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, 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 November 11, 1999, the latest practicable date, 5,720,388 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 20 pages
<PAGE>
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 10
Quantitative and Qualitative Disclosures about
Market Risk 18
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
<PAGE>
<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 12,377 $ 13,206
Interest-bearing deposits in other financial institutions 4,990 22,609
------- -------
Cash and cash equivalents 17,367 35,815
Investment securities available for sale - at market 267 1,307
Investment securities held to maturity - at cost, approximate market value of $17,078
and $10,998 as of September 30, 1999 and December 31, 1998 17,364 10,962
Mortgage-backed securities available for sale - at market 6,852 3,476
Mortgage-backed securities held to maturity - at cost, approximate market value of
$6,151 and $5,102 as of September 30, 1999 and December 31, 1998 6,229 5,019
Loans held for sale - at lower of cost or market 2,669 10,119
Loans receivable - net 687,823 538,550
Office premises and equipment - net 11,186 10,598
Real estate acquired through foreclosure 863 217
Federal Home Loan Bank stock - at cost 12,849 8,250
Accrued interest receivable on loans 4,158 3,576
Accrued interest receivable on mortgage-backed securities 83 61
Accrued interest receivable on investment securities and interest-bearing deposits 270 229
Prepaid expenses and other assets 1,544 393
Cash surrender value of life insurance 5,595 5,161
Goodwill and other intangible assets 3,290 3,402
------- -------
Total assets $778,409 $637,135
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $454,679 $443,227
Advances from the Federal Home Loan Bank 252,671 125,483
Advances by borrowers for taxes and insurance 2,524 2,478
Accounts payable and accrued liabilities 3,287 2,679
Dividends payable 687 589
Accrued federal income taxes 60 354
Deferred federal income taxes 2,378 2,186
------- -------
Total liabilities 716,286 576,996
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares;
no shares outstanding - -
Common stock - $1 par value; authorized, 8,900,000 shares, 5,752,276 and
5,480,331 shares issued at September 30, 1999 and December 31, 1998, respectively 5,752 5,480
Additional paid-in capital 30,350 27,053
Retained earnings - substantially restricted 26,553 27,628
Less 31,888 and 6,388 shares of treasury stock - at cost (459) (118)
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (73) 96
------- -------
Total stockholders' equity 62,123 60,139
------- -------
Total liabilities and stockholders' equity $778,409 $637,135
======= =======
</TABLE>
3
<PAGE>
<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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $34,526 $29,988 $12,496 $10,214
Mortgage-backed securities 540 621 199 176
Investment securities 635 820 242 265
Interest-bearing deposits and other 1,157 1,510 370 537
------ ------ ------ ------
Total interest income 36,858 32,939 13,307 11,192
Interest expense
Deposits 14,211 14,570 4,794 5,107
Borrowings 7,064 3,822 3,042 1,388
------ ------ ------ ------
Total interest expense 21,275 18,392 7,836 6,495
------ ------ ------ ------
Net interest income 15,583 14,547 5,471 4,697
Provision for losses on loans 168 186 45 49
------ ------ ------ ------
Net interest income after provision
for losses on loans 15,415 14,361 5,426 4,648
Other income
Late charges, rent and other 1,698 1,868 495 529
Loan servicing fees 416 340 218 51
Service charges and other fees on deposits 419 496 158 148
Gain on sale of loans 1,557 2,856 225 894
Gain on sale of investment and mortgage-backed
securities designated as available for sale - 13 - 4
Gain (loss) on disposition of fixed assets (3) 1 (4) 3
Gain on sale of real estate acquired through foreclosure 12 64 26 60
------ ------ ------ ------
Total other income 4,099 5,638 1,118 1,689
General, administrative and other expense
Employee compensation and benefits 5,834 5,349 2,038 1,851
Office occupancy and equipment 1,835 1,499 628 534
Federal deposit insurance premiums 220 220 74 74
Data processing 636 1,075 187 369
Advertising 484 477 153 143
Franchise taxes 667 507 229 160
Amortization of goodwill 112 112 37 37
Other operating 2,989 2,766 976 789
------ ------ ------ ------
Total general, administrative and other expense 12,777 12,005 4,322 3,957
------ ------ ------ ------
Earnings before federal income taxes 6,737 7,994 2,222 2,380
Federal income taxes
Current 2,002 2,386 752 668
Deferred 279 236 - 101
-------- ------ ------ ------
Total federal income taxes 2,281 2,622 752 769
------- ------ ------ ------
NET EARNINGS $ 4,456 $ 5,372 $ 1,470 $ 1,611
======= ====== ====== ======
EARNINGS PER SHARE
Basic $0.78 $0.93 $0.26 $0.28
==== ==== ==== ====
Diluted $0.76 $0.91 $0.25 $0.27
==== ==== ==== ====
</TABLE>
4
<PAGE>
<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $4,456 $5,372 $1,470 $1,611
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) during the
period, net of tax of $87,000, $5,000, $25,000
and $15,000, respectively (169) (3) (49) (29)
Reclassification adjustment for gains on sale
included in net earnings, net of related taxes - (9) - (3)
----- ----- ----- -----
Comprehensive income $4,287 $5,360 $1,421 $1,579
===== ===== ===== =====
Accumulated comprehensive income (loss) $ (73) $ 119 $ (73) $ 119
===== ===== ===== =====
</TABLE>
5
<PAGE>
<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 4,456 $ 5,372
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (269) (518)
Amortization of premiums and discounts on investment
and mortgage-backed securities - net (4) 1
Amortization of goodwill 112 113
Amortization of purchase accounting adjustments - net 78 268
Depreciation and amortization 725 682
Provision for losses on loans 168 186
Gain on sale of real estate acquired through foreclosure (12) (64)
Federal Home Loan Bank stock dividends (518) (332)
Gain on sale of loans (385) (1,113)
(Gain) loss on sale of premises and equipment 3 (1)
Gain on sale of investment and mortgage-backed securities
designated as available for sale - (13)
Loans originated for sale in the secondary market (70,622) (149,721)
Proceeds from sale of loans in the secondary market 78,457 145,477
Increase (decrease) in cash due to changes in:
Accrued interest receivable (645) (434)
Prepaid expenses and other assets (1,151) 587
Accrued interest and other liabilities 705 (937)
Federal income taxes:
Current (294) 274
Deferred 279 236
------- -------
Net cash provided by operating activities 11,083 63
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 5,508 14,684
Proceeds from sale of investment securities designated as available for sale 15 900
Proceeds from sale of mortgage-backed securities designated
as available for sale - 4,612
Purchase of investment securities designated as available for sale (22) (150)
Purchase of investment securities designated as held to maturity (10,896) (8,999)
Purchase of mortgage-backed securities designated as available for sale (5,080) -
Purchase of mortgage-backed securities designated as held to maturity (1,992) -
Purchase of loans (21,871) -
Loan disbursements (260,381) (142,470)
Principal repayments on loans 131,940 120,194
Principal repayments on mortgage-backed securities 2,265 2,436
Proceeds from sale of office premises and equipment - 22
Purchase of office premises and equipment (1,316) (1,878)
Proceeds from sales of real estate acquired through foreclosure 583 1,037
Additions to real estate acquired through foreclosure (153) (19)
Purchase of Federal Home Loan Bank stock (4,081) (1,169)
Purchase of cash surrender value of life insurance (250) -
Proceeds from redemption of life insurance - 580
Net increase in cash surrender value of life insurance (184) (202)
------- -------
Net cash used in investing activities (165,915) (10,422)
------- -------
Net cash used in operating and investing activities
(subtotal carried forward) (154,832) (10,359)
------- -------
</TABLE>
6
<PAGE>
<TABLE>
Camco Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
1999 1998
<S> <C> <C>
Net cash used in operating and investing activities
(subtotal brought forward) $(154,832) $(10,359)
Cash flows provided by (used in) financing activities:
Net increase in deposits 11,452 10,795
Proceeds from Federal Home Loan Bank advances 163,055 62,410
Repayment of Federal Home Loan Bank advances (35,867) (43,353)
Dividends paid on common stock (1,961) (1,607)
Proceeds from exercise of stock options - 110
Advances by borrowers for taxes and insurance 46 (2,913)
Purchase of treasury shares (341) -
-------- -------
Net cash provided by financing activities 136,384 25,442
-------- -------
Net increase (decrease) in cash and cash equivalents (18,448) 15,083
Cash and cash equivalents at beginning of period 35,815 22,904
-------- -------
Cash and cash equivalents at end of period $ 17,367 $ 37,987
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 20,843 $ 18,954
======== =======
Income taxes $ 1,594 $ 2,000
======== =======
Supplemental disclosure of noncash investing activities:
Transfers of mortgage loans to real estate acquired
through foreclosure $ 1,064 $ 363
======== =======
Unrealized losses on investments and mortgage-backed
securities designated as available for sale $ (169) $ (12)
======== =======
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 1,172 $ 1,743
======== =======
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
======== =======
Shares issued in conjunction with 5% stock dividend $ 272 $ -
========= =======
</TABLE>
7
<PAGE>
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 nine and three month
periods ended September 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 nine and three month periods ended
September 30, 1999, is computed based on 5,730,981 and 5,715,774
weighted-average shares outstanding during the respective periods.
Basic earnings per share for the nine and three month periods ended
September 30, 1998, is computed based on 5,750,893 and 5,747,279
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 5,842,657 and 5,810,791 for the nine and three month
periods ended September 30, 1999, respectively, and 5,896,644 and
5,941,245 for the nine and three month periods ended September 30,
1998, respectively.
Incremental shares related to the assumed exercise of stock options
included in the computation of diluted earnings per share for the nine
and three month periods ended September 30, 1999, totaled 111,676 and
95,017, and for the nine and three month periods ended September 30,
1998, totaled 145,751 and 193,966, respectively.
8
<PAGE>
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.
9
<PAGE>
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, 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,
primarily gains on sale of loans and other fees on loans and deposit accounts.
During 1999, Camco's management has focused the Corporation's strategic emphasis
on building net interest income through growth in the loan portfolio.
Implementation of this strategy has resulted in $1.04 million, or 7.1%, increase
in net interest income during 1999. In the short run this increase in stabilized
core earnings has been more than offset by a $1.3 million decline in the more
unpredictable source of revenue resulting from gains on sale of loans in the
secondary market. 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 $778.4 million of consolidated assets at September 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, in a transaction accounted for as a
pooling of interest) 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.
Continuing its expansion into contiguous markets, Camco has agreed to acquire
Westwood Homestead Financial Corporation ("Westwood Homestead"), which is the
holding company for Westwood Homestead Savings Bank ("Westwood Bank"). Westwood
Bank is a savings bank with two offices in Cincinnati, Ohio. At September 30,
1999, Westwood Homestead had total assets of $149.7 million. The shareholders of
Westwood Homestead will receive $5.20 in cash and .611 shares of Camco stock for
each Westwood Homestead share held at the effective time of the merger. The
merger is expected to be completed in the first quarter of 2000.
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.
10
<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, 1999 and 1998
Discussion of Financial Condition Changes from December 31, 1998 to September
30, 1999
At September 30, 1999, Camco's consolidated assets totaled $778.4 million, an
increase of $141.3 million, or 22.2%, over the December 31, 1998 total. The
increase during the current nine month period was primarily funded by deposit
growth of $11.5 million and an increase of $127.2 million in advances from the
Federal Home Loan Bank ("FHLB").
Cash and interest-bearing deposits in other financial institutions totaled $17.4
million at September 30, 1999, a decrease of $18.4 million, or 51.5%, from
December 31, 1998 levels. Excess liquidity was used to fund purchases of higher
yielding assets.
Investment securities totaled $17.6 million at September 30, 1999, an increase
of $5.4 million, or 43.7%, over the total at December 31, 1998. During the 1999
period, investment securities totaling $10.9 million were purchased, while
maturities amounted to $5.5 million.
Mortgage-backed securities totaled $13.1 million at September 30, 1999, an
increase of $4.6 million, or 54.0%, over December 31, 1998, due primarily to
purchases totaling $7.1 million, partially offset by principal repayments
totaling $2.3 million and a market valuation adjustment of $200,000 during the
period. Loans receivable increased by $149.3 million, or 27.0%, during the nine
months ended September 30, 1999, to a total of $687.8 million. The increase was
primarily attributable to loan disbursements and purchases totaling $352.9
million, which were partially offset by principal repayments of $131.9 million
and loan sales of $78.1 million. The volume of loans originated and purchased
during the 1999 nine month period exceeded that of the 1998 period by $60.7
million, or 20.8%, while the volume of loan sales decreased by $66.3 million
year to year. Loans held for sale totaled $2.7 million at September 30, 1999,
compared to $10.6 million at December 31, 1998.
Throughout the low interest rate environment that has prevailed throughout much
of the past few years, Camco has pursued a strategy of originating fixed-rate
loans for sale in the secondary market and maintaining adjustable rate loans in
its portfolio. As a result of the high consumer demand for fixed-rate loans
during low interest rate cycles, a majority of the loans originated by Camco in
recent years have been fixed-rate loans. Throughout 1999, as interest rates have
edged up, consumer demand for adjustable-rate loans has increased to the point
where a majority of the loans originated by Camco in 1999 are ARMs. Consistent
with its past practice, Camco has retained ARMs in its portfolio.
Loans purchased during 1999, totaling $21.9 million, were made to replace
lower-yielding liquid assets. This strategy resulted in a targeted loan volume
that exceeded the production capability in Camco's primary market areas. The
loans purchased consist primarily of (adjustable-rate/fixed rate) loans secured
by single-family residences, condominiums and residential building lots outside
of Camco's primary market areas.
11
<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, 1999 and 1998
Discussion of Financial Condition Changes from December 31, 1998 to September
30, 1999 (continued)
Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled
$5.2 million and $4.3 million at September 30, 1999 and December 31, 1998,
respectively, constituting .75% and .78% of total net loans, including loans
held for sale, at those dates. The consolidated allowance for loan losses
totaled $1.8 million at both September 30, 1999 and December 31, 1998,
representing 34.6% and 41.5% of nonperforming loans, respectively, at those
dates. Although management believes that its allowance for loan losses at
September 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 $454.7 million at September 30, 1999, an increase of $11.5
million, or 2.6%, 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
$127.2 million, or 101.4%, to a total of $252.7 million at September 30, 1999.
The proceeds from deposit growth and advances from the FHLB were primarily used
to fund loan originations during the nine month period.
The Banks are required to maintain minimum regulatory capital pursuant to
federal regulations. At September 30, 1999, the Banks' regulatory capital
exceeded all regulatory capital requirements.
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and 1998
General
Camco's net earnings for the nine months ended September 30, 1999 totaled $4.5
million, a decrease of $916,000, or 17.1%, from the $5.4 million of net earnings
reported in the comparable 1998 period. The decrease in earnings was primarily
attributable to a decrease in other income of $1.5 million, resulting from
decreased gains on loan sales and a decline in late charges, rent and other
income, coupled with a $772,000 increase in general, administrative and other
expense, which were partially offset by a $1.0 million increase in net interest
income and a $341,000 decrease in the provision for federal income taxes.
Net Interest Income
Total interest income for the nine months ended September 30, 1999, increased by
$3.9 million, or 11.9%, over the nine month period ended September 30, 1998,
generally reflecting the effects of growth in average interest-earning assets
outstanding of approximately $120.8 million.
12
<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, 1999 and 1998
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and 1998 (continued)
Net Interest Income (continued)
Interest income on loans and mortgage-backed securities totaled $35.1 million
for the nine months ended September 30, 1999, an increase of $4.5 million, or
14.6%, over the comparable 1998 period. The increase resulted primarily from a
$126.2 million, or 25.3%, increase in the average balance outstanding year to
year, which was partially offset by a decline in yield. Interest income on
investments and interest-bearing deposits decreased by $538,000, or 23.1%, in
connection with the increased origination of ARMs with below-market rates, due
primarily to a $5.4 million, or 11.2%, decrease in the average balance
outstanding year to year.
Interest expense on deposits decreased by $359,000, or 2.5%, to a total of $14.2
million for the nine months ended September 30, 1999, due primarily to a
decrease in the interest rates paid. Interest expense on borrowings totaled $7.1
million for the nine months ended September 30, 1999, an increase of $3.2
million, or 84.8%, over the 1998 nine month period. The increase resulted
primarily from a $90.1 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 $1.0 million, or 7.1%, to a total of $15.6
million for the nine months ended September 30, 1999. The interest rate spread
decreased to approximately 2.85% for the nine months ended September 30, 1999,
from 3.26% for the 1998 period, while the net interest margin decreased to
approximately 3.11% in 1999, as compared to 3.54% 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,
and other factors related to the collectibility of the Bank's loan portfolio.
The provision for losses on loans totaled $168,000 for the nine months ended
September 30, 1999, a decrease of $18,000, or 9.7%, from the comparable period
in 1998. The current period provision generally reflects the effects of loan
portfolio growth and, while nonperforming loans have increased. Nonperforming
loans consist primarily of one- to four-family residential properties which
management believes are adequately collateralized. There can be no assurance
that the allowance for loan losses will be adequate to cover losses on
nonperforming loans in the future.
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, 1999 and 1998
Comparison of Results of Operations for the Nine Months Ended September 30, 1999
and 1998 (continued)
Other Income
Other income totaled $4.1 million for the nine months ended September 30, 1999,
a decrease of $1.5 million, or 27.3%, from the comparable 1998 period. The
decrease in other income was primarily attributable to a $1.3 million, or 45.5%,
decrease in gains on sale of loans and a decrease of $170,000, or 9.1%, 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 $12.8 million for the nine
months ended September 30, 1999, an increase of $772,000, or 6.4%, over the
comparable period in 1998. This increase was due primarily to a $485,000, or
9.1%, increase in employee compensation and benefits, a $336,000, or 22.4%,
increase in occupancy and equipment and a $160,000, or 31.6%, increase in
franchise taxes, which were partially offset by a decrease in data processing
expense of $439,000, or 40.8%.
The increase in employee compensation and benefits resulted primarily from
normal merit increases coupled with increased staffing levels due to Camco's
overall growth year to year. 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 nine 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 data processing service bureau.
Federal Income Taxes
The provision for federal income taxes totaled $2.3 million for the nine months
ended September 30, 1999, a decrease of $341,000, or 13.0%, from the nine months
ended September 30, 1998. This decrease is attributable to a $1.3 million, or
15.7%, decrease in pre-tax earnings. The Corporation's effective tax rate
amounted to 33.9% and 32.8% for the nine months ended September 30, 1999 and
1998, respectively.
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, 1999 and 1998
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and 1998
General
Camco's net earnings for the three months ended September 30, 1999, totaled $1.5
million, a decrease of $141,000, or 8.8%, from the $1.6 million of net earnings
reported in the comparable 1998 period. The decrease in earnings is primarily
attributable to a $571,000 decrease in other income and a $365,000 increase in
general, administrative and other expense, which were partially offset by an
increase in net interest income of $774,000 and a $17,000 decrease in the
provision for federal income taxes.
Net Interest Income
Total interest income for the three months ended September 30, 1999, increased
by $2.1 million, or 18.9%, generally reflecting the effects of growth in average
interest-earning assets outstanding of approximately $156.7 million, which was
partially offset by a decrease in the yield on interest-earning assets.
Interest income on loans and mortgage-backed securities totaled $12.7 million
for the three months ended September 30, 1999, an increase of $2.3 million, or
22.2%, over the comparable 1998 period. The increase resulted primarily from a
$165.2 million, or 32.9%, increase in the average balance outstanding year to
year. Interest income on investments and interest-bearing deposits decreased by
$190,000, or 23.7%, due to a decrease in average outstanding balances of $10.6
million. Interest expense on deposits decreased by $313,000, or 6.1%, to a total
of $4.8 million for the three months ended September 30, 1999, due primarily to
a decrease in interest rates paid. Interest expense on borrowings totaled $3.0
million for the three months ended September 30, 1999, an increase of $1.7
million, or 119.2%, over the 1998 three month period. The increase resulted
primarily from a $127.2 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 $774,000, or 16.5%, to a total of $5.5 million
for the three months ended September 30, 1999. The interest rate spread
decreased to approximately 2.80% for the three months ended September 30, 1999,
from 3.05% for the 1998 period, while the net interest margin decreased to
approximately 3.04% in 1999, compared to 3.34% in 1998.
Provision for Losses on Loans
The provision for losses on loans totaled $45,000 for the three months ended
September 30, 1999, a decrease of $4,000 from 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.
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, 1999 and 1998
Comparison of Results of Operations for the Three Months Ended September 30,
1999 and 1998 (continued)
Other Income
Other income totaled $1.1 million for the three months ended September 30, 1999,
a decrease of $571,000, or 33.8%, from the comparable 1998 period. The decrease
in other income was primarily attributable to a $669,000 decrease in gains on
sale of loans, which was partially offset by a $167,000 increase in loan
servicing fees. The decrease in gains on sale of loans primarily reflects a
decrease in sales volume year to year. The increase in loan servicing fees is
mainly attributable to the decreased levels of amortization of mortgage
servicing rights.
General, Administrative and Other Expense
General, administrative and other expense totaled $4.3 million for the three
months ended September 30, 1999, an increase of $365,000, or 9.2%, over the
comparable quarter in 1998. This increase was due primarily to a $187,000, or
10.1%, increase in employee compensation and benefits, a $94,000, or 17.6%,
increase in occupancy and equipment and a $187,000, or 23.7%, increase in other
operating expenses, which were partially offset by a decrease in data processing
expense of $182,000, or 49.3%.
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 data processing service bureau.
Federal Income Taxes
The provision for federal income taxes totaled $752,000 for the three months
ended September 30, 1999, a decrease of $17,000, or 2.2%, from the same quarter
in 1998. This decrease was attributable to a $158,000, or 6.6%, decrease in
pre-tax earnings. The Corporation's effective tax rate amounted to 33.8% and
32.3% for the three months ended September 30, 1999 and 1998, respectively.
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, 1999 and 1998
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. Implementation of the contingency plans occurred
during September 1999.
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 completed the testing of non-information technology hardware
and, where necessary, has either repaired or replaced those systems if they were
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 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 have been made to determine the customer's Y2K
preparedness if they were deemed to be sensitive to the Y2K issue.
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, 1999 and 1998
Year 2000 Compliance Matters (continued)
The Corporation has conducted 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 would not exceed $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 September 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
None.
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 will be completed
during the first quarter of 2000.
ITEM 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: On August 13, 1999, Camco filed a Form
8-K reporting the execution of the
Agreement in Item 5.
Exhibits:
15 Independent Accountants' Report
27.1 Financial data schedule for the nine
months ended September 30, 1999.
27.2 Restated financial data schedule for the
nine months ended September 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: November 12, 1999 By: /s/Larry A. Caldwell
--------------------------- -----------------------------------
Larry A. Caldwell
President and Chief Executive Officer
Date: November 12, 1999 By: /s/Gary Crane
--------------------------- -----------------------------------
Gary Crane
Chief Financial Officer
20
Independent Accountants' Report
Board of Directors
Camco Financial Corporation
We have reviewed the accompanying consolidated statement of financial condition
of Camco Financial Corporation as of September 30, 1999, and the related
consolidated statements of earnings, comprehensive income, and cash flows for
the three-month and nine-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
November 1, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,377
<INT-BEARING-DEPOSITS> 4,990
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,119
<INVESTMENTS-CARRYING> 23,593
<INVESTMENTS-MARKET> 23,229
<LOANS> 690,492
<ALLOWANCE> 1,832
<TOTAL-ASSETS> 778,409
<DEPOSITS> 454,679
<SHORT-TERM> 252,671
<LIABILITIES-OTHER> 8,936
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 62,123
<TOTAL-LIABILITIES-AND-EQUITY> 778,409
<INTEREST-LOAN> 34,526
<INTEREST-INVEST> 1,175
<INTEREST-OTHER> 1,157
<INTEREST-TOTAL> 36,858
<INTEREST-DEPOSIT> 14,211
<INTEREST-EXPENSE> 21,275
<INTEREST-INCOME-NET> 15,583
<LOAN-LOSSES> 168
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,777
<INCOME-PRETAX> 6,737
<INCOME-PRE-EXTRAORDINARY> 4,456
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,456
<EPS-BASIC> .78
<EPS-DILUTED> .76
<YIELD-ACTUAL> 2.79
<LOANS-NON> 1,861
<LOANS-PAST> 3,720
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,783
<CHARGE-OFFS> 125
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,832
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,832
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-01-1998
<CASH> 14,745
<INT-BEARING-DEPOSITS> 23,242
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,344
<INVESTMENTS-CARRYING> 18,897
<INVESTMENTS-MARKET> 19,116
<LOANS> 509,253
<ALLOWANCE> 1,717
<TOTAL-ASSETS> 601,676
<DEPOSITS> 434,528
<SHORT-TERM> 101,376
<LIABILITIES-OTHER> 6,577
<LONG-TERM> 0
0
0
<COMMON> 5,480
<OTHER-SE> 53,715
<TOTAL-LIABILITIES-AND-EQUITY> 601,676
<INTEREST-LOAN> 29,988
<INTEREST-INVEST> 1,441
<INTEREST-OTHER> 1,510
<INTEREST-TOTAL> 32,939
<INTEREST-DEPOSIT> 14,570
<INTEREST-EXPENSE> 18,392
<INTEREST-INCOME-NET> 14,547
<LOAN-LOSSES> 186
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 12,005
<INCOME-PRETAX> 7,994
<INCOME-PRE-EXTRAORDINARY> 5,372
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,372
<EPS-BASIC> .93
<EPS-DILUTED> .91
<YIELD-ACTUAL> 3.44
<LOANS-NON> 1,412
<LOANS-PAST> 1,818
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,598
<CHARGE-OFFS> 47
<RECOVERIES> 20
<ALLOWANCE-CLOSE> 1,717
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,717
</TABLE>
