Prospectus Filed Pursuant to Rule 424(b)(3) (424b3)

Date: March 28, 2014

/s/ Rick M. Robertson

Rick M. Robertson, President and CEO

(Principal Executive Officer)

Filed Pursuant to Rule 424(b)(3)
under the Securities Act of 1933
Registration No. 333-190362

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2013.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to .

Commission File Number 0-20159

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)

Registrant’s telephone number, including area code (419) 332-7301

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [ ] No [X]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [ ] No [X]

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 Web site, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 [ ] Smaller Reporting Company [X]

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: The aggregate market value of the Registrant’s common shares, par value $12.50 per share, held by non-affiliates as of June 30, 2013, based on the closing price quoted on the OTC Bulletin Board on such date, was $54,619,560.

The Registrant had 2,270,729 common shares, par value $12.50 per share, outstanding as of February 28, 2014.

This Annual Report on Form 10K contains 124 pages. The Exhibit Index is on pages 51 through 52 and also immediately preceding the filed exhibits on pages 47 through 49.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2013 (the “2013 Annual Report to Shareholders”) are incorporated by reference into PART II of this Annual Report on Form 10-K.

INDEX


Part I
Item 1.	Business	4 - 23
Item 1A.	Risk Factors	24 - 28
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	28
Item 4.	Mine Safety Disclosures	28

Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	29
Item 6.	Selected Financial Data	29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 8.	Financial Statements and Supplementary Data	30
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	30
Item 9A.	Controls and Procedures	30 - 31
Item 9B.	Other Information	31

Part III
Item 10.	Directors, Executive Officers, and Corporate Governance	32 - 36
Item 11.	Executive Compensation	36 - 42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43 - 44
Item 13.	Certain Relationships and Related Transactions, and Director Independence	44 - 45
Item 14.	Principal Accountant Fees and Services	45 - 46

Part IV
Item 15.	Exhibits and Financial Statement Schedules	47 - 49

Signatures		50

PART I

ITEM 1. BUSINESS

GENERAL

Croghan Bancshares, Inc. (the “Corporation”), was organized under the laws of the State of Ohio on September 27, 1983, and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). As the result of a reorganization effective in 1984, the Corporation acquired all of the voting shares of The Croghan Colonial Bank (the “Bank”), an Ohio chartered bank organized in 1888. The Bank is the only direct subsidiary of the Corporation and substantially all of the Corporation’s operations are conducted through the Bank. The Bank has one wholly-owned insurance company subsidiary, Croghan Insurance Agency LLC (“Croghan Insurance”), which was organized on August 21, 2009 as an Ohio limited liability company for the purpose of allowing the Bank to participate in certain commission revenue generated through its third party insurance agreement. The principal offices of the Corporation, the Bank, and Croghan Insurance are located at 323 Croghan Street, Fremont, Ohio. The Bank operates 16 Ohio offices, including one in Bellevue, one in Clyde, one in Curtice, five in Fremont, one in Green Springs, one in Monroeville, one in Norwalk, one in Oak Harbor, one in Oregon, one in Port Clinton, and two in Tiffin.

On December 6, 2013, the Corporation completed the acquisition of Indebancorp and its bank subsidiary, National Bank of Ohio (“NBOH”), in a stock and cash merger transaction. Under the terms of the merger agreement, the shareholders of Indebancorp received either $55.00 in cash, 1.63 common shares of the Corporation, or a combination thereof subject to the overall consideration being 70% stock and 30% cash. Based on the closing price of the Corporation’s common shares on December 6, 2013 (i.e., the date of closing), the transaction was valued at $29.15 million and is expected to qualify as a tax-free reorganization. Indebancorp and NBOH were headquartered in Oak Harbor, Ohio, and operated four full-service branches and two loan production offices, all located within 30 miles of its corporate headquarters. In the transaction, the Bank acquired a total of $223,095,000 in total assets, with $163,453,000 in net loans and $22,876,000 in securities, and assumed $194,491,000 in deposits.

In December 2013, the Bank also completed the sale of its Custar Branch to another financial institution. The branch sale included $28,328,000 of assets, including $16,590,000 of cash paid and cash on hand and $11,467,000 of loans, and the transfer of $29,500,000 of liabilities, including $29,483,000 of deposits.

The Corporation maintains a website at www.croghan.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate the Corporation’s website into this Annual Report on Form 10-K). The Corporation makes available free of charge on or through its website, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after the Corporation electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (the “SEC”).

Through the Bank, the Corporation operates in one industry segment – the commercial banking industry. The Bank conducts a general banking business embracing the usual functions of commercial, retail, and savings banking, including time, savings, money market and demand deposits; commercial, industrial, agricultural, real estate, consumer installment, and credit card lending; safe deposit box rental; automatic teller machines; trust department services; and other services tailored for individual customers. The Bank originates and services secured and unsecured loans to individuals, firms, and corporations. Direct loans are made to individuals and installment obligations are purchased from retailers, both with and without recourse. The Bank makes a variety of residential, industrial, commercial, and agricultural loans secured by real estate, including interim construction financing. Additionally, investment products bearing no Federal Deposit Insurance Corporation (“FDIC”) insurance are offered through the Bank’s Trust and Investment Services Division.

Interest and fees on loans are the Bank’s primary sources of income. The Bank’s principal expenses are interest paid on deposit accounts and borrowed funds, and personnel and operating costs. Operating results are dependent to a significant degree on the “net interest income” of the Bank, which is the difference between the interest income derived from its interest-earning assets, such as loans and securities, and the interest expense paid on its interest-bearing liabilities, consisting of deposits and borrowings. Interest income and interest expense are significantly affected by general economic conditions and the policies of various regulatory authorities. See “EFFECTS OF GOVERNMENT MONETARY POLICY” on page 22 of this Annual Report on Form 10-K.

The Corporation’s only sources of funds are dividends and interest paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. See “DIVIDEND RESTRICTIONS” on page 22 of this Annual Report on Form 10-K.

As a bank holding company, the Corporation is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (the “FRB”). The deposits of the Bank are insured up to the applicable limits by the FDIC and, therefore, the Bank is subject to regulation, supervision, and examination by the FDIC. As a bank incorporated under the laws of the State of Ohio, the Bank is also subject to regulation, supervision, and examination by the Division of Financial Institutions of the Ohio Department of Commerce (the “Division”). See “REGULATION AND SUPERVISION” beginning on page 18, and “REGULATORY CAPITAL REQUIREMENTS” beginning on page 20 of this Annual Report on Form 10-K.

Because the Corporation’s activities have been limited primarily to holding the common shares of the Bank, the following discussion of operations focuses primarily on the business of the Bank. The following discussion encompasses only domestic operations since neither the Corporation nor the Bank have any foreign operations or foreign loans.

FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K which are not historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects”, “believes”, “anticipates”, “targets”, “plans”, “will”, “would”, “should”, “could”, and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. Factors that might cause such difference include, but are not limited to, the factors discussed under “ITEM 1A – RISK FACTORS” beginning on page 24 of this Annual Report on Form 10-K. Forward-looking statements speak only as of the date on which they are made and, except as required by law, the Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect unanticipated events. All subsequent written and oral forward-looking statements attributable to the Corporation or any person acting on its behalf are qualified by these cautionary statements.

LENDING ACTIVITIES

General. As a commercial bank, the Bank makes a wide variety of different types of loans. Among the Bank’s lending activities are the origination of commercial, financial, and agricultural loans, which may be secured by various assets of the borrower or unsecured; loans secured by mortgages on residential and non-residential real estate; construction loans secured by mortgages on the underlying property; consumer loans which may be on an unsecured basis or secured by vehicles or other assets of the borrower; and credit card loans which are typically unsecured.

The following table sets forth the composition of the Bank’s loan portfolio by type of loan at the dates indicated:


	December 31,

	2013		2012		2011		2010		2009

	(Dollars in thousands)
Type of Loan: (1)
Commercial, financial, and agricultural (2)		$ 44,134		$ 35,303		$ 28,963		$ 21,576		$ 27,311
Real estate – mortgage		387,936		264,189		253,865		254,371		276,416
Real estate – construction		11,608		3,635		5,237		4,084		5,828
Consumer		27,515		15,234		11,203		10,676		12,333
Credit card and other		3,555		2,916		2,697		2,598		2,596

		$474,748		$321,277		$301,965		$293,305		$324,484

(1)	The Bank made no foreign loans in 2013, 2012, 2011, 2010, or 2009.

(2)	Lease financing receivables included in commercial, financial, and agricultural, were $313,000 in 2013, $184,000 in 2012, $311,000 in 2011, $650,000 in 2010, and $859,000 in 2009.

Loan Maturity Schedule. The following table sets forth certain information, as of December 31, 2013, regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity and the dollar amount of such loans that have fixed or variable rates within certain maturity ranges after 2013:


	Maturing

	Within one year		After one but within five years		After five years		Total

	(Dollars in thousands)

Commercial, financial, and agricultural		$10,079		$21,484		$12,571		$44,134
Real estate – construction		2,715		1,816		7,077		11,608

Total		$12,794		$23,300		$19,648		$55,742


	Interest Sensitivity

	Fixed Rate		Variable Rate

	(Dollars in thousands)

Due after one but within five years		$21,587		$1,713
Due after five years		7,623		12,025

		$29,210		$13,738

The above maturity information is based on the contract terms at December 31, 2013, and does not include any possible “rollover” at maturity date. In the normal course of business, the Bank considers and acts upon the borrower’s request for renewal of a loan at maturity. Evaluation of such a request includes a review of the borrower’s credit history, the collateral securing the loan, and the purpose for such request.

Commercial, Financial, and Agricultural Loans. The Bank makes loans for commercial purposes, including industrial and professional purposes, to sole proprietorships, partnerships, corporations, limited liability companies, and other business enterprises. The Bank makes agricultural loans for the purpose of financing agricultural production, including all costs associated with growing crops or raising livestock. Commercial, financial, and agricultural loans may be secured, other than by real estate, or unsecured, requiring one single repayment, or on an installment repayment schedule. Commercial, financial, and agricultural loans generally have final maturities of five years or less and are made with interest rates that adjust either daily or annually based upon the national prime rate in effect at the time of the applicable rate change. However, under the current low rate environment there has been a shift to lock in fixed rates to maturity. Such loans typically do not contain any periodic rate adjustment caps or lifetime rate caps.

Commercial lending involves certain risks relating to changes in local and national economic conditions and the resulting effect on the borrowing entities. Such loans are subject to greater risk of default during periods of adverse economic conditions. Because such loans may be secured by equipment, inventory, accounts receivable, and other non-real estate assets, the collateral may not be sufficient to ensure full payment of the loan in the event of a default. To reduce such risk, the Bank may obtain the personal guarantees of one or more of the principals of the borrowers.

At December 31, 2013, the Bank had $44,134,000, or 9.3% of total loans, invested in commercial, financial, and agricultural loans. At December 31, 2013, the Bank had $188,000 of nonperforming loans of this type (i.e., those loans in nonaccrual status or past due 90 days or more).

Real Estate – Mortgage Loans. The Bank makes non-residential real estate loans secured by first mortgages and/or junior mortgages on non-residential real estate, including retail stores, office buildings, warehouses, apartment buildings, and residential real estate loans secured by first mortgages on one-to-four family residences, with a majority being single-family residences.

Non-Residential Real Estate Loans. The Bank’s non-residential real estate loans generally have final maturities of between 10 and 20 years and are typically made with adjustable interest rates (“ARMs”). Interest rates on the ARMs adjust either daily, annually, every three years, or every five years based upon the national prime or U.S. Treasury Note rates in effect at the time of the applicable rate change. Such loans typically do not contain periodic rate adjustment caps or lifetime rate caps.

The Bank limits the amount of each non-residential real estate loan in relationship to the appraised value of the real estate and improvements at the time of origination of such loans. The maximum loan-to-value ratio (the “LTV”) on non-residential real estate loans made by the Bank is 80%, subject to certain exceptions.

Non-residential real estate lending is generally considered to involve a higher degree of risk than residential lending. Such risk is due primarily to the dependence of the borrower on the cash flow from the property to service the loan. If the cash flow from the property is reduced due to a downturn in the economy for example, or due to any other reason, the borrower’s ability to repay the loan may be impaired. To reduce such risk, the decision to underwrite a non-residential real estate loan is based primarily on the quality and characteristics of the income stream generated by the property and/or the business of the borrower. The Bank carefully evaluates the location of the real estate, the quality of the management operating the property, the debt service ratio, and appraisals supporting the property’s valuation. In addition, the Bank may obtain the personal guarantees of one or more of the principals of the borrower.

At December 31, 2013, the Bank had $211,852,000, or 44.6% of total loans, invested in non-residential real estate loans, a majority of which were secured by properties located in the Northwestern Ohio area. At December 31, 2013, the Bank had $2,842,000 of nonperforming loans of this type.

Residential Real Estate Loans. The Bank’s residential real estate loans have either fixed or adjustable interest rates (“ARMs”). Interest rates on ARMs adjust every three or five years based upon the three or five year Constant Treasury Maturity (“CMT”) as published by the Wall Street Journal, plus an additional margin, that is in effect at the time of the applicable rate change. The three and five year ARMs typically have periodic adjustment caps of 2% and lifetime adjustment caps of 6%. The maximum amortization period for such loans is 30 years. The Bank does not engage in the practice of deeply discounting the initial rates on such loans, nor does the Bank engage in the practice of putting payment caps on loans which could lead to negative amortization. In addition to the three and five year ARM programs, where the loan is retained and serviced by the Bank, loans are originated by the Bank and sold into the secondary market (e.g., to Freddie Mac and Fannie Mae). The Bank retains the servicing and related support functions on loans that are sold into the secondary market. The establishment of this arrangement allows the Bank to maintain its customer relationships by providing very competitive residential real estate loan offerings, while at the same time eliminating the risks associated with long-term fixed-rate mortgage loan financing.

The Bank limits the amount of each residential real estate loan in relationship to the appraised value of the real estate and improvements at the time of origination of a residential real estate loan. The maximum LTV on residential real estate loans made by the Bank is 85%, subject to certain exceptions.

The Bank’s residential real estate loans amounted to $176,084,000 at December 31, 2013, which represented 37.1% of total loans. At December 31, 2013, the Bank had $2,663,000 of nonperforming loans of this type.

Real Estate – Construction Loans . The Bank makes construction loans to finance land development prior to erecting new structures and the construction of new buildings or additions to existing buildings. During the construction period, these loans are structured with either fixed rates or adjustable rates of interest tied to changes in the national prime interest rate. Many of the construction loans originated by the Bank are made to owner-occupants for the construction of single-family homes. Other loans are made to builders and developers for various projects, including the construction of homes and other buildings that have not been pre-sold, and the preparation of land for site and project development.

Construction loans involve greater underwriting and default risks than do loans secured by mortgages on improved and developed properties due to the effects that general economic conditions have on real estate developments, developers, managers, and builders. In addition, such loans are more difficult to evaluate and monitor. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to accurately evaluate the LTVs and the total loan funds required to complete a project. In the event that a default or foreclosure on a construction or land development loan occurs, the Bank must take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project.

At December 31, 2013, the Bank’s construction loans amounted to $11,608,000, or 2.5% of total loans. At December 31, 2013, the Bank had no nonperforming loans of this type.

Consumer Loans. The Bank makes a variety of consumer loans to individuals for family, household, and other personal expenditures. These loans often are made for the purpose of financing the purchase of vehicles, furniture, educational expenses, medical expenses, taxes, or vacation expenses. Consumer loans may be secured, other than by real estate, or unsecured, and generally require repayment pursuant to an installment repayment schedule.

Consumer loans involve a higher risk of default than residential real estate loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets, such as vehicles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage or depreciation, and the remaining deficiency may not warrant further collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, illness, or personal bankruptcy. Various federal and state laws, including federal and state bankruptcy and insolvency laws, may also limit the amount which can be recovered on such loans.

At December 31, 2013, the Bank had $27,515,000, or 5.8% of total loans, invested in consumer loans, of which $34,000 were nonperforming.

Credit Card and Other Loans. Credit card and other loans are made to individuals for personal expenditures and principally arise from bank credit cards. Such loans generally pose the most risk as they are most frequently unsecured.

At December 31, 2013, the Bank had $3,555,000, or 0.7% of total loans, invested in credit card and other loans, of which $37,000 were nonperforming.

Loan Solicitation and Processing. The Bank’s loan originations are developed from a number of sources, including continuing business with depositors, borrowers, and real estate developers, periodic newspaper and radio advertisements, solicitations by the Bank’s lending staff, walk-in customers, director referrals, and loan participations purchased from other financial institutions.

For non-residential real estate loans, the Bank obtains information with respect to the credit and business history of the borrower and prior projects completed by the borrower. Personal guarantees of one or more principals of the borrower are obtained as deemed necessary. An environmental study of the real estate might also be conducted when deemed necessary. Upon the completion of the appraisal of the non-residential real estate and the receipt of information on the borrower, the loan application may be submitted to the Loan Committee for approval or rejection if the loan amount is in excess of established limits contained in the Bank’s Loan Policy. Additionally, loans in material amounts as established in the Bank’s Loan Policy must be submitted to the Executive Committee of the Board of Directors for approval or rejection.

In connection with residential real estate loans, the Bank may obtain a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate on which the Bank will be granted a mortgage to secure the loan is generally prepared by an independent appraiser approved by the Board of Directors. An environmental study of the real estate is conducted only if the appraiser has reason to believe that an environmental problem may exist.

When either a residential or non-residential real estate loan application is approved, a lawyer’s opinion of title or title insurance is obtained with respect to the real estate which will secure the loan. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name the Bank as an insured mortgagee.

Commercial, financial, and agricultural loans are underwritten primarily on the basis of the stability of the income generated by the business and/or property. The personal guarantees of one or more principals of the borrower also are generally obtained. Consumer loans are underwritten on the basis of the borrower’s credit history and an analysis of the borrower’s income and expenses, ability to repay the loan and the value of the collateral, if any. The procedure for approval of real estate - construction loans is the same as for real estate - mortgage loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. The Bank also evaluates the feasibility of the proposed construction project and the experience and record of the builder.

Loan Origination and Other Fees. The Bank realizes loan origination fees and other fee income from its lending activities. The Bank also realizes income from late payment charges, application fees, and fees for other miscellaneous services. Loan origination fees and other fees realized by the Bank are a volatile source of income and vary with the volume of lending, loan repayments and general economic conditions. Nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment to yield over the life of the related loan.

Delinquent Loans, Nonperforming Assets, and Classified Assets. When a borrower fails to make a required payment on a loan, the Bank attempts to cause the deficiency to be cured by contacting the borrower. In most cases, deficiencies are cured promptly as a result of these efforts.

When a borrower fails to make a timely payment, the borrower will receive a series of scheduled delinquency notices and possibly follow-up calls from an employee of the Bank. In most cases, delinquencies are paid promptly. Generally, if a real estate loan becomes 90 days delinquent, the borrower and collateral will be assessed to determine whether foreclosure action is required. When deemed appropriate by management, a foreclosure action will be instituted or a deed in lieu of foreclosure will be pursued.

Loans are placed into nonaccrual status when, in the opinion of management, full collection of principal and interest is unlikely. Under-collateralized loans are then fully or partially charged-off against the allowance for loan losses, and interest is recognized on a cash basis where future collections of principal are probable.

The following table presents information concerning the amount of loans which contain certain risk elements at the dates indicated:


	December 31,

	2013		2012		2011		2010		2009

	(Dollars in thousands)

Loans accounted for on a nonaccrual basis including Troubled Debt Restructuring (“TDR”) non-accruing (1)		$4,604		$2,753		$4,671		$4,127		$5,903

Loans contractually past due 90 days or more as to principal or interest payments and still accruing interest (2)		1,160		967		672		586		45

Loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest because of a deterioration in the financial position of the borrower (3)		6,081		4,342		3,532		4,665		3,191

(1)

The amount of gross interest income that would have been recorded had all nonaccrual loans been current in accordance with their terms approximated $151,000 in 2013, $161,000 in 2012, $200,000 in 2011, $270,000 in 2010, and $375,000 in 2009. Actual interest included in interest income on these loans amounted to $33,000 in 2013, $39,000 in 2012, $33,000 in 2011, $36,000 in 2010, and $33,000 in 2009.

(2)

Excludes loans accounted for on a nonaccrual basis.

(3)

Excludes loans accounted for on a nonaccrual basis and loans contractually past due 90 days or more as to principal or interest payments.

In addition to the loan amounts identified in the preceding table, there was $7,079,000 of potential problem loans at December 31, 2013. While these loans are all currently performing, management has some doubt about the ability of the borrowers to continue to comply with all of their present loan repayment terms. Management typically classifies a loan as a potential problem loan, regardless of its collateralization or any contractually obligated guarantors, when a review of the borrower’s financial statements indicates the borrowing entity does not generate sufficient operating cash flow to adequately service its debts.

The Bank’s loans are spread over a broad range of industrial classifications. As of December 31, 2013, the Bank had no significant concentrations of loans (i.e., greater that 10% of total loans) to borrowers engaged in the same or similar industries.

Allowance for Loan Losses. The Bank maintains an allowance for loan losses to provide for loans that might not be repaid. At December 31, 2013, the Bank’s allowance for loan losses totaled $4,042,000. To determine the adequacy of the allowance for loan losses, the Bank performs a detailed quarterly analysis that focuses on delinquency trends within each loan category (i.e., commercial, real estate, and consumer loans), the status of nonperforming loans (i.e., impaired, nonaccrual and restructured loans, and loans past due 90 days or more), current and historic trends of charged-off loans within each category, existing local and national economic conditions, and changes in the volume and mix within each loan category. Additionally, loans that are identified as impaired are individually evaluated and specific reserves provided to the extent the loan amount exceeds anticipated future cash flows, including cash flows from the sale of the underlying collateral.

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the Bank’s portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments, and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. The regulatory agencies that periodically review the Bank’s allowance for loan losses may also require adjustments to the allowance or the charge-off of specific loans based upon the information available to them at the time of their examinations.

The following table shows the daily average loan balances, for the periods indicated, and changes in the allowance for loan losses for such years:


	December 31,
	2013		2012		2011		2010		2009

	(Dollars in thousands)

Daily average amount of loans		$331,291		$306,343		$286,576		$306,924		$334,648


Allowance for loan losses at beginning of year		$4,325		$4,778		$4,955		$4,433		$3,287


Loan charge-offs:
Commercial, financial, and agricultural		(-)		(2)		(56)		(4)		(212)
Real estate – mortgage		(529)		(984)		(1,649)		(1,169)		(1,594)
Consumer		(73)		(75)		(38)		(97)		(141)
Credit card and other		(47)		(23)		(43)		(39)		(74)

		(649)		(1,084)		(1,786)		(1,309)		(2,021)


Recoveries of loans previously charged off:
Commercial, financial, and agricultural		13		15		203		15		66
Real estate – mortgage		18		72		598		93		34
Consumer		51		13		23		42		57
Credit card and other		9		6		10		6		10

		91		106		834		156		167

Net charge-offs		(558)		(978)		(952)		(1,153)		(1,854)


Additions to allowance charged to expense		275		525		775		1,675		3,000

Allowance for loan losses at end of year		$4,042		$4,325		$4,778		$4,955		$4,433

Allowance for loan losses as a percent of year-end loans		.85%		1.35%		1.58%		1.69%		1.37%

Ratio of net charge-offs during the year to average net loans outstanding during the year		.17%		.32%		.34%		.38%		.56%

The amount of charge-offs and recoveries fluctuate from year to year due to factors relating to the condition of the general economy and specific business segments. During 2009, there were no commercial loan charge-offs exceeding $25,000; however, there was one recovery that totaled $34,000 that was recovered from a commercial loan that was charged off in 2008. Also during 2009, there were 15 real estate loan charge-offs individually exceeding $25,000 with the largest being $518,000, and others including $253,000, $224,000, and $178,000. There were no individual recoveries over $25,000 in the real estate loan category during 2009. There were also two consumer loan charge-offs that individually exceeded $25,000 during 2009 with the largest being $31,000. During 2010, there were no commercial loan charge-offs or recoveries exceeding $25,000. Also during 2010, there were 11 real estate loan charge-offs individually exceeding $25,000 with the largest being $273,000, and others including $180,000, $138,000, and $85,000. There were two individual recoveries over $25,000 in the real estate loan category during 2010. There were no consumer loan charge-offs or recoveries that individually exceeded $25,000 during 2010. During 2011, there was one commercial loan charge-off exceeding $25,000 that totaled $36,000 and there was a recovery from one borrower totaling $169,000. Also during 2011, there were 15 real estate loan charge-offs individually exceeding $25,000 with the largest being $335,000, and others including $308,000, $120,000, $112,000, and $100,000. There were two individual recoveries over $25,000 in the real estate loan category during 2011 totaling $519,000 and $66,000. There were no consumer loan charge-offs or recoveries that individually exceeded $25,000 during 2011. During 2012, there were no commercial loan charge-offs or recoveries exceeding $25,000. Also during 2012, there were 15 real estate loan charge-offs individually exceeding $25,000 with the largest being $150,000, and others including $83,000, $65,000, and two each of $59,000. There were no recoveries over $25,000 in the real estate loan category during 2012. There were no consumer loan charge-offs or recoveries that individually exceeded $25,000 during 2012. During 2013, there were no commercial loan charge-offs or recoveries exceeding $25,000, five real estate charge-offs exceeding $25,000 (with the largest charge-off being $159,000 and the aggregate being $305,000), and one consumer loan charge-off of $29,000. There were no other individual charge-offs or recoveries exceeding $25,000 during 2013. There were no lease financing charge-offs or recoveries in any of the years presented.

The Corporation recognized a provision for loan losses of $275,000 for the year ended December 31, 2013. The decrease in the provision for loan losses in 2013, as compared to 2012, was due to a decrease in the level of specifically analyzed loans in 2013, as compared to 2012, and a reduction in net loan charge-offs of $420,000. The Bank will continue to monitor the credit quality of its entire loan portfolio to maintain the allowance for loan losses at an appropriate level.

The following table allocates the allowance for loan losses for the periods indicated to each loan category. The allowance has been allocated to the categories of loans noted according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred based on specific credit analyses:


	December 31, 2013				December 31, 2012
	Allowance		Percentage of loans to total loans		Allowance		Percentage of loans to total loans

	(Dollars in thousands)				(Dollars in thousands)

Commercial, financial, and agricultural		$ 456		9.3%		$ 621		11.0%
Real estate – mortgage		2,885		81.7%		3,315		82.2%
Real estate – construction		464		2.5%		184		1.1%
Consumer		164		5.8%		127		4.8%
Credit card and other		73		.7%		78		.9%

		$4,042		100.0%		$4,325		100.0%


	December 31, 2011				December 31, 2010
	Allowance		Percentage of loans to total loans		Allowance		Percentage of loans to total loans

	(Dollars in thousands)				(Dollars in thousands)

Commercial, financial, and agricultural		$ 615		9.6%		$ 542		7.4%
Real estate – mortgage		3,831		84.1%		3,906		86.7%
Real estate – construction		179		1.7%		347		1.4%
Consumer		84		3.7%		85		3.6%
Credit card and other		69		.9%		75		.9%

		$4,778		100.0%		$4,955		100.0%


	December 31, 2009
	Allowance		Percentage of loans to total loans

	(Dollars in thousands)

Commercial, financial, and agricultural		$ 526		8.4%
Real estate – mortgage		3,649		85.2%
Real estate – construction		72		1.8%
Consumer		115		3.8%
Credit card and other		71		.8%

		$4,433		100.0%

The Bank decreased its allowance for loan losses to $4,042,000 at December 31, 2013, from $4,325,000 at December 31, 2012. There were specific reserves of $437,000 on individual credits at December 31, 2013. Because the loan loss allowance is based on estimates, it is monitored on an ongoing basis and adjusted as necessary to provide an adequate allowance.

INVESTMENT ACTIVITIES

The Bank’s investment policy is designed to effectively utilize excess funds and to provide for liquidity needs as dictated by loan demand and daily operations. The Bank’s federal income tax position is also a consideration in its investment decisions. Investments in tax-exempt securities with maturities of less than 20 years are often desirable when the net yield exceeds that of taxable securities and the Bank’s effective tax rate warrants such investments.

The following sets forth the carrying amount of securities at December 31, 2013, 2012, and 2011:


	December 31,
	2013		2012		2011

	(Dollars in thousands)

Obligations of U.S. Government agencies and corporations (1)		$153,465		$131,990		$137,244
Obligations of states and political subdivisions (2)		98,657		105,881		87,688
Other securities (2)		5,387		4,524		4,194

		$257,509		$242,395		$229,126

(1)	There were no holdings of U.S. Treasury securities at December 31, 2013, 2012, or 2011.

(2)	There were no securities of any single “issuer” where the aggregate carrying amount of such securities exceeded ten percent of stockholders’ equity.

The following sets forth the maturities of securities at December 31, 2013 and the weighted average yields of such securities:


	Maturing
	Within one year				After one but within five years				After five but within ten years				After ten years
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield

	(Dollars in thousands)

Obligations of U.S. Government agencies and corporations		$23,321		.63%		$114,046		2.21%		$15,397		2.70%		$ 701		5.68%
Obligations of states and political subdivisions (1)		5,066		3.37%		22,631		3.26%		58,319		3.18%		12,641		2.72%

Total (2)		$28,387		1.12%		$136,677		2.20%		$73,716		3.07%		$13,342		2.86%

(1)	Weighted average yields on non-taxable obligations have been computed on a fully tax-equivalent basis assuming a tax rate of 34%.

(2)	Excludes equity investments of $5,387,000 which have no stated maturity.

DEPOSITS AND BORROWINGS

General. Deposits have traditionally been the Bank’s primary funding source for use in lending and other investment activities. In addition to deposits, the Bank derives funds from interest and principal repayments on loans and income from other earning assets. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate in response to economic conditions and interest rates. The Bank has established lines of credit with its major correspondent banks to purchase federal funds to meet liquidity needs. At December 31, 2013, the Bank did not have any federal funds purchased, out of the $17,000,000 available under such lines of credit.

The Bank also uses retail repurchase agreements as a source of funds. These agreements essentially represent borrowings by the Bank from customers with maturities of three months or less. Certain securities are pledged as collateral for these agreements. At December 31, 2013, the Bank had $24,577,000 in retail repurchase agreements.

Neither the Corporation nor the Bank had any capital lease obligations as of December 31, 2013. The Bank had future operating lease obligations totaling $85,000 at December 31, 2013, related to the following lease arrangements: the Port Clinton banking center located in a retail supermarket in the Knollcrest Shopping Center, an ATM site north of Fremont, a loan production office in Perrysburg Ohio, and an ATM and Night Drop box in two separate locations on the Put In Bay Islands. Additionally, the Bank had various future operating lease obligations aggregating $47,000 at December 31, 2013, for photocopying and mail processing equipment.

Deposits. Deposits are attracted principally from within the Bank’s designated market area by offering a variety of deposit instruments, including regular savings accounts, negotiable order of withdrawal (“NOW”) accounts, money market deposit accounts, term certificate accounts, and individual retirement accounts (“IRAs”). Interest rates paid, maturity terms, service fees, and withdrawal penalties for the various types of accounts are established periodically by the Bank’s management based on the Bank’s liquidity requirements, growth goals, and market trends. The Bank does not use brokers to attract deposits. The amount of deposits from outside the Bank’s market area is not significant.

The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits for 2013, 2012, and 2011 as set forth in the following table:


	2013					2012					2011
	Average balance		Average rate paid			Average balance		Average rate paid			Average balance		Average rate paid

	(Dollars in thousands)

Non-interest bearing demand deposits		$102,355		-			$ 87,396		-			$ 68,977		-
Interest-bearing demand deposits		95,840		.07	%		82,390		.08	%		66,335		.07	%
Savings, including Money Market, deposits		183,372		.13	%		168,352		.19	%		133,603		.28	%
Time deposits		155,904		.84	%		178,121		1.09	%		131,081		1.67	%

Total		$537,471					$516,259					$399,996

Maturities of time deposits of $100,000 or more outstanding at December 31, 2013 were as follows (dollars in thousands):



3 months or less					$ 8,991
Over 3 through 6 months					6,385
Over 6 through 12 months					7,530
Over 12 months					36,154

Total					$59,060

Borrowings. In addition to repurchase agreements, the Bank has agreements with correspondent banks to purchase federal funds as needed to meet daily liquidity needs. As a member of the Federal Home Loan Bank of Cincinnati (“FHLB”) since 1993, the Bank is authorized to obtain advances from the FHLB provided certain credit standards are met. The Bank had $10,276,000 in FHLB advances outstanding at December 31, 2013 and had an additional borrowing capacity of $43,033,000.

The following table sets forth the maximum month-end balance for the Bank’s outstanding short-term borrowings (i.e., federal funds purchased and repurchase agreements), along with the average aggregate balances and weighted average interest rates, for 2013, 2012, and 2011:


	2013		2012		2011

	(Dollars in thousands)

Balance at year-end		$24,577		$32,344		$40,861

Maximum balance at any month-end during the period		24,577		32,344		40,861

Average balance		17,192		23,552		23,432

Weighted average interest rate		.09%		.12%		.19%

The following sets forth the maximum month-end balance for the Bank’s outstanding long-term borrowings (i.e., FHLB advances and a note payable to a correspondent bank), along with the average aggregate balance and weighted average interest rates, for 2013, 2012, and 2011:


	2013		2012		2011

	(Dollars in thousands)

Balance at year-end		$14,346		$15,199		$18,500

Maximum balance at any month-end during the period		14,922		18,500		30,500

Average balance		14,826		18,015		20,075

Weighted average interest rate		3.86%		4.07%		3.44%

ASSET/LIABILITY MANAGEMENT

The Bank’s earnings are highly dependent upon its net interest income, which is the difference between the interest income derived from interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, consisting of deposits and borrowings. Interest rate risk is one of the Bank’s most significant financial exposures. This risk, which is common to the financial institution sector, is an integral part of the Bank’s operations and impacts the rate-pricing strategies for essentially all of the Bank’s loan and deposit products.

The Bank monitors its interest rate risk through a sensitivity analysis, which strives to measure potential changes in future earnings and the fair values of its financial instruments that could result from hypothetical changes in interest rates. The first step in this analysis is to estimate the expected cash flows from the Bank’s financial instruments using the interest rates in effect at December 31, 2013. To arrive at fair value estimates, the cash flows from the Bank’s financial instruments are discounted to their approximated present values. Hypothetical changes in interest rates are applied to those financial instruments, and the cash flows and fair value estimates are then simulated. When calculating the net interest income estimations, hypothetical rates are applied to the financial instruments based upon the assumed cash flows. The Bank applies interest rate “shocks” to its financial instruments of 100, 200, 300, and 400 basis points (1%, 2%, 3%, and 4%) up and down for its net interest income, and 200 basis points (2%) up and down for the value of its equity. However, because interest rates were below 1.0% at December 31, 2013, the sensitivity analysis could not be performed with respect to a negative 200, 300, and 400 basis point changes in market rates.

The following table presents the potential sensitivity in the Bank’s annual net interest income to 100, 200, 300, and 400 basis-point changes in market interest rates and the potential sensitivity in the present value of the Bank’s equity if a sudden and sustained 200 basis-point change in market interest rates occurred (dollars in thousands):


	December 31, 2013
	Change in Dollars ($)	Change in Percent (%)

Annual Net Interest Income Impact
For a Change of +100 Basis Points	(904)	(1.7)
For a Change of - 100 Basis Points	740	1.4
For a Change of +200 Basis Points	(555)	(1.1)
For a Change of - 200 Basis Points	N/A	N/A
For a Change of +300 Basis Points	(939)	(1.8)
For a Change of - 300 Basis Points	N/A	N/A
For a Change of +400 Basis Points	(1,398)	(2.7)
For a Change of - 400 Basis Points	N/A	N/A

Impact on the Net Present Value of Equity
For a Change of +200 Basis Points	6,388	3.3
For a Change of - 200 Basis Points	N/A	N/A

The preceding analysis encompasses the use of a variety of assumptions, including the relative levels of market interest rates, loan prepayments, and the possible reaction of depositors to changes in interest rates. The analysis simulates possible outcomes and should not be relied upon as being indicative of actual results. Additionally, the analysis does not necessarily contemplate all of the actions that the Bank could undertake in response to changes in market interest rates. For example, the Bank could enter into derivatives or swaps, which are not included in the model.

The following table sets forth, for the years ended December 31, 2013, 2012, and 2011, the distribution of assets, liabilities, and stockholders’ equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities:


	2013						2012						2011
	Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate		Average Balance		Interest		Yield/ Rate

	(Dollars in thousands)
Assets

Interest-earning assets:
Loans (1) (2)		$331,291		$16,713		5.04%		$306,343		$16,797		5.48%		$286,576		$16,632		5.80%
Taxable securities		143,863		1,578		1.10%		156,354		1,231		.79%		98,876		2,724		2.75%
Non-taxable securities (3)		98,039		3,137		3.20%		93,521		3,006		3.21%		64,809		2,254		3.48%
Interest-earning deposits		9,777		28		.39%		8,188		25		.31%		7,327		12		.16%

Total interest-earning assets (4)		582,970		21,456		3.68%		564,406		21,059		3.73%		457,588		21,622		4.73%


Non-interest-earning assets:
Cash and due from banks		15,656						17,524						14,638
Unrealized gains on securities		4,759						8,461						3,389
Bank premises and equipment, net		7,493						7,824						6,568
Other assets		33,632						33,986						28,964
Less allowance for loan losses		(4,167)						(4,010)						(4,729)

Total		$640,343		$21,456				$628,191		$21,059				$506,418		$21,622


Liabilities and Stockholders’ Equity

Interest-bearing liabilities:
Savings, NOW and Money Market deposits		$279,212		$ 302		.11%		$250,742		$ 376		.15%		$199,938		$ 425		.21%
Time Deposits		155,904		1,303		.84%		178,121		1,947		1.09%		131,081		2,195		1.67%
Federal funds purchased and securities sold under repurchase agreements		17,193		16		.09%		23,552		29		.12%		23,432		44		.19%
Borrowed funds		14,825		573		3.86%		18,015		734		4.07%		20,075		691		3.44%

Total interest-bearing liabilities		467,134		2,194		.47%		470,430		3,086		.90%		374,526		3,355		.90%

Non-interest-bearing liabilities:
Demand deposits		102,355						87,396						68,977
Other liabilities		3,450						4,935						3,294

Total non-interest-bearing liabilities		105,805						92,331						72,271

Stockholders’ equity:
Stockholders’ equity		62,645						56,969						56,232
Unrealized gains on securities		4,759						8,461						3,389

Total stockholders’ equity		67,404						65,430						59,621

Total		$640,343		$2,194				$628,191		$3,086				$506,418		$3,355

Net interest income				$19,262						$17,973						$18,267

Net yield on interest-earning assets						3.30%						3.18%						3.99%

(1)	Included in loan interest income are loan fees of $676 in 2013, $717 in 2012, and $447 in 2011 (in thousands).

(2)	Non-accrual loans are included in loan totals and do not have a material impact on the analysis presented.

(3)	Interest and yield for non-taxable securities have not been tax-effected for the 34% exception for federal income taxes.

(4)	Excludes unrealized gains on taxable and non-taxable securities.

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate:


	2013 compared to 2012 Increase (decrease) due to volume/rate (1)						2012 compared to 2011 Increase (decrease) due to volume/rate (1)
	Volume		Rate		Net		Volume		Rate		Net

	(Dollars in thousands)

Interest income:
Loans receivable		$1,313		$(1,397)		$(84)		$1,112		$(947)		$165
Taxable securities		(106)		453		347		1,076		(2,569)		(1,493)
Non-taxable securities		145		(14)		131		934		(182)		752
Interest bearing deposits		4		(1)		3		1		12		13

Total interest-earning assets		1,356		(959)		397		3,123		(3,686)		(563)


Interest expense:
Savings, NOW, and Money Market deposits		40		(114)		(74)		93		(142)		(49)
Time deposits		(223)		(421)		(644)		648		(896)		(248)
Federal funds purchased and securities sold under repurchase agreements		(7)		(6)		(13)		0		(15)		(15)
Borrowed funds		(126)		(35)		(161)		(76)		119		43

Total interest-bearing liabilities		(316)		(576)		(892)		665		(934)		(269)

Net interest income		$1,672		$(383)		$1,289		$2,458		$(2,752)		$(294)

(1)	The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the absolute dollar change due to volume and the change due to rate.

The ratio of net income to daily average total assets and average stockholders’ equity, and certain other ratios, for the periods noted are as follows:


	Year ended December 31,
	2013			2012			2011

Percentage of net income to:
Average total assets		.69	%		.77	%		.94	%
Average stockholders’ equity		6.60	%		7.40	%		7.97	%

Percentage of cash dividends declared per common share to net income per common share -basic		49.61	%		44.29	%		45.07	%

Percentage of average stockholders’ equity to average total assets		10.53	%		10.42	%		11.77	%

COMPETITION

The Bank faces intense competition in its market areas. The Bank competes for commercial and individual deposits and/or loans with other commercial banks in Huron, Lucas, Ottawa, Sandusky, Seneca, and Wood counties in Northwestern Ohio, as well as with savings and loan associations in the trade area, credit unions, brokerage firms, mutual funds, and loan production offices and other financial units of non-local bank holding companies. Many competitors of the Bank have substantially greater resources and lending limits and can offer services that the Bank does not or cannot provide. The primary factors in competing for loans are interest rates charged and overall services provided to borrowers, while the primary factors in competing for deposits are interest rates paid on deposits, account liquidity, convenience, hours of facilities, and quality of service provided to depositors. The Bank focuses on personalized service, convenience of facilities, pricing of products, community stature, and its local ownership and control in meeting its competition.

SUBSIDIARY ACTIVITIES

The Corporation’s only subsidiary is the Bank. The Bank’s only subsidiary is Croghan Insurance, which engages in activities related to the sale of insurance and, as a licensed insurance agency, receives commissions from insurance sales.

EMPLOYEES

As of December 31, 2013, the Corporation and its subsidiaries employed 174 full-time employees and 35 part-time employees. The Corporation and its subsidiaries believe that relations with its employees are excellent. The Corporation and its subsidiaries provide a variety of benefits to full-time employees, including health, disability, and life insurance benefits.

REGULATION AND SUPERVISION

The Corporation is registered as a bank holding company under the BHCA. As a bank holding company, the Corporation is required to file periodic reports with, and is subject to regulation, supervision and examination by, the FRB. Such examination by the FRB determines whether the Corporation is operating in accordance with various regulatory requirements and in a safe and sound manner.

The FRB has extensive enforcement authority over bank holding companies, including the ability to assess civil money penalties, issue cease and desist orders, and require that a bank holding company divest subsidiaries. In general, the FRB may initiate enforcement actions for activities that are deemed by the FRB to constitute a serious risk to the financial safety, soundness, or stability of a bank holding company, that are inconsistent with sound banking principles, or that are in violation of law. Further, bank holding companies and their subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services.

Subject to certain exceptions, the BHCA requires a bank holding company to obtain the prior approval of the FRB before (a) acquiring all or substantially all of the assets of any bank or bank holding company, (b) merging or consolidating with any other bank holding company, or (c) acquiring direct or indirect ownership or control of any voting shares of any other bank, if after such acquisition, the bank holding company would own or control more than 5% of the voting shares of such bank. In making such determinations, the FRB considers the effect of the acquisition on competition, the financial and managerial resources of the holding company, and the convenience and needs of the affected communities.

The BHCA also prohibits a bank holding company from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any activities other than banking or managing or controlling banks or furnishing services to its subsidiaries. The primary exception to this prohibition allows a bank holding company to own shares in any company the activities of which the FRB has determined, by order or regulation, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) permits qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Act of 1991, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, by filing a declaration that the bank holding company wishes to become a financial holding company. The Corporation has not elected to become a financial holding company at this time, but intends to periodically re-evaluate the advantages and disadvantages of becoming a financial holding company.

As an Ohio-chartered bank, the Bank is further subject to regulation, supervision, and examination by the Division. Chapter 1109 of the Ohio Revised Code imposes limitations on the amount of certain types of loans and other investments that an Ohio-chartered bank is permitted to make. In addition, the aggregate amount that an Ohio-chartered bank can lend to any one borrower is limited by Ohio law to an amount equal to 15% of the institution’s unimpaired capital. An Ohio-chartered bank may lend to one borrower an additional amount not to exceed 10% of the institution’s unimpaired capital, if the additional amount is fully secured by certain forms of “readily marketable collateral.” Real estate is not considered “readily marketable collateral.”

The Division conducts periodic examinations of the Bank, often times on a joint basis with the FRB examiners. The Division may initiate certain supervisory measures or formal enforcement actions against an Ohio-chartered bank. Ultimately, if the grounds provided by law exist, the Division may place an Ohio-chartered bank in conservatorship or receivership. Any mergers, acquisitions, or changes of control involving an Ohio-chartered bank must be approved by the Division.

In addition to Ohio laws relating to banks, the Bank is subject to the Ohio general corporation law to the extent such law does not conflict with the laws specifically governing banks.

Croghan Insurance, the Bank’s wholly-owned insurance agency subsidiary, is also subject to the insurance laws and regulations of the State of Ohio and the Ohio Department of Insurance. The insurance laws and regulations require education and licensing of agencies and individual agents, require reports, and impose business conduct rules.

The Bank is also a member of the Federal Reserve System and is subject to regulation, supervision, and examination by the FRB. The FRB issues regulations governing the operations of state member banks, examines state member banks, and may initiate enforcement actions against state member banks and certain persons affiliated with them for violations of laws and regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the FRB may appoint a conservator or a receiver for a state member bank.

Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W restrict transactions by banks and their subsidiaries with their affiliates. Generally, Sections 23A and 23B and Regulation W: (a) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus (i.e., tangible capital); (b) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to 20% of the bank’s capital stock and surplus; and (c) require that all such covered transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate. The term “covered transactions” includes the making of loans, the purchase of assets, the issuance of a guarantee, and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors, and greater than 10% shareholders, as well as entities controlled by such persons, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the FRB. Among other requirements, these loans must be made on terms substantially the same as those offered to unaffiliated persons, or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. The amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

The Corporation and the Bank are subject to the Community Reinvestment Act of 1977, as amended (the “CRA”), which is designed to encourage financial institutions to give special attention to the needs of low and moderate income areas in meeting the credit needs of the communities in which they operate. If the CRA regulatory evaluation of a bank’s activities is less than satisfactory, regulatory approval of proposed acquisitions, branch openings, and other applications requiring FRB approval may be delayed until a satisfactory CRA evaluation is achieved. The Bank currently has a CRA regulatory evaluation of satisfactory.

The Bank is a member of the FHLB of Cincinnati and, therefore, must maintain an investment in the capital stock of the FHLB. Upon the origination or renewal of a loan or advance, each FHLB is required by law to obtain and maintain a security interest in certain types of collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the CRA and its record of lending to first-time home buyers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was enacted into law on July 21, 2010. The Dodd-Frank Act is significantly changing the regulation of financial institutions and the financial services industry. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with significant discretion, many of the details of the new law and the effects they will have on the Corporation will not be known for months and even years. The following summarizes significant aspects of the Dodd-Frank Act that may affect the Corporation and the Bank:

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a new Consumer Financial Protection Bureau has been established with broad powers to adopt and enforce consumer protection regulations;

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the federal law prohibiting the payment of interest on commercial demand deposit accounts was eliminated effective in July 2011;

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the standard maximum amount of deposit insurance per customer was permanently increased to $250,000 and non-interest-bearing transaction accounts have unlimited insurance through December 31, 2012;

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the assessment base for determining deposit insurance premiums has been expanded from domestic deposits to average assets minus average tangible equity;

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public companies in all industries are or will be required to provide shareholders the opportunity to cast a non-binding advisory vote on executive compensation;

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new capital regulations for bank holding companies have been adopted, which will impose stricter requirements, and any new trust preferred securities issued after May 19, 2010 will no longer constitute Tier I capital; and

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new corporate governance requirements applicable generally to all public companies in all industries require new compensation practices and disclosure requirements, including requiring companies to “claw back” incentive compensation under certain circumstances, to consider the independence of compensation advisors, and to make additional disclosures in proxy statements with respect to compensation matters.

Many provisions of the Dodd-Frank Act have not yet been implemented and will require interpretation and rule making by federal regulators. As a result, the ultimate effect of the Dodd-Frank Act on the Corporation cannot yet be determined. However, it is likely that the implementation of these provisions will increase compliance costs and fees paid to regulators, along with possibly restricting the operations of the Corporation and the Bank.

REGULATORY CAPITAL REQUIREMENTS

The FRB has adopted risk-based capital guidelines for bank holding companies, such as the Corporation, and for state member banks, such as the Bank. Bank holding companies and state member banks must maintain adequate consolidated capital to meet the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet items such as standby letters of credit) (the “Total Risk-Based Ratio”) of 8%. At least half of the minimum-required Total Risk-Based Ratio (4%) must be composed of “Tier 1” capital, which consists of common stockholders’ equity, minority interests in certain equity accounts of consolidated subsidiaries, and a limited amount of perpetual preferred stock and qualified trust preferred securities, less goodwill and certain other intangibles. The remainder of total risk-based capital (commonly referred to as “Tier 2” risk-based capital) may consist of certain amounts of hybrid capital instruments, mandatory convertible debt, subordinated debt, preferred stock not qualifying as Tier 1 capital, loan and lease loss allowances, and net unrealized gains on certain available-for-sale securities, all subject to limitations established by the guidelines.

Under the guidelines, capital is compared to the relative risk of the balance sheet. To derive the risk included in the balance sheet, one of four risk weights (0%, 20%, 50%, and 100%) is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The FRB also has established minimum leverage ratio guidelines for bank holding companies and state member banks. The guidelines provide for a minimum ratio of Tier 1 capital to average total assets (excluding the loan and lease loss allowance, goodwill, and certain other intangibles) (the “Leverage Ratio”) of 3% for bank holding companies and state member banks that meet specified criteria, including having the highest regulatory rating. All other bank holding companies and state member banks must maintain a Leverage Ratio of 4% to 5%. The guidelines further provide that bank holding companies and state member banks making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels.

The following sets forth the Tier 1 Risk-Based Ratio, Total Risk-Based Ratio, and Leverage Ratio for the Corporation and the Bank at December 31, 2013:


	At December 31, 2013
	Corporation				Bank
	Amount		Percent		Amount		Percent
	(Dollars in thousands)

Tier 1 risk-based		$56,036		11.0%		$59,574		11.8%
Minimum capital requirement		20,339		4.0		20,277		4.0

Excess		$35,697		7.0%		$39,297		7.8%


Total risk-based		$60,078		11.8%		$63,616		12.6%
Minimum capital requirement		40,678		8.0		40,555		8.0

Excess		$19,400		3.8%		$23,061		4.6%


Leverage ratio		$56,036		8.6%		$59,574		9.1%
Minimum capital requirement		26,089		4.0		26,075		4.0

Excess		$29,947		4.6%		$33,499		5.1%

The FRB and other federal banking agencies have established a system of prompt corrective action to resolve certain problems of capital deficient and otherwise troubled banks under its regulation. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” At each successively lower defined capital category, an institution is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the federal banking agencies have less flexibility in determining how to resolve the problems of the institution. An undercapitalized institution must submit a capital restoration plan to the FRB within 45 days after it becomes undercapitalized. Such an institution will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching, and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances.

The Bank’s capital levels at December 31, 2013 met the standards for the highest level, a “well capitalized” institution.

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital standards, which proposed new capital requirements for banking organizations. On July 2, 2013, the Federal Reserve Board adopted a final rule implementing a revised capital framework based in part on the Basel III capital standards and, on July 9, 2013, the Office of the Comptroller of the Currency also adopted a final rule and the FDIC adopted an interim final rule implementing a revised capital framework based in part on the Basel III capital standards. The rule will not begin to phase in until January 1, 2014 for larger institutions and January 1, 2015 for smaller, less complex banking organizations such as the Corporation. The rule will be fully phased in by January 1, 2019.

The implementation of the final rule will lead to higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. Specifically, the rule imposes the following minimum capital requirements on federally insured financial institutions: (1) a new minimum common equity tier 1 capital to risk-weighted assets ratio of 4.5%; (2) a leverage capital ratio of 4%; (3) a tier 1 risk-based capital ratio of 6%; and (4) a total risk-based capital ratio of 8%. Under the rule, common equity generally consists of common stock, retained earnings and limited amounts of minority interests in the form of common stock. In addition, in order to avoid limitations on capital distributions, such as dividend payments and certain bonus payments to executive officers, the rule requires insured financial institutions to hold a capital conservation buffer of common equity tier 1 capital above its minimum risk-based capital requirements. The capital conservation buffer will be phased in over time, becoming effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. The rule will also revise the regulatory agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of common equity. Until the rule is fully phased in, we cannot predict the ultimate impact it will have upon the financial condition or results of operations of the Corporation.

DIVIDEND RESTRICTIONS

The ability of the Corporation to obtain funds for the payment of dividends on its common shares is largely dependent on the amount of dividends which may be declared and paid by the Bank to the Corporation. However, the FRB expects the Corporation to serve as a source of strength to the Bank, which may require the Corporation to retain capital for further investment in the Bank, rather than pay dividends to the Corporation’s shareholders. The ability of the Bank to pay dividends to the Corporation is subject to various legal limitations and to prudent and sound banking principles. Generally, the Bank may declare a dividend without the approval of the Division, unless the total dividends in a calendar year exceed the total of its net profits for the year plus its retained profits for the preceding two years, less required transfers to surplus. However, the Bank is prohibited from paying dividends out of its surplus if, after paying such dividends, it would fail to meet the required minimum Total Risk-Based Ratio requirements and minimum Leverage Ratio requirements under the FRB guidelines.

FDIC DEPOSIT INSURANCE

The FDIC is an independent federal agency which insures the deposits of federally-insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The deposits of the Bank are subject to the deposit insurance assessments of the FDIC. Under the FDIC’s deposit insurance assessment system, the assessment rate for any insured institution may vary according to regulatory capital levels of the institution and other factors such as supervisory evaluations.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

On February 7, 2011, the FDIC approved a final rule that changed the deposit insurance assessment base, as required by the Dodd-Frank Act. As adopted, the final rule changed the deposit insurance assessment base from domestic deposits to average assets minus average tangible equity. In addition, the final rule also adopted a new large-bank pricing assessment scheme and established a target size for the Deposit Insurance Fund. The final rule went into effect beginning with the second quarter of 2011.

FRB RESERVE REQUIREMENTS

For 2013, FRB regulations required depository institutions to maintain reserves of 3% of net transaction accounts (primarily demand and NOW accounts) up to and including $79,500,000 (subject to an exemption for the first $12,400,000 of net transaction accounts), and of 10% of net transaction accounts in excess of $79,500,000. For 2014, the applicable threshold for net transaction accounts have been increased by the FRB to $89,000,000 (subject to an exemption for the first $13,300,000 of net transaction accounts).

EFFECTS OF GOVERNMENT MONETARY POLICY

The business and earnings of the Bank are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings, and setting reserve requirements against member and nonmember bank deposits. FRB monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including the Bank, and are expected to continue to do so in the future.

SEC REGULATION

Through the third quarter of 2012, the Corporation was an SEC-reporting company and filed reports, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, with the SEC under the Exchange Act. The Corporation was also required to comply with regulations governing proxy solicitations and certain shareholders were required to file security ownership reports. In April 2012, the JOBS Act was signed into law and amended Sections 12(g) and 15(d) of the Exchange Act to increase the holders of record threshold for banks and bank holding companies to terminate the proxy solicitation and security ownership reports and to suspend their obligations to file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. With respect to the Corporation, the JOBS Act increased the holder of record threshold from 300 to 1,200. Because the Corporation had fewer than 700 holders of record of its common shares at the time of the adoption of the JOBS Act, the Corporation became eligible to suspend and terminate those obligations. Due to the expense associated with preparing and filing periodic reports with the SEC and the historically low trading volume of the

Corporation’s common shares, among other reasons, the Board of Directors of the Corporation approved deregistration of the Corporation’s common shares under Section 12(g) of the Exchange Act and the suspension of the Corporation’s reporting obligations under Section 15(d) of the Exchange Act during the fourth quarter of 2012. The Corporation subsequently filed with the SEC Form 15 on November 13, 2012 to terminate the registration of its common shares under Section 12(g) and Form 15 on March 27, 2013 to suspend its reporting obligations under Section 15(d).

Because the common shares issued to shareholders of Indebancorp in the merger that was completed in December 2013 were being registered with the SEC pursuant to a Registration Statement on Form S-4, the Corporation was required to recommence filing reports with the SEC under Section 15(d) of the Exchange Act beginning with the filing of the Corporation’s Quarterly Report on Form 10-Q for the quarterly period ending September 30, 2013. The Corporation’s obligation to file reports under Section 15(d) of the Exchange Act continues through the filing of this Annual Report on Form 10-K for the fiscal year ending December 31, 2013 (which is the year in which the Registration Statement on Form S-4 became effective) and will then automatically terminate because the Corporation had fewer than 1,200 holders of record as of the first day of the 2014 fiscal year. As a result, the Corporation intends to suspend its reporting obligations under Section 15(d) of the Exchange Act following the filing of this Annual Report on Form 10-K.

EFFECT OF ENVIRONMENTAL REGULATION

Compliance with federal, state, and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings, or competitive position of the Corporation or the Bank. The Corporation believes the nature of the operations of the Bank has little, if any, environmental impact. The Corporation, therefore, does not anticipate any material capital expenditures for environmental control facilities for the foreseeable future. The Corporation believes that its primary exposure to environmental risk is through the lending activities of the Bank. In the event management believes there exists a potential environmental risk, the Bank attempts to mitigate the potential risk by requiring environmental site assessments at the time the loan is originated. In addition, the Bank typically requires an environmental assessment prior to any foreclosure of non-residential real estate collateral.

ITEM 1A. Risk Factors

Set forth below is a description of risk factors related to the Corporation’s business, provided to enable investors to assess, and be appropriately apprised of, certain risks and uncertainties the Corporation faces in conducting its business. An investor should carefully consider the risks described below and elsewhere in this report, which could materially and adversely affect the Corporation’s business, results of operations, or financial condition. The risks and uncertainties discussed below are also applicable to forward-looking statements contained in this report and in other reports filed by the Corporation with the Securities and Exchange Commission. Given these risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking statements.

Changes in interest rates could have a material adverse effect on the Corporation’s financial condition and results of operations.

The Corporation’s operating results are dependent to a significant degree on the difference between the interest rates earned on interest-earning assets such as loans and investment securities, and the interest rates paid on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors beyond the Corporation’s control, including general economic conditions, and the policies of various governmental and regulatory authorities (in particular, the Board of Governors of the Federal Reserve System). Changes in interest rates will influence the demand for loans, the prepayment of loans, the purchase of investments, the generation of deposits, and the rates received on loans and investment securities and paid on deposits and borrowings, and these changes could have a material adverse effect on the Corporation’s financial condition and results of operations. The impact of these changes may be magnified if the Corporation does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates. Additional information pertaining to the impact that changes in interest rates could have on our net income is contained in the section entitled “ASSET/LIABILITY MANAGEMENT” under Item 1 of this Annual Report on Form 10-K.

Changes in economic and political conditions could adversely affect the Corporation’s financial condition and results of operations.

The Corporation’s success depends, to a significant extent, upon economic and political conditions, local and national, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, change in interest rates, money supply, and other factors beyond the Corporation’s control may adversely affect its asset quality, deposit levels, and loan demand and, therefore, its earnings. Because the Corporation has a significant amount of real estate loans, further decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of the Corporation’s borrowers to make timely repayments of their loans, which would have an adverse impact on the Corporation’s earnings. In addition, a substantial portion of the Corporation’s loans are to individuals and businesses located in Northwest Ohio. Consequently, a significant continued decline in the economy of this market area could have a materially adverse effect on the Corporation’s financial condition and results of operations.

The Corporation’s loan portfolio is concentrated in Northwest Ohio, and changes in the economic conditions and real estate valuations in this market area could adversely impact results of operations, financial condition and cash flows.

The Corporation’s lending and deposit gathering activities are concentrated in Huron, Lucas, Ottawa, Sandusky, Seneca and Wood Counties in Northwest Ohio. The Corporation’s success has and will continue to depend on the general economic conditions in Northwest Ohio, particularly given that a significant portion of the Corporation’s lending relates to real estate located in this area. Real estate values in these Ohio communities have been negatively impacted by the recent economic crisis. Although there has been some improvement recently in some economic measures, including home prices and unemployment rates in Ohio, adverse changes in the economic conditions in the Northwest Ohio markets could impair the Corporation’s ability to collect payments on loans, increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, increase devaluations recognized within the Corporation’s OREO portfolio, decrease the demand for the Corporation’s products and services and decrease the value of collateral for loans, especially real estate values, which could have a material adverse effect on the Corporation’s financial condition, results of operations and cash flows.

If actual loan losses exceed the allowance for loan losses, the Corporation’s net income will decrease.

The Corporation maintains an allowance for loan losses based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current economic conditions in the primary lending area, past loss experience, possible losses arising from specific problem loans, and changes in the composition of the loan portfolio. Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the portfolio. While the Corporation’s management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in material adjustments, and net earnings could be significantly adversely affected, if circumstances differ substantially from the assumptions and estimates used by management to determine the allowance for loan losses.

FDIC insurance premiums may increase materially, which would negatively affect the Corporation’s net income.

The Federal Deposit Insurance Corporation (“FDIC”) insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured financial institutions premiums to maintain the Deposit Insurance Fund at a certain level. The costs of resolving bank failures have increased during the last few years and decreased the Deposit Insurance Fund. The FDIC collected a special assessment in 2009 to replenish the Deposit Insurance Fund and also required a prepayment of an estimated amount of future deposit insurance premiums. If the costs of future bank failures increase, deposit insurance premiums may also increase.

The Corporation’s businesses have been and may continue to be adversely affected by conditions in the financial markets and economic conditions generally.

The capital and credit markets have been experiencing unprecedented levels of volatility since 2008. As a consequence of the U.S. economic recession, business activity across a wide range of industries has faced serious difficulties due to the lack of consumer spending and the extreme lack of liquidity in the global credit markets. Unemployment has also increased significantly. A sustained weakness or weakening in business and economic conditions generally or specifically in the markets in which the Corporation does business could have one or more of the following adverse effects on its businesses:

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A decrease in the demand for loans and other products and services offered by the Corporation.

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An impairment of certain intangible assets, such as goodwill.

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An increase in the number of clients who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Corporation. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale.

Legislative or regulatory changes or actions could adversely impact the Corporation’s business.

The financial services industry is extensively regulated. Banking laws and regulations are primarily intended for the protection of consumers, depositors and the deposit insurance fund, not to benefit our shareholders. Changes to laws and regulations or other actions by regulatory agencies may negatively impact the Corporation, possibly limiting the services it provides, increasing the ability of non-banks to compete with it, or requiring it to change the way it operates. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on the operation of an institution and the ability to determine the adequacy of an institution’s allowance for loan losses. Failure to comply with applicable laws, regulations and policies could result in sanctions being imposed by the regulatory agencies, including the imposition of civil money penalties, which could have a material adverse effect on the Corporation’s operations and financial condition.

In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Recently, Congress and the federal bank regulators have acted on an unprecedented scale in responding to the stresses experienced in the global financial markets. Some of the laws enacted by Congress and regulations promulgated by federal bank regulators subject the Corporation, and other financial institutions, to additional restrictions, oversight and costs that may have an impact on the Corporation’s business and results of operations. The Dodd-Frank Act was signed into law on July 21, 2010 and, although it became generally effective in July 2010, many of its provisions have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities. The Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, could result in a number of adverse impacts. The levels of capital and liquidity with which the Corporation must operate may be subject to more stringent capital requirements. In addition, the Corporation may be subjected to higher deposit insurance premiums to the FDIC. The Corporation may also be subject to additional regulations under the newly established Consumer Financial Protection Bureau, which was given broad authority to implement new consumer protection regulations. These and other provisions of the Dodd-Frank Act may place significant additional costs on the Corporation, impede its growth opportunities and place it at a competitive disadvantage.

The Corporation may not be able to pay dividends in the future in accordance with past practice.

As a bank holding company, the Corporation’s principal source of funds to pay dividends on its common shares is dividends from the Bank. In the event that the Bank is unable to pay dividends, the Corporation may not be able to pay dividends on its common shares.

The ability of the Bank to pay dividends to the Corporation is subject to various legal limitations and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the Bank may declare a dividend without the approval of the Division of Financial Institutions of the Ohio Department of Commerce, unless the total dividends in a calendar year exceed the total of the Bank’s net profits for the year combined with the Bank’s retained profits of the two preceding years. In the event that the Bank is unable to pay dividends, the Corporation in turn would likely have to reduce or stop paying dividends on its common shares. The Corporation’s failure to pay dividends on its common shares could, in turn, have a material adverse effect on the market price of the Corporation’s common shares.

The Corporation’s credit standards and on-going process of credit assessment might not protect it from significant credit losses.

The Corporation takes credit risk by virtue of making loans. The Corporation’s exposure to credit risk is managed through the use of consistent and conservative underwriting standards. The Corporation’s credit administration function employs risk management techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. While these procedures are designed to provide the Corporation with the information needed to implement policy adjustments where necessary, and to take proactive corrective actions, there can be no assurance that such measures will be effective in avoiding undue credit risk.

The Corporation depends upon the accuracy and completeness of information about customers.

In deciding whether to extend credit or enter into other transactions with customers, the Corporation may rely on information provided by customers, including financial statements and other financial information. The Corporation may also rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent accountants. For example, in deciding whether to extend credit to a business, the Corporation may assume that the customer’s financial statements conform with generally accepted accounting principles and present fairly, in all material respects, the financial condition, results of operations, and cash flows of the customer. The Corporation may also rely on the reports of accounting firms issuing an opinion or other assurances on those financial statements. The Corporation’s financial condition and results of operation could be negatively impacted to the extent it relies on financial statements that do not comply with generally accepted accounting principles or that are materially misleading.

The Corporation may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.

The Corporation and the Bank are required by federal and state regulatory authorities to maintain adequate levels of capital to support their operations. If the Bank experiences increased loan losses, additional capital may need to be infused. In addition, the Corporation may elect to raise additional capital to support its business or to finance acquisitions, or it may otherwise elect or be required to raise additional capital. The Corporation’s ability to raise additional capital, if needed, will depend on its financial performance, conditions in the capital markets, economic conditions and a number of other factors, many of which are outside its control. Accordingly, there can be no assurance that the Corporation can raise additional capital if needed or on acceptable terms. If the Corporation cannot raise additional capital when needed, it may have a material adverse effect on the Corporation’s financial condition and results of operations. In addition, the Corporation’s issuance of additional common shares, preferred shares or other equity securities to raise additional capital may have a dilutive effect on our existing shareholders and could lead to a decline in the price of our common shares.

The Corporation operates in an extremely competitive market and the Corporation will suffer if it is unable to compete effectively.

In the Corporation’s market area, it encounters significant competition from other commercial banks, as well as from savings and loan associations, credit unions, brokerage firms, mutual funds, and loan production offices and other financial units of non-local bank holding companies. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology, product delivery systems, and the accelerating pace of consolidation among financial service providers. Many of the Corporation’s competitors have substantially greater resources and lending limits than it does and may offer services that it does not or cannot provide. The Corporation’s ability to maintain its history of strong financial performance will depend in part on its continued ability to compete successfully in its market area and on its ability to expand its scope of available financial services as needed to meet the needs and demands of its customers.

There is a limited trading market for the Corporation’s common shares, thus the ability to sell or purchase the Corporation’s common shares may be limited.

The ability to sell common shares of the Corporation or purchase additional common shares of the Corporation largely depends upon the existence of an active market for the Corporation’s common shares. Although the Corporation’s common shares are quoted on the OTC Bulletin Board, they are not listed on any securities exchange and the volume of trading of the Corporation’s common shares has been limited historically. As a result, it may be difficult to sell or purchase the Corporation’s common shares at the volume, time and price that is desired. In addition, a fair valuation of the purchase or sales price of the Corporation’s common shares also depends upon an active trading market, and thus the price received for a thinly traded stock, such as the Corporation’s common shares, may not reflect its true value.

Changes in accounting standards could impact the Corporation’s results of operations.

The accounting standard setters, including the Financial Accounting Standards Board, the SEC, and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Corporation’s consolidated financial statements. These changes can be difficult to predict and can materially affect how the Corporation records and reports its financial condition and results of operations. In some cases, the Corporation could be required to apply a new or revised standard retroactively, which would result in the restatement of its financial statements for prior periods.

Changes in tax laws could adversely affect the Corporation’s results of operations.

The Corporation is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to the Corporation’s taxes could have a material adverse effect on its results of operations. In addition, the Corporation’s customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by the Corporation’s customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for loans and deposit products. In addition, such negative effects on the Corporation’s customers could result in defaults on the loans made by the Bank and decrease the value of mortgage-backed securities in which the Bank has invested.

The Corporation relies heavily on its management team and the unexpected loss of key management may adversely affect its business and financial results.

The Corporation’s success to date has been strongly influenced by its ability to attract and to retain senior management experienced in banking in the markets that the Corporation serves. The Corporation’s ability to retain executive officers and the current management team will continue to be important to successful implementation of its strategies. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Corporation’s business and financial results.

The Corporation must stay current on technological changes in order to compete effectively and meet customer demands.

The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable the Corporation to reduce costs. The Corporation’s future success will depend, in part, on its ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in its operations. Some of the Corporation’s competitors have substantially greater resources to invest in technological improvements. The Corporation may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.

The Corporation’s information systems may experience an interruption or security breach.

The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of its information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of the Corporation’s information systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability.

The Corporation may be the subject of litigation, which could result in legal liability and damage to its business and reputation.

From time to time, the Corporation and the Bank may be subject to claims or legal action from customers, employees or others. Financial institutions like the Corporation and the Bank are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Corporation and the Bank are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding their businesses. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other financial institutions, the Corporation and the Bank are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against the Corporation could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.

ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

The Corporation neither owns nor leases any properties. The principal offices of the Corporation, the Bank, and Croghan Insurance are located at 323 Croghan Street, Fremont, Ohio. In addition, the Bank operates 15 banking centers, including one in Bellevue, one in Clyde, one in Curtice, four in Fremont, one in Green Springs, one in Monroeville, one in Norwalk, one in Oak Harbor, one in Oregon, one in Port Clinton, and two in Tiffin, Ohio. The Bank also operates a Loan Production Office in Perrysburg, Ohio. The Bank’s operations center is also located in Fremont, Ohio. With the exception of the Port Clinton banking center, located in a retail supermarket in the Knollcrest Shopping Center, Perrysburg office, an ATM site north of Fremont, and two ATM night deposits on the Put In Bay Islands, which are leased, all other premises are owned by the Bank.

ITEM 3. Legal Proceedings

Management is aware of no pending legal proceedings to which the Corporation, the Bank, or Croghan Insurance is a party or of which any of their property is subject, other than ordinary routine litigation to which the Bank is a party incidental to its banking business. The Corporation considers none of those proceedings to be material. Similarly, management is aware of no material proceedings involving the Corporation, the Bank, or Croghan Insurance that are contemplated by any governmental authority.

ITEM 4. Mine Safety Disclosures

Not applicable

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and

Issuer Purchases of Equity Securities

The Corporation’s common shares are quoted on the OTC Bulletin Board under the symbol “CHBH”. There were approximately 998 holders of record of the Corporation’s common shares as of February 28, 2014.

The other information required by Items 201(a), 201(b) and 201(c) of SEC Regulation S-K is contained in (a) Financial Statement Note 19, captioned “REGULATORY MATTERS,” on pages 51 through 52 of the 2013 Annual Report to Shareholders, (b) the section captioned “DIVIDEND RESTRICTIONS”, in Item 1 of Part 1 of this Annual Report on Form 10-K, and (c) the section captioned “MARKET PRICE AND DIVIDENDS ON COMMON SHARES” on page 5 of the 2013 Annual Report to Shareholders, and each of (a), (b) and (c) is incorporated herein by reference.

The Corporation did not repurchase any of its common shares during 2012 or 2013.

ITEM 6. Selected Financial Data

The information required by this Item 6 is contained under the caption “FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA” on page 6 of the 2013 Annual Report to Shareholders and is incorporated herein by reference.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and

Results of Operations

The information required by this Item 7 is contained under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” on pages 7 through 21 of the 2013 Annual Report to Shareholders and is incorporated herein by reference.

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this Item 7A is contained in the discussion of interest rate sensitivity included in the section captioned “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - INTEREST RATE RISK”, beginning on page 19 of the 2013 Annual Report to Shareholders and is incorporated herein by reference, and in the section captioned “ASSET/LIABILITY MANAGEMENT” in Item 1 of Part I of this Form 10-K. In addition, discussions of the Corporation’s contractual obligations, contingent liabilities and commitments, and off-balance sheet arrangements is included in the section captioned “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS” on page 20 of the 2013 Annual Report to Shareholders, and in Financial Statement Note 18, captioned “FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK” on page 51 of the 2013 Annual Report to Shareholders, and both are incorporated herein by reference.

ITEM 8. Financial Statements and Supplementary Data

The following consolidated financial statements (and reports thereon) are set forth on pages 23 through 59 of the 2013 Annual Report to Shareholders and are incorporated herein by reference:


Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2013 and 2012
Consolidated Statements of Operations – Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income – Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows – Years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements

ITEM 9. Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure

Not applicable

ITEM 9A. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K.

Management’s Annual Report on Internal Control Over Financial Reporting.

The management of Croghan Bancshares, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in conformity with U.S. generally accepted accounting principles. Internal control over financial reporting of Croghan Bancshares, Inc. and its subsidiary (the “Corporation”) includes those policies and procedures that:

(1)

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation;

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

With the supervision and participation of our President and Chief Executive Officer and our Treasurer, management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth for effective internal control over financial reporting as described in the “Internal Control Integrated Framework (1992),” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Corporation’s system of internal control over financial reporting is effective as of December 31, 2013.

This Annual Report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to applicable rules and regulations.

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 December 31, 2013, that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

ITEM 9B. Other Information

None

PART III

ITEM 10. Directors, Executive Officers, and Corporate Governance

Directors and Executive Officers

The following sets forth information concerning each director of the Corporation (including each director nominated for re-election as a director of the Corporations at the 2014 Annual Meeting of Shareholders to be held on May 13, 2014). Unless otherwise indicated, each person has held his or her principal occupation for more than five years. All directors of the Corporation also serve as members of the Board of Directors of the Bank.

Board Nominations

The following sets forth information, as of the date of this Proxy Statement, concerning each Board nominee for election as a director of the Corporation. Unless otherwise indicated, each person has held his or her principal occupation for more than five years. All directors of the Corporation also serve as members of the Board of Directors of the Bank.


Name	Age	Position(s) Held with the Company and the Bank and Principal Occupation(s)	Director of the Company Continuously Since	Nominee for Term Expiring In

John J. Caputo	67	Semi-Retired, Co-Owner/Vice President of Jack Bradley Realty Company located in Ottawa County since 1976 and operating in Sandusky County since 1990. Mr. Caputo was elected as a director of the Company and the Bank upon the closing of the merger of Indenbancorp with and into the Company on December 6, 2013.	2013	2017

James C. Dunn	67	Co-Owner of Dunn Chevrolet Buick located in Oregon, Ohio. Mr. Dunn was elected as a director of the Company and the Bank upon the closing of the merger of Indenbancorp with and into the Company on December 6, 2013.	2013	2016

Claire F. Johansen	60	Owner of Lane of Dreams Farm LLC, an equestrian training center located in Tiffin, Ohio.	2000	2017

Rick M. Robertson	61	President and Chief Executive Officer of the Company and the Bank since September 2010. Previously served as Executive Vice President and Chief Banking Officer at ViewPoint Bank headquartered in Plano, Texas, from February 2006 to August 2010, and served as Chairman at ViewPoint Bankers Mortgage, Inc., a wholly-owned subsidiary of ViewPoint Bank, from September 2007 to August 2010.	2010	2017

Gary L. Zimmerman	67	Owner and Partner of Swint-Reineck Company, a real estate holding company located in Fremont, Ohio. Formerly Owner and President of Swint-Reineck Hardware, Inc.	1991	2017

Continuing Directors

The following sets forth information, as of the date of this Proxy Statement, concerning the current directors whose terms will continue after the Annual Meeting. Unless otherwise indicated, each person has held his principal occupation for more than five years. All directors of the Company also serve as members of the Board of Directors of the Bank.


Name	Age	Position(s) Held with the Company and the Bank and Principal Occupation(s)	Director of the Company Continuously Since	Term Expires In

Michael D. Allen Sr.	68	Executive Vice President and General Manager of International Metal Hose Company, a manufacturer of flexible conduit and metal tubing located in Bellevue, Ohio.	2002	2015

James E. Bowlus	65	President and Treasurer of Fremont Candy & Cigar Inc., located in Fremont, Ohio. Lead Independent Director of the Company and the Bank since October 2010.	2000	2016

James R. Faist	66	Retired in 2011 as Vice President of Finance of Crown Battery Manufacturing Company located in Fremont, Ohio.	2007	2016

Stephen A. Kemper	74	Owner and President of Kemper Iron and Metal Company, a recycler and scrap processor located in Bellevue, Ohio.	1996	2015

Daniel W. Lease	65	Vice President of Administration and CFO of WT Holdings LCC, a manufacturing holding company located in Cabot, Pennsylvania. Formerly President of KL&L, Inc., a refractory construction company located in Braddock, Pennsylvania. Formerly Vice President of Administration and CFO of Whetstone Technology, LLC, a refractory products manufacturer located in Cabot, Pennsylvania.	1994	2016

Thomas W. McLaughlin	61	Vice President of Underground Utilities, Inc., a construction company located in Monroeville, Ohio.	2006	2015

Allan E. Mehlow	59	Chief Financial Officer of The Mosser Group/WMOG Inc. located in Fremont, Ohio.	2000	2016

The following are the executive officers of the Company and the Bank, all of whom are elected annually and serve at the pleasure of the Board of Directors of the Corporation and the Bank.


Name	Age	Position and Business Background

Charles T. Barteck	51	Mr. Barteck is Vice President and Retail Sales Manager of the Bank and has served in such position since December 2011. He previously served as President/Owner of Buckeye Land Title LTD in Genoa, Ohio from 2009 to 2011. Prior to joining Buckeye Land Title LTD, he served as Vice President of Commercial Lending from 2007 to 2009 and 2000 to 2004 at Genoa Banking Company. He also served as Vice President of Retail at Genoa Banking Company from 2004 to 2007.

Stacy A. Cox	46	Ms. Cox is Senior Vice President and Chief Operations Officer of the Bank and has served is such position since September 2011. She previously served as Vice President of Core Banking Operations and Information Technology at First National Bank in Omaha, Nebraska from September 2008 to September 2011. Prior to joining First National Bank Omaha, she worked at Huntington National Bank (Sky Financial Group) from 1992 until 2008 as Senior Vice President.

Thomas J. Elder Jr.	66	Mr. Elder was Executive Vice President/Chief Lending Officer of the Bank until his retirement on July 26, 2013. He had served in such position since May 2010. He joined the Bank in February 2003 and served as Senior Vice President/Chief Lending Officer of the Bank from May 2008 to May 2010, and as Vice President/Chief Lending Officer of the Bank from October 2003 to May 2008. He had also served as Vice President of the Corporation since July 2006.

Barry F. Luse	61	Mr. Luse is Senior Vice President & Trust Officer of the Bank and has served in such position since May 2010. He joined the Bank in 1990 and served as Trust Officer of the Bank from 1990 to 1993, as Vice President/Trust Officer of the Bank from 1993 to 2009, and as Vice President/Senior Trust Officer of the Bank from May 2009 to May 2010. He has also served as Secretary of the Corporation since March 2001. Mr. Luse is a lawyer and has been a member of the Ohio Bar since 1983.



Kendall W. Rieman	43	Mr. Rieman is Executive Vice President and Chief Financial Officer of the Bank and has served in such position since September 2011. He joined the Bank in 2006 and served as Vice President and Chief Financial Officer/Chief Operations Officer of the Bank from June 2006 to May 2010, as Senior Vice President and Chief Financial Officer/Chief Operations Officer of the Bank from May 2010 to January 2011, and as Executive Vice President and Chief Financial Officer/Chief Operations Officer of the Bank from January 2011 to September 2011. He has also served as Treasurer of the Corporation since July 2006.

Rick M. Robertson	61	Mr. Robertson is President and Chief Executive Officer of the Corporation and the Bank and has served in such position since September 2010. Before joining the Corporation and the Bank, Mr. Robertson served as Executive Vice President and Chief Banking Officer of ViewPoint Bank headquartered in Plano, Texas, from February 2006 until August 2010, and served as Chairman of ViewPoint Bankers Mortgage, Inc., a wholly-owned subsidiary of ViewPoint Bank, from September 2007 until August 2010. Prior to joining ViewPoint Bank, Mr. Robertson worked for Key Bank as Michigan District President from February 2002 until February 2006.

Daniel N. Schloemer	57	Mr. Schloemer is Senior Vice President and Chief Lending Officer of the Bank and has served in such position since July 2013. He joined the Bank in 2002 and has served as Vice President and Commercial Loan Officer from 2002 to 2011 and as Senior Vice President and Commercial Loan Officer from 2011 to 2013.

Compliance With Section 16(a) of the Exchange Act

Not applicable – The Corporation does not have a class of equity securities registered pursuant to Section 12 of the Exchange Act.

Nominating Procedures for Directors

The Corporation does not currently have a separate nominating committee of the Board of Directors. Instead, all of the independent directors of the Corporation meet in executive session to consider and recommend nominees for election or re-election to the Board of Directors of the Corporation. The Board of Directors believes that the independent directors as a group are able to perform the nominating functions in a fair and impartial manner. As a result, the Board of Directors believes it is unnecessary to create a separate nominating committee at this time.

The independent directors consider nominees proposed by shareholders of the Corporation in the same manner as nominees proposed by the Board of Directors. Section 2.04 of the Regulations prescribes the method by which a shareholder may nominate a candidate for election to the Board of Directors. Nominations for the election of directors at an annual meeting, other than those made by or on behalf of the existing Board of Directors of the Corporation, must be made in writing and must be received by the Secretary of the Corporation on or before the December 31st immediately preceding the annual meeting, or within a reasonable time as determined by the Board of Directors. Such notification must contain the following information:

—

The name, age, business or residence address of each nominee;

—

The principal occupation or employment of each nominee;

—

The number of common shares of the Corporation owned beneficially and/or of record by each nominee; and

—

The length of time each nominee has owned such shares.

Audit Committee

The Board of Directors of the Corporation has an Audit Committee that is comprised of Michael D. Allen Sr., Daniel W. Lease, and Thomas W. McLaughlin (Chair).

The Board of Directors of the Corporation has determined that each of Messrs. Lease and McLaughlin qualifies as an “audit committee financial expert” as defined in SEC rules. Mr. Lease has been a Certified Public Accountant since 1976, has served as Chief Financial Officer of Whetstone Technology, LLC since 2001, and served as President and Chief Executive Officer of Wahl Refractories, Inc. prior to 2001. Mr. McLaughlin has been a Certified Public Accountant since 1976, has served as Vice President and Chief Financial Officer of Underground Utilities, Inc. since December 2005, and practiced in the public accounting profession for more than 30 years prior to joining Underground Utilities, Inc.

Code of Ethics

The Corporation has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that is applicable to all employees of the Corporation and the Bank, including the Corporation’s principal executive officer and principal financial officer. The Code of Ethics is included in Exhibit 14 to this Annual Report on Form 10-K.

ITEM 11. Executive Compensation

Compensation of Directors

During the 2013 fiscal year, each director of the Corporation received a fee of $900 for attendance at each meeting of the Board of Directors of the Bank and a fee of $450 for attendance at each committee meeting. Each chair of a committee of the Board of Directors received an additional fee of $100 for attendance at each meeting and the Board’s Lead Independent Director receives an additional fee of $100 for attendance at each Board of Directors meeting.

No compensation was paid to directors for attendance at meetings of the Board of Directors of the Corporation in 2013. Directors who are also officers of Corporation or the Bank do not receive compensation for attendance at committee meetings.

The following contains information regarding the compensation awarded or paid to, or earned by, the directors during the 2013 fiscal year.

Director Compensation


Name (1)	Fees Earned or Paid in Cash ($)	All Other Compensation ($)	Total ($)
Michael D. Allen Sr.	$26,200.00	$0		$26,200.00
James E. Bowlus (2)	$34,550.00	$0		$34,550.00
John J. Caputo (3)	$0.00	$0		$0.00
James C. Dunn (3)	$900.00	$0		$900.00
James R. Faist	$20,700.00	$0		$20,700.00
Claire F. Johansen	$25,300.00	$0		$25,300.00
Stephen A. Kemper	$25,200.00	$0		$25,200.00
Daniel W. Lease	$19,650.00	$0		$19,650.00
Thomas W. McLaughlin	$23,000.00	$0		$23,000.00
Allan E. Mehlow	$23,400.00	$0		$23,400.00
Gary L. Zimmerman	$18,900.00	$0		$18,900.00

(1)

Rick M. Robertson is not included in the above table because he served as a named executive officer of the Corporation during the 2013 fiscal year, and the fees paid to Mr. Robertson in his capacity as director of the Bank are fully reflected in the Summary Compensation Table below.

(2)

Includes a $5,000 fee paid to Mr. Bowlus in recognition of additional time and effort devoted to the Indebancorp merger transaction.

(3)

John J. Caputo and James C. Dunn were elected as directors of the Corporation and the Bank effective December 6, 2013.

Compensation of Executive Officers

Provided below is an overview of the Corporation’s compensation policies and practices for its executive officers, including named executive officers. The term “named executive officers” refers to the Corporation’s Chief Executive Officer and those other executive officers of the Corporation included in the Summary Compensation Table.

Objectives of Croghan Compensation Programs

The primary objective of the Corporation’s compensation programs is to provide competitive compensation to attract, retain, and motivate qualified employees who will contribute to the long-term success of the Corporation. In furtherance of this objective, the Corporation regularly evaluates the compensation provided to the Corporation’s executive officers to ensure that it remains competitive in relation to the compensation paid to similarly situated executive officers at other financial institutions of comparable size and performance. In addition, the Corporation endeavors to ensure that the compensation provided to the Corporation’s executive officers is internally equitable based upon the skill requirements and responsibilities associated with each executive position.

The Corporation’s compensation programs are designed to reward each executive officer’s job performance and contributions to the Corporation. These factors are generally determined in the subjective judgment of the Corporation’s Compensation Committee for the Chief Executive Officer and with the benefit of performance reviews and salary recommendations by the Chief Executive Officer and the Corporation’s human resources department for other executive officers.

In making compensation decisions, the Compensation Committee places significant emphasis on the Corporation’s performance relative to the Corporation’s industry and peers. The Compensation Committee generally has not considered stock price as an indicator of company performance in making compensation decisions because the price of the Corporation’s common shares is subject to a variety of factors outside of the Corporation’s control.

Components of 2013 Executive Compensation

The following are general components to the annual compensation that the Corporation provides to its executive officers:

—

base salary

—

cash bonuses

—

retirement and death benefits

—

equity-based awards

—

perquisites and other benefits

Base Salary

Base salary represents the primary component of annual compensation paid to the Corporation’s executive officers. When recommending an executive officer’s salary within the pay range established by peer group comparison data, the Corporation’s Compensation Committee primarily considers the executive officer’s job performance and contribution to the objectives of the Corporation. As discussed above, these factors are determined in the subjective judgment of the Compensation Committee for the Chief Executive Officer and with the benefit of performance reviews and salary recommendations by the Chief Executive Officer for other executive officers of the Corporation and the Bank. To a lesser extent, the Compensation Committee also considers local and national economic conditions and future business prospects of the Bank in setting base salary levels.

Cash Bonuses

Effective January 1, 2003, the Bank introduced the “Performance Compensation for STAKEHOLDERS™” program in which all employees, including the named executive officers, participate. Pursuant to this program, employees of the Corporation and the Bank are eligible to receive annual cash bonuses based on the attainment of established company-wide performance goals. These goals focus on four general areas of company performance: growth, profitability, loan quality, and productivity. Performance targets and bonus levels under the program are established at the start of the each fiscal year through a collaborative effort involving management and the Compensation Committee, and are subject to final approval by the Board of Directors. Additionally, the Corporation and the Bank occasionally award discretionary cash bonuses to its executive officers to attract new executive officers, to reward exceptional job performance, or to address special circumstances. Discretionary bonuses are awarded on a limited basis and are not contemplated or anticipated when setting annual compensation for the Corporation’s executive officers.

Equity-Based Awards

The Corporation believes that it is also important to provide compensation which serves as an incentive for pursuing the long-term growth, profitability and financial success of the Corporation. Accordingly, the Board of Directors adopted the Croghan Bancshares, Inc. 2002 Stock Option and Incentive Plan (the “2002 Plan”), which was approved by the shareholders of the Corporation at the 2002 Annual Meeting of Shareholders. The 2002 Plan expired in accordance with its terms in March 2012, as a result of which no further awards may be granted under the 2002 Plan. The Board subsequently adopted the Croghan Bancshares, Inc. 2012 Equity Incentive Plan (the “2012 Plan”), which was approved by the shareholders of the Corporation at the 2012 Annual Meeting of Shareholders.

Perquisites and Other Benefits

The Corporation provides its executive officers with certain perquisites and other benefits that the Compensation Committee believes are reasonable to enable the Corporation to attract and retain qualified executive officers and to promote business development activities by the executive officers in the communities served by the Bank. In accordance with past practice, the Corporation approved cash bonuses in 2013 to reimburse certain executive officers, including certain named executive officers, for the cost of dues to the Fremont Country Club and the Catawba Island Club. The Compensation Committee believes that these perquisites and other benefits are reasonable in amount and consistent with those provided by similarly situated financial institutions in the Corporation’s market area.

The executive officers of the Corporation are eligible to participate in the Bank’s 401(k) Profit Sharing Plan on the same basis as all full-time employees of the Bank. For each executive officer or other employee who participates in the 401(k) Profit Sharing Plan, the Bank matches 50% of contributions up to 6% of the participant’s annual compensation, with a maximum match of 3% of annual compensation. The Corporation may also provide an annual discretionary contribution to the 401(k) Profit Sharing Plan on behalf of executive officers and other employees based upon a Board-established target percentage of employee compensation for those eligible to participate in the plan.

The executive officers of the Corporation are also eligible to participate in all of the employee benefit plans, such as medical, dental, group term life insurance, and disability insurance, which are generally available to all employees of the Corporation and the Bank on a non-discriminatory basis.

SUMMARY COMPENSATION TABLE

The following contains information regarding the compensation earned by the named executive officers of the Corporation during the fiscal years ended December 31, 2013 and 2012.

Summary Compensation Table


Name and Principal Position	Year	Salary ($)	Bonus & Non-Equity Incentive Plan Compensation ($) (1)	Stock Awards (2)	All Other Compensation ($)	Total ($)

Rick M. Robertson President and Chief Executive Officer of the Corporation and the Bank	2013 2012	$271,415 (3) $247,570 (5)	$60,000 $41,650	$0 $51,965	$29,051 (4) $24,469 (6)	$360,466 $365,654


Kendall W. Rieman Vice President and Treasurer of the Corporation and Executive Vice President and Chief Financial Officer of the Bank	2013 2012	$156,874 $145,711	$38,824 $16,759	$0 $26,060	$20,042 (7) $16,691 (8)	$215,740 $205,221

Thomas J. Elder Jr. Vice President of the Corporation and Executive Vice President and Chief Lending Officer of the Bank until July 26, 2013	2013 2012	$89,307 $138,027	$15,000 $15,183	$0 $15,605	$7,832 (9) $9,299 (10)	$112,139 $178,114

Stacy A. Cox Senior Vice President and Chief Operating Officer of the Bank	2013 2012	$126,311 $122,635	$35,157 $13,489	$0 $15,605	$10,940 (11) $6,891 (12)	$172,408 $158,620

(1)

Includes discretionary bonuses and non-equity incentive plan compensation paid pursuant to the Stakeholders ^TM Program.

(2)

Stock awards consist of restricted stock awards granted to employees during the fiscal year ended December 31, 2012 under the 2012 Equity Incentive Plan. Shares awarded in 2012 will vest annually over a five year period, starting April 30, 2013. The dollar value shown in the Stock Awards Column above represent the aggregate grant date fair value computed using the Financial Accounting Standards Board Accounting Standards Codification Topic 718, “Compensation – Stock Compensation.” Grant date fair value for restricted stock is calculated using the closing stock price on the date of grant, which was $31.21 per share for all 2012 grants.

(3)

Includes director fees of $15,300 paid to Mr. Robertson for attendance at meetings of the Board of Directors of the Bank.

(4)

Includes (a) $10,018 reimbursed to Mr. Robertson for the payment of club dues and (b) $9,082 of matching contributions and a $9,951 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Mr. Robertson.

(5)

Includes director fees of $10,800 paid to Mr. Robertson for attendance at meetings of the Board of Directors of the Bank.

(6)

Includes (a) $7,831 reimbursed to Mr. Robertson for the payment of club dues and (b) $8,411 of matching contributions and $8,227 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan of behalf of Mr. Robertson.

(7)

Includes (a) $6,139 reimbursed to Mr. Rieman for the payment of club dues and (b) $5,833 of matching contributions and $8,070 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Mr. Rieman.

(8)

Includes (a) $6,645 reimbursed to Mr. Rieman for the payment of club dues and (b) $4,425 of matching contributions and $5,621 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Mr. Rieman.

(9)

Includes $3,323 of matching contributions and $4,509 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Mr. Elder.

(10)

Includes $4,140 of matching contributions and $5,159 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Mr. Elder.

(11)

Includes $4,794 of matching contributions and $6,146 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Ms. Cox.

(12)

Includes $2,709 of matching contributions and $4,182 discretionary contribution made by the Bank to the 401(k) Profit Sharing Plan on behalf of Ms. Cox.

Grants of Plan-Based Awards for 2012 Fiscal Year

Under the 2012 plan, the Corporation awarded 5,250 restricted shares to certain employees during the fiscal year ended December 31, 2012. Of the restricted shares awarded, Rick Robertson received 1,665 shares, Kendall Rieman 835 shares, Thomas Elder Jr. 500 shares, and Stacy Cox 500 shares. Shares awarded in 2012 vest annually over a five year period, starting April 30, 2013.

Grants of Plan-Based Awards for 2013 Fiscal Year

No plan-based awards were granted by the Corporation during the 2013 fiscal year.

Outstanding Equity Awards at Fiscal Year-End Table

The following table sets forth information regarding the unexercised stock options held by each of the named executive officers as of the end of the 2013 fiscal year. Dollar amounts have been rounded up to the nearest whole dollar.


	Option Awards				Stock Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable (1)	Number of Securities Underlying Unexercised Options (#) Unexercisable	Option Exercise Price ($) (2)	Option Expiration Date	Number of shares or units of stock that have not vested (#)	Market Value of shares or units of stock that have not vested (3)

Rick M. Robertson	5,500	2,750	$24.99	05-09-2021	1,332	$45,621

Kendall W. Rieman	2,750	1,375	$24.99	05-09-2021	668	$22,879

Barry F. Luse	2,750	1,375	$24.99	05-09-2021	400	$13,700

Daniel N. Schloemer	1,374	687	$24.99	05-09-2021	400	$13,700

Stacy A. Cox	--	--			400	$13,700

Charles T. Barteck	--	--			200	$6,850

(1)

All amounts reflect Common Shares of the Corporation underlying stock options granted pursuant to the 2002 Plan.

(2)

Stock options have 10-year terms and vest over a 3-year period. The portion of the stock options that are unexercisable will vest and become exercisable as follows: Provided that the participant has not terminated prior to such date, the option will vest and become exercisable with respect to one-third of the common shares subject to the option on each of the first three anniversaries of the grant date.

(3)

The market value was determined using the closing price of the Corporation’s common shares at the end of fiscal year 2013.

Option Exercises and Restricted Stock Vesting During 2013 Fiscal Year

None of the Corporation’s named executive officers exercised any stock options during the 2013 fiscal year.

Employment Agreement with Rick M. Robertson

On November 9, 2010, the Bank entered into an employment agreement with Rick M. Robertson with respect to Mr. Robertson’s service as President and Chief Executive Officer of the Bank (the “Robertson Agreement”).

The Robertson Agreement provides for an initial term of three years commencing on August 30, 2010. Beginning on August 30, 2011 and each day thereafter, the initial term is automatically extended for one (1) additional day unless either party provides the other with at least 90 days prior written notice that the term will not be extended, such that the term will have a rolling two (2) year term after August 30, 2011.

Pursuant to the Robertson Agreement, Mr. Robertson is entitled to receive an annual base salary of $230,000 that may be adjusted in accordance with the salary administration program in effect for Bank employees generally. Mr. Robertson was eligible to receive a discretionary annual bonus for the period ending December 31, 2010 and is eligible to receive an annual bonus for each period beginning after December 31, 2010 equal to between five percent (5%) and twenty percent (20%) of his annual base salary. The amount of this annual bonus is based on the satisfaction or attainment of mutually acceptable performance goals. Mr. Robertson is entitled to participate in the various employee benefit plans, programs, and arrangements available to other senior officers of the Bank.

If Mr. Robertson’s employment is terminated by the Bank without “cause” (as defined in the Robertson Agreement) or voluntarily terminates his employment for “good reason” (as defined in the Robertson Agreement), Mr. Robertson will be entitled to a payment equal to two times his annual base salary.

If Mr. Robertson’s employment is terminated without cause within twenty-four (24) months following a “change in control” (as defined in the Robertson Agreement), in lieu of any other payment under the Robertson Agreement, Mr. Robertson will be entitled to: (a) two times his annual base salary; (b) a payment equal to 14% of his annual base salary; and (c) a payment equal to his “target” bonus opportunity.

If any payment or distribution to Mr. Robertson under the Robertson Agreement or otherwise would be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, the payments and or distributions under the Robertson Agreement or otherwise will be reduced to $1.00 less than the amount which would cause the payments or distributions to be subject to the excise tax.

If, following the termination of Mr. Robertson’s employment other than for cause, the Bank determines that cause to terminate Mr. Robertson existed, Mr. Robertson will forfeit any future rights to payment under the Robertson Agreement and will be required to repay any amounts paid under the Robertson Agreement upon written notice from the Board of Directors of the Bank.

The Robertson Agreement contains non-competition and non-solicitation covenants to prevent Mr. Robertson, during the term of the Robertson Agreement and for twenty-four (24) months thereafter, from competing with the Bank within a 100-mile radius of Fremont, Ohio, or soliciting customers or employees of the Bank to terminate their relationship with the Bank. The Robertson Agreement also contains a nondisclosure covenant that prevents Mr. Robertson from disclosing confidential information.

Employment Agreement with Kendall W. Rieman

On September 10, 2013, the Bank entered into an employment agreement with Kendall W. Rieman with respect to Mr. Rieman’s service as Executive Vice President and Chief Financial Officer of the Bank (the “Rieman Agreement”).

The Rieman Agreement provides for an initial term of two years. Thereafter, the Rieman Agreement will be extended for successive one-year renewal terms unless the Bank’s Board of Directors elects, in its sole discretion, to terminate the agreement by providing written notice of termination to Mr. Rieman not less than 90 days prior to the end of the initial term or then-applicable renewal term.

Pursuant to the Rieman Agreement, Mr. Rieman is entitled to receive an annual base salary of $160,000 that may be adjusted in accordance with the salary administration program in effect for Bank employees generally. Mr. Rieman may be eligible for any incentive bonus payment in each calendar year based on the satisfaction or attainment of performance goals or objectives and such other terms and conditions as the Board of Directors, in its sole discretion, may provide, and the Board of Directors, in its sole discretion, may also elect to provide Mr. Rieman with additional equity compensation. The Rieman Agreement also provides that the Bank will pay or reimburse Mr. Rieman for reasonable initiation fees, assessments and periodic membership dues in connection with establishing a membership at a country club or similar membership and a membership in an appropriate service organization. Mr. Rieman is also entitled to participate in the various employee benefit plans, programs, and arrangements available to other senior officers of the Bank.

If Mr. Rieman’s employment is terminated by the Bank without “cause” (as defined in the Rieman Agreement) or voluntarily terminates his employment for “good reason” (as defined in the Rieman Agreement), Mr. Rieman will be entitled to a payment equal to two times his annual base salary.

If Mr. Rieman’s employment is terminated without cause within twenty-four (24) months following a “change in control” (as defined in the Rieman Agreement), in lieu of any other payment under the Rieman Agreement, Mr. Rieman will be entitled to: (a) two times his annual base salary; (b) a payment equal to 7% of his annual base salary; and (c) a payment equal to his “target” bonus opportunity.

If any payment or distribution to Mr. Rieman under the Rieman Agreement or otherwise would be subject to the excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, the payments and or distributions under the Rieman Agreement or otherwise will be reduced to $1.00 less than the amount which would cause the payments or distributions to be subject to the excise tax.

If, following the termination of Mr. Rieman’s employment other than for cause, the Bank determines that cause to terminate Mr. Rieman existed, Mr. Rieman will forfeit any future rights to payment under the Rieman Agreement and will be required to repay any amounts paid under the Rieman Agreement upon written notice from the Board of Directors of the Bank.

The Rieman Agreement contains non-competition and non-solicitation covenants to prevent Mr. Rieman, during the term of the Rieman Agreement and for twenty-four (24) months thereafter, from competing with the Bank within a 100-mile radius of Fremont, Ohio, or soliciting customers or employees of the Bank to terminate their relationship with the Bank. The Rieman Agreement also contains a nondisclosure covenant that prevents Mr. Rieman from disclosing confidential information.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

Beneficial Ownership Information

As of March 14, 2014, no person or entity beneficially owned more than five percent (5%) of the outstanding common shares of the Corporation.

As of March 14, 2014, the following sets forth certain information concerning the beneficial ownership of common shares by each director of the Corporation, by each person nominated by the Board of Directors for election as a director of the Corporation at the 2014 Annual Meeting of Shareholders, by each of the named executive officers of the Corporation and by all current executive officers and directors of the Corporation as a group.


Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (1)		Percent of Class (2)
Michael D. Allen Sr.		6,886	(3)
Charles T. Barteck		14	(3)
James E. Bowlus (4)		35,550	1.57%
John J. Caputo (5)		5,623	(3)
Stacy A. Cox		134	(3)
James C. Dunn (6)		14,824	(3)
James R. Faist (7)		2,500	(3)
Claire F. Johansen		4,330	(3)
Stephen A. Kemper		9,419	(3)
Daniel W. Lease (8)		5,433	(3)
Barry F. Luse (9)		7,587	(3)
Thomas W. McLaughlin		4,817	(3)
Allan E. Mehlow		3,773	(3)
Kendall W. Rieman		5,763	(3)
Rick M. Robertson		8,883	(3)
Daniel N. Schloemer		2,349	(3)
Gary L. Zimmerman		3,920	(3)
All current executive officers and directors as a group (17 persons)		121,805	5.36%

(1)

Unless otherwise noted, the beneficial owner is the owner of record and has sole voting and investment power with respect to all of the common shares and none of the common shares are pledged as security, except for 4,200 common shares held by Mr. McLaughlin which are pledged as security to an unaffiliated financial institution. The mailing address of each of the current executive officers and directors of the Corporation is 323 Croghan Street, Fremont, Ohio 43420.

(2)

The percent of class is based upon the sum of (a) 2,270,729 common shares of the Corporation outstanding on March 14, 2014 and (b) the number of common shares, if any, as to which the named person or group has the right to acquire beneficial ownership upon the exercise of options which are currently exercisable or will become exercisable within 60 days of March 14, 2014.

(3)

Reflects ownership of less than 1% of the outstanding common shares of the Corporation.

(4)

Includes 300 shares owned by Mr. Bowlus’ wife, as to which she exercises sole voting and investment power.

(5)

All shares are held jointly by Mr. Caputo and his wife, as to which they exercise shared voting and investment power.

(6)

Includes 4,793 shares owned by Mr. Dunn’s wife, as to which she exercises sole voting and investment power.

(7)

All shares are held jointly by Mr. Faist and his wife, as to which they exercise shared voting and investment power.

(8)

Includes 4,688 shares owned jointly by Mr. Lease and his wife, as to which they exercise shared voting and investment power.

(9)

Includes 130 shares owned by Mr. Luse’s wife, as to which she exercises sole voting and investment power, and 160 shares owned jointly by Mr. Luse and his wife, as to which they exercise shared voting and investment power.

Equity Plan Information

The following table provides certain information regarding the Corporation’s equity compensation plans as of December 31, 2013.


	(a)		(b)		(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights		Weighted-average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by security holders		28,869		24.99		156,832	(2)

Equity compensation plans not approved by security holders (1)		-		-		-

Total		28,869		24.99		156,832

(1)	The Corporation has no equity compensation plans that have not been approved by the Corporation’s shareholders.

(2)	Represents common shares available for issuance under the 2012 plan. The 2002 Plan expired in March 2012 and no further awards may be granted under the 2002 Plan.

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

Related Party Transactions

Pursuant to its Charter, the Corporation’s Audit Committee is responsible for reviewing and overseeing the procedures designed to identify “related party” transactions that are material to the Corporation’s consolidated financial statements or otherwise require disclosure under applicable laws, and the Audit Committee has the authority to approve such “related party” transactions.

During the 2013 and 2012 fiscal years, the Bank entered into banking-related transactions in the ordinary course of business with certain executive officers, directors, and principal shareholders of the Corporation (including certain executive officers of the Bank), members of their immediate families and corporations or organizations with which they are affiliated. It is expected that similar transactions will be entered into in the future. Loans to such persons have been made on substantially the same terms, including the interest rate charged and collateral required, as those prevailing at the time for comparable transactions with persons not affiliated with the Corporation or the Bank. These loans have been, and are presently, subject to no more than the normal risk of collectibility and present no other unfavorable features.

Director Independence

The Board of Directors of the Corporation affirmatively determines whether each director of the Corporation is independent based on the definition of an “independent director” set forth in NASDAQ Marketplace Rule 5605(a)(2). In making this determination, the Board of Directors considered any transactions, relationships, or arrangements between each director (including his or her family members and affiliates) and the Corporation or the Bank, including those described above under “Related Party Transactions.”

Based on these considerations, the Board of Directors has determined that each of the following individuals who served as a director during the 2013 fiscal year qualifies as an “independent director”:


Michael D. Allen Sr.	Claire F. Johansen	Thomas W. McLaughlin
James E. Bowlus	James R. Faist	Allan E. Mehlow
John J. Caputo	Stephen A. Kemper	Gary L. Zimmerman
James C. Dunn	Daniel W. Lease

The Board of Directors has determined that Rick M. Robertson did not qualify as an “independent director” because he serves as President and Chief Executive Officer of the Corporation and the Bank.

ITEM 14. Principal Accountant Fees and Services

In accordance with the Audit Committee Charter and the requirements of the Sarbanes-Oxley Act of 2002 and related SEC rules, all services to be provided by the Corporation’s independent registered public accounting firm are subject to pre-approval by the Audit Committee. This includes audit services, audit-related services, tax services and other services. In some cases, the pre-approval of services is provided by the full Audit Committee. In other cases, the Chair of the Audit Committee has the delegated authority to pre-approve additional services, and such pre-approvals are then communicated to the full Audit Committee. All (100%) of the audit services, audit related services, tax services, and other services provided by the Corporation’s independent registered public accounting firm, CliftonLarsonAllen LLP during 2013 and 2012 were pre-approved by the Audit Committee.

The Sarbanes-Oxley Act and related SEC rules prohibit the Corporation from obtaining certain non-audit services from its auditing firm in order to avoid potential conflicts of interest. The Corporation has not obtained any of these prohibited services from CliftonLarsonAllen LLP since these rules went into effect.

The following lists the fees that the Corporation paid or accrued for the audit and other services provided by CliftonLarsonAllen LLP for the following fiscal years.


	2013		2012

Audit Fees		$102,648		$196,500
Audit-Related Fees		27,100		26,780
Tax Fees		12,575		14,925

Total		$142,323		$238,205

Audit Fees

This category includes the audit of the Corporation’s annual financial statements, review of financial statements included in the Corporations Quarterly Reports on Form 10-Q, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements and the preparation of the annual “management letter” on internal control matters.

Audit-Related Fees

This category consists of assurance and related services provided by CliftonLarsonAllen LLP that are reasonably related to the performance of the audit or review of the Corporation’s financial statements and are not reported under “Audit Fees.” The services provided by CliftonLarsonAllen LLP under this category include: the annual audit of the Bank’s 401(k) Profit Sharing Plan, including review of the related Form 11-K for 2012; and reporting on the Trust Department and on the suitability of the design and operating effectiveness of its controls for both years.

Tax Fees

This category consists of professional services rendered by CliftonLarsonAllen for tax compliance, tax advice, and tax planning. The services provided by CliftonLarsonAllen LLP under this category include tax return preparation and miscellaneous technical tax advice.

All Other Fees

None

AUDIT COMMITTEE REPORT

In fulfilling its oversight responsibilities with respect to the Corporation’s audited financial statements for the year ended December 31, 2013, the Audit Committee has:

—

reviewed and discussed the Corporations’ audited financial statements with management;

—

discussed with CliftonLarsonAllen LLP, the Corporation’s independent registered public accounting firm, the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T as currently in effect; and

—

received the written disclosures and the letter from CliftonLarsonAllen LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding CliftonLarsonAllen’s LLP communications with the Audit Committee concerning independence, and has discussed with CliftonLarsonAllen LLP its independence.

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors of the Corporation (and the Board of Directors has approved) that the audited financial statements be included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013, for filing with the SEC.

Submitted by the members of the Audit Committee.

Michael D. Allen Sr., Daniel W. Lease (Chair) and Thomas W. McLaughlin

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

The following consolidated financial statements (and reports thereon) are set forth on pages 23 through 59 of the Corporation’s 2013 Annual Report to Shareholders (included as Exhibit 13 to this Annual Report on Form 10-K) and are incorporated herein by reference:


Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2013 and 2012
Consolidated Statements of Operations - Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income – Years ended December 31, 2013, 2012 and 2011
Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows - Years ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

Financial statement schedules have been omitted either because they are not applicable or because the required information is provided in the consolidated financial statements or in the notes thereto.

(a)(3) Exhibits

The following exhibits are filed with or incorporated by reference in this Annual Report on Form 10-K:


Exhibit Number	Description	Location

2.1	Agreement and Plan of Merger, dated as of June 20, 2013, by and between Croghan Bancshares, Inc. and Indebancorp	Incorporated herein by reference to Annex A to the Prospectus/Proxy Statement included in the Registration Statement on Form S-4/A of the Registrant filed on September 12, 2013 (File No. 333-190362)

3.1(a)	Amended Articles of Incorporation of Croghan Bancshares, Inc.	Incorporated herein by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 0-20159)

3.1(b)	Certificate of Amendment to Articles of Incorporation of Croghan Bancshares, Inc. as filed with the Ohio Secretary of State on May 12, 2006	Incorporated herein by reference to Exhibit 3.1(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20159)

3.2	Amended and Restated Code of Regulations of Croghan Bancshares, Inc.	Incorporated herein by reference to Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 0-20159)

4.1	Agreement to furnish instruments and agreements defining rights of holders of long-term debt	Included in this filing

*10.1	Croghan Bancshares, Inc. Amended and Restated 2002 Stock Option and Incentive Plan	Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-20159)


Exhibit Number	Description	Location

*10.2	Form of Incentive Stock Option Award Agreement to be used in connection with grants under the Croghan Bancshares, Inc. Amended and Restated 2002 Stock Option and Incentive Plan	Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (File No. 0-20159)

*10.3	Croghan Bancshares, Inc. 2012 Equity Incentive Plan	Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-4 of the Registrant filed on August 2, 2013 (File No. 333-190362)

*10.4	Form of Restricted Stock Award Agreement to be used in connection with grants under the Croghan Bancshares, Inc. 2012 Equity Incentive Plan	Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of the Registrant filed on August 2, 2013 (File No. 333-190362)

*10.5	Executive Supplemental Death Benefit Agreement	Incorporated by reference to Exhibit 10(v) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 (File No. 0-20159)

*10.6	Employment Agreement, dated as of November 9, 2010, between The Croghan Colonial Bank and Rick M. Robertson	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 16, 2010 (File No. 0-20159)

*10.7	Amendment to Employment Agreement, dated as of July 21, 2011, between The Croghan Colonial Bank and Rick M. Robertson	Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (File No. 0-20159)

*10.8	Employment Agreement, dated as of September 10, 2013, between The Croghan Colonial Bank and Kendall W. Rieman	Included with this filing

13	2013 Annual Report to Shareholders	Included with this filing (not deemed filed except for portions thereof which are specifically incorporated by reference into this Annual Report on Form 10-K)

14	Croghan Bancshares, Inc. Code of Business Conduct and Ethics	Included with this filing

21	Subsidiaries of the Registrant	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


Exhibit Number	Description	Location

32	Section 1350 Certification – Principal Executive Officer and Principal Financial Officer	Included with this filing

101	The following materials from Croghan Bancshares, Inc.’s 2013 Annual Report and incorporated therefrom in Croghan Bancshares, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011; (iii) the Consolidated Statements of Comprehensive Income - Years ended December 31, 2013, 2012, and 2011; (iv) the Consolidated Statements Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011; and (vi) the Notes to Consolidated Financial Statements	Included with this filing

*	Denotes management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


						CROGHAN BANCSHARES, INC.

Date: March 28, 2014						/s/ Rick M. Robertson
						Rick M. Robertson
						President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated:


Signature		Title(s)

/s/ Rick M. Robertson Rick M. Robertson		President and Chief Executive Officer (Principal Executive Officer) and Director

/s/ Kendall W. Rieman Kendall W. Rieman		Treasurer (Principal Financial Officer and Principal Accounting Officer)

/s/ Michael D. Allen Sr. Michael D. Allen Sr.		Director

/s/ James E. Bowlus James E. Bowlus		Director

/s/ John J. Caputo John J. Caputo		Director

/s/ James C. Dunn James C. Dunn		Director

/s/ James R. Faist James R. Faist		Director

/s/ Claire F. Johansen Claire F. Johansen		Director

/s/ Stephen A. Kemper Stephen A. Kemper		Director

/s/ Daniel W. Lease Daniel W. Lease		Director

/s/ Thomas W. McLaughlin Thomas W. McLaughlin		Director

/s/ Allan E. Mehlow Allan E. Mehlow		Director

/s/ Gary L. Zimmerman Gary L. Zimmerman		Director

Date: March 28, 2014

EXHIBIT INDEX


Exhibit Number	Description	Location

2.1	Agreement and Plan of Merger, dated as of June 20, 2013, by and between Croghan Bancshares, Inc. and Indebancorp	Incorporated herein by reference to Annex A to the Prospectus/Proxy Statement included in the Registration Statement on Form S-4/A of the Registrant filed on September 12, 2013 (File No. 333-190362)

3.1(a)	Amended Articles of Incorporation of Croghan Bancshares, Inc.	Incorporated herein by reference to Exhibit 3(i) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 (File No. 0-20159)

3.1(b)	Certificate of Amendment to Articles of Incorporation of Croghan Bancshares, Inc. as filed with the Ohio Secretary of State on May 12, 2006	Incorporated herein by reference to Exhibit 3.1(b) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (File No. 0-20159)

3.2	Amended and Restated Code of Regulations of Croghan Bancshares, Inc.	Incorporated herein by reference to Exhibit 3(ii) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 0-20159)

4.1	Agreement to furnish instruments and agreements defining rights of holders of long-term debt	Included in this filing

*10.1	Croghan Bancshares, Inc. Amended and Restated 2002 Stock Option and Incentive Plan	Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-20159)

*10.2	Form of Incentive Stock Option Award Agreement to be used in connection with grants under the Croghan Bancshares, Inc. Amended and Restated 2002 Stock Option and Incentive Plan	Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (File No. 0-20159)

*10.3	Croghan Bancshares, Inc. 2012 Equity Incentive Plan	Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-4 of the Registrant filed on August 2, 2013 (File No. 333-190362)

*10.4	Form of Restricted Stock Award Agreement to be used in connection with grants under the Croghan Bancshares, Inc. 2012 Equity Incentive Plan	Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-4 of the Registrant filed on August 2, 2013 (File No. 333-190362)

*10.5	Executive Supplemental Death Benefit Agreement	Incorporated by reference to Exhibit 10(v) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 (File No. 0-20159)


Exhibit Number	Description	Location

*10.6	Employment Agreement, dated as of November 9, 2010, between The Croghan Colonial Bank and Rick M. Robertson	Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 16, 2010 (File No. 0-20159)

*10.7	Amendment to Employment Agreement, dated as of July 21, 2011, between The Croghan Colonial Bank and Rick M. Robertson	Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (File No. 0-20159)

*10.8	Employment Agreement, dated as of September 10, 2013, between The Croghan Colonial Bank and Kendall W. Rieman	Included with this filing

13	2013 Annual Report to Shareholders	Included with this filing (not deemed filed except for portions thereof which are specifically incorporated by reference into this Annual Report on Form 10-K)

14	Croghan Bancshares, Inc. Code of Business Conduct and Ethics	Included with this filing

21	Subsidiaries of the Registrant	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 2013 Annual Report and incorporated therefrom in Croghan Bancshares, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012; (ii) the Consolidated Statements of Operations for the years ended December 31, 2013, 2012, and 2011; (iii) the Consolidated Statements of Comprehensive Income - Years ended December 31, 2013, 2012, and 2011; (iv) the Consolidated Statements Stockholders’ Equity for the years ended December 31, 2013, 2012, and 2011; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011; and (vi) the Notes to Consolidated Financial Statements	Included with this filing

*	Denotes management contract or compensatory plan or arrangement.

Exhibit 4.1

[Croghan Bancshares, Inc. Letterhead]

March 28, 2014

Securities and Exchange Commission

100 F Street, NE

Washington, D.C. 20549

Re:

Croghan Bancshares, Inc. – Annual Report on Form 10-K for the fiscal year ended December 31, 2013

Ladies and Gentlemen:

Croghan Bancshares, Inc., an Ohio corporation (“Croghan”), is today filing with the Securities and Exchange Commission (the “SEC”) its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“Croghan’s 2013 Form 10-K”).

Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, Croghan hereby agrees to furnish to the SEC, upon request, copies of instruments and agreements defining the rights of holders of long-term debt and of the long-term debt of its consolidated subsidiary, which are not being filed as exhibits to Croghan’s 2013 Form 10-K. None of such long-term debt exceeds 10% of the total assets of Croghan and its subsidiaries on a consolidated basis.

Very truly yours,

CROGHAN BANCSHARES, INC.

/s/ Kendall W. Rieman

Kendall W. Rieman

Treasurer

Exhibit 10.8

Employment Agreement with Kendall W. Rieman

Exhibit 13

LOGO

CROGHAN BANCSHARES, INC.

CONTENTS


Financial Highlights			2

President’s Letter			3

Description of the Corporation and Common Share Information			5

Selected Financial Data			6

Management’s Discussion and Analysis			7

Report of Independent Registered Public Accounting Firm			22

Consolidated Financial Statements			23

C ROGHAN B ANCSHARES , I NC .

FINANCIAL HIGHLIGHTS


	2013		2012		Percent Change

For the year:
Net income		$4,447,000		$4,843,000		(8.2)%
Income per common share-Basic		2.58		2.89		(10.7)%
Dividends per common share		1.28		1.28		-

Return on average assets		.69%		.77%		(10.4)%
Return on average stockholders’ equity		6.60%		7.40%		(10.8)%

At year-end:
Assets		$817,860,000		$630,952,000		29.6%
Loans		474,748,000		321,277,000		47.8%
Securities		257,509,000		242,395,000		6.2%
Deposits		688,921,000		511,940,000		34.6%
Stockholders’ equity		85,048,000		67,164,000		26.6%

Book value per common share		$37.45		$40.01		(6.4)%
Stockholders’ equity to total assets		10.40%		10.64%		(2.3)%

Number of stockholders of record		994		688		44.5%
Number of full-time equivalent employees		190		167		13.8%

Notes:

1.)

Financial Data for 2013 includes the impact of the December 2013 acquisition of Indebancorp and its bank subsidiary, National Bank of Ohio, Oak Harbor Ohio, and the 2013 sale of the Custar branch.

AVAILABILITY OF MORE INFORMATION

To obtain a free copy of the Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2013, contact us by one of the methods noted below:

Croghan Bancshares, Inc.

Amy LeJeune

323 Croghan Street

Fremont, OH 43420

419-332-7301

888-276-4426

www.croghan.com

A Message from CEO Rick Robertson

Highlights for 2013

During 2013, the Croghan story was dominated by the successful merger of National Bank of Ohio (Indebancorp) into The Croghan Colonial Bank (Croghan Bancshares, Inc.)

Cash Dividends continued at a rate of $0.32 cents per share on a quarterly basis ($1.28 on an annualized basis)

Shareholder Equity grew to $85 million

The Croghan Colonial Bank celebrated its 125 ^th Year Anniversary based on our founding in 1888

NBOH Merger

In June 2013, we announced the agreement to acquire National Bank of Ohio (NBOH) which had four full service offices in Oak Harbor, Port Clinton, Oregon, and Curtice and total assets of approximately $220 million. NBOH was founded in 1934 and similar to Croghan, had decades of serving the financial needs of customers in its respective communities. As stated previously, the completion of the merger is expected to provide the following benefits to Croghan:

Provide geographic expansion and the associated additional revenue

Provide an excellent strategic fit with the combination of the two balance sheets

Provide an increase in combined assets which provides for operating efficiencies

After receipt of the necessary regulatory approvals and the approval by the shareholders of both entities, we successfully closed this transaction on December 6, 2013. Upon the closing, NBOH merged with and became part of The Croghan Colonial Bank and Indebancorp merged with and became part of Croghan Bancshares, Inc. We continue to be encouraged by the opportunities presented by this strategic acquisition.

Financial Update

We have become a larger bank in 2013, as a result of the NBOH merger. While larger is beneficial in many ways, we also are making a special point to let you know that we will work diligently to maintain our Community Bank mindset, providing our products and services in a consultative manner with customer needs being a top priority. At December 31, 2013, our assets totaled $818 million, up from $631 million at December 31, 2012, a 30% increase. Clearly the merger was the primary driver of this increase. For strategic reasons, we also sold our Custar branch office which reduced deposit totals by approximately $29 million. While influenced by the acquisition and branch sale, it is important to review some critical components of the larger resulting bank, loans increased 48% from $321 million at December 31, 2012 to $475 million at December 31, 2013, and deposits increased 35%, from $512 million at December 31, 2012 to $689 million at December 31, 2013. Stockholder equity increased from $67.1 million to $85.0 million including $20.9 million related to Croghan stock issued to former NBOH shareholders in the merger. Net Income in 2013 was $4.45 million, considering the level of one-time expenses related to the NBOH transaction, we are very pleased with these results.

There are also some important trends you will see as you review the details of our Annual Report. Our Provision for Loan Losses has steadily decreased over past three-year which we believe is reflective of quality improvements in our loan portfolio. Non-Interest Income continued to increase over the three year period as well. You will also notice a significant increase in the Salary and Wage expense category in 2013; this increase was significantly impacted by deferred compensation payouts relating to the NBOH transaction as further described in the notes to the consolidated financial statements.

As you read the current year financial statements, you may notice several items that will appear different, many of which are attributable to accounting for the merger (Purchase Accounting). A key ratio like the Allowance for Loan Losses compared to Total Loans (ALLL/Loan Loss) is quite different at December 31, 2013 when compared to prior periods. Under Purchase Accounting rules, the ALLL for the acquired entity, NBOH, is not recorded in the Bank’s allowance for loan loss; however, the credit loss related to these loans is a component of the purchase accounting adjustment for loans. Purchase accounting provides for a calculated credit reserve separate from the traditional ALLL, which is to provide for future loan losses from the acquired portfolio. Additionally, you will notice that other assets, like Core Deposit Intangible (CDI) and Goodwill, have increased as a result of accounting for the merger. Further details of the merger accounting can be found in the Management Discussion and Analysis, as well as the notes to our consolidated financial statements.

People in the News

After a 40-plus year career, EVP & Chief Lending Officer Tom Elder retired in July. Tom had been Chief Lending Officer for the past 10 years and he and his team had been instrumental in our loan portfolio improvement over the past few years. With Tom’s retirement, Daniel Schloemer was named SVP & Chief Lending Officer. Dan joined Croghan in 2002 and is well positioned to continue the progress in our loan area.

Another benefit of the merger was that we were able to add two of the NBOH Board members to the Croghan Board. John Caputo and James Dunn joined the Croghan Board in December and both are experienced businessmen and have served their communities in a variety of capacities. We look forward to having both John and Jim on the Board.

Many employees put forth an excellent effort in order to complete our merger in December. Months of planning and work were required. While I do not have the space to recognize everyone, Kendall Rieman, EVP & CFO, and Stacy Cox, SVP & COO, took on leadership roles for this merger. I would like to thank Kendall, Stacy, and the rest of the Croghan team for a job well done.

125 ^th Anniversary

The origin of our bank dates back to 1888, with 2013 being our 125 ^th Anniversary. Hopefully you believe, as we do, that highlights for 2013 including our merger, growth, and progress represent a pretty good way to celebrate our anniversary. What better time to extend a welcome to our new shareholders from the NBOH merger. We are glad to have you as part of our future.

We believe we are well positioned for the future and as always, on behalf of our Board and our employees, thank you for your continued support.

LOGO

Rick M. Robertson

President and Chief Executive Officer

January 2014

C ROGHAN B ANCSHARES , I NC .

DESCRIPTION OF THE CORPORATION

Croghan Bancshares, Inc. (“Croghan”), an Ohio corporation, is a bank holding company incorporated in 1983 with $817,860,000 in total assets as of December 31, 2013. Croghan owns all of the outstanding shares of The Croghan Colonial Bank (“Bank”), an Ohio state-chartered bank incorporated in 1888 and headquartered in Fremont, Ohio.

The Bank offers a diverse range of commercial and retail banking services through its 16 banking centers located in Bellevue, Clyde, Curtice, Fremont, Green Springs, Monroeville, Norwalk, Oak Harbor, Oregon, Port Clinton, and Tiffin Ohio, as well as one Loan Production office located in Perrysburg Ohio. Products are comprised of traditional banking services such as consumer, commercial, agricultural and real estate loans, personal and business checking accounts, savings accounts, time deposit accounts, safe deposit box services, and trust department services. Investment products bearing no FDIC insurance are offered through the Bank’s Trust and Investment Services Division.

MARKET PRICE AND DIVIDENDS ON COMMON SHARES

Croghan’s common shares are quoted on the OTC Bulletin Board under the symbol “CHBH.” The following shows the range of high and low price quotations, as reported on the OTC Bulletin Board, for Croghan’s common shares for each quarterly period during 2013 and 2012. OTC Bulletin Board quotations reflect inter-dealer prices, without mark-up, mark-down, or commission and may not necessarily represent actual transactions.


	2013					2012
	Low			High		Low			High
First Quarter		$	30.65		35.03		$	27.80		36.50
Second Quarter			33.75		35.75			33.75		36.50
Third Quarter			34.25		36.75			31.21		35.00
Fourth Quarter			32.55		37.00			30.27		33.49

Net income, basic net income per share data, and dividends declared by Croghan on its common shares during the past two years are as follows (dollars in thousands, except per share data):


2013				Basic
	Net			net income			Dividend
	income			per share			per share

First quarter		$	1,216		$	.72		$	.32
Second quarter			1,392			.83			.32
Third quarter			1,054			.63			.32
Fourth quarter			785			.40			.32


Total		$	4,447		$	2.58		$	1.28


2012				Basic
	Net			net income			Dividend
	income			per share			per share

First quarter		$	934		$	.56		$	.32
Second quarter			1,371			.82			.32
Third quarter			1,284			.77			.32
Fourth quarter			1,254			.74			.32


Total		$	4,843		$	2.89		$	1.28

The ability of Croghan to declare and pay dividends on its common shares is dependent, in large part, on dividends received from the Bank. The ability of the Bank to pay dividends is subject to certain legal and regulatory limitations described in Note 19 to the consolidated financial statements contained in this Annual Report.

There were 995 holders of record of the Corporation’s common shares on January 31, 2014.

C ROGHAN B ANCSHARES , I NC .

FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA


	Years ended December 31,
	2013				2012				2011				2010				2009
	(Dollars in thousands, except share data)
Statements of operations:
Total interest income		$	21,456			$	21,059			$	21,622			$	22,739			$	23,926
Total interest expense			2,194				3,086				3,355				5,085				6,275

Net interest income			19,262				17,973				18,267				17,654				17,651
Provision for loan losses			275				525				775				1,675				3,000

Net interest income, after provision for loan losses			18,987				17,448				17,492				15,979				14,651
Total non-interest income			5,919				4,553				3,468				3,780				3,588
Total non-interest expenses			19,567				16,417				15,008				14,732				14,181

Income before federal income taxes			5,339				5,584				5,952				5,027				4,058
Federal income taxes			892				741				1,198				1,003				952


Net income		$	4,447			$	4,843			$	4,754			$	4,024			$	3,106


Per share of common stock:
Net income		$	2.58			$	2.89			$	2.84			$	2.38			$	1.81
Dividends			1.28				1.28				1.28				1.28				1.28
Book value			37.45				40.01				37.58				33.71				32.75


Average shares of common stock outstanding			1,720,807				1,673,667				1,673,775				1,692,307				1,719,509


Year-end balances:
Loans, net		$	470,706			$	316,952			$	297,187			$	288,350			$	320,051
Securities			257,509				242,395				229,126				144,623				110,138
Total assets			817,860				630,952				629,651				489,727				481,988
Deposits			688,921				511,940				501,837				384,157				370,719
Stockholders’ equity			85,048				67,164				62,883				56,513				56,127


Average balances:
Loans, net		$	327,124			$	302,333			$	281,847			$	302,065			$	330,829
Securities			246,661				258,336				167,074				126,385				83,555
Total assets			640,343				628,191				506,418				490,198				468,170
Deposits			537,471				516,259				399,996				375,246				358,192
Stockholders’ equity			67,405				65,430				59,621				57,249				55,895


Selected ratios:
Net yield on average interest-earning assets			3.30	%			3.18	%			3.99	%			4.01	%			4.12	%
Return on average assets			.69				.77				.94				.82				.66
Return on average stockholders’ equity			6.60				7.40				7.97				7.03				5.56
Net loan charge-offs as a percent of average outstanding net loans			.17				.32				.34				.38				.56
Allowance for loan losses as a percent of year-end loans			.85				1.35				1.58				1.69				1.37
Stockholders’ equity as a percent of total year-end assets			10.40				10.64				9.99				11.54				11.64

Notes:

1.)

Financial Data for 2013, 2012, and 2011 includes the impact of the December 2011 acquisition of four branches of The Home Savings and Loan Company of Youngstown, Ohio.

2.)

Financial Data for 2013 includes the impact of the December 2013 acquisition of Indebancorp and its bank subsidiary, The National Bank of Ohio, Oak Harbor, Ohio, and the 2013 sale of the Custar branch.

C ROGHAN B ANCSHARES , I NC .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion provides additional information relating to Croghan’s financial condition and results of operations. This information is presented to further the reader’s understanding of Croghan’s Consolidated Financial Statements included in the 2013 Annual Report.

FORWARD-LOOKING STATEMENTS

Where appropriate, the following discussion contains the insights of management into known events and trends that have or may be expected to have a material effect on Croghan’s operations and financial condition. The information presented may also contain forward-looking statements regarding future financial performance, which are not historical facts and which involve various risks and uncertainties. Croghan cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors including regional and national economic conditions, changes in the levels of market interest rates, and competitive and regulatory issues could affect Croghan’s financial performance and cause the actual results for future periods to differ materially from those anticipated or projected.

Without limiting the foregoing and by way of example and not by way of limitation, some of the statements in the following referenced sections of this discussion and analysis are forward-looking and are, therefore, subject to such risks and uncertainties:

Management’s discussion of the interest rates included under “Net Interest Income”

Management’s discussion relating to the determination and assessment of the provision and allowance for loan losses included under “Provision for Loan Losses and the Allowance for Loan Losses”

Management’s discussion of capital requirements and impairment charges included under “Stockholders’ Equity”

Management’s discussion relating to the Bank’s liquidity sources and needs included under “Liquidity”

Management’s discussion of interest rate risk exposure included under “Interest Rate Risk”

Management’s discussion of goodwill evaluation under “Significant Accounting Policies”

Croghan 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.

BANK ACQUISITION AND BRANCH SALE

On December 6, 2013, Croghan completed the acquisition of Indebancorp and its bank subsidiary, National Bank of Ohio (“NBOH”) in a stock and cash merger transaction as described in Note 3 to the consolidated financial statements in the 2013 Annual Report. Under the terms of the agreement, shareholders of Indebancorp received for each share of NBOH stock owned immediately prior to the merger $55.00 in cash, 1.63 common shares of Croghan stock, or a combination thereof, subject to the overall consideration being 70% stock and 30% cash. Indebancorp and NBOH were headquartered in Oak Harbor, Ohio and operated four full-service branches and two loan production offices, all located within 30 miles of its corporate headquarters. The total cost of the transaction was $29,150,000 and resulted in the Bank acquiring $223,095,000 of assets and assuming $202,275,000 of liabilities. Assets acquired included loans of $163,453,000, securities of $23,736,000, and cash of $19,701,000 (net of cash paid to NBOH shareholders). Liabilities assumed included deposits of $194,491,000 and other borrowings of $5,262,000. Goodwill arising from the transaction totaled $8,330,000. This acquisition is intended to expand the geographical footprint of Croghan, which will help grow the balance sheet and future earnings. The operations of NBOH subsequent to the transaction are included in the Corporation’s 2013 consolidated operating results.

Additional information regarding the acquisition of Indebancorp and NBOH can be found in the notes to the consolidated financial statements contained in the 2013 Annual Report and the Corporation’s Registration Statement on Form S-4/A filed with the Securities and Exchange Commission (“SEC”) on September 9, 2013.

BANK ACQUISITION AND BRANCH SALE (CONTINUED)

Also in December 2013, the Bank completed a sale of its Custar branch to another financial institution resulting in a gain on sale of $1,172,000 as described in Note 4 to the consolidated financial statements in the 2013 Annual Report. The transaction included the sale of loans ($11,467,000), deposits ($29,483,000) and cash paid of $16,590,000. The operations of the Custar branch subsequent to the acquisition are not included in the Corporation’s 2013 consolidated operating results. The consolidated financial position of the Corporation at December 31, 2013 reflects the impact of these transactions. Consequently, any comparison of the December 31, 2013 consolidated financial position to December 31, 2012 will be significantly impacted by these transactions. The impact of these transactions on comparison of operating results was less dramatic based on the timing of the transactions.

PERFORMANCE SUMMARY

Croghan’s net income for the year ended December 31, 2013 was $4,447,000, compared to $4,843,000 in 2012, and $4,754,000 in 2011. Net income in 2013 as compared to 2012 was favorably impacted by a $1,289,000 increase in net interest income, a $250,000 decrease in the provision for loan losses, and a $1,366,000 increase in non-interest income, while net income was unfavorably impacted by a $3,150,000 increase in non-interest expense and a $151,000 increase in federal income tax expense.

The return on average assets in 2013 was .69%, compared to .77% in 2012, and .94% in 2011. The return on average stockholders’ equity was 6.60% in 2013, 7.40% in 2012, and 7.97% in 2011. Net income per share in 2013 amounted to $2.58, compared to $2.89 in 2012, and $2.84 in 2011. Changes in these amounts from year to year were generally reflective of changes in the level of net income and the balance sheet size.

Total assets increased to $817,860,000 at December 31, 2013, compared to $630,952,000 at December 31, 2012, an increase of 29.6%. Loans increased $153,471,000, or 47.8%, to $474,748,000 at December 31, 2013, compared to $321,277,000 at December 31, 2012. Securities increased $15,114,000, or 6.2%, to $257,509,000 at December 31, 2013, compared to $242,395,000 at December 31, 2012. Deposits increased $176,981,000, or 34.6%, to $688,921,000 at December 31, 2013, from $511,940,000 at December 31, 2012. Stockholders’ equity at December 31, 2013 was $85,048,000, a 26.6% increase compared to $67,164,000 at December 31, 2012. These changes primarily resulted from the aforementioned December 2013 NBOH acquisition and Custar branch sale and are discussed in further detail in the Financial Position section below.

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income, which represents the revenue generated from interest-earning assets in excess of the interest cost of funding those assets, is Croghan’s principal source of income. Net interest income is influenced by market interest rate conditions and the volume and mix of interest-earning assets and interest-bearing liabilities. Many external factors affect net interest income and typically include the strength of client loan demand, client preference for individual deposit account products, competitors’ loan and deposit product offerings, the national and local economic climates, and Federal Reserve monetary policy.

The following demonstrates the components of net interest income for the years ended December 31 (dollars in thousands):


	2013			2012			2011
Average interest-earning assets		$	582,970		$	564,406		$	457,588
Interest income			21,456			21,059			21,622
Average rate earned			3.68%			3.73%			4.73%

Average interest-bearing liabilities		$	467,134		$	470,430		$	374,526
Interest expense			2,194			3,086			3,355
Average rate paid			.47%			.66%			.90%

Net interest income		$	19,262		$	17,973		$	18,267
Net interest yield (net interest income divided by average interest-earning assets)			3.30%			3.18%			3.99%

NET INTEREST INCOME (CONTINUED)

2013 vs. 2012 . Net interest income for 2013 increased $1,289,000, or 7.2%, to $19,262,000, compared to $17,973,000 in 2012. Average interest-earning assets in 2013 increased $18,564,000, which was a partial result of the December 2013 NBOH acquisition, as well as modest loan growth achieved during the year. Throughout 2013, Croghan continued to reinvest security maturities run-off, which also helped maintain net interest income. Average interest-bearing liabilities decreased $3,296,000. The decrease in time deposits resulting from lower rates more than offset the increase in average deposits resulting from the December 2013 NBOH transaction.

The average rate earned on interest-earning assets decreased to 3.68% in 2013 from 3.73% in 2012, and the average rate paid on interest-bearing liabilities decreased to .47% in 2013 from .66% in 2012. The net effect of these changes was that Croghan’s net interest yield increased to 3.30% in 2013 from 3.18% in 2012. In 2013, the Federal Reserve Open Market Committee (FOMC) continued to maintain low managed interest rates. The low rates caused the average rate earned on interest-earning assets and average rate paid on interest-bearing liabilities to decrease in 2013, continuing the trend from 2012 and 2011. In addition to the overall low level of rates on loans and deposits, Croghan also, on average, increased the investment portfolio yield when comparing 2013 and 2012 to help offset the decrease in the loan yield.

2012 vs. 2011. Net interest income for 2012 decreased $294,000, or 1.6%, to $17,973,000, compared to $18,267,000 in 2011. Average interest-earning assets in 2012 increased $106,818,000 (23.3%), which was a direct result of the December 2011 acquisition of four HSL branches. As a result of soft loan demand in its lending markets, Croghan invested most of the funds resulting from the HSL branches acquisition in securities and also re-invested substantially all proceeds from securities maturities. As a result, the average balance of securities increased $86,190,000 in 2012 as compared to 2011. Average interest-bearing liabilities increased $95,904,000, which was also largely attributed to interest-bearing liabilities obtained from the HSL branches acquisition.

The average rate earned on interest-earning assets decreased to 3.73% in 2012 from 4.73% in 2011, and the average rate paid on interest-bearing liabilities also decreased to .66% in 2012 from .90% in 2011. The net effect of these changes was that Croghan’s net interest yield decreased to 3.18% in 2012 from 3.99% in 2011. Throughout 2012, the FOMC continued to maintain low managed interest rates. The low rates caused the average rate earned on interest-earning assets and average rate paid on interest-bearing liabilities to further decrease in 2012, even below the low rates experienced in 2011. In addition to the overall low level of rates, the average balance of securities increased $86,190,000 (52.7%) while the average balance of loans increased only $19,767,000 (6.9%).

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES

Croghan’s loan policy provides guidelines for managing both credit risk and asset quality. The policy details acceptable lending practices, establishes loan-grading classifications, and prescribes the use of a loan review process. Croghan employs credit analysis staff 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.

Croghan performs ongoing reviews to identify potential problem and nonperforming loans and also completes in-depth analysis with respect to the quarterly allowance for loan losses calculation. Part of this analysis involves assessing the need for specific reserves relative to impaired loans. This evaluation typically includes a review of the loan’s past performance history, a comparison of the estimated collateral value in relation to the outstanding loan balance, the overall financial strength of the borrower, industry risks pertinent to the borrower, and competitive trends that may influence the borrower’s future financial performance. Loans are considered impaired when, based upon the most current information available, it appears probable that the borrower will not be able to make payments according to the contractual terms of the loan agreement. Impaired loans are recorded at the observable market price of the loan, the fair value of the underlying collateral (if the loan is collateral dependent), or the present value of the expected future cash flows discounted at the loan’s effective interest rate. Given that Croghan’s impaired loans are typically collateralized by real estate or other borrower assets, the fair value of impaired loans is most often based upon the underlying collateral value. Large groups of smaller balance homogenous loans are collectively evaluated for impairment.

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)

To determine the allowance for loan losses, Croghan prepares a detailed quarterly analysis that focuses on delinquency trends, the status of nonperforming loans (i.e., impaired, nonaccrual, restructured, and past due 90 days or more), current and historical trends of charged-off loans within each loan category (i.e., commercial, real estate, and consumer), existing local and national economic conditions, and changes within the volume and mix in each loan category. Higher loss rates are applied in calculating the allowance for loan losses relating to potential problem loans. The loss rates are periodically evaluated considering historic loss rates in the respective potential problem loan categories (i.e., special mention, substandard, doubtful) and current trends.

Real estate loans that are deemed impaired are considered collateral dependent and have specific reserves allocated based upon appraisals that are less than 13 months old and discounted 20-25% to account for expected discounts to liquidate the collateral. Non real estate loans that are impaired are considered collateral dependent and have specific reserves allocated based upon the most current net book value and discounted 65% for account receivables collateral and 25% for equipment collateral to account for any discounts to liquidate the collateral. As collateral dependent loans approach foreclosure or liquidation, additional costs to sell are identified which often result in a minimum of $2,500 additional loan loss requirement for these loans.

Regular provisions are made in amounts sufficient to maintain the balance in the allowance for loan losses at a level considered by management to be adequate for losses within the portfolio. Even though management uses all available information to assess possible loan losses, future additions or reductions to the allowance may be required as changes occur in economic conditions, appraisal values, and specific borrower circumstances. The regulatory agencies that periodically review Croghan’s allowance for loan losses may also require additions to the allowance or the charge-off of specific loans based upon the information available to them at the time of their examinations.

The following provides factors relating to the provision and allowance for loan losses for the years ended December 31 (dollars in thousands):


	2013		2012		2011
Provision for loan losses charged to expense	$	275	$	525	$	775
Net loan charge-offs		558		978		952
Net loan charge-offs as a percent of average outstanding net loans		.17%		.32%		.34%

The following provides information relating to problem loans and the allowance for loan losses as of December 31, 2013. Nonperforming loans include nonaccrual loans, accruing loans past due 90 days or more, and troubled debt restructurings (TDR). Nonperforming loans at December 31, 2013 includes $3.6 million of loans acquired in the NBOH transaction that were not performing in accordance with the contractual terms. However, due to the application of ASC 805, no allowance for loan losses was provided at the acquisition date for these loans, but rather the credit risk related to these loans was reflected as a purchase accounting adjustment (dollars in thousands):


	2013		2012		2011

Nonaccrual loans, excluding TDR-non-accruing	$	1,889	$	1,837	$	3,376
Loans contractually past due 90 days or more and still accruing interest		1,160		967		672

TDR-accruing		6,081		4,342		3,532
TDR-non-accruing		2,715		916		1,295

Total TDR loans		8,796		5,258		4,827

Potential problem loans, other than those past due 90 days or more, nonaccrual, or restructured		7,079		6,542		18,161


Total potential problem and nonperforming loans	$	18,924	$	14,604	$	27,036


Allowance for loan losses	$	4,042	$	4,325	$	4,778
Allowance for loan losses as a percent of year-end loans		.85%		1.35%		1.58%

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)

2013 vs. 2012 .

Provision for loan losses and net loan charge-offs

The 2013 provision for loan losses totaled $275,000, which was $250,000 less than the 2012 provision of $525,000. The decrease in the 2013 provision was attributed to overall reduced levels of potential problem and nonperforming loans used in the calculation. During 2013, Croghan recognized $558,000 of net charge-offs, a decrease of $420,000 as compared to the $978,000 of net charge-offs recognized in 2012. The trends in the historical loss rates, which are used to calculate losses on non-impaired credits continued to improve as well during 2013.

Nonaccrual loans

Non-accrual loans increased $1,851,000 to $4,604,000 at December 31, 2013 compared to $2,753,000 at December 31, 2012. This increase included $226,000 of non-accrual loans related to the NBOH acquisition. The net overall decrease of $52,000 in nonaccrual loans in 2013 compared to 2012 was due to several commercial and commercial real estate loans being paid off. In addition to the loans being paid off, there was one commercial real estate loan totaling $180,000 which was moved to OREO, after realizing a $159,000 charge-off.

Restructured loans

Restructured (TDR) loans at December 31, 2013 totaled $8,796,000. Included in this amount was $3,624,000 of TDR loans resulting from the NBOH transaction. These loans were restructured from their original loan agreements by modifying their principal or interest payment terms, or have interest only payments for a certain time period. These restructured terms are intended to minimize the Bank’s potential losses during a time when the borrower is experiencing a reduction in their anticipated or actual cash flow. If a restructured loan is placed on nonaccrual, it is classified as nonaccrual.

Potential problem and nonperforming loans

Croghan typically classifies a loan as a potential problem loan, regardless of its collateralization or any contractually obligated guarantors, when a review of the borrower’s financial statements indicates that the borrower does not generate sufficient operating cash flow to adequately service its debts.

Total potential problem and nonperforming loans increased $4,320,000, or 29.6%, to $18,924,000 at December 31, 2013, compared to $14,604,000 at December 31, 2012, including a $537,000 increase in potential problem loans. These increases are primarily the result of the NBOH acquisition which totaled $4,871,000.

The following table provides additional detail pertaining to the past due status of Croghan’s potential problem loans as of December 31, 2013 (dollars in thousands):


Potential problem loans not currently past due	$	2,660
Potential problem loans past due one day or more but less than 10 days		545
Potential problem loans past due 10 days or more but less than 30 days		3,019
Potential problem loans past due 30 days or more but less than 60 days		111
Potential problem loans past due 60 days or more but less than 90 days		744


Total potential problem loans	$	7,079

As illustrated in the table, $6,224,000, or 87.9% of total potential problem loans were less than 30 days past due at December 31, 2013. In addition, 98.7% of these potential problem loans were secured by an interest in real property.

PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES (CONTINUED)

2012 vs. 2011 .

Provision for loan losses and net loan charge-offs

The 2012 provision for loan losses totaled $525,000, which was $250,000 less than the 2011 provision of $775,000. The decrease in the 2012 provision was attributable to overall reduced levels of potential problem and nonperforming loans. During 2012, Croghan recognized $978,000 of net charge-offs, which was up $26,000 from the $952,000 of net charge-offs in 2011. The trends in the historical loss rates, which are used to calculate losses on non-impaired credits, stayed consistent throughout 2012.

Nonaccrual loans

The $1,918,000 decrease in nonaccrual loans at December 31, 2012 as compared to December 31, 2011 was due to several commercial and commercial real estate loans being paid off. In addition to the loans being paid off, there was one commercial real estate loan totaling $275,000 which was moved to OREO, after realizing a $92,000 charge-off.

Potential problem and nonperforming loans

Total potential problem and nonperforming loans decreased $12,432,000, or 46.0%, to $14,604,000 at December 31, 2012, compared to $27,036,000 at December 31, 2011. Components of this decrease included a decrease of $11,619,000 in potential problem loans. The decrease was the result of several large commercial and commercial real estate loans being paid off as well as one large commercial client totaling $7,455,000 being upgraded to a pass credit.

The following table provides additional detail pertaining to the past due status of potential problem loans as of December 31, 2012 (dollars in thousands):


Potential problem loans not currently past due	$	4,777
Potential problem loans past due one day or more but less than 10 days		406
Potential problem loans past due 10 days or more but less than 30 days		755
Potential problem loans past due 30 days or more but less than 60 days		130
Potential problem loans past due 60 days or more but less than 90 days		474


Total potential problem loans	$	6,542

As illustrated in the table, $5,938,000, or 90.8% of total potential problem loans were less than 30 days past due at December 31, 2012. In addition, 97.7% of these potential problem loans were secured by an interest in real property.

NON-INTEREST INCOME

Non-interest income is comprised of the items summarized for the years ended December 31 as follows (dollars in thousand):


	2013			2012			2011

Trust income		$	1,248		$	1,167		$	1,076
Service charges on deposit accounts			1,849			1,780			1,444
Gain on sale of loans			331			246			115
Gain on sale of securities			293			311			149
Loss on security impairment			-			-			(394)
Increase in cash value of life insurance			126			321			301
Gain from life insurance proceeds			-			-			204
Gain on sale of Custar branch			1,172			-			-
Other operating income			900			728			573


Total non-interest income		$	5,919		$	4,553		$	3,468

NON-INTEREST INCOME (CONTINUED)

2013 vs. 2012 . Total non-interest income in 2013 increased $1,366,000, or 30.0%, to $5,919,000, compared to $4,553,000 in 2012. The most significant factor contributing to this increase was the $1,172,000 gain resulting from the December 2013 sale of the Custar branch.

Service charges on deposit accounts, which include deposit service charges, debit card interchange and service charges, and overdraft fees, increased $69,000, or 3.9%, in 2013. The increase across all these categories is a result of higher number of accounts. Debit card interchange income which is included in the service charge on deposit accounts, in addition to the increased numbers of accounts, also benefitted from increased activity in general from all account holders, increasing $33,000, or 5.6%, to $623,000 for 2013.

Gains resulting from the sale of fixed-rate residential mortgage loans in the secondary market increased $85,000, or 34.6%. Included in gain on sale of loans was capitalized mortgage servicing rights of $104,000 in 2013 and $65,000 in 2012. The increase was a direct result of increased 1-4 family mortgage loan origination volume. At December 31, 2013, the unpaid balance of mortgage loans serviced for others amounted to $160,150,000, including $124,971,000 acquired in the NBOH transaction, compared to $26,496,000 at December 31, 2012.

Trust income in 2013 increased $81,000, or 6.9%, from 2012. The Trust Department held total assets of $185,808,000 for 565 clients at December 31, 2013, compared to $157,604,000 for 537 clients at December 31, 2012. Services offered by the Trust Department include qualified retirement plans (e.g., 401k and simple plans), personal trusts, investment management accounts, cash management accounts, individual retirement accounts, custody accounts, charitable trusts, and charitable gift annuities.

During 2013, the Bank realized gains on sales of securities of $293,000, compared to $311,000 in 2012 as the Bank sold bonds in a continued effort to manage interest rate risk in the bond portfolio.

Croghan has purchased split-dollar life insurance policies on behalf of certain current and former employees and officers. The increase in the cash value of these policies accumulates on a tax-exempt basis, as long as the policies are not cashed, and the tax savings is used to fund supplemental retirement benefits for the named individuals. The total cash value of these life insurance policies aggregated $16,810,000 at December 31, 2013, including $5,597,000 acquired in the NBOH transaction, and $11,087,000 at December 31, 2012. The increase in cash value of the policies amounted to $126,000 in 2013 compared to $321,000 in 2012. The decrease was due to the interest rate decline the policies were earning.

Other operating income increased $172,000, or 23.6%, to $900,000 in 2013, from $728,000 in 2012. Other operating income includes fees generated by the Investment Department of Croghan’s Trust and Investment Services Division. The Investment Department markets non-FDIC insured investment products, such as mutual funds and annuities. Fees generated by the Investment Department totaled $145,000 in 2013, compared to $193,000 in 2012. Other items of note that comprise other operating income include gains on sale of other real estate owned, rental income, ATM surcharge fees, MasterCard merchant referral commissions, safe deposit box fees, credit life insurance sales commissions, and fees from the sale of official checks and money orders.

2012 vs. 2011 . Total non-interest income in 2012 increased $1,085,000, or 31.3%, to $4,553,000, compared to $3,468,000 in 2011. Service charges on deposit accounts increased $336,000, or 23.3%, in 2012. The increase across all these categories is a result of higher number of accounts primarily from the December 2011 Home Savings and Loan Company four branch acquisition. Debit card interchange income, in addition to the increased numbers of accounts, also benefitted from increased activity in general from all account holders, increasing $227,000, or 62.6%, at $590,000 for 2012.

Gain on sale of loans increased $131,000 to $246,000 in 2012 compared to $115,000 in 2011. Included in gain on sale of loans was capitalized mortgage servicing rights of $65,000 in 2012 and $39,000 in 2011.

Trust income in 2012 increased $91,000, or 8.5%, from 2011. The Trust Department held total assets of $157,604,000 for 537 clients at December 31, 2012, compared to $151,230,000 for 556 clients at December 31, 2011.

In an effort to manage interest rate risk, the Bank sold bonds and had realized gains on sales of securities of $311,000 in 2012 compared to $149,000 in 2011.

The total cash value of these life insurance policies aggregated $11,087,000 at December 31, 2012 and $10,766,000 at December 31, 2011. The increase in cash value of the policies amounted to $321,000 in 2012 compared to $301,000 in 2011.

NON-INTEREST INCOME (CONTINUED)

Other operating income increased $155,000, or 27.1%, to $728,000 in 2012, from $573,000 in 2011. Fees generated by the Investment Department totaled $193,000 in 2012, compared to $91,000 in 2011.

NON-INTEREST EXPENSES

Non-interest expenses are comprised of the items summarized for the years ended December 31 as follows (dollars in thousands):


	2013		2012		2011
Salaries and wages	$	7,845	$	6,872	$	6,578
Employee benefits		3,171		2,050		1,806

Total personnel		11,016		8,922		8,384
Occupancy of premises		893		961		851
FDIC premium assessments		410		392		372
Amortization of core deposit intangible assets		272		400		58
Equipment and vehicle		1,386		1,242		1,096
Professional and consulting services		1,119		580		659
State franchise and other taxes		680		643		512
Postage		298		287		252
Stationery and supplies		178		243		231
Advertising and marketing		334		292		217
Third-party computer processing		183		210		223
Examination fees		255		186		179
MasterCard franchise and processing		191		168		125
Loan collection and repossession fees		293		381		359
ATM network and processing fees		371		357		151
Telephone		122		123		89
Other		1,566		1,030		1,250


Total non-interest expenses	$	19,567	$	16,417	$	15,008

2013 vs. 2012 . Total non-interest expenses in 2013 increased to $19,567,000, from $16,417,000 in 2012, an increase of $3,150,000, or 19.2%, of which $2,391,000 were one-time costs incurred as a result of the Indebancorp/NBOH transaction. Total personnel expense increased $2,094,000, or 23.5%, to $11,016,000 in 2013, from $8,922,000 in 2012. The increase included $1,349,000 of expense relating to deferred compensation and severance agreements due former directors and officers of Indebancorp/NBOH. This expense related to certain change of control provisions which accelerated the payment of benefits under these contracts. Other increases were due to cash bonuses paid in connection with the Indebancorp/NBOH acquisition, as well as payments under the Bank’s stakeholder program. Full-time equivalent employees totaled 190 at December 31, 2013 compared to 167 at December 31, 2012.

Professional and consulting services increased $539,000 in 2013 as compared to 2012, including $754,000 of costs related to the NBOH transaction. These expenses related to completing the merger agreement, filing of the Form S-4 registration statement with the Securities Exchange Commission, and all other acquisition expenses. The $144,000 increase in equipment and vehicle costs was also largely attributable to the NBOH transaction to facilitate new computers and equipment.

Loan collection and repossession fees decreased $88,000, or 23.1%, in 2013 as compared to 2012 as a result of continued improvement in the loan portfolio experienced throughout 2013. Advertising and marketing increased $42,000, or 14.4%, due to new markets and the associated costs that comes with a larger geographical footprint. Also in 2013, amortization of the core deposit intangible resulting from the December 2011 branches acquisition, decreased $128,000, or 32.0%, based on the use of the sum-of-the-years digits amortization method which provides accelerated amortization in the years immediately following a transaction. As a result of the NBOH transaction, amortization of core deposit intangible assets will increase to $1,011,000 in 2014.

NON-INTEREST EXPENSES (CONTINUED)

2012 vs. 2011 . Total non-interest expenses in 2012 increased to $16,417,000, from $15,008,000 in 2011, an increase of $1,409,000, or 9.4%. Total personnel expense increased $538,000, or 6.4%, to $8,922,000 in 2012, from $8,384,000 in 2011. Full-time equivalent employees totaled 167 at December 31, 2012 compared to 171 at December 31, 2011.

For the year 2012, non-interest expense increases related to the 2011 branch acquisition were personnel, which increased $538,000 or 6.4% to $8,922,000 primarily from the additional 16 full-time and two part-time employees needed after the branch acquisition. Additionally, other non-interest expenses and corresponding increases related to the additional branches acquired in late 2011 included; occupancy of premises $110,000; equipment and vehicle expense $147,000; advertising and marketing $75,000; MasterCard franchise and processing $43,000; ATM network and processing fees $206,000; and telephone $34,000. The amortization of core deposit intangible asset expenses increased to $400,000, up $342,000, as a result of the 2011 branch acquisition and the related amortization of the core deposit intangible asset.

FEDERAL INCOME TAXES

Federal income tax expense totaled $892,000 in 2013, compared to $741,000 in 2012, and $1,198,000 in 2011. The effective tax rate in 2013 was 16.7%, compared to 13.3% in 2012 and 20.1% in 2011. The increase in the effective tax rate in 2013, as compared to 2012, was primarily due to non-deductible merger expenses.

FINANCIAL POSITION

SECURITIES

Croghan’s securities portfolio is used to enhance net interest income, provide liquidity in the event of unforeseen cash flow needs, and diversify financial risk. At December 31, 2013, Croghan classified all of its securities other than restricted stock as available-for-sale. Available-for-sale securities are reported at their fair values, with the net unrealized gain or loss, net of tax, reported as a component of stockholders’ equity known as “accumulated other comprehensive income (loss).” All securities are periodically reviewed for impairment.

Croghan’s available-for-sale security portfolio is primarily comprised of U.S. Government agency and political subdivision obligations. The fair value of available-for-sale securities totaled $252,472,000 at December 31, 2013, compared to $238,221,000 at December 31, 2012. As previously mentioned in the “Net Interest Income” section, Croghan invested the run-off from the maturities in the portfolio and increases in deposits into the securities portfolio to help maintain net interest income.

Croghan’s restricted stock includes shares issued by the Federal Reserve Bank of Cleveland, Federal Home Loan Bank of Cincinnati, and Bankers Bancshares, Inc. of Gahanna, Ohio. Croghan maintains investments in these entities to facilitate borrowing capacity (FHLB), as a member (Federal Reserve), and for loan participation opportunities (Bankers Bancshares). The carrying value of restricted stock totaled $5,037,000 at December 31, 2013 and $4,174,000 at December 31, 2012.

The aggregate carrying value of all securities at December 31, 2013 totaled $257,509,000, an increase of 6.2%, as compared to $242,395,000 at December 31, 2012.

At December 31, 2013, the Bank’s securities portfolio included obligations of U.S. states and political subdivisions with a fair value of $98,657,000, which comprises 116.0% of consolidated stockholders’ equity. The largest exposure to any one state is $22,418,000 or 22.7%, issued within the state of Ohio. The Bank’s procedures for evaluating investments in securities issued by U.S. states and political subdivisions are in accordance with guidance issued by the Board of Governors of the Federal Reserve System, “Investing in Securities without Reliance on Nationally Recognized Statistical Rating Agencies” (SR 12-15) and other regulatory guidance. Credit ratings are considered in our analysis only as a guide to the historical default rate associated with similarly-rated bonds. There have been no significant differences in our internal analyses compared with the ratings assigned by the third party credit rating agencies.

LOANS

The following summarizes total loans and the percent change by major category as of December 31 (dollars in thousands):


	2013		2012		Percent Change
Commercial, financial, and agricultural	$	44,134	$	35,303		25.0
Real estate – residential mortgage		176,084		128,252		37.3
Real estate – non-residential mortgage		211,852		135,937		55.8
Real estate – construction		11,608		3,635		219.3
Consumer		27,515		15,234		80.6
Credit card		3,555		2,916		21.9


Total loans	$	474,748	$	321,277		47.8

Total loans amounted to $474,748,000, at December 31, 2013 compared to $321,277,000 at December 31, 2012, an increase of $153,471,000, which includes the impact of $163,453,000 acquired in the NBOH transaction and $11,467,000 sold in the Custar branch transaction. Excluding the impact of these transactions, loans increased $1,485,000. The loan portfolio at December 31, 2013 is made up of 9.3% of commercial, financial, and agricultural loans; these loans are affected by lines of credit of our borrowers and floor plan activity. Residential real estate makes up 37.1% of the loan portfolio. These balances are influenced by the refinancing activity and the amount of loans that are either sold to the secondary market or retained and is in general affected by the economics conditions and rate environment. Nonresidential real estate is made up of commercial properties secured by real estate and comprises 44.6% of the loan portfolio. This sector is largely driven by economic factors and the reinvestment of earnings of borrowers. Consumer and credit card loans make up 6.5% of the new loan portfolio. These amounts are influenced by customer habits and the trend of paying down debt in an uncertain environment.

OTHER REAL ESTATE OWNED

Other real estate owned (OREO) decreased $419,000 to $876,000 at December 31, 2013, compared to $1,295,000 at December 31, 2012. The net effect of OREO sales and write-downs of properties held in OREO at December 31, 2012, resulted in a net gain on sale or write-down of OREO of $66,000 in 2013.

DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES

Deposits and other interest-bearing liabilities at December 31, 2013 increased $168,361,000, or 30.1%, compared to December 31, 2012. Deposits and other interest-bearing liabilities serve as a primary source of cash flows to fund loan demand and are summarized in the following table as of December 31 (dollars in thousands):


	2013		2012		Percent Change
Demand non-interest bearing	$	142,124	$	89,530		58.7
Savings, NOW, and money market deposits		344,695		261,860		31.6
Time deposits		202,102		160,550		25.9


Total deposits		688,921		511,940		34.6
Federal funds purchased and securities sold under repurchase agreements		24,577		32,344		(24.0	)
Borrowed funds		14,346		15,199		(5.6	)


Total deposits and other interest-bearing liabilities	$	727,844	$	559,483		30.1

The increases in total deposits in all categories resulted from the NBOH transaction and the resulting acquired deposits of $194,491,000, offset by the $29,483,000 of deposits sold with the Custar branch.

DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES (CONTINUED)

In general, the Bank did experience a continuation of consumer habits changing to maintain liquid deposits. The Bank experienced a run-off in the time deposit category and transfer to other categories prior to the acquisition, which is a continued result of the low rate environment. The Bank expects to continue and further develop its relationship with the deposit customers arising from the NBOH transaction and maintain the new deposit levels acquired in the past year in new and established markets. It is the Corporation’s strategy to develop customer relationships with the new markets that will drive deposit growth, portfolio growth, and stability in our new areas.

STOCKHOLDERS’ EQUITY

Croghan’s stockholders’ equity is summarized in the following table at December 31 (dollars in thousands):


	2013		2012
Common stock	$	31,328	$	23,926
Surplus		13,361		118
Retained earnings		47,460		45,361
Accumulated other comprehensive income		983		5,843
Treasury stock		(8,084)		(8,084)


Total stockholders’ equity	$	85,048	$	67,164

Common stock and surplus increased $20,645,000 due to the issuance of 592,099 common shares to Indebancorp shareholders in the acquisition. Overall equity increased $17,884,000, or 26.6%.

Accumulated other comprehensive income consists of the net unrealized gain on securities classified as available-for-sale. At December 31, 2013, the Bank held $252,472,000 of available-for-sale securities with a net unrealized gain of $983,000, net of income taxes compared to available-for-sale securities of $238,221,000 at December 31, 2012, with a net unrealized gain of $5,843,000, net of income taxes. The $4,860,000 decrease in accumulated other comprehensive income was the result of customary and expected fluctuations in the bond market related to changes in interest rates during 2013. Management does not believe that any of the Bank’s investment securities holdings are in a permanent unrealized loss position at December 31, 2013 or 2012.

There was no change to treasury stock at December 31, 2013 as compared to December 31, 2012. Changes in 2012 were due the issuance of 5,250 restricted shares pursuant to Croghan’s 2012 equity incentive plan. The restricted shares were issued to eight employees and vest equally every year for five years starting April 30, 2013 and ending April 30, 2017.

Bank holding companies, including Croghan, are subject to minimum capital requirements established by the Federal Reserve Board. Additionally, all insured depository institutions, including the Bank, are subject to the Federal Reserve Board’s capital classification system that assigns institutions into one of the following categories: well capitalized, adequately capitalized, or undercapitalized. Failure of a bank or bank holding company to meet the adequately capitalized or minimum capital standards may result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on an institution’s financial statements.

The Federal Reserve Board’s minimum Tier I risk-based and total risk-based capital ratios established for bank holding companies are 4% and 8%, respectively. At December 31, 2013, Croghan had a Tier I risk-based capital ratio of 11.0%, a total risk-based capital ratio of 11.8%, and Tier 1 capital to average assets ratio of 8.6%. To be considered “well capitalized” under prompt corrective action provisions, a bank must have a Tier I risk-based capital ratio of at least 6%, a total capital ratio of at least 10%, and Tier 1 capital to average assets ratio of 5%. At December 31, 2013, the Bank was deemed “well capitalized” with a Tier I risk-based capital ratio of 11.8%, a total risk-based capital ratio of 12.6%, and a Tier 1 capital to average assets ratio of 9.1%.

STOCKHOLDERS’ EQUITY (CONTINUED)

In December 2010, the Basel Committee on Banking Supervision, an international forum for cooperation on banking supervisory matters, announced the “Basel III” capital standards, which proposed new capital requirements for banking organizations. On July 2, 2013, the Federal Reserve Board adopted a final rule implementing a revised capital framework based in part on the Basel III capital standards and, on July 9, 2013, the Office of the Comptroller of the Currency also adopted a final rule and the FDIC adopted an interim final rule implementing a revised capital framework based in part on the Basel III capital standards. The rule will not begin to phase in until January 1, 2014 for larger institutions and January 1, 2015 for smaller, less complex banking organizations such as Croghan. The rule will be fully phased in by January 1, 2019.

The implementation of the final rule will lead to higher capital requirements and more restrictive leverage and liquidity ratios than those currently in place. Specifically, the rule imposes the following minimum capital requirements on federally insured financial institutions: (1) a new minimum common equity tier 1 capital to risk-weighted assets ratio of 4.5%; (2) a leverage capital ratio of 4%; (3) a tier 1 risk-based capital ratio of 6%; and (4) a total risk-based capital ratio of 8%. Under the rule, common equity generally consists of common stock, retained earnings, and limited amounts of minority interests in the form of common stock. In addition, in order to avoid limitations on capital distributions, such as dividend payments and certain bonus payments to executive officers, the rule requires insured financial institutions to hold a capital conservation buffer of common equity tier 1 capital above its minimum risk-based capital requirements. The capital conservation buffer will be phased in over time, becoming effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. The rule will also revise the regulatory agencies’ prompt corrective action framework by incorporating the new regulatory capital minimums and updating the definition of common equity. Until the rule is fully phased in, we cannot predict the ultimate impact it will have upon the financial condition or results of operations of Croghan.

A detailed analysis of the capital amounts and related capital ratios for Croghan and the Bank is included in Note 19 to the Consolidated Financial Statements. Management believes that, as of December 31, 2013 and 2012, Croghan and the Bank met all applicable capital adequacy requirements.

LIQUIDITY

The Bank’s primary sources of liquidity are derived from its core deposit base and stable stockholders’ equity position. Secondary liquidity is provided by adjusting the daily federal funds sold position (when available), by actively managing the investment portfolio, and by adjusting federal funds purchased (borrowed) under established lines of credit from correspondent banks. At December 31, 2013, the Bank had established lines of credit with two correspondent banks to purchase federal funds, which are readily available on an unsecured short-term basis to meet daily liquidity needs as they arise. The average balance borrowed under these lines during 2013 totaled $130,000. The Bank had no federal funds purchased at December 31, 2013 and 2012. The Bank had additional borrowing capacity of $95,486,000 available from the Federal Home Loan Bank of Cincinnati. These funds can be drawn upon subject to adequate pledging of Federal Home Loan Bank stock and eligible residential mortgage loans.

Additionally, the Bank maintains a portion of its assets in liquid form to meet anticipated client loan demands and to fund possible deposit account outflows. At December 31, 2013, liquid assets in the form of cash and cash equivalents totaled $27,710,000, or 3.4%, of total assets. The Bank also had $252,472,000 of available-for-sale securities which management has no current plans of selling, but could provide liquidity should the need arise. Management believes these liquid assets, as well as a staggered maturity schedule for other borrowings , principal pay downs within the investment portfolio , and cash flow from loan repayments provide adequate liquidity for day-to-day operations.

The liquidity needs of Croghan, primarily the need to pay quarterly cash dividends to stockholders, are funded by upstream-dividends from the Bank. Dividends to the holding company from the Bank totaled $12,576,000 in 2013, $3,252,000 in 2012, and $2,317,000 in 2011. Dividends in 2013 included an $8,565,000 special dividend to facilitate the NBOH transaction. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking practices. In general, subject to certain minimum capital requirements, the Bank may declare a dividend at any time without the approval from the State of Ohio Division of Financial Institutions, provided its dividends in a calendar year do not exceed the total of its net profits for that year combined with its retained profits for the two preceding years. Under these provisions, the Bank did not have the ability to pay any dividends without prior approval from the Ohio Department of Financial Institutions and the Federal Reserve as of January 1, 2014.

LIQUIDITY (CONTINUED)

In connection with the acquisition of Indebancorp and NBOH, the Bank applied for and received special approval from its regulators to make a special dividend to Croghan to fund the cash portion of the merger consideration. Because the amount of the special dividend, together with other dividends during 2013, exceeded the amount available for dividends permitted without regulatory approval. However, the Bank projects to have adequate income throughout 2014 to support Croghan’s anticipated cash dividends to shareholders in 2014.

INTEREST RATE RISK

Interest rate risk is one of Croghan’s most significant financial exposures. This risk, which is common to the financial institution sector, is an integral part of Croghan’s operations and impacts the rate-pricing strategy for essentially all loan and deposit products. The management and oversight of interest rate risk, including the establishment of acceptable guidelines, is the responsibility of the Asset/Liability Management Committee (ALCO). ALCO, and the associated Asset/Liability Management Policy, seeks to quantify and monitor the risk, to adequately provide for liquidity needs, and to maximize net interest income by managing net interest yield.

Croghan monitors its interest rate risk through a sensitivity analysis, which strives to measure potential changes in future earnings and the fair values of its financial instruments that could result from hypothetical changes in interest rates. The first step in this analysis is to estimate the expected cash flows from Croghan’s financial instruments using the interest rates in effect at December 31, 2013. To arrive at fair value estimates, the cash flows from Croghan’s financial instruments are discounted to their approximated present values.

Hypothetical changes in interest rates are applied to those financial instruments, and the cash flows and fair value estimations are then simulated. When calculating the net interest income estimations, hypothetical rates are applied to the financial instruments based upon the assumed cash flows. The Bank has historically applied interest rate “shocks” to its financial instruments of 100 and 200 basis points (up and down) for its net interest income, and 200 basis points (up and down) for the value of its equity. In 2010, the Bank added 300 and 400 (up and down) shocks to its net interest income to further its monitoring process. Interest rates were still below 1.0% at December 31, 2013, resulting in the sensitivity analysis not being able to be performed with respect to a large negative change in market rates.

The following presents the potential sensitivity in the Bank’s net interest income for a 100, 200, 300, and 400 basis-point (i.e., 1.0%, 2.0%, 3.0%, and 4.0%) change in market interest rates and the potential sensitivity in the present value of the Bank’s equity for a sudden and sustained 200 basis-point (i.e., 2.0%) change in market interest rates (dollars in thousands):


	December 31, 2013 ALCO Guidelines
	Change in Dollars ($)	Change in Percent (%)	For the Change in Percent (%)
Annual Net Interest Income Impact
For a Change of +100 Basis Points	(904)	(1.7)		(5.0)
For a Change of –100 Basis Points	740	1.4		5.0
For a Change of +200 Basis Points	(555)	(1.1)		(7.5)
For a Change of –200 Basis Points	N/A	N/A		7.5
For a Change of +300 Basis Points	(939)	(1.8)		(10.0)
For a Change of –300 Basis Points	N/A	N/A		10.0
For a Change of +400 Basis Points	(1,398)	(2.7)		(15.0)
For a Change of –400 Basis Points	N/A	N/A		15.0

Impact on the Net Present Value of Equity
For a Change of +200 Basis Points	6,388	3.3		(20.0)
For a Change of –200 Basis Points	N/A	N/A		20.0

The projected volatility of net interest income and the net present value of equity at December 31, 2013 were within Croghan’s established guidelines. The preceding analysis encompasses the use of a variety of assumptions, including the relative levels of market interest rates, loan prepayments, and the possible reaction of depositors to changes in interest rates. The analysis simulates possible outcomes and should not be relied upon as being indicative of actual results. Additionally, the analysis does not necessarily contemplate all of the actions that Croghan could undertake in response to changes in market interest rates.

OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS

The following summarizes Croghan’s loan commitments, including letters of credit, as of December 31, 2013 (dollars in thousands):


	Amount of Commitment to Expire Per Period
Type of Commitment	Total Amount		Less Than 1 Year		1-3 Years		4-5 Years		Over 5 Years

Commercial lines of credit		$ 52,518		$49,854		$1,470		$1,168		$ 26
Real estate lines of credit		53,605		9,774		7,763		4,219		31,849
Consumer lines of credit		136		136		-		-		-
Credit card lines of credit		13,118		13,118		-		-		-
Guarantees		-		-		-		-		-


Total Commitments		$119,377		$72,882		$9,233		$5,387		$31,875

Croghan had $119,377,000 in total loan commitments at December 31, 2013, including $72,882,000 expiring within one year. All lines of credit represent either fee-paid or legally binding loan commitments for the loan categories noted. Letters of credit are also included in the amounts noted above, since Croghan requires that each letter of credit be supported by a loan agreement. Commercial and consumer lines represent both unsecured and secured obligations. Real estate lines are secured by mortgages on residential and non-residential property. Credit card lines are made on an unsecured basis. It is anticipated that a significant portion of these lines will expire without being drawn upon, particularly credit card lines, which represent the maximum amount available to all cardholders. Additionally, $35,962,000 of the commercial lines are due on demand, with many of those lines established for seasonal operating purposes.

The following summarizes Croghan’s other contractual obligations as of December 31, 2013 (dollars in thousands):


	Payments Due by Period
Contractual Obligations	Total Amount		Less Than 1 Year		1-3 Years		4-5 Years		Over 5 Years

Long-term debt		$14,346		$5,233		$2,529		$5,360		$1,224
Capital leases		-		-		-		-		-
Operating leases		85		59		26		-		-
Unconditional purchase obligations		-		-		-		-		-
Other		1,395		-		-		-		1,395


Total Obligations		$15,826		$5,292		$2,555		$5,360		$2,619

Long-term debt represents borrowings from the Federal Home Loan Bank of Cincinnati (“FHLB”) which requires payment of interest and principal on one borrowing on a monthly basis with principal due at maturity for all others, and a borrowing from Great Lakes Bankers Bank (“GLBB”) which requires quarterly interest and principal repayments. The obligations at the FHLB are at fixed interest rates and stipulate a prepayment penalty if the respective note’s interest rate exceeds the current market rate for similar borrowings at the time of prepayment. As notes mature, Croghan evaluates the liquidity and interest-rate circumstances at that point in time to determine whether to pay off or renew the notes. The evaluation process typically includes: the strength of current and projected client loan demand, Croghan’s federal funds sold or purchased position, projected cash flows from maturing investment securities, the current and projected market interest rate environment, local and national economic conditions, and client demand for Croghan’s deposit product offerings.

Croghan had no capital leases or unconditional purchase obligations as of December 31, 2013. Additionally, obligations pertaining to deposits or federal funds purchased and securities sold under repurchase agreements are not included. Croghan’s operating lease obligations include the Port Clinton banking center, located in a retail supermarket in the Knollcrest Shopping Center, an ATM site north of Fremont, a Loan Production office in Perrysburg Ohio, and a ATM and Night Drop box in two separate locations on the Put In Bay Islands. Croghan also has various future operating lease obligations aggregating $47,000 at December 31, 2013 for photocopying and mail processing equipment which are not included in the table.

The “Other” contractual obligations totaling $1,395,000 represent projected payments for the periods indicated to various participants and their designated beneficiaries in the Bank’s various supplemental retirement benefit plans. Of this amount, $379,000 has been accrued as a liability as of December 31, 2013.

IMPACT OF RECENT ACCOUNTING STANDARDS

There were no new accounting standards adopted or subject to adoption in 2013. A summary of newly-issued but not effective accounting standards at December 31, 2013 is presented in Note 2 to the Consolidated Financial Statements.

SIGNIFICANT ACCOUNTING POLICIES

Croghan’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices for the commercial banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements. These estimates, assumptions, and judgments are based upon the information available as of the date of the financial statements.

The most significant accounting policies followed by Croghan are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the other disclosures presented in the Notes to the Consolidated Financial Statements and in Management’s Discussion and Analysis, provide information about how significant assets and liabilities are valued in the financial statements and how those values are determined. Management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective and complex estimates, assumptions, and judgments and, as such, could be the most subject to revision in the near term as new information becomes available. Additionally, management has identified the determination of the value of goodwill, fair value of securities, and other financial instruments as accounting areas that require complex estimates, assumptions, and judgments.

As noted in the section entitled “Provision for Loan Losses and the Allowance for Loan Losses”, Croghan performs a detailed quarterly analysis to assess the adequacy of its allowance for loan losses. This analysis encompasses a variety of factors including the potential loss exposure for individually reviewed loans, the historical loss experience for each loan category (i.e., commercial, real estate, and consumer), the volume of nonperforming loans (i.e., loans in nonaccrual status or past due 90 days or more), the volume of loans past due 30 to 89 days, a segmentation of each loan category by internally-assigned risk grades, any significant changes in lending or loan review staff, an evaluation of current and future local and national economic conditions, any significant changes in the volume or mix of loans within each category, a review of the significant concentrations of credit, and any legal, competitive, or regulatory concerns.

A goodwill evaluation is performed as of July 1 of each year. The evaluation process provides data to substantiate the balance in goodwill by estimating Croghan’s implied market value based upon recent bank merger and acquisition transactions. If the results indicate that Croghan’s estimated implied value is greater than its total stockholder’s equity plus goodwill as of the evaluation date, then no impairment exists. To date, none of Croghan’s goodwill evaluations have revealed the need for an impairment charge. On July 1, 2012, Croghan had an independent valuation specialist assess its goodwill. The assessment supported management’s internal assessments that no impairment adjustments to goodwill were warranted. Management performed an internal goodwill assessment during 2013 and does not believe that any significant conditions have changed relating to possible goodwill impairment through December 31, 2013.

The Corporation reviews securities prices and fair value estimates of other financial instruments supplied by an independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. The Corporation’s securities portfolio primarily consists of U.S. Government agencies and political subdivision obligations. Pricing for such instruments is typically based on models with observable inputs. From time to time, the Corporation will validate, on a sample basis, prices supplied by the independent pricing service by comparison to prices obtained from other third-party sources or derived using internal models. The Corporation also considers the reasonableness of inputs for financial instruments that are priced using unobservable inputs.

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors

Croghan Bancshares, Inc.

Fremont, Ohio

We have audited the accompanying consolidated balance sheets of Croghan Bancshares, Inc. and its subsidiary as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Croghan Bancshares, Inc. and its subsidiary as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

LOGO

Toledo, Ohio

March 28, 2014

LOGO

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED BALANCE SHEETS


December 31,
ASSETS	2013			2012
(Dollars in thousands, except par value)
CASH AND CASH EQUIVALENTS	$	27,710		$	31,216

SECURITIES
Available-for-sale, at fair value		252,472			238,221
Restricted stock		5,037			4,174


Total securities		257,509			242,395


LOANS		474,748			321,277
Less allowance for loan losses		4,042			4,325


Net loans		470,706			316,952


PREMISES AND EQUIPMENT, NET		9,729			7,514
CASH SURRENDER VALUE OF LIFE INSURANCE		16,810			11,087
GOODWILL		22,959			14,629
CORE DEPOSIT INTANGIBLE ASSETS, NET		5,052			927
ACCRUED INTEREST RECEIVABLE		3,094			2,591
OTHER REAL ESTATE OWNED, net of valuation allowance of $99,000 in 2013 and $33,000 in 2012		876			1,295
OTHER ASSETS		3,415			2,346


TOTAL ASSETS	$	817,860		$	630,952


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Demand, non-interest bearing	$	142,124		$	89,530
Savings, NOW, and Money Market deposits		344,695			261,860
Time		202,102			160,550


Total deposits		688,921			511,940

Federal funds purchased and securities sold under repurchase agreements		24,577			32,344
Borrowed funds		14,346			15,199
Dividends payable		726			-
Other liabilities		4,242			4,305


Total liabilities		732,812			563,788


STOCKHOLDERS’ EQUITY
Common stock, $12.50 par value. Authorized 6,000,000 shares; issued 2,506,208 shares in 2013 and 1,914,109 shares in 2012		31,328			23,926
Surplus		13,361			118
Retained earnings		47,460			45,361
Accumulated other comprehensive income		983			5,843
Treasury stock, 235,479 shares in 2013 and 2012, at cost		(8,084	)		(8,084	)


Total stockholders’ equity		85,048			67,164


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	817,860		$	630,952

The accompanying notes are an integral part of the consolidated financial statements.

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED STATEMENTS OF OPERATIONS


	Years ended December 31,
	2013		2012		2011
(Dollars in thousands, except per share data)
INTEREST INCOME
Loans, including fees	$	16,713	$	16,797	$	16,632
Securities:
Obligations of U.S. Government agencies and corporations		1,377		1,033		2,536
Obligations of states and political subdivisions		3,137		3,006		2,254
Other		201		198		188
Deposits in other banks		28		25		12


Total interest income		21,456		21,059		21,622


INTEREST EXPENSE
Deposits		1,605		2,323		2,620
Other borrowings		589		763		735


Total interest expense		2,194		3,086		3,355


Net interest income		19,262		17,973		18,267

PROVISION FOR LOAN LOSSES		275		525		775


Net interest income, after provision for loan losses		18,987		17,448		17,492


NON-INTEREST INCOME
Trust income		1,248		1,167		1,076
Service charges on deposit accounts		1,849		1,780		1,444
Gain on sale of Custar branch		1,172		-		-
Gain on sale of loans		331		246		115
Loss on security impairment		-		-		(394	)
Gain on sale of securities		293		311		149
Other		1,026		1,049		1,078


Total non-interest income		5,919		4,553		3,468


NON-INTEREST EXPENSES
Salaries, wages, and employee benefits		11,016		8,922		8,384
Occupancy of premises		893		961		851
Amortization of core deposit intangible assets		272		400		58
Other operating		7,386		6,134		5,715


Total non-interest expenses		19,567		16,417		15,008


Income before federal income taxes		5,339		5,584		5,952

FEDERAL INCOME TAXES		892		741		1,198


NET INCOME	$	4,447	$	4,843	$	4,754


NET INCOME PER SHARE
Basic	$	2.58	$	2.89	$	2.84


Diluted	$	2.57	$	2.88	$	2.84

The accompanying notes are an integral part of the consolidated financial statements.

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Years ended December 31,
	2013			2012			2011
	(Dollars in thousands)

NET INCOME	$	4,447		$	4,843		$	4,754


OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on available-for-sale securities		(7,070	)		2,587			5,958
Reclassification adjustments for securities gains included in income		(293	)		(311	)		(149	)


Net unrealized gains (losses)		(7,363	)		2,276			5,809

Income tax effect		(2,503	)		774			1,975


Other comprehensive income (loss)		(4,860	)		1,502			3,834


TOTAL COMPREHENSIVE INCOME (LOSS)	$	(413	)	$	6,345		$	8,588

The accompanying notes are an integral part of the consolidated financial statements.

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Years ended December 31, 2013, 2012, and 2011

												Accumulated
												other
	Common							Retained				comprehensive				Treasury
	stock			Surplus				earnings				income				stock				Total

	(Dollars in thousands, except per share data)

BALANCE AT DECEMBER 31, 2010		$	23,926		$	179			$	40,050			$	507			$	(8,149	)		$	56,513

Net income			-			-				4,754				-				-				4,754
Other comprehensive income			-			-				-				3,834				-				3,834
Purchase of 3,000 treasury shares			-			-				-				-				(76	)			(76	)
Cash dividends declared, $1.28 per share			-			-				(2,142	)			-				-				(2,142	)


BALANCE AT DECEMBER 31, 2011			23,926			179				42,662				4,341				(8,225	)			62,883

Net income			-			-				4,843				-				-				4,843
Other comprehensive income			-			-				-				1,502				-				1,502
Issuance of restricted stock (5,250 shares from treasury)			-			(141	)			-				-				141				-
Stock-based compensation expense			-			80				-				-				-				80
Cash dividends declared, $1.28 per share			-			-				(2,144	)			-				-				(2,144	)


BALANCE AT DECEMBER 31, 2012			23,926			118				45,361				5,843				(8,084	)			67,164

Net income			-			-				4,447				-				-				4,447
Shares issued in connection with business combination			7,402			13,184				(10	)			-				-				20,576
Other comprehensive loss			-			-				-				(4,860	)			-				(4,860	)
Stock-based compensation expense			-			59				-				-				-				59
Cash dividends declared, $1.28 per share			-			-				(2,338	)			-				-				(2,338	)


BALANCE AT DECEMBER 31, 2013		$	31,328		$	13,361			$	47,460			$	983			$	(8,084	)		$	85,048

The accompanying notes are an integral part of the consolidated financial statements.

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years ended December 31,
	2013				2012				2011
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	4,447			$	4,843			$	4,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			547				629				823
Provision for loan losses			275				525				775
Deferred federal income taxes			439				206				(55	)
Gain on sale of Custar branch			(1,172	)			-				-
Gain on sale of loans			(331	)			(246	)			(115	)
Net loss on sale or write-down of other real estate owned			66				20				141
Loss on sale of premises			10				-				-
Increase in cash value of life insurance			(126	)			(321	)			(301	)
Gain on life insurance settlement			-				-				(204	)
Net amortization of security premiums and discounts			5,398				6,425				2,356
Stock-based compensation expense			59				80				-
Gain on sale of securities			(293	)			(311	)			(149	)
Loss on security impairment			-				-				394
Proceeds from sale of loans, net of originations			227				181				76
Decrease (increase) in accrued interest receivable			43				(106	)			(444	)
Decrease (increase) in other assets			1,191				253				(803	)
Increase (decrease) in other liabilities			(100	)			(430	)			946


Net cash provided by operating activities			10,680				11,748				8,194


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities			82,803				86,240				36,342
Proceeds from sales of available-for-sale securities			6,813				7,858				4,005
Proceeds from sale of other real estate owned			1,145				1,757				1,125
Proceeds from disposal of premises			69				174				-
Proceeds from life insurance			-				1,097				-
Purchases of available-for-sale securities			(93,459	)			(110,875	)			(121,643	)
Cash disbursed from sale of Custar branch			(16,590	)			-				-
Net proceeds from business combination			11,127				-				-
Proceeds from branch acquisition, net of final settlement payment			-				(1,026	)			83,496
Purchase of restricted stock			(3	)			(330	)			-
Net decrease (increase) in loans			(2,774	)			(21,446	)			10,000
Additions to premises and equipment			(347	)			(225	)			(544	)


Net cash provided by (used in) investing activities			(11,216	)			(36,776	)			12,781

C ROGHAN B ANCSHARES , I NC .

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


	Years ended December 31,
	2013				2012				2011
	(Dollars in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		$	12,524			$	10,648			$	6,608
Increase (decrease) in federal funds purchased and securities sold under repurchase agreements			(7,767	)			(8,517	)			19,872
Borrowed funds:
Proceeds			-				-				6,000
Repayments			(6,115	)			(3,301	)			(13,000	)
Cash dividends paid			(1,612	)			(2,679	)			(2,142	)
Purchase of treasury stock			-				-				(76	)


Net cash provided by (used in) financing activities			(2,970	)			(3,849	)			17,262


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(3,506	)			(28,877	)			38,237

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			31,216				60,093				21,856


CASH AND CASH EQUIVALENTS AT END OF YEAR		$	27,710			$	31,216			$	60,093


SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest		$	2,114			$	3,097			$	3,572


Federal income taxes		$	735			$	579			$	1,210


Non-cash operating activities:
Change in deferred income taxes on net unrealized gain on available-for-sale securities		$	(2,503	)		$	774			$	1,975


Non-cash investing activity:
Change in net unrealized gain on available-for-sale securities		$	(7,363	)		$	2,276			$	5,809


Non-cash operating and investing activity:
Transfer of loans to other real estate owned		$	692			$	1,195			$	1,700

The accompanying notes are an integral part of the consolidated financial statements.

C ROGHAN B ANCSHARES , I NC .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Croghan Bancshares, Inc. (the “Corporation”) was incorporated on September 27, 1983 in the State of Ohio. The Corporation is a bank holding company and has one wholly-owned subsidiary, The Croghan Colonial Bank (the “Bank”). The Corporation, through its subsidiary, operates in one industry segment, the commercial banking industry. The Bank, an Ohio chartered bank organized in 1888, has its main office in Fremont, Ohio and has branch offices located in Bellevue, Clyde, Curtice, Fremont, Green Springs, Monroeville, Norwalk, Oak Harbor, Oregon, Port Clinton, and Tiffin Ohio. The Bank’s primary source of revenue is providing loans to clients primarily located in Lucas County, Ottawa County, Sandusky County, Seneca County, Wood County, and the northwest portion of Huron County, which includes Bellevue, Monroeville, and Norwalk. Such clients are predominantly small and middle-market businesses and individuals. See Note 3 regarding the 2013 business combination.

Significant accounting policies followed by the Corporation are presented below.

Use of Estimates in Preparing Financial Statements

In preparing consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during each reporting period. Actual results could differ from those estimates. The most significant estimates susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of goodwill, and fair value of securities and other financial instruments.

Principles of Consolidation

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank established a trust department in 1990 and the assets held by the Bank in fiduciary or agency capacities for its clients are not included in the consolidated balance sheets as such items are not assets of the Bank.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold which mature overnight or within four days.

Restrictions on Cash

The Bank was required to have $275,000 of non-interest bearing cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 2013 and 2012.

Securities

The Bank has designated all its securities as available-for-sale. Such securities are carried at fair value, with unrealized gains and losses, net of applicable income taxes, on such securities recognized as a separate component of stockholders’ equity.

The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income from securities, principally using the interest method over the terms of the securities. Declines in the fair value of securities below their cost that are deemed to be other than temporary (“OTTI”) and are reflected in earnings as realized losses. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the intent to sell the investment securities and the more likely than not requirement that the Corporation will be required to sell the investment securities prior to recovery, (2) the length of time and extent to which the fair value has been less than cost, and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, it is at least reasonably possible that changes in management’s assessment of OTTI will occur in the near term and that such changes could be material to the amounts reported in the Corporation’s consolidated financial statements.

Restricted stock primarily consists of Federal Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. Such securities are carried at cost and evaluated for impairment on an annual basis.

Gains and losses on sales of securities are recorded on the trade date, using the specific identification method, and are included in non-interest income.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at their outstanding principal balances, adjusted for charge-offs, the allowance for loan losses, and any deferred loan fees or costs on originated loans. Interest is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

The accrual of interest on real estate and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Personal loans are typically charged-off no later than 120 days past due and credit card loans are typically charged-off no later than 180 days past due. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on nonaccrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Acquired Loans

Acquired loans: Purchased loans acquired in a business combination are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality, and impaired loans with evidence of significant credit deterioration.

Ÿ Pass rated loans (typically performing loans) are accounted for in accordance with Account Standards Codification (ASC) 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

Ÿ Non-impaired loans (typically past-due loans, special mention loans and performing substandard loans) are accounted for in accordance with ASC 310-30 “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as they display at least some level of credit deterioration since origination.

Ÿ Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination. In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans, the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. This amount is not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Furthermore, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield net of any impact of the loss share agreement with the FDIC, if applicable, on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. If the Bank does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost recovery method or cash basis method of income recognition. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and secondary components. For loans that are classified as impaired, a specific reserve is established when the discounted cash flow (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers classified (i.e., substandard or special mention) loans which are not impaired, as well as non-classified loans and is generally based on historical loss experience adjusted for qualitative factors. The secondary component is maintained to cover economic and other external factors that could affect management’s estimate of probable losses and considers the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Under certain circumstances, the Bank may provide borrowers relief through loan restructurings. A restructuring of debt constitutes a troubled debt restructuring (TDR) if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Concessions may include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due, or acceptance of other assets in full or partial satisfaction of the debt. TDR loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment, as previously described. TDR loans that have performed as agreed under the restructured terms for a period of 12 months or longer may cease to be reported as a TDR loan. However, the loan continues to be individually evaluated for impairment.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential mortgage loans for impairment disclosures.

Premises and Equipment

Premises and equipment is stated at cost, less accumulated depreciation. Upon the sale or disposition of the assets, the difference between the depreciated cost and proceeds is charged or credited to income. Depreciation is determined based on the estimated useful lives of the individual assets (typically 20 to 40 years for buildings and 3 to 10 years for equipment) and is computed primarily using the straight-line method.

Cash Surrender Value of Life Insurance

Cash surrender value of life insurance is carried at the cash value of the underlying policies. Income on the investments in the policies, net of insurance costs, is recorded as non-interest income.

Goodwill and Other Intangible Assets

Goodwill is tested for impairment at least annually to determine if an impairment loss has occurred. The core deposit intangible asset arising from the 2005 purchase of The Custar State Bank was amortized over an eight-year period on a straight-line basis through December 31, 2012. Core deposit intangible assets arising from the business combination described in Note 3 and the 2011 branch acquisition described in Note 4 are being amortized over ten years using the sum of the years digits amortization method.

Estimated future amortization of core deposit intangible assets is as follows: 2014, $1,011,000; 2015, $879,000; 2016, $755,000; 2017, $638,000; 2018, $529,000; and $1,240,000 thereafter.

Other Real Estate Owned

Assets acquired through or in lieu of foreclosure are initially recorded at fair value, less estimated costs to sell, and any loan balance in excess of fair value is charged to the allowance for loan losses. Subsequent valuations are periodically performed and any further write-downs are included in other operating expenses, as are gains or losses upon sale and expenses related to maintenance of the properties.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Servicing

Mortgage servicing rights are recognized as an asset when acquired through sale of loans. Capitalized servicing rights are reported in other assets and amortized to expense in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Mortgage servicing rights are evaluated for impairment based upon the estimated fair value of the rights as compared to amortized cost. Fair value is determined based upon estimated discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized amount.

Servicing fee income is recorded for fees earned for servicing loans and is included in other operating income, net of amortization of mortgage servicing rights.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received, except any cash flows allocated as any compensation for servicing or other services performed, must be divided proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each participating interest holder must have the same priority, and (4) no party has the right to pledge or exchange the entire financial asset unless all participating interest holders agree to do so.

Supplemental Retirement Benefits

Annual provisions are made for the estimated liability for accumulated supplemental retirement benefits under agreements with various officers and employees. These provisions are determined based on the terms of the agreements, as well as certain assumptions including estimated service periods and discount rates.

Advertising Costs

All advertising costs are expensed as incurred.

Federal Income Taxes

Deferred income taxes are provided on temporary differences between financial statement and income tax reporting. Temporary differences are differences between the amounts of assets and liabilities reported for financial statement purposes and their tax bases. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns. Benefits from tax positions taken or expected to be taken in a tax return are not recognized if the likelihood that the tax position would be sustained upon examination by a taxing authority is considered to be 50% or less. Interest and penalties resulting from the filing of income tax returns is a component of income tax expenses.

The Bank is not currently subject to state and local income taxes.

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Comprehensive Income

Recognized revenue, expenses, gains and losses are included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Per Share Data

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each year. Diluted net income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be used by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method.

The weighted average number of shares outstanding for the years ended December 31, 2013, 2012, and 2011 are as follows:


	2013		2012		2011

Basic		1,720,807		1,673,667		1,673,775


Diluted		1,728,309		1,679,983		1,673,775

Dividends per share are based on the number of shares outstanding at the declaration date.

Subsequent Events

Management evaluated subsequent events through March 11, 2014, the date the consolidated financial statements were issued. Events or transactions occurring after December 31, 2013, but prior to March 11, 2014, that provided additional evidence about conditions that existed at December 31, 2013, have been recognized in the consolidated financial statements for the year ended December 31, 2013. Events or transactions that provided evidence about conditions that did not exist at December 31, 2013, but arose before the consolidated financial statements issued, have not been recognized in the consolidated financial statements for the year ended December 31, 2013.

NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, Disclosures about Offsetting Assets and Liabilities , amending ASC Topic 210 requiring an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, the FASB issued ASU 2013-01 to amend and clarify that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with ASC Topic 815, derivatives and hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement. The amendments were effective for annual and interim periods beginning on or after January 1, 2013, and the adoption did not have any impact on the Corporation’s 2013 consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11 Topic 740, Income Taxes, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . The FASB issued ASU 2013-11 to eliminate the diversity in the presentation of unrecognized tax benefits in those instances. The amendments in this update are effective for annual and interim reporting periods beginning after December 15, 2013. The Corporation will consider the provisions of ASU 2013-11 when they become effective in 2014, although the adoption is not expected to have a significant impact on the Corporation’s consolidated financial statements considering the level of tax credit carryforwards available at December 31, 2013.

In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors, to clarify when an in substance repossession or foreclosure occurs. That is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the receivable should be derecognized and the real estate property recognized. The amendments in ASU 2014-04 apply to all creditors who obtain physical possession of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable and are effective for annual and interim periods beginning after December 15, 2014. The Corporation has not yet determined the financial statement impact of the requirements of ASU 2014-04.

NOTE 3 - BUSINESS COMBINATION

On December 6, 2013, the Corporation acquired all of the outstanding common shares of Oak Harbor, Ohio based Indebancorp and its wholly-owned subsidiary, National Bank of Ohio (“NBOH”), in exchange for total cash and stock consideration of approximately $29,150,000. Under the terms of the acquisition, Indebancorp shareholders received a combination of cash at the rate of $55.00 for each Indebancorp share and/or common shares of the Corporation at the rate of 1.63 common shares of the Corporation in exchange for each common share of Indebancorp. Subject to cash paid in lieu of fractional common shares of the Corporation, the total consideration was allocated among Indebancorp shareholders, subject to the overall consideration being a 70% stock and 30% cash, in accordance with the provisions of the merger agreement. As a result of the acquisition, the four full-service banking centers of NBOH, located in Oak Harbor, Port Clinton, Oregon, and Curtice, Ohio, became full service offices of the Bank, and one loan production office of NBOH located in Perrysburg Ohio, became a loan production office of the Bank. With the acquisition, the Corporation has expanded its geographical footprint that will help to continue the growth of the Corporation’s overall profile in size and in earnings.

The results of operations of Indebancorp are included in the Corporation’s consolidated operating results for the period subsequent to the date of the transaction. Acquisition-related costs of $1,042,000 (excluding compensation costs related to charge of control provisions described below) are included in other non-interest operating expenses in the accompanying 2013 consolidated statement of operations. The fair value of common shares issued in connection with the transaction was determined based on the closing price of the Corporation’s common stock on the date of the acquisition.

Goodwill of $8,330,000 arising from the acquisition consists largely of synergies and the cost savings expected to result from the combining of operations and is not expected to be deductible for income tax purposes.

NOTE 3 - BUSINESS COMBINATION (CONTINUED)

Consideration paid and the estimated fair value of the assets acquired and liabilities assumed at the acquisition date are as follows (dollars in thousands):


	Cash paid	$ 8,574
	Common shares issued (592,099 shares)	20,576


	Fair value of total consideration transferred	$29,150


Recognized fair values of identifiable assets acquired and liabilities assumed:
	Cash and cash equivalents	$19,701
	Securities, available for sale	22,876
	Restricted stock	860
	Loans	163,453
	Premises and equipment	2,937
	Cash surrender value of life insurance	5,597
	Core deposit intangible asset	4,397
	Accrued interest receivable	546
	Other real estate owned	100
	Other assets	2,628


	Total assets acquired	223,095


	Deposits	194,491
	Borrowed funds	5,262
	Other liabilities	2,522


	Total liabilities assumed	202,275


	Net identifiable assets	20,820

	Goodwill	8,330


	Total cash and stock consideration	$29,150

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2012 (dollars in thousands). The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.


	2013		2012

Net interest income		$ 27,943		$ 27,701


Net income		$ 5,198		$ 6,800


Basic earnings per share		$ 2.29		$ 2.95


Diluted earnings per share		$ 2.29		$ 2.95

Other liabilities arising from the business combination included $1,586,000 of deferred compensation payable to former officers and directors of Indebancorp and its wholly-owned bank subsidiary. As a result of the transaction, certain change of control provisions went into effect accelerating the payments of benefits under these agreements. As a result, the Corporation recognized additional compensation expense of $1,052,000 in December 2013. The Corporation made payments in December 2013 and January 2014 aggregating $2,312,000 to such former officers and directors of Indebancorp and its wholly-owned subsidiary. The Corporation’s remaining obligation under these arrangements is $326,000.

NOTE 4 - BRANCH TRANSACTIONS

On August 31, 2011, the Bank entered into an agreement to purchase four branch offices of The Home Savings and Loan (“HSL”) Company of Youngstown, Ohio, located in Fremont, Clyde, and Tiffin, Ohio. Under the terms of the agreement, the Bank assumed all related deposits and purchased the related branch premises and certain loans. The transaction was completed on December 16, 2011, with assets acquired and deposits assumed being recorded at their estimated fair values as follows (dollars in thousands):


Cash	$	83,398
Loans		21,503
Bank premises and equipment		1,801
Goodwill		4,245
Core deposit intangible asset		1,269
Other assets		66


Total assets acquired	$	112,282


Deposits assumed	$	111,075
Other liabilities, including payable to seller		1,207


Total liabilities assumed	$	112,282

On March 12, 2012, the Bank made a payment of $1,026,000 as final settlement for changes occurring between the draft settlement and final settlement. The operating results of the acquired branches, subsequent to December 16, 2011, are included in the Corporation’s consolidated financial statements.

On August 7, 2013, the Bank entered into an agreement to sell its Custar branch to another financial institution. Under the terms of the agreement, the Bank received a 4% premium for all core deposits. The transaction closed on December 13, 2013, resulting in a gain on sale of $1,172,000 and is as follows (dollars in thousands):


Deposits, including accrued interest	$	29,483
Other liabilities		17


Total liabilities released		29,500


Cash paid, including cash on hand		16,590
Loans, including accrued interest		11,467
Premises and equipment		271


Total assets released		28,328


Net gain on sale of branch	$	1,172

NOTE 5 - CASH AND CASH EQUIVALENTS

Cash and cash equivalents as of December 31, 2013 and 2012 were as follows (dollars in thousands):


	2013		2012

Cash and due from banks	$	23,585	$	19,388
Interest-bearing deposits in other banks		4,125		11,828


Total	$	27,710	$	31,216

NOTE 6 - SECURITIES

The amortized cost and fair value of securities as of December 31, 2013 and 2012 were as follows (dollars in thousands):


	2013						2012
	Amortized			Fair			Amortized			Fair
	cost			value			cost			value
Available-for-sale:
Obligations of U.S. Government agencies and corporations		$	152,252		$	153,465		$	129,591		$	131,990
Obligations of states and political subdivisions			98,380			98,657			99,427			105,881
Other			350			350			350			350


Total available-for-sale			250,982			252,472			229,368			238,221

Restricted stock			5,037			5,037			4,174			4,174


Total		$	256,019		$	257,509		$	233,542		$	242,395

A summary of gross unrealized gains and losses on securities at December 31, 2013 and 2012 follows (dollars in thousands):


	2013						2012
	Gross			Gross			Gross			Gross
	unrealized			unrealized			unrealized			unrealized
	gains			losses			gains			losses
Available-for-sale:
Obligations of U.S. Government agencies and corporations		$	1,888		$	675		$	2,865		$	466
Obligations of states and political subdivisions			2,316			2,039			6,584			130


Total available-for-sale		$	4,204		$	2,714		$	9,449		$	596

The amortized cost and fair value of securities at December 31, 2013, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands).


	Available-for-sale

	Amortized			Fair
	cost			value

Due in one year or less		$	28,169		$	28,387
Due after one year through five years			134,708			136,677
Due after five years through ten years			73,337			73,716
Due after ten years			14,418			13,342
Other equity security having no maturity date			350			350


Total		$	250,982		$	252,472

Securities with a carrying value of $100,870,000 at December 31, 2013 and $81,301,000 at December 31, 2012 were pledged to secure public deposits and for other purposes as required or permitted by law.

Restricted stock primarily consists of investments in Federal Home Loan Bank of Cincinnati and Federal Reserve Bank of Cleveland stock. The Bank’s investment in Federal Home Loan Bank of Cincinnati stock amounted to $3,392,000 at December 31, 2013 and $2,551,000 at December 31, 2012. The Bank’s investment in Federal Reserve Bank of Cleveland stock amounted to $1,451,000 at December 31, 2013 and $1,448,000 at December 31, 2012.

Gross gains realized from sales of securities available-for-sale amounted to $321,000 in 2013, $311,000 in 2012, and $149,000 in 2011 with the income tax provision applicable to such gains amounting to $109,000 in 2013, $106,000 in 2012, and $51,000 in 2011. Gross realized losses from sales of securities available-for-sale amounted to $28,000 in 2013 (none in 2012 and 2011) with the income tax provision applicable to such losses amounting to $10,000.

NOTE 6 - SECURITIES (CONTINUED)

The following presents gross unrealized losses and fair value of securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012 (dollars in thousands):


	Securities in a continuous unrealized loss position
	Less than						12 months
	12 months						or more						Total			Total
	Unrealized			Fair			Unrealized			Fair			Unrealized			Fair
	losses			value			losses			value			losses			value
2013
Obligations of U.S. Government agencies and corporations		$	653		$	47,379		$	22		$	2,832		$	675		$	50,211
Obligations of states and political subdivisions			1,430			34,214			609			5,062			2,039			39,276


Total temporarily impaired securities		$	2,083		$	81,593		$	631		$	7,894		$	2,714		$	89,487


2012
Obligations of U.S. Government agencies and corporations		$	222		$	24,334		$	244		$	14,485		$	466		$	38,819
Obligations of states and political subdivisions			130			6,299			-			-			130			6,299


Total temporarily impaired securities		$	352		$	30,633		$	244		$	14,485		$	596		$	45,118

At December 31, 2013, there were 113 securities in an unrealized loss position, with 17 being in a continuous unrealized loss position for twelve months or more. When evaluating these securities for impairment, management considers the issuer’s financial condition, whether the securities are issued by federally-sponsored government agencies or political subdivisions, whether downgrades by the bond rating agencies have occurred, industry analyst reports, and volatility in the bond market. Management has concluded that the unrealized losses as of December 31, 2013 were primarily the result of customary and expected fluctuations in the bond market related to changes in interest rates. As management has the ability and intent to hold debt securities until recovery and meets the more likely than not requirement regarding the ability to hold securities for a period of time sufficient to allow for any anticipated recovery in fair value for securities classified as available-for-sale, all security impairments as of December 31, 2013 are considered temporary.

During 2011, the repayment terms of a municipal bond in default were modified resulting in a decline in the estimated fair value of the bond that management considered to be other than temporary. As a result, the Bank recognized a permanent impairment of $394,000 relating to the bond resulting in a charge to 2011 earnings. There were no further impairment adjustments with respect to the bond in 2013 and 2012. During 2013, the Bank reached a final settlement with the issuer, resulting in a realized loss of $16,000.

NOTE 7 - LOANS

Most of the Bank’s lending activity is with clients primarily located within Sandusky County, Lucas County, Ottawa County, Wood County, Seneca County, and a portion of Huron County. Credit concentrations, as determined using the North American Industry Classification System, that exceeded 5% of total loans at December 31, 2013 and 2012 include $34,892,000 and $25,067,000, respectively, to borrowers in the accommodation and food service industry. Credit concentrations that exceeded 5% of total loans at December 31, 2012 included $16,828,000 to borrowers in the construction industry, $21,862,000 to borrowers in the manufacturing industry, and $14,544,000 to borrowers in the agriculture industry.

The construction industry concentration includes loans to residential and commercial contractors who construct or install roads, sewers, bridges, homes, hotels, motels, apartment or commercial buildings, electrical and plumbing infrastructure, and air comfort systems. These loans are generally secured by real property, equipment, and receivables. Repayment is expected from cash flow from providing such services. The accommodation and food service industry concentration includes loans for the construction, purchase, and operation of hotels, restaurants, lounges, and campgrounds. These loans are generally secured by real property and equipment. Repayment is expected from cash flow from providing accommodations and food service to tourists, primarily visiting the Lake Erie region. The manufacturing industry concentration includes loans to local manufacturers who produce goods for a wide variety of industries, including chemical, automotive, and food processing. These loans are generally secured by real property, equipment, and receivables. Repayment is expected from cash flows generated from these operations.

NOTE 7 - LOANS (CONTINUED)

Commercial, construction, and agricultural real estate loans are subject to underwriting standards and processes similar to commercial and agricultural operating loans, in addition to those unique to real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial and agricultural real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Loan-to-value is generally 75% of the cost or value of the assets. Appraisals on properties securing these loans are generally performed by appraisers approved by the Board of Directors. Because payments on commercial and agricultural real estate loans are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Management monitors and evaluates commercial and agricultural real estate loans based on collateral and risk rating criteria. The Corporation generally requires guarantees on these loans. The Corporation’s commercial and agricultural real estate loans are secured primarily by properties located in its primary market area.

Commercial and agricultural operating loans are underwritten based on the Corporation’s examination of current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. This underwriting standard includes the evaluation of cash flows of the borrower, underlying collateral, if applicable, and the borrower’s ability to manage its business activities. The cash flows of borrowers and the collateral securing these loans may fluctuate in value after the initial evaluation. A first priority lien on the general assets of the business normally secures these types of loans. Loan-to-value limits vary and are dependent upon the nature and type of the underlying collateral and the financial strength of the borrower. Crop and hail insurance is recommended for most agricultural borrowers. Loans are generally guaranteed by the principal owner. The Corporation’s commercial and agricultural operating loan lending is primarily in its market area.

Construction loans are underwritten utilizing independent appraisals, sensitivity analysis of absorption, vacancy and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and values associated with the completed project, and are subjective by nature. Construction loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions, and the availability of long-term financing. The Corporation generally requires guarantees on these loans. The Corporation’s Construction loans are secured primarily by properties located in its primary market area.

The Corporation originates 1 to 4 family real estate and consumer loans utilizing credit reports to supplement the underwriting process. The Corporation’s underwriting standards for 1 to 4 family loans are generally in accordance with FHLMC and FNMA underwriting guidelines. Properties securing 1 to 4 four family real estate loans are appraised by appraisers who are independent of the loan origination function and have been approved by the Board of Directors. The loan-to-value ratios normally do not exceed 80% without credit enhancements such as mortgage insurance. The Corporation will lend up to 100% of the lesser of the appraised value or purchase price for conventional 1 to 4 family real estate loans, provided private mortgage insurance is obtained. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of their ability to meet existing obligations and payments on the proposed loan. To monitor and manage loan risk, policies and procedures are developed, and modified as needed by management. This activity, coupled with smaller loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, market conditions are reviewed by management on a regular basis. The Corporation’s 1 to 4 family real estate loans are secured primarily by properties located in its primary market area.

The Corporation maintains an internal credit analysis department that reviews and validates the credit risk program on a periodic basis, as well as an external loan review performed annually or semi-annually. Results of these reviews are presented to management and the Audit Committee of the Board of Directors. The credit analysis and loan review processes compliment and reinforce the risk identification and assessment decisions made by lenders and credit personnel, as well as the Corporation’s policies and procedures.

Credit losses arising from the Bank’s lending experience in these industries compare favorably with the Bank’s loss experience on its loan portfolio as a whole. Credit evaluation of construction industry and accommodation and food service industry lending is based on an evaluation of cash flow coverage of principal and interest payments and the adequacy of collateral received.

NOTE 7 - LOANS (CONTINUED)

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 December 31, 2013 and 2012 (dollars in thousands):


				Real Estate
							Non-									Credit
	Commercial			Residential			residential			Construction			Consumer			card			Total
2013

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	-		$	320		$	117		$	-		$	-		$	-		$	437
Collectively evaluated for impairment			456			1,565			883			464			164			73			3,605


Total		$	456		$	1,885		$	1,000		$	464		$	164		$	73		$	4,042


Loans:
Loans individually evaluated for impairment		$	676		$	2,644		$	3,575		$	-		$	-		$	-		$	6,895
Loans acquired with deteriorated credit quality			102			639			2,432			-			-			-			3,173
Loans collectively evaluated for impairment			43,356			172,801			205,845			11,608			27,515			3,555			464,680


Total		$	44,134		$	176,084		$	211,852		$	11,608		$	27,515		$	3,555		$	474,748


2012

Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	6		$	283		$	247		$	-		$	-		$	-		$	536
Collectively evaluated for impairment			615			1,665			1,120			184			127			78			3,789


Total		$	621		$	1,948		$	1,367		$	184		$	127		$	78		$	4,325


Loans:
Loans individually evaluated for impairment		$	909		$	2,642		$	3,606		$	-		$	-		$	-		$	7,157
Loans collectively evaluated for impairment			34,394			125,610			132,331			3,635			15,234			2,916			314,120


Total		$	35,303		$	128,252		$	135,937		$	3,635		$	15,234		$	2,916		$	321,277

Fixed-rate loans amounted to $163,891,000 at December 31, 2013 and $137,001,000 at December 31, 2012.

NOTE 7 - LOANS (CONTINUED)

The following represents loans individually evaluated for impairment by class of loans as of December 31, 2013 and 2012 (dollars in thousands):


	2013									2012
							Allowance									Allowance
							for									for
	Unpaid						loan			Unpaid						loan
	principal			Recorded			losses			principal			Recorded			losses
	balance			investment			allocated			balance			investment			allocated

With no related allowance recorded:
Commercial loans		$	616		$	616		$	-		$	771		$	771		$	-
Commercial overdraft LOC			60			60			-			61			61			-
Open-end home equity			140			140			-			177			177			-
1 – 4 family real estate
(1st mortgages)			972			949			-			1,110			1,103			-
1 – 4 family real estate
(Jr. mortgages)			8			8			-			14			14			-
Multifamily real estate			277			276			-			200			200			-
Non-farm/non-residential real estate			1,460			1,299			-			788			638			-
With an allowance recorded:
Commercial loans			-			-			-			76			76			6
Open-end home equity			201			201			69			-			-			-
1 – 4 family real estate
(1st mortgages)			1,213			1,070			251			1,297			1,133			267
1 – 4 family real estate
(Jr. mortgages)			-			-			-			16			16			16
Non-farm/non-residential real estate			2,276			2,276			117			2,968			2,968			247


Total		$	7,223		$	6,895		$	437		$	7,478		$	7,157		$	536

The following is additional information with respect to impaired loans for the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):


	2013		2012		2011

Average investment in impaired loans	$	7,139	$	7,448	$	9,425


Interest income recognized on impaired loans	$	249	$	306	$	281


Interest income recognized on a cash basis on impaired loans	$	33	$	39	$	33

No additional funds are committed to be advanced in connection with impaired loans.

NOTE 7 - LOANS (CONTINUED)

The following represents a summary of the number and recorded investments of TDRs occurring during the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):


	2013					2012					2011
	Number		Amount			Number		Amount			Number		Amount

Commercial loans		-		$	-		2		$	771		1		$	54
Open-end home equity		1			130		2			134		-			-
1 – 4 family real estate (1st mortgage)		3			228		6			579		3			184
1 – 4 family real estate (Jr. mortgage)		-			-		2			15		-			-
Non-farm/non-residential real estate		3			399		-			-		4			607
Construction real estate		-			-		2			149		-			-


Total recorded investments		7		$	757		14		$	1,648		8		$	845

The provision for loan losses relating to loans that were modified in troubled debt restructurings amounted to $54,000 in 2013, $33,000 in 2012, and $305,000 in 2011.

TDRs that occurred during 2013 involved seven loans and four overall borrowing relationships. One of these modifications involved advancing additional funds to pay real estate taxes, two involved modification and extension of loan payments, and one involved a re-appraisal and charge-down.

The following is a summary of the conditions and modifications for TDRs occurring during 2012:

•

Two of the modifications resulted in extending the maturity and a new amortization schedule.

•

Two modifications resulted in a reduced interest rate.

•

Two modifications had an independent source bring the loans current and agree to service the loans for a specified period of time.

•

Two modifications had a reduction of principal and interest resulting in a balloon payment at maturity.

•

One modification resulted in principal and interest being suspended for 11 months.

•

Two modifications resulted in interest only concessions for six and four month periods, respectively.

•

Two modifications resulted in reduced principal and interest payments for six and 12 months periods, respectively.

•

One modification resulted in the renewal of a line-of-credit in exchange for loan term changing from interest only to principal and interest during the renewal period.

For TDRs occurring during 2011, four of the loan modifications resulted in principal reductions. Three of the multifamily real estate loans, to the same borrower, had a restructured rate. The other multifamily real estate loan was placed in OREO.

The post-modification balances approximate the pre-modification balances. The aggregate amount of charge-offs resulting from restructuring are not significant.

There were no subsequent defaults on TDRs during the years ended December 31, 2013, 2012, and 2011.

The Bank does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in TDRs or whose loans are on nonaccrual.

NOTE 7 - LOANS (CONTINUED)

The following presents the recorded investment in past due and non-accrual loans as of December 31, 2013 and 2012 by class of loans (dollars in thousands):


									Loans
	Loans past due								not
	accruing interest						Loans		past due
	30 – 89		90 +				on non-		or non-
	days		days		Total		accrual		accrual		Total
2013

Agricultural loans	$	-	$	-	$	-	$	-	$	4,348	$	4,348
Commercial loans		104		-		104		188		36,993		37,285
Commercial overdraft LOC		-		-		-		-		1,033		1,033
Commercial non-profit/political subdivisions		-		-		-		-		1,010		1,010
Open-end home equity		347		150		497		67		35,073		35,637
1 – 4 family real estate
(1 ^st mortgages)		3,530		891		4,421		1,272		127,376		133,069
1 – 4 family real estate
(Jr. mortgages)		142		7		149		-		6,019		6,168
Multifamily real estate		-		-		-		276		32,776		33,052
Farm real estate		-		-		-		-		10,311		10,311
Non-farm/non-residential real estate		161		41		202		2,801		167,154		170,157
Construction real estate		-		-		-		-		11,608		11,608
Consumer loans – vehicle		270		12		282		-		13,255		13,537
Consumer overdraft LOC		6		1		7		-		299		306
Consumer loans:
Mobile home		24		-		24		-		1,935		1,959
Home Improvement		2		-		2		-		208		210
Other		137		21		158		-		11,345		11,503
MasterCard/VISA		69		37		106		-		3,449		3,555


Total	$	4,792	$	1,160	$	5,952	$	4,604	$	464,192	$	474,748


2012

Agricultural loans	$	-	$	-	$	-	$	-	$	5,283	$	5,283
Commercial loans		17		-		17		-		28,962		28,979
Commercial overdraft LOC		-		-		-		-		306		306
Commercial non-profit/political subdivisions		-		-		-		-		733		733
Open-end home equity		234		154		388		26		25,528		25,942
1 – 4 family real estate
(1 ^st mortgages)		1,885		770		2,655		1,595		89,838		94,088
1 – 4 family real estate
(Jr. mortgages)		141		38		179		16		7,828		8,023
Multifamily real estate		-		-		-		200		10,030		10,230
Farm real estate		-		-		-		-		9,554		9,554
Non-farm/non-residential real estate		389		-		389		916		115,049		116,354
Construction real estate		-		-		-		-		3,635		3,635
Consumer loans – vehicle		37		-		37		-		5,227		5,264
Consumer overdraft LOC		4		1		5		-		449		454
Consumer loans:
Mobile home		-		-		-		-		561		561
Home Improvement		-		-		-		-		220		220
Other		95		-		95		-		8,640		8,735
MasterCard/VISA		33		4		37		-		2,879		2,916


Total	$	2,835	$	967	$	3,802	$	2,753	$	314,722	$	321,277

NOTE 7 - LOANS (CONTINUED)

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 special mention possess some credit deficiency or potential weakness that deserves close attention, but 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.

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 December 31, 2013 and 2012 that are collectively evaluated for impairment and are not considered to be impaired (dollars in thousands):


				Special			Sub-						Not
2013	Pass			mention			standard			Doubtful			rated			Total

Agricultural loans		$	4,348		$	-		$	-		$	-		$	-		$	4,348
Commercial loans			36,379			160			28			-			-			36,567
Commercial overdraft LOC			-			-			-			-			973			973
Commercial non-profit/political subdivisions			1,010			-			-			-			-			1,010
Open-end home equity			34,561			400			278			-			-			35,239
1 – 4 family real estate (1st mortgages)			125,821			2,220			2,427			-			-			130,468
1 – 4 family real estate (Jr. mortgages)			5,936			138			86			-			-			6,160
Multifamily real estate			30,457			-			2,319			-			-			32,776
Farm real estate			10,191			120			-			-			-			10,311
Non-farm/non-residential real estate			150,434			10,910			2,806			-			-			164,150
Construction real estate			11,608			-			-			-			-			11,608
Consumer loans – vehicle			13,425			65			47			-			-			13,537
Consumer overdraft LOC			-			-			-			-			306			306
Consumer loans:
Mobile home			1,951			-			8			-			-			1,959
Home improvement			210			-			-			-			-			210
Other			11,224			248			31			-			-			11,503
MasterCard/VISA			-			-			-			-			3,555			3,555


Total		$	437,555		$	14,261		$	8,030		$	-		$	4,834		$	464,680


2012

Agricultural loans		$	5,283		$	-		$	-		$	-		$	-		$	5,283
Commercial loans			25,213			2,778			142			-			-			28,133
Commercial overdraft LOC			-			-			-			-			245			245
Commercial non-profit/political subdivisions			733			-			-			-			-			733
Open-end home equity			25,142			351			272			-			-			25,765
1 – 4 family real estate (1st mortgages)			88,183			1,635			2,034			-			-			91,852
1 – 4 family real estate (Jr. mortgages)			7,662			54			277			-			-			7,993
Multifamily real estate			7,599			-			2,431			-			-			10,030
Farm real estate			9,509			45			-			-			-			9,554
Non-farm/non-residential real estate			96,184			14,344			2,219			-			-			112,747
Construction real estate			3,007			628			-			-			-			3,635
Consumer loans – vehicle			5,249			10			5			-			-			5,264
Consumer overdraft LOC			-			-			-			-			454			454
Consumer loans:
Mobile home			561			-			-			-			-			561
Home improvement			220			-			-			-			-			220
Other			8,722			8			5			-			-			8,735
MasterCard/VISA			-			-			-			-			2,916			2,916


Total		$	283,267		$	19,853		$	7,385		$	-		$	3,615		$	314,120

NOTE 7 - LOANS (CONTINUED)

Certain directors and executive officers, including their immediate families and companies in which they are principal owners, are loan clients of the Bank. Such loans are made in the ordinary course of business in accordance with the Bank’s normal lending policies, including the interest rate charged and collateralization, and do not represent more than a normal collection risk. Such loans amounted to $1,398,000 and $739,000 at December 31, 2013 and 2012, respectively.

The following is a summary of activity during 2013, 2012, and 2011, with loan renewals included in additions and repayments (dollars in thousands):


	Balance at									Balance
	beginning			Additions			Repayments			at end

2013		$	739		$	867		$	208		$	1,398


2012		$	860		$	229		$	350		$	739


2011		$	756		$	398		$	294		$	860

Additions for 2013 include $576,000 from new directors resulting from the business combination described in Note 3.

NOTE 8 - ALLOWANCE FOR LOAN LOSSES

The following presents the balances and activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):


									Non-
					Residential				residential				Construction
					real				real				real								Credit
	Commercial				estate				estate				estate				Consumer				card				Total

Balance at December 31, 2012		$	621			$	1,948			$	1,367			$	184			$	127			$	78			$	4,325
Provision (credit) for loan losses			(178	)			284				(203	)			280				59				33				275
Losses charged off			-				(360	)			(169	)			-				(73	)			(47	)			(649	)
Recoveries			13				13				5				-				51				9				91


Balance at December 31, 2013		$	456			$	1,885			$	1,000			$	464			$	164			$	73			$	4,042


Balance at December 31, 2011		$	615			$	1,905			$	1,926			$	179			$	84			$	69			$	4,778
Provision (credit) for loan losses			(7	)			628				(232	)			5				105				26				525
Losses charged off			(2	)			(602	)			(382	)			-				(75	)			(23	)			(1,084	)
Recoveries			15				17				55				-				13				6				106


Balance at December 31, 2012		$	621			$	1,948			$	1,367			$	184			$	127			$	78			$	4,325


Balance at December 31, 2010		$	542			$	1,857			$	2,049			$	347			$	85			$	75			$	4,955
Provision (credit) for loan losses			(74	)			720				256				(168	)			14				27				775
Losses charged off			(56	)			(746	)			(903	)			-				(38	)			(43	)			(1,786	)
Recoveries			203				74				524				-				23				10				834


Balance at December 31, 2011		$	615			$	1,905			$	1,926			$	179			$	84			$	69			$	4,778

NOTE 9 - PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 2013 and 2012 (dollars in thousands):


	2013			2012

Land and improvements		$	2,728		$	1,884
Buildings			13,083			11,655
Equipment			7,731			7,069


			23,542			20,608
Less accumulated depreciation			13,813			13,094


Premises and equipment, net		$	9,729		$	7,514

Depreciation of premises and equipment amounted to $719,000 in 2013, $757,000 in 2012, and $743,000 in 2011.

NOTE 10 - SECONDARY MARKET LENDING

As part of its normal business activity, the Bank services loans for others, including substantially all qualifying fixed rate residential mortgage loans which it originates and sells in the secondary market with servicing retained. Serviced loans are not reported as assets of the Bank and amounted to $160,150,000 and $26,496,000 as of December 31, 2013 and 2012, respectively.

Loans sold in the secondary market amounted to $12,241,000 in 2013, $8,052,000 in 2012, and $4,521,000 in 2011, resulting in gain on sale of loans of $331,000 in 2013, $246,000 in 2012, and $115,000 in 2011.

The following is a summary of activity for capitalized mortgage servicing rights for the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):


	2013				2012				2011

Beginning of year		$	144			$	141			$	161

Business combination			1,135				-				-
Capitalized servicing rights			104				65				39
Amortized to expense			(68	)			(62	)			(59	)


End of year		$	1,315			$	144			$	141

Mortgage servicing rights are included in other assets in the accompanying consolidated balance sheets.

NOTE 11 - DEPOSITS

Time deposits at December 31, 2013 and 2012 included individual deposits of $100,000 and over amounting to $59,060,000 and $43,222,000, respectively. Interest expense on time deposits of $100,000 or more amounted to $389,000 in 2013, $532,000 in 2012, and $601,000 in 2011.

At December 31, 2013, the scheduled maturities of time deposits were as follows (dollars in thousands):


2014	$	72,679
2015		53,099
2016		35,541
2017		18,409
2018		15,786
Thereafter		6,588


Total	$	202,102

NOTE 12 - BORROWED FUNDS

Borrowed funds consist of the following at December 31, 2013 and 2012 (dollars in thousands):


	2013		2012

Federal Home Loan Bank (FHLB):
Secured note, with interest at 2.74%, due December 2013	$	-	$	5,000
Secured note, with interest at 4.26%, due March 2014		3,031		-
Secured note, with interest at 2.79%, due October 2014		1,021		-
Secured note, with interest at 4.45%, due February 2017		5,000		5,000
Secured note, with interest at 1.87%, due February 2021		1,224		-


		10,276		10,000
Great Lakes Bankers Bank (GLBB):
Term note payable in quarterly installments of $337,000 including interest at the greater of prime rate or 4.5% with any remaining principal due January 1, 2017. Loan is secured by certain assets of the Corporation as stated in the pledge agreement dated October 20, 2011.		4,070		5,199


Total	$	14,346	$	15,199

Future maturities of borrowed funds at December 31, 2013 were as follows (dollars in thousands):


2014	$	5,233
2015		1,236
2016		1,293
2017		5,360
2021		1,224


Total	$	14,346

The FHLB notes require monthly interest payments and are secured by stock in the FHLB of Cincinnati and eligible mortgage loans totaling $257,255,000 at December 31, 2013.

The GLBB term note contains certain financial covenants which require the Corporation and Bank to, among other things, maintain minimum return on equity, return on assets, and debt service coverage ratios (as defined), as well as asset quality and liquidity levels.

At December 31, 2013, the Bank had available borrowings of $43,033,000 under its line of credit with the Federal Home Loan Bank. In addition, the Bank had $17,000,000 of short-term borrowing availability at December 31, 2013, under lines of credit with two correspondent banks.

NOTE 13 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

Securities sold under repurchase agreements, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Bank may be required to provide additional collateral based on the fair value of the underlying securities.

NOTE 14 - NON-INTEREST EXPENSES

The following is a summary of non-interest expenses for the years ended December 31, 2013, 2012, and 2011 (dollars in thousands):


	2013		2012		2011

Salaries, wages, and employee benefits	$	11,016	$	8,922	$	8,384
Occupancy of premises		893		961		851
Amortization of core deposit intangible assets		272		400		58
FDIC premium assessments		410		392		372
Equipment and vehicle		1,386		1,242		1,096
Professional and examination		1,374		766		838
State franchise and other taxes		680		643		512
Postage, stationery, and supplies		476		530		483
Advertising and marketing		334		292		217
Third-party computer processing		183		210		223
MasterCard franchise and processing		191		168		125
Loan collection and repossession fees		293		381		359
ATM network and processing fees		371		357		151
Other		1,688		1,153		1,339


Total non-interest expenses	$	19,567	$	16,417	$	15,008

NOTE 15 - FEDERAL INCOME TAXES

The provision for federal income taxes consisted of the following for 2013, 2012, and 2011 (dollars in thousands):


	2013		2012		2011

Current	$	453	$	535	$	1,253
Deferred		439		206		(55	)


Total	$	892	$	741	$	1,198

The income tax provision attributable to income from operations differs from the amounts computed by applying the U.S. federal income tax rate of 34% to income before federal income taxes as a result of the following (dollars in thousands):


	2013			2012			2011

Expected tax using statutory tax rate of 34%	$	1,815		$	1,899		$	2,023
Increase (decrease) in tax resulting from:
Tax-exempt income on state and municipal securities and political subdivision loans		(1,074	)		(1,033	)		(781	)
Interest expense associated with carrying certain state and municipal securities and political subdivision loans		21			30			32
Increase in cash value of life insurance policies		(46	)		(109	)		(102	)
Nondeductible merger expenses		170			-			-
Other, net		6			(46	)		26


Total	$	892		$	741		$	1,198

The deferred federal income tax provision (credit) of $439,000 in 2013, $206,000 in 2012, and ($55,000) in 2011, resulted from the tax effects of temporary differences. There was no impact for changes in tax laws and rates or changes in the valuation allowance for deferred tax assets.

NOTE 15 - FEDERAL INCOME TAXES (CONTINUED)

The tax effects of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2013 and 2012 are presented below (dollars in thousands):


	2013		2012

Deferred tax assets:
Purchase accounting basis difference	$	2,735	$	85
Allowance for loan losses		1,060		1,176
Accrued expenses and other		821		479
Alternative minimum tax credit carryforwards		18		9


Total deferred tax assets		4,634		1,749


Deferred tax liabilities:
Unrealized gain on securities available-for-sale		507		3,010
Purchase accounting basis difference		2,066		370
Depreciation of premises and equipment		260		204
Federal Home Loan Bank stock dividends		581		455
Mortgage servicing rights		447		49
Deferred loan costs and other		164		129


Total deferred tax liabilities		4,025		4,217


Net deferred tax assets (liabilities)	$	609	$	(2,468	)

Net deferred tax assets at December 31, 2013 are included in other assets and net deferred tax liabilities at December 31, 2012 are included in other liabilities in the accompanying consolidated balance sheets.

The alternative minimum tax credit carryforwards of $18,000 at December 31, 2013 may be utilized in the future to the extent computed regular tax exceeds the alternative minimum tax.

Management believes it is more likely than not that the benefit of deferred tax assets will be realized. Consequently, no valuation allowance for deferred tax assets is deemed necessary as of December 31, 2013 and 2012.

In management’s determination, the Corporation has no tax positions for which it deems reasonably possible that the total amounts of the unrecognized tax benefit will significantly increase or decrease within the 12 months subsequent to December 31, 2013. The tax years that remain open and subject to examination as of December 31, 2013 are years 2010 – 2013 for Federal and the State of Ohio.

NOTE 16 - EMPLOYEE BENEFITS

The Bank sponsors The Croghan Colonial Bank 401(k) Profit Sharing Plan, a defined contribution plan which provides for both profit sharing and employer matching contributions. The Plan permits investment in the Corporation’s common shares subject to various limitations. The Bank’s profit sharing and matching contributions to the 401(k) profit sharing plan for the years ended December 31, 2013, 2012, and 2011 amounted to $423,000, $372,000, and $372,000, respectively. As of December 31, 2013, the Plan held 21,906 common shares of the Corporation.

The Bank has entered into various split-dollar life insurance arrangements, including agreements with certain officers and employees of the Bank to provide for supplemental retirement benefits. All split-dollar policies required the payment of single premiums. The cash value of all split-dollar policies amounted to $16,810,000 and $11,087,000 at December 31, 2013 and 2012, respectively. In connection with the agreements, the Bank provided an estimated liability for accumulated supplemental retirement benefits of $379,000 at December 31, 2013 and $210,000 at December 31, 2012, which is included in other liabilities in the accompanying consolidated balance sheets. The Bank has also provided an estimated liability for certain salary continuation benefits to former officers of Indebancorp’s wholly-owned bank subsidiary as more fully described in Note 3.

The Bank recognized a provision for deferred compensation of $13,000 in 2013, $11,000 in 2012, and $16,000 in 2011.

No other postretirement or postemployment benefits are offered to retirees or employees.

NOTE 17 - STOCK-BASED COMPENSATION

The Corporation established in 2002 a Stock Option and Incentive Plan (the “2002 Plan”) which permitted the awarding of stock options and/or stock appreciation rights to directors, managerial and other key employees of the Corporation. The 2002 Plan, which provided for the issuance of up to 190,951 shares, expired in March 2012.

At the 2012 Annual Stockholders Meeting, the stockholders of the Corporation adopted the Croghan Bancshares, Inc. 2012 Equity Incentive Plan (the “2012 Plan”), which permits the Corporation to award stock options, stock appreciation rights, restricted stock, and other stock-based and performance-based awards to directors, employees, and other eligible participants. A total of 162,082 shares are available for issuance pursuant to the 2012 Plan.

The Corporation issued 28,869 options during 2011 at an exercise price of $24.99 under the 2002 plan. Following is a summary of activity for stock options for the years ended December 31, 2013, 2012, and 2011:


	2013			2012		2011

Outstanding, beginning of year		28,869			28,869		-
Granted		-			-		28,869
Exercised		-			-		-
Forfeited		(1,375	)		-		-


Outstanding, end of year		27,494			28,869		28,869

The options vest over a three-year period on the anniversary date of issuance. At December 31, 2013, 18,329 options were exercisable with a weighted average remaining contractual term of 6 years.

The fair value of options granted is estimated at the date of grant using the Black Scholes option pricing model. Following are assumptions used in calculating the fair value of the options issued in 2011:


Weighted-average fair value of options granted	$	3.62

Average dividend yield		5.0%

Expected volatility		25.0%

Risk-free interest rate		2.85%

Expected term (in years)		8

Compensation expense related to issued stock options amounted to $30,000 in 2013 and $57,000 in 2012. As of December 31, 2013, there is $11,000 of unrecognized compensation expense expected to be recognized over a period of four months.

Restricted stock awards may also be issued under the 2012 Plan. A summary of restricted stock activity for 2013 and 2012 is as follows:


	2013						2012
	Shares			Weighted average grant date fair value			Shares		Weighted average grant date fair value

Nonvested at beginning of year		5,250			$	31.21		-		$	-

Granted		-				-		5,250			31.21
Vested		1,050				-		-			-
Forfeited		(400	)			31.21		-			-


Nonvested at end of year		3,800			$	31.21		5,250		$	31.21

Compensation expense relating to restricted stock is recognized over the vesting period based on the market value of the shares on the issue date amounting to $29,000 in 2013 and $23,000 in 2012. As of December 31, 2013, there was $101,000 of total unrecognized compensation cost related to unvested restricted stock awards. The cost is expected to be recognized over a weighted average period of 3.3 years. Restricted stock awards vest over a five year period.

NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments are primarily loan commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The contract amount of these instruments reflects the extent of involvement the Bank has in these financial instruments.

The Bank’s exposure to credit loss in the event of the nonperformance by the other party to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of these instruments. The Bank uses the same credit policies in making loan commitments as it does for on-balance sheet loans.

The following financial instruments whose contract amount represents credit risk were outstanding at December 31, 2013 and 2012 (dollars in thousands):


	Contract amount
	2013			2012

Commitments to extend credit, including commitments to grant loans and unfunded commitments under lines of credit		$	117,684		$	92,492


Standby letters of credit		$	1,693		$	1,619

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the client. Collateral held varies but may include accounts receivable; inventory; property, plant, and equipment; and income-producing commercial properties.

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party and are reviewed for renewal at expiration. All outstanding standby letters of credit at December 31, 2013 expire in 2014. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to clients. The Bank requires collateral supporting these commitments when deemed necessary.

NOTE 19 - REGULATORY MATTERS

The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier I capital to average assets (as defined in the regulations). Management believes, as of December 31, 2013 and 2012, that the Corporation and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2013, the most recent notification from federal and state banking agencies categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, an institution must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following. There are no conditions or events since that notification that management believes have changed the Bank’s category.

NOTE 19 - REGULATORY MATTERS (CONTINUED)

The actual capital amounts and ratios of the Corporation and the Bank as of December 31, 2013 and 2012 are also presented in the following (dollars in thousands):


							Minimum						Minimum to be well capitalized under prompt
							capital						corrective
	Actual						requirement						action provisions
	Amount			Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2013
Total Capital
(to Risk-Weighted Assets)
Consolidated		$	60,078		11.8	%		$	40,678		> 8.0	%			N/A		N/A
Bank			63,616		12.6	%			40,555		> 8.0	%		$	50,693		> 10.0	%

Tier I Capital
(to Risk-Weighted Assets)
Consolidated			56,036		11.0	%			20,339		> 4.0	%			N/A		N/A
Bank			59,574		11.8	%			20,277		> 4.0	%			30,416		> 6.0	%

Tier I Capital
(to Average Assets)
Consolidated			56,036		8.6	%			26,089		> 4.0	%			N/A		N/A
Bank			59,574		9.1	%			26,075		> 4.0	%			32,594		> 5.0	%

As of December 31, 2012
Total Capital
(to Risk-Weighted Assets)
Consolidated		$	50,076		14.2	%		$	28,273		> 8.0	%			N/A		N/A
Bank			54,828		15.5	%			28,245		> 8.0	%		$	35,306		> 10.0	%

Tier I Capital
(to Risk-Weighted Assets)
Consolidated			45,751		13.0	%			14,136		> 4.0	%			N/A		N/A
Bank			50,503		14.3	%			14,122		> 4.0	%			21,184		> 6.0	%

Tier I Capital
(to Average Assets)
Consolidated			45,751		7.6	%			24,239		> 4.0	%			N/A		N/A
Bank			50,503		8.3	%			24,225		> 4.0	%			30,282		> 5.0	%

On a parent company only basis, the Corporation’s primary source of funds are dividends paid by the Bank. The ability of the Bank to pay dividends is subject to limitations under various laws and regulations, and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, the Bank may declare a dividend without the approval of the State of Ohio Division of Financial Institutions, unless the total dividends in a calendar year exceed the total of its net profits for the year combined with its retained profits of the two preceding years. Under these provisions, the Bank did not have the ability to pay any dividends without prior approval from the Ohio Department of Financial Institutions and the Federal Reserve as of January 1, 2014.

The Board of Governors of the Federal Reserve System generally considers it to be an unsafe and unsound banking practice for a bank holding company to pay dividends except out of current operating income, although other factors such as overall capital adequacy and projected income may also be relevant in determining whether dividends should be paid.

NOTE 20 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION

A summary of condensed financial information of the parent company as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 was as follows (dollars in thousands):


CONDENSED BALANCE SHEETS				2013			2012

Assets:
Cash				$	57		$	27
Dividends receivable from subsidiary					726			-
Investment in subsidiary					88,586			71,916
Available-for-sale security					350			350
Other asset					237			136


Total assets				$	89,956		$	72,429


Liabilities:
Borrowed funds				$	4,070		$	5,199
Dividends and other payables					838			66


Total liabilities					4,908			5,265


Stockholders’ equity:
Common stock					31,328			23,926
Surplus					13,361			118
Retained earnings					47,460			45,361
Accumulated other comprehensive income					983			5,843
Treasury stock					(8,084	)		(8,084	)


Total stockholders’ equity					85,048			67,164


Total liabilities and stockholders’ equity				$	89,956		$	72,429


CONDENSED STATEMENTS OF OPERATIONS	2013			2012			2011

Income – dividends from subsidiary	$	12,576		$	3,252		$	2,317
Interest income on subordinated note from subsidiary		-			-			190
Professional fees, interest, and other expenses		(697	)		(400	)		(342	)


Income before income taxes and equity in undistributed net income of subsidiary		11,879			2,852			2,165

Federal income tax credit		(237	)		(136	)		(52	)


Income before equity in undistributed net income of subsidiary		12,116			2,988			2,217

Equity in net income of subsidiary, less dividends		(7,669	)		1,855			2,537


Net income	$	4,447		$	4,843		$	4,754

NOTE 20 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)


CONDENSED STATEMENTS OF CASH FLOWS	2013				2012				2011

Cash flows from operating activities:
Net income		$	4,447			$	4,843			$	4,754
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in net income of subsidiary, less dividends			7,669				(1,855	)			(2,537	)
Decrease (increase) in dividends receivable			(726	)			535				1
Decrease (increase) in accrued interest receivable			-				-				90
Increase in other assets			(101	)			(84	)			(52	)
Increase (decrease) in other liabilities			56				37				(10	)


Net cash provided by operating activities			11,345				3,476				2,246


Cash flows from financing activities:
Principal payments on borrowed funds			(1,129	)			(801	)			-
Cash dividends paid			(1,612	)			(2,679	)			(2,142	)
Cash paid for business combination			(8,574	)			-				-
Purchase of treasury shares			-				-				(76	)


Net cash used in financing activities			(11,315	)			(3,480	)			(2,218	)


Net increase (decrease) in cash			30				(4	)			28

Cash at beginning of year			27				31				3


Cash at end of year		$	57			$	27			$	31

Under a program initially approved by the Board of Directors in 2002, the Corporation periodically purchased shares of its common stock in the over-the-counter market. During the first quarter of 2012, the Board of Directors opted not to renew the program.

NOTE 21 - FAIR VALUE MEASUREMENTS

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, and both able and willing to transact.

Nonfinancial assets and liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Nonfinancial assets measured at fair value on a nonrecurring basis include nonfinancial assets and liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment, such as other real estate owned.

NOTE 21 - FAIR VALUE MEASUREMENTS (CONTINUED)

ASC 820-10 requires the use of valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC 820-10 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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 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 December 31, 2013 and 2012.

The following summarizes financial assets (there were no financial liabilities) measured at fair value as of December 31, 2013 and 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (dollars in thousands):


	Level 1			Level 2			Level 3			Total
	inputs			inputs			inputs			fair value
2013
Recurring:
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	-		$	153,465		$	-		$	153,465
Obligations of states and political subdivisions			-			98,657			-			98,657
Other			-			350			-			350


Total		$	-		$	252,472		$	-		$	252,472


Nonrecurring:
Other real estate owned		$	-		$	-		$	876		$	876
Impaired loans			-			-			6,458			6,458


Total		$	-		$	-		$	7,334		$	7,334

NOTE 21 - FAIR VALUE MEASUREMENTS (CONTINUED)


	Level 1			Level 2			Level 3			Total
	inputs			inputs			inputs			fair value
2012
Recurring:
Securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	-		$	131,990		$	-		$	131,990
Obligations of states and political subdivisions			-			105,881			-			105,881
Other			-			350			-			350


Total		$	-		$	238,221		$	-		$	238,221


Nonrecurring:
Other real estate owned		$	-		$	-		$	1,295		$	1,295
Impaired loans			-			-			6,621			6,621


Total		$	-		$	-		$	7,916		$	7,916

Impaired loans are reported net of an allowance for loan losses of $437,000 at December 31, 2013 and $536,000 at December 31, 2012.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount as of December 31, 2013 of $876,000, which is made up of the balance of $975,000, net of a valuation allowance of $99,000. Other real estate owned had a net carrying amount of $1,295,000 made up of the balance of $1,328,000, net of a valuation allowance of $33,000, at December 31, 2012. Write-downs of other real estate owned amounted to $85,000 and $28,000 for the years ended December 31, 2013 and 2012, respectively, and are included in other non-interest expenses.

There were no transfers of financial instruments between Levels 1 and 2 during 2013 and 2012.

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.

In connection with the business combination described in Note 3, certain financial instruments were acquired or assumed and were recorded at their estimated fair values as of the date of acquisition. In connection with the branch acquisition described in Note 4, loans acquired of $21,503,000 and deposits assumed of $111,075,000 were recorded at their estimated fair values as of the December 16, 2011 closing date based on the present value of the future incremental cash flows. Certain inputs used in these calculations would be unobservable to a market participant making them level 3 inputs.

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 December 31, 2013 and 2012.

NOTE 21 - FAIR VALUE MEASUREMENTS (CONTINUED)

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 including discounting of appraisals based on age or changes in property or market conditions. These discounts generally range from 10% to 55%. Collateral values are also discounted for estimated selling costs of 10%. Estimated cash flows are discounted considering the loan rate and current market rates and generally range from 5% to 11%. Due to the significance of the Level 3 inputs, fair value of 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, generally approximating 10%. 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 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of recognized financial instruments at December 31, 2013 and 2012, as well as indication of where the instrument falls within the fair value hierarchy described in Note 21, are as follows (dollars in thousands):


			2013						2012
	Fair value		Carrying			Fair			Carrying			Fair
	hierarchy		amount			value			amount			value
FINANCIAL ASSETS
Cash and cash equivalents		Level 1		$	27,710		$	27,710		$	31,216		$	31,216
Securities		Level 2			257,509			257,509			242,395			242,395
Loans, net		Level 3			470,706			485,760			316,952			323,143


Total				$	755,925		$	770,979		$	590,563		$	596,754


FINANCIAL LIABILITIES
Deposits		Level 2		$	688,921		$	690,672		$	511,940		$	513,710
Federal funds purchased and securities sold under repurchase agreements		Level 1			24,577			24,577			32,344			32,344
Borrowed funds		Level 2			14,346			14,472			15,199			16,642


Total				$	727,844		$	729,721		$	559,483		$	562,696

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 $119,377,000 at December 31, 2013 and $94,111,000 at December 31, 2012. The fair value of such instruments is not considered significant since they represent commitments at current interest rates.

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 mature in 90 days or less and do not represent unanticipated credit concerns.

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Securities

The fair value of available-for-sale securities 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.

Loans

Fair value for loans is 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 nonperforming loans is based on recent appraisals or estimated discounted cash flows. The estimated value of credit card loans is based on existing loans and does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio.

Deposit Liabilities

The fair value of core deposits, including demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates offered at year end for deposits of similar remaining maturities. The estimated fair value does not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the marketplace.

Other Financial Instruments

Federal funds purchased and securities sold under repurchase agreements are considered to be short-term borrowings and are valued at carrying value. Borrowed funds are typically long-term in nature with fair value determined based on 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 23 - COMMITMENTS AND CONTINGENCIES

The Bank has entered into multi-year agreements to lease certain of its facilities, as well as equipment under various short-term operating leases through June 2015. Rent expense under these agreements amounted to $47,000 in 2013, $76,000 in 2012, and $116,000 in 2011. Future minimum lease payments under long-term operating leases aggregate $85,000 at December 31, 2013 as follows: 2014, $59,000; and 2015, $26,000.

In the normal course of business, the Corporation and Bank may be involved in various legal actions, but in the opinion of management and its legal counsel, the ultimate disposition of such matters is not expected to have a material adverse effect on the consolidated financial statements.

NOTE 24 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of selected quarterly financial data (unaudited) for the years ended December 31, 2013 and 2012 (dollars in thousands, except per share data):


	Interest		Net interest		Net		Net income
	income		income		income		per share
2013
First quarter		$ 5,209		$ 4,642		$ 1,216		$ .72
Second quarter		5,172		4,618		1,392		.83
Third quarter		5,186		4,673		1,054		.63
Fourth quarter		5,889		5,329		785		.40

2012
First quarter		$5,318		$4,395		$ 934		$ .56
Second quarter		5,303		4,514		1,371		.82
Third quarter		5,290		4,568		1,284		.77
Fourth quarter		5,148		4,496		1,254		.74

The accompanying notes are an integral part of the consolidated financial statements.

LOGO

Exhibit 14

CODE OF BUSINESS CONDUCT AND ETHICS

November 12, 2013

The business of Croghan Bancshares, Inc. and its subsidiary, The Croghan Colonial Bank (collectively, the “Company”), is based upon trust. Without trust in our integrity, customers would not deposit their money in The Croghan Colonial Bank (the “Bank”) or count on us to properly administer their loans, and investors would not purchase our stock. Our continued success depends on every director, officer and employee performing his or her job in an ethical, honest, professional and competent manner.

Today, more than ever, the ethics of corporations are under scrutiny by the government and the public. This Code of Business Conduct and Ethics (this “Code of Ethics”) has been adopted by the Board of Directors of the Company to demonstrate to customers, investors and the public the importance that management of the Company places on ethical conduct. The Code of Ethics is intended to serve as a guide for ethical business practices of the Company’s officers, directors and employees, to promote advance disclosure and review of conflicts of interest and similar matters, to promote fair, accurate, complete, objective, relevant and timely financial reporting and public reports and disclosures by the Company, to encourage the reporting of questionable behavior, and to appropriately discipline those who engage in improper conduct.

All directors, officers and employees of the Company are encouraged to read this Code of Ethics carefully. Directors and officers of the Company will be asked to re-read this Code of Ethics on an annual basis and provide a written acknowledgment of such review. New employees will be asked to read the Code of Ethics and sign a written acknowledgment form during their orientation. All directors, officers and employees will be asked to re-read the Code of Ethics and sign new acknowledgment forms after any amendments are adopted by the Board of Directors.

It is the Company’s expectation that each and every director, officer and employee shall comply with the following principles.

I.	Compliance with Laws and Regulations

It is the Company’s policy to comply with all applicable laws and regulations. Each director, officer and employee of the Company is expected to understand and comply with all applicable laws and regulations that apply to the performance of his or her position with the Company. If an employee does not understand a particular law or how it applies, the employee should seek appropriate guidance from the Company’s Chief Executive Officer. If a director or officer is uncertain with respect to a law or regulation, the director or officer should consult with legal counsel for the Company.

The Company has a specific securities trading policy applicable to all directors, officers and employees. The Company expects that every director, officer and employee will fully comply with that policy.

II.

Reporting and Disclosure Obligations

The federal and state securities laws and the statutes and regulations applicable to banks and bank holding companies require the Company to issue financial statements in conformity with generally accepted accounting principles and to make public disclosures regarding certain aspects of its business. The Company expects all directors, officers and employees to keep accurate and complete books, records and accounts that enable the Company to meet its accounting and reporting requirements and to provide prompt, accurate answers to inquiries related to the Company’s public disclosure requirements. Furthermore, the Chief Executive Officer and the Chief Financial Officer shall prepare or oversee the preparation of full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, federal and state regulatory authorities (including the SEC, as applicable) and in the Company’s other public communications.

All persons involved in the Company’s disclosure process are required to maintain familiarity with the disclosure requirements applicable to the Company and are prohibited from knowingly misrepresenting, omitting or causing others to misrepresent or omit material facts about the Company to others, whether within or outside the Company, including the Company’s independent auditors. Anyone who believes that the Company’s accounting method is inappropriate or not in compliance with generally accepted accounting principles or who believes that public disclosures made or about to be made are inaccurate should report this belief directly to the Company’s Chief Financial Officer and, if unsatisfied with the response, directly to the Audit Committee of the Board of Directors. Any officer or employee who becomes aware of a material event or fact involving the Company that has not been previously disclosed publicly by the Company should immediately report such material event or fact to the Company’s Chief Executive Officer or Chief Financial Officer. In addition, no officer or employee shall alter, destroy, mutilate, or conceal any document relevant to any audit of the Company or which is or may be relevant to any investigation by a governmental agency or in a matter pending before any court.

III.

Conflicts of Interest

Conflicts of interest arise when decisions or judgments in the course of fulfilling one’s responsibility to the Company may be influenced by personal interests not shared by the Company. An example of such a conflict is when an employee’s family member has an interest in a transaction to which the Company is a party, or when an individual competes with the Company with respect to a particular business opportunity.

When an actual or apparent conflict of interest is identified, an employee is expected to bring the matter to the attention of the Chief Executive Officer, who will evaluate the matter. Any conflict of interest involving a director or executive officer must be brought to the attention of the Audit Committee. If the Chief Executive Officer or the Audit Committee determines that a conflict does exist or may exist, how the matter shall be treated will be decided by the disinterested directors of the Company, and the affected individual is expected to abide by the decision of the disinterested directors.

It is considered a conflict of interest if an employee makes a loan, processes a transaction (e.g., withdrawals, deposits, check cashing, etc.), or waives a fee or service charge for his or her own personal loans and accounts or those of immediate family members or affiliates. It is the responsibility of each employee to exercise prudence and good judgment when making loans or processing transactions to or for anyone whose personal relationship with such employee may influence his or her judgment.

Directors, officers and employees of the Company should never place themselves under actual or apparent obligation to a third party which deals or proposes to deal with the Company by accepting (or permitting a relative to accept) from the third party such things as gifts, benefit, gratuities or unusual hospitality for the purpose of, or which might have the effect of, improperly influencing their judgment in the performance of Company duties and responsibilities. This policy does not include the receipt of insignificant gifts or other benefits, or the value of reasonable and reciprocal entertainment, which is consistent with local and social business custom. If there is any question as to whether a gift or other benefit is prohibited by this policy, an officer or director should contact the Audit Committee, and an employee should contact the Chief Executive Officer.

IV.

Confidentiality

In the course of conducting the Company’s business, directors, officers and employees often learn confidential or proprietary information about the Company, the Company’s customers, prospective customers or other third parties. Directors, officers and employees must maintain the confidentiality of all such information, except when disclosure is authorized by management of the Company in accordance with the Company’s privacy and disclosure policies or when disclosure is legally required. Confidential or proprietary information includes, among other things, any non-public information concerning the Company, including its businesses, financial performance, results or prospects, and any non-public information provided by a third party with the expectation that the information will be kept confidential and used solely for the business purpose for which it was conveyed.

Banks receive and maintain considerable information which, though not necessarily confidential, must nonetheless be treated confidentially if the right of privacy of customers is to be safeguarded. Therefore, confidential information with respect to the Company’s customers acquired by an employee through his or her employment is considered to be privileged and must be held in the strictest confidence. This confidential information is to be used solely for corporate purposes and not as a basis for personal gain or for any other purpose. In no case shall such information be transmitted to persons outside the Company, including family or other acquaintances, or even to other employees of the Company who do not need to know such information in discharging their duties.

V.	Fairness of Dealings with Customers, Suppliers, Vendors and Employees

No officer, director or associate of the Company should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practice. The Company’s intention is to compete fairly and honestly and to seek competitive advantage through performing better than the competition, not through unethical or illegal business practices. The Company does not permit offering or making payments of any kind, whether of money, services or property, to any domestic or foreign public official or of providing personal benefits that are not clearly reasonable and business related to any employee, agent or representative of any organization seeking to or doing business with the Company. If there is any question as to whether any such personal benefit is clearly reasonable and business related, an officer or director should seek pre-approval from the Audit Committee, and an employee should seek pre-approval from the Chief Executive Officer.

The Company has established comprehensive programs for compliance with labor and employment laws, including equal employment opportunity policies and procedures, policies respecting sexual harassment in the workplace, safety programs, and wage and hour procedures. For further information about such compliance policies, see the Company’s Human Resources Manager.

VI.

Protection and Proper Use of Assets

Theft, carelessness and waste of Company property directly affect the Company’s profitability and will not be tolerated. All directors, officers and employees are expected to protect the Company’s assets, to use them efficiently and to use them only for legitimate business purposes.

VII.

Political Activities

The Company respects your right to participate or not participate in the political process as you see fit. No director, officer or employee may use his or her position with the Company to compel or pressure any other director, officer or employee to work for or on behalf of any legislation, candidate, political party or committee, to make contributions for any political cause or candidate or to cast his or her vote in any particular way.

VIII.

Duty to Report and Consequences

The Company expects full compliance with this Code of Ethics. Employees are encouraged to report any violation or suspected violation of this Code of Ethics to his or her supervisor, the Chief Executive Officer or the Audit Committee. Officers and directors must report any violation or suspected violation to the Audit Committee. The Company will not permit any retaliation against a director, officer or employee who, in good faith, appropriately reports a matter that he or she believes, in good faith, to be a violation of this Code of Ethics. Any employee who is found by the Audit Committee to have violated this Code of Ethics may be subject to discipline, including termination of employment.

The Audit Committee shall investigate any alleged violation of this Code of Ethics. In the event that the Audit Committee determines that a violation has occurred, the Audit Committee shall be authorized to take any action it deems appropriate. In the event that the Audit Committee recognizes a violation by a director or executive officer but elects to take no action against the offending director or executive officer, the Company shall disclose the facts and circumstances of its waiver of the violation by any means required by applicable law.

IX.

Scope of Code of Ethics

THERE ARE MANY OTHER POLICIES THAT ARE VERY IMPORTANT TO THE COMPANY AND ITS OPERATIONS. NOTHING CONTAINED IN THIS CODE OF ETHICS SHALL RELIEVE ANY OFFICER, DIRECTOR OR EMPLOYEE FROM COMPLYING WITH ANY OTHER APPLICABLE COMPANY POLICY.

Nothing in this Code of Ethics changes the general policy that employment is at will and may be terminated by the Company at any time and for any or no reason.

Exhibit 21

CROGHAN BANCSHARES, INC.

Subsidiaries of the Registrant


Subsidiary	State of Incorporation	Percentage of securities owned
The Croghan Colonial Bank (1)	Ohio	100%
Croghan Insurance Agency (1)(2)	Ohio	100%

(1)	Each principal office is located in Fremont, Ohio.

(2)	Wholly-owned subsidiary of The Croghan Colonial Bank

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Rick M. Robertson, certify that:

1.	I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2013 of Croghan Bancshares, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION

I, Kendall W. Rieman, certify that:

1.	I have reviewed this Annual Report on Form 10-K for the fiscal year ended December 31, 2013 of Croghan Bancshares, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 32

SECTION 1350 CERTIFICATION*

In connection with Croghan Bancshares, Inc.’s (the “Corporation”) Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Annual Report”), the undersigned, Rick M. Robertson, President and Chief Executive Officer of the Corporation, and Kendall W. Rieman, Treasurer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Annual Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)	The information contained in the Annual Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Corporation and its subsidiary.



/s/ Rick M. Robertson				/s/ Kendall W. Rieman
Rick M. Robertson, President and CEO (Principal Executive Officer) Date: March 28, 2014				Kendall W. Rieman, Treasurer (Principal Financial Officer) Date: March 28, 2014

* This certification is being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. This certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Corporation specifically incorporates this certification by reference.

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