<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998. Commission File Number: 0-20159
CROGHAN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Ohio 31-1073048
(State of Incorporation) (I.R.S. Employer Identification No.)
323 Croghan Street, Fremont, Ohio 43420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (419) 332-7301
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Act:
Common Stock, Par Value $12.50 Per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$47,174,708 as of January 31, 1999.
The number of shares outstanding for the registrant's sole class of common
equity as of February 28, 1999 is 1,904,045 shares of common stock, par value
$12.50 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended December 31, 1998 - PART
II of Form 10-K.
Proxy Statement dated March 26, 1999 for the 1999 Annual Meeting of Shareholders
- - PART III of Form 10-K.
This document contains 64 pages. The Exhibit Index is on pages 19 and 20.
<PAGE> 2
INDEX
PART I
Item 1. Description of business 3 - 14
Item 2. Description of property 15
Item 3. Legal proceedings 15
Item 4. Submission of matters to a vote of security holders 15
PART II
Item 5. Market for registrant's common equity and related
stockholder matters 16
Item 6. Selected financial data 16
Item 7. Management's discussion and analysis 16
Item 7A. Quantitative and qualitative disclosures about
market risk 16
Item 8. Financial statements and supplementary data 16
Item 9. Changes in and disagreements with accountants on
accounting and financial disclosure 17
PART III
Item 10. Directors and executive officers of the registrant 18
Item 11. Executive compensation 18
Item 12. Security ownership of certain beneficial owners
and management 18
Item 13. Certain relationships and related transactions 18
PART IV
Item 14. Exhibits, financial statement schedules, and reports
on Form 8-K 19 - 21
Signatures 22
2
<PAGE> 3
PART I
ITEM 1. Description of Business
Croghan Bancshares, Inc. (the "Corporation") was organized under the laws of the
State of Ohio on September 27, 1983, and is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended. The Corporation, as the
result of a merger and reorganization effective in 1984, acquired all of the
voting shares of The Croghan Colonial Bank (the "Bank"), an Ohio chartered bank
organized in 1888. The Bank is the only subsidiary of the Corporation, and
substantially all of the Corporation's operations are conducted through the
Bank. The principal offices of both the Corporation and the Bank are located at
323 Croghan Street, Fremont, Ohio. The Bank also operates eight Ohio branch
offices: two in Bellevue, one in Clyde, three in Fremont, one in Green Springs,
and one in Monroeville. The Corporation and the Bank had total consolidated
assets of $350,144,000 at December 31, 1998.
The Corporation, through its subsidiary, the Bank, operates in one industry
segment, the commercial banking industry.
General
The Bank conducts a general banking business embracing the usual functions of
commercial, retail, and savings banking, including time, savings, money market
and demand deposits; commercial, industrial, agricultural, real estate, consumer
installment and credit card lending; safe deposit box rental; automatic teller
machines; trust department services; and other services tailored for individual
customers. The Bank makes and services secured and unsecured loans to
individuals, firms and corporations. The Bank makes direct loans to individuals
and purchases installment obligations from retailers, both with and without
recourse. The Bank makes a variety of residential, industrial, commercial and
agricultural loans secured by real estate, including interim construction
financing. Additionally, investment products bearing no FDIC insurance are
offered through the Bank's Specialized Investment Division.
On a parent company only basis, the Corporation's only source of funds is the
receipt of dividends paid by the Bank subsidiary. The ability of the Bank to pay
dividends is subject to limitations under various laws and regulations, and to
prudent and sound banking principles. Generally, subject to certain minimum
capital requirements, the Bank may declare a dividend without the approval of
the State of Ohio Division of Financial Institutions, unless the total of the
dividends in a calendar year exceeds the total of its net profits for the year
combined with its retained profits of the two preceding years. Management
believes that the future earnings of the Bank will be sufficient to support
anticipated asset growth at the Bank and at the same time provide funds to the
Corporation to service debt and continue dividends at their current level.
On August 1, 1996, the Corporation acquired all of the outstanding shares of
Union Bancshares Corp. ("Union"), the sole shareholder of The Union Bank and
Savings Company, an Ohio banking corporation, for $20,227,000 cash plus $73,000
in acquisition costs pursuant to a Plan and Agreement of Reorganization dated
February 15, 1996, and an Agreement of Merger dated March 27, 1996. The purchase
price was deemed representative of the fair market value of Union and was
subject to final adjustment based upon the results of an audit of Union's
financial statements as of July 31, 1996. The Corporation funded the acquisition
with internally-generated cash (primarily through the available undistributed
income of the Bank) and with $4,500,000 borrowed from NBD Bank. The transaction
was accounted for as a purchase with Union's assets and liabilities stated at
their fair values. The fair values of the assets acquired totalled $102,276,000
and the fair values of the liabilities assumed totalled $91,545,000. Goodwill
arising from the purchase of $9,569,000 is being amortized on a straight-line
basis over a period of 15 years.
3
<PAGE> 4
ITEM 1. Description of Business, Continued
Regulation and Supervision
The Corporation, as a registered bank holding company, is subject to regulation
by the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended (the "Act"). The Act limits the activities in
which the Corporation and the Bank may engage to those activities that the
Federal Reserve Board finds, by order or regulation, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. A
favorable determination by the Federal Reserve Board as to whether any such new
activity by the Corporation or the Bank is in the public interest, taking into
account both the likely adverse effects and the likely benefits, is also
necessary before any such activity may be engaged in. A bank holding company is
prohibited from acquiring direct or indirect ownership or control of any company
that is not a bank or bank holding company unless its business and activities
would be acceptable for the bank holding company itself. The Federal Reserve
Board, however, is empowered to differentiate between activities which are
initiated de novo by a bank holding company or a subsidiary and activities
commenced by acquisition of a going concern. The Act also requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
acquiring all or substantially all of the assets of any bank, or acquiring
ownership or control of any voting shares of any other bank, if after such
acquisition, it would own or control such bank. In making such determinations,
the Federal Reserve Board considers the effect of the acquisition on
competition, the financial and managerial resources of the holding company and
the convenience and needs of the affected communities.
The Federal Reserve Board possesses cease and desist powers over bank holding
companies and their non-bank subsidiaries for activities that are deemed by the
Board of Governors to constitute a serious risk to the financial safety,
soundness or stability of a bank holding company, that are inconsistent with
sound banking principles, or that are in violation of law. Further, under
Section 106 of the 1970 Amendments to the Board's regulations, bank holding
companies and their subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of any
property or the furnishing of services.
The Bank, as an Ohio chartered bank, is supervised by the State of Ohio Division
of Financial Institutions. The Bank is also a member of the Federal Reserve
System and subject to its supervision. As such, the Bank is subject to periodic
examinations by both the Ohio Division of Financial Institutions and the Federal
Reserve Board. These examinations are designed primarily for the protection of
the Bank's depositors and not for its shareholders. The Bank must file
prescribed periodic reports with the Ohio Division of Financial Institutions
containing a full and accurate statement of its affairs.
The Corporation and the Bank are subject to the Community Reinvestment Act of
1977, as amended (the "CRA"), which is designed to encourage financial
institutions to give special attention to the needs of low and moderate income
areas in meeting the credit needs of the communities in which they operate. If
the CRA regulatory evaluation of a bank's activities is less than satisfactory,
regulatory approval of proposed acquisitions, branch openings and other
applications requiring Federal Reserve Board approval may be delayed until a
satisfactory CRA evaluation is achieved. The Bank currently has a CRA regulatory
evaluation of outstanding.
The Corporation and Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
4
<PAGE> 5
ITEM 1. Description of Business, Continued
corrective action, the Corporation and Bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and Bank to maintain minimum amounts and ratios
of total and Tier I capital to risk-weighted assets, and of Tier I capital to
average assets. Management believes that the Corporation and Bank meet all
capital adequacy requirements to which they are subject.
The Corporation's only source of funds are dividends paid by the Bank. The
ability of the Bank to pay dividends is subject to limitations under various
laws and regulations, and to prudent and sound banking principles. Generally,
subject to certain minimum capital requirements, the Bank may declare a dividend
without the approval of the State of Ohio Division of Financial Institutions,
unless the total dividends in a calendar year exceed the total of its net
profits for the year combined with its retained profits of the two preceding
years. The Board of Governors of the Federal Reserve System generally considers
it to be an unsafe and unsound banking practice for a bank holding company to
pay dividends except out of current operating income, although other factors
such as overall capital adequacy and projected income may also be relevant in
determining whether dividends should be paid.
Effects of Government Monetary Policy
The earnings of the Bank are affected by general and local economic conditions
and by the policies of various governmental regulatory authorities. In
particular, the Federal Reserve Board regulates money and credit conditions and
interest rates in order to influence general economic conditions, primarily
through open market acquisitions or dispositions of United States Government
securities, varying the discount rate on member bank borrowings, and setting
reserve requirements against member and nonmember bank deposits. Federal Reserve
Board monetary policies have had a significant effect on the interest income and
interest expense of commercial banks, including the Bank, and are expected to
continue to do so in the future.
Competition
The Corporation's wholly-owned subsidiary, the Bank, has active competition in
all areas in which it engages. The Bank competes for commercial and individual
deposits and/or loans with other commercial banks in Huron, Sandusky, and Seneca
counties in Northwestern Ohio, as well as with savings and loan associations in
the trade area, credit unions, brokerage firms, mutual funds, and financial
units of non-local bank holding companies. The Bank focuses on personalized
service, convenience of facilities, pricing of products, community stature, and
its local ownership and control in meeting its competition.
Employees
The Corporation has no employees and conducts its business through its
wholly-owned subsidiary, the Bank.
As of December 31, 1998, the Bank employed 175 full-time employees and 31
part-time employees to whom it provides a variety of benefits and with whom it
believes relationships are excellent.
The following pages present various statistical disclosures required for bank
holding companies. The information represents only domestic information since
the Corporation has no foreign operations or foreign loans.
5
<PAGE> 6
ITEM 1. Description of Business, Continued
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential
The following table sets forth, for the years ended December 31, 1998, 1997 and
1996, the distribution of assets, liabilities and stockholders' equity,
including interest amounts and average rates of major categories of
interest-earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ -------------------------- --------------------------
Average Yield Average Yield Average Yield
balance Interest /rate balance Interest /rate balance Interest /rate
Assets
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)(2) $232,977 20,639 8.86% $227,900 20,440 8.97% $187,126 16,700 8.92%
Taxable investment securities 56,618 3,439 6.07% 58,576 3,735 6.38% 61,315 3,843 6.27%
Non-taxable investment securities 14,000 616 4.40% 14,187 636 4.48% 12,743 576 4.52%
Federal funds sold 8,545 457 5.35% 4,417 245 5.55% 3,148 166 5.27%
-------- ------- -------- ------- -------- ------
Total interest-earning assets 312,140 25,151 8.06% 305,080 25,056 8.21% 264,332 21,285 8.05%
-------- ------- -------- ------- -------- ------
Non-interest-earning assets:
Cash and due from banks 9,050 9,083 8,140
Bank premises and equipment, net 8,073 7,951 5,762
Other assets 11,744 12,287 7,322
Less allowance for loan losses (3,514) (3,522) (2,889)
-------- -------- --------
Total $337,493 25,151 $330,879 25,056 $282,667 21,285
======== ======= ======== ======= ======== ======
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings, NOW and Money Market deposits $110,491 2,771 2.51% $109,158 2,584 2.37% $91,385 2,161 2.36%
Time deposits 151,644 8,222 5.42% 150,976 8,169 5.41% 125,026 6,736 5.39%
Federal funds purchased and securities
sold under repurchase agreements 5,418 241 4.45% 3,515 136 3.88% 2,206 92 4.17%
Borrowed funds 2,614 186 7.12% 4,386 339 7.73% 4,129 315 7.63%
-------- ------- -------- ------- -------- ------
Total interest-bearing liabilities 270,167 11,420 4.23% 268,035 11,228 4.19% 222,746 9,304 4.18%
-------- ------- -------- ------- -------- ------
Non-interest-bearing liabilities:
Demand deposits 32,090 29,745 28,890
Other liabilities 2,564 2,579 2,202
-------- -------- --------
34,654 32,324 31,092
-------- -------- --------
Stockholders' equity 32,672 30,520 28,829
-------- -------- --------
Total $337,493 11,420 $330,879 11,228 $282,667 9,304
======== ======= ======== ======= ======== =======
Net interest income $13,731 $13,828 $11,981
======= ======= =======
Net yield on interest-earning assets 4.40% 4.53% 4.53%
==== ==== ====
</TABLE>
(1) Included in loan interest income are loan fees of $446,556 in 1998,
$422,894 in 1997, and $335,960 in 1996.
(2) Non-accrual loans are included in loan totals and do not have a material
impact on the analysis presented.
6
<PAGE> 7
ITEM 1. Description of Business, Continued
Changes in Interest Income and Interest Expense
Resulting from Changes in Volume and Changes in Rate
The following table sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rate:
<TABLE>
<CAPTION>
1998 compared to 1997 1997 compared to 1996
Increase (decrease) Increase (decrease)
due to volume/rate (1) due to volume/rate (1)
---------------------- -----------------------
Volume Rate Net Volume Rate Net
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 450 (251) 199 $ 3,657 83 3,740
Taxable investment securities (122) (174) (296) (177) 69 (108)
Non-taxable investment securities (8) (12) (20) 65 (5) 60
Federal funds sold 221 (9) 212 70 9 79
------- ---- --- ------- --- -----
Total interest-earning assets 541 (446) 95 3,615 156 3,771
------- ---- --- ------- --- -----
Interest expense:
Savings, NOW and Money Market deposits 32 155 187 421 2 423
Time deposits 36 17 53 1,404 29 1,433
Federal funds purchased and securities
sold under repurchase agreements 82 23 105 50 (6) 44
Borrowed funds (128) (25) (153) 20 4 24
------- ---- --- ------- --- -----
Total interest-bearing liabilities 22 170 192 1,895 29 1,924
------- ---- --- ------- --- -----
Net interest income $ 519 (616) (97) $ 1,720 127 1,847
======= ==== === ======= === =====
</TABLE>
(1) The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated
proportionately to the absolute dollar change due to volume and the change
due to rate.
7
<PAGE> 8
ITEM 1. Description of Business, Continued
Investment Portfolio
The following table sets forth the carrying amount of investment securities at
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997 1996
(dollars in thousands)
<S> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $58,857 54,713 57,235
Obligations of states and political subdivisions(1) 15,141 12,307 15,696
Other securities 2,237 2,644 3,550
------- ------- -------
$76,235 69,664 76,481
======= ======= =======
</TABLE>
(1) There are no investment securities of an "issuer" where the aggregate
carrying value of such securities exceeded ten percent of stockholders'
equity.
(2) All amounts are presented on the basis of Statement of Financial Accounting
Standards No. 115.
The following table sets forth the maturities of investment securities at
December 31, 1998 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------
After one After five
Within but within but within After
one year five years ten years ten years
-------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations $17,099 5.95% $39,367 5.44% $ 1,803 6.81% $ 588 7.21%
Obligations of states and political subdivisions(1) 2,633 6.42% 10,445 6.43% 1,312 6.90% 751 7.05%
Other securities(2) 100 5.71% - - - - - -
------- ---- ------- ---- ------- ---- ------- ----
$19,832 6.01% $49,812 5.65% $ 3,115 6.85% $ 1,339 7.12%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
(1) Weighted average yields on non-taxable obligations have been computed
on a fully tax-equivalent basis assuming a tax rate of 34%.
(2) Excludes equity investments of $2,137,000 which have no stated
maturity.
8
<PAGE> 9
ITEM 1. Description of Business, Continued
Loan Portfolio
Types of Loans
The amounts of gross loans outstanding at December 31, 1998, 1997, 1996, 1995
and 1994 are shown in the following table according to types of loans:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 32,161 32,739 33,574 24,830 24,545
Real estate - mortgage 155,431 156,717 156,846 105,484 99,612
Real estate - construction 903 3,478 1,239 2,585 796
Consumer 48,327 43,609 36,440 25,150 27,960
Credit card and other 2,537 2,533 2,548 1,921 1,948
-------- ------- ------- ------- -------
$239,359 239,076 230,647 159,970 154,861
======== ======= ======= ======= =======
</TABLE>
Commercial loans are those made for commercial, industrial, and professional
purposes to sole proprietorships, partnerships, corporations, and other business
enterprises. Financial loans are those made to banks, depository institutions,
other associations and financial intermediaries whose business is to accept
deposits and extend credit. Agricultural loans are for the purpose of financing
agricultural production, including all costs associated with growing crops or
raising livestock. These loans may be secured, other than by real estate, or
unsecured, requiring one single repayment or on an installment repayment
schedule. The loans involve certain risks relating to changes in local and
national economic conditions and the resulting effect on the borrowing entities.
Real estate - mortgage loans are secured wholly or substantially by a lien on
real property. Real estate - mortgage loans generally pose the least risk
exposure to the Bank.
Real estate - construction loans are made to finance land development prior to
erecting new structures and the construction of new buildings or additions to
existing buildings. Real estate - construction loans pose more risk than real
estate-mortgage loans, but generally afford adequate security upon completion of
the construction project.
Consumer loans are made to individuals for household, family, and other personal
expenditures. These often include the purchase of vehicles or furniture,
educational expenses, medical expenses, taxes, or vacation expenses. Consumer
loans may be secured, other than by real estate, or unsecured, generally
requiring repayment on an installment repayment schedule. Consumer loans pose
relatively higher risk and are also influenced by local and national economic
conditions.
Credit card and other loans are made to individuals for personal expenditures
and principally arise from bank credit cards. Such loans generally pose the most
risk as they are most frequently unsecured.
There are no foreign loans and lease financing receivables, included in
commercial, financial and agricultural, were $128,000 in 1998, $511,000 in 1997,
and $515,000 in 1996 (none in years prior to 1996).
9
<PAGE> 10
ITEM 1. Description of Business, Continued
Loan Portfolio
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the amount of commercial, financial and agricultural
loans outstanding as of December 31, 1998 which, based on the contract terms for
repayments of principal, are due in the periods indicated. Also, the amounts due
after one year are classified according to their sensitivity to changes in
interest rates.
<TABLE>
<CAPTION>
Maturing
-------------------------------------------
After one
Within but within After
one year five years five years Total
-------- ---------- ---------- -----
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $5,680 10,579 15,902 32,161
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Interest
Sensitivity
-------------------
Fixed Variable
rate rate
(dollars in thousands)
<S> <C> <C>
Due after one but within five years $ 4,405 6,174
Due after five years 1,693 14,209
------- ------
$ 6,098 20,383
======= ======
</TABLE>
The above maturity information is based on the contract terms at December 31,
1998 and does not include any possible "rollover" at maturity date. In the
normal course of business, the Bank considers and acts upon the borrower's
request for renewal of a loan at maturity. Evaluation of such a request includes
a review of the borrower's credit history, the collateral securing the loan, and
the purpose for such request.
10
<PAGE> 11
ITEM 1. Description of Business, Continued
Loan Portfolio
Risk Elements
The following table presents information concerning the amount of loans at
December 31, 1998, 1997, 1996, 1995, and 1994 which contain certain risk
elements:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis(1) $ 315 212 649 845 604
Loans contractually past due 90 days or more
as to principal or interest payments(2) 1,086 582 764 477 845
Loans whose terms have been renegotiated
to provide a reduction or deferral of
interest or principal because of a deterioration in the
financial position of the borrower(1)(3) - - 471 - -
====== === === === ===
</TABLE>
(1) Loans are placed on nonaccrual status when, in the opinion of management,
full collection of principal and interest is unlikely. Interest is then
recognized on a cash basis where future collections of principal are
probable. The amount of interest income that would have been recorded had
all nonaccrual and renegotiated (of the type specified above) loans been
current in accordance with their terms approximated $48,000 in 1998,
$100,000 in 1997, $167,000 in 1996, $89,000 in 1995, and $77,000 in 1994.
Actual interest included in income on these loans amounted to approximately
$25,000 in 1998, $84,000 in 1997, $130,000 in 1996, $27,000 in 1995, and
$16,000 in 1994.
(2) Excludes loans accounted for on a nonaccrual basis.
(3) Excludes loans accounted for on a nonaccrual basis and loans contractually
past due 90 days or more as to principal or interest payments.
In addition to the loan amounts identified above, there were approximately
$1,275,000 of potential problem loans at December 31, 1998, none of which relate
to any concentrated risk elements common to all the loans. While these loans are
all currently performing, management has some doubt about the ability of the
borrowers to continue to comply with all of their present loan repayment terms.
As of December 31, 1998 there was no concentration of loans that exceeded 10% of
total loans.
11
<PAGE> 12
ITEM 1. Description of Business, Continued
Summary of Loan Loss Experience
Analysis of the Allowance for Loan Losses
The following table shows the daily average loan balances, for the periods
indicated, and changes in the allowance for possible loan losses for such years:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Daily average amount of loans $ 232,977 227,900 187,126 155,253 148,544
========= ======= ======= ======= =======
Allowance for loan losses at beginning of year $ 3,518 3,368 2,614 2,357 2,238
Acquisition of Union Bancshares Corp. - - 711 - -
--------- ------- ------- ------- -------
3,518 3,368 3,325 2,357 2,238
--------- ------- ------- ------- -------
Loan charge-offs:
Commercial, financial and agricultural (6) - (97) (2) -
Real estate - mortgage (58) (111) - (25) (117)
Real estate - construction - - (198) - -
Consumer (389) (159) (116) (99) (148)
Credit card and other (22) (17) (17) (12) (7)
--------- ------- ------- ------- -------
(475) (287) (428) (138) (272)
--------- ------- ------- ------- -------
Recoveries of loans previously charged-off:
Commercial, financial and agricultural 15 16 80 154 7
Real estate - mortgage 15 193 - 88 11
Real estate - construction - 1 187 - -
Consumer 101 45 40 32 41
Credit card and other 4 2 4 1 2
--------- ------- ------- ------- -------
135 257 311 275 61
--------- ------- ------- ------- -------
Net recoveries (charge-offs)(2) (340) (30) (117) 137 (211)
--------- ------- ------- ------- -------
Additions to allowance charged to expense(1) 240 180 160 120 330
--------- ------- ------- ------- -------
Allowance for loan losses at end of year $ 3,418 3,518 3,368 2,614 2,357
========= ======= ======= ======= =======
Allowance for loan losses as a percent of year-end loans 1.43% 1.47% 1.46% 1.63% 1.52%
==== ==== ==== ==== ====
Ratio of net charge-offs (recoveries) during the year to
average loans outstanding .15% .01% .06% (.09)% .14%
=== === === ==== ===
</TABLE>
(1) The determination of the balance of the allowance for loan losses is based
upon an analysis of the loan portfolio and reflects an amount which, in
management's judgment, is adequate to provide for possible loan losses.
Such analysis is based on the character of the loan portfolio, current
economic conditions, past loan loss experience, and such other factors as
management believes require current recognition in estimating possible loan
losses.
(2) The amount of charge-offs and recoveries fluctuates from year to year due
to factors relating to the condition of the general economy and specific
business segments. The 1994 charge-offs included one real estate-mortgage
loan write-down of $116,946. The 1995 recoveries included one real
estate-mortgage loan recovery of $63,465 and one commercial loan recovery
of $122,700. The 1996 charge-offs included one real estate-construction
loan write-off of $197,452 and the recoveries included a $186,769 recovery
on the same loan. The 1997 real estate-mortgage recoveries included a
$191,782 recovery. The 1998 charge-offs included one real estate-mortgage
loan write-off of $57,836.
12
<PAGE> 13
ITEM 1. Description of Business, Continued
Summary of Loan Loss Experience
Allocation of Allowance for Loan Losses
The following table allocates the allowance for loan losses for the periods
indicated to each loan category. The allowance has been allocated to the
categories of loans noted according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred based on
specific credit analyses and the proration of the unallocated allowance to the
loan categories based on actual loss experience:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------- ------------------------
Percentage Percentage
of loans to of loans to
Allowance total loans Allowance total loans
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 585 13.4% $ 635 13.7%
Real estate - mortgage 1,415 64.9% 1,517 65.5%
Real estate - construction - .4% - 1.5%
Consumer 1,322 20.2% 1,264 18.2%
Credit card and other 96 1.1% 102 1.1%
------ ------ ------ ------
$3,418 100.0% $3,518 100.0%
====== ===== ====== =====
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ------------------------
Percentage Percentage
of loans to of loans to
Allowance total loans Allowance total loans
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 647 14.6% $1,161 15.5%
Real estate - mortgage 1,216 68.0% 682 66.0%
Real estate - construction - .5% - 1.6%
Consumer 1,350 15.8% 682 15.7%
Credit card and other 155 1.1% 89 1.2%
------ ----- ------ -----
$3,368 100.0% $2,614 100.0%
====== ===== ====== =====
<CAPTION>
December 31, 1994
-------------------------
Percentage
of loans to
Allowance total loans
(dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 933 15.8%
Real estate - mortgage 889 64.3%
Real estate - construction - .5%
Consumer 482 18.1%
Credit card and other 53 1.3%
------ -----
$2,357 100.0%
====== =====
</TABLE>
13
<PAGE> 14
ITEM 1. Description of Business, Continued
Deposits
The average daily amount of deposits (all in domestic offices) and average rates
paid on such deposits is summarized for the years 1998, 1997 and 1996 in the
following table :
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------- -------------------
Average Average Average Average Average Average
balance rate paid balance rate paid balance rate paid
(dollars in thousands)
<S> <C> <C> <C> <S> <C> <S>
Non-interest bearing demand deposits $ 32,090 -% $ 29,745 -% $ 28,890 -%
Interest-bearing demand deposits 37,186 1.97% 35,034 2.02% 25,186 2.07%
Savings, including Money Market deposits 73,305 2.77% 74,124 2.53% 66,199 2.48%
Time deposits 151,644 5.42% 150,976 5.41% 125,026 5.39%
-------- -------- --------
$294,225 $289,879 $245,301
======== ======== ========
</TABLE>
Maturities of time deposits of $100,000 or more outstanding at December 31, 1998
are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
3 months or less $ 6,256
Over 3 through 6 months 6,278
Over 6 through 12 months 6,967
Over 12 months 4,986
-------
$24,487
=======
</TABLE>
Return on Equity and Assets
The ratio of net income to daily average total assets and average stockholders'
equity, and certain other ratios, for the periods noted are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------
1998 1997 1996
<S> <C> <C> <C>
Percentage of net income to:
Average total assets .94% .94% 1.08%
Average stockholders' equity 9.67% 10.18% 10.60%
Percentage of cash dividends declared per common
share to net income per common share 36.14% 36.76% 37.38%
Percentage of average stockholders' equity to
average total assets 9.68% 9.22% 10.20%
</TABLE>
14
<PAGE> 15
ITEM 2. Description of Property
The Corporation neither owns nor leases any properties. The Bank maintains its
main office at 323 Croghan Street, Fremont, Ohio. In addition, the Bank operates
two branch offices in Bellevue, one in Clyde, three in Fremont, one in Green
Springs, and one in Monroeville. The Bank's operations center is also located in
Fremont, Ohio. All of such premises are owned by the Bank, are in satisfactory
condition, and are suitable for their intended use.
ITEM 3. Legal Proceedings
Corporation management is aware of no material pending or threatened litigation
in which the Corporation or its subsidiary Bank faces potential loss or exposure
which could materially affect the consolidated financial statements. The
Corporation is not aware of any proceedings involving the Corporation that a
governmental authority is contemplating.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 1998.
15
<PAGE> 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The number of holders of record of the Corporation's common stock at December
31, 1998 is 736.
Information relating to dividend restrictions is contained on pages 31 and 32 in
Financial Statement Footnote No. 13 captioned "Regulatory Matters" of the 1998
Annual Report to Shareholders of Croghan Bancshares, Inc. and is incorporated
herein by reference.
Other information required by this Item is contained on page 4 under the caption
"Market Price and Dividends on Common Stock" of the 1998 Annual Report to
Shareholders of Croghan Bancshares, Inc. and is incorporated herein by
reference.
ITEM 6. Selected Financial Data
Information required by this Item is contained on page 5 under the caption "Five
Year Summary of Selected Financial Data" of the 1998 Annual Report to
Shareholders of Croghan Bancshares, Inc. and is incorporated herein by
reference.
ITEM 7. Management's Discussion and Analysis
Information required by this Item is contained on pages 6 through 14 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the 1998 Annual Report to Shareholders of Croghan Bancshares,
Inc. and is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item is contained on pages 12 and 13 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Interest Rate Risk " of the 1998 Annual Report to Shareholders
of Croghan Bancshares, Inc. and is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The following information required by this Item is contained on pages 15 through
35 in the 1998 Annual Report to Shareholders of Croghan Bancshares, Inc. and is
incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and
1996
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
16
<PAGE> 17
PART II
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in or disagreements with accountants during the years
ended December 31, 1998 or 1997.
17
<PAGE> 18
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information concerning Directors and Executive Officers of the Corporation is
contained on pages 2 and 3 under the caption "Election of Directors", and on
pages 4 and 5 under the caption "Executive Officers" in the Corporation's
Definitive Proxy Statement dated March 26, 1999, for the Annual Meeting of
Shareholders to be held on May 11, 1999, and is incorporated herein by
reference. Information concerning the failure of a director of the Corporation
to comply with share beneficial ownership reporting requirements under Section
16(a) of the Securities Exchange Act of 1934, as amended, is contained on page 7
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Corporation's Definitive Proxy Statement dated March 26, 1999, for the
Annual Meeting of Shareholders to be held on May 11, 1999, and is incorporated
herein by reference.
ITEM 11. Executive Compensation
Information concerning compensation of directors and executive compensation is
contained on page 4 under the caption "Election of Directors", on pages 5 and 6
under the captions "Executive Compensation" and "Compensation Committee Report",
and on page 6 under the caption "Performance Graph" in the Corporation's
Definitive Proxy Statement dated March 26, 1999, for the Annual Meeting of
Shareholders to be held on May 11, 1999, and is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is contained on pages 1, 2, and 3 under the captions "Voting
Securities and Principal Holders Thereof" and "Election of Directors" in the
Corporation's Definitive Proxy Statement dated March 26, 1999, for the Annual
Meeting of Shareholders to be held on May 11, 1999, and is incorporated herein
by reference.
ITEM 13. Certain Relationships and Related Transactions
Information concerning related party transactions is contained on page 7 under
the caption "Indebtedness Of and Transactions with Officers and Directors" in
the Corporation's Definitive Proxy Statement dated March 26, 1999, for the
Annual Meeting of Shareholders to be held on May 11, 1999, and is incorporated
herein by reference.
18
<PAGE> 19
PART IV
ITEM 14. (a) Exhibits and Financial Statement Schedules
The following financial statements are filed as a part of this report and are
contained on pages 15 through 35 of Exhibit 13 (the 1998 Annual Report to
Shareholders of Croghan Bancshares, Inc.):
Independent Auditor's Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997
and 1996
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
Financial statement schedules have been omitted because they are not applicable
or because the required information is provided in the Consolidated Financial
Statements, including the Notes thereto.
The following exhibits are filed with or incorporated by reference (in
accordance with Item 601 of Regulation S-K) in this filing:
Reference to
Prior Filing
Regulation of Exhibit or of the
S-K Exhibit Exhibit's Inclusion
Number Document in this Filing
3(i) Amended Articles of Incorporation of Croghan (1)
Bancshares, Inc.
3(ii) Code of Regulations of Croghan Bancshares, Inc. (2)
4.1 Certificate of Registrant's Common Stock (3)
4.2 Articles Fourth, Fifth and Eighth of (1)
Registrant's Articles of Incorporation
4.3 Articles II, III, V, VII and VIII of (2)
Registrant's Code of Regulations
13 Annual Report to Shareholders - 1998 Included with
this filing
21 Subsidiaries of the Registrant Included with
this filing
23 Consent of Independent Auditor Included with
this filing
27 Financial Data Schedule Included with
this filing
19
<PAGE> 20
ITEM 14. (a) Exhibits and Financial Statement Schedules, continued
(1) This document was previously filed as Exhibit 3(i) to the
Registrant's June 30, 1997 quarterly report on Form 10-QSB and is
incorporated herein by reference.
(2) This document was previously filed as Exhibit 2 to the Registrant's
Form 10 registration statement pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and is incorporated herein by
reference.
(3) This document was previously filed as Exhibit 3 to the Registrant's
Form 10 registration statement pursuant to Section 12(g) of the
Securities Exchange Act of 1934 and is incorporated herein by
reference.
20
<PAGE> 21
ITEM 14. (b) Reports on Form 8-K
None were filed during the quarter ended December 31, 1998.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROGHAN BANCSHARES, INC.
Date: March 9, 1999 /s/ Thomas F. Hite
------------- -------------------------
Thomas F. Hite, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the date indicated:
/s/ Allan E. Mehlow /s/ Robert H. Moyer
- --------------------------------- ---------------------------------
Allan E. Mehlow, Treasurer/ Robert H. Moyer, Director
Principal Financial Officer
/s/ Janet E. Burkett /s/ Albert C. Nichols
- --------------------------------- ---------------------------------
Janet E. Burkett, Director Albert C. Nichols, Director
/s/ Thomas F. Hite /s/ K. Brian Pugh
- ---------------------------------- ---------------------------------
Thomas F. Hite, Director/President K. Brian Pugh, Director
- --------------------------------- ---------------------------------
John P. Keller, Director Clemens J. Szymanowski, Director
/s/ Stephen A. Kemper /s/ J. Terrence Wolfe
- --------------------------------- ---------------------------------
Stephen A. Kemper, Director J. Terrence Wolfe, Director
/s/ Daniel W. Lease
- --------------------------------- ---------------------------------
Daniel W. Lease, Director Claude E. Young, Director
Date: March 9, 1999 /s/ Gary L. Zimmerman
- --------------------------------- ---------------------------------
Gary L. Zimmerman, Director
22
<PAGE> 1
Exhibit 13
CROGHAN BANCSHARES, INC.
1998 ANNUAL REPORT
<PAGE> 2
CROGHAN BANCSHARES, INC.
CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Description of the Corporation and Common Stock Data 4
Selected Financial Data 5
Management's Discussion and Analysis 6
Independent Auditor's Report 15
Consolidated Financial Statements 16
Directors and Officers 36
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 Percent
Change
<S> <C> <C> <C>
For the year:
Net income $ 3,160,000 $ 3,107,000 1.7%
Income per common share 1.66 1.63 1.8%
Dividends per common share .60 .60 - %
Return on average assets .94% .94%
Return on average tangible
stockholders' equity 13.08% 14.47%
At year end:
Assets $350,144,000 $335,040,000 4.5%
Loans 239,359,000 239,076,000 .1%
Investment securities 76,235,000 69,664,000 9.4%
Deposits 301,456,000 289,053,000 4.3%
Stockholders' equity 33,705,000 31,590,000 6.7%
Book value per common share $ 17.70 $ 16.60 6.6%
Stockholders' equity to
total assets 9.63% 9.43%
Number of stockholders of record 736 665 10.7%
Number of full-time equivalent
employees 190 181 5.0%
</TABLE>
1
<PAGE> 3
To Our Shareholders
For Croghan Bancshares, Inc. 1998 was a year of turning corners. The
Corporation's net income increased to $3,160,000 which is 1.7 percent above the
1997 performance. Return on average assets held steady at .94 percent and return
on average tangible stockholder's equity stood at 13.08 percent. The Corporation
declared a 3-for-1 stock split effective on June 5, 1998. This resulted in our
shareholders owning three shares for each one owned prior to the split. The
performance on the market price of the shares is shown elsewhere in the report.
Operationally, a significant amount of time and energy was devoted to
troubleshooting equipment malfunctions involving the Bank's on-line teller
system. A turnover of personnel in the Specialized Investment Division set us
back a step or two but before year end we were able to remedy the situation and,
we believe, establish a stronger department as a result.
The national economy started 1998 on a rocky note as the Asian markets were
experiencing some turmoil at the end of 1997. By the end of winter, the U.S.
economy shrugged off the global concerns and the Dow Jones Industrial Average
closed above 9,000 for the first time in early April. By mid summer continuing
global concerns caused a steady downturn in the market. The Federal Reserve
stepped in with downward rate adjustments in late September, mid October and mid
November which stabilized the economy and the stock market rebounded by year end
to a position slightly below the earlier high points. The Wall Street prime rate
at year-end was 7.75 percent.
The local economy, in the Bank's marketing area, was similar to previous years.
Retail sales were moderate with the Christmas season being the key factor, in
many cases, to a successful year. Manufacturing was mixed with the closing of
the Eveready Battery plant in Fremont early in the year and Lighting Resources
in Bellevue in November. Two local firms, Chemi-Trol Chemical Co. and Fremont
Plastic Products, have been purchased by out-of-state companies but maintain
facilities in the Fremont area. On a positive note, Continental PET, a plastic
bottle supplier to H.J. Heinz Co., has located a plant in Fremont and Aeroquip
Inoac, an auto industry supplier, has increased its workforce by approximately
90 jobs. The agriculture industry, an important segment of our local economy,
had a spotty year. Yields were somewhat higher than average but prices were very
low. The hog market prices were extremely low.
The Corporation's balance sheet at year-end posted growth of 4.3 percent in the
deposit categories and 4.5 percent in total assets. While total loans at
year-end were basically flat from the 1997 year end, the investment securities
noted an increase of 9.4 percent. Management's challenge, and goal, will be to
increase the loan categories. While loans increase balance sheet risk they also
offer a higher rate of return.
The Year 2000 computer based problem has been a focus since early 1997. An
internal task force was formed comprising representatives from all operating
areas of the Bank. The purpose was to foster awareness, assess systems to
identify possible problems, renovate these problems by seeking solutions,
validate the solutions by testing, and implement any necessary adjustments or
changes. The new computer mainframe software installed in 1997 came to us
advertised as Y2K compliant. Our testing program, thus far, has turned up no
problems of a serious nature. Our 136 personal computers have been tested and
the few minor problems encountered are easily corrected. A consultant has been
working with the Trust Department and Specialized Investment Division computers
and testing is on schedule with few problems encountered. We have also engaged
an outside independent reviewer to validate the testing reports on mission
critical processes. Obviously we cannot guarantee there will be no problems on
January 1, 2000. The Bank has had a disaster plan in place for years. That plan
will be the basis for a contingency plan should some or all of our systems fail.
Our goal is to be able to provide "business as usual", or very close to it, on
January 3, 2000. Please be very careful about
2
<PAGE> 4
"doomsayers" or some stranger offering to keep your funds safe. Your bank is the
safest place for your funds, fully FDIC insured. Your mattress has no deposit
insurance.
On a sad note and a shock to all the Croghan family, Thomas F. Camella, Vice
President & Chief Operating Officer died on January 26, 1999 after a brief
illness. Tom came to the Bank on March 1, 1991 after 18 years at Clyde Savings
Bank and two years at Huntington Bank. His willingness to take on any task and
see it to completion will be sorely missed. He was devoted to his family, his
church, his vocation and his community. Our heartfelt sympathy goes out to the
Camella family.
As 1999 continues, we expect to be challenged by the economy, the competition
and our own goals. Financial services to the customers in our market area
communities and profitability for our shareholders are the main focus. The City
of Fremont celebrates its sesquicentennial in October, 1999. A year long string
of events is planned to commemorate this event. The Bank, one of the many
sponsors of the events, is planning to be involved. We have been serving the
community for 111 of its 150 years. Our goal is to continue that service because
"We're Community People" and we are "In Your Corner, On Your Corner."
Thank you for your continued trust, encouragement and support.
/s/ Thomas Hite
Thomas F. Hite
President & CEO
3
<PAGE> 5
CROGHAN BANCSHARES, INC.
DESCRIPTION OF THE CORPORATION
Croghan Bancshares, Inc. (the "Corporation" or "Croghan"), a one bank holding
company, was incorporated in 1983 and has approximately $350,000,000 in total
assets as of December 31, 1998. Its operating subsidiary, The Croghan Colonial
Bank (the "Bank"), was incorporated in 1888 and is headquartered in Fremont,
Ohio. The Corporation purchased Union Bancshares Corp. ("Union"), with assets of
$102,276,000, on August 1, 1996.
The Bank offers a diverse range of commercial and retail banking services
through its nine offices located in Bellevue, Clyde, Fremont, Green Springs, and
Monroeville, Ohio. Products are comprised of traditional banking services such
as consumer, commercial, agricultural and real estate loans, personal and
business checking accounts, savings accounts, time deposit accounts, safe
deposit box services, and trust department services. Additionally, beginning in
June 1995, investment products bearing no FDIC insurance are offered through
the Bank's Specialized Investments Division.
MARKET PRICE AND DIVIDENDS ON COMMON STOCK
There is no established public trading market for the Corporation's common
stock, although McDonald & Company of Cleveland, Ohio has functioned as a market
intermediary for the Corporation's stock since July 1, 1992. Solely on the basis
of transactions that have been reported to the Corporation, as adjusted for the
effect of a 3-for-1 stock split that was paid on June 5, 1998, the ranges of
transaction prices for shares of its common stock for each quarterly period
during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
First Quarter $ 24.00 to 24.66 $ 19.67 to 19.67
Second Quarter 24.00 to 26.00 20.33 to 20.67
Third Quarter 26.00 to 28.00 20.67 to 21.00
Fourth Quarter 28.00 to 28.25 21.33 to 22.67
</TABLE>
Dividends declared by the Corporation on its common stock during the past two
years, as adjusted for the effect of a 3-for-1 stock split that was paid on June
5, 1998, were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Three-months ended March 31 $ .15 $ .15
Three-months ended June 30 .15 .15
Three-months ended September 30 .15 .15
Three-months ended December 31 .15 .15
--- ---
$ .60 $ .60
=== ===
</TABLE>
AVAILABILITY OF MORE INFORMATION
To obtain a copy of the Corporation's annual report (Form 10-K) filed with the
Securities and Exchange Commission, please write to:
James K. Walter, Secretary
Croghan Bancshares, Inc.
323 Croghan Street
Fremont, OH 43420
419-332-7301
1-888-Croghan (276-4426)
4
<PAGE> 6
CROGHAN BANCSHARES, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of operations:
Total interest income $ 25,151 $ 25,056 $ 21,285 $ 18,076 $ 15,991
Total interest expense 11,420 11,228 9,304 7,409 6,306
---------- ---------- ---------- ---------- ----------
Net interest income 13,731 13,828 11,981 10,667 9,685
Provision for loan losses 240 180 160 120 330
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses 13,491 13,648 11,821 10,547 9,355
Total non-interest income 1,742 1,514 1,314 1,126 776
Total non-interest expenses 10,424 10,446 8,594 6,960 6,827
---------- ---------- ---------- ---------- ----------
Income before federal income taxes 4,809 4,716 4,541 4,713 3,304
Federal income taxes 1,649 1,609 1,486 1,444 917
---------- ---------- ---------- ---------- ----------
Net income $ 3,160 $ 3,107 $ 3,055 $ 3,269 $ 2,387
========== ========== ========== ========== ==========
Per share of common stock:
Net income $ 1.66 $ 1.63 $ 1.60 $ 1.72 $ 1.25
Dividends .60 .60 .60 .55 .44
Book value 17.70 16.60 15.57 14.66 13.20
========== ========== ========== ========== ==========
Average common shares outstanding 1,903,616 1,903,578 1,903,578 1,903,578 1,903,578
========== ========== ========== ========== ==========
Year end balances:
Loans receivable, net $ 235,941 $ 235,558 $ 227,279 $ 157,356 $ 152,505
Investment securities 76,235 69,664 76,481 72,951 72,301
Total assets 350,144 335,040 340,168 245,518 240,331
Deposits 301,456 289,053 295,310 207,876 205,789
Stockholders' equity 33,705 31,590 29,640 27,898 25,129
========== ========== ========== ========== ==========
Average balances:
Loans receivable, net $ 229,463 $ 224,378 $ 184,237 $ 152,764 $ 146,185
Investment securities 70,618 72,763 74,058 68,744 74,382
Total assets 337,493 330,879 282,667 238,759 236,977
Deposits 294,225 289,879 245,301 206,097 207,003
Stockholders' equity 32,672 30,520 28,829 26,613 24,548
========== ========== ========== ========== ==========
Selected ratios:
Net yield on average interest-earnings assets 4.40% 4.53% 4.53% 4.70% 4.31%
Return on average total assets .94 .94 1.08 1.37 1.01
Return on average stockholders' equity 9.67 10.18 10.60 12.28 9.72
Return on average tangible stockholders' equity 13.08 14.47 12.34 12.28 9.72
Net loan charge offs (recoveries) as a percent of average
outstanding net loans .15 .01 .06 (.09) .14
Allowance for loan losses as a percent of year-end loans 1.43 1.47 1.46 1.63 1.52
Stockholders' equity as a percent of total year-end assets 9.63 9.43 8.71 11.36 10.46
========== ========== ========== ========== ==========
</TABLE>
All share data has been adjusted for the 2-for-1 stock split in 1995 and the
3-for-1 stock split in 1998. Amounts for 1996 reflect the August 1, 1996
purchase of Union Bancshares Corp.
5
<PAGE> 7
CROGHAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information pertaining to
Croghan's financial condition and results of operations. This information is
presented to further the reader's understanding of the Consolidated Financial
Statements which appear on pages 16 through 35 of this Annual Report. Where
appropriate, Management has noted their insights into known events and trends
that have or may be expected to have a material effect on Croghan's operations
and financial condition. The information presented may contain forward-looking
statements regarding future financial performance which are not historical facts
and involve various risks and uncertainties. Actual results and performance
could materially differ from those contemplated in such forward-looking
statements.
ACQUISITION OF UNION BANCSHARES CORP.
On August 1, 1996, Croghan purchased Union Bancshares Corp. and its
commercial bank subsidiary, The Union Bank and Savings Company of Bellevue,
Ohio. As a result of this transaction, Croghan acquired two offices in Bellevue,
an office in Clyde, and an office in Monroeville.
Union stockholders were paid cash for their share holdings and the
transaction was recorded using the purchase method of accounting. The fair value
of Union's assets and liabilities on the acquisition date totalled $102,276,000
and $91,545,000, respectively. The purchase price amounted to $20,300,000 and
goodwill of $9,569,000 was recorded as a result of the transaction. The impact
of the purchase of Union Bancshares Corp. should be considered when comparing
income and expense items and average balances to prior year amounts.
PERFORMANCE SUMMARY
Croghan's net income increased 1.7% to $3,160,000 for the year ended
December 31, 1998. This compares to net income of $3,107,000 in 1997 and
$3,055,000 in 1996. The improvement in 1998 net income was the result of
increases in all items within the non-interest income category. The improvement
in 1997 net income was the result of specific cost saving measures from the
consolidation of various redundant operations and functions within the newly
acquired offices.
The 1998 return on average assets was .94%. This compares to .94% in
1997 and 1.08% in 1996. Croghan's return on average tangible stockholders'
equity totalled 13.08% in 1998, compared to 14.47% in 1997 and 12.34% in 1996.
Income per share in 1998 amounted to $1.66, compared to $1.63 in 1997 and $1.60
in 1996.
Total assets at December 31, 1998 were $350,144,000 or a 4.5% increase
from 1997's total assets of $335,040,000. Total loans were $239,359,000 at
December 31, 1998, a .1% increase over 1997's total loans of $239,076,000. Total
deposits were $301,456,000 at December 31, 1998 or an increase of 4.3% from
1997's total deposits of $289,053,000. Total stockholders' equity at December
31, 1998 amounted to $33,705,000 or a 6.7% increase as compared to $31,590,000
in 1997.
NET INTEREST INCOME
Net interest income, which is the revenue generated from earning assets
in excess of the interest cost of funding those assets, is Croghan's principal
source of income. Net interest income is influenced by market interest rate
conditions and the volume and mix of earning assets and interest-bearing
liabilities. Many external factors affect net interest income and typically
include the strength of customer loan demand, customer preference for individual
deposit account products, competitors' loan and deposit product offerings, the
national and local economic climates, and Federal Reserve monetary policy. The
following table demonstrates the components of net interest income for the years
ended December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Average interest-earning assets $312,140 $305,080 $264,332
Interest income 25,151 25,056 21,285
Average rate earned 8.06% 8.21% 8.05%
Average interest-bearing liabilities $270,167 $268,035 $222,746
Interest expense 11,420 11,228 9,304
Average rate paid 4.23% 4.19% 4.18%
Net interest income $ 13,731 $ 13,828 $ 11,981
Net interest yield
(net interest income divided
by average interest-earning assets) 4.40% 4.53% 4.53%
</TABLE>
Net interest income in 1998 decreased by $97,000 to $13,731,000 or .7%
below 1997's level of $13,828,000. This followed an increase of $1,847,000 in
1997 or 15.4% over 1996's net interest income of $11,981,000. The net interest
yield stood at 4.40%, 4.53%, and 4.53% in 1998, 1997, and 1996, respectively.
Management believes the Federal Reserve Open Market Committee will
likely keep rates steady through mid-1999 until a clear consensus can be drawn
regarding international markets and their impact on the U.S. economy. A renewed
bias towards "tightening" (i.e., an inclination to raise rates) may surface in
late 1999 if unemployment levels remain low and wage pressures accelerate. Such
action would translate into slightly lower loan and deposit rates through
mid-to-late 1999, with possible higher rates near year end.
Additionally, local market conditions will continue to pressure net
interest income in 1999. Two bank competitors, one headquartered in Clyde, Ohio
and one headquartered in Old Fort, Ohio, have announced plans to open branches
in the Fremont market. Croghan will take the steps necessary to protect its loan
and deposit base in light of this renewed competition. Initial projections
indicate that 1999 net interest income should increase between 1% and 2% from
1998's level.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES
Croghan has implemented a loan policy which establishes procedures to
manage both credit risk and asset quality. The policy details acceptable lending
guidelines and also stipulates the use of a loan review process. The loan review
process, which is conducted by an outside credit review firm, facilitates the
early identification of problem loans, ensures sound credit decisions, and aids
in determining the amount of the provision for loan losses. Monthly provisions
are made in amounts which maintain the balance in the allowance for loan losses
at a level considered by management to be adequate for potential losses within
the portfolio. The ultimate goal of Croghan's loan policy is to minimize the
uncertainties associated with the lending function.
In addition to the comprehensive lending guidelines and loan review
process, management monitors the following factors to determine the adequacy of
the allowance for loan losses: delinquency trends, the status of nonperforming
loans, current and historical trends in charged-off loans, existing local and
national economic conditions, and changes within the volume and mix of the
various loan categories. Even though management uses all available information
to provide for possible loan losses, future additions to the allowance may be
required as changes occur in economic conditions and specific borrower
circumstances. Also, the regulatory agencies that periodically review Croghan's
allowance for loan losses may require additions to the allowance or the
charge-off of specific loans based on the information available to them at the
time of their examinations. The following table details factors relating to the
provision and allowance for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
</TABLE>
7
<PAGE> 9
<TABLE>
<S> <C> <C> <C>
Provision for loan losses charged
to expense $ 240 $ 180 $ 160
Net loan charge-offs 340 30 117
Net loan charge-offs as a percent of
average outstanding net loans .15% .01% .06%
Nonaccrual loans $ 315 $ 212 $ 649
Loans contractually past due 90 days or more 1,086 582 764
Restructured loans - - 471
Potential problem loans, other than those past due
90 days or more, nonaccrual, or restructured 1,275 1,992 1,738
Allowance for loan losses 3,418 3,518 3,368
Allowance for loan losses as a percent of
year-end loans 1.43% 1.47% 1.46%
</TABLE>
The provision for loan losses in 1998 totalled $240,000 compared to
$180,000 in 1997 and $160,000 in 1996. A positive trend in the loan portfolio at
December 31, 1998 was a $717,000 decrease in other potential problem loans to
$1,275,000. Negative trends include a $103,000 increase in nonaccrual loans and
a $504,000 increase in loans past due 90 days or more. Net loan charge-offs in
1998 totalled $340,000 with $288,000 of that total attributable to the consumer
loan portfolio. Management continues to monitor consumer loan delinquencies and
feels that overall loan portfolio quality remains quite manageable.
In accordance with Generally Accepted Accounting Principles, Croghan
determines its investment in impaired loans on a quarterly basis. An impaired
loan represents one which, based on the most current information available,
appears probable that the borrower will not be able to make payments according
to the contractual terms of the loan agreement. Impaired loans are recorded
based upon the observable market price of the loan, the fair value of the
underlying collateral (if the loan is collateral dependent), or the present
value of the expected future cash flows discounted at the loan's effective
interest rate. At December 31, 1998 Croghan's impaired loans totalled $316,000
as compared to $257,000 at December 31, 1997.
NON-INTEREST INCOME
Non-interest income in 1998 increased $228,000 to $1,742,000 or 15.1%
above 1997's total of $1,514,000. This followed an increase of $200,000 in 1997
or 15.2% more than 1996's total of $1,314,000. The following table details
non-interest income for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Trust income $ 373 $ 324 $ 268
Service charges on deposit accounts 747 720 637
Loss on sale of investment securities - (27) (22)
Gain on sale of loans to Freddie Mac 35 - -
Other operating income 587 497 431
------ ------ ------
Total non-interest income $1,742 $1,514 $1,314
====== ====== ======
</TABLE>
Trust income increased $49,000 or 15.1% in 1998 following an increase
of $56,000 or 20.9% in 1997. The Trust Department had over $70,000,000 in assets
under management at the end of 1998 compared to $56,156,000 at December 31,
1997.
Service charges on deposit accounts increased $27,000 or 3.8% in 1998
following an increase of $83,000 or 13.0% in 1997. There were no investment
securities losses in 1998 as compared to losses of $27,000 in 1997 and $22,000
in 1996. A substantial portion of the 1997 and 1996 losses were realized upon
the sale of U.S. Treasury Notes with approximately one year remaining until
their maturities. Investments due in two years were purchased to replace those
securities that were sold. Significant portions of the reported securities
losses during those years were offset by increased investment
8
<PAGE> 10
earnings on the replacement securities purchased, with such earnings
reported as a component of total interest income.
As a result of the low interest rate environment encountered throughout
1998, a portion of Croghan's mortgage loan originations were sold to Freddie Mac
(Federal Home Loan Mortgage Corporation). The sale of these loans allowed
Croghan to maintain its customer relationships while at the same time
eliminating the risk associated with long-term fixed-rate mortgage loan
financing. Croghan realized gains of $35,000 as a result of loan sales in 1998.
Other operating income increased $90,000 or 18.1% in 1998 following an
increase of $66,000 or 15.3% in 1997. Croghan has an established Specialized
Investments Division which markets non-FDIC insured investment products (e.g.,
mutual funds and annuities). The Specialized Investments Division generated
$131,000 in fees during 1998, compared to $142,000 in 1997 and $113,000 in 1996.
In 1998, Croghan instituted an ATM surcharge fee which is levied
against users of our proprietary automated teller machines that are not Croghan
customers. ATM surcharge fees in 1998 totalled $66,000 and are expected to
increase 10% to 20% in 1999.
In addition to investment division fee income and ATM surcharge fees,
significant components of other operating income include Master Card merchant
fees, safe deposit box fees, commissions from the sale of credit life insurance
on loan products, fees from the sale of official checks and money orders, and
other miscellaneous fee income items.
NON-INTEREST EXPENSES
Non-interest expenses in 1998 decreased by $22,000 to $10,424,000 or
.2% below 1997's total of $10,446,000. This followed an increase of $1,852,000
in 1997 or 21.5% more than 1996's total of $8,594,000. The following table
details non-interest expenses for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Compensation $ 4,577 $4,482 $3,895
Benefits 1,017 1,053 1,007
------- ------ ------
Total personnel expense 5,594 5,535 4,902
Net occupancy expense 654 672 474
Equipment expense 870 749 604
Goodwill amortization 638 638 266
State franchise and other taxes 359 352 477
Postage 235 224 191
Stationery and supplies 223 228 232
Advertising and marketing 203 210 204
Examination expense 173 150 133
Telephone 136 125 95
Professional and consulting services 107 135 139
Third party computer processing 105 304 150
Other 1,127 1,124 727
------- ------- ------
Total non-interest expenses $10,424 $10,446 $8,594
======= ======= ======
</TABLE>
Total personnel expense increased $59,000 or 1.1% in 1998 compared to
an increase of $633,000 or 12.9% in 1997. Net occupancy expense decreased
$18,000 in 1998 after increasing $198,000 in 1997. Equipment expense increased
$121,000 or 16.2% in 1998 following an increase of $145,000 or 24.0% in 1997.
Significant portions of the 1998 and 1997 increases in equipment expense were
attributable to the purchase and maintenance of computer equipment used to
deliver accurate and efficient customer service. Year 2000 compliant mainframe
hardware and software was installed in 1997 and various personal computers were
upgraded to Year 2000 compliant status throughout 1998.
9
<PAGE> 11
Goodwill amortization, arising from the 1996 purchase of Union
Bancshares, Inc., totalled $638,000 in 1998 and 1997, and $266,000 in 1996. The
goodwill created in the Union transaction is being amortized over a 15 year
period.
State franchise taxes, which are based on Croghan's capital structure,
and other taxes increased $7,000 or 2.0% in 1998 following a $125,000 or 26.2%
decrease in 1997. The 1997 reduction resulted from a lower franchise tax rate
structure enacted by the Ohio legislature.
Examination expense increased $23,000 or 15.3% in 1998 following a
$17,000 or 12.8% increase in 1997. Professional and consulting services
decreased by $28,000 or 20.7% in 1998 following a slight decrease in 1997. Third
party computer processing fees decreased $199,000 or 65.5% in 1998 compared to a
$154,000 or 102.7% increase in 1997. The significant increase in 1997 relates to
outside processing associated with the offices acquired in the Union
transaction. In 1997 all offices were converted to a common in-house computer
processing system and this allowed outside computer processing expenses to
decline significantly in 1998.
Other operating expenses decreased slightly in 1998 after increasing
$387,000 or 54.6% in 1997. Major expense categories included in other operating
expenses are Master Card processing and franchise fees, miscellaneous employee
expenses, fidelity and liability insurance, director and committee fees, loan
origination and collection expenses, dues and subscriptions, ATM network fees,
software amortization costs, correspondent bank service charges, and charitable
donations.
FEDERAL INCOME TAXES
Federal income tax expense totalled $1,649,000 in 1998, compared to
$1,609,000 in 1997 and $1,486,000 in 1996. The effective tax rate in 1998
increased to 34.3%, compared to 34.1% in 1997 and 32.7% in 1996. The effective
tax rate for all three years reflects the disallowance of any tax deduction for
goodwill amortization.
INVESTMENT SECURITIES
The investment portfolio is used to enhance net income, provide
liquidity, and diversify financial risk. Croghan currently classifies its
securities as either held-to-maturity (those investments with the intention to
be held until maturity) or available-for-sale. Held-to-maturity securities are
reported at amortized cost, while available-for-sale securities are reported at
their fair values (with the net unrealized holding gain or loss reported as a
separate component of stockholders' equity).
Croghan's investment portfolio is comprised primarily of U.S. Treasury
and U.S. Government Agency obligations. The carrying value of such investments
totalled $58,857,000 at December 31, 1998, compared to $54,713,000 at December
31, 1997. Croghan also invests in debt obligations of domestic corporations and
political subdivisions, and in stock issues of the Federal Reserve Bank of
Cleveland and the Federal Home Loan Bank of Cincinnati. The carrying value of
these investments totalled $17,378,000 at December 31, 1998, compared to
$14,951,000 at December 31, 1997.
As previously noted, Croghan did not sell any securities in 1998. In
1997, Croghan received $7,011,000 in proceeds from the sale of U.S. Treasury
Notes and U.S. Government Agency obligations prior to their stated maturities. A
majority of the 1997 sales were the result of a planned strategy to improve the
portfolio's yield without significantly increasing its average maturity.
TOTAL LOANS RECEIVABLE
Total loans receivable at December 31, 1998 increased $283,000 over
December 31, 1997. The following table summarizes total loans and the percent
change by major category as of December 31:
<TABLE>
<CAPTION>
Percent
1998 1997 Change
(Dollars in thousands)
<S> <C> <C> <C>
Commercial, financial and agricultural $ 32,161 $ 32,739 (1.8)%
Real estate - residential mortgage 103,947 106,195 (2.1)%
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Real estate - nonresidential mortgage 51,484 50,522 1.9%
Real estate - construction 903 3,478 (74.0)%
Consumer 48,327 43,609 10.8%
Credit card 2,537 2,533 .2%
-------- --------
Total loans $239,359 $239,076 .1%
======== ========
</TABLE>
As noted in the preceding table, consumer, nonresidential real estate,
and credit card loans increased. Conversely, residential real estate loans,
construction real estate loans, and commercial, financial, and agricultural
loans decreased. Total loan growth was less than projected and resulted from
intense competition due to the low interest rate environment. Additionally,
Croghan sold $1,804,000 of residential real estate loans to Freddie Mac without
recourse in an effort to mitigate the interest rate risk associated with
long-term mortgage loan financing. Croghan anticipates similar slow loan growth
in 1999, although a change in the rate environment could influence the actual
results.
TOTAL DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits and other interest-bearing liabilities serve as the primary
source of cash flows to fund loan demand and are summarized in the following
table as of December 31:
<TABLE>
<CAPTION>
Percent
1998 1997 Change
(Dollars in thousands)
<S> <C> <C> <C>
Demand, non-interest bearing $ 34,518 $ 30,753 12.2%
Savings, NOW and Money Market deposits 116,887 106,836 9.4%
Time deposits 150,051 151,464 (.9)%
-------- --------
Total deposits 301,456 289,053 4.3%
Federal funds purchased 7,940 8,663 (8.3)%
Securities sold under repurchase agreements 1,200 - 100.0%
Borrowed funds 3,335 3,200 4.2%
-------- --------
Total deposits and other
interest-bearing liabilities $313,931 $300,916 4.3%
======== ========
</TABLE>
All deposit categories, except time deposits, increased in 1998 as a
result of Croghan's aggressive posture towards maintaining its core deposit
base. Croghan will closely monitor its deposit product rates throughout 1999 in
the wake of renewed competition in the Fremont market area.
Other interest-bearing liabilities at December 31, 1998 increased
$612,000 to $12,475,000 from $11,863,000 at December 31, 1997. A $723,000
decrease in federal funds purchased was more than offset by a $135,000 increase
in borrowed funds and a $1,200,000 increase in securities sold under repurchase
agreements. Borrowed funds at December 31, 1998 are comprised of $3,000,000 from
the Federal Home Loan Bank of Cincinnati and $335,000 from NBD Bank. The
proceeds from the Federal Home Loan Bank loans were obtained in 1994 and 1998 to
assist in managing interest rate sensitivity associated with Croghan's fixed
rate real estate loan portfolio. The proceeds from the NBD Bank loan were
obtained in 1996 to assist in funding the purchase of Union.
CAPITAL
Croghan's stockholders' equity at December 31 is summarized in the
following table (with the 1998 amounts reflecting the effect of the 3-for-1
stock split):
<TABLE>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Common stock $23,797 $ 7,932
Surplus 3 8,989
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C>
Retained earnings 9,731 14,587
Net unrealized gain on investment
securities available-for-sale 174 82
------- -------
Total stockholders' equity $33,705 $31,590
======= =======
</TABLE>
As noted in the table, the net unrealized holding gain on investment
securities classified as available-for-sale is a component of stockholders'
equity. At year-end 1998, Croghan held $30,493,000 in available-for-sale
securities with a net unrealized holding gain of $174,000. This compares to 1997
year-end holdings of $34,197,000 with a net unrealized holding gain of $82,000.
Croghan's capital structure is subject to capital requirements as
established by the Federal Reserve Board. To be considered "well capitalized" an
institution must have a Tier I risk-based capital ratio of at least 6% and a
total risk-based capital ratio of at least 10%. At December 31, 1998, Croghan
was deemed "well capitalized" with a Tier I risk-based capital ratio of 11.7%
and a total risk-based capital ratio of 13.0%.
LIQUIDITY
Croghan's primary sources of liquidity are derived from its core
deposit base and stockholders' equity position. Secondary liquidity is provided
by actively managing the investment portfolio and the ability to borrow funds
from correspondent banks under established lines of credit which total
$13,000,000 at December 31, 1998.
Croghan maintains a portion of its assets in liquid form to meet
anticipated customer loan demands and fund possible deposit account withdrawals.
At December 31, 1998, liquid assets in the form of cash and due from banks
totalled $10,334,000 or 3.0% of total assets. These highly liquid assets, in
addition to an evenly staggered maturity schedule within the investment
portfolio and cash flows from loan repayments, provide adequate liquidity for
day-to-day operations.
The liquidity needs of the Corporation, primarily the need to pay
quarterly cash dividends to shareholders and make debt service payments to NBD
Bank, are funded by upstream-dividends from the Bank subsidiary. Dividends paid
to the Corporation by the Bank for such purposes totalled $3,067,000 in 1998,
$3,102,000 in 1997, and $1,667,000 in 1996. Additionally, a special 1996
dividend approved by the regulatory agencies of $15,630,000 was declared to
assist in funding the purchase of Union.
As previously noted, Croghan's indebtedness to NBD Bank totalled
$335,000 at December 31, 1998. Management believes that Croghan's liquidity is
not only sufficient to make the required debt service payments, but also
adequate to fund its daily operating needs and provide for future dividend
payments.
INTEREST RATE RISK
Interest rate risk is one of Croghan's most significant financial
exposures. This risk, which is common to the financial institution sector, is an
integral part of Croghan's operations and impacts the rate pricing strategy for
essentially all loan and deposit product offerings.
In an effort to identify and quantify its interest rate risk, Croghan
uses a model that divides interest-earning assets and interest-bearing
liabilities into repricing categories. Their relationship at December 31, 1998
is noted in the following table:
<TABLE>
<CAPTION>
1 year
Less than through Over
1 year 5 years 5 years
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 8,300 $ - $ -
Investment securities 20,128 50,971 2,999
Loans receivable 97,552 70,577 70,915
--------- -------- -------
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
Total interest-earning assets 125,980 121,548 73,914
Interest-bearing liabilities:
Savings, NOW and Money Market deposits 116,887 - -
Time deposits 118,756 30,905 390
Federal funds purchased 7,940 - -
Securities sold under repurchase agreements 1,200 - -
Borrowed funds 1,335 - 2,000
--------- -------- -------
Total interest-bearing liabilities 246,118 30,905 2,390
Interest sensitivity GAP (120,138) 90,643 71,524
--------- -------- -------
Cumulative GAP $(120,138) $(29,495) $42,029
========= ======== =======
Cumulative earning assets/cumulative
interest-bearing liabilities 51.2% 89.4% 115.0%
==== ==== =====
</TABLE>
A calculated amount, or "GAP", is measured between the repricing assets
and repricing liabilities within each category. This rate sensitivity GAP
provides the framework to measure interest rate risk or the potential exposure
to net interest income that could result from changes in market interest rates.
In an effort to manage interest rate risk, Croghan emphasizes the
products and terms of interest-earning assets and interest-bearing liabilities
which produce satisfactory earnings while limiting the potential negative
effects of changes in market interest rates. Since Croghan's primary source of
revenue is derived from its loan portfolio, a significant number of loans are
made on an adjustable rate basis to reduce the exposure to interest rate risk.
Deposit products, which are Croghan's principal interest-bearing liabilities,
are more difficult to manage since customer preferences for product types and
terms are not easily influenced.
Croghan's potential financial exposure is typically measured based upon
sudden and sustained market rate increases and decreases of 1%. The effect of an
immediate 1% increase in rates would theoretically decrease net interest income
by $940,000 or 6.8%.
Conversely, a 1% decrease in rates would theoretically increase net
interest income by $940,000. The actual future impact of general interest rate
movements on Croghan's net interest income may be materially different from the
calculated amounts since the computations are based upon hypothetical interest
rate changes and various assumptions. The oversight of interest rate risk is the
responsibility of a committee established by Croghan's asset/liability
management policy. The policy provides a framework to quantify and monitor the
risk, to provide for liquidity needs, and to maximize net income by actively
managing net interest yield.
YEAR 2000 PREPAREDNESS
There is considerable concern over the ability of many computer
software programs to function when the year 2000 arrives. This concern arises
because many existing programs use only the last two digits to refer to the
year. As such, programs do not recognize the difference between a year that
begins with "20" instead of the current "19".
Computer operations are a crucial part of Croghan's operating strategy
and a comprehensive program has been implemented to verify that all internal
software will operate properly. Certified Year 2000 compliant mainframe computer
hardware and software was purchased and installed in 1997. To ensure the
validity of this certification, multiple testing sessions were conducted during
the fourth quarter of 1998. Additional testing will occur during the first half
of 1999 and will specifically involve changing the processing dates to December
31, 1999 and January 1, 2000.
A testing program has also been implemented to verify that all desktop
personal computers and network servers will function properly in the year 2000.
Year 2000 test software and date changing procedures have been effected on all
13
<PAGE> 15
of the 136 personal computers located throughout the organization. The network
servers are scheduled for testing prior to June 30, 1999.
Croghan's direct exposure to embedded microchip technology is of little
or no consequence. Unlike many manufacturers which use computerized robots,
controllers, and assembly lines, Croghan has only to assess its elevators and
HVAC systems. All such systems have been evaluated and were determined to be
free of embedded microchip technology.
Croghan also has a vested interest in the computer processing
requirements of its vendors and customers. Many primary suppliers have been
contacted to ensure their preparedness. A tickler system was instituted to
follow up with those vendors that have not replied or possibly indicated some
question as to their commitment to readiness. These vendors will be contacted
throughout 1999.
From a customer standpoint, the problem could affect the ability of
Croghan's borrowers to service debts if their direct operations, vendors, or
customers were impacted. To raise the customers' level of awareness, Croghan has
sponsored two Year 2000 seminars for local businesses. Additionally, the Federal
Reserve Bank instituted a Year 2000 examination process to which Croghan is
subject. As a part of that process, Croghan was required to identify those
commercial customers (borrowers and depositors) which exceeded a set threshold
and prepare written Year 2000 assessment work sheets. As of December 31, 1998,
approximately 200 such assessments have been completed. A tickler system was
then instituted to follow up on those customers with a high inclination to Year
2000 risk. The Year 2000 risk assessment for Croghan's borrowers is a factor in
determining the provision for loan losses.
A majority of the cost associated with upgrading Croghan's internal
hardware and software was incurred when the mainframe equipment was purchased in
1997. Additional direct expenditures attributable to Year 2000 internal hardware
and software approximated $32,000 in 1998 and are estimated at $25,000 for 1999.
Costs associated with the vendor and customer compliance portions of the Year
2000 preparedness plan are difficult to quantify, but direct costs of the
program were estimated at $25,000 in 1998 and should approximate a similar
amount in 1999. An even more difficult amount to quantify is the personnel time
required to verify system integrity and assure compliance with the policies and
procedures mandated by the regulatory agencies. Such expense is estimated to
have amounted to over $100,000 since 1997 and will likely approximate $75,000 in
1999.
As a bank holding company, Croghan has a well established and tested
contingency plan for mainframe and personal computer processing. The plan has
been implemented on various occasions during times of electrical and telephone
circuit interruption. A worst-case Year 2000 scenario would likely be similar in
nature to interruptions that have been experienced in the past. At those times,
Croghan has reverted to the manual processing of customer transactions at the
teller windows with mainframe processing accomplished at the off-site disaster
recovery location (the off-site location was tested in October 1998 for Year
2000 preparedness and found satisfactory). Croghan has strived to ensure that
its contingency plan, vendor, internal processing, and customer segments of the
Year 2000 preparedness plan are being executed.
14
<PAGE> 16
Clifton
Gunderson Ltd.
Certified Public Accountants & Consultants
Independent Auditor's Report
Stockholders and Board of Directors
Croghan Bancshares, Inc.
Fremont, Ohio
We have audited the accompanying consolidated balance sheets of Croghan
Bancshares, Inc. and its subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Croghan Bancshares,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ CLIFTON GUNDERSON LTD.
Toledo, Ohio
January 12, 1999
Members of
NEXIA
International
American Institute
of Certified Public
Accountants
15
<PAGE> 17
CROGHAN BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1998 1997
(Dollars in thousands, except par value)
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 10,334 $ 9,735
Federal funds sold 8,300 -
-------- --------
Total cash and cash equivalents 18,634 9,735
-------- --------
INVESTMENT SECURITIES
Available-for-sale, at market value 30,493 34,197
Held-to-maturity, at amortized cost, market value of
$45,935 in 1998 and $35,588 in 1997 45,742 35,467
-------- --------
Total investment securities 76,235 69,664
-------- --------
LOANS RECEIVABLE 239,359 239,076
Less: Allowance for loan losses 3,418 3,518
-------- --------
Net loans receivable 235,941 235,558
-------- --------
PREMISES AND EQUIPMENT, NET 7,821 8,119
ACCRUED INTEREST RECEIVABLE 2,752 2,613
OTHER REAL ESTATE OWNED - 140
GOODWILL 8,027 8,665
OTHER ASSETS 734 546
-------- --------
TOTAL ASSETS $350,144 $335,040
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing $ 34,518 $ 30,753
Savings, NOW and Money Market deposits 116,887 106,836
Time 150,051 151,464
-------- --------
Total deposits 301,456 289,053
Federal funds purchased and securities sold under repurchase agreements 9,140 8,663
Borrowed funds 3,335 3,200
Dividends payable 285 285
Other liabilities 2,223 2,249
-------- --------
Total liabilities 316,439 303,450
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value. Authorized 3,000,000 shares; issued and
outstanding 1,903,754 shares and 634,526 shares in 1998 and 1997, respectively 23,797 7,932
Surplus 3 8,989
Retained earnings 9,731 14,587
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 174 82
-------- --------
Total stockholders' equity 33,705 31,590
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $350,144 $335,040
======== ========
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes to
consolidated financial statements.
16
<PAGE> 18
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans receivable $ 20,639 $ 20,440 $ 16,700
Interest and dividends on investment securities:
U.S. Treasury securities 1,757 1,752 2,150
Obligations of U.S. Government agencies and corporations 1,499 1,772 1,395
Obligations of states and political subdivisions 646 636 576
Other securities 153 211 298
Interest on federal funds sold 457 245 166
-------- -------- --------
Total interest income 25,151 25,056 21,285
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 10,993 10,753 8,897
Interest on other borrowings 427 475 407
-------- -------- --------
Total interest expense 11,420 11,228 9,304
-------- -------- --------
Net interest income 13,731 13,828 11,981
PROVISION FOR LOAN LOSSES 240 180 160
-------- -------- --------
Net interest income after provision for loan losses 13,491 13,648 11,821
-------- -------- --------
NON-INTEREST INCOME
Trust income 373 324 268
Service charges on deposit accounts 747 720 637
Loss on sale of investment securities - (27) (22)
Gain on sale of loans 35 - -
Other operating income 587 497 431
-------- -------- --------
Total non-interest income 1,742 1,514 1,314
-------- -------- --------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 5,594 5,535 4,902
Net occupancy expense of premises 654 672 474
Amortization of goodwill 638 638 266
Other operating expenses 3,538 3,601 2,952
-------- -------- --------
Total non-interest expenses 10,424 10,446 8,594
-------- -------- --------
Income before federal income taxes 4,809 4,716 4,541
FEDERAL INCOME TAXES 1,649 1,609 1,486
-------- -------- --------
NET INCOME $ 3,160 $ 3,107 $ 3,055
======== ======== ========
NET INCOME PER SHARE, based on 1,903,616 shares in 1998 $ 1.66 $ 1.63 $ 1.60
and 1,903,578 shares in 1997 and 1996 ======= ======= =======
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes to
consolidated financial statements.
17
<PAGE> 19
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
Net
unrealized
Common Retained holding
stock Surplus earnings gain (loss) Total
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 7,932 $ 8,989 $ 10,709 $ 268 $ 27,898
--------
Comprehensive income:
Net income for 1996 - - 3,055 - 3,055
Reclassification adjustment for losses included in
net income, net of tax of $7 - - - 15 15
Change in net unrealized holding gain (loss) for 1996,
net of related income taxes - - - (186) (186)
--------
Total comprehensive income 2,884
--------
Cash dividends declared, $.60 per share - - (1,142) - (1,142)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 7,932 8,989 12,622 97 29,640
--------
Comprehensive income:
Net income for 1997 - - 3,107 - 3,107
Reclassification adjustment for losses included in
net income, net of tax of $9 - - - 18 18
Change in net unrealized holding gain (loss) for 1997,
net of related income taxes - - - (33) (33)
--------
Total comprehensive income 3,092
--------
Cash dividends declared, $.60 per share - - (1,142) - (1,142)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 7,932 8,989 14,587 82 31,590
--------
Comprehensive income:
Net income for 1998 - - 3,160 - 3,160
Change in net unrealized holding gain (loss) for 1998,
net of related income taxes - - - 92 92
--------
Total comprehensive income 3,252
--------
Transfer for three-for-one stock split 15,863 (8,989) (6,874) - -
Issuance of common stock 2 3 - - 5
Cash dividends declared, $.60 per share - - (1,142) - (1,142)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 $ 23,797 $ 3 $ 9,731 $ 174 $ 33,705
======== ======== ======== ======== ========
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes to
consolidated financial statements.
18
<PAGE> 20
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,160 $ 3,107 $ 3,055
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,227 1,100 740
Provision for loan losses 240 180 160
Deferred federal income taxes 63 (48) 54
FHLB stock dividends (94) (88) (68)
Net amortization of investment security premiums and discounts 11 66 89
Loss on sale of investment securities - 27 22
Gain on sale of loans (35) - -
Loss on disposal of equipment 3 114 9
Decrease (increase) in accrued interest receivable (139) (33) 543
Decrease (increase) in other assets (38) 115 333
Increase (decrease) in other liabilities (136) (26) 190
-------- -------- --------
Net cash provided by operating activities 4,262 4,514 5,127
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Union Bancshares Corp., net of $6,213 cash and cash equivalents acquired - - (14,087)
Purchases of investment securities:
Available-for-sale (10,018) (17,522) (12,997)
Held-to-maturity (33,052) (14,947) (5,020)
Proceeds from maturities of investment securities 36,761 32,314 29,096
Proceeds from sales of available-for-sale investment securities - 7,011 15,307
Proceeds from sale of loans receivable 1,805 - 487
Net increase in loans receivable (2,408) (8,599) (9,806)
Capital expenditures (476) (1,145) (309)
Proceeds from sale of equipment 6 12 11
-------- -------- --------
Net cash provided by (used in) investing activities (7,382) (2,876) 2,682
-------- -------- --------
</TABLE>
19
<PAGE> 21
CROGHAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 12,544 $ (6,116) $ (2,982)
Increase (decrease) in federal funds purchased and securities sold
under repurchase agreements 477 2,623 527
Borrowed funds:
Proceeds 2,000 - 4,063
Repayments (1,865) (3,362) -
Proceeds from issuance of common stock 5 - -
Cash dividends paid (1,142) (1,142) (1,142)
-------- -------- --------
Net cash provided by (used in) financing activities 12,019 (7,997) 466
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,899 (6,359) 8,275
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,735 16,094 7,819
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,634 $ 9,735 $ 16,094
======== ======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ 11,610 $ 11,434 $ 9,312
======== ======== ========
Federal income taxes $ 1,495 $ 1,810 $ 1,400
======== ======== ========
Non-cash operating activities:
Change in deferred income taxes on net unrealized holding gain (loss)
on available-for-sale securities $ 48 $ (8) $ (88)
======== ======== ========
Non-cash investing activities:
Transfer of loans to other real estate $ - $ 140 $ 79
======== ======== ========
Change in net unrealized holding gain (loss) on available-for-sale securities $ 140 $ (23) $ (259)
======== ======== ========
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes to
consolidated financial statements.
20
<PAGE> 22
CROGHAN BANCSHARES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Croghan Bancshares, Inc. (the "Corporation") was incorporated on September 27,
1983 in the State of Ohio. The Corporation is a bank holding company and has one
wholly-owned subsidiary, The Croghan Colonial Bank (the "Bank"). The
Corporation, through its subsidiary, operates in one industry segment, the
commercial banking industry. The Bank, an Ohio chartered bank organized in 1888,
has its main office in Fremont, Ohio and has branch offices located in Fremont,
Bellevue, Clyde, Green Springs, and Monroeville, Ohio. The Bank's primary source
of revenue is providing loans to customers primarily located in Sandusky County,
the Village of Green Springs, and the northwest portion of Huron County which
includes the City of Bellevue and Village of Monroeville. Such customers are
predominantly small and middle-market businesses and individuals. See Note 1
regarding the 1996 acquisition of Union Bancshares Corp.
Significant accounting policies followed by the Corporation are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during each reporting period. The
most significant areas involving the use of management's estimates and
assumptions are the allowance for loan losses, depreciation of premises and
equipment, and the carrying value and amortization of goodwill. Actual results
could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Bank established a trust department in 1990 and the assets held by the Bank
in fiduciary or agency capacities for its customers are not included in the
consolidated balance sheets as such items are not assets of the Bank.
CASH AND CASH EQUIVALENTS
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The average reserve balance
for the years ended December 31, 1998 and 1997 approximated $3,274,000 and
$2,460,000, respectively.
For purposes of the statements of cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold which mature
overnight or within three days.
INVESTMENT SECURITIES
The Bank's investment securities are designated at the time of purchase as
either held-to-maturity or available-for-sale. Securities designated as
held-to- maturity are carried at their amortized cost. Securities designated as
available-for-sale are carried at market value, with unrealized gains and
losses, net of applicable income taxes, on such securities recognized as a
separate component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
21
<PAGE> 23
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
discounts to maturity. Such amortization and accretion is included in
interest and dividends on investment securities.
Gains and losses on sales of investment securities are accounted for on a
completed transaction basis, using the specific identification method, and are
included in non-interest income.
The Bank does not hold any derivative financial instruments. The Bank does make
fixed-rate loan commitments for short periods of time during the course of its
normal operations, however, such commitments are not material at any point of
time.
LOANS RECEIVABLE
Loans receivable are stated at their principal amount, adjusted for loan fees
and costs and net of an allowance for loan losses. Interest is accrued as earned
based upon the daily outstanding principal balance.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The allowance for loan losses is determined based on an analysis of the loan
portfolio and reflects an amount which, in management's judgment, is adequate to
provide for possible loan losses. Such analysis, which is done on a quarterly
basis, is based on the character of the loan portfolio, value of any underlying
collateral, current economic conditions, past loan loss experience, and such
other factors as management believes requires current recognition in estimating
loan losses. Various regulatory agencies, as part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Loans are generally placed on a nonaccrual basis when, in the opinion of
management, full collection of principal and interest is unlikely. At the time a
loan is placed on nonaccrual status, interest previously accrued, but not
collected, is charged against current interest income. Income on such loans is
then recognized only to the extent that cash is received and where future
collections of principal are probable.
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure or
deeded to the Bank in lieu of foreclosure on real estate mortgage loans on which
the borrowers have defaulted as to payment of principal and interest. Other real
estate owned is recorded at the lower of cost or fair value, less estimated
costs to sell, and any loan balance in excess of fair value is charged to the
allowance for loan losses. Subsequent write-downs are included in other
operating expense, as are gains or losses upon sale and expenses
related to maintenance of the properties.
PREMISES AND EQUIPMENT
Premises and equipment is stated at cost, less accumulated depreciation. Upon
the sale or disposition of the assets, the difference between the depreciated
cost and proceeds is charged or credited to income. Depreciation is determined
based on the estimated useful lives of the individual assets (typically 20 to 40
years for buildings and 3 to 10 years for equipment) and is computed using both
accelerated and straight-line methods.
22
<PAGE> 24
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill arising from the 1996 purchase of Union Bancshares Corp. is being
amortized on a straight-line basis over a period of 15 years.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
FEDERAL INCOME TAXES
Deferred income taxes are provided on temporary differences between financial
statement and income tax reporting. Temporary differences are differences
between the amounts of assets and liabilities reported for financial statement
purposes and their tax bases. Deferred tax assets are recognized for temporary
differences that will be deductible in future years' tax returns and for
operating loss and tax credit carryforwards. Deferred tax assets are reduced by
a valuation allowance if it is deemed more likely than not that some or all of
the deferred tax assets will not be realized. Deferred tax liabilities are
recognized for temporary differences that will be taxable in future years' tax
returns.
The Corporation and the Bank are not currently subject to state and local income
taxes.
COMPREHENSIVE INCOME
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" in June 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income (as defined) in a full set of general-purpose financial statements.
Statement 130 requires classification of items of other comprehensive income by
their nature in a financial statement and display of the accumulated balance of
other comprehensive income separately from retained earnings and surplus in the
equity section of the balance sheet. The Corporation has only one item of other
comprehensive income and has elected to report comprehensive income in the
consolidated statements of stockholders' equity, with reclassification of 1997
and 1996 amounts.
PER SHARE DATA
Net income per share is computed based on the weighted average number of shares
of common stock outstanding during each year, after restatement for stock
dividends. Under Financial Accounting Standards Board's Statement No. 128,
"Earnings Per Share", which was effective in 1997, this computation is referred
to as "basic earnings per share". The adoption of Statement 128 in 1997 had no
impact on the previously reported net income per share for 1996.
Dividends per share are based on the number of shares outstanding at the
declaration date, after restatement for stock dividends.
This information is an integral part of the accompanying
consolidated financial statements.
23
<PAGE> 25
CROGHAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACQUISITION
On August 1, 1996, the Corporation acquired for cash all of the outstanding
shares of Union Bancshares Corp. ("Union"). Union's principal subsidiary was The
Union Bank and Savings Company, an Ohio banking corporation. Union and its
subsidiaries were subsequently merged into the Corporation or the Bank with the
transaction accounted for as a purchase, resulting in goodwill of $9,569,000
which is being amortized over a period of 15 years. Accordingly, the results of
operations of Union have been included in the consolidated results of the
Corporation from August 1, 1996.
NOTE 2 - INVESTMENT SECURITIES
At December 31, 1998, a net unrealized holding gain of $174,000, net of federal
income taxes of $90,000, was reported with respect to reporting
available-for-sale investment securities at market value. At December 31, 1997,
such accounting resulted in a net unrealized holding gain of $82,000, net of
federal income taxes of $42,000. Such amounts are reported as a component of
stockholders' equity.
The amortized cost and market value of investment securities as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Amortized Market Amortized Market
cost value cost value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $28,010 $28,245 $28,459 $28,551
Obligations of U.S. Government agencies and corporations 2,115 2,141 5,108 5,136
Obligations of states and political subdivisions 104 107 505 510
------- ------- ------- -------
Total available-for-sale 30,229 30,493 34,072 34,197
------- ------- ------- -------
Held-to-maturity:
Obligations of U.S. Government agencies and corporations 28,471 28,463 21,026 21,040
Obligations of states and political subdivisions 15,034 15,235 11,797 11,905
Other securities 2,237 2,237 2,644 2,643
------- ------- ------- -------
Total held-to-maturity 45,742 45,935 35,467 35,588
------- ------- ------- -------
Total $75,971 $76,428 $69,539 $69,785
======= ======= ======= =======
</TABLE>
A summary of unrealized gains and losses on investment securities at December
31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
Gross Gross Gross Gross
unrealized unrealized unrealized unrealized
gains losses gains losses
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $239 $ 4 $101 $ 9
Obligations of U.S. Government agencies and corporations 27 1 53 25
Obligations of states and political subdivisions 3 - 5 -
---- ---- ---- ----
Total available-for-sale 269 5 159 34
---- ---- ---- ----
Held-to-maturity:
Obligations of U.S. Government agencies and corporations 73 81 43 29
Obligations of states and political subdivisions 202 1 108 -
Other securities - - - 1
---- ---- ---- ----
Total held-to-maturity 275 82 151 30
---- ---- ---- ----
Total $544 $ 87 $310 $ 64
==== ==== ==== ====
</TABLE>
24
<PAGE> 26
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and market value of investment securities at December 31,
1998, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
Amortized Market Amortized Market
cost value cost value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $15,996 $16,098 $ 3,734 $ 3,750
Due after one year through five years 12,014 12,147 37,665 37,807
Due after five years through ten years 1,527 1,553 1,562 1,587
Over ten years 692 695 644 654
Other securities having no maturity date - - 2,137 2,137
------- ------- ------- -------
Total $30,229 $30,493 $45,742 $45,935
======= ======= ======= =======
</TABLE>
Investment securities with an amortized cost of $36,588,000 at December 31, 1998
and $43,394,000 at December 31, 1997 were pledged to secure public deposits and
for other purposes as required or permitted by law.
There were no sales of investment securities during 1998. Proceeds from sales of
investment securities during 1997 and 1996 all related to available-for-sale
securities. Proceeds from such sales during 1997 amounted to $7,011,000,
resulting in gross realized gains and losses of $8,000 and $35,000,
respectively. Proceeds from such sales during 1996 amounted to $15,307,000,
resulting in gross realized gains and losses of $49,000 and $71,000,
respectively.
Other securities consist of corporate obligations and investments in Federal
Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. The
Bank's investment in Federal Home Loan Bank stock amounted to $1,372,000 and
$1,278,000 at December 31, 1998 and 1997, respectively. The investment in
Federal Reserve Bank of Cleveland stock amounted to $697,000 at December 31,
1998 and 1997.
NOTE 3 - LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 32,161 $ 32,739
Real estate - residential mortgage 103,947 106,195
Real estate - non-residential mortgage 51,484 50,522
Real estate - construction 903 3,478
Consumer 48,327 43,609
Credit card 2,537 2,533
-------- --------
Total $239,359 $239,076
======== ========
</TABLE>
Fixed rate loans totalled $128,406,000 at December 31, 1998 and $121,088,000 at
December 31, 1997.
The Bank's investment in impaired loans totalled $316,000 at December 31, 1998
and $257,000 at December 31, 1997, including $148,000 and $71,000, respectively,
of such loans for which an allowance for loan losses has been provided. The
following is a summary of the activity in the allowance for loan losses for
impaired loans, which is included in the Bank's total allowance for loan losses,
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 71 $ 75
Reduction for loan pay-downs - (4)
Addition for provision 77 -
---- ----
Balance at end of year $148 $ 71
==== ====
</TABLE>
25
<PAGE> 27
NOTE 3 - LOANS RECEIVABLE (CONTINUED)
The average recorded investment in impaired loans for the years ended December
31, 1998 and 1997 amounted to $432,000 and $521,000, respectively. Interest
income on impaired loans is accrued based on the principal amounts outstanding.
The accrual of interest is discontinued when an impaired loan becomes 90 days
delinquent unless it is well collateralized and in the process of collection.
For nonaccrual loans, interest income is recorded on a cash basis as long as
future collections of principal are probable. Interest income recognized on
impaired loans for the years ended December 31, 1998, 1997 and 1996 amounted to
$27,000, $90,000 and $98,000, respectively, including $27,000, $46,000 and
$92,000, respectively, which was recognized on a cash basis.
The amount of loans on a nonaccrual of interest at December 31, 1998 and 1997
amounted to $315,000 and $212,000, respectively. The impact on interest income
of such nonaccrual loans was not significant. None of the loans to directors
and executive officers at December 31, 1998 or 1997 were on a nonaccrual basis.
Certain directors and executive officers, including their immediate families and
companies in which they are principal owners, are loan customers of the Bank.
Such loans are made in the ordinary course of business in accordance with the
Bank's normal lending policies, including the interest rate charged and
collateralization, and do not represent more than a normal collection risk. Such
loans amounted to $7,347,000 and $8,020,000 at December 31, 1998 and 1997,
respectively. The following is a summary of activity during 1998 and 1997 for
such loans:
<TABLE>
<CAPTION>
Balance at Balance
beginning Additions Repayments at end
(Dollars in thousands)
<S> <C> <C> <C> <C>
1998 $ 8,020 $ 7,258 $ 7,931 $ 7,347
======= ======= ======= =======
1997 $ 8,451 $10,421 $10,852 $ 8,020
======= ======= ======= =======
</TABLE>
Additions and repayments include loan renewals.
Most of the Bank's lending activity is with customers primarily located within
Sandusky County, the Village of Green Springs, and the northwest portion of
Huron County. As of December 31, 1998 and 1997, the Bank's loans from borrowers
in the agriculture industry represent the single largest industry and amounted
to $10,056,000 and $11,262,000, respectively. Agricultural loans are generally
secured by property, equipment, and crop income. Repayment is expected from cash
flow from the harvest and sale of crops. The agricultural customers are subject
to the risks of weather and market prices of crops which could have an impact on
their ability to repay their loans. Credit losses arising from the Bank's
lending experience in the agriculture industry compare favorably with the Bank's
loss experience on its loan portfolio as a whole. Credit evaluation of
agricultural lending is based on an evaluation of cash flow coverage of
principal and interest payments and the adequacy of collateral received.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following represents a summary of the activity in the allowance for loan
losses for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,518 $ 3,368 $ 2,614
Provision charged to operations 240 180 160
Addition resulting from acquisition of Union - - 711
Loans charged-off (475) (287) (428)
Recoveries of loans charged-off 135 257 311
------- ------- -------
Balance at end of year $ 3,418 $ 3,518 $ 3,368
======= ======= =======
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1998 and
1997:
26
<PAGE> 28
NOTE 5 - PREMISES AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Land and improvements $ 1,028 $ 1,028
Buildings 8,056 7,946
Equipment 3,551 3,418
------- -------
12,635 12,392
Accumulated depreciation 4,814 4,273
------- -------
Premises and equipment, net $ 7,821 $ 8,119
======= =======
</TABLE>
Depreciation expense amounted to $766,000 in 1998, $669,000 in 1997 and $474,000
in 1996.
NOTE 6 - DEPOSITS
Time deposits at December 31, 1998 and 1997 include individual deposits of
$100,000 and over which amounted to $24,487,000 and $26,923,000, respectively.
Interest expense on time deposits of $100,000 or more amounted to $1,476,000 for
1998, $1,590,000 for 1997 and $1,112,000 for 1996.
At December 31, 1998, the scheduled maturities of time deposits were as follows
(dollars in thousands):
<TABLE>
<S> <C>
1999 $109,485
2000 27,050
2001 8,931
2002 2,278
2003 1,917
2004 and after 390
--------
Total $150,051
========
</TABLE>
NOTE 7 - OTHER BORROWINGS
Federal funds purchased and securities sold under repurchase agreements
generally mature within one to four days from the transaction date. Such balance
amounted to $9,140,000 at December 31, 1998 and $8,663,000 at December 31, 1997.
Additional information concerning federal funds purchased and securities sold
under repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Average balance during the year $5,418 $3,515
Average interest rate during the year 4.45% 3.88%
Maximum month-end balance during the year $9,140 $8,663
====== ======
</TABLE>
At December 31, 1998 and 1997, borrowed funds consisted of the following:
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Federal Home Loan Bank:
Secured note, with interest at 7.00% due April 1999 $1,000 $1,000
Secured note, with interest at 5.14% due October 2005 2,000 -
------ ------
3,000 1,000
------ ------
NBD Bank:
Term secured note, with interest at a variable rate (7.25%
in 1998 and 8.00% in 1997) 335 2,200
------ ------
Total borrowed funds $3,335 $3,200
====== ======
</TABLE>
27
<PAGE> 29
NOTE 7 - OTHER BORROWINGS (CONTINUED)
Interest is payable monthly on the Federal Home Loan Bank notes which are
secured by stock in the Federal Home Loan Bank of Cincinnati and all eligible
mortgage loans. The NBD Bank term note requires interest and principal payable
on a quarterly basis, with the balance of the note due in July, 1999. Stock in
The Croghan Colonial Bank is pledged as collateral on the NBD Bank note.
NOTE 8 - COMMON STOCK
On May 12, 1998, the Board of Directors declared a three-for-one stock split
(stock split effected in the form of a 200% stock dividend) to shareholders of
record as of May 29, 1998, payable on June 5, 1998. Since the par value of the
shares was not adjusted, the stock dividend was recorded at the par value of the
additional 1,269,052 shares issued (amounting to $15,863,000) through a transfer
to common stock of the balance of the Corporation's surplus ($8,989,000) and a
charge to retained earnings ($6,874,000).
All per share amounts included in the consolidated financial statements and the
notes thereto are based on the increased number of shares giving retroactive
effect to the 1998 stock split.
NOTE 9 - OTHER OPERATING EXPENSES
The following is a summary of other operating expenses for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Equipment $ 870 $ 749 $ 604
State franchise and other taxes 359 352 477
Postage, stationery and supplies 458 452 423
Professional and examination fees 280 285 272
MasterCard 293 277 225
Other 1,278 1,486 951
------ ------ ------
Total other operating expenses $3,538 $3,601 $2,952
====== ====== ======
</TABLE>
NOTE 10 - FEDERAL INCOME TAXES
Total federal income tax expense for 1998, 1997 and 1996 was allocated as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Income from operations $ 1,649 $ 1,609 $ 1,486
Stockholders' equity 48 (8) (88)
------- ------- -------
Total $ 1,697 $ 1,601 $ 1,398
======= ======= =======
</TABLE>
Federal income tax expense allocated to operations consisted of the following
for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Current expense $ 1,586 $ 1,657 $ 1,432
Deferred expense (credit) 63 (48) 54
------- ------- -------
Total $ 1,649 $ 1,609 $ 1,486
======= ======= =======
</TABLE>
28
<PAGE> 30
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
Income tax expense attributable to income from operations differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to income
before federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C> <C>
Expected tax using statutory tax rate of 34% $ 1,635 $ 1,604 $ 1,544
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and
political subdivision loans (242) (250) (217)
Interest expense associated with carrying certain state and
municipal securities and political subdivision loans 37 37 32
Amortization of goodwill 217 217 90
Other, net 2 1 37
------- ------- -------
Total $ 1,649 $ 1,609 $ 1,486
======= ======= =======
</TABLE>
The deferred federal income tax expense (credit) of $63,000 for 1998, ($48,000)
for 1997 and $54,000 for 1996 resulted from the tax effects of temporary
differences. There was no impact for changes in tax laws and rates or changes in
the valuation allowance for deferred tax assets.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
(Dollars in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 742 $ 705
Accrued vacation and medical insurance expenses 109 145
Other 29 35
------- -------
Total deferred tax assets 880 885
------- -------
Deferred tax liabilities:
Unrealized holding gain on securities available-for-sale (90) (42)
Purchase accounting basis difference (600) (579)
Depreciation of premises and equipment (217) (196)
Federal Home Loan Bank stock dividends (133) (101)
Deferred loan costs (158) (143)
Other (39) (70)
------- -------
Total deferred tax liabilities (1,237) (1,131)
------- -------
Net deferred tax liabilities $ (357) $ (246)
======= =======
</TABLE>
The net deferred tax liabilities at December 31, 1998 and 1997 are included in
other liabilities in the consolidated balance sheets.
The Corporation believes it is more likely than not that the benefit of deferred
tax assets will be realized. Therefore, no valuation allowance for deferred tax
assets is deemed necessary as of December 31, 1998 and 1997.
NOTE 11 - RETIREMENT PLANS
In September, 1996, the Board of Directors of the Bank authorized the
termination of its two retirement plans (Croghan Plan and Union Plan). This
action resulted in a pretax curtailment loss of $395,000 from the Croghan Plan
and a pretax curtailment gain of $342,000 from the Union Plan. Such amounts were
recorded in 1996 and were determined under the provisions of Financial
Accounting Standards Board Statement No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Plans and Termination Benefits".
Final settlement of both plans occurred in 1997 and resulted in a pretax gain of
$37,000.
Also in 1996, the Board of directors of the Bank approved the adoption of the
Croghan Colonial Bank 401(k) Profit Sharing
29
<PAGE> 31
NOTE 11 - RETIREMENT PLANS (CONTINUED)
Plan, a defined contribution plan, to be effective January 1, 1997. This plan
includes both a profit sharing and employer matching contribution. In 1998, the
Plan elected to permit investing in the Corporation's stock subject to various
limitations. The Bank's profit sharing and matching contributions to the 401(k)
profit sharing plan for the years ended December 31, 1998 and 1997 amounted to
$278,000 and $272,000, respectively.
Pension expense relating to the two terminated plans amounted to $225,000 in
1996 and is included in salaries, wages and employee benefits in the
accompanying 1996 consolidated statement of operations. The components of 1996
pension expense are as follows (dollars in thousands):
<TABLE>
<S> <C>
Service cost - benefits earned during the period $ 208
Interest cost on the projected benefit obligation 250
Actual return on plan assets (271)
Net curtailment loss 53
Net amortization and deferral (15)
-----
Total $ 225
=====
</TABLE>
No other postretirement benefits are offered to retirees.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are primarily loan commitments to extend credit and
letters of credit. These instruments involve, to varying degrees, elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The contract amount of these instruments reflects the extent of
involvement the Bank has in these financial instruments.
The Bank's exposure to credit loss in the event of the nonperformance by the
other party to the financial instruments for loan commitments to extend credit
and letters of credit is represented by the contractual amounts of these
instruments. The Bank uses the same credit policies in making loan commitments
as it does for on-balance sheet loans.
Financial instruments whose contract amount represents credit risk totalled the
following amounts at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Contract amount
1998 1997
(Dollars in thousands)
<S> <C> <C>
Commitments to extend credit $47,942 $47,766
======= =======
Letters of credit $ 1,352 $ 1,319
======= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's credit
evaluation of the customer. Collateral held varies but may include accounts
receivable; inventory; property, plant, and equipment; and income-producing
commercial properties.
Letters of credit are written conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party and are reviewed for
renewal at expiration. At December 31, 1998, letters of credit totalling
$952,000 expire in 1999 and $400,000 expire in 2001. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers. The Bank requires collateral supporting these commitments
when deemed necessary. The extent of collateral on these commitments at December
31, 1998 and 1997 approximates 100% of the commitments.
30
<PAGE> 32
NOTE 13 - REGULATORY MATTERS
The Corporation and Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1998 and
1997, that the Corporation and Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from federal and state
banking agencies categorized the Corporation and Bank as "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well capitalized", the Corporation and Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the category.
The actual capital amounts and ratios are also presented in the following table:
<TABLE>
<CAPTION>
To be
For "well capitalized"
capital under prompt
adequacy corrective
Actual purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets)
Consolidated $28,235 13.0% $17,434 Greater than = 8.0% $21,792 Greater than = 10.0%
Bank 28,523 13.1% 17,430 Greater than = 8.0% 21,788 Greater than = 10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated $25,502 11.7% $ 8,717 Greater than = 4.0% $13,075 Greater than = 6.0%
Bank 25,791 11.8% 8,715 Greater than = 4.0% 13,073 Greater than = 6.0%
Tier I Capital (to Average Assets)
Consolidated $25,502 7.6% $10,081 Greater than = 3.0% $16,801 Greater than = 5.0%
Bank 25,791 7.7% 13,441 Greater than = 4.0% 16,801 Greater than = 5.0%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
Consolidated $25,548 11.9% $17,244 Greater than = 8.0% $21,555 Greater than =10.0%
Bank 27,680 12.8% 17,244 Greater than = 8.0% 21,555 Greater than =10.0%
Tier I Capital (to Risk-Weighted Assets)
Consolidated $22,843 10.6% $ 8,622 Greater than = 4.0% $12,933 Greater than = 6.0%
Bank 24,975 11.6% 8,622 Greater than = 4.0% 12,933 Greater than = 6.0%
Tier I Capital (to Average Assets)
Consolidated $22,843 7.0% $ 9,817 Greater than = 3.0% $16,212 Greater than = 5.0%
Bank 24,975 7.7% 12,970 Greater than = 4.0% 16,212 Greater than = 5.0%
</TABLE>
On a parent company only basis, the Corporation's only source of funds are
dividends paid by the Bank. The ability of the Bank to pay dividends is subject
to limitations under various laws and regulations, and to prudent and sound
banking principles. Generally, subject to certain minimum capital requirements,
the Bank may declare a dividend without the approval of the State of Ohio
Division of Financial Institutions, unless the total dividends in a calendar
year exceed the total of its net profits for the year combined with its retained
profits of the two preceding years. Under these provisions, approximately
$358,000 was available for dividends on January 1, 1999, without the need to
obtain the approval of the State of Ohio Division of Financial Institutions.
31
<PAGE> 33
NOTE 13 - REGULATORY MATTERS (CONTINUED)
The Board of Governors of the Federal Reserve System generally considers it to
be an unsafe and unsound banking practice for a bank holding company to pay
dividends except out of current operating income, although other factors such as
overall capital adequacy and projected income may also be relevant in
determining whether dividends should be paid.
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS 1998 1997
(Dollars in thousands)
Assets:
<S> <C> <C>
Cash $ 18 $ 9
Dividends receivable from subsidiary 285 285
Investment in subsidiary 33,994 33,722
Other assets 45 89
------- -------
Total assets $34,342 $34,105
======= =======
Liabilities:
Borrowed funds $ 335 $ 2,200
Dividends payable 285 285
Other liabilities 17 30
------- -------
Total liabilities 637 2,515
------- -------
Stockholders' equity:
Common stock 23,797 7,932
Surplus 3 8,989
Retained earnings 9,731 14,587
Net unrealized holding gain on investment securities available-for-sale,
net of related income taxes 174 82
------- -------
Total stockholders' equity 33,705 31,590
------- -------
Total liabilities and stockholders' equity $34,342 $34,105
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS 1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Income - dividends from subsidiary $ 3,067 $ 3,102 $ 17,297
Expenses - interest, professional fees and other expenses,
net of federal income tax benefit 87 172 128
-------- -------- --------
Income before equity in undistributed net income of subsidiary 2,980 2,930 17,169
Equity in net income of subsidiary, less dividends 180 177 (14,114)
-------- -------- --------
Net income $ 3,160 $ 3,107 $ 3,055
======== ======== ========
</TABLE>
Dividends from subsidiary for 1996 include a $15,630,000 special dividend in
connection with the purchase of Union Bancshares Corp.
32
<PAGE> 34
NOTE 14 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,160 $ 3,107 $ 3,055
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net income of subsidiary, less dividends (180) (177) 14,114
Decrease (increase) in other assets 44 10 (59)
Increase (decrease) in other liabilities (13) (23) 53
-------- -------- --------
Net cash provided by operating activities 3,011 2,917 17,163
-------- -------- --------
Cash flow used in investing activities -
purchase of Union Bancshares Corp., net of $215 cash acquired - - (20,085)
-------- -------- --------
Cash flows from financing activities:
Proceeds from borrowed funds - - 4,063
Proceeds from issuance of common stock 5 - -
Repayments of borrowed funds (1,865) (1,863) -
Cash dividends paid (1,142) (1,142) (1,142)
-------- -------- --------
Net cash provided by (used in) financing activities (3,002) (3,005) 2,921
-------- -------- --------
Net increase (decrease) in cash 9 (88) (1)
Cash at beginning of the year 9 97 98
-------- -------- --------
Cash at end of the year $ 18 $ 9 $ 97
======== ======== ========
</TABLE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments",
requires that the estimated fair value of financial instruments, as defined by
the Statement, be disclosed. Statement 107 also requires disclosure of the
methods and significant assumptions used to estimate the fair value of financial
instruments.
The estimated fair values of recognized financial instruments at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
amount value amount value
(Dollars in thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 18,634 $ 18,634 $ 9,735 $ 9,735
Investment securities 76,235 76,428 69,664 69,785
Loans receivable, net 235,941 239,182 235,558 240,078
-------- -------- -------- --------
Total $330,810 $334,244 $314,957 $319,598
======== ======== ======== ========
FINANCIAL LIABILITIES
Deposits $301,456 $301,682 $289,053 $289,641
Federal funds purchased and securities sold
under repurchase agreements 9,140 9,140 8,663 8,663
Borrowed funds 3,335 3,335 3,200 3,200
-------- -------- -------- --------
Total $313,931 $314,157 $300,916 $301,504
======== ======== ======== ========
</TABLE>
The above does not include accrued interest receivable, dividends payable, and
other liabilities which are also considered financial instruments. The estimated
fair value of such items is considered to be their carrying amount.
33
<PAGE> 35
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The Bank also has unrecognized financial instruments at December 31, 1998 and
1997. These financial instruments relate to commitments to extend credit and
letters of credit. The contract amount of such financial instruments amounts to
$49,294,000 at December 31, 1998 and $49,085,000 at December 31, 1997. Such
amounts are also considered to be the estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments shown above:
Cash and cash equivalents:
Fair value is determined to be the carrying amount for these items (which
include cash on hand, due from banks, and federal funds sold) because they
represent cash or mature in 90 days or less and do not represent unanticipated
credit concerns.
Investment securities:
The fair value of investment securities (both available-for-sale and held-to-
maturity) is determined based on quoted market prices of the individual
securities or, if not available, estimated fair value was obtained by comparison
to other known securities with similar risk and maturity characteristics. Such
value does not consider possible tax ramifications or estimated transaction
costs.
Loans receivable:
Fair value for loans receivable was estimated for portfolios of loans with
similar financial characteristics. For adjustable rate loans, which re-price at
least annually and generally possess low risk characteristics, the carrying
amount is believed to be a reasonable estimate of fair value. For fixed rate
loans the fair value is estimated based on secondary market quotes from various
dealers, considering weighted average rates and terms of the portfolio, adjusted
for credit and interest rate risk inherent in the loans. Fair value for
nonperforming loans is based on recent appraisals or estimated discounted cash
flows. The estimated value of credit card loans is based on existing loans and
does not include the value that relates to estimated cash flows from new loans
generated from existing cardholders over the remaining life of the portfolio.
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts,
and certain money market deposits, is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
offered at year end for deposits of similar remaining maturities. The estimated
fair value does not include the benefit that results from the low-cost funding
provided by the deposit liabilities compared to the cost of borrowing funds in
the marketplace.
Other financial instruments:
The fair value of commitments to extend credit and letters of credit is
determined to be the contract amount since these financial instruments generally
represent commitments at existing rates. The fair value of federal funds
purchased and securities sold under repurchase agreements is determined to be
the carrying amount since these financial instruments represent obligations
which are due on demand. The fair value of borrowed funds is determined to be
the carrying amount since the interest rates on such borrowings closely
approximate current year end rates.
The fair value estimates of financial instruments are made at a specific point
34
<PAGE> 36
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
in time based on relevant market information. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
entire holdings of a particular financial instrument over the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments. Since no ready market exists for a significant
portion of the financial instruments, fair value estimates are largely based on
judgments after considering such factors as future expected credit losses,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
these estimates.
NOTE 16 - CONTINGENT LIABILITIES
In the normal course of business, the Corporation and its subsidiary may be
involved in various legal actions, but in the opinion of management and its
legal counsel, the ultimate disposition of such matters is not expected to have
a material adverse effect on the consolidated financial statements.
This information is an integral part of the accompanying
consolidated financial statements.
35
<PAGE> 37
DIRECTORS AND OFFICERS OF CROGHAN BANCSHARES, INC.
DIRECTORS---------------------------------------------------------------------
JANET E. BURKETT
Treasurer
Burkett Industries, Inc.
THOMAS F. HITE
President & Chief Executive Officer
The Croghan Colonial Bank
JOHN P. (PHIL) KELLER
Vice President, Keller-Ochs-Koch
Funeral Home, Inc.
STEPHEN A. KEMPER
Owner
Kemper Iron & Metal Company
DANIEL W. LEASE
President, Wahl Refractories, Inc.
ROBERT H. MOYER
Chairman, Mosser Construction, Inc.
ALBERT C. NICHOLS
Chairman of the Board of Directors
The Croghan Colonial Bank
K. BRIAN PUGH
President & CEO
Clyde Parts Company
CLEMENS J. SZYMANOWSKI
Retired
J. TERRENCE WOLFE
Vice President, Robert F. Wolfe Co.
CLAUDE E. YOUNG
Chairman, Progress Plastic
Products, Inc.
GARY L. ZIMMERMAN
Vice President, Swint-Reineck
Hardware, Inc.
OFFICERS----------------------------------------------------------------------
ALBERT C. NICHOLS
Chairman of the Board of Directors
THOMAS F. HITE
President
JAMES K. WALTER
Vice President, Secretary
ALLAN E. MEHLOW
Treasurer
36
<PAGE> 38
DIRECTORS AND OFFICERS OF THE CROGHAN COLONIAL BANK
DIRECTORS --------------------------------------------------------------------
JANET E. BURKETT
Treasurer
Burkett Industries, Inc.
THOMAS F. HITE
President & Chief Executive Officer
The Croghan Colonial Bank
JOHN P. (PHIL) KELLER
Vice President, Keller-Ochs-Koch
Funeral Home, Inc.
STEPHEN A. KEMPER
Owner, Kemper Iron & Metal Company
DANIEL W. LEASE
President, Wahl Refractories, Inc.
ROBERT H. MOYER
Chairman, Mosser Construction, Inc.
ALBERT C. NICHOLS
Chairman of the Board of Directors
The Croghan Colonial Bank
K. BRIAN PUGH
President & CEO
Clyde Parts Company
CLEMENS J. SZYMANOWSKI
Retired
J. TERRENCE WOLFE
Vice President, Robert F. Wolfe Co.
CLAUDE E. YOUNG
Chairman, Progress Plastic
Products, Inc.
GARY L. ZIMMERMAN
Vice President, Swint-Reineck
Hardware, Inc.
Directors Emeriti
T. L. HILTY D.W. MILLER D.B. SLESSMAN
OFFICERS----------------------------------------------------------------------
ADMINISTRATIVE
ALBERT C. NICHOLS
Chairman of the Board of Directors
THOMAS F. HITE
President & Chief Executive Officer
CHIEF OPERATING OFFICER
THOMAS F. CAMELLA
Vice President
CHIEF LENDING OFFICER
WILLIAM C. HENSLEY
Vice President
COMMERCIAL AND REAL ESTATE LOANS
JAMES K. WALTER
Sr. Vice President
OIC Commercial Loans
JAMES A. DRAEGER
Vice President/OIC R.E. Loans
Agricultural Administrator
JAMES R. WALTERS
Vice President Real Estate Loans
JEFFREY L. GEARY
Assistant Vice President
Commercial Loans
JEFFERY C. HUBER
Assistant Vice President
Commercial Loans
MARK A. LOHRBACH
Loan Officer
NANCY C. RODDY
Loan Officer
CONSUMER LOANS
JOSEPH W. BERGER
Assistant Vice President
OIC Consumer Loans
JACQUELINE L. LILLY
Assistant Vice President
Consumer Loans
JEFF D. WILSON
Loan Officer
MICHAEL S. WISE
Loan Officer
GREGG C. COLEMAN
Loan Officer
ACCOUNTING
ALLNA E. MEHLOW
Vice President
Chief Financial Officer
LAWRENCE R. FULK
Vice President/Controller
37
<PAGE> 39
OFFICERS----------------------------------------------------------------------
TRUST DEPARTMENT
BARRY F. LUSE
Vice President/Trust Officer
RICHARD G. STEIN
Assistant Vice President/
Trust Officer
NORMA J. COZETTE
Trust Operations Manager
COMPLIANCE AND SECURITY
SANDRA S. REED
Compliance/Security Officer
HUMAN RESOURCE
PAMELA J. SWINT
Human Resource Manager
AUDIT
JOHN C. HOFFMAN
Auditor
OPERATIONS
MICHAEL J. HARTENSTEIN
Operations Officer
TERRY A. SCHROEDER
Information Systems Manager
DEPOSIT ADMINISTRATION
ROBERT L. OVERMYER
Assistant Vice President
Deposit Administrator
MAIN OFFICE
JUDITH A. GANGWER
Branch Manager
WEST SIDE OFFICE
JOSEPHINE L. WEYER
Branch Manager
EAST SIDE OFFICE
RONALD T. GOEHRING
Branch Manager
COLEEN O. MILLER
Assistant Cashier/
Assistant Branch Manager
BALLVILLE OFFICE
JAMI L. SEVERS
Branch Manager
GREEN SPRINGS OFFICE
THEODORE J. RUTHERFORD
Branch Manager/
Agricultural Representative
MARILYN J. HUMBERT
Assistant Cashier/
Assistant Branch Manager
BELLEVUE OFFICES
DEE A. BLACKBURN
Branch Manager
CLYDE OFFICE
RICHARD E. LAWRIE
Branch Manager
MONROEVILLE OFFICE
DAVID M. SABO
Branch Manager
38
<PAGE> 1
Exhibit 21
CROGHAN BANCSHARES, INC.
Subsidiaries of the Registrant
State of Percentage of
Subsidiary Incorporation securities owned
The Croghan Colonial Bank (1) Ohio 100%
(1) The subsidiary's principal office is located in Fremont, Ohio.
<PAGE> 1
Exhibit 23
Consent of Independent Auditor
The Board of Directors
Croghan Bancshares, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-53075) on Form S-8 of Croghan Bancshares, Inc. of our report dated January
12, 1999, relating to the consolidated balance sheets of Croghan Bancshares,
Inc. and its subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of Croghan
Bancshares, Inc.
/s/ CLIFTON GUNDERSON LTD.
Toledo, Ohio
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,334
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,493
<INVESTMENTS-CARRYING> 45,742
<INVESTMENTS-MARKET> 45,935
<LOANS> 239,359
<ALLOWANCE> 3,418
<TOTAL-ASSETS> 350,144
<DEPOSITS> 301,456
<SHORT-TERM> 9,140
<LIABILITIES-OTHER> 2,508
<LONG-TERM> 3,335
0
0
<COMMON> 23,797
<OTHER-SE> 9,908
<TOTAL-LIABILITIES-AND-EQUITY> 350,144
<INTEREST-LOAN> 20,639
<INTEREST-INVEST> 4,055
<INTEREST-OTHER> 457
<INTEREST-TOTAL> 25,151
<INTEREST-DEPOSIT> 10,993
<INTEREST-EXPENSE> 11,420
<INTEREST-INCOME-NET> 13,731
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,424
<INCOME-PRETAX> 4,809
<INCOME-PRE-EXTRAORDINARY> 3,160
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,160
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
<YIELD-ACTUAL> 4.40
<LOANS-NON> 315
<LOANS-PAST> 1,086
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,275
<ALLOWANCE-OPEN> 3,518
<CHARGE-OFFS> 475
<RECOVERIES> 135
<ALLOWANCE-CLOSE> 3,418
<ALLOWANCE-DOMESTIC> 3,418
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
