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 June 30, 1999
---------------------------------------------
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 August 9, 1999, the latest practicable date, 5,725,776.5 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
Accountants' Review Report 3
Consolidated Statements of Financial Condition 4
Consolidated Statements of Earnings 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Quantitative and Qualitative Disclosures about
Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
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Independent Accountants' Report
Board of Directors
Camco Financial Corporation
814 Wheeling Avenue
Cambridge, Ohio 43725
We have reviewed the accompanying consolidated statements of financial
condition, earnings, comprehensive income, and cash flows of Camco Financial
Corporation as of June 30, 1999, and for the three-month and six-month periods
then ended.
The financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition as of December 31,
1998, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for the year then ended (not presented herein) and in our report
dated February 25, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated statement of financial condition as of December
31, 1998, is fairly stated, in all material respects, in relation to the
consolidated statement of financial condition from which it has been derived.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
August 6, 1999
3
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 11,508 $ 13,206
Interest-bearing deposits in other financial institutions 8,855 22,609
------- -------
Cash and cash equivalents 20,363 35,815
Investment securities available for sale - at market 319 1,307
Investment securities held to maturity - at cost, approximate market value of $14,239
and $10,998 as of June 30, 1999 and December 31, 1998 14,463 10,962
Mortgage-backed securities available for sale - at market 7,228 3,476
Mortgage-backed securities held to maturity - at cost, approximate market value of
$4,302 and $5,102 as of June 30, 1999 and December 31, 1998 4,362 5,019
Loans held for sale - at lower of cost or market 4,620 10,119
Loans receivable - net 639,633 538,550
Office premises and equipment - net 10,717 10,598
Real estate acquired through foreclosure 869 217
Federal Home Loan Bank stock - at cost 10,341 8,250
Accrued interest receivable on loans 3,697 3,576
Accrued interest receivable on mortgage-backed securities 76 61
Accrued interest receivable on investment securities and interest-bearing deposits 208 229
Prepaid expenses and other assets 1,259 393
Cash surrender value of life insurance 5,535 5,161
Goodwill and other intangible assets 3,327 3,402
Prepaid federal income tax 41 -
------- -------
Total assets $727,058 $637,135
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $457,762 $443,227
Advances from the Federal Home Loan Bank 199,919 125,483
Advances by borrowers for taxes and insurance 2,005 2,478
Accounts payable and accrued liabilities 2,920 2,679
Dividends payable 658 589
Accrued federal income taxes - 354
Deferred federal income taxes 2,403 2,186
------- -------
Total liabilities 665,667 576,996
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares;
no shares outstanding - -
Common stock - $1 par value; authorized, 8,900,000 shares, 5,480,298 and
5,480,331 shares issued at June 30, 1999 and December 31, 1998, respectively 5,480 5,480
Additional paid-in capital 30,372 27,053
Retained earnings - substantially restricted 26,021 27,628
Less 31,888 and 6,388 shares of treasury stock - at cost (458) (118)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (24) 96
------- -------
Total stockholders' equity 61,391 60,139
------- -------
Total liabilities and stockholders' equity $727,058 $637,135
======= =======
</TABLE>
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $22,030 $19,774 $11,392 $ 9,918
Mortgage-backed securities 341 445 204 194
Investment securities 394 555 198 266
Interest-bearing deposits and other 786 973 351 566
------ ------ ------ ------
Total interest income 23,551 21,747 12,145 10,944
Interest expense
Deposits 9,417 9,463 4,715 4,582
Borrowings 4,022 2,434 2,224 1,475
------ ------ ------ ------
Total interest expense 13,439 11,897 6,939 6,057
------ ------ ------ ------
Net interest income 10,112 9,850 5,206 4,887
Provision for losses on loans 123 137 69 41
------ ------ ------ ------
Net interest income after provision
for losses on loans 9,989 9,713 5,137 4,846
Other income
Late charges, rent and other 1,203 1,337 587 573
Loan servicing fees 199 289 140 260
Service charges and other fees on deposits 260 348 148 173
Gain on sale of loans 1,331 1,962 549 890
Gain (loss) on sale of real estate acquired through foreclosure (13) 4 (9) -
Gain on sale of investment and mortgage-backed securities
designated as available for sale - 9 - -
------ ------ ------ ------
Total other income 2,980 3,949 1,415 1,896
General, administrative and other expense
Employee compensation and benefits 3,796 3,498 1,972 1,640
Occupancy and equipment 1,207 965 621 524
Federal deposit insurance premiums 147 146 73 73
Data processing 449 706 219 509
Advertising 330 334 187 205
Franchise taxes 438 347 223 251
Amortization of goodwill 75 75 37 37
Other operating 2,012 1,977 1,074 931
------ ------ ------ ------
Total general, administrative and other expense 8,454 8,048 4,406 4,170
------ ------ ------ ------
Earnings before federal income taxes 4,515 5,614 2,146 2,572
Federal income taxes
Current 1,250 1,718 563 617
Deferred 279 135 167 203
------ ------ ------ ------
Total federal income taxes 1,529 1,853 730 820
------ ------ ------ ------
NET EARNINGS $ 2,986 $ 3,761 $ 1,416 $ 1,752
====== ====== ====== ======
EARNINGS PER SHARE
Basic $.52 $.65 $.25 $.30
=== === === ===
Diluted $.51 $.63 $.24 $.29
=== === === ===
</TABLE>
5
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six months ended June 30,
(In thousands)
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $2,986 $3,761 $1,416 $1,752
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the
period, net of tax (120) 26 (90) 14
Reclassification adjustment for gains on sale
included in net earnings, net of related taxes - (6) - (3)
----- ----- ----- -----
Comprehensive income $2,866 $3,781 $1,326 $1,763
===== ===== ===== =====
Accumulated comprehensive income (loss) $ (24) $ 96 $ (24) $ 96
===== ===== ===== =====
</TABLE>
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 2,986 $ 3,761
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (196) (721)
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 3 27
Amortization of goodwill 75 75
Amortization of purchase accounting adjustments - net 19 248
Depreciation and amortization 570 431
Provision for losses on loans 123 137
(Gain) loss on sale of real estate acquired through foreclosure 13 (4)
Federal Home Loan Bank stock dividends (313) (209)
Gain on sale of loans (236) (748)
Loss on sale of premises and equipment - 2
Gain on sale of investment and mortgage-backed securities designated
as available for sale - (9)
Loans originated for sale in the secondary market (52,574) (92,518)
Proceeds from sale of loans in the secondary market 58,309 91,918
Increase (decrease) in cash due to changes in:
Accrued interest receivable (115) (217)
Prepaid expenses and other assets (866) 355
Accrued interest and other liabilities 310 (2,349)
Federal income taxes:
Current (395) 189
Deferred 279 135
------- -------
Net cash provided by operating activities 7,992 503
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities and interest-bearing deposits 5,000 9,750
Proceeds from sale of investment securities designated as available for sale - 900
Proceeds from sale of mortgage-backed securities designated as available for sale - 4,608
Purchases of investment securities designated as held to maturity (7,498) (7,999)
Purchases of investments designated as available for sale (22) (123)
Purchase of mortgage-backed securities designated as available for sale (5,080) -
Loan principal repayments 120,991 110,571
Loan disbursements (201,700) (121,678)
Purchases of loans (21,068) -
Principal repayments on mortgage-backed securities 1,807 1,657
Proceeds from sale of office premises and equipment - 20
Additions to office premises and equipment (689) (1,312)
Additions to real estate acquired through foreclosure (44) -
Proceeds from sale of real estate acquired through foreclosure 126 412
Purchase of Federal Home Loan Bank stock (1,778) (807)
Proceeds from redemption of life insurance - 580
Net increase in cash surrender value of life insurance (124) (142)
Purchase of cash surrender life insurance (250) -
------- -------
Net cash used in investing activities (110,329) (3,563)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (102,337) (3,060)
------- -------
</TABLE>
7
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<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
1999 1998
<S> <C> <C>
Net cash used in operating and investing activities
(balance brought forward) $(102,337) $(3,060)
Cash flows provided by (used in) financing activities:
Net increase in deposits 14,535 5,086
Proceeds from Federal Home Loan Bank advances and other borrowings 93,756 39,500
Repayment of Federal Home Loan Bank advances and other borrowings (19,319) (27,729)
Dividends paid on common stock (1,274) (1,040)
Proceeds from exercise of stock options - 110
Decrease in advances by borrowers for taxes and insurance (473) (769)
Purchase of treasury shares (340) -
-------- ------
Net cash provided by financing activities 86,885 15,158
-------- ------
Increase (decrease) in cash and cash equivalents (15,452) 12,098
Cash and cash equivalents at beginning of period 35,815 22,904
-------- ------
Cash and cash equivalents at end of period $ 20,363 $35,002
======== ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 12,612 $11,819
======== ======
Income taxes $ 928 $ 1,476
======== ======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (120) $ 20
======== ======
Recognition of mortgage servicing rights in accordance with
SFAS No. 125 $ 1,095 $ 1,214
======== ======
Transfer from loans to real estate acquired through foreclosure $ 747 $ 88
======== ======
Transfer of mortgage-backed securities from the 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
======== ======
</TABLE>
8
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Financial Corporation ("Camco", or the "Corporation") included in
Camco's Annual Report on Form 10-K for the year ended December 31,
1998. 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 six and three month periods
ended June 30, 1999, are not necessarily indicative of the results
which may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Camco and its 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 six and three month periods ended June
30, 1999, is computed based on 5,738,710 and 5,736,175 weighted-average
shares outstanding during the respective periods.
Basic earnings per share for the six and three month periods ended June
30, 1998, is computed based on 5,746,577 and 5,750,143 weighted-average
shares outstanding during the respective periods.
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 plans. Weighted-average common
shares deemed outstanding for purposes of computing diluted earnings
per share totaled 5,856,153 and 5,844,063 for the six and three month
periods ended June 30, 1999, and 5,943,565 and 5,955,342 for the six
and three month periods ended June 30, 1998, respectively.
Incremental shares related to the assumed exercise of stock options
included in the computation of diluted earnings per share for the six
and three month periods ended June 30, 1999, totaled 117,443 and
107,888, and 196,988 and 205,199 for the six and three month periods
ended June 30, 1998, respectively.
9
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Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("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, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. 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 June 30, 1998
consolidated financial statements to conform to the June 30, 1999
presentation.
10
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Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three and six month periods ended June 30, 1999 and 1998
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 been heavily influenced by the level of other income,
including gains on sale of loans, loan servicing fees, and other fees. Camco is
currently reducing its loan sales in favor of loan portfolio growth in response
to the current interest rate environment. The interest rate risk of adding a
limited amount of fixed-rate loans to the mortgage portfolio is being managed
with matched borrowings from the Federal Home Loan Bank (the "FHLB") of
Cincinnati. 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 $727.1 million of consolidated assets at June 30, 1999. Camco's level of
growth is largely attributable to the acquisitions of Marietta Savings, First
Federal, First Savings, and Germantown Federal Savings Bank (merged into First
Federal effective January 1998) 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.
11
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Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Discussion of Financial Condition Changes from December 31, 1998 to June 30,
1999
At June 30, 1999, Camco's consolidated assets totaled $727.1 million, an
increase of $89.9 million, or 14.1%, over the December 31, 1998 total. The
increase during the current six month period was primarily funded by deposit
growth of $14.5 million and an increase of $74.4 million in advances from the
FHLB.
Cash and interest-bearing deposits in other financial institutions totaled $20.4
million at June 30, 1999, a decrease of $15.5 million, or 43.1%, from December
31, 1998 levels. Excess liquidity was used to fund purchases of loans,
investment and mortgage-backed securities, as well as to fund loan originations
during the six month period.
Investment securities totaled $14.8 million at June 30, 1999, an increase of
$2.5 million, or 20.5%, over the total at December 31, 1998. During the 1999
period, investment securities totaling $7.5 million were purchased, while
maturities amounted to $5.0 million.
Mortgage-backed securities totaled $11.6 million at June 30, 1999, an increase
of $3.1 million, or 36.4%, over December 31, 1998, due primarily to purchases
totaling $5.1 million, partially offset by principal repayments totaling $1.8
million during the period. Loans receivable and loans held for sale increased by
$95.6 million, or 17.4%, during the six months ended June 30, 1999, to a total
of $644.3 million. The increase was primarily attributable to loan disbursements
and purchases totaling $275.3 million, which were partially offset by principal
repayments of $121.0 million and loan sales of $58.1 million. The volume of
loans originated and purchased during the 1999 six month period exceeded that of
the 1998 period by $61.1 million, or 28.5%, while the volume of loan sales
decreased by $33.1 million year to year.
Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled
$5.0 million and $4.3 million at June 30, 1999 and December 31, 1998,
respectively, constituting .77% and .78% of total net loans, including loans
held for sale, at those dates. The consolidated allowance for loan losses
totaled $1.9 million at June 30, 1999 and $1.8 million at December 31, 1998,
representing 37.7% and 41.5% of nonperforming loans, respectively, at those
dates. Although management believes that its allowance for loan losses at June
30, 1999, 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 $457.8 million at June 30, 1999, an increase of $14.5 million,
or 3.3%, over December 31, 1998 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 $74.4
million, or 59.3%, to a total of $199.9 million at June 30, 1999. The proceeds
from deposit growth and advances from the FHLB were primarily used to fund loan
originations for the six month period.
The Banks are required to maintain minimum regulatory capital pursuant to
federal regulations. At June 30, 1999, the Banks' regulatory capital exceeded
all regulatory capital requirements.
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 six month periods ended June 30, 1999 and 1998
Comparison of Results of Operations for the Six Months Ended June 30, 1999 and
1998
General
Camco's net earnings for the six months ended June 30, 1999 totaled $3.0
million, a decrease of $775,000, or 20.6%, from the $3.8 million of net earnings
reported in the comparable 1998 period. The decrease in earnings was primarily
attributable to a decrease in other income of $969,000, resulting from decreased
gains on loan sales and a decline in late charges, rent and other income,
coupled with a $406,000 increase in general, administrative and other expense,
which were partially offset by a $262,000 increase in net interest income and a
$324,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income for the six months ended June 30, 1999, increased by $1.8
million, or 8.3%, generally reflecting the effects of growth in average
interest-earning assets outstanding of approximately $102.8 million.
Interest income on loans and mortgage-backed securities totaled $22.4 million
for the six months ended June 30, 1999, an increase of $2.2 million, or 10.6%,
over the comparable 1998 period. The increase resulted primarily from a $106.3
million, or 21.6%, increase in the average balance outstanding year to year.
Interest income on investments and interest-bearing deposits decreased by
$348,000, or 22.8%, due primarily to a $3.5 million, or 7.9%, decrease in the
average balance outstanding year to year, coupled with a 19.2% decrease in the
weighted average yield from 6.4% for the six months ended June 30, 1998 to 5.3%
for the comparable period in 1999.
Interest expense on deposits decreased by $46,000, or .5%, to a total of $9.4
million for the six months ended June 30, 1999, due primarily to a decrease in
the interest rates paid. Interest expense on borrowings totaled $4.0 million for
the six months ended June 30, 1999, an increase of $1.6 million, or 65.2%, over
the 1998 six month period. The increase resulted primarily from a $71.6 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 $262,000, or 2.7%, to a total of $10.1 million
for the six months ended June 30, 1999. The interest rate spread decreased to
approximately 2.88% for the six months ended June 30, 1999, from 3.36% for the
1998 period, while the net interest margin decreased to approximately 3.15% in
1999, as compared to 3.65% in 1998.
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 Bank's market area,
13
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Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Comparison of Results of Operations for the Six Months Ended June 30, 1999 and
1998 (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 $123,000 for the six months ended June
30, 1999, a decrease of $14,000, or 10.2%, from the comparable period in 1998.
The current period provision generally reflects the effects of loan portfolio
growth and, while nonperforming loans have increased, such nonperforming loans
consist primarily of one- to four-family residential properties. It is
management's belief that such nonperforming loans are adequately collateralized.
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 $3.0 million for the six months ended June 30, 1999, a
decrease of $969,000, or 24.5%, from the comparable 1998 period. The decrease in
other income was primarily attributable to a $631,000, or 32.2%, decrease in
gains on sale of loans and a decrease of $134,000, or 10.0%, in late charges,
rent and other. The decrease in gains on sale of loans primarily reflects a
reduction in sales volume year to year. The decrease in late charges, rent and
other was primarily attributable to a gain recorded in the 1998 period on
settlement of life insurance of $99,000.
General, Administrative and Other Expense
General, administrative and other expense totaled $8.5 million for the six
months ended June 30, 1999, an increase of $406,000, or 5.0%, over the
comparable period in 1998. This increase was due primarily to a $298,000, or
8.5%, increase in employee compensation and benefits, a $242,000, or 25.1%,
increase in occupancy and equipment and a $91,000, or 26.2%, increase in
franchise taxes, which were partially offset by a decrease in data processing
expense of $257,000, or 36.4%.
The increase in employee compensation and benefits resulted primarily from
increased staffing levels as a result of Camco's overall growth. The increase in
office occupancy and equipment was due to increased depreciation, primarily as a
result of the equipment purchases required to convert all of the Banks to one
data processing service bureau, coupled with increased building maintenance
costs. The increase in franchise taxes was due primarily to the Corporation's
equity growth year to year and a change in Ohio franchise tax law which
increased the overall rate of taxation. Data processing costs declined through
the first six months of 1999 as the expense for the same period in the prior
year included one time non-capitalized costs to convert the Banks to one service
bureau data processor.
14
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Comparison of Results of Operations for the Six Months Ended June 30, 1999 and
1998 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $1.5 million for the six months
ended June 30, 1999, a decrease of $324,000, or 17.5%, from the six months ended
June 30, 1998. This decrease is attributable to a $1.1 million, or 19.6%,
decrease in pre-tax earnings. The Corporation's effective tax rate amounted to
33.9% and 33.0% for the six months ended June 30, 1999 and 1998, respectively.
Comparison of Results of Operations for the Three Months Ended June 30, 1999 and
1998
General
Camco's net earnings for the three months ended June 30, 1999, totaled $1.4
million, a decrease of $336,000, or 19.2%, from the $1.8 million of net earnings
reported in the comparable 1998 period. The decrease in earnings is primarily
attributable to a $481,000 decrease in other income and a $236,000 increase in
general, administrative and other expense, which were partially offset by an
increase in net interest income of $319,000 and a $90,000 decrease in the
provision for federal income taxes.
Net Interest Income
Total interest income for the three months ended June 30, 1999, increased by
$1.2 million, or 11.0%, generally reflecting the effects of growth in average
interest-earning assets outstanding of approximately $111.3 million, which was
partially offset by a decrease in the average yield year to year, from 3.23% in
1998 to 2.88% in 1999.
Interest income on loans and mortgage-backed securities totaled $11.6 million
for the three months ended June 30, 1999, an increase of $1.5 million, or 14.7%,
over the comparable 1998 period. The increase resulted primarily from a $124.2
million, or 24.9%, increase in the average balance outstanding year to year.
Interest income on investments and interest-bearing deposits decreased by
$283,000, or 34.0%, due to a decrease in average outstanding balances of $12.9
million. Interest expense on deposits increased by $133,000, or 2.9%, to a total
of $4.7 million for the three months ended June 30, 1999, due primarily to
growth in the deposit portfolio. Interest expense on borrowings totaled $2.2
million for the three months ended June 30, 1999, an increase of $749,000, or
50.8%, over the 1998 three month period. The increase resulted primarily from an
$85.8 million increase in the average balance outstanding year to year.
15
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Comparison of Results of Operations for the Three Months Ended June 30, 1999 and
1998 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $319,000, or 6.5%, to a total of $5.2 million
for the three months ended June 30, 1999. The interest rate spread decreased to
approximately 2.88% for the three months ended June 30, 1999, from 3.23% for the
1998 period, while the net interest margin increased to approximately 3.14% in
1999, compared to 3.53% in 1998.
Provision for Losses on Loans
The provision for losses on loans totaled $69,000 for the three months ended
June 30, 1999, an increase of $28,000 over the comparable period in 1998. 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 $1.4 million for the three months ended June 30, 1999, a
decrease of $481,000, or 25.4%, from the comparable 1998 period. The decrease in
other income was primarily attributable to a $341,000 decrease in gains on sale
of loans and a decrease of $120,000 in loan servicing fees. The decrease in
gains on sale of loans primarily reflects a decrease in sales volume year to
year. The decrease in loan servicing fees is mainly attributable to the
increased levels of amortization of mortgage servicing rights.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.4 million for the three
months ended June 30, 1999, an increase of $236,000, or 5.7%. This increase was
due primarily to a $332,000, or 20.2%, increase in employee compensation and
benefits, a $97,000, or 18.5%, increase in occupancy and equipment and a
$143,000, or 15.4%, increase in other operating expenses, which were partially
offset by a decrease in data processing expense of $290,000, or 57.0%.
16
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Comparison of Results of Operations for the Three Months Ended June 30, 1999 and
1998 (continued)
General, Administrative and Other Expense (continued)
The increase in employee compensation and benefits resulted primarily from an
increase in staffing levels and normal merit increases year to year. The
increases in occupancy and equipment and other operating expenses were due
primarily to increased depreciation expense primarily as a result of the
equipment purchased in fiscal 1998 required to convert all of the Banks to one
data processing service bureau, increased building maintenance costs which
reflect the eight additional offices added since the first quarter of 1998 and
the Corporation's overall growth year to year. These increases were offset by a
decrease in data processing expense as the expense for the same period in the
prior year included the one-time non-capitalized costs incurred to convert the
Banks to one service bureau data processor.
Federal Income Taxes
The provision for federal income taxes totaled $730,000 for the three months
ended June 30, 1999, a decrease of $90,000, or 11.0%, from the same quarter in
1998. This decrease was attributable to a $426,000, or 16.6%, decrease in
pre-tax earnings. The Corporation's effective tax rate amounted to 34.0% and
31.9% for the three months ended June 30, 1999 and 1998, 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 was 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 satisfactorily tested as being Y2K compliant.
The Corporation has identified other third party vendors and commercial
borrowers and if they were deemed critical to the banking operations, a review
of their Y2K readiness has been conducted. Contingency plans have been completed
in which the Corporation will seek alternative sources for critical services
provided by third party vendors who may be found not to be Y2K compliant upon
arrival of the year 2000.
17
<PAGE>
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three and six month periods ended June 30, 1999 and 1998
Year 2000 Compliance Matters (continued)
The Corporation's service bureau has completed the upgrading of its core systems
and through testing, the Banks have verified that these systems are Y2K
compliant. The Banks have also successfully performed Y2K testing of the
electronic services provided by the Federal Reserve Bank of Cleveland and the
mortgage servicing systems of the Federal Home Loan Mortgage Corporation and the
Federal National Mortgage Association through the Corporation's service bureau.
The Corporation's plan calls for the testing of non-information technology
hardware by the end of the third quarter, and where necessary, either the repair
or replacement of those systems if they are found not to be Y2K compliant.
As part of its risk assessment, the Corporation has analyzed its vulnerability
to third-party vendors and service providers by conducting a review of their Y2K
readiness. The Corporation has received responses from 95% of its vendors and
service providers for the Banks and no significant concerns have been
identified. The Corporation has also assessed the risk associated with certain
of its Bank's customers and contacts are being made to determine the customer's
Y2K preparedness if they were deemed to be sensitive to the Y2K issue.
The Corporation has begun preliminary research concerning the normal cash on
hand at the Banks to determine if the cash needs for potential cash withdrawals
in the fourth quarter of 1999 will be adequate. Because the Corporation
maintains adequate liquidity reserves, it does not anticipate that it will have
to borrow funds to meet any potential disintermediation that might occur due to
Y2K readiness. However, in response to the Y2K issue, both the Federal Reserve
Bank and FHLB have developed temporary borrowing programs to ensure that its
members have access to liquidity to meet any additional cash requirements
directly related to Y2K concerns. Management is currently evaluating both
programs and preliminarily has determined that either one would offer adequate
funding to meet its short term Y2K cash requirements.
The Corporation estimates that the final 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 in 1998 to upgrade existing
technology systems). Beyond the cost incurred to convert its systems, the
Corporation had estimated that the additional cost to address the Y2K issue
would be approximately $75,000, of which $35,000 has been incurred as of June
30, 1999. While management believes its Y2K budget is based on sound
assumptions, 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.
Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Corporation's market risk since the
Corporation's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1998.
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
On May 25, 1999, Camco held its Annual Meeting of Stockholders. Two
matters were submitted to stockholders for which the following votes
were cast:
Three directors were elected to terms expiring in 2002, as follows:
For Withheld
Larry A. Caldwell 4,466,863 85,559
Samuel W. Speck 4,465,652 86,769
Jeffrey T. Tucker 4,463,642 88,779
Ratification of Grant Thornton LLP as auditors for Camco for the year
ended December 31, 1999:
For Against Abstain
4,510,204 32,552 9,666
ITEM 5. Other Information
On August 6, 1999, Camco entered into an Agreement of Merger and Plan
of Reorganization (the "Agreement") with Westwood Homestead Financial
Corporation ("WHFC") and its wholly-owned subsidiary The Westwood
Homestead Savings Bank. Pursuant to the Agreement, WHFC will merge
with and into Camco and the holders of outstanding common shares of
WHFC will receive .611 of a Camco share and $5.20 for each of their
WHFC shares. The parties anticipate that the merger and its related
transaction will be completed during the first quarter of 2000.
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None.
Exhibits:
27.1 Financial Data Schedule for the six
months ended June 30, 1999.
27.2 Restated financial data schedule for the
six months ended June 30, 1998.
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: August 11, 1999 By: /s/Larry A. Caldwell
Larry A. Caldwell
President and Chief Executive
Officer
Date: August 11, 1999 By: /s/Gary Crane
Gary Crane
Chief Financial Officer
20
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