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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

0-20159

(Commission File Number)

 

 

CROGHAN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio		31-1073048
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
323 Croghan Street, Fremont, Ohio		43420
(Address of principal executive offices)		(Zip Code)

(419) 332-7301

(Registrant’s telephone number, including area code)

 

 

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 whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The Registrant had 1,673,380 common shares, par value $12.50 per share, outstanding as of October 28, 2011.

 

This document contains 116 pages. The Exhibit Index is on page 36 and 37 immediately preceding the filed exhibits.

 

 

 

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CROGHAN BANCSHARES, INC.

Index

 

PART I. FINANCIAL INFORMATION					Page(s	)
Item 1.		Financial Statements			3 - 24
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			25 - 31
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			31
Item 4.		Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			32
Item 1A.		Risk Factors			32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			32 - 33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		[Reserved]			33
Item 5.		Other Information			33
Item 6.		Exhibits			34
Signatures					35

 

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROGHAN BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

 

 

		September 30 2011				December 31 2010
		(Dollars in thousands, except par value)
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks		$	10,803			$	15,592
Interest-bearing deposits in other banks			6,822				6,264
Total cash and cash equivalents			17,625				21,856
SECURITIES
Available-for-sale, at fair value			172,375				140,279
Held-to-maturity, at amortized cost, fair value of $505 in 2010			0				500
Restricted stock			3,844				3,844
Total securities			176,219				144,623
LOANS			277,226				293,305
Less: Allowance for loan losses			4,864				4,955
Net loans			272,362				288,350
Premises and equipment, net			6,440				6,613
Cash surrender value of life insurance			11,574				11,357
Goodwill			10,430				10,430
Core deposit intangible asset, net			72				115
Accrued interest receivable			2,412				1,980
Other real estate owned			1,745				1,443
Other assets			3,020				2,960
TOTAL ASSETS		$	501,899			$	489,727
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Demand, non-interest bearing		$	73,527			$	61,409
Savings, NOW, and Money Market deposits			202,033				189,412
Time			125,358				133,336
Total deposits			400,918				384,157
Federal funds purchased and securities sold under repurchase agreements			22,280				20,989
Federal Home Loan Bank borrowings			12,500				25,500
Dividends payable			535				536
Other liabilities			3,869				2,032
Total liabilities			440,102				433,214
STOCKHOLDERS’ EQUITY
Common stock, $12.50 par value. Authorized 6,000,000 shares; issued 1,914,109 shares			23,926				23,926
Surplus			179				179
Retained earnings			42,293				40,050
Accumulated other comprehensive income			3,624				507
Treasury stock, 240,729 shares in 2011 and 237,729 shares in 2010, at cost			(8,225	)			(8,149	)
Total stockholders’ equity			61,797				56,513
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	501,899			$	489,727

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

 

		Three months ended September 30
		2011				2010
		(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees		$	4,313			$	4,549
Securities:
Obligations of U.S. Government agencies and corporations			649				668
Obligations of states and political subdivisions			571				444
Other			45				56
Interest on deposits in other banks			5				5
Total interest income			5,583				5,722
INTEREST EXPENSE
Deposits			583				922
Other borrowings			176				349
Total interest expense			759				1,271
Net interest income			4,824				4,451
PROVISION FOR LOAN LOSSES			(100	)			150
Net interest income, after provision for loan losses			4,924				4,301
NON-INTEREST INCOME
Gain on sale of loans			25				87
Loss on write down of securities			(283	)			0
Gain on sale of securities			149				3
Trust income			260				268
Service charges on deposit accounts			386				374
Other			251				260
Total non-interest income			788				992
NON-INTEREST EXPENSES
Salaries, wages, and employee benefits			2,058				2,128
Occupancy of premises			216				200
Amortization of core deposit intangible asset			14				15
Other operating			1,408				1,423
Total non-interest expenses			3,696				3,766
Income before federal income taxes			2,016				1,527
FEDERAL INCOME TAXES			475				310
NET INCOME		$	1,541			$	1,217
Net income per share, based on 1,673,380 shares in 2011 and 1,685,535 shares in 2010		$	0.92			$	0.72
Dividends declared per share		$	0.32			$	0.32

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

 

		Nine months ended September 30
		2011				2010
		(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees		$	12,564			$	13,763
Securities:
Obligations of U.S. Government agencies and corporations			2,002				2,023
Obligations of states and political subdivisions			1,641				1,212
Other			144				165
Interest on deposits in other banks			11				16
Total interest income			16,362				17,179
INTEREST EXPENSE
Deposits			1,991				2,873
Other borrowings			587				1,035
Total interest expense			2,578				3,908
Net interest income			13,784				13,271
PROVISION FOR LOAN LOSSES			300				1,250
Net interest income, after provision for loan losses			13,484				12,021
NON-INTEREST INCOME
Gain on sale of loans			94				170
Loss on write down of securities			(394	)			0
Gain on sale of securities			149				11
Trust income			841				783
Service charges on deposit accounts			1,052				1,067
Other			710				700
Total non-interest income			2,452				2,731
NON-INTEREST EXPENSES
Salaries, wages, and employee benefits			6,159				6,111
Occupancy of premises			658				624
Amortization of core deposit intangible asset			43				43
Other operating			4,159				4,186
Total non-interest expenses			11,019				10,964
Income before federal income taxes			4,917				3,788
FEDERAL INCOME TAXES			1,069				796
NET INCOME		$	3,848			$	2,992
Net income per share, based on 1,673,907 shares in 2011 and 1,696,795 shares in 2010		$	2.30			$	1.76
Dividends declared per share		$	0.96			$	0.96

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

 

		Three months ended September 30
		2011				2010
		(Dollars in thousands, except per share data)
BALANCE AT BEGINNING OF PERIOD		$	59,527			$	56,852
Comprehensive Income:
Net income			1,541				1,217
Change in net unrealized gain on securities available-for-sale, net of reclassification adjustments and related income taxes			1,264				787
Total comprehensive income			2,805				2,004
Purchase treasury shares of 10,921 in 2010			—				(277	)
Cash dividends declared, $.32 per share in 2011 and 2010			(535	)			(538	)
BALANCE AT END OF PERIOD		$	61,797			$	58,041

 

		Nine months ended September 30
		2011				2010
		(Dollars in thousands, except per share data)
BALANCE AT BEGINNING OF PERIOD		$	56,513			$	56,127
Comprehensive Income:
Net income			3,848				2,992
Change in net unrealized gain on securities available-for-sale, net of reclassification adjustments and related income taxes			3,117				1,360
Total comprehensive income			6,965				4,352
Purchase treasury shares, 3,000 in 2011 and 32,497 in 2010			(76	)			(813	)
Cash dividends declared, $.96 per share in 2011 and 2010			(1,605	)			(1,625	)
BALANCE AT END OF PERIOD		$	61,797			$	58,041

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

		Nine months ended September 30
		2011				2010
		(Dollars in thousands)
NET CASH FLOW FROM OPERATING ACTIVITIES		$	6,973			$	4,932
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities			26,312				16,577
Proceeds from sale of available-for-sale securities			4,005				1,996
Purchases of available-for-sale securities			(58,991	)			(41,215	)
Net decrease in loans			14,486				20,240
Additions to premises and equipment			(386	)			(447	)
Net cash from investing activities			(14,574	)			(2,849	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			16,761				9,022
Net change in federal funds purchased and securities sold under repurchase agreements			1,291				6,817
Net change in borrowed funds			(13,000	)			0
Cash dividends paid			(1,606	)			(1,635	)
Purchase of treasury stock			(76	)			(813	)
Payment of deferred compensation			0				(72	)
Net cash from financing activities			3,370				13,319
NET CHANGE IN CASH AND CASH EQUIVALENTS			(4,231	)			15,402
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			21,856				16,724
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	17,625			$	32,126
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	2,808			$	5,097
Federal income taxes		$	490			$	1,311
NON-CASH OPERATING ACTIVITY:
Change in deferred income taxes on net unrealized gain on available-for-sale securities		$	(1,606	)		$	(700	)
NON-CASH INVESTING ACTIVITY:
Change in net unrealized gain on available-for-sale securities		$	4,723			$	2,060
NON-CASH OPERATING AND INVESTING ACTIVITY:
Transfer of loans to other real estate owned		$	1,393			$	739

See notes to consolidated financial statements.

 

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CROGHAN BANCSHARES, INC.

Notes to Consolidated Financial Statements

September 30, 2011

(Unaudited)

NOTE 1 – CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of Croghan Bancshares, Inc. (“Croghan” or the “Corporation”) and its wholly-owned subsidiary, The Croghan Colonial Bank (the “Bank”), have been prepared without audit. In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present fairly the Corporation’s consolidated financial position, results of operations, and changes in cash flows have been made.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been omitted. The Corporation’s Annual Report to shareholders for the year ended December 31, 2010 (the “2010 Annual Report), contains consolidated financial statements and related footnote disclosures which should be read in conjunction with the accompanying consolidated financial statements. The results of operations for the period ended September 30, 2011, are not necessarily indicative of the operating results for the full year.

Management evaluated subsequent events through October 28, 2011, the date the financial statements were issued. Events or transactions occurring after September 30, 2011, but prior to when the consolidated financial statements were issued, that provided additional evidence about conditions that existed at September 30, 2011, have been recognized in the consolidated financial statements for the period ended September 30, 2011. Events or transactions that provided evidence about conditions that arose before the financial statements were issued, but did not exist at September 30, 2011, have not been recognized in the financial statements for the period ended September 30, 2011.

NOTE 2 – NEW ACCOUNTING PRONOUNCEMENTS

In April 2011, The Financial Accounting Standards Board (FASB) issued ASU 2011-02, A Creditors Determination of whether a Restructuring Is a Troubled Debt Restructuring. The new guidance clarifies when a loan modification or restructuring is considered a troubled debt restructuring (TDR) in order to address current diversity in practice and lead to more consistent application of accounting principles generally accepted in the United States of America. In evaluating whether a restructuring constitutes a TDR, a creditor must separately conclude that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. Additionally, the guidance clarifies that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables (paragraph 470-60-55-10) when evaluating whether a restructuring constitutes a TDR. Management has determined there has been no significant change in the amount of its loan modifications or restructurings classified as TDR as a result of clarification provided in ASU 2011-02

 

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ASU 2011-01, Deferral of the Effective Date of Disclosures about TDR in Update No. 2010-20, deferred additional disclosures regarding TDR required by ASU 2010-20 until ASU 2011-02 was issued. For interim and annual periods beginning after June 15, 2011, entities are required to enhance existing disclosures about the allowance for credit losses and the credit quality of financing receivables to include, at minimum, the nature and extent of a creditor’s TDR and financing receivables modified as TDR retrospectively to the beginning of the annual period of adoption.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement, amending ASC topic 820 which eliminates terminology difference between U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) on the measurement of fair value and the related fair value disclosures. While largely consistent with existing fair value measurement principles and disclosures, the changes were made as part of the continuing efforts to converge GAAP and IFRS. The adoption of this guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

In June 2011, the FASB issued ASU 2011-05 Comprehensive Income, amending ASC topic 220 to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Additionally, the guidance requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The guidance is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Corporation’s financial statements.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other, amending topic 350 to provide the option of a qualitative approach to test goodwill for impairment. The amendment allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC topic 350. The entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted for annual or interim periods that have not yet been issued. The Corporation has not yet determined whether to early adopt the amendment and it is not expected to have a significant impact on the Corporation’s financial statements.

 

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NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of recognized financial instruments were as follows:

 

		September 30, 2011								December 31, 2010
		Carrying amount				Estimated fair value				Carrying amount				Estimated fair value
		(Dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents		$	17,625			$	17,625			$	21,856			$	21,856
Securities			176,219				176,219				144,623				144,628
Loans, net			272,362				274,129				288,350				290,603
Total		$	466,206			$	467,973			$	454,829			$	457,087
FINANCIAL LIABILITIES
Deposits		$	400,918			$	402,646			$	384,157			$	386,087
Federal funds purchased and securities sold under repurchase agreements			22,280				22,280				20,989				20,989
Federal Home Loan Bank borrowings			12,500				13,471				25,500				26,359
Total		$	435,698			$	438,397			$	430,646			$	433,435

The preceding summary does not include accrued interest receivable, cash surrender value of life insurance, 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.

The Bank also has unrecognized financial instruments which relate to commitments to extend credit and standby letters of credit. The contract amount of such financial instruments was $76,359,000 at September 30, 2011 and $73,324,000 at December 31, 2010. Since many of these commitments are expected to expire without being drawn upon, this total does not necessarily represent future cash requirements.

The following methods and assumptions were used to estimate fair value of each class of financial instruments:

Cash and Cash Equivalents

Fair value is determined to be the carrying amount for these items because they represent cash or cash equivalents that mature in 90 days or less and do not represent unanticipated credit concerns.

Securities

The fair value of 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. The fair value of restricted stock is considered to be its carrying amount.

 

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Loans

Fair value for loans 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 a discounted cash flow analysis, considering weighted average rates and terms of the portfolio, adjusted for credit and interest rate risk inherent in the loans. Fair value for non-performing 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 deposits, 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 federal funds purchased and securities sold under repurchase agreements, as well as Federal Home Loan Bank borrowings, is determined based on a discounted cash flow analysis using current interest rates.

The fair value estimates of financial instruments are made at a specific point in time based on relevant market information. 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 4 – FAIR VALUE MEASUREMENTS

Assets and liabilities carried at fair value are required to be classified and disclosed according to this process for determining fair value. There are three levels of determining fair value:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Corporation’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Corporation’s own financial

 

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data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

There were no financial instruments measured at fair value that moved to a lower level in the fair value hierarchy due to the lack of observable quotes in inactive markets for those instruments at September 30, 2011 and December 31, 2010.

The following summarizes financial assets (there were no financial liabilities) measured at fair value as of September 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

		Level 1 inputs				Level 2 inputs				Level 3 inputs				Total fair value
						(Dollars in thousands)
September 30, 2011
Recurring:
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	—			$	99,569			$	—			$	99,569
Obligations of states and political subdivisions			—				72,456				—				72,456
Other			—				350				—				350
Total		$	—			$	172,375			$	—			$	172,375
Nonrecurring:
Other real estate owned		$	—			$	—			$	1,745			$	1,745
Impaired loans			—				—				17,008				17,008
Total		$	—			$	—			$	18,753			$	18,753

 

		Level 1 inputs				Level 2 inputs				Level 3 inputs				Total fair value
						(Dollars in thousands)
December 31, 2010
Recurring:
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	—			$	83,006			$	—			$	83,006
Obligations of states and political subdivisions			—				56,923				—				56,923
Other			—				350				—				350
Total		$	—			$	140,279			$	—			$	140,279
Nonrecurring:
Other real estate owned		$	—			$	—			$	1,443			$	1,443
Impaired loans			—				—				16,041				16,041
Total		$	—			$	—			$	17,484			$	17,484

 

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The following summarizes the changes in other real estate loans measured at fair value on a nonrecurring basis as follows (dollars in thousands):

 

Balance as of December 31, 2010		$	1,443
Transfer of loans			1,393
Impairment			(267	)
Net proceeds from sales			(792	)
Gain on sales			16
Loss on sales			(48	)
Balance as of September 30, 2011		$	1,745

The following summarizes the changes in impaired loans measured at fair value on a nonrecurring basis as follows (dollars in thousands):

 

Balance as of December 31, 2010		$	16,041
Net changes in impaired loans			3,713
Charge off of principal			(1,090	)
Net principal payments and advances			(1,656	)
Balance as of September 30, 2011		$	17,008

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, follows.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available-for-Sale

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would typically include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include corporate and municipal bonds, mortgage-backed securities, and asset-backed securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Corporation did not have any securities classified as Level 1 or Level 3 at September 30, 2011 and December 31, 2010.

 

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Impaired Loans

The Corporation does not record impaired loans at fair value on a recurring basis. However, periodically, a loan is considered impaired and is reported at the fair value of the underlying collateral, less estimated costs to sell, if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs, including recent appraisals and Level 3 inputs based on customized discounting criteria. Due to the significance of the Level 3 inputs, impaired loans have been classified as Level 3.

Other Real Estate Owned

The Corporation values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level 3.

NOTE 5 – SECURITIES

Amortized cost and fair value on securities were as follows (dollars in thousands):

 

		September 30, 2011								December 31, 2010
		Amortized cost				Fair value				Amortized cost				Fair value
Obligations of U.S. Government agencies and corporations		$	97,920			$	99,569			$	81,845			$	83,006
Obligations of states and political subdivisions			68,613				72,456				57,316				56,923
Other			350				350				350				350
Total available-for-sale			166,883				172,375				139,511				140,279
Held-to-maturity – corporate debt obligation			—				—				500				505
Restricted stock			3,844				3,844				3,844				3,844
Total		$	170,727			$	176,219			$	143,855			$	144,628

 

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Gross unrealized gains and losses on securities were as follows (dollars in thousands):

 

		September 30, 2011								December 31, 2010
		Gross				Gross				Gross				Gross
		unrealized gains				unrealized losses				unrealized gains				unrealized losses
Obligations of U.S. Government agencies and corporations		$	2,209			$	560			$	1,558			$	396
Obligations of states and political subdivisions			3,862				19				725				1,119
Total available-for-sale			6,071				579				2,283				1,515
Held-to-maturity – corporate debt obligation			—				—				5				—
Total		$	6,071			$	579			$	2,288			$	1,515

NOTE 6 – LOANS

The following presents the balances and activity in the allowance for loan losses for the period ended September 30, 2011 (dollars in thousands):

 

		Commercial				Residential real estate				Non- residential real estate				Construction real estate				Consumer				Credit card				Total
Balance at December 31, 2010		$	542			$	1,857			$	2,049			$	347			$	85			$	75			$	4,955
Provision charged to expense			(212	)			310				188				(8	)			11				11				300
Losses charged off			(56	)			(460	)			(628	)			—				(34	)			(31	)			(1,209	)
Recoveries			196				72				523				—				20				7				818
Balance at September 30, 2011		$	470			$	1,779			$	2,132			$	339			$	82			$	62			$	4,864

 

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The following presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2011:

 

										Non-
						Residential				residential				Construction
						real				real				real								Credit
		Commercial				estate				estate				estate				Consumer				card				Total
		(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	—			$	535			$	685			$	211			$	—			$	—			$	1,431
Collectively evaluated for impairment			470				1,244				1,447				128				82				62				3,433
Total		$	470			$	1,779			$	2,132			$	339			$	82			$	62			$	4,864
Loans:
Loans individually evaluated for impairment		$	710			$	2,943			$	12,116			$	1,239			$	—			$	—			$	17,008
Loans collectively evaluated for impairment			20,859				103,713				119,007				3,496				10,798				2,345				260,218
Total		$	21,569			$	106,656			$	131,123			$	4,735			$	10,798			$	2,345			$	277,226

The following represents loans individually evaluated for impairment by class of loans as of September 30, 2011 (dollars in thousands):

 

 

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		Unpaid principal balance				Recorded investment				Allowance for loan loss allocated
With no related allowance recorded:
Agricultural loans		$	—			$	—			$	—
Commercial loans			688				688				—
Commercial overdraft LOC			22				22				—
Commercial non-profit/political subdivisions			—				—				—
Open-end home equity			20				20				—
1 – 4 family real estate (1st mortgages)			730				701				—
1 – 4 family real estate (Jr. mortgages)			77				77				—
Multifamily real estate			—				—				—
Farm real estate			—				—				—
Non-farm/non-residential real estate			8,732				8,732				—
Construction real estate			—				—				—
Consumer loans – vehicle			—				—				—
Consumer overdraft LOC			—				—				—
Consumer loans – mobile home			—				—				—
Consumer loans – home improvement			—				—				—
Consumer loans – other			—				—				—
MasterCard/VISA			—				—				—
With an allowance recorded:
Agricultural loans			—				—				—
Commercial loans			—				—				—
Commercial overdraft LOC			—				—				—
Commercial non-profit/political subdivisions			—				—				—
Open-end home equity			17				17				17
1 – 4 family real estate (1st mortgages)			2,286				1,987				461
1 – 4 family real estate (Jr. mortgages)			141				141				57
Multifamily real estate			—				—				—
Farm real estate			—				—				—
Non-farm/non-residential real estate			3,584				3,384				685
Construction real estate			1,709				1,239				211
Consumer loans – vehicle			—				—				—
Consumer overdraft LOC			—				—				—
Consumer loans – mobile home			—				—				—
Consumer loans – home improvement			—				—				—
Consumer loans – other			—				—				—
MasterCard/VISA			—				—				—
Total		$	18,006			$	17,008			$	1,431

 

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The Bank categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Bank uses the following definitions for risk ratings:

 

•

Special Mention – Loans classified as special mention possess some credit deficiency or potential weakness that deserves close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk of losses in the future.

 

•

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are categorized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

•

Doubtful – Loans classified as doubtful have all of the weaknesses of those classified as substandard. Additionally, however, these weaknesses make collection or liquidation in full based on existing conditions improbable.

 

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Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. The following presents loans as of September 30, 2011 that are collectively evaluated for impairment and are considered not impaired. Investments in each category found below do not include loans that are deemed impaired and analyzed individually for impairment which were presented previously (dollars in thousands):

 

		Pass				Special Mention				Sub-standard				Doubtful				Not rated
Agricultural loans		$	2,939			$	—			$	—			$	—			$	—
Commercial loans			16,490				227				3				—				—
Commercial overdraft LOC			—				—				—				—				194
Commercial non-profit/political subdivisions			1,006				—				—				—				—
Open-end home equity			21,885				585				186				—				—
1 – 4 family real estate (1st mortgages)			73,342				1,491				2,435				—				—
1 – 4 family real estate (Jr. mortgages)			3,469				39				281				—				—
Multifamily real estate			6,063				—				2,555				—				—
Farm real estate			8,832				63				—				—				—
Non-farm/non-residential real estate			83,121				12,987				5,386				—				—
Construction real estate			2,534				—				962				—				—
Consumer loans – vehicle			2,892				4				7				—				—
Consumer overdraft LOC			—				—				—				—				133
Consumer loans – mobile home			796				18				—				—				—
Consumer loans – home improvement			192				—				—				—				—
Consumer loans – other			6,711				27				18				—				—
MasterCard/VISA			—				—				—				—				2,345
Total		$	230,272			$	15,441			$	11,833			$	0			$	2,672

 

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The following presents the recorded investment by class of loans which are not on nonaccrual and have collectively been evaluated for impairment (dollars in thousands):

 

		30-89 days past due				90+ days past due				Total past due				Not past due				Total
Agricultural loans		$	—			$	—			$	—			$	2,939			$	2,939
Commercial loans			6				—				6				16,714				16,720
Commercial overdraft LOC			—				—				—				194				194
Commercial non-profit/political subdivisions							—				—				1,006				1,006
Open-end home equity			336				—				336				22,320				22,656
1 – 4 family real estate (1st mortgages)			2,087				319				2,406				74,862				77,268
1 – 4 family real estate (Jr. mortgages)			9				—				9				3,780				3,789
Multifamily real estate			—				—				—				8,618				8,618
Farm real estate			—				—				—				8,895				8,895
Non-farm/non-residential real estate			62				—				62				101,432				101,494
Construction real estate			—				—				—				3,496				3,496
Consumer loans – vehicle			20				—				20				2,883				2,903
Consumer overdraft LOC			3				—				3				130				133
Consumer loans – mobile home			—				—				—				814				814
Consumer loans – home improvement			—				—				—				192				192
Consumer loans – other			77				10				87				6,669				6,756
MasterCard/VISA			133				9				142				2,203				2,345
Total		$	2,733			$	338			$	3,071			$	257,147			$	260,218

 

 

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The following presents the recorded investment in loans past due 90 days or more still accruing, nonaccrual, and Troubled Debt Restructurings (TDR) by class as of September 30, 2011(dollars in thousands):

 

		Loans past due 90+ days and still accruing				Nonaccrual				TDR
Agricultural loans		$	—			$	—			$	—
Commercial loans			—				34				67
Commercial overdraft LOC			—				—				—
Commercial non-profit/political subdivisions			—				—				—
Open-end home equity			—				37				—
1 – 4 family real estate (1st mortgages)			319				2,345				467
1 – 4 family real estate (Jr. mortgages)			—				113				105
Multifamily real estate			—				—				—
Farm real estate			—				—				—
Non-farm/non-residential real estate			—				1,096				3,520
Construction real estate			—				1,239				871
Consumer loans – vehicle			—				—				—
Consumer overdraft LOC			—				—				—
Consumer loans – mobile home			—				—				—
Consumer loans – home improvement			—				—				—
Consumer loans – other			10				—				—
MasterCard/VISA			9				—				—
Total		$	338			$	4,864			$	5,030

 

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The following presents the recorded investment in TDR loans by class, which occurred during the quarter ended September 30, 2011 (dollars in thousands):

 

		Number of Contracts				Recorded Investment				Allowance for loan losses allocated
Agricultural loans			—			$	—			$	—
Commercial loans			1				67				—
Commercial overdraft LOC			—				—				—
Commercial non-profit/political subdivisions			—				—				—
Open-end home equity			—				—				—
1 – 4 family real estate (1st mortgages)			3				184				85
1 – 4 family real estate (Jr. mortgages)			—				—				—
Multifamily real estate			—				—				—
Farm real estate			—				—				—
Non-farm/non-residential real estate			3				537				168
Construction real estate			—				—				—
Consumer loans – vehicle			—				—				—
Consumer overdraft LOC			—				—				—
Consumer loans – mobile home			—				—				—
Consumer loans – home improvement			—				—				—
Consumer loans – other			—				—				—
MasterCard/VISA			—				—				—
Total			7			$	788			$	253

During the nine-month period ended September 30, 2011, there was $253,000 that resulted from TDR loans and was factored into the Allowance for Loan Losses. Of that amount, $168,000 was in the multifamily real estate category and $85,000 was in the residential real estate category.

Within the TDR loan portfolio, four of the loan modifications resulted in delaying a portion of principal payments which results in a balloon payment of interest and principal at the maturity of the loan. The other three loans, all of which belonged to the same borrower, had a restructured rate that increased, due to collateral depletion; this caused an increase to interest income of approximately $6,000.

NOTE 7 – OTHER COMPREHENSIVE INCOME

The components of other comprehensive income and related tax effects for the nine-month periods ended September 30, 2011 and 2010 were as follows (dollars in thousands):

 

		2011				2010
Unrealized gains on available-for-sale securities		$	5,492			$	3,642
Tax effect			1,868				1,238
Net-of-tax amount		$	3,624			$	2,404

 

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NOTE 8 – STOCK BASED COMPENSATION

The Corporation established a Stock Option and Incentive Plan (the “Plan”) in 2002, which permits the Corporation to award stock options and/or stock appreciation rights to directors and managerial and other key employees of the Corporation. The awards may be in the form of stock options and/or stock appreciation rights. The Plan provides for the issuance of up to 190,951 shares.

 

Outstanding Stock Options

Exercisable Stock Options

Exercise Price Range

Number

Weighted Average Exercise Price

Weighted Average Contractual Life (years)

Number

Weighted Average Exercise Price

Weighted Average Contractual Life (years)

$24.99

28,869

$24.99

8

0

N/A

N/A

The Corporation issued 28,869 stock options during the three-month period ended June 30, 2011. The following summarizes stock option activity for the first nine months of 2011:

 

Outstanding, January 1, 2011			0
Granted			28,869
Exercised			0
Outstanding, September 30, 2011			28,869
Exercisable, September 30, 2011			0

The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. The following shows the weighted-average fair value of options granted and the assumptions used in calculating that value for the years indicated:

 

		2011
Weighted-average fair value of options granted		$	3.62
Average dividend yield			5.0	%
Expected volatility			25	%
Risk-free interest rate			2.85	%
Expected term (in years)			8

Compensation expense related to options granted in 2011, which is included in salaries and wages in the consolidated statements of income for the nine months ended September 30, 2011, amounted to $35,000. Compensation expense is recognized over the three year vesting period of the options. As of September 30, 2011, there is $70,000 of unrecognized compensation expense expected to be recognized over the vesting period.

 

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NOTE 9 – MULTI-BRANCH ACQUISITION

On August 31, 2011, the Bank entered into a Purchase and Assumption Agreement (the “P&A Agreement”) with The Home Savings and Loan Company of Youngstown, Ohio (“Home Savings”), an Ohio chartered stock savings bank and a wholly-owned subsidiary of United Community Financial Corp., to purchase certain assets and assume certain liabilities of four retail banking branches of Home Savings located in Tiffin (two banking centers), Fremont, and Clyde, Ohio. Under the terms of the P&A Agreement, the Bank will assume approximately $112 million in deposits and purchase the fixed assets of the branches. In addition, the Bank will purchase performing consumer and residential loans associated with the branches, which totaled approximately $28 million as of June 30, 2011. The Bank has agreed to pay a 4.0% premium on all non-public, non-jumbo, and non-brokered deposits. The Bank’s acquisition of the Home Savings branches is expected to close in the fourth quarter of 2011, subject to the receipt of regulatory approvals and the satisfaction of other customary closing conditions.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Where appropriate, the following discussion relating to the Corporation contains the insights of management into known events and trends that have or may be expected to have a material effect on the Corporation’s operations and financial condition. The information presented may also contain certain forward-looking statements regarding future financial performance, which are not historical facts and which involve various risks and uncertainties. When used herein, the terms “anticipates”, “believes”, “plans”, “intends”, “expects”, “estimates”, “projects”, “targets”, “will”, “would”, “should”, “could”, and similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, but are not the exclusive means of identifying such statements. The Corporation’s actual results may differ materially from those expressed or implied in such forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, changes in regional and/or national economic conditions, changes in policies by regulatory agencies, fluctuations in interest rates, changes in FDIC insurance assessment rates, demand for loans in the Corporation’s market area, and competitive conditions in the financial services industry. Additional information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements is available in the Corporation’s filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the disclosure in “Item 1A. Risk Factors” of Part I of Croghan’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Form 10-K”).

The Corporation cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except to the extent required by law.

PERFORMANCE SUMMARY

Net income for the three-month period ended September 30, 2011 was $1,541,000, or $.92 per common share, compared to $1,217,000, or $.72 per common share, for the same period in 2010. Net income for the nine-month period ended September 30, 2011 was $3,848,000, or $2.30 per common share, compared to $2,992,000, or $1.76 per common share, for the same period in 2010. The results for the third quarter 2011 compared to the third quarter 2010 were positively impacted by an increase of $373,000 in net interest income, a $250,000 decrease in the provision for loan losses, and a decrease of $70,000 in non-interest expenses. Results for the third quarter were adversely impacted by a $204,000 decrease in non-interest income and an $165,000 increase to the provision for federal income taxes.

Assets at September 30, 2011 totaled $501,899,000, compared to $489,727,000 at December 31, 2010. Total cash and cash equivalents decreased $4,231,000 to $17,625,000 during the nine-month period ended September 30, 2011, and total securities increased $31,596,000 to $176,219,000 at September 30, 2011. Total loans decreased $16,079,000 to $277,226,000 at September 30, 2011, from $293,305,000 at 2010 year end. Total deposits increased $16,761,000 to $400,918,000 at September 30, 2011, from $384,157,000 at 2010 year end.

 

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FINANCIAL POSITION

The following comments are based upon a comparison of Croghan’s financial position at September 30, 2011 to December 31, 2010.

Total cash and cash equivalents decreased $4,231,000 (19.4%) and total securities increased $31,596,000 (21.8%) during the nine-month period ended September 30, 2011. Total loans decreased $16,079,000 (5.5%) to $277,226,000 at September 30, 2011, compared to $293,305,000 at December 31, 2010. During the same period, deposits increased $16,761,000 (4.4%) to $400,918,000 at September 30, 2011, compared to $384,157,000 at December 31, 2010.

The increase in securities during the nine-month period ended September 30, 2011 primarily resulted from purchases of available-for sale securities of $58,991,000, with maturities during the period of $26,312,000. There were security sales of $4,005,000 during the period, which resulted in gains of $149,000. Securities purchases were a direct result of the continued loan balance decline and deposit balance increases which resulted in the excess cash being put into interest-earning securities. The funds from the sales of securities were used to purchase more securities which allowed a redistribution of our maturity buckets.

The decrease in total loans during the nine-month period ended September 30, 2011 continued to be the result of the sale of fixed-rate mortgages into the secondary market, pay-downs and payoffs from commercial borrowers, and the soft demand in the Bank’s lending markets resulting from a continuation of a sluggish economy.

Components of the increase in deposits include the liquid deposit category (demand, savings, NOW, and money market deposit accounts), which increased $24,739,000 (9.9%), and the time deposit category, which decreased $7,978,000 (6.0%). Croghan strives to maintain a strong interest margin by balancing deposit needs to fund anticipated loan demand and by maintaining the necessary deposit pricing structure.

Stockholders’ equity at September 30, 2011 increased to $61,797,000, or $36.93 book value per common share, compared to $56,513,000, or $33.71 book value per common share, at December 31, 2010. Stockholders’ equity at September 30, 2011 includes accumulated other comprehensive income, consisting of net unrealized gains on securities classified as available-for-sale, net of related income taxes. At September 30, 2011, Croghan held $172,375,000 of available-for-sale securities with a net unrealized gain of $3,624,000, net of income taxes, compared to $140,279,000 in available-for-sale securities at December 31, 2010, with a net unrealized gain of $507,000, net of income taxes.

Beginning in February 2002, Croghan instituted a stock buy-back program, which has subsequently been extended through February 1, 2012. Since the inception of the program, a total of 248,791 shares have been repurchased by Croghan. The 240,729 treasury shares held as of September 30, 2011 and the 237,729 shares held as of December 31, 2010 are reported at their acquired cost.

A cash dividend of $.32 per share was declared on September 13, 2011, payable on October 31, 2011 to shareholders of record as of October 14, 2011.

 

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NET INTEREST INCOME

Net interest income, which represents the excess revenue generated from interest-earning assets over the interest cost of funding those assets, increased $513,000 (3.9%) for the nine-month period ended September 30, 2011, as compared to the same period in 2010. Croghan’s net interest margin increased to 4.05 percent for the nine-month period ended September 30, 2011, compared to 4.04 percent for the same period in 2010. The increase in net interest income resulted from the Bank recognizing interest of $206,000 which was paid off and collected during the third quarter on a loan that had been on non-accrual. Also contributing to the increase is the continued reduction in average cost of funds, and, as a result, lower rates on interest-bearing deposits. This reduction is offset by the decrease in loans and the increase in available-for-sale securities which are lower yielding assets.

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES

Croghan’s comprehensive loan policy provides guidelines for managing credit risk and asset quality. The policy details acceptable lending practices, establishes loan-grading classifications, and stipulates the use of a loan review process. Croghan directly employs three staff members dedicated to the credit analysis function to aid in facilitating the early identification of problem loans, to help ensure sound credit decisions, and to assist in the determination of the allowance for loan losses. Croghan also engages an outside credit review firm to supplement the credit analysis function and to provide an independent assessment of the loan review process. Croghan’s loan policy, loan review process, and credit analysis staff facilitate management’s evaluation of the credit risk inherent in the lending function.

The following table details factors relating to the provision and allowance for loan losses for the periods noted:

 

		Nine months ended				Nine months ended
		September 30, 2011				September 30, 2010
		(Dollars in thousands)
Provision for loan losses charged to expense		$	300			$	1,250
Net loan charge-offs			391				519
Annualized net loan charge-offs as a percent of average outstanding loans			.19	%			.23	%

 

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The following table details factors relating to non-performing and potential problem loans as of the dates noted:

 

		September 30, 2011				December 31, 2010
		(Dollars in thousands)
Nonaccrual loans, excluding TDR nonaccrual		$	3,870			$	4,127
Loans contractually past due 90 days or more and still accruing interest			338				586
TDR- Accruing			4,036				4,665
TDR- Nonaccrual			994				—
Total TDR			5,030				4,655
Potential problem loans, other than those past due 90 days or more, nonaccrual, or restructured			19,930				15,873
Total potential problem and non-performing loans		$	29,168			$	25,251
Allowance for loan losses		$	4,864			$	4,955
Allowance for loan losses as a percent of period-end loans			1.75	%			1.69	%

During the quarter, Croghan recognized a $754,000 recovery to the allowance for loan losses on a loan previously charged off in the fourth quarter of 2009. As a result of this recovery, Croghan recognized a negative $100,000 provision for loan losses for the three-month period and a $300,000 provision for loan losses for the nine-month period ended September 30, 2011, compared to $150,000 and $1,250,000 during the same time periods ended September 30, 2010. Also, during the quarter, there were new charge-offs of $426,000, which also contributed to this quarter’s allowance for loan loss calculation.

Total potential problem and non-performing loans, which are summarized in the preceding table, increased $3,917,000 (15.5%), to $29,168,000 at September 30, 2011, compared to $25,251,000 at December 31, 2010. At September 30, 2011, as compared to December 31, 2010, nonaccrual loans including TDR nonaccrual increased $737,000 and potential problem loans (other than those past due 90 days or more, nonaccrual, or restructured) increased $4,057,000, while favorable components of potential problem and non-performing loans included a $248,000 decrease in loans contractually past due 90 days or more and still accruing interest and a $629,000 decrease in accruing TDR loans.

Croghan typically classifies a loan as a potential problem loan, regardless of its collateralization or the existence of contractually obligated guarantors, when a review of the borrower’s financial statements indicates that the borrowing entity does not generate sufficient operating cash flow to adequately service its debts. All of Croghan’s potential problem loans, totaling $19,930,000 at September 30, 2011, were less than 90 days past due and a majority of these loans are collateralized by an interest in real property.

 

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The following table provides additional detail pertaining to the aging of Croghan’s potential problem loans as of the dates noted:

 

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Potential problem loans not currently past due		$	15,485			$	8,746
Potential problem loans past due one day or more but less than 10 days			3,300				3,079
Potential problem loans past due 10 days or more but less than 30 days			220				3,051
Potential problem loans past due 30 days or more but less than 60 days			412				641
Potential problem loans past due 60 days or more but less than 90 days			513				356
Total potential problem loans		$	19,930			$	15,873

Total potential problem loans increased $4,057,000 during the first nine months of 2011, which resulted primarily from a $6,739,000 increase in the loans not currently past due. This increase was partially offset by a $2,682,000 decrease in the aggregate amount of potential problem loans past due one day but less than 90 days. Total potential problem loans less than 30 days past due totaled $19,005,000 (95.4% of total potential problem loans) at September 30, 2011, compared to $14,876,000 (93.7% of total potential problem loans) of such loans at December 31, 2010.

The following table provides additional detail pertaining to the collateralization of Croghan’s potential problem loans as of the dates noted:

 

		September 30,				December 31,
		2011				2010
		(Dollars in thousands)
Collateralized by an interest in real property		$	19,325			$	15,427
Collateralized by an interest in assets other than real property			604				438
Unsecured			1				8
Total potential problem loans		$	19,930			$	15,873

Management will continue to monitor asset quality trends throughout 2011 to ensure adequate provisions for loan losses are made in a timely manner. It is Croghan’s policy to maintain the allowance for loan losses at a level sufficient to provide for losses inherent in the portfolio. Management believes the allowance for loan losses at September 30, 2011 is adequate to provide for those losses identified as well as those losses inherent within the loan portfolio.

 

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NON-INTEREST INCOME

Total non-interest income decreased $204,000 (20.6%) for the three-month period ended September 30, 2011, compared to the same period in 2010, and decreased $279,000 (10.2%) for the nine-month period ended September 30, 2011, compared to the same period in 2010. During the third quarter of 2011, the Bank had gains on sales of securities of $149,000 compared to $3,000 in 2010 and an increase of $12,000 in income stemming from service charges on deposit accounts. During the third quarter, the Bank had a write down from an Other Than Temporarily Impaired security of $283,000, and for the year, a write down of $394,000. This was a result of one municipal security that the Bank continues to monitor. Other decreases during the third quarter were gains on sale of loans which decreased $62,000, to $25,000, trust income decreased $8,000 to $260,000, and other income decreased $9,000 to $251,000.

NON-INTEREST EXPENSES

Total non-interest expenses decreased $70,000 (1.9%) for the three-month period ended September 30, 2011, as compared to the same period in 2010, and increased $55,000 (.5%) for the nine-month period ended September 30, 2011, as compared to the same period in 2010. Salaries, wages, and employee benefits decreased $70,000 (3.3%) between comparable three-month periods and increased $48,000 (.8%) between comparable nine-month periods. Occupancy of premises expense increased $16,000 (8.0%) between comparable three-month periods and $34,000 (5.4%) between comparable nine-month periods. Other operating expenses decreased $15,000 (1.1%) between comparable three-month periods and $27,000 (.6%) between comparable nine-month periods.

Within the other operating expense category is the FDIC insurance expense. During the nine-month period ended September 30, 2011, the FDIC insurance expense was $293,000, compared to $399,000 during the same period in 2010. The decrease resulted from a change in the way the FDIC calculates the expense, starting during the second quarter 2011. The new calculation is based on average asset size rather than domestic deposits, and will continue to be calculated this way going forward. The Bank prepaid the amount of $1,797,000 in December 2009 and had a remaining prepaid balance of $976,000 at September 30, 2011. These prepaid assessment amounts are included in other assets of the Corporation. Future quarterly assessments will be charged against the prepaid asset until such time as the prepaid asset has been full expensed, at which point the Bank will resume paying premiums to the FDIC.

FEDERAL INCOME TAX EXPENSE

Federal income tax expense increased $165,000 (53.2%) between comparable three-month periods and $273,000 (34.3%) between comparable nine-month periods. The Corporation’s effective tax rate for the nine months ended September 30, 2011 was 21.8 percent, compared to 21.0 percent for the same period in 2010.

LIQUIDITY AND CAPITAL RESOURCES

Short-term borrowings of federal funds purchased and repurchase agreements averaged $22,514,000 for the nine-month period ended September 30, 2011, compared to $20,002,000 for the twelve-month period ended December 31, 2010 and $19,275,000 for the nine-month period ended September 30, 2010.

 

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Borrowings from the Federal Home Loan Bank totaled $12,500,000 at September 30, 2011, compared to $35,500,000 at September 30, 2010, and $25,500,000 at December 31, 2010.

Capital expenditures for premises and equipment totaled $386,000 for the nine-month period ended September 30, 2011, compared to $447,000 for the same period in 2010. Capital expenditures in 2011 included the purchase of an office building, land, and an ATM in Tiffin, Ohio. Also included in capital expenditures was a new telephone system for our Green Springs banking center, new roofs for two buildings, and new blacktop for one banking center lot.

As of September 30, 2011, loan commitments including letters of credit totaled $76,359,000 compared to $73,324,000 at December 31, 2010. Since many of these commitments are expected to expire without being drawn upon, this total does not necessarily represent future cash requirements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risk from the information provided in the 2010 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF CONTROLS AND PROCEDURES

With the participation of the Corporation’s principal executive officer and principal financial officer, the Corporation’s management has evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Corporation’s principal executive officer and principal financial officer have concluded that:

(a) information required to be disclosed by the Corporation in this Quarterly Report on Form 10-Q and the other reports which the Corporation files or submits under the Exchange Act would be accumulated and communicated to the Corporation’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure;

(b) information required to be disclosed by the Corporation in this Quarterly Report on Form 10-Q and the other reports which the Corporation files or submits under the Exchange Act would be recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and

(c) the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Corporation’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Corporation’s fiscal quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Management is not aware of any pending legal proceedings, except for routine legal proceedings to which the Corporation’s subsidiary Bank is a party incidental to its banking business. Management considers none of those proceedings to be material.

ITEM 1A. RISK FACTORS

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Item 1A. Risk Factors” of Part I of the 2010 Form 10-K, which could materially affect our business, financial condition, and/or operating results. There have been no material changes from those risk factors previously disclosed in “Item 1A. Risk Factors” of Part I of the 2010 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)	Not applicable

 

(b)	Not applicable

 

(c)	The table below includes certain information regarding Croghan’s repurchase of its common shares during the quarterly period ended September 30, 2011:

 

						Total Number of		Maximum Number
						Shares Purchased		of Shares that May
		Total Number		Average		as Part of Publicly		Yet Be Purchased
		of Shares		Price Paid		Announced Plans		Under the Plans
Period		Purchased		per Share		or Programs		or Programs (1)
07/01/11 through 07/31/11		None		None		None		80,819
08/01/11 through 08/31/11		None		None		None		83,669
09/01/11 through 09/30/11		None		None		None		83,669

 

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(1)

An extension of Croghan’s stock repurchase program commencing February 1, 2011 and ending August 1, 2011 was announced on January 28, 2011, in which up to 83,819 shares were authorized to be repurchased (with 3,000 shares purchased in the first quarter of 2011). Another extension of Croghan’s stock repurchase program was approved on July 12, 2011, in which up to 83,669 shares were authorized to be repurchased from August 1, 2011 to February 1, 2012.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. [RESERVED]

ITEM 5. OTHER INFORMATION

Not applicable.

 

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ITEM 6. EXHIBITS

 

Exhibit Number				Description and Exhibit Location
	*2.1			Purchase and Assumption Agreement, dated as of August 31, 2011, between The Croghan Colonial Bank and The Home Savings and Loan Company of Youngstown, Ohio (included with this filing)**
	*10.1			Amendment to Employment Agreement, dated as of July 21, 2011, between The Croghan Colonial Bank and Rick M. Robertson (included with this filing)
	31.1			Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer (included with this filing)
	31.2			Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer (included with this filing)
	32			Section 1350 Certification – Principal Executive Officer and Principal Financial Officer (included with this filing)
	101			The following materials from Croghan Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited); (iii) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2011 and 2010 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited); and (v) the Notes to Unaudited Consolidated Financial Statements tagged as blocks of text (included with this filing)*

 

*

Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

**

The schedules referenced in the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Croghan Bancshares, Inc., hereby agrees to furnish supplementally a copy of any such omitted schedules to the Purchase and Assumption Agreement to the Securities and Exchange Commission upon its request.

 

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SIGNATURES

Pursuant to the requirements 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.                     Registrant
Date: October 28, 2011				By:		/s/ Rick M. Robertson
						Rick M. Robertson, President and CEO
						(Principal Executive Officer)
Date: October 28, 2011				By:		/s/ Kendall W. Rieman
						Kendall W. Rieman, Treasurer
						(Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit Number		Description		Exhibit Location
*2.1		Purchase and Assumption Agreement, dated as of August 31, 2011, between The Croghan Colonial Bank and The Home Savings and Loan Company of Youngstown, Ohio**		Filed herewith
*10.1		Amendment to Employment Agreement, dated July 21, 2011, between The Croghan Colonial Bank and Rick M. Robertson		Filed herewith
31.1		Rule 13a-14(a)/15d-14(a) Certification – Principal Executive Officer		Filed herewith
31.2		Rule 13a-14(a)/15d-14(a) Certification – Principal Financial Officer		Filed herewith
32		Section 1350 Certification – Principal Executive Officer and Principal Financial Officer		Filed herewith

 

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EXHIBIT INDEX (Continued)

 

 

101		The following materials from Croghan Bancshares, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited); (iii) the Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2011 and 2010 (unaudited); (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited); and (v) the Notes to Unaudited Consolidated Financial Statements tagged as blocks of text*		Filed herewith

 

*

Pursuant to Rule 406T of SEC Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

**

The schedules referenced in the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Croghan Bancshares, Inc., hereby agrees to furnish supplementally a copy of any such omitted schedules to the Purchase and Assumption Agreement to the Securities and Exchange Commission upon its request.

 

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