FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (Zip Code)
executive office)
Registrant's telephone number, including area code: (740) 432-5641
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
As of November 10, 1998, the latest practicable date, 5,476,580.5 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 20 pages
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Camco Financial Corporation
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Quantitative and Qualitative Disclosures about
Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 1998 1997
(Restated)
<S> <C> <C>
Cash and due from banks $ 14,745 $ 12,436
Interest-bearing deposits in other financial institutions 23,242 10,468
------- -------
Cash and cash equivalents 37,987 22,904
Investment securities available for sale - at market 1,319 3,573
Investment securities - at cost, approximate market value of $13,432
and $17,536 as of September 30, 1998 and December 31, 1997 13,320 17,489
Mortgage-backed securities available for sale - at market 4,025 8,460
Mortgage-backed securities - at cost, approximate market value of
$5,684 and $8,311 as of September 30, 1998 and December 31, 1997 5,577 8,207
Loans held for sale - at lower of cost or market 9,492 4,135
Loans receivable - net 499,761 477,517
Office premises and equipment - net 9,597 8,420
Real estate acquired through foreclosure 146 737
Federal Home Loan Bank stock - at cost 6,993 5,492
Accrued interest receivable on loans 3,456 2,972
Accrued interest receivable on mortgage-backed securities 70 111
Accrued interest receivable on investment securities and interest-bearing deposits 340 349
Prepaid expenses and other assets 1,049 1,637
Cash surrender value of life insurance 5,104 5,482
Goodwill and other intangible assets 3,440 3,552
Prepaid federal income taxes - 99
------- -------
Total assets $601,676 $571,136
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $434,528 $423,464
Advances from the Federal Home Loan Bank 101,376 82,319
Advances by borrowers for taxes and insurance 1,565 4,478
Accounts payable and accrued liabilities 2,252 3,261
Dividends payable 562 491
Accrued federal income taxes 175 -
Deferred federal income taxes 2,023 1,792
------- -------
Total liabilities 542,481 515,805
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 September 30, 1998 and December 31, 1997 5,480 3,640
Additional paid-in capital 27,053 26,915
Retained earnings - substantially restricted 26,584 24,645
Treasury stock - at cost (41) -
Unrealized gains on securities designated as available for sale,
net of related tax effects 119 131
------- -------
Total stockholders' equity 59,195 55,331
------- -------
Total liabilities and stockholders' equity $601,676 $571,136
======= =======
</TABLE>
3
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
(Restated) (Restated)
<S> <C> <C> <C> <C>
Interest income
Loans $29,988 $27,168 $10,214 $ 9,478
Mortgage-backed securities 621 1,029 176 337
Investment securities 820 1,337 265 391
Interest-bearing deposits and other 1,510 807 537 296
------ ------ ------ ------
Total interest income 32,939 30,341 11,192 10,502
Interest expense
Deposits 14,570 14,008 5,107 4,808
Borrowings 3,822 2,756 1,388 1,037
------ ------ ------ ------
Total interest expense 18,392 16,764 6,495 5,845
------ ------ ------ ------
Net interest income 14,547 13,577 4,697 4,657
Provision for losses on loans 186 169 49 58
------ ------ ------ ------
Net interest income after provision
for losses on loans 14,361 13,408 4,648 4,599
Other income
Late charges, rent and other 1,868 1,094 529 344
Loan servicing fees 340 544 51 292
Service charges and other fees on deposits 496 383 148 145
Gain on sale of loans 2,856 907 894 402
Gain on sale of investment and mortgage-backed
securities designated as available for sale 13 - 4 -
Gain on sale of office equipment 1 4 3 4
Gain on sale of real estate acquired through foreclosure 64 39 60 9
------ ------ ------ ------
Total other income 5,638 2,971 1,689 1,196
General, administrative and other expense
Employee compensation and benefits 5,349 4,508 1,851 1,514
Office occupancy and equipment 1,499 1,266 534 437
Federal deposit insurance premiums 220 214 74 70
Data processing 1,075 474 369 152
Advertising 477 380 143 101
Franchise taxes 507 390 160 117
Amortization of goodwill 113 112 38 37
Other operating 2,765 2,143 788 737
------ ------ ------ ------
Total general, administrative and other expense 12,005 9,487 3,957 3,165
------ ------ ------ ------
Earnings before federal income taxes 7,994 6,892 2,380 2,630
Federal income taxes
Current 2,386 2,155 668 753
Deferred 236 135 101 117
------ ------ ------ ------
Total federal income taxes 2,622 2,290 769 870
------ ------ ------ ------
NET EARNINGS $ 5,372 $ 4,602 $ 1,611 $ 1,760
====== ====== ====== ======
EARNINGS PER SHARE
Basic $0.98 $0.84 $0.29 $0.32
==== ==== ==== ====
Diluted $0.96 $0.81 $0.28 $0.31
==== ==== ==== ====
</TABLE>
4
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the nine months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Net earnings $5,372 $4,602
Unrealized gains (losses) on securities:
Unrealized holding gains/losses during the
period, net of tax (3) 9
Reclassification adjustment for gains on sale
included in net earnings, net of related taxes (9) -
----- -----
Comprehensive income $5,360 $4,611
===== =====
Accumulated other comprehensive income $ 119 $ 131
===== =====
</TABLE>
5
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
1998 1997
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 5,372 $ 4,602
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (518) (367)
Amortization of premiums and discounts on investment
and mortgage-backed securities - net 1 41
Amortization of goodwill 113 112
Amortization of purchase accounting adjustments - net 268 -
Depreciation and amortization 680 536
Provision for losses on loans 186 169
Gain on sale of real estate acquired through foreclosure (64) (39)
Federal Home Loan Bank stock dividends (332) (253)
Gain on sale of loans (1,113) (464)
Gain on sale of premises and equipment 1 -
Gain on sale of investment and mortgage-backed securities
designated as available for sale (13) -
Loans originated for sale in the secondary market (149,721) (50,270)
Proceeds from sale of loans in the secondary market 145,477 48,278
Increase (decrease) in cash due to changes in:
Accrued interest receivable (434) (107)
Prepaid expenses and other assets 587 (481)
Accrued interest and other liabilities (937) (1,505)
Federal income taxes:
Current 274 482
Deferred 236 135
------- -------
Net cash provided by operating activities 63 869
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 14,684 17,599
Proceeds from sale of investment securities designated as available for sale 900 -
Proceeds from sale of mortgage-backed securities designated
as available for sale 4,612 -
Purchase of investment securities designated as available for sale (150) (530)
Purchase of investment securities designated as held to maturity (8,999) (11,500)
Loan disbursements (142,470) (128,618)
Principal repayments on loans 120,194 83,692
Principal repayments on mortgage-backed securities 2,436 3,125
Proceeds from sale of office premises and equipment 22 -
Purchase of office premises and equipment (1,878) (692)
Proceeds from sales of real estate acquired through foreclosure 1,037 286
Additions to real estate acquired through foreclosure (19) (59)
Purchase of Federal Home Loan Bank stock (1,169) (710)
Purchase of cash surrender value of life insurance - (332)
Proceeds from redemption of life insurance 580 -
Net increase in cash surrender value of life insurance (202) (210)
Decrease in certificates of deposit in other financial institutions - 990
------- -------
Net cash used in investing activities (10,422) (36,959)
------- -------
Net cash used in operating and investing activities
(subtotal carried forward) (10,359) (36,090)
------- -------
</TABLE>
6
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
1998 1997
(Restated)
<S> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(10,359) $(36,090)
Cash flows provided by (used in) financing activities:
Net increase in deposits 10,795 16,181
Proceeds from Federal Home Loan Bank advances 62,410 39,800
Repayment of Federal Home Loan Bank advances (43,353) (24,020)
Dividends paid on common stock (1,607) (1,305)
Proceeds from sale of treasury stock - 252
Proceeds from exercise of stock options 110 1
Advances by borrowers for taxes and insurance (2,913) (107)
------- -------
Net cash provided by financing activities 25,442 30,802
------- -------
Net increase (decrease) in cash and cash equivalents 15,083 (5,288)
Cash and cash equivalents at beginning of period 22,904 20,977
------- -------
Cash and cash equivalents at end of period $ 37,987 $ 15,689
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 18,954 $ 16,835
======= =======
Income taxes $ 2,000 $ 1,739
======= =======
Supplemental disclosure of noncash investing activities:
Transfers of mortgage loans to real estate acquired
through foreclosure $ 363 $ 914
======= =======
Unrealized gains (losses) on investments and mortgage-backed
securities designated as available for sale $ (12) $ 9
======= =======
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 1,743 $ 443
======= =======
Transfer of mortgage-backed securities from 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 $ 41 $ -
======= =======
Shares issued in conjunction with the three-for-two stock split $ 1,826 $ -
======= =======
</TABLE>
7
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1997, the Board of Directors of Camco Financial Corporation
("Camco" or the "Corporation") approved a business combination whereby
GF Bancorp, Inc. ("GF Bancorp"), the parent company of Germantown
Federal Savings Bank ("Germantown Federal"), would merge with and into
the Corporation, and Germantown Federal would merge with and into First
Federal Savings Bank of Washington Court House, a subsidiary of the
Corporation. 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 and cash flows for the nine and
three months ended September 30, 1997, as applicable, have been
restated to give effect to the combination as of January 1, 1997.
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles.
Accordingly, these financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Camco
included in Camco's Annual Report on Form 10-K for the year ended
December 31, 1997. However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the consolidated financial statements have
been included. The results of operations for the nine and three month
periods ended September 30, 1998, are not necessarily indicative of the
results which may be expected for the entire year.
2. Principles of Consolidation
Camco has five wholly-owned subsidiaries: Cambridge Savings Bank
("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings"),
First Federal Savings Bank of Washington Court House ("First Federal"),
First Federal Bank for Savings ("First Savings") (collectively
hereinafter "the Banks") and East Ohio Land Title Agency, Inc., as well
as two second tier subsidiaries, Camco Mortgage Corporation and WestMar
Mortgage Company. All significant intercompany balances and
transactions have been eliminated.
3. Earnings Per Share
Basic earnings per share for the nine and three month periods ended
September 30, 1998, is computed based on 5,477,041 and 5,473,599
weighted-average shares outstanding during the respective periods.
Basic earnings per share for each of the nine and three month periods
ended September 30, 1997, is computed based on 5,462,906 and 5,462,900
weighted-average shares outstanding during the respective periods.
8
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Earnings Per Share (continued)
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 5,615,851 and 5,658,329 for the nine and three month
periods ended September 30, 1998, and 5,649,558 and 5,656,095 for each
of the nine and three month periods ended September 30, 1997.
Basic and diluted earnings per share for the nine and three month
periods ended September 30, 1997, have been restated to give effect to
the Corporation's three-for-two stock split which was effected on July
23, 1998, and for the acquisition of GF Bancorp completed in January
1998.
4. Effects 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 which 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, 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.
9
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
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 the
Corporation'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 (revenues, 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 effect on the
Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly
changes the way that public business enterprises report information
about operating 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. SFAS No. 131 is not expected to have
a material impact on the Corporation's financial statements.
10
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements (continued)
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.
5. Reclassifications
Certain reclassifications have been made to the September 30, 1997
consolidated financial statements to conform to the September 30, 1998
presentation.
11
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Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and nine month periods ended September 30, 1998 and 1997
General
Camco's profitability depends primarily on the level of its 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 the level of other income,
including gains on sale of loans, loan servicing fees, and other fees. Camco's
operations are also influenced by the level of general, administrative and other
expenses, including employee compensation and benefits, office occupancy and
equipment, federal deposit insurance premiums, as well as various other
operating expense categories, including federal income tax expense.
Since its incorporation in 1970, Camco has evolved into a full service provider
of financial products to the communities served by its banking subsidiaries.
Utilizing a common marketing theme committed to personalized customer service,
Camco and its affiliates have grown from $22.4 million in consolidated assets in
1970 to $601.7 million of consolidated assets at September 30, 1998. Camco's
level of growth is largely attributable to the acquisitions of Marietta Savings,
First Federal, First Savings, and GF Bancorp and the continued expansion of
product lines from the previously limited deposit and loan offerings of a
heavily regulated 1970's savings and loan association, to the full array of
financial service products that were the previous domain of commercial banks.
Additionally, Camco's operational growth has been enhanced by vertical
integration of the residential lending function through establishing mortgage
banking operations in the Banks' primary market areas and, to a lesser extent,
in areas beyond the primary market areas and 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 bringing
value-added services to their customers. 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 such consumer preferences, Camco's management
designs financial service products with a view towards differentiating each of
the constituent Banks from the competition. It is management's opinion that the
Banks' abilities to rapidly adapt to consumer needs and preferences is essential
to community-based financial institutions in order to compete against the larger
regional and money-center bank holding companies.
12
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Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Discussion of Financial Condition Changes from December 31, 1997 to
September 30, 1998
At September 30, 1998, Camco's consolidated assets totaled $601.7 million, an
increase of $30.5 million, or 5.3%, over the December 31, 1997 total. The
increase during the current nine month period was primarily funded by deposit
growth of $11.1 million, an increase of $19.1 million in advances from the
Federal Home Loan Bank and undistributed net earnings of $3.8 million.
Cash and interest-bearing deposits in other financial institutions totaled $38.0
million at September 30, 1998, an increase of $15.1 million, or 65.9%, over
December 31, 1997 levels.
Investment securities totaled $14.6 million at September 30, 1998, a decrease of
$6.4 million, or 30.5%, from the total at December 31, 1997. During the 1998
period, investment securities totaling $9.1 million were purchased, while
maturities amounted to $14.7 million and sales totaled $900,000.
Mortgage-backed securities totaled $9.6 million at September 30, 1998, a
decrease of $7.1 million from December 31, 1997, due primarily to sales totaling
$4.6 million and principal repayments totaling $2.4 million during the period.
Loans receivable and loans held for sale increased by $27.6 million, or 5.7%,
during the nine months ended September 30, 1998, to a total of $509.3 million.
The increase was primarily attributable to loan disbursements totaling $292.2
million, which were partially offset by principal repayments of $120.2 million
and loan sales of $144.4 million. Loan origination volume during the 1998 nine
month period exceeded that of the 1997 period by $113.3 million, or 63.3%, while
the volume of loan sales increased by $96.6 million year to year.
Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled
$3.3 million and $2.0 million at September 30, 1998 and December 31, 1997,
respectively, constituting .66% and .41% of total net loans, including loans
held for sale, at those dates. The consolidated allowance for loan losses
totaled $1.7 million and $1.4 million at September 30, 1998 and December 31,
1997, representing 51.4% and 72.8% of nonperforming loans, respectively, at
those dates. Although management believes that its allowance for loan losses at
September 30, 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 $434.5 million at September 30, 1998, an increase of $11.1
million, or 2.6%, 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 Federal Home Loan
Bank increased by $19.1 million, or 23.2%, to a total of $101.4 million at
September 30, 1998. The proceeds from deposit growth and advances from the
Federal Home Loan Bank were primarily used to fund loan originations for the
nine month period.
The Banks are required to maintain minimum regulatory capital pursuant to
federal regulations. At September 30, 1998, the Banks' regulatory capital
exceeded all regulatory capital requirements.
13
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Nine Months Ended September 30, 1998
and 1997
General
Camco's net earnings for the nine months ended September 30, 1998 totaled $5.4
million, an increase of $770,000, or 16.7%, over the $4.6 million of net
earnings reported in the comparable 1997 period. The increase in earnings was
primarily attributable to an increase in net interest income of $970,000 and an
increase in other income of $2.7 million, which were partially offset by an
increase in the provision for losses on loans of $17,000, an increase in
general, administrative and other expense of $2.5 million, and an increase in
the provision for federal income taxes of $331,000.
Net Interest Income
Total interest income for the nine months ended September 30, 1998, increased by
$2.6 million, or 8.6%, generally reflecting the effects of growth in average
interest-earning assets outstanding of approximately $55.6 million.
Interest income on loans and mortgage-backed securities totaled $30.6 million
for the nine months ended September 30, 1998, an increase of $2.4 million, or
8.6%, over the comparable 1997 period. The increase resulted primarily from a
$40.1 million, or 8.7%, increase in the average balance outstanding year to
year. Interest income on investments and interest-bearing deposits increased by
$186,000, or 8.7%, due primarily to a $4.0 million increase in the average
outstanding balance. Interest expense on deposits increased by $562,000, or
4.0%, to a total of $14.6 million for the nine months ended September 30, 1998,
due primarily to an increase of $17.5 million in the average balance of deposits
outstanding. Interest expense on borrowings totaled $3.8 million for the nine
months ended September 30, 1998, an increase of $1.1 million, or 38.7%, over the
1997 nine month period. The increase resulted primarily from a $25.2 million
increase in the average balance outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $970,000, or 7.1%, to a total of $14.5 million
for the nine months ended September 30, 1998. The interest rate spread decreased
to approximately 3.26% for the nine months ended September 30, 1998, from 3.30%
for the 1997 period, while the net interest margin decreased to approximately
3.54% in 1998, compared to 3.68% 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,
14
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Nine Months Ended September 30, 1998
and 1997 (continued)
Provision for Losses on Loans (continued)
and other factors related to the collectibility of the Bank's loan portfolio.
The provision for losses on loans totaled $186,000 for the nine months ended
September 30, 1998, an increase of $17,000 over the comparable period in 1997.
The current period provision generally reflects the effects of loan portfolio
growth and an increase in the level of nonperforming loans. There can be no
assurance that the allowance for loan losses will be adequate to cover losses on
nonperforming assets in the future.
Other Income
Other income totaled $5.6 million for the nine months ended September 30, 1998,
an increase of $2.7 million, or 89.8%, over the comparable 1997 period. The
increase in other income is primarily attributable to a $1.9 million increase in
gains on sale of loans and an increase of $774,000 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 $369,000 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 on loans and deposits due to the Corporation's
growth year to year.
General, Administrative and Other Expense
General, administrative and other expense totaled $12.0 million for the nine
months ended September 30, 1998, an increase of $2.5 million, or 26.5%. This
increase is due primarily to an $841,000, or 18.7%, increase in employee
compensation and benefits, a $233,000, or 18.4%, increase in office occupancy
and equipment, a $601,000, or 126.8%, increase in data processing expense, a
$97,000, or 25.5%, increase in advertising, a $117,000, or 30.0%, increase in
franchise taxes and a $622,000, or 29.0%, 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 office occupancy and equipment was due primarily to increased
depreciation and building maintenance costs. The increase in other operating
expenses included $212,000 in merger costs recorded in 1998 related to the
merger with GF Bancorp in January 1998. The increases in advertising, franchise
taxes and other operating expenses were due primarily to the Corporation's
overall growth year to year, while the increase in data processing expenses was
primarily attributable to the Corporation's conversion to a new data processing
system.
Federal Income Taxes
The provision for federal income taxes totaled $2.6 million for the nine months
ended September 30, 1998, an increase of $331,000, or 14.5%. This increase is
attributable to a $1.1 million, or 16.0%, increase in pre-tax earnings. The
Corporation's effective tax rate was 32.8% and 33.2% for the nine months ended
September 30, 1998 and 1997, respectively.
15
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997
General
Net earnings for the three months ended September 30, 1998 totaled $1.6 million,
a decrease of $149,000, or 8.5%, from the $1.8 million in net earnings reported
in the comparable 1997 period. The decrease in net earnings is primarily
attributable to a $792,000 increase in general, administrative and other
expense, which was partially offset by a $40,000 increase in net interest
income, a $493,000 increase in other income, an $11,000 decrease in the
provision for loan losses and a $101,000 decrease in the provision for federal
income taxes.
Net Interest Income
Total interest income for the three months ended September 30, 1998, increased
by $690,000, or 6.6%, compared to the 1997 quarter. Interest income on loans and
mortgage-backed securities increased by $575,000, or 5.9%, due primarily to a
$36.5 million increase in the average balance outstanding year to year. Interest
income on investment securities and interest-bearing deposits increased by
$115,000, or 16.7%, due primarily to a $9.3 million increase in the average
balance outstanding.
Total interest expense increased by $650,000, or 11.1%, for the three months
ended September 30, 1998, compared to the 1997 quarter. Interest expense on
deposits increased by $299,000, or 6.2%, due primarily to a $19.1 million
increase in the average balance outstanding year to year. Interest expense on
borrowings increased by $351,000, or 33.8%, due primarily to a $26.8 million
increase in the average outstanding balance.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $40,000, or .9%, for the three months ended
September 30, 1998, compared to the comparable quarter in 1997. The interest
rate spread was 3.05% for the 1998 quarter, compared to 3.30% in 1997, while the
net interest margin was 3.34% in the 1998 quarter, compared to 3.60% in 1997.
Provision for Losses on Loans
The provision for losses on loans amounted to $49,000 during the three months
ended September 30, 1998, a decrease of $9,000, or 15.5%, compared to the same
period in 1997. The current period provision generally reflects the effects of
loan portfolio growth year to year.
Other Income
Other income increased for the quarter ended September 30, 1998 by $493,000, or
41.2%, compared to the 1997 quarter. The increase is primarily attributable to a
$492,000 increase in gain on sale of loans and a $185,000, or 53.8%, increase in
late charges, rent and other, which were partially offset by a $241,000, or
82.5%, decrease in loan servicing fees. The increase in the gain on sale of
loans is due primarily to the increased volume of fixed-rate loans originated
for sale, while the decrease in loan servicing fees generally reflects the
effects of an increase in amortization expense of capitalized mortgage servicing
rights, due primarily to the high volume of loan refinance activity.
16
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Comparison of Results of Operations for the Three Months Ended September 30,
1998 and 1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense increased by $792,000, or 25.0%,
during the three months ended September 30, 1998, compared to the same period in
1997. The increase is primarily attributable to a $337,000, or 22.3%, increase
in employee compensation and benefits, a $97,000, or 22.2%, increase in
occupancy and equipment, a $51,000, or 6.9%, increase in other operating expense
and a $217,000, or 142.8%, increase in data processing primarily attributed to
conversion related costs. The increase in employee compensation and benefits
resulted primarily from normal merit increases, as well as an increase due to
the hiring of additional personnel coincident with the Corporation's overall
growth. The increase in occupancy and equipment related primarily to increased
depreciation and building maintenance costs. The increase in other operating
expenses generally reflects increased costs attendant to the Corporation's
overall growth year to year.
Federal Income Taxes
Camco's provision for federal income taxes decreased for the three months ended
September 30, 1998, by $101,000, or 11.6%, generally reflecting the $250,000, or
9.5%, decrease in pre-tax earnings year to year. The effective tax rates were
32.3% and 33.1% for the three month periods ended September 30, 1998 and 1997,
respectively.
Year 2000 Compliance Matters
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 who would be Y2K compliant. The
new service bureau was identified and conversion of all data systems of the
Banks will be 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 has identified other third party vendors and commercial
borrowers and if they are deemed critical to the banking operations, a review of
their Y2K readiness is conducted. Contingency plans are being developed in which
the Corporation will seek alternative sources for critical services provided by
third party vendors who it is deemed will not be Y2K compliant.
17
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and nine month periods ended September 30, 1998 and 1997
Year 2000 Compliance Matters (continued)
The final phase of the Corporation's technology plan involves the testing of the
systems in place to ensure Y2K readiness. The Corporation's service bureau is
ahead of schedule in the upgrading of its systems and has now reached the
testing phase. The tests are being 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
not to be non-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). 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. The Corporation is presently completing its
analysis of its vulnerability to third-party vendors (other than its new service
bureau), most of which are insignificant to consolidated operations.
Quantitative and Qualitative Disclosures about Market Risk
This response is incorporated herein by reference from the discussion under the
sub-caption "Asset and Liability Management" of the caption "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the
Company's 1997 Annual Report, included as Part II, Item 6 of the Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1997.
18
<PAGE>
Camco Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibits:
27.1: Financial Data Schedule for the
nine months ended September 30, 1998.
27.2: Restated Financial Data Schedule for
the nine months ended September 30,
1997.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 1998 By: /s/Larry A. Caldwell
-------------------------- --------------------------------
Larry A. Caldwell
President and Chief Executive Officer
Date: November 10, 1998 By: /s/Gary Crane
-------------------------- ---------------------------------
Gary Crane
Chief Financial Officer
20
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