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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] 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: 0-25196
CAMCO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0110823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
814 Wheeling Avenue, Cambridge, Ohio 43725
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 432-5641
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of Each Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value per share
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No_____.
Indicate by check mark if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-K contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the last sale reported as of March
29, 1999, was $69.4 million. (The exclusion from such amount of the market value
of the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
The registrant's revenues for the fiscal year ended December 31, 1998,
were $51.8 million. 5,474,036.50 shares of the Registrant's common
stock were outstanding on March 22, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of Form 10-K: Portions of the Proxy Statement for the 1999
Annual Meeting of Stockholders
PART I
Item 1. Business.
General
Camco Financial Corporation ("Camco") is a multiple savings and loan
holding company organized under Delaware law in 1970. Through its wholly-owned
subsidiaries, Cambridge Savings Bank ("Cambridge Savings"), Marietta Savings
Bank ("Marietta Savings"), First Federal Savings Bank of Washington Court House
("First Federal") and First Federal Bank for Savings ("First Savings"), Camco is
engaged in the financial services business in Ohio, Kentucky and West Virginia.
East Ohio Land Title Agency, Inc. ("East Ohio"), a wholly-owned subsidiary of
Camco, is engaged in the title insurance agency business.
The acquisition by Camco of GF Bancorp, Inc., a Delaware corporation,
and its wholly-owned subsidiary, Germantown Federal Savings Bank, a federal
savings bank ("Germantown Federal"), was completed in January 1998 (the
"Germantown Merger"), in a combination accounted for as a pooling of interest.
In connection with the Germantown Merger, Germantown Federal, which had its main
office in Germantown, Ohio and a branch office in New Lebanon, Ohio, merged into
First Federal.
In October 1996, the merger of First Ashland Financial Corporation, a
Kentucky corporation, with and into Camco (the "Ashland Merger") was completed.
Pursuant to the Ashland Merger, First Savings, which has its main office and a
full-service branch office in Ashland, Kentucky, a full-service branch office in
Russell, Kentucky, and a loan origination office in Huntington, West Virginia,
became a wholly-owned subsidiary of Camco. The Ashland Merger was accounted for
under the purchase method.
First Federal was acquired by Camco in 1988. First Federal has its main
office and a full-service branch office in Washington Court House, loan
origination offices in Chillicothe, Circleville, Miamisburg, Powell and
Wilmington, Ohio, and, as a result of the Germantown Merger, full-service branch
offices in Germantown and New Lebanon, Ohio.
Cambridge Savings, which was acquired by Camco in 1971, was
incorporated under Ohio law in 1885. The main office of Cambridge Savings is in
Cambridge, Ohio. Cambridge Savings has branch offices in Cambridge, Byesville
and Uhrichsville, Ohio. In July 1994, Cambridge Savings converted its charter
from an Ohio savings and loan association to an Ohio savings bank.
Established in 1923 under Ohio law, Marietta Savings was acquired by
Camco in 1973. Marietta has its main office and a branch office in Marietta,
Ohio, and a branch in Belpre, Ohio. In July 1994, Marietta Savings converted its
charter from an Ohio savings and loan association to an Ohio savings bank.
Cambridge Savings, Marietta Savings, First Federal and First Savings
(collectively, the "Banks") are members of the Federal Home Loan Bank (the
"FHLB") of Cincinnati, and the accounts of each are insured up to applicable
limits by the Savings Association Insurance Fund (the "SAIF") administered by
the Federal Deposit Insurance Corporation (the "FDIC"). First Federal and First
Savings are subject to regulation, examination and supervision by the United
States Department of the Treasury, Office of Thrift Supervision (the "OTS") and
the FDIC. Cambridge Savings and Marietta Savings are regulated by the Ohio
Department of Financial Institutions, Division of Savings Banks (the "Division")
and the FDIC.
Cambridge Savings and Marietta Savings each own 50% of the outstanding
stock of Camco Mortgage Corporation ("CMC"), a service corporation engaged in
mortgage lending and related activities in central and southeastern Ohio.
Marietta Savings owns 100% of the outstanding stock of WestMar Mortgage Company
("WestMar"), a service corporation engaged in mortgage lending activities,
2
primarily in Wood County, West Virginia. First Savings owns 100% of the stock of
First S&L Corporation, a Kentucky corporation incorporated in 1975 for the
purpose of acquiring stock in a data processing company located in Cincinnati,
Ohio. East Ohio Land Title Agency, Inc. ("East Ohio"), a wholly-owned subsidiary
of Camco, is engaged in the title insurance agency business.
The financial statements for Camco and its subsidiaries are prepared on
a consolidated basis. The information as of and for the years ended December 31,
1994 through 1997, inclusive, has been restated in this document and the
consolidated financial statements to reflect the effects of the Germantown
Merger. The principal source of revenue for Camco on an unconsolidated basis is
dividends from the Banks. Payment of dividends to Camco by the Banks is subject
to various regulatory restrictions and tax considerations. See "REGULATION."
References in this report to various aspects of the business,
operations and financial condition of Camco may be limited to the Banks, as the
context requires.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the
consolidated financial position and results of operations of Camco at the dates
indicated. This selected financial data should be read in conjunction with the
consolidated financial statements appearing elsewhere in this document.
Consolidated statements of At December 31,
financial condition: 1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In thousands)
Total amount of:
Assets $637,135 $570,170 $517,488 $394,892 $371,489
Interest-bearing deposits in other financial
institutions 22,609 10,473 10,875 5,772 13,105
Investment securities available for sale - at market 1,307 3,572 7,177 8,634 2,978
Investment securities - at cost 10,962 17,489 21,844 19,283 34,835
Mortgage-backed securities available for sale - at
market 3,476 8,447 10,148 11,954 1,464
Mortgage-backed securities - at cost 5,019 8,207 10,700 5,002 17,724
Loans receivable - net (1) 548,669 481,501 420,818 321,005 282,722
Deposits 443,227 422,368 398,161 326,996 307,643
FHLB advances and other borrowings 125,483 82,319 58,354 27,078 26,511
Stockholders' equity - substantially restricted 60,139 55,331 51,391 34,029 30,885
- ---------------------------
(1) Includes loans held for sale.
3
Consolidated statements of earnings: Year ended December 31,
1998 1997 1996 1995 1994
(In thousands, except per share data)
Total interest income $44,283 $41,217 $32,812 $28,833 $22,896
Total interest expense 24,852 22,778 17,811 16,022 11,978
------ ------ ------ ------ ------
Net interest income 19,431 18,439 15,001 12,811 10,918
Provision for losses on loans 250 385 141 143 99
------ ------ ------ ------ ------
Net interest income after provision for loan losses 19,181 18,054 14,860 12,668 10,819
Other income 7,552 3,945 3,700 3,418 2,694
General, administrative and other expense 16,319 13,733 13,762 10,046 9,365
------ ------ ------ ------ ------
Earnings before federal income taxes 10,414 8,266 4,798 6,040 4,148
Federal income taxes 3,410 2,922 1,588 2,064 1,403
------ ------ ------ ------ ------
Net earnings $ 7,004 $ 5,344 $ 3,210 $ 3,976 $ 2,745
====== ====== ====== ====== ======
Earnings per share: (1)
Basic $ 1.28 $ 0.98 $ 0.75 $ 1.02 $ 0.79
====== ====== ====== ====== ======
Diluted $ 1.25 $ 0.96 $ 0.73 $ 1.02 $ 0.79
====== ====== ====== ====== ======
Selected financial ratios: At or for the year ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Return on average assets (2) 1.16% .98% .70% 1.04% .79%
Return on average equity (2) 12.13 10.01 7.52 12.25 9.69
Average equity to average assets (2) 9.56 9.81 9.36 8.47 8.12
Dividend payout ratio (3) 32.89 51.16 53.33 34.91 25.40
- --------------------------
(1) Earnings per share has been adjusted to give effect to the Germantown
Merger and a three-for-two stock split which were effected during 1998 and
the 5% stock dividends which were effected during each of the years ended
December 31, 1997, 1996 and 1995.
(2) Ratios are based upon the mathematical average of the balances at the
beginning and the end of the year.
(3) Represents dividends per share divided by basic earnings per share.
Lending Activities
General. Camco's primary lending activities include the origination of
conventional fixed-rate and variable-rate mortgage loans for the construction,
acquisition or refinancing of single-family homes located in the Banks' primary
market areas. Construction and permanent mortgage loans on condominiums,
multifamily (over four units) and nonresidential properties are also offered by
Camco. In addition to mortgage lending, Camco makes a variety of consumer loans.
4
Loan Portfolio Composition. The following table presents certain
information in respect of the composition of Camco's loan portfolio, including
loans held for sale, at the dates indicated:
At December 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- ----
Percent Percent Percent Percent Percent
of of of of of
total total total total total
Amount loans Amount loans Amount loans Amount loans Amount loans
Type of loan:
Construction $ 37,169 6.8% $ 14,505 3.0% $ 20,489 4.9% $ 20,134 6.3% $ 22,267 7.9%
Existing residential 485,107 88.4 431,646 89.7 370,648 88.0 271,637 84.6 233,433 82.6
properties (1)
Nonresidential real estate 15,019 2.7 11,294 2.3 12,529 3.0 11,486 3.6 14,845 5.2
Developed building lots 3,895 .7 1,870 0.4 1,406 0.3 965 0.3 1,147 0.4
Education loans 2,096 .4 2,224 0.5 2,037 0.5 2,728 0.9 2,799 1.0
Consumer and other
loans (2) 29,835 5.5 32,430 6.7 25,180 6.0 24,554 7.6 20,026 7.1
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Total 573,121 104.5 493,969 102.6 432,289 102.7 331,504 103.3 294,517 104.2
Less:
Undisbursed loans in (22,262) (4.1) (10,059) (2.1) (9,292) (2.2) (8,724) (2.7) (9,764) (3.5)
process
Unamortized yield (407) (.1) (813) (0.2) (806) (0.2) (647) (0.2) (992) (0.3)
adjustments
Allowance for loan losses (1,783) (.3) (1,596) (0.3) (1,373) (0.3) (1,128) (0.4) (1,039) (0.4)
------- ----- ------- ----- -------- ----- ------- ----- ------- -----
Total loans, net $548,669 100.0% $481,501 100.0% $420,818 100.0% $321,005 100.0% $282,722 100.0%
======= ===== ======= ===== ======== ===== ======== ===== ======= =====
- --------------------------
(1) Includes loans held for sale.
(2) Includes second mortgage loans.
Camco's loan portfolio was approximately $548.7 million at December 31,
1998, and represented 86.1% of total assets.
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1998, regarding the dollar amount of loans
maturing in Camco's portfolio based on the contractual terms to maturity of the
loans. Demand loans, loans having no stated schedule of repayments and no stated
maturity, are reported as due in one year or less.
Due during the year
ending Due in
December 31, Due in Years years after
1999 2000-2004 2004 Total
(In thousands)
Real estate loans (1):
One- to four- family $16,798 $48,365 $409,825 $474,988
Multifamily and nonresidential 987 6,348 26,486 33,821
Consumer and other loans 4,539 14,877 12,515 31,931
------ ------ ------- -------
Total $22,324 $69,590 $448,826 $540,740
====== ====== ======= =======
- --------------------------
(1) Excludes loans held for sale of $10.1 million and does not consider the
effects of unamortized yield adjustments of $407,000 and allowance for loan
losses of $1.8 million.
5
The following table sets forth at December 31, 1998, the dollar amount
of all loans due after one year from December 31, 1998, which have predetermined
interest rates and have floating or adjustable interest rates:
Due after
December 31, 1999
(In thousands)
Fixed rate of interest $167,203
Adjustable rate of interest 351,213
-------
Total $518,416
=======
Generally, loans originated by the Banks are on a fully amortized
basis. The Banks have no rollover provisions in their loan documents and
anticipate that loans will be paid in full by the maturity date.
Residential Loans. The primary lending activity of the Banks has been
the origination of conventional loans for the acquisition or construction of
single-family residences. At December 31, 1998, 88.4% the total outstanding
loans consisted of loans secured by mortgages on one- to four-family residential
properties. The Banks also originate loans on multifamily housing (over four
units) and condominiums. Each of such loans is secured by a mortgage on the
underlying real estate and improvements thereon.
Federal regulations and Ohio law limit the amount which the Banks may
lend in relationship to the appraised value of the underlying real estate at the
time of loan origination (the "Loan-to-Value Ratio" or "LTV"). In accordance
with such regulations and law, the Banks make loans on single-family residences
up to 95% of the value of the real estate and improvements. The Banks generally
require the borrower on each loan which has an LTV in excess of 90% to obtain
private mortgage insurance.
The Banks have offered adjustable-rate mortgage loans ("ARMs") since
1981. The interest rate adjustment periods on the ARMs offered by the Banks are
generally one, three or five years. The interest rates initially charged on ARMs
and the new rates at each adjustment date are determined by adding a stated
margin to a designated interest rate index. For the past several years, the
Banks have used the one-year, three-year and five-year United States Treasury
bill rates, adjusted to a constant maturity, as the index for its one-year,
three-year and five-year adjustable-rate loans, respectively. The initial
interest rate for a three-year and a five-year ARM is set slightly higher than
for the one-year ARM to compensate for the reduced interest rate sensitivity.
The maximum adjustment at each adjustment date for ARMs is usually 2%, with a
maximum adjustment of 6% over the term of the loan.
From time to time, the Banks originate ARMs which have an initial
interest rate that is lower than the sum of the specified index plus the margin.
Such loans are subject to increased risk of delinquency or default due to
increasing monthly payments as the interest rates on such loans increase to the
fully indexed level. The Banks attempt to reduce the risk by underwriting such
loans at the fully indexed rate. None of the Banks' ARMs have negative
amortization features.
Residential mortgage loans offered by the Banks are usually for terms
of 10 to 30 years, which could have an adverse effect upon earnings if the loans
do not reprice as quickly as the cost of funds. To minimize such effect, the
Banks emphasize the origination of ARMs and sell fixed-rate loans when
conditions favor such a sale. Furthermore, experience reveals that, as a result
of prepayments in connection with refinancings and sales of the underlying
properties, residential loans generally remain outstanding for periods which are
substantially shorter than the maturity of such loans.
6
Of the total mortgage loans originated by the Banks during the year
ended December 31, 1998, 37.7% were ARMs and 62.3% were fixed-rate loans.
Adjustable-rate loans comprised 66.2% of Camco's total outstanding loans at
December 31, 1998.
Construction Loans. The Banks offer residential construction loans both
to owner-occupants and to builders for homes being built under contract with
owner-occupants. The Banks also make loans to persons constructing projects for
investment purposes. At December 31, 1998, a total of $37.2 million, or
approximately 6.8% of Camco's total loans, consisted of construction loans,
primarily for one- to four-family properties.
Construction loans to owner-occupants are typically adjustable-rate
long-term loans on which the borrower pays only interest during the construction
period. Some construction loans to builders, however, have terms of up to 18
months at fixed rates of interest.
Construction loans for investment properties involve greater
underwriting and default risks to the Banks than do loans secured by mortgages
on existing properties or construction loans for single-family residences. Loan
funds are advanced upon the security of the project under construction, which is
more difficult to value in the case of investment properties before the
completion of construction. Moreover, because of the uncertainties inherent in
estimating construction costs, it is relatively difficult to evaluate precisely
the total loan funds required to complete a project and the related
Loan-to-Value Ratios. In the event a default on a construction loan occurs and
foreclosure follows, Camco could be adversely affected in that it would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. At December 31, 1998, the
Banks had fourteen construction loans in the amount of $5.3 million on
investment properties.
Nonresidential Real Estate Loans. The Banks originate loans secured by
mortgages on nonresidential real estate, including retail, office and other
types of business facilities and apartment projects containing 36 or more units.
Nonresidential real estate loans are generally made on an adjustable-rate basis
for terms of up to 20 years. Nonresidential real estate loans originated by the
Banks generally have an LTV of 80% or less. The largest nonresidential real
estate loan outstanding at December 31, 1998, was a $3.3 million loan secured by
two multi-unit apartment complexes. Nonresidential real estate loans comprised
2.7% of total loans at December 31, 1998.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Banks have endeavored to reduce
this risk by carefully evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management
constructing or operating the property, the debt service ratio, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation.
Federal law limits an association's investment in nonresidential real
estate loans to 400% of the association's capital. At December 31, 1998, Camco's
investment in nonresidential real estate loans was approximately 25.0% of its
total capital.
Consumer Loans. The Banks make various types of consumer loans,
including loans made to depositors on the security of their savings deposits,
automobile loans, education loans, home improvement loans, home equity line of
credit loans and unsecured personal loans. Home equity loans and unsecured loans
are generally made at a variable rate of interest tied to the base rate on
corporate loans, posted by 75% of the nation's 30 largest banks, as reported in
The Wall Street Journal. Home equity loans are for terms of up to 10 years. Most
other consumer loans are generally made at fixed rates of interest for terms of
up to 10 years. The risk of default on consumer loans during an economic
recession is greater than for residential mortgage loans. At December 31, 1998,
education, consumer and other loans constituted 5.8% of Camco's total loans.
7
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including: solicitations by Camco's lending staff; referrals
from real estate brokers and builders; continuing business with depositors,
other borrowers and real estate developers; and walk-in customers. Camco does
not use loan brokers. Camco's management stresses the importance of
individualized attention to the financial needs of its customers.
The loan origination process is decentralized, with each of the Banks
having autonomy in loan processing and approval for its respective market area.
Mortgage loan applications from potential borrowers are taken by one of the loan
officers of the Bank originating the loan, after which they are forwarded to the
Bank's loan department for processing. On new loans, the loan department
typically obtains a credit report, verification of employment and other
documentation concerning the borrower and orders an appraisal of the fair market
value of the real estate which will secure the loan. The real estate is
thereafter physically inspected and appraised by a staff appraiser or by a
designated fee appraiser approved by the Board of Directors of the originating
Bank. Upon the completion of the appraisal and the receipt of all necessary
information regarding the borrower, the mortgage loan application is submitted
to the Bank's loan committee for approval. If the loan is approved, an
attorney's opinion of title or title insurance is obtained on 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
originating Bank as an insured mortgagee.
The procedure for approval of construction loans is the same as for
residential mortgage loans, except that the appraiser evaluates the building
plans, construction specifications and construction cost estimates. The
originating Bank also evaluates the feasibility of the proposed construction
project and the experience and record of the builder.
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.
Loan Originations, Purchases and Sales. The Banks have been actively
originating new 30-year, 15-year and 10-year fixed-rate real estate loans as
well as adjustable-rate real estate loans and consumer loans. Generally all
residential fixed-rate loans made by the Banks are originated on documentation
which will permit a possible sale of such loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") or other secondary mortgage market participants.
When a mortgage loan is sold to the FHLMC, the selling Bank services the loan by
collecting monthly payments of principal and interest and forwarding such
payments to the FHLMC, net of a servicing fee. Fixed-rate loans not sold to the
FHLMC and all of the ARMs originated by the Banks are held in the Banks' loan
portfolios. During the year ended December 31, 1998, Camco sold approximately
$205.9 million in loans to the FHLMC and others. Gross income from loans
serviced by Camco for others was $1.1 million for the year ended December 31,
1998.
From time to time, the Banks sell participation interests in mortgage loans
originated by them and purchase whole loans or participation interests in loans
originated by other lenders. The Banks held whole loans and participations in
loans originated by other lenders of approximately $35.3 million at December 31,
1998. Loans which the Banks purchase must meet or exceed the underwriting
standards for loans originated by the Banks.
In recent years, Camco has purchased mortgage-backed securities insured or
guaranteed by U.S. Government agencies in order to improve Camco's asset
portfolio yield by profitably investing excess funds. Camco intends to continue
to purchase such mortgage-backed securities when conditions favor such an
investment. See "Investment Activities."
8
The following table presents Camco's mortgage loan origination,
purchase, sale and principal repayment activity for the periods indicated:
Year ended December 31,
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(In thousands)
Loans originated:
Construction $ 49,152 $ 34,293 $ 24,182 $ 13,466 $ 16,218
Permanent 328,046 168,519 121,793 106,095 122,397
Consumer and other 67,243 54,351 43,749 28,196 23,595
------- ------- ------- ------- -------
Total loans originated 444,441 257,163 189,724 147,757 162,210
------- ------- ------- ------- -------
Loan purchased (1) 18,982 12,514 - - 5,041
Reductions:
Principal repayments (1) 194,594 134,465 95,508 73,290 63,662
Loans sold (1) 210,535 77,665 61,687 38,891 41,994
Transfers from loans to real estate owned 477 932 92 70 72
------- ------- ------- ------- -------
Total reductions 405,606 213,062 157,287 112,251 105,728
Increase in other items, net (2) 1,192 (238) 456 545 (123)
Increase due to Ashland Merger - - 70,812 - -
------- ------- ------- ------- -------
Net increase $ 59,009 $ 56,377 $103,705 $ 36,051 $ 61,400
======= ======= ======= ======= =======
- -----------------------
(1) Includes mortgage-backed securities.
(2) Other items primarily consist of amortizations of deferred loan origination
fees, the provision for losses on loans and unrealized gains on
mortgage-backed securities designated as available for sale.
Federal Lending Limit. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." In applying this limit, the regulations require that loans to
certain related or affiliated borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower of up to $500,000. In addition,
the OTS, under certain circumstances, may permit exceptions to the lending limit
on a case-by-case basis.
The largest amount which the Banks could have loaned to one borrower at
December 31, 1998, was approximately $2.6 million for Cambridge Savings and $1.8
million for Marietta Savings, First Federal and First Savings. The largest
amount Cambridge Savings had outstanding to one borrower and related persons or
entities at December 31, 1998, was $1.5 million, which consisted of one loan
secured by apartment rental properties. The largest amount Marietta Savings had
outstanding to one borrower and related persons or entities at December 31,
1998, was $1.7 million, which consisted of 269 loans secured by personal
residences and commercial properties and leasing business residuals. The largest
amount First Federal had outstanding to one borrower was $1.4 million, which
consisted of one loan secured by multiple single-family investment properties.
The largest amount First Savings had outstanding to one person and related
persons or entities at December 31, 1998, was $1.2 million, which consisted of a
single loan secured by investment properties.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Banks may receive loan origination fees or "points" of up to 2.0% of
9
the loan amount, depending on the type of loan, plus reimbursement of certain
other expenses. Loan origination fees and other fees are a volatile source of
income, varying with the volume of lending and economic conditions. All
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 in accordance with Statement of Financial Accounting Standards
("SFAS") No. 91.
Delinquent Loans, Nonperforming Assets and Classified Assets. The Banks
attempt to minimize loan delinquencies through the assessment of late charges
and adherence to established collection procedures. Generally, after a loan
payment is 15 days delinquent, a late charge of 5% of the amount of the payment
is assessed and a loan officer contacts the borrower by mail or phone to request
payment. In certain limited instances, the Banks may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize his or
her financial affairs. The Banks generally initiate foreclosure proceedings, in
accordance with applicable laws, when it appears that a modification or
moratorium would not be productive.
Real estate which has been or will be acquired by one of the Banks as a
result of foreclosure or by deed in lieu of foreclosure is classified as "real
estate owned" until it is sold. "Real estate owned" is recorded at the lower of
the book value of the loan or the fair value of the property less estimated
selling expenses at the date of acquisition. Periodically, "real estate owned"
is reviewed to ensure that fair value is not less than carrying value, and any
write-down resulting therefrom is charged to earnings as a provision for losses
on real estate acquired through foreclosure. All costs incurred from the date of
acquisition are expensed in the period paid.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
At December31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Loans delinquent for:
30 to 89 days $10,028 $6,723 $6,291 $5,259 $3,722
90 or more days 4,296 1,818 2,373 1,082 1,319
------ ----- ----- ----- -----
Total delinquent loans $14,324 $8,541 $8,664 $6,341 $5,041
====== ===== ===== ===== =====
Ratio of total delinquent loans to
total net loans 2.61% 1.77% 2.06% 1.98% 1.78%
==== ==== ==== ==== ====
10
Nonaccrual status denotes loans for which, in the opinion of
management, the collection of additional interest is unlikely, or loans that
meet nonaccrual criteria as established by regulatory authorities. Payments
received on a nonaccrual loan are either applied to the outstanding principal
balance or recorded as interest income, depending on management's assessment of
the collectibility of the loan. The following table sets forth information with
respect to Camco's nonaccruing and delinquent loans for the periods indicated.
At December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential $1,328 $ 830 $1,086 $ 574 $ 742
Nonresidential 233 27 655 174 80
Consumer and other 64 79 40 6 26
----- ----- ----- ----- -----
Total nonaccrual loans 1,625 936 1,781 754 848
----- ----- ----- ----- -----
Accruing loans delinquent 90 days or more:
Real estate:
Residential 2,030 710 652 395 515
Nonresidential - - - - 38
Consumer and other 641 293 123 57 94
----- ----- ----- ----- -----
Total loans 90 days past due 2,671 1,003 775 452 647
----- ----- ----- ----- -----
Total nonperforming loans $4,296 $1,939 $2,556 $1,206 $1,495
===== ===== ===== ===== =====
Allowance for loan losses $1,783 $1,596 $1,373 $1,128 $1,039
===== ===== ===== ===== =====
Nonperforming loans as a percent of total net
loans .78% .40% .61% .29% .53%
=== === === === ===
Allowance for loan losses as a percent of
nonperforming loans 41.5% 82.3% 53.7% 93.5% 69.5%
==== ==== ==== ==== ====
As of and for the year ended December 31, 1998, no loans were troubled
debt restructurings as defined in SFAS No. 15. The amount of interest income
that would have been recorded had nonaccrual loans performed in accordance with
contractual terms totaled $167,000 for the year ended December 31, 1998.
Interest collected on such loans and included in net earnings was $39,500.
At December 31, 1998, there were no loans which were not classified as
nonaccrual, 90 days past due or restructured which management considered
classifying in the near future due to concerns as to the ability of the
borrowers to comply with repayment terms.
Federal regulations require each of the Banks to classify its assets on
a regular basis. Problem assets are to be classified as either (i)
"substandard," (ii) "doubtful" or (iii) "loss." Substandard assets have one or
more defined weaknesses and are characterized by the distinct possibility that
the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the same weaknesses as substandard assets with
the additional characteristic that the weaknesses make collection or liquidation
in full highly questionable and improbable on the basis of existing facts,
conditions and value. Assets classified as "loss" are considered uncollectible
and of such little value that their treatment as assets without the
establishment of a specific reserve is unwarranted. Federal regulations provide
for the reclassification of real estate assets by federal examiners.
11
Assets classified as substandard or doubtful require the institution to
establish prudent general allowances for losses. If an asset or portion thereof
is classified as loss, the institution must either establish specific allowances
for losses in the amount of 100% of the portion of the asset classified loss or
charge off such amount.
At December 31, 1998, the aggregate amounts of Camco's classified
assets were as follows:
At December 31, 1998
(In thousands)
Classified assets:
Substandard $3,732
Doubtful 77
Loss 6
-----
Total classified assets $3,815
=====
The regulations also include a "special mention" category, consisting of
assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification, but which possess credit deficiencies
or potential weaknesses deserving management's close attention. Camco had assets
in the amount of $1.5 million designated as "special mention" at December 31,
1998.
Allowance for Loan Losses. The following table sets forth an analysis of
Camco's allowance for loan losses:
Year ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of year $1,596 $1,373 $1,128 $1,039 $1,126
Charge-offs:
1-4 family residential real estate 9 30 3 - -
Multifamily and nonresidential real estate - 124 - 40 169
Consumer 61 22 6 18 25
----- ----- ----- ----- -----
Total charge-offs 70 176 9 58 194
----- ----- ----- ----- -----
Recoveries:
1-4 family residential real estate - 2 - - -
Multifamily and nonresidential real estate - 4 - - -
Consumer 7 8 4 4 7
----- ----- ----- ----- -----
Total recoveries 7 14 4 4 7
----- ----- ----- ----- -----
Net charge-offs (63) (162) (5) (54) (187)
Provision for losses on loans 250 385 141 143 100
Increase attributable to Ashland Merger - - 109 - -
----- ----- ----- ----- -----
Balance at end of year $1,783 $1,596 $1,373 $1,128 $1,039
===== ===== ===== ===== ======
Net charge-offs to average loans -% .04% -% .02% .08%
=== === === === ===
12
The following table sets forth the allocation of Camco's allowance for
loan losses by type of loan at the dates indicated:
At December 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ ----
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
Amount to total Amount to total Amount of total Amount to total Amount to total
loans loans loans loans loans
(Dollars in thousands)
Balance at year end
applicable to:
Mortgage loans $1,340 94.6% $1,030 93.4% $1,072 93.9% $ 922 91.6% $ 829 92.1%
Consumer and other 443 5.4 566 6.6 301 6.1 206 8.4 210 7.9
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
loans
Total $1,783 100.0% $1,596 100.0% $1,373 100.0% $1,128 100.0% $1,039 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Investment Activities
Federal regulations require that the Banks maintain a minimum amount of
liquid assets, which may be invested in United States Treasury obligations,
securities of various agencies of the federal government, certificates of
deposit at insured banks, bankers' acceptances and federal funds sold. The Banks
are also permitted to make limited investments in commercial paper, corporate
debt securities and certain mutual funds, as well as other investments permitted
by federal law and regulations. It has generally been Camco's policy to maintain
liquid assets at the Banks in excess of regulatory requirements in order to
shorten the maturities of the investment portfolios and improve the matching of
short-term investments and interest rate sensitive savings deposit liabilities.
The following table sets forth the composition of Camco's investment
securities portfolio, except its stock in the FHLB of Cincinnati, at the dates
indicated:
At December 31,
1998 1997 1996
------ ------ ------
Amortized % of Fair % of Amortized % of Fair % of Amortized % of Fair % of
cost Total Value Total cost Total value Total cost Total value Total
------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Held to maturity: (Dollars in thousands)
U.S. Government
agency obligations $10,782 52.3% $10,805 51.8% $17,075 45.5% $17,095 45.2% $21,367 42.0% $21,312 41.9%
Deposits in insured
banks - - - - - - - - 990 1.9 990 1.9
Municipal bonds 180 .9 193 .9 414 1.1 441 1.2 477 1.0 510 1.0
Mortgage-backed
securities 5,019 24.3 5,102 24.4 8,207 21.9 8,311 21.9 10,700 21.0 10,735 21.1
------ ----- ------ ----- ------ ---- ------ ----- ------ ----- ------ -----
Total 15,981 77.5 16,100 77.1 25,696 68.5 25,847 68.3 33,534 65.9 33,547 65.9
Available for sale:
U.S. Government
agency obligations 1,003 4.9 1,004 4.8 2,511 6.7 2,519 6.7 5,526 10.9 5,546 10.9
Corporate equity
security 229 1.1 303 1.5 92 .2 158 .4 1,623 3.2 1,631 3.2
Mortgage-backed 3,405 16.5 3,476 16.6 8,317 22.2 8,447 22.3 10,182 20.0 10,148 20.0
securities
Asset management
funds - - - - 900 2.4 895 2.3 - - - -
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total 4,637 22.5 4,783 22.9 11,820 31.5 12,019 31.7 17,331 34.1 17,325 34.1
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total investments and
mortgage-backed
securities $20,618 100.0% $20,883 100.0% $37,516 100.0% $37,866 100.0% $50,865 100.0% $50,872 100.0%
====== ===== ====== ===== ====== ===== ======= ===== ====== ===== ====== =====
13
The following table presents the contractual maturities or terms to
repricing of Camco's investment securities, except its stock in the FHLB of
Cincinnati and corporate equity securities and the weighted average yields at
December 31, 1998:
At December 31, 1998
After one After five
One year or less through five years through ten years After ten years Total
------------------ ------------------ ------------------ ------------------ ---------------------------
Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair average
cost yield Cost yield cost yield cost yield cost value yield
--------- ------ --------- ------- --------- ------- --------- ------- --------- ----- ---------
(Dollars in thousands)
U.S. Government
agency obligations $1,003 7.25% $10,782 6.08% $ - -% $ - -% $11,785 $11,809 6.18%
Municipal bonds - - - - 180 7.01 - - 180 193 7.01
Mortgage-backed
securities 402 7.01 774 8.19 1,554 7.32 5,694 7.07 8,424 8,578 7.21
----- ---- ------ ---- ----- ---- ----- ---- ------ ------ ----
Total $1,405 7.18% $11,556 6.23% $1,734 7.29% $5,694 7.07% $20,389 $20,580 6.62%
===== ==== ====== ==== ===== ==== ===== ==== ====== ====== ====
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Camco's
funds for use in lending and other investment activities. In addition to
deposits, Camco derives funds from interest payments and principal repayments on
loans, advances from the FHLB of Cincinnati and income on earning assets. Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate more in response to general interest rate and money market
conditions. Borrowings from the FHLB of Cincinnati are used on a short-term
basis to compensate for reductions in the availability of funds from other
sources. FHLB advances and other borrowings are also used on a longer term basis
for general business purposes.
Deposits. Deposits are attracted principally from within Camco's
primary market area through the offering of a broad selection of deposit
instruments, including interest and non-interest bearing checking accounts,
money market deposit accounts, regular passbook savings accounts, term
certificate accounts and retirement savings plans. Interest rates paid, maturity
terms, service fees and withdrawal penalties for the various types of accounts
are established periodically by management of the Banks based on their
particular liquidity requirements, growth goals and interest rates paid by
competitors. Interest rates paid by Camco on deposits are not limited by federal
or state law or regulation. Camco generally does not obtain funds through
brokers or offer premiums to attract deposits. Camco does not have a significant
amount of savings accounts from outside its primary market area.
14
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by the Banks at the dates indicated:
At December 31
1998 1997 1996
Weighted ------ ------ ----
average Percent Percent Percent
rate at of total of total of total
12/31/98 Amount deposits Amount deposits Amount deposits
(Dollars in thousands)
Withdrawable accounts:
Interest and non-interest bearing
accounts 1.70% $ 70,944 16.0% $ 56,316 13.4% $ 49,557 12.5%
Money market demand accounts 3.96 24,402 5.5 23,720 5.6 21,198 5.3
Passbook and statement savings
accounts 3.10 74,405 16.8 68,536 16.2 68,571 17.2
---- ------- ----- ------- ----- ------- -----
Total withdrawable accounts 2.64 169,751 38.3 148,572 35.2 139,326 35.0
Certificates accounts:
Term:
Seven days to one year 5.36 88,134 19.9 40,660 9.6 50,563 12.7
One to two years 5.51 58,940 13.3 90,902 21.5 68,907 17.3
Two to eight years 5.90 62,429 14.1 89,287 21.1 89,732 22.5
Negotiated rate certificates 5.66 27,338 6.2 23,566 5.6 21,964 5.5
Individual retirement accounts 5.69 36,635 8.2 29,381 7.0 27,669 7.0
---- ------- ----- ------- ----- ------- -----
Total certificate accounts 5.59 273,476 61.7 273,796 64.8 258,835 65.0
---- ------- ----- ------- ----- ------- -----
Total deposits 4.46% $443,227 100.0% $422,368 100.0% $398,161 100.0%
==== ======= ===== ======= ===== ======= =====
The following table presents the amount and contractual maturities of
Camco's time deposits at December 31, 1998:
Amount Due
Up to Over
one year 1-3 years 3-5 years 5 years Total
-------- --------- --------- ------- --------
(Dollars in thousands)
Amount maturing $181,877 $79,426 $10,406 $1,767 $273,476
======== ======= ======= ====== ========
Average rate 5.30% 5.71% 5.82% 6.22% 5.59%
==== ==== ==== ==== ====
The following table sets forth the amount and maturities of Camco's
time deposits in excess of $100,000 at December 31, 1998:
Maturity At December 31, 1998
(In thousands)
Three months or less $12,716
Over three to six months 11,819
Over six to twelve months 12,997
Over twelve months 7,772
------
Total $45,304
======
Borrowings. The twelve regional FHLBs function as central reserve
banks, providing credit for their member institutions. As members in good
standing of the FHLB of Cincinnati, the Banks are authorized to apply for
advances from the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Advances are made pursuant to several different
programs, each having its own interest rate and range of maturities. Depending
15
on the program, limitations on the amount of advances are based either on a
fixed percentage of an institution's regulatory capital or on the FHLB's
assessment of the institution's creditworthiness. Under current regulations, a
member institution must meet certain qualifications to be eligible for FHLB
advances. The extent to which an association is eligible for such advances will
depend upon whether it meets the Qualified Thrift Lender ("QTL") test. See
"REGULATION - Federal Regulation -- Qualified Thrift Lender Test." If an
institution meets the QTL test, it will be eligible for 100% of the advances it
would otherwise be eligible to receive. If an institution does not meet the QTL
test, it will be eligible for such advances only to the extent it holds QTL test
assets. At December 31, 1998, each of the Banks met the QTL test.
The following table sets forth the maximum amount of Camco's FHLB
advances outstanding at any month end during the periods shown and the average
aggregate balances of FHLB advances for such periods:
Year ended December 31,
1998 1997 1996
------ ------ -----
(Dollars in thousands)
Maximum amount outstanding $125,483 $82,319 $58,354
Average amount outstanding 95,257 67,277 36,678
Weighted average interest cost of FHLB advances
based on month end balances 5.57% 5.77% 5.92%
The following table sets forth certain information with respect to
Camco's FHLB advances at the dates indicated:
At December 31,
1998 1997 1996
------ ------ -----
(Dollars in thousands)
Amount outstanding $125,483 $82,319 $58,354
Weighted average interest rate 5.41% 6.25% 5.87%
16
Yields Earned and Rates Paid
The following table sets forth the weighted average yields earned on
Camco's interest-earning assets, the weighted average interest rates paid on
Camco's interest-bearing liabilities and the interest rate spread between the
weighted average yields earned and rates paid by Camco at the dates indicated:
At December 31,
1998 1997 1996
------ ------ -----
Weighted average yield on:
Loan portfolio 7.81% 8.24% 8.23%
Investment portfolio (1) 6.61 6.46 6.33
Interest-earning assets (2) 7.63 8.04 7.96
Weighted average rate paid on:
Deposits 4.46 4.74 4.75
FHLB advances 5.41 6.25 5.87
Interest-bearing liabilities 4.69 4.99 4.89
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all
interest-bearing liabilities) 2.94 3.06 3.07
- ----------------------------
(1) Interest on mortgage-backed securities included.
(2) Earnings on FHLB stock and cash surrender value of life insurance included.
Average Yield and Rate Analysis
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resulting
yields, and the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. Balances are based on the average of
month-end balances which, in the opinion of management, do not differ materially
from daily balances:
Year ended December 31,
1998 1997 1996
------ ----- ----
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
balance paid rate balance paid rate balance paid rate
----------- -------- ------- ----------- -------- ------- ----------- ------- -------
Interest-earning assets:
Loans receivable (1) $499,515 $40,478 8.10% $448,721 $37,060 8.26% $350,214 $29,106 8.31%
Mortgage-backed
securities (2) 10,435 779 7.47 18,647 1,321 7.08 16,732 1,176 7.03
Investment securities (2) 16,696 1,037 6.21 26,099 1,625 6.23 27,205 1,475 5.42
Interest-bearing deposits and
other interest-earning 31,482 1,989 6.32 17,577 1,211 6.89 12,534 1,055 8.42
-------- ------ ---- ------- ------ ---- ------- ------ ----
assets
Total interest-earning $558,128 44,283 7.93 $511,044 41,217 8.07 $406,685 32,812 8.07
======= ======= =======
assets
Interest-bearing liabilities:
Deposits $428,911 19,538 4.55 $411,778 18,899 4.59 $348,292 15,639 4.49
FHLB advances and other
borrowings 95,257 5,314 5.57 67,277 3,879 5.77 36,678 2,172 5.92
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing $524,168 24,852 4.74 $479,055 22,778 4.75 $384,970 17,811 4.63
======= ------ ---- ======= ------ ---- ======= ------ ----
liabilities
Net interest income; interest
rate spread $19,431 3.19% $18,439 3.32% $15,001 3.44%
====== ==== ====== ==== ====== ====
Net interest margin (3) 3.48% 3.61% 3.69%
==== ==== ====
Average interest-earning
assets to average 106.48% 106.68% 105.64%
====== ====== ======
interest-bearing
liabilities
- -------------------------------------
(Footnotes on next page)
17
(1) Includes nonaccrual loans.
(2) Includes securities designated as available for sale.
(3) Net interest income as a percent of average interest-earning assets.
Rate/Volume Analysis
The following table describes the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected Camco's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and (iii) total changes in rate
and volume. The combined effects of changes in both volume and rate, which
cannot be separately identified, have been designated as "Other."
Year ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase (decrease) due to Increase (decrease) due to
Volume Rate Other Total Volume Rate Other Total
(Dollars in thousands)
Interest income attributable to:
Loans receivable (1) $3,497 $(573) $(52) $2,876 $8,287 $(148) $(40) $8,099
Investment securities (2) 292 (91) (9) 190 251 50 5 306
----- ---- --- ----- ----- ---- --- -----
Total interest income 3,789 (664) (61) 3,066 8,538 (98) (35) 8,405
----- ---- --- ----- ----- ---- --- -----
Interest expense attributable to:
Deposits 786 (141) (6) 639 2,851 347 63 3,261
FHLB advances and other
borrowings 1,613 (126) (52) 1,435 1,812 (57) (48) 1,707
----- ---- --- ----- ----- ---- --- -----
Total interest expense 2,399 (267) (58) 2,074 4,663 290 15 4,968
----- ---- --- ----- ----- ---- --- -----
Increase (decrease) in net interest
income $1,390 $(397) $ (3) $ 992 $3,875 $(388) $(50) $3,437
===== ==== === ===== ===== ==== === =====
- -----------------------------
(1) Includes mortgage-backed securities.
(2) Includes interest-bearing deposits and other.
Competition
Camco competes for deposits with other savings associations, savings
banks, commercial banks and credit unions and with the issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, Camco competes with other savings banks,
savings associations, commercial banks, consumer finance companies, credit
unions and other lenders. Camco competes for loan originations primarily through
the interest rates and loan fees it charges and through the efficiency and
quality of the services it provides to borrowers. Competition is affected by,
among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable.
18
Service Corporation Activities
Federal regulations permit savings associations to invest an amount up
to 2% of their assets in the stock, paid-in surplus and unsecured obligations of
subsidiary service corporations engaged in certain activity. In addition,
federal regulations generally authorize such institutions which meet the minimum
regulatory capital requirements to invest up to 50% of their regulatory capital
in conforming first mortgage loans made by service corporations.
At December 31, 1998, Cambridge Savings and Marietta Savings each had a
direct investment in the capital stock of CMC in the amount of $853,000. The
principal business of CMC is originating first mortgage loans on residential
real estate located primarily in Coshocton, Muskingum, Stark and Tuscarawas
Counties, Ohio. Loans originated by CMC are generally sold to Cambridge Savings.
CMC originated $144.0 million of mortgage loans in 1998, $137.8 million of which
were sold to Cambridge Savings, compared to $73.0 million of mortgage loans in
1997, $72.6 million of which were sold to Cambridge Savings.
Marietta Savings had a direct investment in the capital stock of
WestMar in the amount of $381,712 at December 31, 1998. The principal business
of WestMar is originating first mortgage loans on residential real estate
located in Wood County, West Virginia. WestMar originated $18.8 million of
mortgage loans in 1998, $17.5 million of which were sold to Marietta Savings,
compared to $8.6 million of mortgage loans in 1997, $7.0 million of which were
sold to Marietta Savings.
At December 31, 1998, First Savings' investment in First S&L
Corporation totaled $15,000. First S&L Corporation has not conducted any
business other than the acquisition of stock in a data processing company.
Employees
As of December 31, 1998, Camco had 216 full-time employees and 23
part-time employees. Camco believes that relations with its employees are good.
Camco offers health and disability benefits and a 401(k) salary savings plan.
None of the employees of Camco are represented by a collective bargaining unit.
Year 2000 Considerations
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
In 1996, the Corporation began evaluating the status of all of its technological
systems which included its state of readiness in addressing the Y2K issue. After
the analysis was completed, a technology plan was developed and implementation
of the plan started in mid-1997.
As the Corporation is primarily dependent on a third-party data processing
service bureau for maintaining customer records and financial systems, a task
force was formed to identify a service bureau that would meet the current and
future technology needs of the Corporation and which would be Y2K compliant. The
new service bureau was selected and conversion of all of the Banks' data were
completed in the fourth quarter of 1998. As a part of the conversion process,
all of the data processing hardware and software in the Banks was replaced and
has been tested as being Y2K compliant. The Corporation estimates that the cost
of converting and replacing information and non-information technology systems
will fall within a range of $1.5 million and $1.75 million with at least 75%
being capitalized (which relates to a discretionary management decision to
upgrade existing information technology systems). As stated previously, data
processing expenses during 1998 increased by $854,000, most of which was for
conversion and de-conversion costs, training and increased costs related to out
of contract processing. Management had estimated that the total cost to address
the Y2K issue would be approximately $75,000, of which $30,000 occurred in 1998.
While management believes their Y2K budget is based on sound assumptions, there
is no guarantee that additional expenses will not occur in the future.
19
The Corporation has identified its other third party vendors and
significant borrowers and, if they were deemed critical to the banking
operations of Camco, a review of their Y2K readiness was conducted. The
Corporation continues to monitor its vulnerability to third-party vendors (other
than its new service bureau) and to significant borrowers, all of which are
insignificant to consolidated operations.
Camco is developing contingency plans in which it will seek alternative
sources for critical services provided by third party vendors who it has deemed
will not be Y2K compliant. In addition, business resumption is also being
addressed and will be monitored throughout 1999 for possible enhancements.
The final phase of the Corporation's Y2K plan involves the testing of
the systems in place to ensure Y2K readiness. The Corporation's service bureau
completed the testing of its systems during the fourth quarter of 1998. The
tests were conducted in accordance with recommendations published by the Federal
Financial Institutions Examination Council ("FFIEC"). The Corporation's testing
of all types of transactions through the service bureau will be completed in the
first quarter of 1999. The Corporation's plan also calls for the testing of
non-information technology hardware and where necessary, either the repair or
replacement of those systems if they are found to be non-Y2K compliant.
Because of unknown external risks associated with this issue, the
Corporation cannot quantify the consequences and uncertainty involved beyond
those already identified, however, management believes such remaining external
risks will not have a material adverse effect on the Corporation's financial
condition or results of operations.
REGULATION
General
As a savings and loan holding company within the meaning of the Home
Owners' Loan Act of 1933, as amended (the "HOLA"), Camco is subject to
regulation, examination and oversight by the OTS. First Federal and First
Savings are subject to regulation by the OTS and the FDIC. Cambridge Savings and
Marietta Savings are subject to regulation by the Division and the FDIC. Camco
and the Banks must file periodic reports with these governmental agencies, as
applicable, concerning their activities and financial condition. Examinations
are conducted periodically by the applicable regulators to determine whether
Camco and the Banks are in compliance with various regulatory requirements and
are operating in a safe and sound manner. The Banks are members of the FHLB of
Cincinnati and are also subject to certain regulations promulgated by the Board
of Governors of the Federal Reserve System ("FRB").
20
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
First Federal and First Savings may be regulated under federal law as banks or
be required to change their charters. Such change in regulation or charter would
likely change the range of activities in which the First Federal and First
Savings may engage and would probably subject the First Federal and First
Savings to more regulation by the FDIC. In addition, Camco might become subject
to different holding company regulations which may limit the activities in which
Camco may engage, and subject Camco to other additional regulatory requirements,
including separate capital requirements. At this time, Camco cannot predict when
or whether Congress may actually pass legislation regarding the regulatory
requirements or charter of Camco, First Federal and First Savings. Although such
legislation may change the activities in which Camco, First Federal and First
Savings are authorized to engage, it is not anticipated that the current
activities of Camco, First Federal and First Savings will be materially affected
by those activity limits.
Ohio Regulation
As savings banks incorporated under Ohio law, Cambridge Savings and
Marietta Savings are subject to regulation by the Division. Such regulation
affects the internal organization of Cambridge Savings and Marietta Savings, as
well as their savings, mortgage lending and other investment activities. Ohio
law requires that Cambridge Savings and Marietta Savings each maintain at least
60% of their assets in housing-related and other specified investments. At
December 31, 1998, Cambridge Savings and Marietta Savings had at least 60% of
their respective assets in such investments. The ability of Ohio savings banks
to engage in certain state-authorized investments is subject to oversight and
approval by the FDIC. See "Federal Regulation - State Chartered Bank
Activities."
Ohio law generally limits the aggregate amount that a savings bank can
lend to one borrower to an amount equal to 15% of the institution's unimpaired
capital and surplus. Based on such limit, Cambridge Savings and Marietta Savings
were able to lend approximately $2.65 million and $1.75 million, respectively,
to one borrower at December 31, 1998. A savings bank may lend to one borrower an
additional amount not to exceed 10% of the institution's unimpaired capital and
surplus, if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral."
The Division is responsible for the regulation and supervision of Ohio
savings banks in accordance with the laws of the State of Ohio. Periodic
examinations by the Division are usually conducted on a joint basis with the
federal examiners. Ohio law requires that Cambridge Savings and Marietta Savings
maintain federal deposit insurance as a condition of doing business.
Any mergers involving, or acquisitions of control of, Ohio savings
banks must be approved by the Division. The Division may initiate certain
supervisory measures or formal enforcement actions against Ohio savings banks.
Ultimately, if the grounds provided by law exist, the Division may place an Ohio
savings bank in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically
governing savings banks, Cambridge Savings and Marietta Savings are also
governed by Ohio corporate law, to the extent such law does not conflict with
the laws specifically governing savings banks.
Federal Regulation
Supervision and Examination. The FDIC is responsible for the regulation
and supervision of all commercial banks and state savings banks that are not
members of the Federal Reserve System ("Non-member Banks"), including Cambridge
Savings and Marietta Savings. The OTS is responsible for the regulation and
supervision of all savings associations, including First Federal and First
21
Savings. Each of the Banks must undergo a full-scope, on-site examination by its
primary federal regulator at least (a) once every twelve months, if the bank has
total assets of $250 million or more, or (b) once every eighteen months, if the
institution has total assets of less than $250 million and satisfies other
specified criteria. In lieu of conducting its own examination, the federal
regulator may accept a state examination every other examination period.
The FDIC issues regulations governing the operations of Non-member
Banks, examines such institutions and may initiate enforcement actions against
such institutions 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 FDIC may appoint a conservator or a receiver
for a Non-member Bank.
The OTS issues regulations governing the operations of savings
associations, regularly examines such institutions and imposes assessments on
savings associations based on their asset size to cover the costs of this
supervision and examination. It also promulgates regulations that prescribe
permissible activities for federally chartered associations, including the types
of lending that such associations may engage in and the investments in real
estate, subsidiaries and securities they may make. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Non-member Banks and savings associations are subject to regulatory
oversight under various consumer protection and fair lending laws. These laws
govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an institution to open a new branch or engage in a merger
transaction.
State-Chartered Bank Activities. The ability of Cambridge Savings and
Marietta Savings to engage in any state-authorized activities or make any
state-authorized investments, as principal, is limited if such activity is
conducted or investment is made in a manner different than that permitted for,
or subject to different terms and conditions than those imposed on, national
banks. Engaging as a principal in any such activity or investment not
permissible for a national bank is subject to approval by the FDIC. Such
approval will not be granted unless certain capital requirements are met and
there is not a significant risk to the FDIC insurance fund. Most equity and real
estate investments (excluding office space and other real estate owned)
authorized by state law are not permitted for national banks. Certain exceptions
are granted for activities deemed by the FRB to be closely related to banking
and for FDIC-approved subsidiary activities.
Liquidity. OTS regulations require that each of First Federal and First
Savings maintain an average daily balance of liquid assets (cash, certain time
deposits, bankers' acceptances, and specified United States Government, state or
federal agency obligations. During fiscal 1998, certain maturity requirements
were removed, which, for First Federal and First Savings, resulted in a greater
eligible liquidity amount and percentage at December 31, 1998, than at prior
year ends. At December 31, 1998, such minimum requirement was an amount equal to
a monthly average of not less than 4% of its net withdrawable savings deposits
plus borrowings payable in one year or less. Monetary penalties may be imposed
upon associations failing to meet liquidity requirements. The eligible liquidity
of First Federal and First Savings was approximately $19.3 million, or 23.1%,
and $7.4 million, or 10.4%, respectively, at December 31, 1998, and exceeded the
applicable 4.0% liquidity requirement by approximately $15.8 million and $4.6
million, respectively.
Cambridge Savings and Marietta Savings are not required to maintain a
specific level of liquidity; however, the FDIC expects them to maintain adequate
liquidity to protect safety and soundness.
22
Qualified Thrift Lender Test. Savings associations are required to
maintain a specified level of investments in assets that are designated as
qualifying thrift investments ("QTI"), which are generally related to domestic
residential real estate and manufactured housing and include credit card,
student and small business loans, and stock issued by any FHLB, the FHLMC or the
FNMA. Under this test 65% of an institution's "portfolio assets" (total assets
less goodwill and other intangibles, property used to conduct business and 20%
of liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. Effective September 30, 1996, a savings association may also
qualify as a QTL if at least 60% of the institution's assets (on a tax basis)
consist of specified assets (generally loans secured by residential real estate
or deposits, educational loans, cash and certain governmental obligations). The
OTS may grant exceptions to the QTL test under certain circumstances. If a
savings association fails to meet the QTL test, the association and its holding
company become subject to certain operating and regulatory restrictions. A
savings association that fails to meet the QTL test will not be eligible for new
FHLB advances. At December 31, 1998, each of the Banks met the QTL test.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations, including First
Federal and First Savings, to make capital distributions, including dividend
payments. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year equal to
the greater of 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, or the amount authorized for a
Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. First Federal and First Savings meet the requirements for a Tier 1
association and have not been notified of any need for more than normal
supervision.
Tier 2 consists of associations that before and after the proposed
distribution meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four-quarter period. Tier 3
associations do not meet current minimum capital requirements and must obtain
OTS approval of any capital distribution. Tier 2 associations that propose to
make a capital distribution in excess of the noted safe harbor level must also
obtain OTS approval. Tier 2 associations proposing to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution. The OTS may object to the distribution during
that 30-day period based on safety and soundness concerns.
As subsidiaries of Camco, First Federal and First Savings are required
to give the OTS 30-days' notice prior to declaring any dividend on its stock.
The OTS may object to the distribution during that 30-day period. First Federal
and First Savings paid dividends to Camco totaling $3.7 million during 1998.
Lending Limits. OTS regulations generally limit the aggregate amount
that First Federal and First Savings can lend to one borrower to an amount equal
to 15% of the association's Lending Limit Capital. A savings association may
lend to one borrower an additional amount not to exceed 10% of the association's
unimpaired capital and surplus, if the additional amount is fully secured by
certain forms of "readily marketable collateral." Real estate is not considered
"readily marketable collateral." Certain types of loans are not subject to these
limits. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying these limits,
the regulations require that loans to certain related borrowers be aggregated.
At December 31, 1998, First Federal and First Savings were in compliance with
these lending limits. See "Lending Activities - Federal Lending Limit."
23
Regulatory Capital Requirements. The Banks are required by applicable
law and regulations to meet certain minimum capital requirements. The capital
standards include a leverage limit, or core capital requirement, a tangible
capital requirement applicable to First Federal and First Savings, and a
risk-based capital requirement.
For First Federal and First Savings, the leverage limit requires "core
capital" of at least 3% of total assets. "Core capital" is comprised of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual
associations and certain purchased mortgage servicing rights.
The tangible capital requirement provides that First Federal and First
Savings must maintain "tangible capital" of not less than 1.5% of its adjusted
total assets. "Tangible capital" is defined as core capital minus any
"intangible assets".
For Cambridge Savings and Marietta Savings, the leverage capital
requirement is a minimum level of Tier 1 capital to average total consolidated
assets of 3%, if they have the highest regulatory examination rating, well
diversified risk and minimal anticipated growth or expansion, and between 4% and
5% of average total consolidated assets if they do not meet those criteria.
"Tier 1" capital includes common stockholders equity, noncumulative perpetual
preferred stock and minority interest in the equity accounts of consolidated
subsidiaries, less all intangibles, other than includable purchased mortgage
servicing rights and credit card relationships.
Pursuant to the risk-based capital requirement, the Banks must maintain
total capital, which consists of core or Tier 1 capital and certain general
valuation reserves, of 8% of risk-weighted assets. For purposes of computing
risk-based capital, assets and certain off-balance sheet items are weighted at
percentage levels ranging from 0% to 100%, depending on their relative risk.
There are certain differences between the risk weightings applicable to First
Federal and First Savings and those applicable to Cambridge Savings and Marietta
Savings.
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The following tables present certain information regarding compliance
by the Banks with applicable regulatory capital requirements at December 31,
1998:
At December 31, 1998
To be "well-capitalized"
For capital under prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Cambridge Savings
Total capital
(to risk-weighted assets) $18,001 13.7% =>$10,509 =>8.0% =>$13,136 =>10.0%
Tier I capital
(to risk-weighted assets) $17,451 13.3% =>$ 5,254 =>4.0% =>$ 7,881 => 6.0%
Tier I leverage $17,451 7.3% =>$ 9,535 =>4.0% =>$11,919 => 5.0%
Marietta Savings
Total capital
(to risk-weighted assets) $12,142 13.3% =>$ 7,306 =>8.0% =>$ 9,132 =>10.0%
Tier I capital
(to risk-weighted assets) $11,637 12.7% =>$ 3,653 =>4.0% =>$ 5,479 => 6.0%
Tier I leverage $11,637 8.1% =>$ 5,733 =>4.0% =>$ 7,167 => 5.0%
First Federal
Tangible capital $12,004 9.2% =>$ 1,955 =>1.5% =>$ 6,516 => 5.0%
Core capital $12,004 9.2% =>$ 3,909 =>3.0% =>$ 7,819 => 6.0%
Risk-based capital $12,554 18.1% =>$ 5,555 =>8.0% =>$ 6,944 =>10.0%
First Savings
Tangible capital $12,221 10.2% =>$ 1,796 =>1.5% =>$ 5,987 => 5.0%
Core capital $12,221 10.2% =>$ 3,592 =>3.0% =>$ 7,184 => 6.0%
Risk-based capital $12,407 18.4% =>$ 5,390 =>8.0% =>$ 6,737 =>10.0%
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. In general, an association with less than $300 million in
assets and a risk-based capital ratio of greater than 12% will not be subject to
this requirement. First Federal and First Savings currently qualifies for such
exception. Pending implementation of the interest rate risk component, the OTS
has the authority to impose a higher individualized capital requirement on any
savings association it deems to have excess interest rate risk. The OTS also may
adjust the risk-based capital requirement on an individual basis for any
association to take into account risks due to concentrations of credit and
non-traditional activities.
The FDIC has adopted a new interest rate risk component to the capital
requirements applicable to Non-member Banks. It includes a final rule to allow
for an increase in a Non-member Bank's risk-based capital requirements on an
individualized basis to address the bank's exposure to a decline in the economic
value of its capital due to a change in interest rates. It also includes a
25
proposed policy to provide for measurement of such decline in economic value by
determining the amount of change in the present value of an institution's
assets, liabilities and off-balance sheet items as a result of a 200 basis point
change in interest rates, and taking into account an institution's management of
its interest rate risk and the overall risk exposure of the institution. There
is a proposed exemption from the policy for small, well-managed institutions
with moderate interest rate risk exposure based on asset maturities or repricing
schedules. Such institutions must still measure and assess interest rate risk.
The FDIC has an outstanding proposal to add a market risk component to
the capital requirements of Non-member Banks. Such component would require
additional capital for general or specific market risk of trading portfolios of
debt and equity securities and other investments or assets. The policy will
apply to an institution with less than $5 billion in assets only if its trading
portfolio constitutes at least 10% of the institution's assets. Cambridge
Savings and Marietta Savings cannot predict in what form this market risk
component will be adopted, if at all. At December 31, 1998, Cambridge Savings
and Marietta Savings did not have a trading portfolio. The FDIC may also require
additional capital to address concentrations of credit and non-traditional
activities on a case-by-case basis.
The OTS and FDIC have adopted regulations governing prompt corrective
action to resolve the problems of capital deficient and otherwise troubled
savings associations and Non-member Banks. 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 applicable
agency has less flexibility in determining how to resolve the problems of the
institution. In addition, the agency generally can downgrade an institution's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the institution is deemed to be engaging in an unsafe
or unsound practice, because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized institution must submit a capital restoration plan to the
applicable agency within 45 days after it becomes undercapitalized. Such
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. Each of the Banks' capital levels at December 31, 1998, met the
standards for well-capitalized institutions.
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on an
average during each of the four preceding calendar quarters and must provide
26
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time it became undercapitalized or (b) the
amount necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails to
comply with its capital restoration plan.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency that insures the deposits, up
to prescribed statutory limits, of federally insured banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF")
for commercial banks and state savings banks and the SAIF for savings
associations. The Banks are members of the SAIF and their deposit accounts are
insured by the FDIC, up to the prescribed limits. The FDIC has examination
authority over all insured depository institutions, including the Banks, and has
authority to initiate enforcement actions against federally insured savings
associations, if the FDIC does not believe the OTS has taken appropriate action
to safeguard safety and soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in each
fund. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary based on the risk the
institution poses to its deposit insurance fund. The risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996, and included a special assessment
of $.657 per $100 of SAIF-insured deposits held at March 31, 1995.
The Banks had $277.3 million in deposits at March 31, 1995. The Banks
paid a special assessment of $1.8 million in November 1996, which was accounted
for and recorded as of September 30, 1996. This assessment was tax-deductible,
but reduced earnings for the year ended December 31, 1996.
Transactions with Affiliates and Insiders
Loans to executive officers, directors and principal shareholders and
their related interests must conform to the lending limit on loans to one
borrower, and the total of such loans to executive officers, directors,
principal shareholders and their related interests cannot exceed the
association's Lending Limit Capital (or 200% of Lending Limit Capital for
qualifying institutions with less than $100 million in assets). Most loans to
directors, executive officers and principal shareholders must be approved in
advance by a majority of the "disinterested" members of the board of directors
of the association with any "interested" director not participating. All loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions with the
general public or as offered to all employees in a company-wide benefit program,
and loans to executive officers are subject to additional limitations. The Banks
were in compliance with such restrictions at December 31, 1998.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate is any company or entity which controls, is controlled by or is under
common control with the financial institution. In a holding company context, the
parent holding company of a savings association and any companies that are
controlled by such parent holding company are affiliates of the institution.
Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a
financial institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus for any one affiliate and 20% of such capital stock and
surplus for the aggregate of such transactions with all affiliates, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or the subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar types of transactions.
In addition to limits in Sections 23A and 23B, First Federal and First Savings
may not make any loan or other extension of credit to an affiliate unless the
affiliate is engaged only in activities permissible for a bank holding company
and may not purchase or invest in securities of any affiliate, except shares of
a subsidiary. Exemptions from Sections 23A or 23B of the FRA may be granted only
by the FRB. The Banks were in compliance with these requirements at December 31,
1998.
27
Change in Control
Federal Law. The Federal Deposit Insurance Act (the "FDIA") provides
that no person, acting directly or indirectly or in concert with one or more
persons, shall acquire control of any insured depository institution or holding
company, unless 60-days prior written notice has been given to the primary
federal regulator for that institution and such regulator has not issued a
notice disapproving the proposed acquisition. Control, for purposes of the FDIA,
means the power, directly or indirectly, alone or acting in concert, to direct
the management or policies of an insured institution or to vote 25% or more of
any class of securities of such institution. Control exists in situations in
which the acquiring party has direct or indirect voting control of at least 25%
of the institution's voting shares, controls in any manner the election of a
majority of the directors of such institution or is determined to exercise a
controlling influence over the management or policies of such institution. In
addition, control is presumed to exist, under certain circumstances where the
acquiring party (which includes a group "acting in concert") has voting control
of at least 10% of the institution's voting stock. These restrictions do not
apply to holding company acquisitions. See "Holding Company Regulation".
Ohio Law. A statutory limitation on the acquisition of control of an
Ohio savings bank requires the written approval of the Division prior to the
acquisition by any person or entity of a controlling interest in an Ohio
association. Control exists, for purposes of Ohio law, when any person or entity
which, either directly or indirectly, or acting in concert with one or more
other persons or entities, owns, controls, holds with power to vote, or holds
proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors. A director will not be deemed to be in control by virtue of an
annual solicitation of proxies voted as directed by a majority of the board of
directors. Ohio law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the
outstanding voting securities of Camco must be approved in advance by the
holders of at least a majority of the outstanding voting shares represented at a
meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting, excluding the voting
shares by the acquiring shareholder. This statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers. Under
certain circumstances, interstate mergers and acquisitions involving savings
banks incorporated under Ohio law are permitted by Ohio law. A financial
institution or financial institution holding company with its principal place of
business in another state may acquire a savings and loan association or savings
and loan holding company incorporated under Ohio law if, in the discretion of
the Division, the laws of such other state give an Ohio institution or an Ohio
holding company reciprocal rights.
Holding Company Regulation
Camco is a multiple savings and loan holding company subject to the
regulatory oversight, examination and enforcement authority of the OTS. Though
Cambridge Savings and Marietta Savings are not savings associations, they have
elected to be treated as such for holding company purposes, so that Camco is not
regulated as a bank holding company. Camco is required to register and file
periodic reports with the OTS. If the OTS determines that the continuation of a
particular activity by a savings and loan holding company constitutes a serious
threat to the financial condition of its subsidiary institutions, the OTS may
impose restrictions on the holding company. Such restrictions may include
limiting the payment of dividends, transactions with affiliates or any other
activities deemed to pose a serious threat to the subsidiary institutions.
Generally, no savings and loan holding company may (i) acquire or
retain control of a savings association or another savings and loan holding
company or control the assets thereof or (ii) acquire or retain more than 5% of
the voting shares of a savings association or holding company thereof, which is
not a subsidiary, without the prior written approval of the Director of the OTS.
Additionally, under certain circumstances a savings and loan holding company is
permitted to acquire, with the approval of the Director of the OTS, up to 15% of
28
the previously unissued voting shares of an undercapitalized savings association
for cash, without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the Director of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by state-chartered institutions
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings institutions). As under prior law, the Director of the OTS may approve
an acquisition resulting in a multiple savings and loan holding company
controlling savings associations in more than one state in the case of certain
emergency thrift acquisitions.
As a multiple savings and loan holding company, the activities of Camco
and those of any of its subsidiaries (other than the Banks) are subject to
certain restrictions. Generally, no multiple savings and loan holding company or
subsidiary thereof that is not a savings association may engage in any business
activity other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or an escrow
business, (iii) holding, managing or liquidating assets owned by or acquired
from a subsidiary savings association, (iv) holding or managing properties used
or occupied by a subsidiary savings association, (v) acting as trustee under
deeds of trust, (vi) engaging in those activities previously directly authorized
by federal regulation as of March 5, 1987, to be engaged in by multiple holding
companies, or (vii) furnishing or performing such other services or engaging in
those activities authorized by the FRB as permissible for bank holding
companies, unless the director of the OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of the OTS prior to being
engaged in by a multiple holding company.
Federal law provides that an insured institution shall be liable for
any loss incurred by the FDIC in connection with the default or potential
default of, or federal assistance provided to, an insured institution which is
controlled by the same holding company. Such loss would be apportioned among all
of the insured institutions controlled by the holding company.
Federal Reserve Requirements
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $46.5
million (subject to an exemption of up to $4.9 million), and of 10% of net
transaction accounts in excess of $46.5 million. At December 31, 1998, each of
the Banks was in compliance with its reserve requirements.
Federal Home Loan Bank System
The FHLBs provide credit to their members in the form of advances. As
members of the FHLB of Cincinnati, the Banks are each required to maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of their
29
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of their advances from the FHLB of Cincinnati.
Camco is in compliance with this requirement with an aggregate investment by the
Banks in FHLB of Cincinnati stock of $8.3 million at December 31, 1998.
Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required to obtain and to maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States Government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member's capital) acceptable to
the applicable FHLB, if such collateral has a readily ascertainable value and
the FHLB can perfect its security interest in the 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 FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established the
"Affordable Housing Program" to subsidize the interest rate on advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Cambridge Savings and First Federal have participated in this program.
Federal Taxation
Camco and its subsidiaries are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, Camco and its subsidiaries may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
Camco's average gross receipts for the three tax years ending on
December 31, 1998, is approximately $44.5 million and as a result, Camco does
not qualify as a small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as the Banks, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
30
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995, 1994 and
1993, Camco used the percentage of taxable income method and was subject to
certain limitations based on aggregate loans and savings account balances at the
end of the calendar year.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Market, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property. Camco has provided deferred
taxes of approximately $635,000 and will be permitted to amortize the recapture
of the bad debt reserve over a six year period commencing in 1998.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by any of the Banks to Camco is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and the gross income of Camco for tax purposes would be increased by the amount
31
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of December 31, 1998, the pre-1988 reserves of for the
Banks for tax purposes totaled approximately $1.9 million. Camco believes the
Banks had approximately $27.2 million of accumulated earnings and profits for
tax purposes as of December 31, 1998, which would be available for dividend
distributions, provided regulatory restrictions applicable to the payment of
dividends are met. No representation can be made as to whether the Banks will
have current or accumulated earnings and profits in subsequent years.
The tax returns of Camco have been audited or closed without audit
through calendar year 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Camco.
Ohio Taxation. Camco and East Ohio are subject to the Ohio corporation
franchise tax, which, as applied to them, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.9% of computed Ohio taxable income in
excess of $50,000 or (ii) 0.582% times taxable net worth. For tax years
beginning after December 31, 1999, the rate of tax is the greater of (i) 5.1% on
the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio
taxable income in excess of $50,000 or (ii) .400% times taxable net worth.
A special litter tax is also applicable to all corporations, including
Camco, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
The Banks are "financial institutions" for State of Ohio tax purposes.
As such, they are subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of their book net
worth determined in accordance with generally accepted accounting principles.
For tax year 2000, however, the franchise tax on financial institutions will be
1.4% of the book net worth and for tax year 2001 and years thereafter the tax
will be 1.3% of the book net worth. As "financial institutions," the Banks are
not subject to any tax based upon net income or net profits imposed by the State
of Ohio.
CMC and WestMar are subject to the Ohio Dealers in Intangibles property
tax but currently incur no liability because they are owned by Ohio financial
institutions.
Delaware Taxation. As a Delaware corporation, Camco is subject to an
annual franchise tax based on the quantity and par value of its authorized
capital stock and its gross assets. As a savings and loan holding company, Camco
is exempt from Delaware corporate income tax.
Kentucky Taxation. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. First Savings is subject to an annual
ad valoreum tax which is .1% of First Savings' deposit accounts, common stock
and retained income, with certain deductions for amounts borrowed by depositors
and securities guaranteed by the U.S. Government or certain of its agencies.
West Virginia Taxation. Marietta Savings and WestMar are both subject
to a West Virginia tax on apportioned adjusted net income and a West Virginia
franchise tax on apportioned adjusted capital. The adjusted net income of each
is taxed at a rate of 9.08%. The franchise tax rate is 0.75% of adjusted
capital. The apportionment is based solely on the ratio of gross receipts
derived from West Virginia as compared to gross receipts everywhere.
32
Item 2. Properties
The following table provides the location of, and certain other
information pertaining to, Camco's office premises as of December 31, 1998:
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
- --------------- ---------- ------ ---------
First Federal
134 E. Court Street
Washington Ct. House, Ohio 1963 Owned $649,116
45 West Second Street
Chillicothe, Ohio 1994 Leased (2)
200 N. Court Street
Circleville, Ohio 1993 Leased (3)
135 North South Street
Wilmington, Ohio 1992 Owned 84,384
1050 Washington Ave.
Washington Court House, Ohio 1996 Owned 567,853
1 N. Plum Street
Germantown, Ohio 1998 Owned (12) 533,180
687 West Main Street
New Lebanon, Ohio 1998 Owned 81,163
10. S. Main Street
Miamisburg, Ohio 1998 Leased 1,680
218 W. Olentangy Street
Powell, Ohio, 1998 Leased 1,440
East Ohio
510 Grand Central Ave.
Vienna, West Virginia 1996 Leased (4)
126 S. 9th Street
Cambridge, Ohio 1998 Owned 107,700
33
Marietta Savings
226 Third Street
Marietta, Ohio 1976 Owned $ 605,683
1925 Washington Boulevard
Belpre, Ohio 1979 Owned 147,887
478 Pike Street
Marietta, Ohio 1998 Leased (11) 681,347
Cambridge Savings
814 Wheeling Avenue (5)
Cambridge, Ohio 1963 Owned 1,010,800
327 E. 3rd Street
Uhrichsville, Ohio 1975 Owned 91,900
175 N. 11th Street
Cambridge, Ohio 1981 Owned 185,200
209 Seneca Avenue
Byesville, Ohio 1978 Leased (6)
First Savings
1640 Carter Avenue
Ashland, Kentucky 1961 Owned 815,481
U.S. 60 - Summit
Ashland, Kentucky 1992 Owned 713,437
Greenup Mall
Russell, Kentucky 1980 Owned 100,530
191 Eastern Heights
Shopping Center
Huntington, West Virginia 1997 Leased
34
CMC
1320 4th Street, N.W. (7)
New Philadelphia, Ohio 1985 Owned $240,015
4328 Dressler Road
Canton, Ohio 1992 Leased (8)
2359 Maple Avenue
Zanesville, Ohio 1993 Leased (9)
WestMar
510 Grand Central Avenue
Vienna, West Virginia 1991 Leased (10)
- --------------------------
(1) Net book value amounts are for land, buildings and improvements.
(2) The lease expires in 1999. First Federal has the option to renew the lease
for one five-year term.
(3) The lease expires in 1999.
(4) The lease expired in 1998. Currently East Ohio rents on a month to month
basis and will be relocating from this office before the end of 1999.
(5) The Wheeling Avenue facility also serves as the Camco office and the East
Ohio-Cambridge office.
(6) The lease expires in 2000. Cambridge Savings has the option to renew the
lease for three five-year terms.
(7) The 4th Street facility also serves as the East Ohio-New Philadelphia
office.
(8) The lease is currently on a month-to-month basis.
(9) The lease expires in 1999.
(10) The lease expires in 1999.
(11) The lease expires in 2017. Marietta Savings has the option to renew for 2
five year terms. The lease is for land.
(12) The Plum Street facility also serves as the East Ohio - Germantown office.
Camco also owns furniture, fixtures and various bookkeeping and
accounting equipment. The net book value of Camco's investment in office
premises and equipment totaled $10.6 million at December 31, 1998. See Note E of
Notes to Consolidated Financial Statements for additional information.
35
Item 3. Legal Proceedings.
Neither Camco nor any of the Banks is presently engaged in any legal
proceedings of a material nature. From time to time, Camco is involved in legal
proceedings to enforce its security interest in collateral taken as security for
its loans.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
At December 31, 1998, Camco had 5,473,943 shares of common stock
outstanding and held of record by approximately 975 stockholders. Price
information with respect to Camco's common stock is quoted in the Nasdaq
National Market ("Nasdaq") under the symbol "CAFI." The table below sets forth
the high and low bid information for the common stock of Camco, together with
the respective dividends declared per share of common stock, for each quarter of
1996, 1997 and 1998. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
Cash
dividends
Year ended December 31, 1996 (1) High Low declared
---------------------------- ------ ----- --------
First Quarter $11.34 $10.13 $0.0981
Second Quarter 12.25 10.66 0.1011
Third Quarter 12.22 11.11 0.1093
Fourth Quarter 11.91 10.00 0.1125
Cash
dividends
Year ended December 31, 1997 (1) High Low declared
---------------------------- ------ ----- --------
First Quarter $11.91 $ 9.37 $0.1272
Second Quarter 11.91 11.11 0.1399
Third Quarter 15.17 11.59 0.0867
Fourth Quarter 18.00 14.83 0.1476
Cash
dividends
Year ended December 31, 1998 (1) High Low declared
---------------------------- ------ ----- --------
First Quarter $18.42 $16.67 $0.0933
Second Quarter 20.67 18.33 0.0967
Third Quarter 19.42 15.63 0.1025
Fourth Quarter 16.50 14.38 0.1075
- --------------------------
(1) Amounts have been restated to give effect to the merger with GF
Bancorp, Inc., and to the three-for-two stock split during 1998, and to
the 5% stock dividends which were effected in July of 1997 and 1996.
36
In addition to certain federal income tax considerations, regulations
of the OTS impose limitations on the payment of dividends and other capital
distributions by savings associations.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Since its incorporation in 1970, Camco has evolved into a full-service
provider of financial products to the communities served by its Banks. Utilizing
a common marketing theme based on Camco's commitment to personalized customer
service, Camco and its affiliates have grown from $22.4 million of consolidated
assets in 1970 to $637.1 million of consolidated assets at December 31, 1998.
Camco's rate of growth is largely attributable to its acquisitions of Marietta
Savings, First Federal, First Savings and GF Bancorp and its continued expansion
of product lines from the limited deposit and loan offerings which the Banks
could offer in the heavily regulated environment of the 1970s to the wider array
of financial service products that commercial banks traditionally offered.
Additionally, Camco has enhanced its operational growth by integrating its
residential lending function through establishing mortgage banking operations in
the Banks' primary market areas and, to a lesser extent, by chartering a title
insurance agency.
Management believes that continued success in the financial services
industry will be achieved by those institutions with a rigorous dedication to
building value-added customer-oriented organizations. Toward this end, each of
the Banks' operations are decentralized, with a separate Board of Directors and
management team focusing on consumer preferences for financial products in the
respective communities served. Based on consumer preferences, Camco's management
designs financial service products with a view towards differentiating each of
the constituent Banks from its competition. Management believes that the Banks'
abilities to rapidly adapt to consumer needs and preferences is essential to
them as community-based financial institutions competing against the larger
regional and money-center bank holding companies.
Camco's profitability depends primarily on its level of net interest
income, which is the difference between interest income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on deposit accounts and borrowings. In recent years,
Camco's net earnings have also been heavily influenced by its level of other
income, including gains on sale of loans, loan servicing fees and other fees.
Camco's operations are also influenced by non interest expenses, including
employee compensation and benefits, occupancy expense, federal deposit insurance
premiums, data processing, advertising, other operating expenses and federal
income tax expense.
Asset and Liability Management
Net interest income, the difference between asset yields and the cost
of interest-bearing liabilities, is the principal component of Camco's net
earnings. The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rate levels. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which a financial institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
37
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income. Conversely, during a period of falling interest
rates, a negative gap within shorter maturities would result in an increase in
net interest income, while a positive gap within shorter maturities would have
the opposite effect.
In recognition of the foregoing factors, the Board of Directors of each
of the Banks has implemented an asset and liability management strategy directed
toward improving each Bank's interest rate sensitivity. The principal common
elements of such strategies include (1) meeting the consumer preference for
fixed-rate loans over the past several years by selling such loans in the
secondary market and (2) maintaining higher levels of liquid assets, such as
cash, short-term interest-bearing deposits and short-term investment securities
as a hedge against rising interest rates in the lower interest rate environment,
and (3) utilizing FHLB advances and longer term certificates of deposit as
funding sources when available.
The following table contains information regarding the amounts of
various categories of assets and liabilities repricing within the periods
indicated:
December 31, 1998
Within 1 year 1-5 years Over 5 years Total
------------- --------- ------------ -----
(Dollars in thousands)
Interest-earning assets: (1)
Interest-bearing deposits in other banks $ 22,609 $ - $ - $ 22,609
Investment securities (2) 10,431 1,355 180 11,966
Mortgage-backed securities 4,530 758 3,207 8,495
Loans receivable (3) 163,861 243,215 155,926 563,002
-------- ------- ------- -------
Total 201,431 245,328 159,313 606,072
-------- ------- ------- -------
Interest-bearing liabilities: (1)
Deposits 354,177 86,983 2,067 443,227
FHLB advances 68,525 19,070 37,888 125,483
-------- ------- ------- -------
Total 422,702 106,053 39,955 568,710
-------- ------- ------- -------
Excess (deficiency) of interest sensitive assets over
interest sensitive liabilities $(221,271) $139,275 $119,358 $ 37,362
======== ======= ======= =======
Cumulative excess (deficiency) of interest sensitive
assets over interest sensitive liabilities $(221,271) $(81,996) $ 37,362 $ 37,362
======== ======= ======= =======
Cumulative interest rate sensitivity gap to total assets
(34.73)% (12.87)% 5.86% 5.86%
====== ====== ==== ====
- -----------------------------
(1) Interest-earning assets and interest-bearing liabilities are shown as
repricing based on contractual terms to repricing, without consideration of
loan prepayments or deposit decay assumptions.
(2) Does not include corporate equity securities or FHLB stock.
(3) Represents loans receivable totals before consideration of net items and
excluding loans held for sale.
Discussion of Financial Condition Changes from December 31, 1997 to December 31,
1998
At December 31, 1998, Camco's consolidated assets totaled $637.1
million, an increase of $67.0 million, or 11.7%, over the December 31, 1997
total. The growth in assets in the current year was primarily funded by deposit
growth of $20.9 million, an increase of $43.2 million in advances from the FHLB,
and undistributed net earnings of $4.8 million.
38
Cash and interest-bearing deposits in other financial institutions
totaled $35.8 million at December 31, 1998, an increase of $12.9 million, or
56.3%, from December 31, 1997 levels. The increase was due primarily to funds
required for outstanding loan commitments at December 31, 1998.
Investment securities totaled $12.3 million at December 31, 1998, a
decrease of $8.8 million, or 41.7%, from the total at December 31, 1997. During
1998, investment securities totaling $13.1 million were purchased, while
maturities and sales amounted to $21.9 million. Management utilized the net
proceeds from investment securities to partially fund growth in the loan
portfolio.
Mortgage-backed securities totaled $8.5 million at December 31, 1998, a
decrease of $8.2 million, or 49.0%, from December 31, 1997, due primarily to
sales totaling $4.6 million and principal repayments totaling $3.5 million
during the period. Loans receivable and loans held for sale totaled $548.7
million at December 31, 1998, an increase of $67.2 million, or 13.9%, over the
total at December 31, 1997. The increase was primarily attributable to record
loan disbursements of $463.4 million, which were partially offset by principal
repayments of $191.1 million and loan sales of $205.9 million. Loan origination
volume during 1998 exceeded that of the 1997 period by $193.7 million, or 71.8%,
while the volume of loan sales increased by $128.2 million year to year.
Nonperforming loans (90 days or more delinquent plus nonaccrual loans),
totaled $4.3 million and $1.9 million at December 31, 1998 and 1997,
respectively, constituting .78% and .40% of total net loans, including loans
held for sale at those dates. The consolidated allowance for loan losses totaled
$1.8 million and $1.6 million at December 31, 1998 and 1997, respectively,
representing 41.5% and 82.3% of nonperforming loans at those dates. The
provision for losses on loans for the year ended December 31, 1998, was
primarily attributable to the aforementioned growth in the loan portfolio during
1998. Although management believes that its allowance for loan losses at
December 31, 1998, is adequate based upon the available facts and circumstances,
there can be no assurance that additions to such allowance will not be necessary
in future periods, which could adversely affect Camco's results of operations.
Deposits totaled $443.2 million at December 31, 1998, an increase of
$20.9 million, or 4.9%, over December 31, 1997 levels. The increase resulted
primarily from management's continuing efforts to achieve a moderate rate of
growth through advertising and pricing strategies. Advances from the FHLB
increased by $43.2 million, or 52.4%, to a total of $125.5 million at December
31, 1998. The proceeds from deposit growth and FHLB advances were primarily used
to fund loan originations for 1998.
The Banks are required to maintain minimum regulatory capital pursuant
to federal regulations. At December 31, 1998, the Banks' regulatory capital
exceeded all regulatory capital requirements.
Comparison of Results of Operations for the Years Ended December 31, 1998 and
December 31, 1997
General. Camco's net earnings for the year ended December 31, 1998,
totaled $7.0 million, an increase of $1.7 million, or 31.1%, over the $5.3
million of net earnings reported in 1997. The increase in earnings was primarily
attributable to an increase in net interest income of $992,000, an increase in
other income of $3.6 million and a decrease in the provision for losses on loans
of $135,000, which were partially offset by an increase in general,
administrative and other expense of $2.6 million and an increase in the
provision for federal income taxes of $488,000.
Net Interest Income. Total interest income for the year ended December
31, 1998, amounted to $44.3 million, an increase of $3.1 million, or 7.4%, over
1997, generally reflecting the effects of the $47.1 million, or 9.2%, of growth
in average interest-earning assets outstanding, partially offset by a decrease
of 14 basis points in the yield year to year, from 8.07% in 1997 to 7.93% in
1998.
39
Interest income on loans and mortgage-backed securities totaled $41.3
million for the year ended December 31, 1998, an increase of $2.9 million, or
7.5%, over the comparable 1997 period. The increase resulted primarily from a
$42.6 million, or 9.1%, growth in the average balance outstanding year to year.
Interest income on investments and interest-bearing deposits increased by
$190,000, or 6.7%, due to an increase in the average outstanding balances of
$4.5 million, or 10.3%.
Interest expense on deposits increased by $639,000, or 3.4%, to a total
of $19.5 million for the year ended December 31, 1998, due primarily to an
increase in the average balance of deposits outstanding of $17.1 million, or
4.2%, which was partially offset by a decline in the average cost of deposits of
four basis points to 4.55%. Interest expense on borrowings totaled $5.3 million
for the year ended December 31, 1998, an increase of $1.4 million, or 37.0%,
over 1997. The increase resulted primarily from a $28.0 million increase in the
average balance of borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $992,000, or 5.4%, to a total of $19.4
million for the year ended December 31, 1998. The interest rate spread decreased
to approximately 3.19% for the year ended December 31, 1998, from 3.31% for
1997, while the net interest margin decreased to approximately 3.48% in 1998,
compared to 3.61% in 1997.
Provision for Losses on Loans. A provision for losses on loans is
charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by the Banks, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Banks' market areas, and other factors related to the
collectibility of the Banks' loan portfolios. The provision for losses on loans
totaled $250,000 for the year ended December 31, 1998, a decrease of $135,000,
or 35.1%, from 1997. The current period provision generally reflects the effects
of loan portfolio growth coupled with an increase of $2.4 million in the level
of nonperforming loans year to year. In the period subsequent to December 31,
1998, approximately $1.1 million of the nonperforming loans has been paid off or
paid to current status. Management believes the remaining loans are adequately
collateralized and anticipates no loss on these loans. While management uses the
most current information available in setting loan loss provisions, there can be
no assurance that the loan loss allowance will be adequate to cover losses on
nonperforming assets in the future.
Other Income. Other income increased for the year ended December 31,
1998, by $3.6 million, or 91.4%, over 1997. The increase in other income was
primarily attributable to a $2.4 million, or 147.3%, increase in gains on sale
of loans and an increase of $1.2 million, or 84.3%, in late charges, rent and
other. The increase in gains on sale of loans primarily reflects an increase in
sales volume year to year. The increase in late charges, rent and other was
primarily attributable to a $450,000 increase in title service fees at the
Corporation's title agency subsidiary as a result of the increase in loan
origination volume, a $99,000 gain on settlement of life insurance policies and
an overall increase in fees related to loans and other services due to the
Corporations' growth year to year.
General, Administrative and Other Expense. General, administrative and
other expense totaled $16.3 million for the year ended December 31, 1998, an
increase of $2.6 million, or 18.8%. The increase was due primarily to a
$689,000, or 10.4%, increase in employee compensation and benefits, a $357,000,
or 21.2%, increase in occupancy and equipment, an $854,000, or 132.4%, increase
in data processing, a $101,000, or 19.5%, increase in advertising, a $154,000,
or 30.2%, increase in franchise taxes and a $426,000, or 12.8%, increase in
other operating costs. The increase in employee compensation and benefits
resulted primarily from an increase in staffing levels and normal merit
increases year to year. The increase in occupancy and equipment was primarily
40
attributable to an increase in both depreciation expense on office equipment and
building maintenance costs. The increase in other operating expenses included
$212,000 in costs recorded in 1998 related to the Merger. The increase in data
processing costs resulted from replacing and modernizing the Corporation's data
processing systems and in addressing the Year 2000 issue (see Year 2000).
Advertising, franchise taxes and other operating expenses increased primarily as
a result of the Corporation's overall growth year to year.
Federal Income Taxes. The provision for federal income taxes totaled
$3.4 million for the year ended December 31, 1998, an increase of $488,000, or
16.7%, over 1997. This increase was primarily attributable to a $2.1 million, or
26.0%, increase in pre-tax earnings. The effective tax rate amounted to 32.7%
and 35.3% for the years ended December 31, 1998 and 1997, respectively. The
Corporation's change in effective tax rate year to year was primarily
attributable to the Corporation's receipt of nontaxable life insurance proceeds
in 1998.
Comparison of Results of Operations for the Years Ended December 31, 1997 and
1996
General. Increases in the level of income and expenses during the year
ended December 31, 1997, compared to 1996, were significantly influenced by the
inclusion of the accounts of First Savings, which was acquired by Camco in
October 1996, in a transaction accounted for using the purchase method of
accounting. Accordingly, the statement of earnings for the year ended December
31, 1996, was not restated for the acquisition of First Savings.
Camco's net earnings for the year ended December 31, 1997 totaled $5.3
million, an increase of $2.1 million, or 66.5%, over the $3.2 million of net
earnings reported in 1996. The increase in earnings was primarily attributable
to an increase in net interest income of $3.4 million, an increase in other
income of $245,000, and a decrease in general, administrative and other expense
of $29,000, which were partially offset by an increase in the provision for
losses on loans of $244,000 and an increase in the provision for federal income
taxes of $1.3 million.
Net Interest Income. Total interest income for the year ended December
31, 1997, increased by $8.4 million, or 25.6%, reflecting the effects of $104.4
million of growth in average interest-earning assets outstanding.
Interest income on loans and mortgage-backed securities totaled $38.4
million for the year ended December 31, 1997, an increase of $8.1 million, or
26.7%, over the comparable 1996 period. The increase resulted primarily from a
$100.4 million, or 27.4%, increase in the average balances outstanding year to
year. Interest income on investments and interest-bearing deposits increased by
$306,000, or 12.1%, due to an increase in average outstanding balances of $3.9
million. Interest expense on deposits increased by $3.3 million, or 20.8%, to a
total of $18.9 million for the year ended December 31, 1997, due primarily to an
increase of $63.5 million in the average balance of deposits outstanding.
Interest expense on borrowings totaled $3.9 million for the year ended December
31, 1997, an increase of $1.7 million, or 78.6%, over 1996. The increase
resulted primarily from a $30.6 million increase in the average balance of
borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $3.4 million, or 22.9%, to a total of
$18.4 million for the year ended December 31, 1997. The interest rate spread
decreased to approximately 3.31% for the year ended December 31, 1997, from
3.44% for 1996, while the net interest margin decreased to approximately 3.61%
in 1997, compared to 3.69% in 1996.
Provision for Losses on Loans. A provision for losses on loans is
charged to earnings to bring the total allowance for loan losses to a level
considered appropriate by management based on historical experience, the volume
and type of lending conducted by the Banks, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
41
relate to the Bank's market area, and other factors related to the
collectibility of the Bank's loan portfolio. The provision for losses on loans
totaled $385,000 for the year ended December 31, 1997, an increase of $244,000
over 1996, and generally reflects growth in the loan portfolio.
Other Income. Other income increased for the year ended December 31,
1997, by $245,000, or 6.6%, over 1996. The increase in other income was
primarily attributable to a $342,000, or 27.2%, increase in gains on sale of
loans, an increase of $214,000, or 18.4%, in late charges, rent and other, a
$62,000, or 11.7%, increase in service charges and other fees on deposits and a
$37,000 increase in gains on sale of real estate acquired through foreclosure,
which were partially offset by a $410,000, or 54.7%, decrease in loan servicing
fees. The increase in gains on sale of loans primarily reflects an increase in
sales volume year to year. The increase in late charges, rent and other was
primarily attributable to growth in loans and deposit accounts.
General, Administrative and Other Expense. General, administrative and
other expense totaled $13.7 million for the year ended December 31, 1997, a
decrease of $29,000, or .2%. The decrease was primarily attributable to the
absence of a $2.1 million one-time charge recorded in 1996 as a result of
legislation enacted to recapitalize the SAIF. Excluding the SAIF charge,
general, administrative and other expense increased by approximately $2.1
million, or 17.6%. This increase in general, administrative and other expense
was due primarily to a $979,000, or 17.4%, increase in employee compensation and
benefits, a $250,000, or 17.5%, increase in occupancy and equipment, an
$809,000, or 32.1%, increase in other operating costs, a $111,000 increase in
goodwill amortization and a $122,000, or 23.3%, increase in data processing
costs. As previously discussed, the 1997 consolidated statement of earnings
includes the accounts of First Savings, while the 1996 balances have not been
restated to include the effects of the acquisition of First Savings. First
Savings had approximately $1.7 million of general, administrative and other
expense for the year ended December 31, 1997. The increase in occupancy and
equipment is attributable to increased depreciation expense on office equipment
and general repairs of office buildings. The increase in data processing,
advertising and other operating costs generally reflects the effects of Camco's
growth year to year.
Federal Income Taxes. The provision for federal income taxes totaled
$2.9 million for the year ended December 31, 1997, an increase of $1.3 million,
or 84.0%. This increase is attributable to a $3.5 million, or 72.3%, increase in
pre-tax earnings. The effective tax rate amounted to 35.3% and 33.1% for the
years ended December 31, 1997 and 1996, respectively.
Liquidity and Capital Resources
Savings associations are generally required to maintain specified
minimum levels of liquid investments, including cash and qualifying types of
U.S. Government and agency obligations and other specified instruments. The
primary sources of funds for the Banks are deposits, principal and interest
payments made on the portfolio loans, proceeds from the sale of mortgage loans,
maturing investments, FHLB advances and funds provided by operating activities.
Principal uses of funds include deposit withdrawals, loan originations,
investment purchases, repayment of FHLB advances, payment of interest on
deposits and payment of operating expenses. While certain of these sources and
uses of funds are relatively predictable, deposit flows, loan originations and
prepayments of loans are influenced by external factors such as interest rates,
economic conditions, competition and consumer confidence in financial service
industries.
Camco attempts to maintain a stable retail deposit base which does not
utilize brokered deposits. During the years ended December 31, 1998 and 1997,
Camco maintained its deposit balance goals by offering competitive, but not
excessive, interest rates on deposits.
At December 31, 1998, the Banks had total outstanding loan commitments
of $58.3 million, which included outstanding loan origination commitments,
outstanding commitments to purchase loans, undisbursed loans in process of $22.3
million, and borrower's unused lines of credit of $17.6 million. Such
commitments can be funded from current excess liquidity and normal cash flow
from operations.
42
Camco's principal source of income on an unconsolidated basis is earnings
and dividends from the Banks. The ability of the Banks to pay dividends to Camco
is subject to certain regulatory restrictions. Each of the Banks is currently
able to pay dividends to Camco to the fullest extent permitted by federal
regulations.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
In 1996, the Corporation began evaluating the status of all of its technological
systems which included its state of readiness in addressing the Y2K issue. After
the analysis was completed, a technology plan was developed and implementation
of the plan started in mid-1997.
As the Corporation is primarily dependent on a third-party data processing
service bureau for maintaining customer records and financial systems, a task
force was formed to identify a service bureau that would meet the current and
future technology needs of the Corporation and which would be Y2K compliant. The
new service bureau was selected and conversion of all of the Banks' data systems
were completed in the fourth quarter of 1998. As a part of the conversion
process, all of the data processing hardware and software in the Banks was
replaced and has been tested as being Y2K compliant. The Corporation estimates
that the cost of converting and replacing information and non-information
technology systems will fall within a range of $1.5 million and $1.75 million
with at least 75% being capitalized (which relates to a discretionary management
decision to upgrade existing information technology systems). As stated
previously, data processing expenses during 1998 increased by $854,000, most of
which was for conversion and de-conversion costs, training and increased costs
related to out of contract processing. Management had estimated that the total
cost to address the Y2K issue would be approximately $75,000, of which $30,000
occurred in 1998. While management believes their Y2K budget is based on sound
assumptions, there is no guarantee that additional expenses will not occur in
the future.
The Corporation has identified its other third party vendors and
significant borrowers and, if they were deemed critical to the banking
operations of Camco, a review of their Y2K readiness was conducted. The
Corporation continues to monitor its vulnerability to third-party vendors (other
than its new service bureau) and to significant borrowers, all of which are
insignificant to consolidated operations.
Camco is developing contingency plans in which it will seek alternative
sources for critical services provided by third party vendors who it has deemed
will not be Y2K compliant. In addition, business resumption is also being
addressed and will be monitored throughout 1999 for possible enhancements.
The final phase of the Corporation's Y2K plan involves the testing of the
systems in place to ensure Y2K readiness. The Corporation's service bureau
completed the testing of its systems during the fourth quarter of 1998. The
tests were conducted in accordance with recommendations published by the Federal
Financial Institutions Examination Council ("FFIEC"). The Corporation's testing
of all types of transactions through the service bureau will be completed in the
first quarter of 1999. The Corporation's plan also calls for the testing of
non-information technology hardware and where necessary, either the repair or
replacement of those systems if they are found to be non-Y2K compliant.
Because of unknown external risks associated with this issue, the
Corporation cannot quantify the consequences and uncertainty involved beyond
those already identified, however, management believes such remaining external
risks will not have a material adverse effect on the Corporation's financial
condition or results of operations.
43
Effect of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," that provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishment of liabilities. SFAS
No. 125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which the
seller disposes of only a partial interest in the assets, retains rights or
obligations, makes use of special purpose entities in the transaction, or
otherwise has continuing involvement with the transferred assets. The new
accounting method, referred to as the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligation for the liability or is legally released from being the primary
obligor.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1997, and
is to be applied prospectively. Earlier or retroactive application is not
permitted. Management adopted SFAS No. 125 effective January 1, 1998, as
required, without material effect on Camco's consolidated financial position or
results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS No. 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective January 1, 1998, as required, without material impact on Camco's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
44
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance. For many
enterprises, the management approach will likely result in more segments being
reported. In addition SFAS No. 131 requires significantly more information to be
disclosed for each reportable segment than is presently being reported in annual
financial statements and also requires that selected information be reported in
interim financial statements. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. Management adopted SFAS No. 131 effective
January 1, 1998, as required, without material impact on Camco's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling into
question their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on the Corporation's
financial statements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars, without considering
changes in relative purchasing power of money over time due to inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than does the
effect of general levels of inflation. In the current interest rate environment,
the liquidity, the maturity structure and the quality of Camco's assets and
liabilities are critical to the maintenance of acceptable performance levels.
45
Item 7. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants
Board of Directors
Camco Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Camco Financial Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, comprehensive income, stockholders' equity
and cash flows for each of the years ended December 31, 1998, 1997 and 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Camco Financial
Corporation as of December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the years ended December 31, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
February 25, 1999
46
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 1998 1997
(Restated)
Cash and due from banks $ 13,206 $ 12,436
Interest-bearing deposits in other financial institutions 22,609 10,473
------- -------
Cash and cash equivalents 35,815 22,909
Investment securities available for sale - at market 1,307 3,572
Investment securities held to maturity - at cost, approximate market
value of $10,998 and $17,536 as of December 31, 1998 and 1997 10,962 17,489
Mortgage-backed securities available for sale - at market 3,476 8,447
Mortgage-backed securities held to maturity - at cost, approximate market
value of $5,102 and $8,311 as of December 31, 1998 and 1997 5,019 8,207
Loans held for sale - at lower of cost or market 10,119 4,135
Loans receivable - net 538,550 477,366
Office premises and equipment - net 10,598 8,420
Real estate acquired through foreclosure 217 737
Federal Home Loan Bank stock - at cost 8,250 5,492
Accrued interest receivable on loans 3,576 2,972
Accrued interest receivable on mortgage-backed securities 61 112
Accrued interest receivable on investment securities and interest-bearing deposits 229 349
Prepaid expenses and other assets 393 830
Cash surrender value of life insurance 5,161 5,482
Goodwill - net of accumulated amortization 3,402 3,552
Prepaid federal income taxes - 99
------- -------
Total assets $637,135 $570,170
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $443,227 $422,368
Advances from the Federal Home Loan Bank 125,483 82,319
Advances by borrowers for taxes and insurance 2,478 4,478
Accounts payable and accrued liabilities 2,679 3,459
Dividends payable 589 491
Accrued federal income taxes 354 -
Deferred federal income taxes 2,186 1,724
------- -------
Total liabilities 576,996 514,839
Commitments - -
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized, 8,900,000 shares, 5,480,331 and
3,639,997 shares issued at December 31, 1998 and 1997, respectively 5,480 3,640
Additional paid-in capital 27,053 26,915
Retained earnings - substantially restricted 27,628 24,645
Unrealized gains on securities designated as available for sale, net of related tax effects 96 131
Less 6,388 shares of treasury stock - at cost (118) -
------- -------
Total stockholders' equity 60,139 55,331
------- -------
Total liabilities and stockholders' equity $637,135 $570,170
======= =======
The accompanying notes are an integral part of these statements.
47
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended December 31,
(In thousands, except share data)
1998 1997 1996
(Restated) (Restated)
Interest income
Loans $40,478 $37,060 $29,106
Mortgage-backed securities 779 1,321 1,176
Investment securities 1,037 1,625 1,475
Interest-bearing deposits and other 1,989 1,211 1,055
------ ------ ------
Total interest income 44,283 41,217 32,812
Interest expense
Deposits 19,538 18,899 15,639
Borrowings 5,314 3,879 2,172
------ ------ ------
Total interest expense 24,852 22,778 17,811
------ ------ ------
Net interest income 19,431 18,439 15,001
Provision for losses on loans 250 385 141
------ ------ ------
Net interest income after provision for losses on loans 19,181 18,054 14,860
Other income
Late charges, rent and other 2,543 1,380 1,166
Loan servicing fees 348 339 749
Service charges and other fees on deposits 667 592 530
Gain on sale of loans 3,955 1,599 1,257
Gain on sale of investment and mortgage-backed securities 12 - -
Gain (loss) on sale of real estate acquired through foreclosure 68 35 (2)
Loss on sale of premises and equipment (41) - -
------ ------ ------
Total other income 7,552 3,945 3,700
General, administrative and other expense
Employee compensation and benefits 7,298 6,609 5,630
Occupancy and equipment 2,038 1,681 1,431
Federal deposit insurance premiums 291 287 2,729
Data processing 1,499 645 523
Advertising 620 519 404
Franchise taxes 664 510 483
Amortization of goodwill 150 149 38
Other operating 3,759 3,333 2,524
------ ------ ------
Total general, administrative and other expense 16,319 13,733 13,762
------ ------ ------
Earnings before federal income taxes 10,414 8,266 4,798
Federal income taxes
Current 2,930 2,863 1,914
Deferred 480 59 (326)
------ ------ ------
Total federal income taxes 3,410 2,922 1,588
------ ------ ------
NET EARNINGS $ 7,004 $ 5,344 $ 3,210
====== ====== ======
BASIC EARNINGS PER SHARE $1.28 $0.98 $0.75
==== ==== ====
DILUTED EARNINGS PER SHARE $1.25 $0.96 $0.73
==== ==== ====
The accompanying notes are an integral part of these statements.
48
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31,
(In thousands)
1998 1997 1996
Net earnings $7,004 $5,344 $3,210
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax (27) 78 (115)
Reclassification adjustment for realized gains included
in earnings, net of tax of $4 for the year
ended December 31, 1998 (8) - -
----- ----- -----
Comprehensive income $6,969 $5,422 $3,095
===== ===== =====
Accumulated other comprehensive income $ 96 $ 131 $ 53
===== ===== =====
The accompanying notes are an integral part of these statements.
49
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
(In thousands, except share data)
Unrealized
gains (losses) Shares
on securities acquired
Additional designated for stock Total
Common paid-in Retained as available Treasury benefit stockholders'
stock capital earnings for sale stock plans equity
Balance at January 1, 1996, as restated
for business combination (Note A) $2,354 $ 7,360 $24,429 $168 $(214) $ (68) $34,029
Stock options exercised 6 23 - - - - 29
Cash dividends declared - $0.4210 per share - - (1,253) - - - (1,253)
Stock dividend (5%) including cash in lieu of
fractional shares 118 2,004 (2,126) - - - (4)
Issuance of shares in connection with acquisition 987 14,483 - - - - 15,470
Amortization of stock benefit plans - - - - - 25 25
Net earnings - - 3,210 - - - 3,210
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - (115) - - (115)
----- ------ ------ --- --- -- --------
Balance at December 31, 1996 3,465 23,870 24,260 53 (214) (43) 51,391
Stock options exercised - 1 - - - - 1
Cash dividends declared - $0.5014 per share - - (1,884) - - - (1,884)
Stock dividend (5%) including cash in lieu of
fractional shares 175 2,893 (3,075) - - - (7)
Amortization of stock benefit plans - - - - - 43 43
Proceeds from reissuance of treasury stock - 151 - - 214 - 365
Net earnings - - 5,344 - - - 5,344
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - 78 - - 78
----- ------ ------ ---- --- -- ------
Balance at December 31, 1997 3,640 26,915 24,645 131 - - 55,331
Stock options exercised 14 138 - - (42) - 110
Cash dividends declared - $0.40 per share - - (2,195) - - - (2,195)
Three-for-two stock split including cash in lieu
of fractional shares 1,826 - (1,826) - - - -
Net earnings - - 7,004 - - - 7,004
Purchase of treasury shares - - - - (76) - (76)
Unrealized losses on securities designated as
available for sale, net of related tax effects - - - (35) - - (35)
----- ------ ------ ---- --- -- ------
Balance at December 31, 1998 $5,480 $27,053 $27,628 $ 96 $(118) $- $60,139
===== ====== ====== ==== ==== == ======
The accompanying notes are an integral part of these statements.
50
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31,
(In thousands)
1998 1997 1996
(Restated) (Restated)
Cash flows from operating activities:
Net earnings for the year $ 7,004 $ 5,344 $ 3,210
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of goodwill 150 149 38
Amortization of premiums and discounts on investment and
mortgage-backed securities - net (25) 61 25
Depreciation and amortization 849 739 567
Amortization of purchase accounting adjustments (11) (39) (10)
Provision for losses on loans 250 385 141
Amortization of deferred loan origination fees (769) (610) (441)
(Gain) loss on sale of real estate acquired through foreclosure (68) (35) 2
Gain on sale of investments and mortgage-backed securities
designated as available for sale (12) - -
Amortization expense of stock benefit plans - 43 25
Loss on sale of office premises and equipment 41 - -
Federal Home Loan Bank stock dividends (461) (351) (252)
Gain on sale of loans (1,490) (619) (391)
Loans originated for sale in the secondary market (211,883) (80,869) (61,100)
Proceeds from sale of mortgage loans in the secondary market 207,389 78,284 62,078
Increase (decrease) in cash, net of acquisition of First Ashland
Financial Corporation in 1996, due to changes in:
Accrued interest receivable on loans (604) (349) (265)
Accrued interest receivable on mortgage-backed securities 51 17 32
Accrued interest receivable on investments 120 150 (95)
Prepaid expenses and other assets 437 (295) 262
Accrued interest and other liabilities (682) (981) 1,897
Federal income taxes
Current 453 307 312
Deferred 480 59 (326)
------- ------- -------
Net cash provided by operating activities 1,219 1,390 5,709
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 20,994 22,322 14,288
Proceeds from sale of investment securities designated as
available for sale 900 687 427
Proceeds from sale of mortgage-backed securities designated as
available for sale 4,636 - -
Purchase of investment securities designated as available for sale (150) (540) (33)
Purchase of investment securities designated as held to maturity (12,932) (14,490) (9,996)
Principal repayments on mortgage-backed securities 3,489 4,253 2,672
Loan disbursements (232,558) (176,294) (128,624)
Purchases of loans (18,982) (12,514) -
Principal repayments on loans 191,105 130,541 92,537
Purchase of office premises and equipment - net (3,098) (1,472) (1,130)
Proceeds from sale of office premises and equipment 30 - -
Proceeds from sale of real estate acquired through foreclosure 426 389 326
Purchase of Federal Home Loan Bank stock (2,297) (797) (200)
Additions to real estate acquired through foreclosure (58) (15) (3)
Net decrease in certificates of deposit in other financial institutions - 990 891
Purchase of life insurance (40) (370) (4,735)
Net increase in cash surrender value of life insurance (238) (232) (145)
Proceeds from redemption of life insurance 599 - -
Purchase of First Ashland Financial Corporation stock - net - - 2,633
------- ------- -------
Net cash used in investing activities (48,174) (47,542) (31,092)
------- ------- -------
Net cash used in operating and investing activities
(balance carried forward) (46,955) (46,152) (25,383)
------- ------- -------
51
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the year ended December 31,
(In thousands)
1998 1997 1996
(Restated) (Restated)
Net cash used in operating and investing activities
(balance brought forward) $(46,955) $(46,152) $(25,383)
Cash flows provided by (used in) financing activities:
Net increase in deposits 20,859 24,202 2,334
Proceeds from Federal Home Loan Bank advances and other borrowings 104,089 62,330 110,115
Repayment of Federal Home Loan Bank advances and other borrowings (60,926) (38,366) (80,326)
Dividends paid on common stock (2,195) (1,891) (1,257)
Proceeds from exercise of stock options 110 1 29
Proceeds from reissuance of treasury stock - 365 -
Purchase of treasury shares (76) - -
Increase (decrease) in advances by borrowers for taxes and insurance (2,000) 1,443 (168)
------- ------- -------
Net cash provided by financing activities 59,861 48,084 30,727
------- ------- -------
Net increase in cash and cash equivalents 12,906 1,932 5,344
Cash and cash equivalents at beginning of year 22,909 20,977 15,633
------- ------- -------
Cash and cash equivalents at end of year $ 35,815 $ 22,909 $ 20,977
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 24,746 $ 22,799 $ 17,500
======= ======= =======
Income taxes $ 2,433 $ 2,452 $ 1,653
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfers from mortgage loans to real estate acquired
through foreclosure $ 477 $ 978 $ 92
======= ======= =======
Issuance of mortgage loans upon sale of real
estate acquired through foreclosure $ 697 $ - $ 283
======= ======= =======
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (35) $ 78 $ (115)
======= ======= =======
Recognition of mortgage servicing rights in accordance
with SFAS No. 125 $ 2,465 $ 980 $ 866
======= ======= =======
Transfer of mortgage-backed securities from a held to
maturity classification to available for sale $ 1,344 $ - $ -
======= ======= =======
Supplemental disclosure of noncash financing activities:
Acquisition of treasury stock in exchange for
exercise of stock options $ 42 $ - $ -
======= ======= =======
Liabilities assumed and cash paid in acquisition of
First Ashland Financial Corporation $ - $ - $ 84,467
Less: fair value of assets received - - 80,728
------- ------- -------
Amount assigned to goodwill $ - $ - $ 3,739
======= ======= =======
The accompanying notes are an integral part of these statements.
52
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The business activities of Camco Financial Corporation (the "Corporation")
have been limited primarily to holding the common shares of its wholly-owned
subsidiaries: Cambridge Savings Bank ("Cambridge"), Marietta Savings Bank
("Marietta"), First Federal Savings Bank of Washington Court House ("First
Federal"), First Federal Bank for Savings ("Ashland") (collectively
hereinafter the "Banks") and East Ohio Land Title Agency, Inc., and two
second tier subsidiaries, Camco Mortgage Corporation and WestMar Mortgage
Company. Accordingly, the Corporation's results of operations are
economically dependent upon the results of the Banks' operations. The Banks
conduct a general banking business in eastern and central Ohio, northern
West Virginia and northeastern Kentucky which consists of attracting
deposits from the general public and applying those funds to the origination
of loans for residential, consumer and nonresidential purposes. The Banks'
profitability is significantly dependent on net interest income, which is
the difference between interest income generated from interest-earning
assets (i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. customer deposits and borrowed funds).
Net interest income is affected by the relative amount of interest-earning
assets and interest-bearing liabilities and the interest received or paid on
these balances. The level of interest rates paid or received by the Banks
can be significantly influenced by a number of competitive factors, such as
governmental monetary policy, that are outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
During 1997, the Board of Directors of Camco Financial Corporation ("Camco"
or the "Corporation") approved a business combination whereby GF Bancorp,
Inc., the parent company of Germantown Federal Savings Bank, would merge
with and into the Corporation, and Germantown Federal Savings Bank would
merge with and into First Federal. The merger was approved by regulatory
authorities in 1997, and was completed in January 1998. The business
combination was accounted for as a pooling of interests and, accordingly,
the assets, liabilities and capital of the respective combining companies
were added together at historic carrying value. The December 31, 1997
consolidated statement of financial condition and the consolidated
statements of earnings, stockholders' equity and cash flows for the years
ended December 31, 1997 and 1996 have been restated to give effect to the
combination as of January 1, 1996.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
53
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned and second tier subsidiaries. All
significant intercompany balances and transactions have been eliminated.
2. Interest Rate Risk
The earnings of the Corporation are primarily dependent upon net interest
income, which is determined by 1) the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
(interest rate spread) and 2) the relative amounts of interest-earning
assets and interest-bearing liabilities outstanding. The Corporation's
interest rate spread is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows. The
Corporation is vulnerable to an increase in interest rates to the extent
that interest-bearing liabilities mature or reprice more rapidly than
interest-earning assets. At December 31, 1998, 1997 and 1996, the
Corporation had net interest-earning assets of $605.5 million, $540.7
million and $485.9 million, with weighted average effective yields of 7.63%,
8.04% and 7.96% and net interest-bearing liabilities of approximately $568.7
million, $504.7 million and $456.5 million, with weighted average effective
interest rates of 4.69%, 4.99% and 4.89%. To minimize the effect of adverse
changes in interest rates on its results of operations, the Corporation has
implemented an asset and liability management plan that emphasizes
increasing the interest rate sensitivity and shortening the maturities of
its interest-earning assets and extending the maturities of its
interest-bearing liabilities. Although the Corporation has undertaken a
variety of strategies to minimize its exposure to interest rate risk, its
primary emphasis has been on the origination and purchase of adjustable rate
loans.
3. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No.
115 requires that investments be categorized as held-to-maturity, trading,
or available for sale. Securities classified as held-to-maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities available
for sale are carried at fair value with resulting unrealized gains or losses
recorded to operations or stockholders' equity, respectively. Investment and
mortgage-backed securities are classified as held-to-maturity or available
for sale upon acquisition. At December 31, 1998 and 1997, the Corporation's
stockholders' equity reflected net unrealized gains on securities designated
as available for sale of $96,000 and $131,000, respectively. Realized gains
and losses on sales of securities are recognized using the specific
identification method.
54
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for unamortized yield adjustments, including deferred loan
origination fees and costs and capitalized mortgage servicing rights, and
the allowance for loan losses. The yield adjustments are amortized and
accreted to operations using the interest method over the average life of
the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments has returned to normal, in which case the loan is
returned to accrual status.
Loans held for sale are carried at the lower of cost (less principal
payments received) or fair value (market value), calculated on an aggregate
basis. At December 31, 1998 and 1997, such loans were carried at cost, which
approximated fair value.
The Corporation accounts for mortgage servicing rights in accordance with
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Corporation
recognize as separate assets, rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. An institution that
acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage
servicing rights.
SFAS No. 125 requires that securitization of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 125 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed
for impairment. Impairment is measured based on fair value.
The mortgage servicing rights recorded by the Banks', calculated in
accordance with the provisions of SFAS No. 125, were segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees, interest
earned on float, net interest earned on escrows, miscellaneous income, and
costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
55
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Loans Receivable (continued)
The Corporation recorded amortization related to mortgage servicing rights
totaling approximately $704,000, $497,000 and $99,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, the fair value of the Corporation's mortgage servicing rights totaled
approximately $3.6 million and $1.9 million, respectively.
At December 31, 1998 and 1997, the Banks were servicing mortgage loans of
approximately $408.6 million and $300.1 million, respectively, that have
been sold to the Federal Home Loan Mortgage Corporation and other investors.
5. Loan Origination and Commitment Fees
The Corporation accounts for loan origination fees and costs in accordance
with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Pursuant to the provisions of SFAS No. 91, all loan origination fees
received, net of certain direct origination costs, are deferred on a
loan-by-loan basis and amortized to interest income using the interest
method, giving effect to actual loan prepayments. Additionally, SFAS No. 91
generally limits the definition of loan origination costs to the direct
costs attributable to originating a loan, i.e., principally actual personnel
costs.
Fees received for loan commitments are deferred and amortized over the life
of the related loan using the interest method.
6. Allowance for Loan Losses
It is the Corporation's policy to provide valuation allowances for estimated
losses on loans based upon past loss experience, current trends in the level
of delinquent and problem loans, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
market area. When the collection of a loan becomes doubtful, or otherwise
troubled, the Corporation records a charge-off equal to the difference
between the fair value of the property securing the loan and the loan's
carrying value. Such provision is based on management's estimate of the fair
value of the underlying collateral, taking into consideration the current
and currently anticipated future operating or sales conditions. As a result,
such estimates are particularly susceptible to changes that could result in
a material adjustment to results of operations in the near term. Recovery of
the carrying value of such loans is dependent to a great extent on economic,
operating, and other conditions that may be beyond the Corporation's
control.
56
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Allowance for Loan Losses (continued)
The Corporation accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected
future cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Corporation's investment in multi-family and nonresidential loans, and its
evaluation of any impairment thereon, such loans are generally collateral
dependent and as a result are carried as a practical expedient at the lower
of cost or fair value.
It is the Corporation's policy to charge off unsecured credits that are more
than ninety days delinquent. Similarly, collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No.
114 at that time.
At December 31, 1998 and 1997, the Corporation had no loans that would be
defined as impaired under SFAS No. 114.
7. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the
amount determined at the recording date. In determining the lower of cost or
fair value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
57
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be ten
to fifty years for buildings and improvements and three to twenty-five years
for furniture, fixtures, and equipment. An accelerated depreciation method
is used for tax reporting purposes.
9. Goodwill
Goodwill resulting from the acquisition of Ashland totaled approximately
$3.7 million, and is being amortized over a twenty-five year period using
the straight-line method. Management periodically evaluates the carrying
value of intangible assets in relation to the continuing earnings capacity
of the acquired assets and assumed liabilities.
10. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to the
extent that the amount of net deductible temporary differences or
carryforward attributes may be utilized against current period earnings,
carried back against prior years' earnings, offset against taxable temporary
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net
deductible temporary differences and carryforward attributes exceeds
management's estimates of taxes payable on future taxable income. Deferred
tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
Deferral of income taxes results primarily from different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, the general loan loss allowance, percentage of earnings bad debt
deductions and certain components of retirement expense. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
58
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Earnings Per Share and Dividends Per Share
Basic earnings per share is calculated based on 5,478,017, 5,462,972 and
4,278,350 weighted average number of common shares outstanding for the years
ended December 31, 1998, 1997 and 1996, respectively. Weighted-average
common shares outstanding for the years ended December 31, 1997 and 1996
have been adjusted to reflect the effects of the GF Bancorp merger, the
three-for-two stock split during 1998, and a 5% stock dividend effected
during 1997.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
5,621,974, 5,582,523 and 4,372,471 for the years ended December 31, 1998,
1997 and 1996, respectively. There were 143,957, 119,551 and 94,121
incremental shares related to the assumed exercise of stock options included
in the computation of diluted earnings per share for the years ended
December 31, 1998, 1997 and 1996, respectively.
Dividends per share for the years ended December 31, 1998, 1997 and 1996,
have also been adjusted to reflect the effects of the GF Bancorp merger, the
three-for-two stock split and the 5% stock dividend.
12. Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. The Statement establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented
with the same prominence as other financial statements. SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital. Financial statements for earlier periods have
been restated for comparative purposes. Accumulated comprehensive income
consists solely of the change in unrealized gains/losses on securities
designated as available for sale in accordance with SFAS No. 115.
59
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated statement of financial
condition, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and Cash Equivalents: The carrying amount reported in the
consolidated statements of financial condition for cash and
cash equivalents is deemed to approximate fair value.
Investment Securities and Mortgage-backed Securities: Fair
values for investment securities and mortgage-backed
securities are based on quoted market prices and dealer
quotes.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential real estate, multi-family residential
real estate, installment and other. These loan categories were
further delineated into fixed-rate and adjustable-rate loans.
The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to
borrowers of similar credit quality.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair values of deposits with no stated maturity,
such as money market demand deposits, savings and NOW
accounts, are deemed equal to the amount payable on demand as
of December 31, 1998 and 1997. The fair value of fixed-rate
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining
maturities.
60
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
Advances from the Federal Home Loan Bank: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities or, when
available, quoted market prices.
Advances by Borrowers for Taxes and Insurance: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
Commitments to extend credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At December 31, 1998 and 1997, the
difference between the fair value and notional amount of loan
commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows:
December 31,
1998 1997
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 35,815 $ 35,815 $ 22,909 $ 22,909
Investment securities 12,269 12,305 21,061 21,108
Mortgage-backed securities 8,495 8,578 16,654 16,758
Loans receivable 548,669 555,608 481,501 487,903
Federal Home Loan Bank stock 8,250 8,250 5,492 5,492
------- ------- ------- -------
$613,498 $620,556 $547,617 $554,170
======= ======= ======= =======
Financial liabilities
Deposits $443,227 $443,092 $422,368 $426,845
Advances from the Federal Home Loan Bank 125,483 123,618 82,319 82,652
Advances by borrowers for taxes and insurance 2,478 2,478 4,478 4,478
------- ------- ------- -------
$571,188 $569,188 $509,165 $513,975
======= ======= ======= =======
14. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks and
interest-bearing deposits in other financial institutions with original
maturities of three months or less.
61
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
15. Advertising
Advertising costs are expensed when incurred.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
consolidated financial statement presentation.
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at December 31, 1998 and 1997
are as follows:
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
U.S. Government agency obligations $10,782 $ 28 $ 5 $10,805
Municipal bonds 180 13 - 193
------ --- --- ------
Total investment securities held to maturity 10,962 41 5 10,998
Available for sale:
U.S. Government agency obligations 1,003 1 - 1,004
Corporate equity securities 229 74 - 303
------ --- --- ------
Total investments available for sale 1,232 75 - 1,307
------ --- --- ------
Total investment securities $12,194 $116 $ 5 $12,305
====== === === ======
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
U.S. Government agency obligations $17,075 $ 52 $ 32 $17,095
Municipal bonds 414 27 - 441
------ --- --- ------
Total investment securities held to maturity 17,489 79 32 17,536
Available for sale:
U.S. Government agency obligations 2,511 8 - 2,519
Corporate equity securities 92 66 - 158
Asset management funds 900 - 5 895
------ --- --- ------
Total investments available for sale 3,503 74 5 3,572
------ --- --- ------
Total investment securities $20,992 $153 $ 37 $21,108
====== === === ======
62
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at December 31, 1998 and
1997, are as follows:
1998
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
FNMA $2,831 $ 54 $ 5 $2,880
FHLMC 2,034 36 21 2,049
CMOs 17 1 - 18
GNMA 116 13 - 129
Other 21 5 - 26
------- ----- -- -------
Total mortgage-backed securities
held to maturity 5,019 109 26 5,102
Available for sale:
FHLMC 3,281 76 3 3,354
FNMA 124 - 2 122
------ -- ----- ------
Total mortgage-backed securities
available for sale 3,405 76 5 3,476
----- ---- ----- -----
Total mortgage-backed securities $8,424 $185 $ 31 $8,578
===== === ==== =====
1997
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
FNMA $ 4,335 $ 76 $ 17 $ 4,394
FHLMC 3,645 29 17 3,657
CMOs 24 1 - 25
GNMA 173 26 - 199
Other 30 6 - 36
--------- ----- -- ---------
Total mortgage-backed securities
held to maturity 8,207 138 34 8,311
Available for sale:
FHLMC 8,317 167 37 8,447
------- --- ---- -------
Total mortgage-backed securities $16,524 $305 $ 71 $16,758
====== === ==== ======
63
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
The amortized cost and estimated fair value of investment and
mortgage-backed securities at December 31, 1998 and 1997 (including
securities designated as available for sale) by contractual term to 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.
1998 1997
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Due in one year or less $ 2,495 $ 2,506 $ 6,500 $ 6,488
Due after one year through five years 9,470 9,496 11,831 11,870
Due after five years through ten years - - 1,669 1,697
------- ------- ------- -------
Total investment securities 11,965 12,002 20,000 20,055
Corporate equity securities 229 303 92 158
Mortgage-backed securities - not
due at a single maturity date 8,424 8,578 16,524 16,758
Asset management fund - - 900 895
------- ------- -------- --------
Total $20,618 $20,883 $37,516 $37,866
====== ====== ====== ======
During 1998, 1997 and 1996, the Corporation sold securities designated as
available for sale with a carrying value of $5.5 million, $687,000 and
$427,000, respectively.
64
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
Loans receivable at December 31 consist of the following:
1998 1997
(In thousands)
Conventional real estate loans:
Existing residential properties $474,988 $427,511
Nonresidential real estate 15,019 11,294
Construction 37,169 14,505
Developed building lots 3,895 1,870
Education loans 2,096 2,224
Consumer and other loans 29,835 32,430
-------- --------
Total 563,002 489,834
Less:
Undisbursed portion of loans in process 22,262 10,059
Unamortized yield adjustments 407 813
Allowance for loan losses 1,783 1,596
--------- ---------
Loans receivable - net $538,550 $477,366
======= =======
As depicted above, the Corporation's lending efforts have historically
focused on loans secured by existing residential properties, which comprise
approximately $475.0 million, or 88.2%, of the total loan portfolio at
December 31, 1998 and approximately $427.5 million, or 89.6%, of the total
loan portfolio at December 31, 1997. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Corporation with adequate collateral coverage
in the event of default. Nevertheless, the Corporation, as with any lending
institution, is subject to the risk that residential real estate values
could deteriorate in its primary lending areas of central and eastern Ohio,
northern West Virginia, and northeastern Kentucky, thereby impairing
collateral values. However, management is of the belief that residential
real estate values in the Corporation's primary lending areas are presently
stable.
The Banks, in the ordinary course of business, have granted loans to certain
of their directors, executive officers, and their associates. Such loans are
made on the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons
and do not involve more than normal risk of collectibility. The aggregate
dollar amount of these loans (excluding loans to any such individual which
in the aggregate did not exceed $60,000) was less than 5% of stockholders'
equity at December 31, 1998 and 1997.
65
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE D - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
1998 1997 1996
(In thousands)
Balance at beginning of year $1,596 $1,373 $1,128
Provision for losses 250 385 141
Allowance resulting from acquisition - - 109
Charge-offs, net of immaterial recoveries (63) (162) (5)
------- ------ --------
Balance at end of year $1,783 $1,596 $1,373
===== ===== =====
Nonaccrual and nonperforming loans totaled approximately $4.3 million, $1.9
million and $2.6 million at December 31, 1998, 1997 and 1996, respectively.
Interest income that would have been recognized had such nonaccrual loans
performed pursuant to contractual terms totaled approximately $167,000,
$57,000 and $103,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 is summarized as follows:
1998 1997
(In thousands)
Land $ 1,593 $ 1,443
Buildings and improvements 7,563 7,507
Furniture, fixtures and equipment 6,967 5,030
------- -------
16,123 13,980
Less accumulated depreciation and amortization 5,525 5,560
------- -------
$10,598 $ 8,420
====== =======
66
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposit balances by type and weighted-average interest rate at December 31,
1998 and 1997, are summarized as follows:
1998 1997
Amount Rate Amount Rate
(Dollars in thousands)
NOW accounts $ 70,944 1.70% $ 56,316 1.82%
Money market demand accounts 24,402 3.96 23,720 3.71
Passbook and statement savings accounts 74,405 3.10 68,536 2.98
-------- ---- -------- ----
Total withdrawable accounts 169,751 2.64 148,572 2.65
Certificates of deposit:
Seven days to one year 88,134 5.36 40,660 5.30
One to two years 58,940 5.51 90,902 5.91
Two to eight years 62,429 5.90 89,287 6.12
Negotiated rate certificates 27,338 5.66 23,566 5.87
Individual retirement accounts 36,635 5.69 29,381 5.78
-------- ---- -------- ----
Total certificate accounts 273,476 5.59 273,796 5.88
------- ---- ------- ----
Total deposits $443,227 4.46% $422,368 4.74%
======= ==== ======= ====
At December 31, 1998 and 1997, the Corporation had certificate of deposit
accounts with balances in excess of $100,000 totaling $45.3 million and
$40.9 million, respectively.
Interest expense on deposits is summarized as follows for the years ended
December 31:
1998 1997 1996
(In thousands)
Certificate of deposit accounts $15,256 $14,819 $12,318
NOW accounts and money
market demand accounts 2,023 2,004 1,681
Passbook and statement savings
accounts 2,259 2,076 1,640
------- ------- -------
$19,538 $18,899 $15,639
====== ====== ======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
1998 1997
Year ending December 31: (In thousands)
1998 $ - $164,180
1999 181,985 75,242
2000 56,958 22,665
2001 22,366 4,706
2002 5,291 7,003
After 2002 6,876 -
--------- ---------
Total certificate of deposit accounts $273,476 $273,796
======= =======
67
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE F - DEPOSITS (continued)
At December 31, 1998 and 1997, public savings deposits were collateralized
by investment securities and interest-bearing deposits in other banks
totaling $14.5 million and $16.9 million, respectively.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
1998 and 1997, by pledges of certain residential mortgage loans totaling
$192.5 million and $123.5 million, respectively, as well as the Federal Home
Loan Bank stock of the respective Bank subsidiaries, are summarized as
follows:
Maturing year
Interest Rate ending December 31, 1998 1997
(In thousands)
5.65% - 6.90% 1998 $ - $51,750
5.00% - 6.25% 1999 38,162 12,830
5.80% - 6.10% 2000 1,000 6,000
6.17%2001 714 1,000
4.23% - 6.71% Thereafter 85,607 10,739
-------- ------
$125,483 $82,319
======= ======
Weighted average rate 5.41% 6.25%
==== ====
NOTE H - FEDERAL INCOME TAXES
A reconciliation of the effective tax rate for the years ended December 31,
1998, 1997 and 1996, respectively, and the federal statutory rate in each of
these years, computed by applying the statutory federal corporate tax rate
to income before taxes, is summarized as follows at December 31:
1998 1997 1996
(In thousands)
Federal income taxes computed at the
expected statutory rate $3,545 $2,810 $1,631
Increase (decrease) in taxes resulting from:
Amortization of goodwill 51 51 13
Nontaxable interest income (87) (89) (35)
Nontaxable life insurance proceeds (100) - -
Nondeductible merger related expenses 58 124 -
Other (57) 26 (21)
------- ------- -------
Tax provision per consolidated financial
statements $3,410 $2,922 $1,588
===== ===== =====
68
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE H - FEDERAL INCOME TAXES (continued)
The components of the Corporation's net deferred tax liability at December
31 is as follows:
Taxes (payable) refundable on temporary
differences at statutory rate: 1998 1997
(In thousands)
Deferred tax liabilities:
Deferred loan origination costs $ (81) $ -
FHLB stock dividends (786) (701)
Percentage of earnings bad debt deduction (635) (662)
Book versus tax depreciation (154) (244)
Retirement expense - (43)
Mortgage servicing rights (1,221) (647)
Unrealized gain on securities designated
as available for sale (50) (68)
Other liabilities (30) (43)
-------- --------
Total deferred tax liabilities (2,957) (2,408)
Deferred tax assets:
General loan loss allowance 607 549
Deferred loan origination fees - 6
Other assets 164 129
------- -------
Total deferred tax assets 771 684
------- -------
Net deferred tax liability $(2,186) $(1,724)
====== ======
The Banks were allowed a special bad debt deduction generally limited to 8%
of otherwise taxable income, subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. The percentage of earnings bad
debt deduction had accumulated to approximately $8.4 million as of December
31, 1998. The amount of the unrecognized deferred tax liability relating to
the cumulative bad debt deduction was approximately $2.2 million at December
31, 1998. See Note O for additional information regarding future percentage
of earnings bad debt deductions.
NOTE I - COMMITMENTS
The Banks are parties to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Banks' involvement in such financial instruments.
69
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE I - COMMITMENTS (continued)
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Banks use the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 1998 and 1997, the Banks had outstanding commitments to
originate or purchase fixed rate loans of approximately $9.2 million and
$2.7 million, respectively, and adjustable rate loans of approximately $9.2
million and $3.1 million, respectively. Additionally, the Banks had unused
lines of credit under home equity and other loans of $17.6 million at
December 31, 1998. Management believes that all loan commitments are able to
be funded through cash flow from operations and existing excess liquidity.
Fees received in connection with these commitments have not been recognized
in earnings. At December 31, 1998, the Corporation had commitments to sell
loans to FHLMC totaling $150.0 million which expire in December 1999.
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 may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral on loans may vary but the preponderance of loans granted
generally include a mortgage interest in real estate as security.
NOTE J - REGULATORY CAPITAL
Cambridge and Marietta are subject to the regulatory capital requirements of
the Federal Deposit Insurance Corporation (the "FDIC"). First Federal and
Ashland are subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision (the "OTS"). 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 each of the Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
During the calendar year, each of the Banks were notified from their
respective regulators that the Banks were categorized as "well-capitalized"
under the regulatory framework for prompt corrective action. To be
categorized as "well-capitalized" the Banks' must maintain minimum capital
ratios as set forth in the tables that follow.
71
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
The FDIC has adopted risk-based capital ratio guidelines to which Cambridge
and Marietta are subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings banks are required to
maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1
capital. The FDIC may, however, set higher capital requirements when
particular circumstances warrant. Savings banks experiencing or anticipating
significant growth are expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital to adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings banks that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other savings banks are required to
maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points.
As of December 31, 1998 and 1997, management believes that Cambridge and
Marietta met all capital adequacy requirements to which the Banks are
subject.
Cambridge As of December 31, 1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total capital
(to risk-weighted assets) $18,001 13.7% =>$10,509 =>8.0% =>$13,136 =>10.0%
Tier I capital
(to risk-weighted assets) $17,451 13.3% =>$ 5,254 =>4.0% =>$ 7,881 => 6.0%
Tier I leverage $17,451 7.3% =>$ 9,535 =>4.0% =>$11,919 => 5.0%
72
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
As of December 31, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total capital
(to risk-weighted assets) $15,032 13.4% =>$8,986 =>8.0% =>$11,233 =>10.0%
Tier I capital
(to risk-weighted assets) $14,582 13.0% =>$4,493 =>4.0% =>$ 6,740 => 6.0%
Tier I leverage $14,582 6.9% =>$8,437 =>4.0% =>$10,547 => 5.0%
Marietta As of December 31, 1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total capital
(to risk-weighted assets) $12,142 13.3% =>$7,306 =>8.0% =>$9,132 =>10.0%
Tier I capital
(to risk-weighted assets) $11,637 12.7% =>$3,653 =>4.0% =>$5,479 => 6.0%
Tier I leverage $11,637 8.1% =>$5,733 =>4.0% =>$7,167 => 5.0%
As of December 31, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total capital
(to risk-weighted assets) $10,091 13.0% =>$6,224 =>8.0% =>$7,780 =>10.0%
Tier I capital
(to risk-weighted assets) $ 9,650 12.4% =>$3,112 =>4.0% =>$4,668 => 6.0%
Tier I leverage $ 9,650 7.9% =>$4,897 =>4.0% =>$6,122 => 5.0%
73
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as stockholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4.0% - 5.0% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to the Banks' excess
regulatory capital position as a result of this proposed change in the
regulatory capital requirement. The risk-based capital requirement currently
provides for the maintenance of core capital plus general loss allowances
equal to 8.0% of risk-weighted assets. In computing risk-weighted assets,
the Banks' multiply the value of each asset on their respective statement of
financial condition by a defined risk-weighting factor, e.g., one- to
four-family residential loans carry a risk-weighted factor of 50%.
As of December 31, 1998 and 1997, management believes that First Federal and
Ashland met all capital adequacy requirements to which the Banks are
subject.
First Federal As of December 31, 1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $12,004 9.2% =>$1,955 =>1.5% =>$6,516 => 5.0%
Core capital $12,004 9.2% =>$3,909 =>3.0% =>$7,819 => 6.0%
Risk-based capital $12,554 18.1% =>$5,555 =>8.0% =>$6,944 =>10.0%
As of December 31, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $12,211 9.1% =>$2,003 =>1.5% =>$6,677 => 5.0%
Core capital $12,211 9.1% =>$3,737 =>3.0% =>$8,012 => 6.0%
Risk-based capital $12,760 17.9% =>$5,700 =>8.0% =>$7,125 =>10.0%
74
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL REQUIREMENTS (continued)
Ashland As of December 31, 1998
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $12,221 10.2% =>$1,796 =>1.5% =>$5,987 => 5.0%
Core capital $12,221 10.2% =>$3,592 =>3.0% =>$7,184 => 6.0%
Risk-based capital $12,407 18.4% =>$5,390 =>8.0% =>$6,737 =>10.0%
As of December 31, 1997
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $13,248 13.4% =>$1,483 =>1.5% =>$4,944 => 5.0%
Core capital $13,248 13.4% =>$2,966 =>3.0% =>$5,932 => 6.0%
Risk-based capital $13,382 24.4% =>$4,389 =>8.0% =>$5,486 =>10.0%
The Corporation's management believes that, under the current regulatory
capital regulations, the Banks will continue to meet their minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Corporation, such as increased interest rates or a downturn in the
economy in the subsidiaries' market areas, could adversely affect future
earnings and, consequently, the ability to meet future minimum regulatory
capital requirements.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations,
a savings association that, immediately prior to, and on a pro forma basis
after giving effect to, a proposed capital distribution, has total capital
(as defined by OTS regulation) that is equal to or greater than the amount
of its fully phased-in capital requirement is generally permitted without
OTS approval (but subsequent to 30 days prior
75
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL REQUIREMENTS (continued)
notice to the OTS of the planned dividend) to make capital distributions
during a calendar year in the amount of (i) up to 100% of its net earnings
to date during the year plus an amount equal to one-half of the amount by
which its total capital to assets ratio exceeded its fully phased-in capital
to assets ratio at the beginning of the year (ii) or 75% of its net earnings
for the most recent four quarters. Pursuant to such OTS dividend
regulations, Ashland and First Federal had the ability to pay dividends of
approximately $6.2 million to Camco Financial Corporation at December 31,
1998.
NOTE K - BENEFIT PLANS
The Corporation had a non-contributory defined benefit pension plan (the
"Plan") covering all eligible employees. The Corporation terminated the Plan
during 1997 upon receipt of appropriate regulatory approvals. The Plan's
benefit formula was the projected unit credit formula which encompassed
future salary levels and participants' years of service.
Net pension costs includes the following components for the year ended
December 31, 1996:
(In thousands)
Service cost - benefits earned during year $232
Interest cost on projected benefit obligation 180
Gain on plan assets (69)
Net amortization, deferral and other (40)
----
Net pension cost $303
Assumptions for the plan valuations for the year ended December 31, 1996
include:
Weighted average discount rate 7.71%
Annual rate of increase in compensation levels N/A
Expected long-term rate of return on assets 8.00%
Coincident with the termination of the plan, the Corporation undertook a
retirement plan which provides benefits to certain key officers. The
Corporation's obligations under the plan have been provided for via the
purchase of single premium key man life insurance of which the Corporation
is the beneficiary. The Corporation recorded expense related to the plan
totaling approximately $42,000 and $66,000 during the years ended December
31, 1998 and 1997, respectively.
The Corporation also has a 401(k) Salary Savings Plan covering substantially
all employees. Total expense under this plan was $783,000, $140,000 and
$93,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
76
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - STOCK OPTION PLANS
Stockholders of the Corporation have approved three stock option plans.
Under the 1972 Plan, 242,124 common shares were reserved for issuance to
officers, directors, and key employees of the Corporation and its
subsidiaries. The 1982 Plan reserved 110,309 common shares for issuance to
employees of the Corporation and its subsidiaries. At December 31, 1997, all
of the stock options under the 1972 and 1982 Plans had been granted and were
subject to exercise at the discretion of the grantees through 2002. Under
the 1995 Plan, 153,798 shares were reserved for issuance. At December 31,
1998, no options under the 1995 Plan have been exercised. The foregoing
number of shares under option have been adjusted to reflect the
three-for-two stock split effected during 1998 and the 5% stock dividend
effected during 1997.
Additionally, in connection with the acquisition of First Ashland Financial
Corporation ("First Ashland"), the stock options of First Ashland were
converted into options to purchase 166,115 shares of the Corporation's stock
at an exercise price of $7.75 per share which expire in 2005.
In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair-value based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair-value based method of accounting defined in SFAS No.
123 had been applied.
The Corporation utilizes APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
1998 1997 1996
(In thousands, except share data)
Net earnings As reported $7,004 $5,344 $3,210
===== ===== =====
Pro-forma $6,853 $5,344 $3,210
===== ===== =====
Earnings per share
Basic As reported $1.28 $0.98 $0.75
==== ==== ====
Pro-forma $1.25 $0.98 $0.75
==== ==== ====
Diluted As reported $1.25 $0.96 $0.73
==== ==== ====
Pro-forma $1.22 $0.96 $0.73
==== ==== ====
77
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE L - STOCK OPTION PLANS (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 2.04%,
expected volatility of 10.0%, a risk-free interest rate of 5.5% and expected
lives of seven years.
A summary of the status of the Corporation's stock option plan as of
December 31, 1998, 1997 and 1996, and changes during the periods ending on
those dates is presented below:
1998 1997 1996
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 364,935 $ 8.54 405,862 $8.56 188,028 $9.23
Granted 62,300 15.58 - - - -
First Ashland options - - - - 226,608 7.75
Exercised 21,975 8.13 40,927 7.64 8,774 3.28
Forfeited 53,335 8.80 - - - -
-------- ------ --------- ---- --------- ----
Outstanding at end of year 351,925 $ 9.91 364,935 $8.54 405,862 $8.56
======= ====== ======= ==== ======= ====
Options exercisable at year-end 351,925 $ 9.91 364,935 $8.54 405,862 $8.56
======= ====== ======= ==== ======= ====
Weighted-average fair value of
options granted during the year $3.85 N/A N/A
==== === ===
The following information applies to options outstanding at December 31,
1998:
Number outstanding 351,925
Range of exercise prices $7.77 - $17.42
Weighted-average exercise price $9.91
Weighted-average remaining contractual life 7.3 years
78
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION
The following condensed financial statements summarize the financial
position of the Corporation as of December 31, 1998 and 1997 and the
results of its operations and its cash flows for each of the years ended
December 31, 1998, 1997 and 1996:
Camco Financial Corporation
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
1998 1997
(Restated)
ASSETS
Cash in subsidiary Banks $ 785 $ 1,343
Interest-bearing deposits in other financial institutions 968 83
Investment securities designated as available for sale 288 141
Investment in Bank subsidiaries utilizing
the equity method 57,121 53,434
Investment in title agency subsidiary 683 352
Cash surrender value of life insurance 786 749
Prepaid expenses and other assets 286 217
Prepaid federal income taxes 231 3
-------- ----------
Total assets $61,148 $56,322
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 163 $ 480
Dividends payable 589 491
Deferred federal income taxes 257 20
-------- ---------
Total liabilities 1,009 991
Stockholders' equity
Common stock 5,480 3,640
Additional paid-in capital 27,053 26,915
Retained earnings - substantially restricted 27,628 24,645
Unrealized gains on securities designated as
available for sale, net of related tax effects 96 131
Treasury stock (118) -
-------- -------
Total stockholders' equity 60,139 55,331
------ ------
Total liabilities and stockholders' equity $61,148 $56,322
====== ======
79
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
Camco Financial Corporation
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
1998 1997 1996
(Restated) (Restated)
Income:
Dividends from Bank subsidiaries $3,700 $2,118 $2,264
Dividends from title agency subsidiary - 100 -
Interest and other income 305 144 94
Equity in undistributed net earnings
of the Bank subsidiaries 3,641 4,059 1,333
Equity in undistributed net earnings
of title agency subsidiary 331 13 107
------ ------- ------
Total income 7,977 6,434 3,798
General, administrative and other
expense 1,300 1,364 940
----- ----- ------
Earnings before federal income tax
credits 6,677 5,070 2,858
Federal income tax credits (327) (274) (352)
------ ------ ------
Net earnings $7,004 $5,344 $3,210
===== ===== =====
80
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
Camco Financial Corporation
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
1998 1997 1996
(Restated) (Restated)
Cash flows from operating activities:
Net earnings for the year $7,004 $5,344 $3,210
Adjustments to reconcile net earnings to net cash
flows provided by (used in) operating activities:
Undistributed net earnings of Bank subsidiaries (3,641) (4,059) (1,333)
Undistributed net earnings of title
agency subsidiary (331) (13) (107)
Decrease (increase) in other assets (69) (209) 40
Increase (decrease) in accounts payable
and other liabilities (219) (769) 1,362
Increase (decrease) in current federal income taxes 228 119 (194)
Other - net (297) (48) (272)
------ ------- ------
Net cash provided by operating activities 2,675 365 2,706
Cash flows used in investing activities:
Purchase of investment securities (150) - (20)
Purchase of cash surrender value of life insurance - (85) (614)
Net increase in cash surrender value of life insurance (37) (33) (17)
(Increase) decrease in interest-bearing deposits in other
financial institutions (885) 1,147 (1,230)
------ ----- -----
Net cash provided by (used in) investing activities (1,072) 1,029 (1,881)
Cash flows provided by (used in) financing activities:
Proceeds from other borrowing - - 5,465
Repayment of other borrowing - - (5,465)
Common stock options exercised 110 1 29
Dividends paid (2,195) (1,891) (1,257)
Purchase of treasury shares (76) - -
Proceeds from reissuance of treasury shares - 365 -
----- ------ -----
Net cash used in financing activities (2,161) (1,525) (1,228)
----- ----- -----
Net decrease in cash and cash equivalents (558) (131) (403)
Cash and cash equivalents at beginning of year 1,343 1,474 1,877
----- ----- -----
Cash and cash equivalents at end of year $ 785 $1,343 $1,474
====== ===== =====
81
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE N - BUSINESS COMBINATIONS
On October 4, 1996, the Corporation acquired First Ashland utilizing the
purchase method of accounting. First Ashland was dissolved upon
consummation, with First Ashland's banking subsidiary, Ashland, continuing
operations as a wholly owned subsidiary of the Corporation. The results of
Ashland's operations subsequent to October 4, 1996 are included in the
consolidated financial statements. The Corporation paid $13.2 million in
cash and issued 987,247 of its common shares in connection with the
acquisition, with the $3.7 million excess of the fair value of liabilities
assumed over assets received, assigned to goodwill.
Presented below are pro-forma condensed consolidated statements of earnings
and earnings per share which have been prepared as if the acquisition had
been consummated as of the beginning of the year ended December 31, 1996.
1996
(In thousands, except share data)
(Unaudited)
Total interest income $33,956
Total interest expense 18,504
Net interest income 15,452
Provision for losses on loans 161
Other income 3,749
General, administrative and other expense 14,435
------
Earnings before income taxes 4,605
Federal income taxes 1,617
Net earnings $ 2,988
=======
Earnings per share $.56
===
During 1997, the Corporation's Board of Directors approved a business
combination whereby GF Bancorp, Inc., the parent company of Germantown
Federal Savings Bank, would merge with and into the Corporation, and
Germantown Federal Savings Bank would merge with and into First Federal. The
merger was approved by regulatory authorities in 1997, and was completed in
January 1998. The Corporation issued split-adjusted shares in the merger.
The business combination was accounted for as a pooling of interests and,
accordingly, the assets, liabilities and capital of the respective combining
companies were added together at historic carrying value. As stated
previously, the Corporation's consolidated financial statements have been
restated to reflect this combination as of January 1, 1996.
82
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE O - LEGISLATIVE MATTERS
The deposit accounts of the Banks and of other savings associations are
insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC through the Bank Insurance Fund ("BIF"), except to
the extent such banks have acquired SAIF deposits. The reserves of the BIF
met the level required by law in May 1995. As a result of the respective
reserve levels of the funds, deposit insurance assessments paid by healthy
savings associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. In
connection with this legislation, the Banks paid an assessment of
approximately $2.1 million, or $1.4 million after tax, which was charged to
operations in 1996.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 2000. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, First Federal and Ashland would be regulated
as banks under federal laws which would subject these subsidiaries to the
more restrictive activity limits imposed on national banks. Under separate
legislation related to the recapitalization plan, the Banks are required to
recapture as taxable income approximately $1.9 million of their bad debt
reserve, which represents the post-1987 additions to the reserve, and will
be unable to utilize the percentage of earnings method to compute the
reserve in the future. The Banks have provided deferred taxes for this
amount and are amortizing the recapture of the bad debt reserve in taxable
income over a six year period commencing in 1998.
83
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998, 1997 and 1996
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 1998 and 1997.
Three Months Ended
March 31, June 30, September 30, December 31,
1998: (In thousands, except per share data)
Total interest income $10,803 $10,944 $11,192 $11,344
Total interest expense 5,840 6,057 6,495 6,460
------- ------- ------- -------
Net interest income 4,963 4,887 4,697 4,884
Provision for losses on loans 96 41 49 64
Other income 2,312 1,637 1,689 1,915
General, administrative and other expense 4,137 3,911 3,957 4,315
------- ------- ------- -------
Earnings before income taxes 3,042 2,572 2,380 2,420
Federal income taxes 1,033 820 769 788
------- -------- -------- --------
Net earnings $ 2,009 $ 1,752 $ 1,611 $ 1,632
======= ======= ======= =======
Earnings per share:
Basic $.36 $.32 $.29 $.31
=== === === ===
Diluted $.35 $.31 $.28 $.31
=== === === ===
Three Months Ended
March 31, June 30, September 30, December 31,
1997: (Restated) (In thousands, except per share data)
Total interest income $9,741 $10,098 $10,502 $10,876
Total interest expense 5,383 5,536 5,845 6,014
----- ------- ------- -------
Net interest income 4,358 4,562 4,657 4,862
Provision for losses on loans 51 60 58 216
Other income 738 1,037 1,196 974
General, administrative and other expense 3,113 3,209 3,165 4,246
----- ------- ------- -------
Earnings before income taxes 1,932 2,330 2,630 1,374
Federal income taxes 637 783 870 632
------ -------- -------- --------
Net earnings $1,295 $ 1,547 $ 1,760 $ 742
===== ======= ======= ========
Earnings per share:
Basic $.23 $.28 $.32 $.15
=== === === ===
Diluted $.23 $.27 $.31 $.15
=== === === ===
84
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.
The information contained under the captions "Board of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement for the 1999 Annual Meeting of Stockholders to be filed by Camco no
later than 120 days after the end of the fiscal year (the "Proxy Statement") is
incorporated herein by reference.
Item 10. Executive Compensation.
The information contained in the Proxy Statement under the caption "Compensation
of Executive Officers and Directors" is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption "Voting
Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information contained in the Proxy Statement under the caption "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(i) Certificate of Incorporation
(3)(ii) Bylaws
(10)(ii)-1 Employment Agreement between Camco and
Larry A. Caldwell
(10)(ii)-2 Employment Agreement between Camco and
Anthony J. Popp
(10)(ii)-3 Employment Agreement between Marietta Savings
and Anthony J. Popp
(21) Subsidiaries of Camco
(23.1) Consent of Grant Thornton LLP regarding
Camco's Consolidated Financial Statements
and Form S-8
(23.2) Consent of Grant Thornton LLP regarding
Camco's 401(k) Salary Savings Plan Financial
Statements and Form S-8
(27.1) Financial Data Schedule
(27.2) Restated 1997 Financial Data Schedule
(27.3) Restated 1996 Financial Data Schedule
(99) 1997 Financial Statements of the Camco
Financial Corporation 401(k) Salary Savings
Plan
85
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.
Camco Financial Corporation
By /s/ Larry A. Caldwell
Larry A. Caldwell,
President, Chief Executive
Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Anthony J. Popp By /s/ James R. Hanawalt
Anthony J. Popp, James R. Hanawalt,
Senior Vice President and Director Director
Date: March 23, 1999 Date: March 23, 1999
By /s/ Samuel W. Speck By /s/ Robert C. Dix, Jr.
Samuel W. Speck, Robert C. Dix. Jr.,
Director Director
Date: March 23, 1999 Date: March 23, 1999
By /s/ Jeffrey T. Tucker By /s/ Paul D. Leake
Jeffrey R. Tucker, Paul D. Leake,
Director Director
Date: March 23, 1999 Date: March 23, 1999
By /s/ Eric G. Spann By /s/ Gary E. Crane
Eric Spann, Gary E. Crane,
Director Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 23, 1999 Date: March 23, 1999
By /s/ Kenneth R. Elshoff
Kenneth R. Elshoff,
Director
Date: March 23, 1999
86
INDEX TO EXHIBITS
ITEM DESCRIPTION
Exhibit (3)(i) Third Restated Certificate of
Incorporation of Camco Financial
Corporation, as amended
Exhibit (3)(ii) 1987 Amended and Restated By-Laws of Incorporated by reference to Camco's Annual
Camco Financial Corporation Report on Form 10-KSB for the fiscal year ended
December 31, 1995, filed with the Securities
and Exchange Commission on April 1, 1996 (the
"1995 Form 10-KSB"), Exhibit 3(iii).
Exhibit (10)(ii)-1 Employment Agreement dated January 22, Incorporated by reference to the 1995 Form 10KSB,
1996, by and between Camco and Larry A. Exhibit 10(ii)-1
Caldwell
Exhibit (10)(ii)-2 Employment Agreement dated January 28, Incorporated by reference to Camco's Annual
1994, by and between Camco and Anthony Report on Form 10-KSB for the fiscal year ended
J. Popp December 31, 1993, filed with the SEC on
March 31, 1994 (the "1994 Form 10-KSB"),
Exhibit 10(ii)-1.
Exhibit (10)(ii)-3 Employment Agreement dated January 28, Incorporated by reference to the 1994 Form
1994, by and between Marietta Savings 10-KSB, Exhibit 10(ii)-2.
Bank and Anthony J. Popp
Exhibit 21 Subsidiaries of Camco
Exhibit 23.1 Consent of Grant Thornton LLP regarding
Camco's Consolidated Financial
Statements and Form S-8
Exhibit 23.2 Consent of Grant Thornton LLP regarding
Camco's 401(k) Salary Savings Plan
Financial Statements and Form S-8
Exhibit 27.1 Financial Data Schedule
Exhibit 27.2 Restated 1997 Financial Data Schedule
Exhibit 27.3 Restated 1996 Financial Data Schedule
Exhibit 99 1997 Financial Statements of the Camco
Financial Corporation 401(k) Salary
Savings Plan
87