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CHBH > SEC Filings for CHBH > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for CROGHAN BANCSHARES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CROGHAN BANCSHARES INC


26-Oct-2012

Quarterly Report


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, 2011 (the "2011 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, 2012 was $1,284,000, or $.77 per common share, compared to $1,541,000, or $.92 per common share, for the same period in 2011. Net income for the nine-month period ended September 30, 2012 was $3,589,000, or $2.15 per common share, compared to $3,848,000, or $2.30 per common share, for the same period in 2011. The results for the third quarter 2012 compared to the third quarter 2011 were adversely impacted by a decrease of $256,000 in net interest income, a $250,000 increase in the provision for loan losses, and an increase of $234,000 in non-interest expenses. Results for the third quarter were positively impacted by a $294,000 increase in non-interest income and a $189,000 decrease to the provision for federal income taxes.


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Assets at September 30, 2012 totaled $616,199,000, compared to $629,651,000 at December 31, 2011. Total cash and cash equivalents decreased $50,844,000 to $9,248,000 during the nine-month period ended September 30, 2012, and total securities increased $24,289,000 to $253,415,000 at September 30, 2012. Total loans increased $14,556,000 to $316,521,000 at September 30, 2012, from $301,965,000 at 2011 year end. Total deposits increased $5,240,000 to $507,077,000 at September 30, 2012, from $501,837,000 at 2011 year end.

FINANCIAL POSITION

The following comments are based upon a comparison of Croghan's financial position at September 30, 2012 to December 31, 2011.

Total cash and cash equivalents decreased $50,845,000 (84.6%) and total securities increased $24,289,000 (10.6%) during the nine-month period ended September 30, 2012. Total loans increased $14,556,000 (4.8%) to $316,521,000 at September 30, 2012, compared to $301,965,000 at December 31, 2011. During the same period, deposits increased $5,240,000 (1.0%) to $507,077,000 at September 30, 2012, compared to $501,837,000 at December 31, 2011.

The increase in securities during the nine-month period ended September 30, 2012 primarily resulted from purchases of available-for-sale securities of $94,762,000, with maturities during the period of $61,263,000. Also, during the period there were sales of securities totaling $7,858,000. The security balance increase was the result of using the excess cash from the HSL acquisition to purchase securities, as well as the continuation of investing pay downs and maturing securities back into the portfolio. Securities were sold during the second quarter to fund loan growth.

The total loan balance increased during the nine-month period ended September 30, 2012, due to the Bank being able to grow the portfolio through increased customer demand and the new markets gained from the HSL acquisition.

Components of the increase in deposits included a $26,696,000 (8.7%) increase in the liquid deposit category (demand, savings, NOW, and money market deposit accounts), which was partially offset by a $21,457,000 (11.1%) decrease in the time deposit category. 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, 2012 increased to $66,766,000, or $39.90 book value per common share, compared to $62,883,000, or $37.58 book value per common share, at December 31, 2011. Stockholders' equity at September 30, 2012 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, 2012, Croghan held $249,241,000 of available-for-sale securities with a net unrealized gain of $6,172,000, net of income taxes, compared to $225,282,000 in available-for-sale securities at December 31, 2011, with a net unrealized gain of $4,341,000, net of income taxes.

During the first quarter of 2012, the Board of Directors opted not to renew the stock buy-back program which began in February 2002. During the life span of the program, a total of 248,791 shares were repurchased by Croghan. The 240,729 treasury shares held as of September 30, 2012 and December 31, 2011 are reported at their acquired cost.

A cash dividend of $.32 per share was declared on September 11, 2012, payable on October 31, 2012 to shareholders of record as of October 12, 2012.


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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, decreased $256,000 (5.3%) for the three-month period ended September 30, 2012 as compared to the same period in 2011. Net interest income decreased $307,000 (2.2%) for the nine-month period ended September 30, 2012, as compared to the same period in 2011. Croghan's net interest margin decreased to 3.19 percent for the nine-month period ended September 30, 2012, compared to 4.05 percent for the same period in 2011. The increase of $110,027,000 in average interest-earning assets year-over-year was primarily due to acquisition of cash, loans, and deposits in the HSL branch acquisition. The decrease in net interest income partially resulted from the Bank recognizing interest of $206,000 during the third quarter of 2011, which resulted from the collection of a loan that had been on non-accrual. Contributing to help offset the decrease is the continued reduction in average cost of funds, and, as a result, reduced rates on interest-bearing deposits. This reduction is offset by the decrease in loan yields 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, 2012               September 30, 2011
                                                            (Dollars in thousands)
Provision for loan losses charged
to expense                                   $                325             $                300
Net loan charge-offs                                          760                              391
Annualized net loan charge-offs as
a percent of average outstanding
loans                                                         .33 %                            .19 %


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

                                               September 30, 2012               December 31, 2011
                                                             (Dollars in thousands)
Nonaccrual loans                              $              2,033             $             3,376
Loans contractually past due 90 days
or more and still accruing interest                            392                             672
TDR-accruing                                                 3,600                           3,532

TDR-non-accruing                                               806                           1,295

Total TDR loans                                              4,406                           4,827

Potential problem loans, other than
those past due 90 days or more,
nonaccrual, or restructured                                  9,027                          18,161


Total potential problem and
non-performing loans                          $             15,858             $            27,036


Allowance for loan losses                     $              4,343             $             4,778

Allowance for loan losses as a
percent of period-end loans                                   1.37 %                          1.58 %

During the third quarter of 2012, the Bank recognized a $150,000 provision for loan losses as compared to a negative provision of $100,000 during the same period a year ago. The negative provision in the third quarter 2011 resulted from the collection of a loan that was on nonaccrual and previously charged off. Net loan charge-offs increased $369,000 during the first nine months of 2012 compared to the same period a year ago. The 2012 third quarter provision was calculated by using average historical loss rates, as well as specific loss estimates on impaired loans, which together are used to calculate certain segments of loans and their corresponding allowance for loan losses.

Total potential problem and non-performing loans, which are summarized in the preceding table, decreased $11,178,000, or 41.3%, to $15,858,000 at September 30, 2012, compared to $27,036,000 at December 31, 2011. Favorable components included a $9,134,000 decrease in potential problem loans other than those past due 90 days or more, nonaccrual, or restructured. This decrease was partially the result of one large commercial borrower having significant financial improvement, which allowed the Bank to upgrade this credit. Other favorable components included a $1,343,000 decrease in nonaccrual loans, a $280,000 decrease in loans contractually past due 90 days or more and still accruing interest, and a $421,000 decrease in the total TDR loan category.

As illustrated in the following table, $7,968,000, or 88.3%, of total potential problem loans were less than 30 days past due and $9,022,000, or 99.9%, were secured with collateral at September 30, 2012.

Croghan typically classifies credits as potential problem loans, regardless of 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 the potential problem loans at September 30, 2012, totaling $9,027,000, are currently performing loans (less than 90 days past due) and a majority are collateralized by an interest in real property.


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The following table provides additional detail pertaining to the past due status of Croghan's potential problem loans as of the dates noted:

                                                       September 30,           December 31,
                                                           2012                    2011
                                                              (Dollars in thousands)
Potential problem loans not currently past due        $         6,509         $       16,984
Potential problem loans past due one day or
more but less than 10 days                                        187                     91
Potential problem loans past due 10 days or
more but less than 30 days                                      1,272                    167
Potential problem loans past due 30 days or
more but less than 60 days                                        878                    342
Potential problem loans past due 60 days or
more but less than 90 days                                        181                    577

Total potential problem loans                         $         9,027         $       18,161

Total potential problem loans not currently past due decreased $10,475,000 during the first nine months of 2012, which resulted primarily from one commercial borrower being upgraded. This decrease was partially offset by a $1,341,000 increase in the aggregate amount of potential problem loans in the past due categories.

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,
                                                           2012                    2011
                                                              (Dollars in thousands)
Collateralized by an interest in real property        $         8,861         $       17,582
Collateralized by an interest in assets other
than real property                                                161                    575
Unsecured                                                           5                      4

Total potential problem loans                         $         9,027         $       18,161

Management will continue to monitor asset quality trends throughout 2012 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, 2012 is adequate to provide for those losses identified as well as those losses inherent within the loan portfolio.

NON-INTEREST INCOME

Total non-interest income increased $294,000 (37.3%) for the three-month period ended September 30, 2012, compared to the same period in 2011, and increased $866,000 (35.3%) for the nine-month period ended September 30, 2012, compared to the same period in 2011. During the third quarter of 2012, the Bank had gains on sale of loans of $62,000, which was up $37,000 compared to the third quarter of 2011; an increase of $40,000 in trust income; an increase of $62,000 in income stemming from service charges on deposit accounts; and an increase in other income of $21,000. Comparatively, during the third quarter of 2011, the Bank had gains on sale of securities of $149,000 compared to none during the third quarter of 2012. Also, during the third quarter of 2011, the Bank had an Other Than Temporarily Impaired security write down related to one security in the amount of $283,000.


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NON-INTEREST EXPENSES

Total non-interest expenses increased $234,000 (6.3%) for the three-month period ended September 30, 2012, as compared to the same period in 2011, and increased $1,120,000 (10.2%) for the nine-month period ended September 30, 2012, as compared to the same period in 2011. Salaries, wages, and employee benefits increased $71,000 (3.4%) between comparable three-month periods and $254,000 (4.1%) between comparable nine-month periods. Occupancy of premises expense increased $19,000 (8.8%) between comparable three-month periods and increased $66,000 (10.0%) between comparable nine-month periods. Amortization of core deposit intangible increased $86,000 between comparable three-month periods, and increased $257,000 between comparable nine-month periods due to the core deposit intangible that resulted from the HSL acquisition. Other operating expenses increased $58,000 (4.1%) between comparable three-month periods and $543,000 (13.1%) between comparable nine-month periods. These increases are a result of the HSL acquisition.

Within the other operating expense category is the FDIC insurance expense. During the nine-month period ended September 30, 2012, the FDIC insurance expense was $297,000, compared to $293,000 during the same period in 2011. The Bank prepaid the amount of $1,797,000 in December 2009 and had a remaining prepaid balance of $601,000 at September 30, 2012. This prepaid assessment amount is 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 decreased $189,000 (39.8%) between comparable three-month periods and $327,000 (30.6%) between comparable nine-month periods. The Corporation's effective tax rate for the nine months ended September 30, 2012 was 17.1 percent, compared to 21.8 percent for the same period in 2011. The decrease in the effective tax rate is a result of an increase in tax exempt interest income from investment securities, as well as a decrease in income before federal income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Short-term borrowings of federal funds purchased and repurchase agreements averaged $23,724,000 for the nine-month period ended September 30, 2012. This compares to $22,514,000 for the nine-month period ended September 30, 2011, and $23,433,000 for the twelve-month period ended December 31, 2011.

Borrowings from the Federal Home Loan Bank and Great Lakes Bankers Bank totaled $17,973,000 at September 30, 2012, compared to $18,500,000 at December 31, 2011, and $12,500,000 at September 30, 2011.

Capital expenditures for premises and equipment totaled $177,000 for the nine-month period ended September 30, 2012, compared to $386,000 for the same period in 2011. The 2012 expenditures included improvements to the acquired HSL banking centers, ATM upgrades, and an air conditioning unit upgrade.

Loan commitments, including letters of credit, as of September 30, 2012, totaled $85,633,000 compared to $76,793,000 at December 31, 2011. Since many of these commitments are expected to expire without being drawn upon, these totals do not necessarily represent future cash requirements.


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