-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K3tJ9xhefBU7GbP0p7RE7x7BRfF9GInsLydvGx1uNH6DjHwomE4p3cVC07hQsWBw Db+Hhf8qQGLWVVM5DEh2oA== 0001046386-99-000069.txt : 19990402 0001046386-99-000069.hdr.sgml : 19990402 ACCESSION NUMBER: 0001046386-99-000069 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMCO FINANCIAL CORP CENTRAL INDEX KEY: 0000016614 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 510110823 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25196 FILM NUMBER: 99580717 BUSINESS ADDRESS: STREET 1: 814 WHEELING AVE CITY: CAMBRIDGE STATE: OH ZIP: 43725 BUSINESS PHONE: 6144325641 10-K 1 CAMCO FINANCIAL 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ Commission File Number: 0-25196 CAMCO FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0110823 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 814 Wheeling Avenue, Cambridge, Ohio 43725 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (740) 432-5641 Securities registered pursuant to Section 12(b) of the Act: None None (Title of Each Class) (Name of exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1 par value per share (Title of Class) Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____. Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the last sale reported as of March 29, 1999, was $69.4 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) The registrant's revenues for the fiscal year ended December 31, 1998, were $51.8 million. 5,474,036.50 shares of the Registrant's common stock were outstanding on March 22, 1999. DOCUMENTS INCORPORATED BY REFERENCE: Part III of Form 10-K: Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders PART I Item 1. Business. General Camco Financial Corporation ("Camco") is a multiple savings and loan holding company organized under Delaware law in 1970. Through its wholly-owned subsidiaries, Cambridge Savings Bank ("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings"), First Federal Savings Bank of Washington Court House ("First Federal") and First Federal Bank for Savings ("First Savings"), Camco is engaged in the financial services business in Ohio, Kentucky and West Virginia. East Ohio Land Title Agency, Inc. ("East Ohio"), a wholly-owned subsidiary of Camco, is engaged in the title insurance agency business. The acquisition by Camco of GF Bancorp, Inc., a Delaware corporation, and its wholly-owned subsidiary, Germantown Federal Savings Bank, a federal savings bank ("Germantown Federal"), was completed in January 1998 (the "Germantown Merger"), in a combination accounted for as a pooling of interest. In connection with the Germantown Merger, Germantown Federal, which had its main office in Germantown, Ohio and a branch office in New Lebanon, Ohio, merged into First Federal. In October 1996, the merger of First Ashland Financial Corporation, a Kentucky corporation, with and into Camco (the "Ashland Merger") was completed. Pursuant to the Ashland Merger, First Savings, which has its main office and a full-service branch office in Ashland, Kentucky, a full-service branch office in Russell, Kentucky, and a loan origination office in Huntington, West Virginia, became a wholly-owned subsidiary of Camco. The Ashland Merger was accounted for under the purchase method. First Federal was acquired by Camco in 1988. First Federal has its main office and a full-service branch office in Washington Court House, loan origination offices in Chillicothe, Circleville, Miamisburg, Powell and Wilmington, Ohio, and, as a result of the Germantown Merger, full-service branch offices in Germantown and New Lebanon, Ohio. Cambridge Savings, which was acquired by Camco in 1971, was incorporated under Ohio law in 1885. The main office of Cambridge Savings is in Cambridge, Ohio. Cambridge Savings has branch offices in Cambridge, Byesville and Uhrichsville, Ohio. In July 1994, Cambridge Savings converted its charter from an Ohio savings and loan association to an Ohio savings bank. Established in 1923 under Ohio law, Marietta Savings was acquired by Camco in 1973. Marietta has its main office and a branch office in Marietta, Ohio, and a branch in Belpre, Ohio. In July 1994, Marietta Savings converted its charter from an Ohio savings and loan association to an Ohio savings bank. Cambridge Savings, Marietta Savings, First Federal and First Savings (collectively, the "Banks") are members of the Federal Home Loan Bank (the "FHLB") of Cincinnati, and the accounts of each are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF") administered by the Federal Deposit Insurance Corporation (the "FDIC"). First Federal and First Savings are subject to regulation, examination and supervision by the United States Department of the Treasury, Office of Thrift Supervision (the "OTS") and the FDIC. Cambridge Savings and Marietta Savings are regulated by the Ohio Department of Financial Institutions, Division of Savings Banks (the "Division") and the FDIC. Cambridge Savings and Marietta Savings each own 50% of the outstanding stock of Camco Mortgage Corporation ("CMC"), a service corporation engaged in mortgage lending and related activities in central and southeastern Ohio. Marietta Savings owns 100% of the outstanding stock of WestMar Mortgage Company ("WestMar"), a service corporation engaged in mortgage lending activities, 2 primarily in Wood County, West Virginia. First Savings owns 100% of the stock of First S&L Corporation, a Kentucky corporation incorporated in 1975 for the purpose of acquiring stock in a data processing company located in Cincinnati, Ohio. East Ohio Land Title Agency, Inc. ("East Ohio"), a wholly-owned subsidiary of Camco, is engaged in the title insurance agency business. The financial statements for Camco and its subsidiaries are prepared on a consolidated basis. The information as of and for the years ended December 31, 1994 through 1997, inclusive, has been restated in this document and the consolidated financial statements to reflect the effects of the Germantown Merger. The principal source of revenue for Camco on an unconsolidated basis is dividends from the Banks. Payment of dividends to Camco by the Banks is subject to various regulatory restrictions and tax considerations. See "REGULATION." References in this report to various aspects of the business, operations and financial condition of Camco may be limited to the Banks, as the context requires. SELECTED CONSOLIDATED FINANCIAL INFORMATION The following tables set forth certain information concerning the consolidated financial position and results of operations of Camco at the dates indicated. This selected financial data should be read in conjunction with the consolidated financial statements appearing elsewhere in this document.
Consolidated statements of At December 31, financial condition: 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (In thousands) Total amount of: Assets $637,135 $570,170 $517,488 $394,892 $371,489 Interest-bearing deposits in other financial institutions 22,609 10,473 10,875 5,772 13,105 Investment securities available for sale - at market 1,307 3,572 7,177 8,634 2,978 Investment securities - at cost 10,962 17,489 21,844 19,283 34,835 Mortgage-backed securities available for sale - at market 3,476 8,447 10,148 11,954 1,464 Mortgage-backed securities - at cost 5,019 8,207 10,700 5,002 17,724 Loans receivable - net (1) 548,669 481,501 420,818 321,005 282,722 Deposits 443,227 422,368 398,161 326,996 307,643 FHLB advances and other borrowings 125,483 82,319 58,354 27,078 26,511 Stockholders' equity - substantially restricted 60,139 55,331 51,391 34,029 30,885
- --------------------------- (1) Includes loans held for sale. 3
Consolidated statements of earnings: Year ended December 31, 1998 1997 1996 1995 1994 (In thousands, except per share data) Total interest income $44,283 $41,217 $32,812 $28,833 $22,896 Total interest expense 24,852 22,778 17,811 16,022 11,978 ------ ------ ------ ------ ------ Net interest income 19,431 18,439 15,001 12,811 10,918 Provision for losses on loans 250 385 141 143 99 ------ ------ ------ ------ ------ Net interest income after provision for loan losses 19,181 18,054 14,860 12,668 10,819 Other income 7,552 3,945 3,700 3,418 2,694 General, administrative and other expense 16,319 13,733 13,762 10,046 9,365 ------ ------ ------ ------ ------ Earnings before federal income taxes 10,414 8,266 4,798 6,040 4,148 Federal income taxes 3,410 2,922 1,588 2,064 1,403 ------ ------ ------ ------ ------ Net earnings $ 7,004 $ 5,344 $ 3,210 $ 3,976 $ 2,745 ====== ====== ====== ====== ====== Earnings per share: (1) Basic $ 1.28 $ 0.98 $ 0.75 $ 1.02 $ 0.79 ====== ====== ====== ====== ====== Diluted $ 1.25 $ 0.96 $ 0.73 $ 1.02 $ 0.79 ====== ====== ====== ====== ======
Selected financial ratios: At or for the year ended December 31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Return on average assets (2) 1.16% .98% .70% 1.04% .79% Return on average equity (2) 12.13 10.01 7.52 12.25 9.69 Average equity to average assets (2) 9.56 9.81 9.36 8.47 8.12 Dividend payout ratio (3) 32.89 51.16 53.33 34.91 25.40
- -------------------------- (1) Earnings per share has been adjusted to give effect to the Germantown Merger and a three-for-two stock split which were effected during 1998 and the 5% stock dividends which were effected during each of the years ended December 31, 1997, 1996 and 1995. (2) Ratios are based upon the mathematical average of the balances at the beginning and the end of the year. (3) Represents dividends per share divided by basic earnings per share. Lending Activities General. Camco's primary lending activities include the origination of conventional fixed-rate and variable-rate mortgage loans for the construction, acquisition or refinancing of single-family homes located in the Banks' primary market areas. Construction and permanent mortgage loans on condominiums, multifamily (over four units) and nonresidential properties are also offered by Camco. In addition to mortgage lending, Camco makes a variety of consumer loans. 4 Loan Portfolio Composition. The following table presents certain information in respect of the composition of Camco's loan portfolio, including loans held for sale, at the dates indicated:
At December 31, 1998 1997 1996 1995 1994 ------- ------- ------- ------- ---- Percent Percent Percent Percent Percent of of of of of total total total total total Amount loans Amount loans Amount loans Amount loans Amount loans Type of loan: Construction $ 37,169 6.8% $ 14,505 3.0% $ 20,489 4.9% $ 20,134 6.3% $ 22,267 7.9% Existing residential 485,107 88.4 431,646 89.7 370,648 88.0 271,637 84.6 233,433 82.6 properties (1) Nonresidential real estate 15,019 2.7 11,294 2.3 12,529 3.0 11,486 3.6 14,845 5.2 Developed building lots 3,895 .7 1,870 0.4 1,406 0.3 965 0.3 1,147 0.4 Education loans 2,096 .4 2,224 0.5 2,037 0.5 2,728 0.9 2,799 1.0 Consumer and other loans (2) 29,835 5.5 32,430 6.7 25,180 6.0 24,554 7.6 20,026 7.1 ------- ----- ------- ----- -------- ----- ------- ----- ------- ----- Total 573,121 104.5 493,969 102.6 432,289 102.7 331,504 103.3 294,517 104.2 Less: Undisbursed loans in (22,262) (4.1) (10,059) (2.1) (9,292) (2.2) (8,724) (2.7) (9,764) (3.5) process Unamortized yield (407) (.1) (813) (0.2) (806) (0.2) (647) (0.2) (992) (0.3) adjustments Allowance for loan losses (1,783) (.3) (1,596) (0.3) (1,373) (0.3) (1,128) (0.4) (1,039) (0.4) ------- ----- ------- ----- -------- ----- ------- ----- ------- ----- Total loans, net $548,669 100.0% $481,501 100.0% $420,818 100.0% $321,005 100.0% $282,722 100.0% ======= ===== ======= ===== ======== ===== ======== ===== ======= =====
- -------------------------- (1) Includes loans held for sale. (2) Includes second mortgage loans. Camco's loan portfolio was approximately $548.7 million at December 31, 1998, and represented 86.1% of total assets. Loan Maturity Schedule. The following table sets forth certain information as of December 31, 1998, regarding the dollar amount of loans maturing in Camco's portfolio based on the contractual terms to maturity of the loans. Demand loans, loans having no stated schedule of repayments and no stated maturity, are reported as due in one year or less.
Due during the year ending Due in December 31, Due in Years years after 1999 2000-2004 2004 Total (In thousands) Real estate loans (1): One- to four- family $16,798 $48,365 $409,825 $474,988 Multifamily and nonresidential 987 6,348 26,486 33,821 Consumer and other loans 4,539 14,877 12,515 31,931 ------ ------ ------- ------- Total $22,324 $69,590 $448,826 $540,740 ====== ====== ======= =======
- -------------------------- (1) Excludes loans held for sale of $10.1 million and does not consider the effects of unamortized yield adjustments of $407,000 and allowance for loan losses of $1.8 million. 5 The following table sets forth at December 31, 1998, the dollar amount of all loans due after one year from December 31, 1998, which have predetermined interest rates and have floating or adjustable interest rates:
Due after December 31, 1999 (In thousands) Fixed rate of interest $167,203 Adjustable rate of interest 351,213 ------- Total $518,416 =======
Generally, loans originated by the Banks are on a fully amortized basis. The Banks have no rollover provisions in their loan documents and anticipate that loans will be paid in full by the maturity date. Residential Loans. The primary lending activity of the Banks has been the origination of conventional loans for the acquisition or construction of single-family residences. At December 31, 1998, 88.4% the total outstanding loans consisted of loans secured by mortgages on one- to four-family residential properties. The Banks also originate loans on multifamily housing (over four units) and condominiums. Each of such loans is secured by a mortgage on the underlying real estate and improvements thereon. Federal regulations and Ohio law limit the amount which the Banks may lend in relationship to the appraised value of the underlying real estate at the time of loan origination (the "Loan-to-Value Ratio" or "LTV"). In accordance with such regulations and law, the Banks make loans on single-family residences up to 95% of the value of the real estate and improvements. The Banks generally require the borrower on each loan which has an LTV in excess of 90% to obtain private mortgage insurance. The Banks have offered adjustable-rate mortgage loans ("ARMs") since 1981. The interest rate adjustment periods on the ARMs offered by the Banks are generally one, three or five years. The interest rates initially charged on ARMs and the new rates at each adjustment date are determined by adding a stated margin to a designated interest rate index. For the past several years, the Banks have used the one-year, three-year and five-year United States Treasury bill rates, adjusted to a constant maturity, as the index for its one-year, three-year and five-year adjustable-rate loans, respectively. The initial interest rate for a three-year and a five-year ARM is set slightly higher than for the one-year ARM to compensate for the reduced interest rate sensitivity. The maximum adjustment at each adjustment date for ARMs is usually 2%, with a maximum adjustment of 6% over the term of the loan. From time to time, the Banks originate ARMs which have an initial interest rate that is lower than the sum of the specified index plus the margin. Such loans are subject to increased risk of delinquency or default due to increasing monthly payments as the interest rates on such loans increase to the fully indexed level. The Banks attempt to reduce the risk by underwriting such loans at the fully indexed rate. None of the Banks' ARMs have negative amortization features. Residential mortgage loans offered by the Banks are usually for terms of 10 to 30 years, which could have an adverse effect upon earnings if the loans do not reprice as quickly as the cost of funds. To minimize such effect, the Banks emphasize the origination of ARMs and sell fixed-rate loans when conditions favor such a sale. Furthermore, experience reveals that, as a result of prepayments in connection with refinancings and sales of the underlying properties, residential loans generally remain outstanding for periods which are substantially shorter than the maturity of such loans. 6 Of the total mortgage loans originated by the Banks during the year ended December 31, 1998, 37.7% were ARMs and 62.3% were fixed-rate loans. Adjustable-rate loans comprised 66.2% of Camco's total outstanding loans at December 31, 1998. Construction Loans. The Banks offer residential construction loans both to owner-occupants and to builders for homes being built under contract with owner-occupants. The Banks also make loans to persons constructing projects for investment purposes. At December 31, 1998, a total of $37.2 million, or approximately 6.8% of Camco's total loans, consisted of construction loans, primarily for one- to four-family properties. Construction loans to owner-occupants are typically adjustable-rate long-term loans on which the borrower pays only interest during the construction period. Some construction loans to builders, however, have terms of up to 18 months at fixed rates of interest. Construction loans for investment properties involve greater underwriting and default risks to the Banks than do loans secured by mortgages on existing properties or construction loans for single-family residences. Loan funds are advanced upon the security of the project under construction, which is more difficult to value in the case of investment properties before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate precisely the total loan funds required to complete a project and the related Loan-to-Value Ratios. In the event a default on a construction loan occurs and foreclosure follows, Camco could be adversely affected in that it would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. At December 31, 1998, the Banks had fourteen construction loans in the amount of $5.3 million on investment properties. Nonresidential Real Estate Loans. The Banks originate loans secured by mortgages on nonresidential real estate, including retail, office and other types of business facilities and apartment projects containing 36 or more units. Nonresidential real estate loans are generally made on an adjustable-rate basis for terms of up to 20 years. Nonresidential real estate loans originated by the Banks generally have an LTV of 80% or less. The largest nonresidential real estate loan outstanding at December 31, 1998, was a $3.3 million loan secured by two multi-unit apartment complexes. Nonresidential real estate loans comprised 2.7% of total loans at December 31, 1998. Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. The Banks have endeavored to reduce this risk by carefully evaluating the credit history and past performance of the borrower, the location of the real estate, the quality of the management constructing or operating the property, the debt service ratio, the quality and characteristics of the income stream generated by the property and appraisals supporting the property's valuation. Federal law limits an association's investment in nonresidential real estate loans to 400% of the association's capital. At December 31, 1998, Camco's investment in nonresidential real estate loans was approximately 25.0% of its total capital. Consumer Loans. The Banks make various types of consumer loans, including loans made to depositors on the security of their savings deposits, automobile loans, education loans, home improvement loans, home equity line of credit loans and unsecured personal loans. Home equity loans and unsecured loans are generally made at a variable rate of interest tied to the base rate on corporate loans, posted by 75% of the nation's 30 largest banks, as reported in The Wall Street Journal. Home equity loans are for terms of up to 10 years. Most other consumer loans are generally made at fixed rates of interest for terms of up to 10 years. The risk of default on consumer loans during an economic recession is greater than for residential mortgage loans. At December 31, 1998, education, consumer and other loans constituted 5.8% of Camco's total loans. 7 Loan Solicitation and Processing. Loan originations are developed from a number of sources, including: solicitations by Camco's lending staff; referrals from real estate brokers and builders; continuing business with depositors, other borrowers and real estate developers; and walk-in customers. Camco does not use loan brokers. Camco's management stresses the importance of individualized attention to the financial needs of its customers. The loan origination process is decentralized, with each of the Banks having autonomy in loan processing and approval for its respective market area. Mortgage loan applications from potential borrowers are taken by one of the loan officers of the Bank originating the loan, after which they are forwarded to the Bank's loan department for processing. On new loans, the loan department typically obtains a credit report, verification of employment and other documentation concerning the borrower and orders an appraisal of the fair market value of the real estate which will secure the loan. The real estate is thereafter physically inspected and appraised by a staff appraiser or by a designated fee appraiser approved by the Board of Directors of the originating Bank. Upon the completion of the appraisal and the receipt of all necessary information regarding the borrower, the mortgage loan application is submitted to the Bank's loan committee for approval. If the loan is approved, an attorney's opinion of title or title insurance is obtained on the real estate which will secure the loan. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name the originating Bank as an insured mortgagee. The procedure for approval of construction loans is the same as for residential mortgage loans, except that the appraiser evaluates the building plans, construction specifications and construction cost estimates. The originating Bank also evaluates the feasibility of the proposed construction project and the experience and record of the builder. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan and the value of the collateral, if any. Loan Originations, Purchases and Sales. The Banks have been actively originating new 30-year, 15-year and 10-year fixed-rate real estate loans as well as adjustable-rate real estate loans and consumer loans. Generally all residential fixed-rate loans made by the Banks are originated on documentation which will permit a possible sale of such loans to the Federal Home Loan Mortgage Corporation ("FHLMC") or other secondary mortgage market participants. When a mortgage loan is sold to the FHLMC, the selling Bank services the loan by collecting monthly payments of principal and interest and forwarding such payments to the FHLMC, net of a servicing fee. Fixed-rate loans not sold to the FHLMC and all of the ARMs originated by the Banks are held in the Banks' loan portfolios. During the year ended December 31, 1998, Camco sold approximately $205.9 million in loans to the FHLMC and others. Gross income from loans serviced by Camco for others was $1.1 million for the year ended December 31, 1998. From time to time, the Banks sell participation interests in mortgage loans originated by them and purchase whole loans or participation interests in loans originated by other lenders. The Banks held whole loans and participations in loans originated by other lenders of approximately $35.3 million at December 31, 1998. Loans which the Banks purchase must meet or exceed the underwriting standards for loans originated by the Banks. In recent years, Camco has purchased mortgage-backed securities insured or guaranteed by U.S. Government agencies in order to improve Camco's asset portfolio yield by profitably investing excess funds. Camco intends to continue to purchase such mortgage-backed securities when conditions favor such an investment. See "Investment Activities." 8 The following table presents Camco's mortgage loan origination, purchase, sale and principal repayment activity for the periods indicated:
Year ended December 31, 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- (In thousands) Loans originated: Construction $ 49,152 $ 34,293 $ 24,182 $ 13,466 $ 16,218 Permanent 328,046 168,519 121,793 106,095 122,397 Consumer and other 67,243 54,351 43,749 28,196 23,595 ------- ------- ------- ------- ------- Total loans originated 444,441 257,163 189,724 147,757 162,210 ------- ------- ------- ------- ------- Loan purchased (1) 18,982 12,514 - - 5,041 Reductions: Principal repayments (1) 194,594 134,465 95,508 73,290 63,662 Loans sold (1) 210,535 77,665 61,687 38,891 41,994 Transfers from loans to real estate owned 477 932 92 70 72 ------- ------- ------- ------- ------- Total reductions 405,606 213,062 157,287 112,251 105,728 Increase in other items, net (2) 1,192 (238) 456 545 (123) Increase due to Ashland Merger - - 70,812 - - ------- ------- ------- ------- ------- Net increase $ 59,009 $ 56,377 $103,705 $ 36,051 $ 61,400 ======= ======= ======= ======= =======
- ----------------------- (1) Includes mortgage-backed securities. (2) Other items primarily consist of amortizations of deferred loan origination fees, the provision for losses on loans and unrealized gains on mortgage-backed securities designated as available for sale. Federal Lending Limit. OTS regulations impose a lending limit on the aggregate amount that a savings association can lend to one borrower to an amount equal to 15% of the association's total capital for risk-based capital purposes plus any loan reserves not already included in total capital (the "Lending Limit Capital"). A savings association may loan to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. An exception to this limit permits loans of any type to one borrower of up to $500,000. In addition, the OTS, under certain circumstances, may permit exceptions to the lending limit on a case-by-case basis. The largest amount which the Banks could have loaned to one borrower at December 31, 1998, was approximately $2.6 million for Cambridge Savings and $1.8 million for Marietta Savings, First Federal and First Savings. The largest amount Cambridge Savings had outstanding to one borrower and related persons or entities at December 31, 1998, was $1.5 million, which consisted of one loan secured by apartment rental properties. The largest amount Marietta Savings had outstanding to one borrower and related persons or entities at December 31, 1998, was $1.7 million, which consisted of 269 loans secured by personal residences and commercial properties and leasing business residuals. The largest amount First Federal had outstanding to one borrower was $1.4 million, which consisted of one loan secured by multiple single-family investment properties. The largest amount First Savings had outstanding to one person and related persons or entities at December 31, 1998, was $1.2 million, which consisted of a single loan secured by investment properties. Loan Origination and Other Fees. In addition to interest earned on loans, the Banks may receive loan origination fees or "points" of up to 2.0% of 9 the loan amount, depending on the type of loan, plus reimbursement of certain other expenses. Loan origination fees and other fees are a volatile source of income, varying with the volume of lending and economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment to yield over the life of the related loan in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91. Delinquent Loans, Nonperforming Assets and Classified Assets. The Banks attempt to minimize loan delinquencies through the assessment of late charges and adherence to established collection procedures. Generally, after a loan payment is 15 days delinquent, a late charge of 5% of the amount of the payment is assessed and a loan officer contacts the borrower by mail or phone to request payment. In certain limited instances, the Banks may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs. The Banks generally initiate foreclosure proceedings, in accordance with applicable laws, when it appears that a modification or moratorium would not be productive. Real estate which has been or will be acquired by one of the Banks as a result of foreclosure or by deed in lieu of foreclosure is classified as "real estate owned" until it is sold. "Real estate owned" is recorded at the lower of the book value of the loan or the fair value of the property less estimated selling expenses at the date of acquisition. Periodically, "real estate owned" is reviewed to ensure that fair value is not less than carrying value, and any write-down resulting therefrom is charged to earnings as a provision for losses on real estate acquired through foreclosure. All costs incurred from the date of acquisition are expensed in the period paid. The following table reflects the amount of loans in a delinquent status as of the dates indicated:
At December31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in thousands) Loans delinquent for: 30 to 89 days $10,028 $6,723 $6,291 $5,259 $3,722 90 or more days 4,296 1,818 2,373 1,082 1,319 ------ ----- ----- ----- ----- Total delinquent loans $14,324 $8,541 $8,664 $6,341 $5,041 ====== ===== ===== ===== ===== Ratio of total delinquent loans to total net loans 2.61% 1.77% 2.06% 1.98% 1.78% ==== ==== ==== ==== ====
10 Nonaccrual status denotes loans for which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet nonaccrual criteria as established by regulatory authorities. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the collectibility of the loan. The following table sets forth information with respect to Camco's nonaccruing and delinquent loans for the periods indicated.
At December 31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in thousands) Loans accounted for on nonaccrual basis: Real estate: Residential $1,328 $ 830 $1,086 $ 574 $ 742 Nonresidential 233 27 655 174 80 Consumer and other 64 79 40 6 26 ----- ----- ----- ----- ----- Total nonaccrual loans 1,625 936 1,781 754 848 ----- ----- ----- ----- ----- Accruing loans delinquent 90 days or more: Real estate: Residential 2,030 710 652 395 515 Nonresidential - - - - 38 Consumer and other 641 293 123 57 94 ----- ----- ----- ----- ----- Total loans 90 days past due 2,671 1,003 775 452 647 ----- ----- ----- ----- ----- Total nonperforming loans $4,296 $1,939 $2,556 $1,206 $1,495 ===== ===== ===== ===== ===== Allowance for loan losses $1,783 $1,596 $1,373 $1,128 $1,039 ===== ===== ===== ===== ===== Nonperforming loans as a percent of total net loans .78% .40% .61% .29% .53% === === === === === Allowance for loan losses as a percent of nonperforming loans 41.5% 82.3% 53.7% 93.5% 69.5% ==== ==== ==== ==== ====
As of and for the year ended December 31, 1998, no loans were troubled debt restructurings as defined in SFAS No. 15. The amount of interest income that would have been recorded had nonaccrual loans performed in accordance with contractual terms totaled $167,000 for the year ended December 31, 1998. Interest collected on such loans and included in net earnings was $39,500. At December 31, 1998, there were no loans which were not classified as nonaccrual, 90 days past due or restructured which management considered classifying in the near future due to concerns as to the ability of the borrowers to comply with repayment terms. Federal regulations require each of the Banks to classify its assets on a regular basis. Problem assets are to be classified as either (i) "substandard," (ii) "doubtful" or (iii) "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the same weaknesses as substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of existing facts, conditions and value. Assets classified as "loss" are considered uncollectible and of such little value that their treatment as assets without the establishment of a specific reserve is unwarranted. Federal regulations provide for the reclassification of real estate assets by federal examiners. 11 Assets classified as substandard or doubtful require the institution to establish prudent general allowances for losses. If an asset or portion thereof is classified as loss, the institution must either establish specific allowances for losses in the amount of 100% of the portion of the asset classified loss or charge off such amount. At December 31, 1998, the aggregate amounts of Camco's classified assets were as follows:
At December 31, 1998 (In thousands) Classified assets: Substandard $3,732 Doubtful 77 Loss 6 ----- Total classified assets $3,815 =====
The regulations also include a "special mention" category, consisting of assets which do not currently expose an insured institution to a sufficient degree of risk to warrant classification, but which possess credit deficiencies or potential weaknesses deserving management's close attention. Camco had assets in the amount of $1.5 million designated as "special mention" at December 31, 1998. Allowance for Loan Losses. The following table sets forth an analysis of Camco's allowance for loan losses:
Year ended December 31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (Dollars in thousands) Balance at beginning of year $1,596 $1,373 $1,128 $1,039 $1,126 Charge-offs: 1-4 family residential real estate 9 30 3 - - Multifamily and nonresidential real estate - 124 - 40 169 Consumer 61 22 6 18 25 ----- ----- ----- ----- ----- Total charge-offs 70 176 9 58 194 ----- ----- ----- ----- ----- Recoveries: 1-4 family residential real estate - 2 - - - Multifamily and nonresidential real estate - 4 - - - Consumer 7 8 4 4 7 ----- ----- ----- ----- ----- Total recoveries 7 14 4 4 7 ----- ----- ----- ----- ----- Net charge-offs (63) (162) (5) (54) (187) Provision for losses on loans 250 385 141 143 100 Increase attributable to Ashland Merger - - 109 - - ----- ----- ----- ----- ----- Balance at end of year $1,783 $1,596 $1,373 $1,128 $1,039 ===== ===== ===== ===== ====== Net charge-offs to average loans -% .04% -% .02% .08% === === === === ===
12 The following table sets forth the allocation of Camco's allowance for loan losses by type of loan at the dates indicated:
At December 31, 1998 1997 1996 1995 1994 ------ ------ ------ ------ ---- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each category category category category category Amount to total Amount to total Amount of total Amount to total Amount to total loans loans loans loans loans (Dollars in thousands) Balance at year end applicable to: Mortgage loans $1,340 94.6% $1,030 93.4% $1,072 93.9% $ 922 91.6% $ 829 92.1% Consumer and other 443 5.4 566 6.6 301 6.1 206 8.4 210 7.9 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- loans Total $1,783 100.0% $1,596 100.0% $1,373 100.0% $1,128 100.0% $1,039 100.0% ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Investment Activities Federal regulations require that the Banks maintain a minimum amount of liquid assets, which may be invested in United States Treasury obligations, securities of various agencies of the federal government, certificates of deposit at insured banks, bankers' acceptances and federal funds sold. The Banks are also permitted to make limited investments in commercial paper, corporate debt securities and certain mutual funds, as well as other investments permitted by federal law and regulations. It has generally been Camco's policy to maintain liquid assets at the Banks in excess of regulatory requirements in order to shorten the maturities of the investment portfolios and improve the matching of short-term investments and interest rate sensitive savings deposit liabilities. The following table sets forth the composition of Camco's investment securities portfolio, except its stock in the FHLB of Cincinnati, at the dates indicated:
At December 31, 1998 1997 1996 ------ ------ ------ Amortized % of Fair % of Amortized % of Fair % of Amortized % of Fair % of cost Total Value Total cost Total value Total cost Total value Total ------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Held to maturity: (Dollars in thousands) U.S. Government agency obligations $10,782 52.3% $10,805 51.8% $17,075 45.5% $17,095 45.2% $21,367 42.0% $21,312 41.9% Deposits in insured banks - - - - - - - - 990 1.9 990 1.9 Municipal bonds 180 .9 193 .9 414 1.1 441 1.2 477 1.0 510 1.0 Mortgage-backed securities 5,019 24.3 5,102 24.4 8,207 21.9 8,311 21.9 10,700 21.0 10,735 21.1 ------ ----- ------ ----- ------ ---- ------ ----- ------ ----- ------ ----- Total 15,981 77.5 16,100 77.1 25,696 68.5 25,847 68.3 33,534 65.9 33,547 65.9 Available for sale: U.S. Government agency obligations 1,003 4.9 1,004 4.8 2,511 6.7 2,519 6.7 5,526 10.9 5,546 10.9 Corporate equity security 229 1.1 303 1.5 92 .2 158 .4 1,623 3.2 1,631 3.2 Mortgage-backed 3,405 16.5 3,476 16.6 8,317 22.2 8,447 22.3 10,182 20.0 10,148 20.0 securities Asset management funds - - - - 900 2.4 895 2.3 - - - - ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total 4,637 22.5 4,783 22.9 11,820 31.5 12,019 31.7 17,331 34.1 17,325 34.1 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total investments and mortgage-backed securities $20,618 100.0% $20,883 100.0% $37,516 100.0% $37,866 100.0% $50,865 100.0% $50,872 100.0% ====== ===== ====== ===== ====== ===== ======= ===== ====== ===== ====== =====
13 The following table presents the contractual maturities or terms to repricing of Camco's investment securities, except its stock in the FHLB of Cincinnati and corporate equity securities and the weighted average yields at December 31, 1998:
At December 31, 1998 After one After five One year or less through five years through ten years After ten years Total ------------------ ------------------ ------------------ ------------------ --------------------------- Weighted Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair average cost yield Cost yield cost yield cost yield cost value yield --------- ------ --------- ------- --------- ------- --------- ------- --------- ----- --------- (Dollars in thousands) U.S. Government agency obligations $1,003 7.25% $10,782 6.08% $ - -% $ - -% $11,785 $11,809 6.18% Municipal bonds - - - - 180 7.01 - - 180 193 7.01 Mortgage-backed securities 402 7.01 774 8.19 1,554 7.32 5,694 7.07 8,424 8,578 7.21 ----- ---- ------ ---- ----- ---- ----- ---- ------ ------ ---- Total $1,405 7.18% $11,556 6.23% $1,734 7.29% $5,694 7.07% $20,389 $20,580 6.62% ===== ==== ====== ==== ===== ==== ===== ==== ====== ====== ====
Deposits and Borrowings General. Deposits have traditionally been the primary source of Camco's funds for use in lending and other investment activities. In addition to deposits, Camco derives funds from interest payments and principal repayments on loans, advances from the FHLB of Cincinnati and income on earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to general interest rate and money market conditions. Borrowings from the FHLB of Cincinnati are used on a short-term basis to compensate for reductions in the availability of funds from other sources. FHLB advances and other borrowings are also used on a longer term basis for general business purposes. Deposits. Deposits are attracted principally from within Camco's primary market area through the offering of a broad selection of deposit instruments, including interest and non-interest bearing checking accounts, money market deposit accounts, regular passbook savings accounts, term certificate accounts and retirement savings plans. Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by management of the Banks based on their particular liquidity requirements, growth goals and interest rates paid by competitors. Interest rates paid by Camco on deposits are not limited by federal or state law or regulation. Camco generally does not obtain funds through brokers or offer premiums to attract deposits. Camco does not have a significant amount of savings accounts from outside its primary market area. 14 The following table sets forth the dollar amount of deposits in the various types of savings programs offered by the Banks at the dates indicated:
At December 31 1998 1997 1996 Weighted ------ ------ ---- average Percent Percent Percent rate at of total of total of total 12/31/98 Amount deposits Amount deposits Amount deposits (Dollars in thousands) Withdrawable accounts: Interest and non-interest bearing accounts 1.70% $ 70,944 16.0% $ 56,316 13.4% $ 49,557 12.5% Money market demand accounts 3.96 24,402 5.5 23,720 5.6 21,198 5.3 Passbook and statement savings accounts 3.10 74,405 16.8 68,536 16.2 68,571 17.2 ---- ------- ----- ------- ----- ------- ----- Total withdrawable accounts 2.64 169,751 38.3 148,572 35.2 139,326 35.0 Certificates accounts: Term: Seven days to one year 5.36 88,134 19.9 40,660 9.6 50,563 12.7 One to two years 5.51 58,940 13.3 90,902 21.5 68,907 17.3 Two to eight years 5.90 62,429 14.1 89,287 21.1 89,732 22.5 Negotiated rate certificates 5.66 27,338 6.2 23,566 5.6 21,964 5.5 Individual retirement accounts 5.69 36,635 8.2 29,381 7.0 27,669 7.0 ---- ------- ----- ------- ----- ------- ----- Total certificate accounts 5.59 273,476 61.7 273,796 64.8 258,835 65.0 ---- ------- ----- ------- ----- ------- ----- Total deposits 4.46% $443,227 100.0% $422,368 100.0% $398,161 100.0% ==== ======= ===== ======= ===== ======= =====
The following table presents the amount and contractual maturities of Camco's time deposits at December 31, 1998:
Amount Due Up to Over one year 1-3 years 3-5 years 5 years Total -------- --------- --------- ------- -------- (Dollars in thousands) Amount maturing $181,877 $79,426 $10,406 $1,767 $273,476 ======== ======= ======= ====== ======== Average rate 5.30% 5.71% 5.82% 6.22% 5.59% ==== ==== ==== ==== ====
The following table sets forth the amount and maturities of Camco's time deposits in excess of $100,000 at December 31, 1998:
Maturity At December 31, 1998 (In thousands) Three months or less $12,716 Over three to six months 11,819 Over six to twelve months 12,997 Over twelve months 7,772 ------ Total $45,304 ======
Borrowings. The twelve regional FHLBs function as central reserve banks, providing credit for their member institutions. As members in good standing of the FHLB of Cincinnati, the Banks are authorized to apply for advances from the FHLB of Cincinnati, provided certain standards of creditworthiness have been met. Advances are made pursuant to several different programs, each having its own interest rate and range of maturities. Depending 15 on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's regulatory capital or on the FHLB's assessment of the institution's creditworthiness. Under current regulations, a member institution must meet certain qualifications to be eligible for FHLB advances. The extent to which an association is eligible for such advances will depend upon whether it meets the Qualified Thrift Lender ("QTL") test. See "REGULATION - Federal Regulation -- Qualified Thrift Lender Test." If an institution meets the QTL test, it will be eligible for 100% of the advances it would otherwise be eligible to receive. If an institution does not meet the QTL test, it will be eligible for such advances only to the extent it holds QTL test assets. At December 31, 1998, each of the Banks met the QTL test. The following table sets forth the maximum amount of Camco's FHLB advances outstanding at any month end during the periods shown and the average aggregate balances of FHLB advances for such periods:
Year ended December 31, 1998 1997 1996 ------ ------ ----- (Dollars in thousands) Maximum amount outstanding $125,483 $82,319 $58,354 Average amount outstanding 95,257 67,277 36,678 Weighted average interest cost of FHLB advances based on month end balances 5.57% 5.77% 5.92%
The following table sets forth certain information with respect to Camco's FHLB advances at the dates indicated:
At December 31, 1998 1997 1996 ------ ------ ----- (Dollars in thousands) Amount outstanding $125,483 $82,319 $58,354 Weighted average interest rate 5.41% 6.25% 5.87%
16 Yields Earned and Rates Paid The following table sets forth the weighted average yields earned on Camco's interest-earning assets, the weighted average interest rates paid on Camco's interest-bearing liabilities and the interest rate spread between the weighted average yields earned and rates paid by Camco at the dates indicated:
At December 31, 1998 1997 1996 ------ ------ ----- Weighted average yield on: Loan portfolio 7.81% 8.24% 8.23% Investment portfolio (1) 6.61 6.46 6.33 Interest-earning assets (2) 7.63 8.04 7.96 Weighted average rate paid on: Deposits 4.46 4.74 4.75 FHLB advances 5.41 6.25 5.87 Interest-bearing liabilities 4.69 4.99 4.89 Interest rate spread (spread between weighted average rate on all interest-earning assets and all interest-bearing liabilities) 2.94 3.06 3.07
- ---------------------------- (1) Interest on mortgage-backed securities included. (2) Earnings on FHLB stock and cash surrender value of life insurance included. Average Yield and Rate Analysis The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resulting yields, and the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. Balances are based on the average of month-end balances which, in the opinion of management, do not differ materially from daily balances:
Year ended December 31, 1998 1997 1996 ------ ----- ---- Average Interest Average Average Interest Average Average Interest Average outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/ balance paid rate balance paid rate balance paid rate ----------- -------- ------- ----------- -------- ------- ----------- ------- ------- Interest-earning assets: Loans receivable (1) $499,515 $40,478 8.10% $448,721 $37,060 8.26% $350,214 $29,106 8.31% Mortgage-backed securities (2) 10,435 779 7.47 18,647 1,321 7.08 16,732 1,176 7.03 Investment securities (2) 16,696 1,037 6.21 26,099 1,625 6.23 27,205 1,475 5.42 Interest-bearing deposits and other interest-earning 31,482 1,989 6.32 17,577 1,211 6.89 12,534 1,055 8.42 -------- ------ ---- ------- ------ ---- ------- ------ ---- assets Total interest-earning $558,128 44,283 7.93 $511,044 41,217 8.07 $406,685 32,812 8.07 ======= ======= ======= assets Interest-bearing liabilities: Deposits $428,911 19,538 4.55 $411,778 18,899 4.59 $348,292 15,639 4.49 FHLB advances and other borrowings 95,257 5,314 5.57 67,277 3,879 5.77 36,678 2,172 5.92 ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest-bearing $524,168 24,852 4.74 $479,055 22,778 4.75 $384,970 17,811 4.63 ======= ------ ---- ======= ------ ---- ======= ------ ---- liabilities Net interest income; interest rate spread $19,431 3.19% $18,439 3.32% $15,001 3.44% ====== ==== ====== ==== ====== ==== Net interest margin (3) 3.48% 3.61% 3.69% ==== ==== ==== Average interest-earning assets to average 106.48% 106.68% 105.64% ====== ====== ====== interest-bearing liabilities
- ------------------------------------- (Footnotes on next page) 17 (1) Includes nonaccrual loans. (2) Includes securities designated as available for sale. (3) Net interest income as a percent of average interest-earning assets. Rate/Volume Analysis The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected Camco's interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume) and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been designated as "Other."
Year ended December 31, 1998 vs. 1997 1997 vs. 1996 Increase (decrease) due to Increase (decrease) due to Volume Rate Other Total Volume Rate Other Total (Dollars in thousands) Interest income attributable to: Loans receivable (1) $3,497 $(573) $(52) $2,876 $8,287 $(148) $(40) $8,099 Investment securities (2) 292 (91) (9) 190 251 50 5 306 ----- ---- --- ----- ----- ---- --- ----- Total interest income 3,789 (664) (61) 3,066 8,538 (98) (35) 8,405 ----- ---- --- ----- ----- ---- --- ----- Interest expense attributable to: Deposits 786 (141) (6) 639 2,851 347 63 3,261 FHLB advances and other borrowings 1,613 (126) (52) 1,435 1,812 (57) (48) 1,707 ----- ---- --- ----- ----- ---- --- ----- Total interest expense 2,399 (267) (58) 2,074 4,663 290 15 4,968 ----- ---- --- ----- ----- ---- --- ----- Increase (decrease) in net interest income $1,390 $(397) $ (3) $ 992 $3,875 $(388) $(50) $3,437 ===== ==== === ===== ===== ==== === =====
- ----------------------------- (1) Includes mortgage-backed securities. (2) Includes interest-bearing deposits and other. Competition Camco competes for deposits with other savings associations, savings banks, commercial banks and credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, Camco competes with other savings banks, savings associations, commercial banks, consumer finance companies, credit unions and other lenders. Camco competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of the services it provides to borrowers. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. 18 Service Corporation Activities Federal regulations permit savings associations to invest an amount up to 2% of their assets in the stock, paid-in surplus and unsecured obligations of subsidiary service corporations engaged in certain activity. In addition, federal regulations generally authorize such institutions which meet the minimum regulatory capital requirements to invest up to 50% of their regulatory capital in conforming first mortgage loans made by service corporations. At December 31, 1998, Cambridge Savings and Marietta Savings each had a direct investment in the capital stock of CMC in the amount of $853,000. The principal business of CMC is originating first mortgage loans on residential real estate located primarily in Coshocton, Muskingum, Stark and Tuscarawas Counties, Ohio. Loans originated by CMC are generally sold to Cambridge Savings. CMC originated $144.0 million of mortgage loans in 1998, $137.8 million of which were sold to Cambridge Savings, compared to $73.0 million of mortgage loans in 1997, $72.6 million of which were sold to Cambridge Savings. Marietta Savings had a direct investment in the capital stock of WestMar in the amount of $381,712 at December 31, 1998. The principal business of WestMar is originating first mortgage loans on residential real estate located in Wood County, West Virginia. WestMar originated $18.8 million of mortgage loans in 1998, $17.5 million of which were sold to Marietta Savings, compared to $8.6 million of mortgage loans in 1997, $7.0 million of which were sold to Marietta Savings. At December 31, 1998, First Savings' investment in First S&L Corporation totaled $15,000. First S&L Corporation has not conducted any business other than the acquisition of stock in a data processing company. Employees As of December 31, 1998, Camco had 216 full-time employees and 23 part-time employees. Camco believes that relations with its employees are good. Camco offers health and disability benefits and a 401(k) salary savings plan. None of the employees of Camco are represented by a collective bargaining unit. Year 2000 Considerations The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits to indicate the year. Such computer systems may be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In 1996, the Corporation began evaluating the status of all of its technological systems which included its state of readiness in addressing the Y2K issue. After the analysis was completed, a technology plan was developed and implementation of the plan started in mid-1997. As the Corporation is primarily dependent on a third-party data processing service bureau for maintaining customer records and financial systems, a task force was formed to identify a service bureau that would meet the current and future technology needs of the Corporation and which would be Y2K compliant. The new service bureau was selected and conversion of all of the Banks' data were completed in the fourth quarter of 1998. As a part of the conversion process, all of the data processing hardware and software in the Banks was replaced and has been tested as being Y2K compliant. The Corporation estimates that the cost of converting and replacing information and non-information technology systems will fall within a range of $1.5 million and $1.75 million with at least 75% being capitalized (which relates to a discretionary management decision to upgrade existing information technology systems). As stated previously, data processing expenses during 1998 increased by $854,000, most of which was for conversion and de-conversion costs, training and increased costs related to out of contract processing. Management had estimated that the total cost to address the Y2K issue would be approximately $75,000, of which $30,000 occurred in 1998. While management believes their Y2K budget is based on sound assumptions, there is no guarantee that additional expenses will not occur in the future. 19 The Corporation has identified its other third party vendors and significant borrowers and, if they were deemed critical to the banking operations of Camco, a review of their Y2K readiness was conducted. The Corporation continues to monitor its vulnerability to third-party vendors (other than its new service bureau) and to significant borrowers, all of which are insignificant to consolidated operations. Camco is developing contingency plans in which it will seek alternative sources for critical services provided by third party vendors who it has deemed will not be Y2K compliant. In addition, business resumption is also being addressed and will be monitored throughout 1999 for possible enhancements. The final phase of the Corporation's Y2K plan involves the testing of the systems in place to ensure Y2K readiness. The Corporation's service bureau completed the testing of its systems during the fourth quarter of 1998. The tests were conducted in accordance with recommendations published by the Federal Financial Institutions Examination Council ("FFIEC"). The Corporation's testing of all types of transactions through the service bureau will be completed in the first quarter of 1999. The Corporation's plan also calls for the testing of non-information technology hardware and where necessary, either the repair or replacement of those systems if they are found to be non-Y2K compliant. Because of unknown external risks associated with this issue, the Corporation cannot quantify the consequences and uncertainty involved beyond those already identified, however, management believes such remaining external risks will not have a material adverse effect on the Corporation's financial condition or results of operations. REGULATION General As a savings and loan holding company within the meaning of the Home Owners' Loan Act of 1933, as amended (the "HOLA"), Camco is subject to regulation, examination and oversight by the OTS. First Federal and First Savings are subject to regulation by the OTS and the FDIC. Cambridge Savings and Marietta Savings are subject to regulation by the Division and the FDIC. Camco and the Banks must file periodic reports with these governmental agencies, as applicable, concerning their activities and financial condition. Examinations are conducted periodically by the applicable regulators to determine whether Camco and the Banks are in compliance with various regulatory requirements and are operating in a safe and sound manner. The Banks are members of the FHLB of Cincinnati and are also subject to certain regulations promulgated by the Board of Governors of the Federal Reserve System ("FRB"). 20 Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Pursuant to such legislation, Congress may eliminate the OTS and First Federal and First Savings may be regulated under federal law as banks or be required to change their charters. Such change in regulation or charter would likely change the range of activities in which the First Federal and First Savings may engage and would probably subject the First Federal and First Savings to more regulation by the FDIC. In addition, Camco might become subject to different holding company regulations which may limit the activities in which Camco may engage, and subject Camco to other additional regulatory requirements, including separate capital requirements. At this time, Camco cannot predict when or whether Congress may actually pass legislation regarding the regulatory requirements or charter of Camco, First Federal and First Savings. Although such legislation may change the activities in which Camco, First Federal and First Savings are authorized to engage, it is not anticipated that the current activities of Camco, First Federal and First Savings will be materially affected by those activity limits. Ohio Regulation As savings banks incorporated under Ohio law, Cambridge Savings and Marietta Savings are subject to regulation by the Division. Such regulation affects the internal organization of Cambridge Savings and Marietta Savings, as well as their savings, mortgage lending and other investment activities. Ohio law requires that Cambridge Savings and Marietta Savings each maintain at least 60% of their assets in housing-related and other specified investments. At December 31, 1998, Cambridge Savings and Marietta Savings had at least 60% of their respective assets in such investments. The ability of Ohio savings banks to engage in certain state-authorized investments is subject to oversight and approval by the FDIC. See "Federal Regulation - State Chartered Bank Activities." Ohio law generally limits the aggregate amount that a savings bank can lend to one borrower to an amount equal to 15% of the institution's unimpaired capital and surplus. Based on such limit, Cambridge Savings and Marietta Savings were able to lend approximately $2.65 million and $1.75 million, respectively, to one borrower at December 31, 1998. A savings bank may lend to one borrower an additional amount not to exceed 10% of the institution's unimpaired capital and surplus, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." The Division is responsible for the regulation and supervision of Ohio savings banks in accordance with the laws of the State of Ohio. Periodic examinations by the Division are usually conducted on a joint basis with the federal examiners. Ohio law requires that Cambridge Savings and Marietta Savings maintain federal deposit insurance as a condition of doing business. Any mergers involving, or acquisitions of control of, Ohio savings banks must be approved by the Division. The Division may initiate certain supervisory measures or formal enforcement actions against Ohio savings banks. Ultimately, if the grounds provided by law exist, the Division may place an Ohio savings bank in conservatorship or receivership. In addition to being governed by the laws of Ohio specifically governing savings banks, Cambridge Savings and Marietta Savings are also governed by Ohio corporate law, to the extent such law does not conflict with the laws specifically governing savings banks. Federal Regulation Supervision and Examination. The FDIC is responsible for the regulation and supervision of all commercial banks and state savings banks that are not members of the Federal Reserve System ("Non-member Banks"), including Cambridge Savings and Marietta Savings. The OTS is responsible for the regulation and supervision of all savings associations, including First Federal and First 21 Savings. Each of the Banks must undergo a full-scope, on-site examination by its primary federal regulator at least (a) once every twelve months, if the bank has total assets of $250 million or more, or (b) once every eighteen months, if the institution has total assets of less than $250 million and satisfies other specified criteria. In lieu of conducting its own examination, the federal regulator may accept a state examination every other examination period. The FDIC issues regulations governing the operations of Non-member Banks, examines such institutions and may initiate enforcement actions against such institutions and certain persons affiliated with them for violations of laws and regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the FDIC may appoint a conservator or a receiver for a Non-member Bank. The OTS issues regulations governing the operations of savings associations, regularly examines such institutions and imposes assessments on savings associations based on their asset size to cover the costs of this supervision and examination. It also promulgates regulations that prescribe permissible activities for federally chartered associations, including the types of lending that such associations may engage in and the investments in real estate, subsidiaries and securities they may make. The OTS also may initiate enforcement actions against savings associations and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. If the grounds provided by law exist, the OTS may appoint a conservator or receiver for a savings association. Non-member Banks and savings associations are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an institution to open a new branch or engage in a merger transaction. State-Chartered Bank Activities. The ability of Cambridge Savings and Marietta Savings to engage in any state-authorized activities or make any state-authorized investments, as principal, is limited if such activity is conducted or investment is made in a manner different than that permitted for, or subject to different terms and conditions than those imposed on, national banks. Engaging as a principal in any such activity or investment not permissible for a national bank is subject to approval by the FDIC. Such approval will not be granted unless certain capital requirements are met and there is not a significant risk to the FDIC insurance fund. Most equity and real estate investments (excluding office space and other real estate owned) authorized by state law are not permitted for national banks. Certain exceptions are granted for activities deemed by the FRB to be closely related to banking and for FDIC-approved subsidiary activities. Liquidity. OTS regulations require that each of First Federal and First Savings maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations. During fiscal 1998, certain maturity requirements were removed, which, for First Federal and First Savings, resulted in a greater eligible liquidity amount and percentage at December 31, 1998, than at prior year ends. At December 31, 1998, such minimum requirement was an amount equal to a monthly average of not less than 4% of its net withdrawable savings deposits plus borrowings payable in one year or less. Monetary penalties may be imposed upon associations failing to meet liquidity requirements. The eligible liquidity of First Federal and First Savings was approximately $19.3 million, or 23.1%, and $7.4 million, or 10.4%, respectively, at December 31, 1998, and exceeded the applicable 4.0% liquidity requirement by approximately $15.8 million and $4.6 million, respectively. Cambridge Savings and Marietta Savings are not required to maintain a specific level of liquidity; however, the FDIC expects them to maintain adequate liquidity to protect safety and soundness. 22 Qualified Thrift Lender Test. Savings associations are required to maintain a specified level of investments in assets that are designated as qualifying thrift investments ("QTI"), which are generally related to domestic residential real estate and manufactured housing and include credit card, student and small business loans, and stock issued by any FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) must consist of QTI on a monthly average basis in nine out of every 12 months. Effective September 30, 1996, a savings association may also qualify as a QTL if at least 60% of the institution's assets (on a tax basis) consist of specified assets (generally loans secured by residential real estate or deposits, educational loans, cash and certain governmental obligations). The OTS may grant exceptions to the QTL test under certain circumstances. If a savings association fails to meet the QTL test, the association and its holding company become subject to certain operating and regulatory restrictions. A savings association that fails to meet the QTL test will not be eligible for new FHLB advances. At December 31, 1998, each of the Banks met the QTL test. Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the ability of associations, including First Federal and First Savings, to make capital distributions, including dividend payments. OTS regulations also establish a three-tier system limiting capital distributions according to ratings of associations based on their capital level and supervisory condition. Tier 1 consists of associations that, before and after the proposed distribution, meet their fully phased-in capital requirements. Associations in this category may make capital distributions during any calendar year equal to the greater of 100% of net income, current year-to-date, plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its fully phased-in capital requirement for such capital component, as measured at the beginning of the calendar year, or the amount authorized for a Tier 2 association. A Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association. First Federal and First Savings meet the requirements for a Tier 1 association and have not been notified of any need for more than normal supervision. Tier 2 consists of associations that before and after the proposed distribution meet their current minimum, but not fully phased-in, capital requirements. Associations in this category may make capital distributions of up to 75% of net income over the most recent four-quarter period. Tier 3 associations do not meet current minimum capital requirements and must obtain OTS approval of any capital distribution. Tier 2 associations that propose to make a capital distribution in excess of the noted safe harbor level must also obtain OTS approval. Tier 2 associations proposing to make a capital distribution within the safe harbor provisions and Tier 1 associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. As subsidiaries of Camco, First Federal and First Savings are required to give the OTS 30-days' notice prior to declaring any dividend on its stock. The OTS may object to the distribution during that 30-day period. First Federal and First Savings paid dividends to Camco totaling $3.7 million during 1998. Lending Limits. OTS regulations generally limit the aggregate amount that First Federal and First Savings can lend to one borrower to an amount equal to 15% of the association's Lending Limit Capital. A savings association may lend to one borrower an additional amount not to exceed 10% of the association's unimpaired capital and surplus, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Certain types of loans are not subject to these limits. A general exception to the 15% limit provides that an association may lend to one borrower up to $500,000, for any purpose. In applying these limits, the regulations require that loans to certain related borrowers be aggregated. At December 31, 1998, First Federal and First Savings were in compliance with these lending limits. See "Lending Activities - Federal Lending Limit." 23 Regulatory Capital Requirements. The Banks are required by applicable law and regulations to meet certain minimum capital requirements. The capital standards include a leverage limit, or core capital requirement, a tangible capital requirement applicable to First Federal and First Savings, and a risk-based capital requirement. For First Federal and First Savings, the leverage limit requires "core capital" of at least 3% of total assets. "Core capital" is comprised of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual associations and certain purchased mortgage servicing rights. The tangible capital requirement provides that First Federal and First Savings must maintain "tangible capital" of not less than 1.5% of its adjusted total assets. "Tangible capital" is defined as core capital minus any "intangible assets". For Cambridge Savings and Marietta Savings, the leverage capital requirement is a minimum level of Tier 1 capital to average total consolidated assets of 3%, if they have the highest regulatory examination rating, well diversified risk and minimal anticipated growth or expansion, and between 4% and 5% of average total consolidated assets if they do not meet those criteria. "Tier 1" capital includes common stockholders equity, noncumulative perpetual preferred stock and minority interest in the equity accounts of consolidated subsidiaries, less all intangibles, other than includable purchased mortgage servicing rights and credit card relationships. Pursuant to the risk-based capital requirement, the Banks must maintain total capital, which consists of core or Tier 1 capital and certain general valuation reserves, of 8% of risk-weighted assets. For purposes of computing risk-based capital, assets and certain off-balance sheet items are weighted at percentage levels ranging from 0% to 100%, depending on their relative risk. There are certain differences between the risk weightings applicable to First Federal and First Savings and those applicable to Cambridge Savings and Marietta Savings. 24 The following tables present certain information regarding compliance by the Banks with applicable regulatory capital requirements at December 31, 1998:
At December 31, 1998 To be "well-capitalized" For capital under prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Cambridge Savings Total capital (to risk-weighted assets) $18,001 13.7% =>$10,509 =>8.0% =>$13,136 =>10.0% Tier I capital (to risk-weighted assets) $17,451 13.3% =>$ 5,254 =>4.0% =>$ 7,881 => 6.0% Tier I leverage $17,451 7.3% =>$ 9,535 =>4.0% =>$11,919 => 5.0% Marietta Savings Total capital (to risk-weighted assets) $12,142 13.3% =>$ 7,306 =>8.0% =>$ 9,132 =>10.0% Tier I capital (to risk-weighted assets) $11,637 12.7% =>$ 3,653 =>4.0% =>$ 5,479 => 6.0% Tier I leverage $11,637 8.1% =>$ 5,733 =>4.0% =>$ 7,167 => 5.0% First Federal Tangible capital $12,004 9.2% =>$ 1,955 =>1.5% =>$ 6,516 => 5.0% Core capital $12,004 9.2% =>$ 3,909 =>3.0% =>$ 7,819 => 6.0% Risk-based capital $12,554 18.1% =>$ 5,555 =>8.0% =>$ 6,944 =>10.0% First Savings Tangible capital $12,221 10.2% =>$ 1,796 =>1.5% =>$ 5,987 => 5.0% Core capital $12,221 10.2% =>$ 3,592 =>3.0% =>$ 7,184 => 6.0% Risk-based capital $12,407 18.4% =>$ 5,390 =>8.0% =>$ 6,737 =>10.0%
The OTS has adopted an interest rate risk component to the risk-based capital requirement, though the implementation of that component has been delayed. Pursuant to that requirement, a savings association would have to measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio, as determined under the methodology established by the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the association will be required to deduct one-half of that excess exposure from its total capital when determining its level of risk-based capital. In general, an association with less than $300 million in assets and a risk-based capital ratio of greater than 12% will not be subject to this requirement. First Federal and First Savings currently qualifies for such exception. Pending implementation of the interest rate risk component, the OTS has the authority to impose a higher individualized capital requirement on any savings association it deems to have excess interest rate risk. The OTS also may adjust the risk-based capital requirement on an individual basis for any association to take into account risks due to concentrations of credit and non-traditional activities. The FDIC has adopted a new interest rate risk component to the capital requirements applicable to Non-member Banks. It includes a final rule to allow for an increase in a Non-member Bank's risk-based capital requirements on an individualized basis to address the bank's exposure to a decline in the economic value of its capital due to a change in interest rates. It also includes a 25 proposed policy to provide for measurement of such decline in economic value by determining the amount of change in the present value of an institution's assets, liabilities and off-balance sheet items as a result of a 200 basis point change in interest rates, and taking into account an institution's management of its interest rate risk and the overall risk exposure of the institution. There is a proposed exemption from the policy for small, well-managed institutions with moderate interest rate risk exposure based on asset maturities or repricing schedules. Such institutions must still measure and assess interest rate risk. The FDIC has an outstanding proposal to add a market risk component to the capital requirements of Non-member Banks. Such component would require additional capital for general or specific market risk of trading portfolios of debt and equity securities and other investments or assets. The policy will apply to an institution with less than $5 billion in assets only if its trading portfolio constitutes at least 10% of the institution's assets. Cambridge Savings and Marietta Savings cannot predict in what form this market risk component will be adopted, if at all. At December 31, 1998, Cambridge Savings and Marietta Savings did not have a trading portfolio. The FDIC may also require additional capital to address concentrations of credit and non-traditional activities on a case-by-case basis. The OTS and FDIC have adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled savings associations and Non-member Banks. At each successively lower defined capital category, an institution is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the applicable agency has less flexibility in determining how to resolve the problems of the institution. In addition, the agency generally can downgrade an institution's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the institution is deemed to be engaging in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized institution must submit a capital restoration plan to the applicable agency within 45 days after it becomes undercapitalized. Such institution will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Furthermore, critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. Each of the Banks' capital levels at December 31, 1998, met the standards for well-capitalized institutions. Federal law prohibits a financial institution from making a capital distribution to anyone or paying management fees to any person having control of the institution if, after such distribution or payment, the institution would be undercapitalized. In addition, each company controlling an undercapitalized institution must guarantee that the institution will comply with its capital restoration plan until the institution has been adequately capitalized on an average during each of the four preceding calendar quarters and must provide 26 adequate assurances of performance. The aggregate liability pursuant to such guarantee is limited to the lesser of (a) an amount equal to 5% of the institution's total assets at the time it became undercapitalized or (b) the amount necessary to bring the institution into compliance with all capital standards applicable to such institution at the time the institution fails to comply with its capital restoration plan. Federal Deposit Insurance Corporation The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF for savings associations. The Banks are members of the SAIF and their deposit accounts are insured by the FDIC, up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including the Banks, and has authority to initiate enforcement actions against federally insured savings associations, if the FDIC does not believe the OTS has taken appropriate action to safeguard safety and soundness and the deposit insurance fund. The FDIC is required to maintain designated levels of reserves in each fund. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Prior to September 1996, the SAIF's ratio of reserves to insured deposits was significantly below the level required by law, while the BIF's ratio was above the required level. As a result, institutions with SAIF-insured deposits were paying higher deposit insurance assessments than institutions with BIF-insured deposits. Federal legislation providing for the recapitalization of the SAIF became effective in September 1996, and included a special assessment of $.657 per $100 of SAIF-insured deposits held at March 31, 1995. The Banks had $277.3 million in deposits at March 31, 1995. The Banks paid a special assessment of $1.8 million in November 1996, which was accounted for and recorded as of September 30, 1996. This assessment was tax-deductible, but reduced earnings for the year ended December 31, 1996. Transactions with Affiliates and Insiders Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders and their related interests cannot exceed the association's Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in assets). Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the association with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. The Banks were in compliance with such restrictions at December 31, 1998. All transactions between savings associations and their affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An affiliate is any company or entity which controls, is controlled by or is under common control with the financial institution. In a holding company context, the parent holding company of a savings association and any companies that are controlled by such parent holding company are affiliates of the institution. Generally, Sections 23A and 23B of the FRA (i) limit the extent to which a financial institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus for any one affiliate and 20% of such capital stock and surplus for the aggregate of such transactions with all affiliates, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable to the institution or the subsidiary, as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. In addition to limits in Sections 23A and 23B, First Federal and First Savings may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate, except shares of a subsidiary. Exemptions from Sections 23A or 23B of the FRA may be granted only by the FRB. The Banks were in compliance with these requirements at December 31, 1998. 27 Change in Control Federal Law. The Federal Deposit Insurance Act (the "FDIA") provides that no person, acting directly or indirectly or in concert with one or more persons, shall acquire control of any insured depository institution or holding company, unless 60-days prior written notice has been given to the primary federal regulator for that institution and such regulator has not issued a notice disapproving the proposed acquisition. Control, for purposes of the FDIA, means the power, directly or indirectly, alone or acting in concert, to direct the management or policies of an insured institution or to vote 25% or more of any class of securities of such institution. Control exists in situations in which the acquiring party has direct or indirect voting control of at least 25% of the institution's voting shares, controls in any manner the election of a majority of the directors of such institution or is determined to exercise a controlling influence over the management or policies of such institution. In addition, control is presumed to exist, under certain circumstances where the acquiring party (which includes a group "acting in concert") has voting control of at least 10% of the institution's voting stock. These restrictions do not apply to holding company acquisitions. See "Holding Company Regulation". Ohio Law. A statutory limitation on the acquisition of control of an Ohio savings bank requires the written approval of the Division prior to the acquisition by any person or entity of a controlling interest in an Ohio association. Control exists, for purposes of Ohio law, when any person or entity which, either directly or indirectly, or acting in concert with one or more other persons or entities, owns, controls, holds with power to vote, or holds proxies representing, 15% or more of the voting shares or rights of an association, or controls in any manner the election or appointment of a majority of the directors. A director will not be deemed to be in control by virtue of an annual solicitation of proxies voted as directed by a majority of the board of directors. Ohio law also requires that certain acquisitions of voting securities that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of Camco must be approved in advance by the holders of at least a majority of the outstanding voting shares represented at a meeting at which a quorum is present and a majority of the portion of the outstanding voting shares represented at such a meeting, excluding the voting shares by the acquiring shareholder. This statute was intended, in part, to protect shareholders of Ohio corporations from coercive tender offers. Under certain circumstances, interstate mergers and acquisitions involving savings banks incorporated under Ohio law are permitted by Ohio law. A financial institution or financial institution holding company with its principal place of business in another state may acquire a savings and loan association or savings and loan holding company incorporated under Ohio law if, in the discretion of the Division, the laws of such other state give an Ohio institution or an Ohio holding company reciprocal rights. Holding Company Regulation Camco is a multiple savings and loan holding company subject to the regulatory oversight, examination and enforcement authority of the OTS. Though Cambridge Savings and Marietta Savings are not savings associations, they have elected to be treated as such for holding company purposes, so that Camco is not regulated as a bank holding company. Camco is required to register and file periodic reports with the OTS. If the OTS determines that the continuation of a particular activity by a savings and loan holding company constitutes a serious threat to the financial condition of its subsidiary institutions, the OTS may impose restrictions on the holding company. Such restrictions may include limiting the payment of dividends, transactions with affiliates or any other activities deemed to pose a serious threat to the subsidiary institutions. Generally, no savings and loan holding company may (i) acquire or retain control of a savings association or another savings and loan holding company or control the assets thereof or (ii) acquire or retain more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary, without the prior written approval of the Director of the OTS. Additionally, under certain circumstances a savings and loan holding company is permitted to acquire, with the approval of the Director of the OTS, up to 15% of 28 the previously unissued voting shares of an undercapitalized savings association for cash, without such savings association being deemed to be controlled by the holding company. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. The Director of the OTS may approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). As under prior law, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. As a multiple savings and loan holding company, the activities of Camco and those of any of its subsidiaries (other than the Banks) are subject to certain restrictions. Generally, no multiple savings and loan holding company or subsidiary thereof that is not a savings association may engage in any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or an escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) engaging in those activities previously directly authorized by federal regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) furnishing or performing such other services or engaging in those activities authorized by the FRB as permissible for bank holding companies, unless the director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS prior to being engaged in by a multiple holding company. Federal law provides that an insured institution shall be liable for any loss incurred by the FDIC in connection with the default or potential default of, or federal assistance provided to, an insured institution which is controlled by the same holding company. Such loss would be apportioned among all of the insured institutions controlled by the holding company. Federal Reserve Requirements FRB regulations currently require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $46.5 million (subject to an exemption of up to $4.9 million), and of 10% of net transaction accounts in excess of $46.5 million. At December 31, 1998, each of the Banks was in compliance with its reserve requirements. Federal Home Loan Bank System The FHLBs provide credit to their members in the form of advances. As members of the FHLB of Cincinnati, the Banks are each required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of their 29 residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of their advances from the FHLB of Cincinnati. Camco is in compliance with this requirement with an aggregate investment by the Banks in FHLB of Cincinnati stock of $8.3 million at December 31, 1998. Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required to obtain and to maintain a security interest in collateral in one or more of the following categories: fully disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the United States Government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. The FHLBs have established the "Affordable Housing Program" to subsidize the interest rate on advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. The FHLB of Cincinnati reviews and accepts proposals for subsidies under that program twice a year. Cambridge Savings and First Federal have participated in this program. Federal Taxation Camco and its subsidiaries are each subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, Camco and its subsidiaries may be subject to the alternative minimum tax which is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. Such tax preference items include interest on certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to this preference item and prior to reduction by net operating losses, is included in alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. However, the Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain "small corporations" for tax years beginning after December 31, 1997. A corporation initially qualifies as a small corporation if it had average gross receipts of $5,000,000 or less for the three tax years ending with its first tax year beginning after December 31, 1996. Once a corporation is recognized as a small corporation, it will continue to be exempt from the alternative minimum tax for as long as its average gross receipts for the prior three-year period does not exceed $7,500,000. In determining if a corporation meets this requirement, the first year that it achieved small corporation status is not taken into consideration. Camco's average gross receipts for the three tax years ending on December 31, 1998, is approximately $44.5 million and as a result, Camco does not qualify as a small corporation exempt from the alternative minimum tax. Prior to the enactment of the Small Business Jobs Protection Act (the "Act"), which was signed into law on August 21, 1996, certain thrift institutions, such as the Banks, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions could compute deductions for bad debts using either the specific charge-off method of Section 166 of the Code or one of two reserve methods of Section 593 of the Code. The reserve methods under Section 593 of the Code permitted a thrift institution annually to elect to deduct bad debts under either (i) the "percentage of taxable income" method applicable only to thrift institutions, or (ii) the "experience" method that also was available to small banks. Under the "percentage of taxable income" method, a thrift institution 30 generally was allowed a deduction for an addition to its bad debt reserve equal to 8% of its taxable income (determined without regard to this deduction and with additional adjustments). Under the "experience" method, a thrift institution was generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year. A thrift institution could elect annually to compute its allowable addition to bad debt reserves for qualifying loans either under the experience method or the percentage of taxable income method. For tax years 1995, 1994 and 1993, Camco used the percentage of taxable income method and was subject to certain limitations based on aggregate loans and savings account balances at the end of the calendar year. The Act eliminated the percentage of taxable income method of accounting for bad debts by thrift institutions, effective for taxable years beginning after 1995. Thrift institutions that are treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method. A thrift institution required to change its method of computing reserves for bad debt will treat such change as a change in the method of accounting, initiated by the taxpayer and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amounts to be recaptured will be determined solely with respect to the "applicable excess reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that is treated as a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that is treated as a small bank, like Market, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. For taxable years that begin after December 31, 1995, and before January 1, 1998, if a thrift meets the residential loan requirement for a tax year, the recapture of the applicable excess reserves otherwise required to be taken into account as a Code Section 481(a) adjustment for the year will be suspended. A thrift meets the residential loan requirement if, for the tax year, the principal amount of residential loans made by the thrift during the year is not less than its base amount. The "base amount" generally is the average of the principal amounts of the residential loans made by the thrift during the six most recent tax years beginning before January 1, 1996. A residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by residential or church property and certain mobile homes), but only to the extent that the loan is made to the owner of the property. Camco has provided deferred taxes of approximately $635,000 and will be permitted to amortize the recapture of the bad debt reserve over a six year period commencing in 1998. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e), as modified by the Act, which require recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by any of the Banks to Camco is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the gross income of Camco for tax purposes would be increased by the amount 31 which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of December 31, 1998, the pre-1988 reserves of for the Banks for tax purposes totaled approximately $1.9 million. Camco believes the Banks had approximately $27.2 million of accumulated earnings and profits for tax purposes as of December 31, 1998, which would be available for dividend distributions, provided regulatory restrictions applicable to the payment of dividends are met. No representation can be made as to whether the Banks will have current or accumulated earnings and profits in subsequent years. The tax returns of Camco have been audited or closed without audit through calendar year 1993. In the opinion of management, any examination of open returns would not result in a deficiency which could have a material adverse effect on the financial condition of Camco. Ohio Taxation. Camco and East Ohio are subject to the Ohio corporation franchise tax, which, as applied to them, is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times taxable net worth. For tax years beginning after December 31, 1999, the rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii) .400% times taxable net worth. A special litter tax is also applicable to all corporations, including Camco, subject to the Ohio corporation franchise tax other than "financial institutions." If the franchise tax is paid on the net income basis, the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable income and .22% of computed Ohio taxable income in excess of $50,000. If the franchise tax is paid on the net worth basis, the litter tax is equal to .014% times taxable net worth. The Banks are "financial institutions" for State of Ohio tax purposes. As such, they are subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.5% of their book net worth determined in accordance with generally accepted accounting principles. For tax year 2000, however, the franchise tax on financial institutions will be 1.4% of the book net worth and for tax year 2001 and years thereafter the tax will be 1.3% of the book net worth. As "financial institutions," the Banks are not subject to any tax based upon net income or net profits imposed by the State of Ohio. CMC and WestMar are subject to the Ohio Dealers in Intangibles property tax but currently incur no liability because they are owned by Ohio financial institutions. Delaware Taxation. As a Delaware corporation, Camco is subject to an annual franchise tax based on the quantity and par value of its authorized capital stock and its gross assets. As a savings and loan holding company, Camco is exempt from Delaware corporate income tax. Kentucky Taxation. The Commonwealth of Kentucky imposes no income or franchise taxes on savings institutions. First Savings is subject to an annual ad valoreum tax which is .1% of First Savings' deposit accounts, common stock and retained income, with certain deductions for amounts borrowed by depositors and securities guaranteed by the U.S. Government or certain of its agencies. West Virginia Taxation. Marietta Savings and WestMar are both subject to a West Virginia tax on apportioned adjusted net income and a West Virginia franchise tax on apportioned adjusted capital. The adjusted net income of each is taxed at a rate of 9.08%. The franchise tax rate is 0.75% of adjusted capital. The apportionment is based solely on the ratio of gross receipts derived from West Virginia as compared to gross receipts everywhere. 32 Item 2. Properties The following table provides the location of, and certain other information pertaining to, Camco's office premises as of December 31, 1998:
Year facility Leased commenced or Net book Office Location operations owned value (1) - --------------- ---------- ------ --------- First Federal 134 E. Court Street Washington Ct. House, Ohio 1963 Owned $649,116 45 West Second Street Chillicothe, Ohio 1994 Leased (2) 200 N. Court Street Circleville, Ohio 1993 Leased (3) 135 North South Street Wilmington, Ohio 1992 Owned 84,384 1050 Washington Ave. Washington Court House, Ohio 1996 Owned 567,853 1 N. Plum Street Germantown, Ohio 1998 Owned (12) 533,180 687 West Main Street New Lebanon, Ohio 1998 Owned 81,163 10. S. Main Street Miamisburg, Ohio 1998 Leased 1,680 218 W. Olentangy Street Powell, Ohio, 1998 Leased 1,440 East Ohio 510 Grand Central Ave. Vienna, West Virginia 1996 Leased (4) 126 S. 9th Street Cambridge, Ohio 1998 Owned 107,700
33
Marietta Savings 226 Third Street Marietta, Ohio 1976 Owned $ 605,683 1925 Washington Boulevard Belpre, Ohio 1979 Owned 147,887 478 Pike Street Marietta, Ohio 1998 Leased (11) 681,347 Cambridge Savings 814 Wheeling Avenue (5) Cambridge, Ohio 1963 Owned 1,010,800 327 E. 3rd Street Uhrichsville, Ohio 1975 Owned 91,900 175 N. 11th Street Cambridge, Ohio 1981 Owned 185,200 209 Seneca Avenue Byesville, Ohio 1978 Leased (6) First Savings 1640 Carter Avenue Ashland, Kentucky 1961 Owned 815,481 U.S. 60 - Summit Ashland, Kentucky 1992 Owned 713,437 Greenup Mall Russell, Kentucky 1980 Owned 100,530 191 Eastern Heights Shopping Center Huntington, West Virginia 1997 Leased
34
CMC 1320 4th Street, N.W. (7) New Philadelphia, Ohio 1985 Owned $240,015 4328 Dressler Road Canton, Ohio 1992 Leased (8) 2359 Maple Avenue Zanesville, Ohio 1993 Leased (9) WestMar 510 Grand Central Avenue Vienna, West Virginia 1991 Leased (10)
- -------------------------- (1) Net book value amounts are for land, buildings and improvements. (2) The lease expires in 1999. First Federal has the option to renew the lease for one five-year term. (3) The lease expires in 1999. (4) The lease expired in 1998. Currently East Ohio rents on a month to month basis and will be relocating from this office before the end of 1999. (5) The Wheeling Avenue facility also serves as the Camco office and the East Ohio-Cambridge office. (6) The lease expires in 2000. Cambridge Savings has the option to renew the lease for three five-year terms. (7) The 4th Street facility also serves as the East Ohio-New Philadelphia office. (8) The lease is currently on a month-to-month basis. (9) The lease expires in 1999. (10) The lease expires in 1999. (11) The lease expires in 2017. Marietta Savings has the option to renew for 2 five year terms. The lease is for land. (12) The Plum Street facility also serves as the East Ohio - Germantown office. Camco also owns furniture, fixtures and various bookkeeping and accounting equipment. The net book value of Camco's investment in office premises and equipment totaled $10.6 million at December 31, 1998. See Note E of Notes to Consolidated Financial Statements for additional information. 35 Item 3. Legal Proceedings. Neither Camco nor any of the Banks is presently engaged in any legal proceedings of a material nature. From time to time, Camco is involved in legal proceedings to enforce its security interest in collateral taken as security for its loans. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters. At December 31, 1998, Camco had 5,473,943 shares of common stock outstanding and held of record by approximately 975 stockholders. Price information with respect to Camco's common stock is quoted in the Nasdaq National Market ("Nasdaq") under the symbol "CAFI." The table below sets forth the high and low bid information for the common stock of Camco, together with the respective dividends declared per share of common stock, for each quarter of 1996, 1997 and 1998. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
Cash dividends Year ended December 31, 1996 (1) High Low declared ---------------------------- ------ ----- -------- First Quarter $11.34 $10.13 $0.0981 Second Quarter 12.25 10.66 0.1011 Third Quarter 12.22 11.11 0.1093 Fourth Quarter 11.91 10.00 0.1125 Cash dividends Year ended December 31, 1997 (1) High Low declared ---------------------------- ------ ----- -------- First Quarter $11.91 $ 9.37 $0.1272 Second Quarter 11.91 11.11 0.1399 Third Quarter 15.17 11.59 0.0867 Fourth Quarter 18.00 14.83 0.1476 Cash dividends Year ended December 31, 1998 (1) High Low declared ---------------------------- ------ ----- -------- First Quarter $18.42 $16.67 $0.0933 Second Quarter 20.67 18.33 0.0967 Third Quarter 19.42 15.63 0.1025 Fourth Quarter 16.50 14.38 0.1075
- -------------------------- (1) Amounts have been restated to give effect to the merger with GF Bancorp, Inc., and to the three-for-two stock split during 1998, and to the 5% stock dividends which were effected in July of 1997 and 1996. 36 In addition to certain federal income tax considerations, regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations. General Since its incorporation in 1970, Camco has evolved into a full-service provider of financial products to the communities served by its Banks. Utilizing a common marketing theme based on Camco's commitment to personalized customer service, Camco and its affiliates have grown from $22.4 million of consolidated assets in 1970 to $637.1 million of consolidated assets at December 31, 1998. Camco's rate of growth is largely attributable to its acquisitions of Marietta Savings, First Federal, First Savings and GF Bancorp and its continued expansion of product lines from the limited deposit and loan offerings which the Banks could offer in the heavily regulated environment of the 1970s to the wider array of financial service products that commercial banks traditionally offered. Additionally, Camco has enhanced its operational growth by integrating its residential lending function through establishing mortgage banking operations in the Banks' primary market areas and, to a lesser extent, by chartering a title insurance agency. Management believes that continued success in the financial services industry will be achieved by those institutions with a rigorous dedication to building value-added customer-oriented organizations. Toward this end, each of the Banks' operations are decentralized, with a separate Board of Directors and management team focusing on consumer preferences for financial products in the respective communities served. Based on consumer preferences, Camco's management designs financial service products with a view towards differentiating each of the constituent Banks from its competition. Management believes that the Banks' abilities to rapidly adapt to consumer needs and preferences is essential to them as community-based financial institutions competing against the larger regional and money-center bank holding companies. Camco's profitability depends primarily on its level of net interest income, which is the difference between interest income on interest-earning assets, principally loans, mortgage-backed securities and investment securities, and interest expense on deposit accounts and borrowings. In recent years, Camco's net earnings have also been heavily influenced by its level of other income, including gains on sale of loans, loan servicing fees and other fees. Camco's operations are also influenced by non interest expenses, including employee compensation and benefits, occupancy expense, federal deposit insurance premiums, data processing, advertising, other operating expenses and federal income tax expense. Asset and Liability Management Net interest income, the difference between asset yields and the cost of interest-bearing liabilities, is the principal component of Camco's net earnings. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained during fluctuations in prevailing interest rate levels. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap", provides an indication of the extent to which a financial institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. Generally, during a period of rising interest rates, a 37 negative gap within shorter maturities would adversely affect net interest income, while a positive gap within shorter maturities would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap within shorter maturities would result in an increase in net interest income, while a positive gap within shorter maturities would have the opposite effect. In recognition of the foregoing factors, the Board of Directors of each of the Banks has implemented an asset and liability management strategy directed toward improving each Bank's interest rate sensitivity. The principal common elements of such strategies include (1) meeting the consumer preference for fixed-rate loans over the past several years by selling such loans in the secondary market and (2) maintaining higher levels of liquid assets, such as cash, short-term interest-bearing deposits and short-term investment securities as a hedge against rising interest rates in the lower interest rate environment, and (3) utilizing FHLB advances and longer term certificates of deposit as funding sources when available. The following table contains information regarding the amounts of various categories of assets and liabilities repricing within the periods indicated:
December 31, 1998 Within 1 year 1-5 years Over 5 years Total ------------- --------- ------------ ----- (Dollars in thousands) Interest-earning assets: (1) Interest-bearing deposits in other banks $ 22,609 $ - $ - $ 22,609 Investment securities (2) 10,431 1,355 180 11,966 Mortgage-backed securities 4,530 758 3,207 8,495 Loans receivable (3) 163,861 243,215 155,926 563,002 -------- ------- ------- ------- Total 201,431 245,328 159,313 606,072 -------- ------- ------- ------- Interest-bearing liabilities: (1) Deposits 354,177 86,983 2,067 443,227 FHLB advances 68,525 19,070 37,888 125,483 -------- ------- ------- ------- Total 422,702 106,053 39,955 568,710 -------- ------- ------- ------- Excess (deficiency) of interest sensitive assets over interest sensitive liabilities $(221,271) $139,275 $119,358 $ 37,362 ======== ======= ======= ======= Cumulative excess (deficiency) of interest sensitive assets over interest sensitive liabilities $(221,271) $(81,996) $ 37,362 $ 37,362 ======== ======= ======= ======= Cumulative interest rate sensitivity gap to total assets (34.73)% (12.87)% 5.86% 5.86% ====== ====== ==== ====
- ----------------------------- (1) Interest-earning assets and interest-bearing liabilities are shown as repricing based on contractual terms to repricing, without consideration of loan prepayments or deposit decay assumptions. (2) Does not include corporate equity securities or FHLB stock. (3) Represents loans receivable totals before consideration of net items and excluding loans held for sale. Discussion of Financial Condition Changes from December 31, 1997 to December 31, 1998 At December 31, 1998, Camco's consolidated assets totaled $637.1 million, an increase of $67.0 million, or 11.7%, over the December 31, 1997 total. The growth in assets in the current year was primarily funded by deposit growth of $20.9 million, an increase of $43.2 million in advances from the FHLB, and undistributed net earnings of $4.8 million. 38 Cash and interest-bearing deposits in other financial institutions totaled $35.8 million at December 31, 1998, an increase of $12.9 million, or 56.3%, from December 31, 1997 levels. The increase was due primarily to funds required for outstanding loan commitments at December 31, 1998. Investment securities totaled $12.3 million at December 31, 1998, a decrease of $8.8 million, or 41.7%, from the total at December 31, 1997. During 1998, investment securities totaling $13.1 million were purchased, while maturities and sales amounted to $21.9 million. Management utilized the net proceeds from investment securities to partially fund growth in the loan portfolio. Mortgage-backed securities totaled $8.5 million at December 31, 1998, a decrease of $8.2 million, or 49.0%, from December 31, 1997, due primarily to sales totaling $4.6 million and principal repayments totaling $3.5 million during the period. Loans receivable and loans held for sale totaled $548.7 million at December 31, 1998, an increase of $67.2 million, or 13.9%, over the total at December 31, 1997. The increase was primarily attributable to record loan disbursements of $463.4 million, which were partially offset by principal repayments of $191.1 million and loan sales of $205.9 million. Loan origination volume during 1998 exceeded that of the 1997 period by $193.7 million, or 71.8%, while the volume of loan sales increased by $128.2 million year to year. Nonperforming loans (90 days or more delinquent plus nonaccrual loans), totaled $4.3 million and $1.9 million at December 31, 1998 and 1997, respectively, constituting .78% and .40% of total net loans, including loans held for sale at those dates. The consolidated allowance for loan losses totaled $1.8 million and $1.6 million at December 31, 1998 and 1997, respectively, representing 41.5% and 82.3% of nonperforming loans at those dates. The provision for losses on loans for the year ended December 31, 1998, was primarily attributable to the aforementioned growth in the loan portfolio during 1998. Although management believes that its allowance for loan losses at December 31, 1998, is adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could adversely affect Camco's results of operations. Deposits totaled $443.2 million at December 31, 1998, an increase of $20.9 million, or 4.9%, over December 31, 1997 levels. The increase resulted primarily from management's continuing efforts to achieve a moderate rate of growth through advertising and pricing strategies. Advances from the FHLB increased by $43.2 million, or 52.4%, to a total of $125.5 million at December 31, 1998. The proceeds from deposit growth and FHLB advances were primarily used to fund loan originations for 1998. The Banks are required to maintain minimum regulatory capital pursuant to federal regulations. At December 31, 1998, the Banks' regulatory capital exceeded all regulatory capital requirements. Comparison of Results of Operations for the Years Ended December 31, 1998 and December 31, 1997 General. Camco's net earnings for the year ended December 31, 1998, totaled $7.0 million, an increase of $1.7 million, or 31.1%, over the $5.3 million of net earnings reported in 1997. The increase in earnings was primarily attributable to an increase in net interest income of $992,000, an increase in other income of $3.6 million and a decrease in the provision for losses on loans of $135,000, which were partially offset by an increase in general, administrative and other expense of $2.6 million and an increase in the provision for federal income taxes of $488,000. Net Interest Income. Total interest income for the year ended December 31, 1998, amounted to $44.3 million, an increase of $3.1 million, or 7.4%, over 1997, generally reflecting the effects of the $47.1 million, or 9.2%, of growth in average interest-earning assets outstanding, partially offset by a decrease of 14 basis points in the yield year to year, from 8.07% in 1997 to 7.93% in 1998. 39 Interest income on loans and mortgage-backed securities totaled $41.3 million for the year ended December 31, 1998, an increase of $2.9 million, or 7.5%, over the comparable 1997 period. The increase resulted primarily from a $42.6 million, or 9.1%, growth in the average balance outstanding year to year. Interest income on investments and interest-bearing deposits increased by $190,000, or 6.7%, due to an increase in the average outstanding balances of $4.5 million, or 10.3%. Interest expense on deposits increased by $639,000, or 3.4%, to a total of $19.5 million for the year ended December 31, 1998, due primarily to an increase in the average balance of deposits outstanding of $17.1 million, or 4.2%, which was partially offset by a decline in the average cost of deposits of four basis points to 4.55%. Interest expense on borrowings totaled $5.3 million for the year ended December 31, 1998, an increase of $1.4 million, or 37.0%, over 1997. The increase resulted primarily from a $28.0 million increase in the average balance of borrowings outstanding year to year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $992,000, or 5.4%, to a total of $19.4 million for the year ended December 31, 1998. The interest rate spread decreased to approximately 3.19% for the year ended December 31, 1998, from 3.31% for 1997, while the net interest margin decreased to approximately 3.48% in 1998, compared to 3.61% in 1997. Provision for Losses on Loans. A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Banks' market areas, and other factors related to the collectibility of the Banks' loan portfolios. The provision for losses on loans totaled $250,000 for the year ended December 31, 1998, a decrease of $135,000, or 35.1%, from 1997. The current period provision generally reflects the effects of loan portfolio growth coupled with an increase of $2.4 million in the level of nonperforming loans year to year. In the period subsequent to December 31, 1998, approximately $1.1 million of the nonperforming loans has been paid off or paid to current status. Management believes the remaining loans are adequately collateralized and anticipates no loss on these loans. While management uses the most current information available in setting loan loss provisions, there can be no assurance that the loan loss allowance will be adequate to cover losses on nonperforming assets in the future. Other Income. Other income increased for the year ended December 31, 1998, by $3.6 million, or 91.4%, over 1997. The increase in other income was primarily attributable to a $2.4 million, or 147.3%, increase in gains on sale of loans and an increase of $1.2 million, or 84.3%, in late charges, rent and other. The increase in gains on sale of loans primarily reflects an increase in sales volume year to year. The increase in late charges, rent and other was primarily attributable to a $450,000 increase in title service fees at the Corporation's title agency subsidiary as a result of the increase in loan origination volume, a $99,000 gain on settlement of life insurance policies and an overall increase in fees related to loans and other services due to the Corporations' growth year to year. General, Administrative and Other Expense. General, administrative and other expense totaled $16.3 million for the year ended December 31, 1998, an increase of $2.6 million, or 18.8%. The increase was due primarily to a $689,000, or 10.4%, increase in employee compensation and benefits, a $357,000, or 21.2%, increase in occupancy and equipment, an $854,000, or 132.4%, increase in data processing, a $101,000, or 19.5%, increase in advertising, a $154,000, or 30.2%, increase in franchise taxes and a $426,000, or 12.8%, increase in other operating costs. The increase in employee compensation and benefits resulted primarily from an increase in staffing levels and normal merit increases year to year. The increase in occupancy and equipment was primarily 40 attributable to an increase in both depreciation expense on office equipment and building maintenance costs. The increase in other operating expenses included $212,000 in costs recorded in 1998 related to the Merger. The increase in data processing costs resulted from replacing and modernizing the Corporation's data processing systems and in addressing the Year 2000 issue (see Year 2000). Advertising, franchise taxes and other operating expenses increased primarily as a result of the Corporation's overall growth year to year. Federal Income Taxes. The provision for federal income taxes totaled $3.4 million for the year ended December 31, 1998, an increase of $488,000, or 16.7%, over 1997. This increase was primarily attributable to a $2.1 million, or 26.0%, increase in pre-tax earnings. The effective tax rate amounted to 32.7% and 35.3% for the years ended December 31, 1998 and 1997, respectively. The Corporation's change in effective tax rate year to year was primarily attributable to the Corporation's receipt of nontaxable life insurance proceeds in 1998. Comparison of Results of Operations for the Years Ended December 31, 1997 and 1996 General. Increases in the level of income and expenses during the year ended December 31, 1997, compared to 1996, were significantly influenced by the inclusion of the accounts of First Savings, which was acquired by Camco in October 1996, in a transaction accounted for using the purchase method of accounting. Accordingly, the statement of earnings for the year ended December 31, 1996, was not restated for the acquisition of First Savings. Camco's net earnings for the year ended December 31, 1997 totaled $5.3 million, an increase of $2.1 million, or 66.5%, over the $3.2 million of net earnings reported in 1996. The increase in earnings was primarily attributable to an increase in net interest income of $3.4 million, an increase in other income of $245,000, and a decrease in general, administrative and other expense of $29,000, which were partially offset by an increase in the provision for losses on loans of $244,000 and an increase in the provision for federal income taxes of $1.3 million. Net Interest Income. Total interest income for the year ended December 31, 1997, increased by $8.4 million, or 25.6%, reflecting the effects of $104.4 million of growth in average interest-earning assets outstanding. Interest income on loans and mortgage-backed securities totaled $38.4 million for the year ended December 31, 1997, an increase of $8.1 million, or 26.7%, over the comparable 1996 period. The increase resulted primarily from a $100.4 million, or 27.4%, increase in the average balances outstanding year to year. Interest income on investments and interest-bearing deposits increased by $306,000, or 12.1%, due to an increase in average outstanding balances of $3.9 million. Interest expense on deposits increased by $3.3 million, or 20.8%, to a total of $18.9 million for the year ended December 31, 1997, due primarily to an increase of $63.5 million in the average balance of deposits outstanding. Interest expense on borrowings totaled $3.9 million for the year ended December 31, 1997, an increase of $1.7 million, or 78.6%, over 1996. The increase resulted primarily from a $30.6 million increase in the average balance of borrowings outstanding year to year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $3.4 million, or 22.9%, to a total of $18.4 million for the year ended December 31, 1997. The interest rate spread decreased to approximately 3.31% for the year ended December 31, 1997, from 3.44% for 1996, while the net interest margin decreased to approximately 3.61% in 1997, compared to 3.69% in 1996. Provision for Losses on Loans. A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments, general economic conditions, particularly as such conditions 41 relate to the Bank's market area, and other factors related to the collectibility of the Bank's loan portfolio. The provision for losses on loans totaled $385,000 for the year ended December 31, 1997, an increase of $244,000 over 1996, and generally reflects growth in the loan portfolio. Other Income. Other income increased for the year ended December 31, 1997, by $245,000, or 6.6%, over 1996. The increase in other income was primarily attributable to a $342,000, or 27.2%, increase in gains on sale of loans, an increase of $214,000, or 18.4%, in late charges, rent and other, a $62,000, or 11.7%, increase in service charges and other fees on deposits and a $37,000 increase in gains on sale of real estate acquired through foreclosure, which were partially offset by a $410,000, or 54.7%, decrease in loan servicing fees. The increase in gains on sale of loans primarily reflects an increase in sales volume year to year. The increase in late charges, rent and other was primarily attributable to growth in loans and deposit accounts. General, Administrative and Other Expense. General, administrative and other expense totaled $13.7 million for the year ended December 31, 1997, a decrease of $29,000, or .2%. The decrease was primarily attributable to the absence of a $2.1 million one-time charge recorded in 1996 as a result of legislation enacted to recapitalize the SAIF. Excluding the SAIF charge, general, administrative and other expense increased by approximately $2.1 million, or 17.6%. This increase in general, administrative and other expense was due primarily to a $979,000, or 17.4%, increase in employee compensation and benefits, a $250,000, or 17.5%, increase in occupancy and equipment, an $809,000, or 32.1%, increase in other operating costs, a $111,000 increase in goodwill amortization and a $122,000, or 23.3%, increase in data processing costs. As previously discussed, the 1997 consolidated statement of earnings includes the accounts of First Savings, while the 1996 balances have not been restated to include the effects of the acquisition of First Savings. First Savings had approximately $1.7 million of general, administrative and other expense for the year ended December 31, 1997. The increase in occupancy and equipment is attributable to increased depreciation expense on office equipment and general repairs of office buildings. The increase in data processing, advertising and other operating costs generally reflects the effects of Camco's growth year to year. Federal Income Taxes. The provision for federal income taxes totaled $2.9 million for the year ended December 31, 1997, an increase of $1.3 million, or 84.0%. This increase is attributable to a $3.5 million, or 72.3%, increase in pre-tax earnings. The effective tax rate amounted to 35.3% and 33.1% for the years ended December 31, 1997 and 1996, respectively. Liquidity and Capital Resources Savings associations are generally required to maintain specified minimum levels of liquid investments, including cash and qualifying types of U.S. Government and agency obligations and other specified instruments. The primary sources of funds for the Banks are deposits, principal and interest payments made on the portfolio loans, proceeds from the sale of mortgage loans, maturing investments, FHLB advances and funds provided by operating activities. Principal uses of funds include deposit withdrawals, loan originations, investment purchases, repayment of FHLB advances, payment of interest on deposits and payment of operating expenses. While certain of these sources and uses of funds are relatively predictable, deposit flows, loan originations and prepayments of loans are influenced by external factors such as interest rates, economic conditions, competition and consumer confidence in financial service industries. Camco attempts to maintain a stable retail deposit base which does not utilize brokered deposits. During the years ended December 31, 1998 and 1997, Camco maintained its deposit balance goals by offering competitive, but not excessive, interest rates on deposits. At December 31, 1998, the Banks had total outstanding loan commitments of $58.3 million, which included outstanding loan origination commitments, outstanding commitments to purchase loans, undisbursed loans in process of $22.3 million, and borrower's unused lines of credit of $17.6 million. Such commitments can be funded from current excess liquidity and normal cash flow from operations. 42 Camco's principal source of income on an unconsolidated basis is earnings and dividends from the Banks. The ability of the Banks to pay dividends to Camco is subject to certain regulatory restrictions. Each of the Banks is currently able to pay dividends to Camco to the fullest extent permitted by federal regulations. Year 2000 Issue The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits to indicate the year. Such computer systems may be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In 1996, the Corporation began evaluating the status of all of its technological systems which included its state of readiness in addressing the Y2K issue. After the analysis was completed, a technology plan was developed and implementation of the plan started in mid-1997. As the Corporation is primarily dependent on a third-party data processing service bureau for maintaining customer records and financial systems, a task force was formed to identify a service bureau that would meet the current and future technology needs of the Corporation and which would be Y2K compliant. The new service bureau was selected and conversion of all of the Banks' data systems were completed in the fourth quarter of 1998. As a part of the conversion process, all of the data processing hardware and software in the Banks was replaced and has been tested as being Y2K compliant. The Corporation estimates that the cost of converting and replacing information and non-information technology systems will fall within a range of $1.5 million and $1.75 million with at least 75% being capitalized (which relates to a discretionary management decision to upgrade existing information technology systems). As stated previously, data processing expenses during 1998 increased by $854,000, most of which was for conversion and de-conversion costs, training and increased costs related to out of contract processing. Management had estimated that the total cost to address the Y2K issue would be approximately $75,000, of which $30,000 occurred in 1998. While management believes their Y2K budget is based on sound assumptions, there is no guarantee that additional expenses will not occur in the future. The Corporation has identified its other third party vendors and significant borrowers and, if they were deemed critical to the banking operations of Camco, a review of their Y2K readiness was conducted. The Corporation continues to monitor its vulnerability to third-party vendors (other than its new service bureau) and to significant borrowers, all of which are insignificant to consolidated operations. Camco is developing contingency plans in which it will seek alternative sources for critical services provided by third party vendors who it has deemed will not be Y2K compliant. In addition, business resumption is also being addressed and will be monitored throughout 1999 for possible enhancements. The final phase of the Corporation's Y2K plan involves the testing of the systems in place to ensure Y2K readiness. The Corporation's service bureau completed the testing of its systems during the fourth quarter of 1998. The tests were conducted in accordance with recommendations published by the Federal Financial Institutions Examination Council ("FFIEC"). The Corporation's testing of all types of transactions through the service bureau will be completed in the first quarter of 1999. The Corporation's plan also calls for the testing of non-information technology hardware and where necessary, either the repair or replacement of those systems if they are found to be non-Y2K compliant. Because of unknown external risks associated with this issue, the Corporation cannot quantify the consequences and uncertainty involved beyond those already identified, however, management believes such remaining external risks will not have a material adverse effect on the Corporation's financial condition or results of operations. 43 Effect of Recent Accounting Pronouncements In June 1996, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, referred to as the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not qualify as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loan participations, factoring arrangements, and transfers of receivables with recourse. An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitization of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1997, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management adopted SFAS No. 125 effective January 1, 1998, as required, without material effect on Camco's consolidated financial position or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management adopted SFAS No. 130 effective January 1, 1998, as required, without material impact on Camco's consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 significantly changes the way that public business enterprises report information about operating 44 segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 uses a "management approach" to disclose financial and descriptive information about the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. For many enterprises, the management approach will likely result in more segments being reported. In addition SFAS No. 131 requires significantly more information to be disclosed for each reportable segment than is presently being reported in annual financial statements and also requires that selected information be reported in interim financial statements. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Management adopted SFAS No. 131 effective January 1, 1998, as required, without material impact on Camco's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. The definition of a derivative financial instrument is complex, but in general, it is an instrument with one or more underlyings, such as an interest rate or foreign exchange rate, that is applied to a notional amount, such as an amount of currency, to determine the settlement amount(s). It generally requires no significant initial investment and can be settled net or by delivery of an asset that is readily convertible to cash. SFAS No. 133 applies to derivatives embedded in other contracts, unless the underlying of the embedded derivative is clearly and closely related to the host contract. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On adoption, entities are permitted to transfer held-to-maturity debt securities to the available-for-sale or trading category without calling into question their intent to hold other debt securities to maturity in the future. SFAS No. 133 is not expected to have a material impact on the Corporation's financial statements. Impact of Inflation and Changing Prices The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars, without considering changes in relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than does the effect of general levels of inflation. In the current interest rate environment, the liquidity, the maturity structure and the quality of Camco's assets and liabilities are critical to the maintenance of acceptable performance levels. 45 Item 7. Financial Statements and Supplementary Data Report of Independent Certified Public Accountants Board of Directors Camco Financial Corporation We have audited the accompanying consolidated statements of financial condition of Camco Financial Corporation as of December 31, 1998 and 1997, and the related consolidated statements of earnings, comprehensive income, stockholders' equity and cash flows for each of the years ended December 31, 1998, 1997 and 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Camco Financial Corporation as of December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. /s/GRANT THORNTON LLP Cincinnati, Ohio February 25, 1999 46
Camco Financial Corporation CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands, except share data) ASSETS 1998 1997 (Restated) Cash and due from banks $ 13,206 $ 12,436 Interest-bearing deposits in other financial institutions 22,609 10,473 ------- ------- Cash and cash equivalents 35,815 22,909 Investment securities available for sale - at market 1,307 3,572 Investment securities held to maturity - at cost, approximate market value of $10,998 and $17,536 as of December 31, 1998 and 1997 10,962 17,489 Mortgage-backed securities available for sale - at market 3,476 8,447 Mortgage-backed securities held to maturity - at cost, approximate market value of $5,102 and $8,311 as of December 31, 1998 and 1997 5,019 8,207 Loans held for sale - at lower of cost or market 10,119 4,135 Loans receivable - net 538,550 477,366 Office premises and equipment - net 10,598 8,420 Real estate acquired through foreclosure 217 737 Federal Home Loan Bank stock - at cost 8,250 5,492 Accrued interest receivable on loans 3,576 2,972 Accrued interest receivable on mortgage-backed securities 61 112 Accrued interest receivable on investment securities and interest-bearing deposits 229 349 Prepaid expenses and other assets 393 830 Cash surrender value of life insurance 5,161 5,482 Goodwill - net of accumulated amortization 3,402 3,552 Prepaid federal income taxes - 99 ------- ------- Total assets $637,135 $570,170 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $443,227 $422,368 Advances from the Federal Home Loan Bank 125,483 82,319 Advances by borrowers for taxes and insurance 2,478 4,478 Accounts payable and accrued liabilities 2,679 3,459 Dividends payable 589 491 Accrued federal income taxes 354 - Deferred federal income taxes 2,186 1,724 ------- ------- Total liabilities 576,996 514,839 Commitments - - Stockholders' equity Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - - Common stock - $1 par value; authorized, 8,900,000 shares, 5,480,331 and 3,639,997 shares issued at December 31, 1998 and 1997, respectively 5,480 3,640 Additional paid-in capital 27,053 26,915 Retained earnings - substantially restricted 27,628 24,645 Unrealized gains on securities designated as available for sale, net of related tax effects 96 131 Less 6,388 shares of treasury stock - at cost (118) - ------- ------- Total stockholders' equity 60,139 55,331 ------- ------- Total liabilities and stockholders' equity $637,135 $570,170 ======= =======
The accompanying notes are an integral part of these statements. 47
Camco Financial Corporation CONSOLIDATED STATEMENTS OF EARNINGS For the year ended December 31, (In thousands, except share data) 1998 1997 1996 (Restated) (Restated) Interest income Loans $40,478 $37,060 $29,106 Mortgage-backed securities 779 1,321 1,176 Investment securities 1,037 1,625 1,475 Interest-bearing deposits and other 1,989 1,211 1,055 ------ ------ ------ Total interest income 44,283 41,217 32,812 Interest expense Deposits 19,538 18,899 15,639 Borrowings 5,314 3,879 2,172 ------ ------ ------ Total interest expense 24,852 22,778 17,811 ------ ------ ------ Net interest income 19,431 18,439 15,001 Provision for losses on loans 250 385 141 ------ ------ ------ Net interest income after provision for losses on loans 19,181 18,054 14,860 Other income Late charges, rent and other 2,543 1,380 1,166 Loan servicing fees 348 339 749 Service charges and other fees on deposits 667 592 530 Gain on sale of loans 3,955 1,599 1,257 Gain on sale of investment and mortgage-backed securities 12 - - Gain (loss) on sale of real estate acquired through foreclosure 68 35 (2) Loss on sale of premises and equipment (41) - - ------ ------ ------ Total other income 7,552 3,945 3,700 General, administrative and other expense Employee compensation and benefits 7,298 6,609 5,630 Occupancy and equipment 2,038 1,681 1,431 Federal deposit insurance premiums 291 287 2,729 Data processing 1,499 645 523 Advertising 620 519 404 Franchise taxes 664 510 483 Amortization of goodwill 150 149 38 Other operating 3,759 3,333 2,524 ------ ------ ------ Total general, administrative and other expense 16,319 13,733 13,762 ------ ------ ------ Earnings before federal income taxes 10,414 8,266 4,798 Federal income taxes Current 2,930 2,863 1,914 Deferred 480 59 (326) ------ ------ ------ Total federal income taxes 3,410 2,922 1,588 ------ ------ ------ NET EARNINGS $ 7,004 $ 5,344 $ 3,210 ====== ====== ====== BASIC EARNINGS PER SHARE $1.28 $0.98 $0.75 ==== ==== ==== DILUTED EARNINGS PER SHARE $1.25 $0.96 $0.73 ==== ==== ====
The accompanying notes are an integral part of these statements. 48
Camco Financial Corporation CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, (In thousands) 1998 1997 1996 Net earnings $7,004 $5,344 $3,210 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities during the period, net of tax (27) 78 (115) Reclassification adjustment for realized gains included in earnings, net of tax of $4 for the year ended December 31, 1998 (8) - - ----- ----- ----- Comprehensive income $6,969 $5,422 $3,095 ===== ===== ===== Accumulated other comprehensive income $ 96 $ 131 $ 53 ===== ===== =====
The accompanying notes are an integral part of these statements. 49
Camco Financial Corporation CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996 (In thousands, except share data) Unrealized gains (losses) Shares on securities acquired Additional designated for stock Total Common paid-in Retained as available Treasury benefit stockholders' stock capital earnings for sale stock plans equity Balance at January 1, 1996, as restated for business combination (Note A) $2,354 $ 7,360 $24,429 $168 $(214) $ (68) $34,029 Stock options exercised 6 23 - - - - 29 Cash dividends declared - $0.4210 per share - - (1,253) - - - (1,253) Stock dividend (5%) including cash in lieu of fractional shares 118 2,004 (2,126) - - - (4) Issuance of shares in connection with acquisition 987 14,483 - - - - 15,470 Amortization of stock benefit plans - - - - - 25 25 Net earnings - - 3,210 - - - 3,210 Unrealized losses on securities designated as available for sale, net of related tax effects - - - (115) - - (115) ----- ------ ------ --- --- -- -------- Balance at December 31, 1996 3,465 23,870 24,260 53 (214) (43) 51,391 Stock options exercised - 1 - - - - 1 Cash dividends declared - $0.5014 per share - - (1,884) - - - (1,884) Stock dividend (5%) including cash in lieu of fractional shares 175 2,893 (3,075) - - - (7) Amortization of stock benefit plans - - - - - 43 43 Proceeds from reissuance of treasury stock - 151 - - 214 - 365 Net earnings - - 5,344 - - - 5,344 Unrealized gains on securities designated as available for sale, net of related tax effects - - - 78 - - 78 ----- ------ ------ ---- --- -- ------ Balance at December 31, 1997 3,640 26,915 24,645 131 - - 55,331 Stock options exercised 14 138 - - (42) - 110 Cash dividends declared - $0.40 per share - - (2,195) - - - (2,195) Three-for-two stock split including cash in lieu of fractional shares 1,826 - (1,826) - - - - Net earnings - - 7,004 - - - 7,004 Purchase of treasury shares - - - - (76) - (76) Unrealized losses on securities designated as available for sale, net of related tax effects - - - (35) - - (35) ----- ------ ------ ---- --- -- ------ Balance at December 31, 1998 $5,480 $27,053 $27,628 $ 96 $(118) $- $60,139 ===== ====== ====== ==== ==== == ======
The accompanying notes are an integral part of these statements. 50
Camco Financial Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, (In thousands) 1998 1997 1996 (Restated) (Restated) Cash flows from operating activities: Net earnings for the year $ 7,004 $ 5,344 $ 3,210 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of goodwill 150 149 38 Amortization of premiums and discounts on investment and mortgage-backed securities - net (25) 61 25 Depreciation and amortization 849 739 567 Amortization of purchase accounting adjustments (11) (39) (10) Provision for losses on loans 250 385 141 Amortization of deferred loan origination fees (769) (610) (441) (Gain) loss on sale of real estate acquired through foreclosure (68) (35) 2 Gain on sale of investments and mortgage-backed securities designated as available for sale (12) - - Amortization expense of stock benefit plans - 43 25 Loss on sale of office premises and equipment 41 - - Federal Home Loan Bank stock dividends (461) (351) (252) Gain on sale of loans (1,490) (619) (391) Loans originated for sale in the secondary market (211,883) (80,869) (61,100) Proceeds from sale of mortgage loans in the secondary market 207,389 78,284 62,078 Increase (decrease) in cash, net of acquisition of First Ashland Financial Corporation in 1996, due to changes in: Accrued interest receivable on loans (604) (349) (265) Accrued interest receivable on mortgage-backed securities 51 17 32 Accrued interest receivable on investments 120 150 (95) Prepaid expenses and other assets 437 (295) 262 Accrued interest and other liabilities (682) (981) 1,897 Federal income taxes Current 453 307 312 Deferred 480 59 (326) ------- ------- ------- Net cash provided by operating activities 1,219 1,390 5,709 Cash flows provided by (used in) investing activities: Proceeds from maturities of investment securities 20,994 22,322 14,288 Proceeds from sale of investment securities designated as available for sale 900 687 427 Proceeds from sale of mortgage-backed securities designated as available for sale 4,636 - - Purchase of investment securities designated as available for sale (150) (540) (33) Purchase of investment securities designated as held to maturity (12,932) (14,490) (9,996) Principal repayments on mortgage-backed securities 3,489 4,253 2,672 Loan disbursements (232,558) (176,294) (128,624) Purchases of loans (18,982) (12,514) - Principal repayments on loans 191,105 130,541 92,537 Purchase of office premises and equipment - net (3,098) (1,472) (1,130) Proceeds from sale of office premises and equipment 30 - - Proceeds from sale of real estate acquired through foreclosure 426 389 326 Purchase of Federal Home Loan Bank stock (2,297) (797) (200) Additions to real estate acquired through foreclosure (58) (15) (3) Net decrease in certificates of deposit in other financial institutions - 990 891 Purchase of life insurance (40) (370) (4,735) Net increase in cash surrender value of life insurance (238) (232) (145) Proceeds from redemption of life insurance 599 - - Purchase of First Ashland Financial Corporation stock - net - - 2,633 ------- ------- ------- Net cash used in investing activities (48,174) (47,542) (31,092) ------- ------- ------- Net cash used in operating and investing activities (balance carried forward) (46,955) (46,152) (25,383) ------- ------- -------
51
Camco Financial Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the year ended December 31, (In thousands) 1998 1997 1996 (Restated) (Restated) Net cash used in operating and investing activities (balance brought forward) $(46,955) $(46,152) $(25,383) Cash flows provided by (used in) financing activities: Net increase in deposits 20,859 24,202 2,334 Proceeds from Federal Home Loan Bank advances and other borrowings 104,089 62,330 110,115 Repayment of Federal Home Loan Bank advances and other borrowings (60,926) (38,366) (80,326) Dividends paid on common stock (2,195) (1,891) (1,257) Proceeds from exercise of stock options 110 1 29 Proceeds from reissuance of treasury stock - 365 - Purchase of treasury shares (76) - - Increase (decrease) in advances by borrowers for taxes and insurance (2,000) 1,443 (168) ------- ------- ------- Net cash provided by financing activities 59,861 48,084 30,727 ------- ------- ------- Net increase in cash and cash equivalents 12,906 1,932 5,344 Cash and cash equivalents at beginning of year 22,909 20,977 15,633 ------- ------- ------- Cash and cash equivalents at end of year $ 35,815 $ 22,909 $ 20,977 ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest on deposits and borrowings $ 24,746 $ 22,799 $ 17,500 ======= ======= ======= Income taxes $ 2,433 $ 2,452 $ 1,653 ======= ======= ======= Supplemental disclosure of noncash investing activities: Transfers from mortgage loans to real estate acquired through foreclosure $ 477 $ 978 $ 92 ======= ======= ======= Issuance of mortgage loans upon sale of real estate acquired through foreclosure $ 697 $ - $ 283 ======= ======= ======= Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (35) $ 78 $ (115) ======= ======= ======= Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 2,465 $ 980 $ 866 ======= ======= ======= Transfer of mortgage-backed securities from a held to maturity classification to available for sale $ 1,344 $ - $ - ======= ======= ======= Supplemental disclosure of noncash financing activities: Acquisition of treasury stock in exchange for exercise of stock options $ 42 $ - $ - ======= ======= ======= Liabilities assumed and cash paid in acquisition of First Ashland Financial Corporation $ - $ - $ 84,467 Less: fair value of assets received - - 80,728 ------- ------- ------- Amount assigned to goodwill $ - $ - $ 3,739 ======= ======= =======
The accompanying notes are an integral part of these statements. 52 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The business activities of Camco Financial Corporation (the "Corporation") have been limited primarily to holding the common shares of its wholly-owned subsidiaries: Cambridge Savings Bank ("Cambridge"), Marietta Savings Bank ("Marietta"), First Federal Savings Bank of Washington Court House ("First Federal"), First Federal Bank for Savings ("Ashland") (collectively hereinafter the "Banks") and East Ohio Land Title Agency, Inc., and two second tier subsidiaries, Camco Mortgage Corporation and WestMar Mortgage Company. Accordingly, the Corporation's results of operations are economically dependent upon the results of the Banks' operations. The Banks conduct a general banking business in eastern and central Ohio, northern West Virginia and northeastern Kentucky which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Banks' profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Banks can be significantly influenced by a number of competitive factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles ("GAAP") and general accounting practices within the financial services industry. In preparing financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. During 1997, the Board of Directors of Camco Financial Corporation ("Camco" or the "Corporation") approved a business combination whereby GF Bancorp, Inc., the parent company of Germantown Federal Savings Bank, would merge with and into the Corporation, and Germantown Federal Savings Bank would merge with and into First Federal. The merger was approved by regulatory authorities in 1997, and was completed in January 1998. The business combination was accounted for as a pooling of interests and, accordingly, the assets, liabilities and capital of the respective combining companies were added together at historic carrying value. The December 31, 1997 consolidated statement of financial condition and the consolidated statements of earnings, stockholders' equity and cash flows for the years ended December 31, 1997 and 1996 have been restated to give effect to the combination as of January 1, 1996. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. 53 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation and its wholly-owned and second tier subsidiaries. All significant intercompany balances and transactions have been eliminated. 2. Interest Rate Risk The earnings of the Corporation are primarily dependent upon net interest income, which is determined by 1) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (interest rate spread) and 2) the relative amounts of interest-earning assets and interest-bearing liabilities outstanding. The Corporation's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Corporation is vulnerable to an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. At December 31, 1998, 1997 and 1996, the Corporation had net interest-earning assets of $605.5 million, $540.7 million and $485.9 million, with weighted average effective yields of 7.63%, 8.04% and 7.96% and net interest-bearing liabilities of approximately $568.7 million, $504.7 million and $456.5 million, with weighted average effective interest rates of 4.69%, 4.99% and 4.89%. To minimize the effect of adverse changes in interest rates on its results of operations, the Corporation has implemented an asset and liability management plan that emphasizes increasing the interest rate sensitivity and shortening the maturities of its interest-earning assets and extending the maturities of its interest-bearing liabilities. Although the Corporation has undertaken a variety of strategies to minimize its exposure to interest rate risk, its primary emphasis has been on the origination and purchase of adjustable rate loans. 3. Investment Securities and Mortgage-Backed Securities The Corporation accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or stockholders' equity, respectively. Investment and mortgage-backed securities are classified as held-to-maturity or available for sale upon acquisition. At December 31, 1998 and 1997, the Corporation's stockholders' equity reflected net unrealized gains on securities designated as available for sale of $96,000 and $131,000, respectively. Realized gains and losses on sales of securities are recognized using the specific identification method. 54 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. Loans Receivable Loans held in portfolio are stated at the principal amount outstanding, adjusted for unamortized yield adjustments, including deferred loan origination fees and costs and capitalized mortgage servicing rights, and the allowance for loan losses. The yield adjustments are amortized and accreted to operations using the interest method over the average life of the underlying loans. Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. Loans held for sale are carried at the lower of cost (less principal payments received) or fair value (market value), calculated on an aggregate basis. At December 31, 1998 and 1997, such loans were carried at cost, which approximated fair value. The Corporation accounts for mortgage servicing rights in accordance with SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which requires that the Corporation recognize as separate assets, rights to service mortgage loans for others, regardless of how those servicing rights are acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 125 requires that securitization of mortgage loans be accounted for as sales of mortgage loans and acquisitions of mortgage-backed securities. Additionally, SFAS No. 125 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Banks', calculated in accordance with the provisions of SFAS No. 125, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income, and costs to service the loans. The present value of future earnings is the "economic" value for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing. 55 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. Loans Receivable (continued) The Corporation recorded amortization related to mortgage servicing rights totaling approximately $704,000, $497,000 and $99,000 for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the fair value of the Corporation's mortgage servicing rights totaled approximately $3.6 million and $1.9 million, respectively. At December 31, 1998 and 1997, the Banks were servicing mortgage loans of approximately $408.6 million and $300.1 million, respectively, that have been sold to the Federal Home Loan Mortgage Corporation and other investors. 5. Loan Origination and Commitment Fees The Corporation accounts for loan origination fees and costs in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions of SFAS No. 91, all loan origination fees received, net of certain direct origination costs, are deferred on a loan-by-loan basis and amortized to interest income using the interest method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments are deferred and amortized over the life of the related loan using the interest method. 6. Allowance for Loan Losses It is the Corporation's policy to provide valuation allowances for estimated losses on loans based upon past loss experience, current trends in the level of delinquent and problem loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the primary market area. When the collection of a loan becomes doubtful, or otherwise troubled, the Corporation records a charge-off equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Such provision is based on management's estimate of the fair value of the underlying collateral, taking into consideration the current and currently anticipated future operating or sales conditions. As a result, such estimates are particularly susceptible to changes that could result in a material adjustment to results of operations in the near term. Recovery of the carrying value of such loans is dependent to a great extent on economic, operating, and other conditions that may be beyond the Corporation's control. 56 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 6. Allowance for Loan Losses (continued) The Corporation accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Corporation considers its investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Corporation's investment in multi-family and nonresidential loans, and its evaluation of any impairment thereon, such loans are generally collateral dependent and as a result are carried as a practical expedient at the lower of cost or fair value. It is the Corporation's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. At December 31, 1998 and 1997, the Corporation had no loans that would be defined as impaired under SFAS No. 114. 7. Real Estate Acquired Through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. Real estate loss provisions are recorded if the properties' fair value subsequently declines below the amount determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. 57 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 8. Office Premises and Equipment Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be ten to fifty years for buildings and improvements and three to twenty-five years for furniture, fixtures, and equipment. An accelerated depreciation method is used for tax reporting purposes. 9. Goodwill Goodwill resulting from the acquisition of Ashland totaled approximately $3.7 million, and is being amortized over a twenty-five year period using the straight-line method. Management periodically evaluates the carrying value of intangible assets in relation to the continuing earnings capacity of the acquired assets and assumed liabilities. 10. Federal Income Taxes The Corporation accounts for federal income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. Deferral of income taxes results primarily from different methods of accounting for deferred loan origination fees, Federal Home Loan Bank stock dividends, the general loan loss allowance, percentage of earnings bad debt deductions and certain components of retirement expense. A temporary difference is also recognized for depreciation expense computed using accelerated methods for federal income tax purposes. 58 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 11. Earnings Per Share and Dividends Per Share Basic earnings per share is calculated based on 5,478,017, 5,462,972 and 4,278,350 weighted average number of common shares outstanding for the years ended December 31, 1998, 1997 and 1996, respectively. Weighted-average common shares outstanding for the years ended December 31, 1997 and 1996 have been adjusted to reflect the effects of the GF Bancorp merger, the three-for-two stock split during 1998, and a 5% stock dividend effected during 1997. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share totaled 5,621,974, 5,582,523 and 4,372,471 for the years ended December 31, 1998, 1997 and 1996, respectively. There were 143,957, 119,551 and 94,121 incremental shares related to the assumed exercise of stock options included in the computation of diluted earnings per share for the years ended December 31, 1998, 1997 and 1996, respectively. Dividends per share for the years ended December 31, 1998, 1997 and 1996, have also been adjusted to reflect the effects of the GF Bancorp merger, the three-for-two stock split and the 5% stock dividend. 12. Comprehensive Income The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of January 1, 1998. The Statement establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. Financial statements for earlier periods have been restated for comparative purposes. Accumulated comprehensive income consists solely of the change in unrealized gains/losses on securities designated as available for sale in accordance with SFAS No. 115. 59 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and Cash Equivalents: The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is deemed to approximate fair value. Investment Securities and Mortgage-backed Securities: Fair values for investment securities and mortgage-backed securities are based on quoted market prices and dealer quotes. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential real estate, multi-family residential real estate, installment and other. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair values of deposits with no stated maturity, such as money market demand deposits, savings and NOW accounts, are deemed equal to the amount payable on demand as of December 31, 1998 and 1997. The fair value of fixed-rate certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. 60 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments (continued) Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices. Advances by Borrowers for Taxes and Insurance: The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value. Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At December 31, 1998 and 1997, the difference between the fair value and notional amount of loan commitments was not material. Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments are as follows:
December 31, 1998 1997 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents $ 35,815 $ 35,815 $ 22,909 $ 22,909 Investment securities 12,269 12,305 21,061 21,108 Mortgage-backed securities 8,495 8,578 16,654 16,758 Loans receivable 548,669 555,608 481,501 487,903 Federal Home Loan Bank stock 8,250 8,250 5,492 5,492 ------- ------- ------- ------- $613,498 $620,556 $547,617 $554,170 ======= ======= ======= ======= Financial liabilities Deposits $443,227 $443,092 $422,368 $426,845 Advances from the Federal Home Loan Bank 125,483 123,618 82,319 82,652 Advances by borrowers for taxes and insurance 2,478 2,478 4,478 4,478 ------- ------- ------- ------- $571,188 $569,188 $509,165 $513,975 ======= ======= ======= =======
14. Cash and Cash Equivalents Cash and cash equivalents consist of cash and due from banks and interest-bearing deposits in other financial institutions with original maturities of three months or less. 61 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 15. Advertising Advertising costs are expensed when incurred. 16. Reclassifications Certain prior year amounts have been reclassified to conform to the 1998 consolidated financial statement presentation. NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of investment securities at December 31, 1998 and 1997 are as follows:
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Held to maturity: U.S. Government agency obligations $10,782 $ 28 $ 5 $10,805 Municipal bonds 180 13 - 193 ------ --- --- ------ Total investment securities held to maturity 10,962 41 5 10,998 Available for sale: U.S. Government agency obligations 1,003 1 - 1,004 Corporate equity securities 229 74 - 303 ------ --- --- ------ Total investments available for sale 1,232 75 - 1,307 ------ --- --- ------ Total investment securities $12,194 $116 $ 5 $12,305 ====== === === ======
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Held to maturity: U.S. Government agency obligations $17,075 $ 52 $ 32 $17,095 Municipal bonds 414 27 - 441 ------ --- --- ------ Total investment securities held to maturity 17,489 79 32 17,536 Available for sale: U.S. Government agency obligations 2,511 8 - 2,519 Corporate equity securities 92 66 - 158 Asset management funds 900 - 5 895 ------ --- --- ------ Total investments available for sale 3,503 74 5 3,572 ------ --- --- ------ Total investment securities $20,992 $153 $ 37 $21,108 ====== === === ======
62 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of mortgage-backed securities at December 31, 1998 and 1997, are as follows:
1998 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Held to maturity: FNMA $2,831 $ 54 $ 5 $2,880 FHLMC 2,034 36 21 2,049 CMOs 17 1 - 18 GNMA 116 13 - 129 Other 21 5 - 26 ------- ----- -- ------- Total mortgage-backed securities held to maturity 5,019 109 26 5,102 Available for sale: FHLMC 3,281 76 3 3,354 FNMA 124 - 2 122 ------ -- ----- ------ Total mortgage-backed securities available for sale 3,405 76 5 3,476 ----- ---- ----- ----- Total mortgage-backed securities $8,424 $185 $ 31 $8,578 ===== === ==== =====
1997 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Held to maturity: FNMA $ 4,335 $ 76 $ 17 $ 4,394 FHLMC 3,645 29 17 3,657 CMOs 24 1 - 25 GNMA 173 26 - 199 Other 30 6 - 36 --------- ----- -- --------- Total mortgage-backed securities held to maturity 8,207 138 34 8,311 Available for sale: FHLMC 8,317 167 37 8,447 ------- --- ---- ------- Total mortgage-backed securities $16,524 $305 $ 71 $16,758 ====== === ==== ======
63 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost and estimated fair value of investment and mortgage-backed securities at December 31, 1998 and 1997 (including securities designated as available for sale) by contractual term to maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
1998 1997 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in one year or less $ 2,495 $ 2,506 $ 6,500 $ 6,488 Due after one year through five years 9,470 9,496 11,831 11,870 Due after five years through ten years - - 1,669 1,697 ------- ------- ------- ------- Total investment securities 11,965 12,002 20,000 20,055 Corporate equity securities 229 303 92 158 Mortgage-backed securities - not due at a single maturity date 8,424 8,578 16,524 16,758 Asset management fund - - 900 895 ------- ------- -------- -------- Total $20,618 $20,883 $37,516 $37,866 ====== ====== ====== ======
During 1998, 1997 and 1996, the Corporation sold securities designated as available for sale with a carrying value of $5.5 million, $687,000 and $427,000, respectively. 64 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE C - LOANS RECEIVABLE Loans receivable at December 31 consist of the following:
1998 1997 (In thousands) Conventional real estate loans: Existing residential properties $474,988 $427,511 Nonresidential real estate 15,019 11,294 Construction 37,169 14,505 Developed building lots 3,895 1,870 Education loans 2,096 2,224 Consumer and other loans 29,835 32,430 -------- -------- Total 563,002 489,834 Less: Undisbursed portion of loans in process 22,262 10,059 Unamortized yield adjustments 407 813 Allowance for loan losses 1,783 1,596 --------- --------- Loans receivable - net $538,550 $477,366 ======= =======
As depicted above, the Corporation's lending efforts have historically focused on loans secured by existing residential properties, which comprise approximately $475.0 million, or 88.2%, of the total loan portfolio at December 31, 1998 and approximately $427.5 million, or 89.6%, of the total loan portfolio at December 31, 1997. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Corporation with adequate collateral coverage in the event of default. Nevertheless, the Corporation, as with any lending institution, is subject to the risk that residential real estate values could deteriorate in its primary lending areas of central and eastern Ohio, northern West Virginia, and northeastern Kentucky, thereby impairing collateral values. However, management is of the belief that residential real estate values in the Corporation's primary lending areas are presently stable. The Banks, in the ordinary course of business, have granted loans to certain of their directors, executive officers, and their associates. Such loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans (excluding loans to any such individual which in the aggregate did not exceed $60,000) was less than 5% of stockholders' equity at December 31, 1998 and 1997. 65 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE D - ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows for the years ended December 31:
1998 1997 1996 (In thousands) Balance at beginning of year $1,596 $1,373 $1,128 Provision for losses 250 385 141 Allowance resulting from acquisition - - 109 Charge-offs, net of immaterial recoveries (63) (162) (5) ------- ------ -------- Balance at end of year $1,783 $1,596 $1,373 ===== ===== =====
Nonaccrual and nonperforming loans totaled approximately $4.3 million, $1.9 million and $2.6 million at December 31, 1998, 1997 and 1996, respectively. Interest income that would have been recognized had such nonaccrual loans performed pursuant to contractual terms totaled approximately $167,000, $57,000 and $103,000 for the years ended December 31, 1998, 1997 and 1996, respectively. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at December 31 is summarized as follows:
1998 1997 (In thousands) Land $ 1,593 $ 1,443 Buildings and improvements 7,563 7,507 Furniture, fixtures and equipment 6,967 5,030 ------- ------- 16,123 13,980 Less accumulated depreciation and amortization 5,525 5,560 ------- ------- $10,598 $ 8,420 ====== =======
66 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE F - DEPOSITS Deposit balances by type and weighted-average interest rate at December 31, 1998 and 1997, are summarized as follows:
1998 1997 Amount Rate Amount Rate (Dollars in thousands) NOW accounts $ 70,944 1.70% $ 56,316 1.82% Money market demand accounts 24,402 3.96 23,720 3.71 Passbook and statement savings accounts 74,405 3.10 68,536 2.98 -------- ---- -------- ---- Total withdrawable accounts 169,751 2.64 148,572 2.65 Certificates of deposit: Seven days to one year 88,134 5.36 40,660 5.30 One to two years 58,940 5.51 90,902 5.91 Two to eight years 62,429 5.90 89,287 6.12 Negotiated rate certificates 27,338 5.66 23,566 5.87 Individual retirement accounts 36,635 5.69 29,381 5.78 -------- ---- -------- ---- Total certificate accounts 273,476 5.59 273,796 5.88 ------- ---- ------- ---- Total deposits $443,227 4.46% $422,368 4.74% ======= ==== ======= ====
At December 31, 1998 and 1997, the Corporation had certificate of deposit accounts with balances in excess of $100,000 totaling $45.3 million and $40.9 million, respectively. Interest expense on deposits is summarized as follows for the years ended December 31:
1998 1997 1996 (In thousands) Certificate of deposit accounts $15,256 $14,819 $12,318 NOW accounts and money market demand accounts 2,023 2,004 1,681 Passbook and statement savings accounts 2,259 2,076 1,640 ------- ------- ------- $19,538 $18,899 $15,639 ====== ====== ======
The contractual maturities of outstanding certificates of deposit are summarized as follows at December 31:
1998 1997 Year ending December 31: (In thousands) 1998 $ - $164,180 1999 181,985 75,242 2000 56,958 22,665 2001 22,366 4,706 2002 5,291 7,003 After 2002 6,876 - --------- --------- Total certificate of deposit accounts $273,476 $273,796 ======= =======
67 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE F - DEPOSITS (continued) At December 31, 1998 and 1997, public savings deposits were collateralized by investment securities and interest-bearing deposits in other banks totaling $14.5 million and $16.9 million, respectively. NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at December 31, 1998 and 1997, by pledges of certain residential mortgage loans totaling $192.5 million and $123.5 million, respectively, as well as the Federal Home Loan Bank stock of the respective Bank subsidiaries, are summarized as follows:
Maturing year Interest Rate ending December 31, 1998 1997 (In thousands) 5.65% - 6.90% 1998 $ - $51,750 5.00% - 6.25% 1999 38,162 12,830 5.80% - 6.10% 2000 1,000 6,000 6.17%2001 714 1,000 4.23% - 6.71% Thereafter 85,607 10,739 -------- ------ $125,483 $82,319 ======= ====== Weighted average rate 5.41% 6.25% ==== ====
NOTE H - FEDERAL INCOME TAXES A reconciliation of the effective tax rate for the years ended December 31, 1998, 1997 and 1996, respectively, and the federal statutory rate in each of these years, computed by applying the statutory federal corporate tax rate to income before taxes, is summarized as follows at December 31:
1998 1997 1996 (In thousands) Federal income taxes computed at the expected statutory rate $3,545 $2,810 $1,631 Increase (decrease) in taxes resulting from: Amortization of goodwill 51 51 13 Nontaxable interest income (87) (89) (35) Nontaxable life insurance proceeds (100) - - Nondeductible merger related expenses 58 124 - Other (57) 26 (21) ------- ------- ------- Tax provision per consolidated financial statements $3,410 $2,922 $1,588 ===== ===== =====
68 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE H - FEDERAL INCOME TAXES (continued) The components of the Corporation's net deferred tax liability at December 31 is as follows:
Taxes (payable) refundable on temporary differences at statutory rate: 1998 1997 (In thousands) Deferred tax liabilities: Deferred loan origination costs $ (81) $ - FHLB stock dividends (786) (701) Percentage of earnings bad debt deduction (635) (662) Book versus tax depreciation (154) (244) Retirement expense - (43) Mortgage servicing rights (1,221) (647) Unrealized gain on securities designated as available for sale (50) (68) Other liabilities (30) (43) -------- -------- Total deferred tax liabilities (2,957) (2,408) Deferred tax assets: General loan loss allowance 607 549 Deferred loan origination fees - 6 Other assets 164 129 ------- ------- Total deferred tax assets 771 684 ------- ------- Net deferred tax liability $(2,186) $(1,724) ====== ======
The Banks were allowed a special bad debt deduction generally limited to 8% of otherwise taxable income, subject to certain limitations based on aggregate loans and savings account balances at the end of the year. If the amounts that qualify as deductions for federal income taxes are later used for purposes other than for bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The percentage of earnings bad debt deduction had accumulated to approximately $8.4 million as of December 31, 1998. The amount of the unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $2.2 million at December 31, 1998. See Note O for additional information regarding future percentage of earnings bad debt deductions. NOTE I - COMMITMENTS The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Banks' involvement in such financial instruments. 69 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE I - COMMITMENTS (continued) The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At December 31, 1998 and 1997, the Banks had outstanding commitments to originate or purchase fixed rate loans of approximately $9.2 million and $2.7 million, respectively, and adjustable rate loans of approximately $9.2 million and $3.1 million, respectively. Additionally, the Banks had unused lines of credit under home equity and other loans of $17.6 million at December 31, 1998. Management believes that all loan commitments are able to be funded through cash flow from operations and existing excess liquidity. Fees received in connection with these commitments have not been recognized in earnings. At December 31, 1998, the Corporation had commitments to sell loans to FHLMC totaling $150.0 million which expire in December 1999. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans granted generally include a mortgage interest in real estate as security. NOTE J - REGULATORY CAPITAL Cambridge and Marietta are subject to the regulatory capital requirements of the Federal Deposit Insurance Corporation (the "FDIC"). First Federal and Ashland are subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on each of the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. During the calendar year, each of the Banks were notified from their respective regulators that the Banks were categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized" the Banks' must maintain minimum capital ratios as set forth in the tables that follow. 71 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE J - REGULATORY CAPITAL (continued) The FDIC has adopted risk-based capital ratio guidelines to which Cambridge and Marietta are subject. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to four risk-weighting categories, with higher levels of capital being required for the categories perceived as representing greater risk. These guidelines divide the capital into two tiers. The first tier ("Tier 1") includes common equity, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and purchased credit card relationships, subject to certain limitations). Supplementary ("Tier II") capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions. Savings banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may, however, set higher capital requirements when particular circumstances warrant. Savings banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels. In addition, the FDIC established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for savings banks that meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or anticipating significant growth. All other savings banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. As of December 31, 1998 and 1997, management believes that Cambridge and Marietta met all capital adequacy requirements to which the Banks are subject.
Cambridge As of December 31, 1998 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $18,001 13.7% =>$10,509 =>8.0% =>$13,136 =>10.0% Tier I capital (to risk-weighted assets) $17,451 13.3% =>$ 5,254 =>4.0% =>$ 7,881 => 6.0% Tier I leverage $17,451 7.3% =>$ 9,535 =>4.0% =>$11,919 => 5.0%
72 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE J - REGULATORY CAPITAL (continued)
As of December 31, 1997 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $15,032 13.4% =>$8,986 =>8.0% =>$11,233 =>10.0% Tier I capital (to risk-weighted assets) $14,582 13.0% =>$4,493 =>4.0% =>$ 6,740 => 6.0% Tier I leverage $14,582 6.9% =>$8,437 =>4.0% =>$10,547 => 5.0%
Marietta As of December 31, 1998 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $12,142 13.3% =>$7,306 =>8.0% =>$9,132 =>10.0% Tier I capital (to risk-weighted assets) $11,637 12.7% =>$3,653 =>4.0% =>$5,479 => 6.0% Tier I leverage $11,637 8.1% =>$5,733 =>4.0% =>$7,167 => 5.0%
As of December 31, 1997 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $10,091 13.0% =>$6,224 =>8.0% =>$7,780 =>10.0% Tier I capital (to risk-weighted assets) $ 9,650 12.4% =>$3,112 =>4.0% =>$4,668 => 6.0% Tier I leverage $ 9,650 7.9% =>$4,897 =>4.0% =>$6,122 => 5.0%
73 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE J - REGULATORY CAPITAL (continued) The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4.0% - 5.0% of adjusted total assets for substantially all savings associations. Management anticipates no material change to the Banks' excess regulatory capital position as a result of this proposed change in the regulatory capital requirement. The risk-based capital requirement currently provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Banks' multiply the value of each asset on their respective statement of financial condition by a defined risk-weighting factor, e.g., one- to four-family residential loans carry a risk-weighted factor of 50%. As of December 31, 1998 and 1997, management believes that First Federal and Ashland met all capital adequacy requirements to which the Banks are subject.
First Federal As of December 31, 1998 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $12,004 9.2% =>$1,955 =>1.5% =>$6,516 => 5.0% Core capital $12,004 9.2% =>$3,909 =>3.0% =>$7,819 => 6.0% Risk-based capital $12,554 18.1% =>$5,555 =>8.0% =>$6,944 =>10.0%
As of December 31, 1997 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $12,211 9.1% =>$2,003 =>1.5% =>$6,677 => 5.0% Core capital $12,211 9.1% =>$3,737 =>3.0% =>$8,012 => 6.0% Risk-based capital $12,760 17.9% =>$5,700 =>8.0% =>$7,125 =>10.0%
74 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE J - REGULATORY CAPITAL REQUIREMENTS (continued)
Ashland As of December 31, 1998 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $12,221 10.2% =>$1,796 =>1.5% =>$5,987 => 5.0% Core capital $12,221 10.2% =>$3,592 =>3.0% =>$7,184 => 6.0% Risk-based capital $12,407 18.4% =>$5,390 =>8.0% =>$6,737 =>10.0%
As of December 31, 1997 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $13,248 13.4% =>$1,483 =>1.5% =>$4,944 => 5.0% Core capital $13,248 13.4% =>$2,966 =>3.0% =>$5,932 => 6.0% Risk-based capital $13,382 24.4% =>$4,389 =>8.0% =>$5,486 =>10.0%
The Corporation's management believes that, under the current regulatory capital regulations, the Banks will continue to meet their minimum capital requirements in the foreseeable future. However, events beyond the control of the Corporation, such as increased interest rates or a downturn in the economy in the subsidiaries' market areas, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. Regulations of the OTS impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations, a savings association that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 days prior 75 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE J - REGULATORY CAPITAL REQUIREMENTS (continued) notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of (i) up to 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital to assets ratio exceeded its fully phased-in capital to assets ratio at the beginning of the year (ii) or 75% of its net earnings for the most recent four quarters. Pursuant to such OTS dividend regulations, Ashland and First Federal had the ability to pay dividends of approximately $6.2 million to Camco Financial Corporation at December 31, 1998. NOTE K - BENEFIT PLANS The Corporation had a non-contributory defined benefit pension plan (the "Plan") covering all eligible employees. The Corporation terminated the Plan during 1997 upon receipt of appropriate regulatory approvals. The Plan's benefit formula was the projected unit credit formula which encompassed future salary levels and participants' years of service. Net pension costs includes the following components for the year ended December 31, 1996: (In thousands) Service cost - benefits earned during year $232 Interest cost on projected benefit obligation 180 Gain on plan assets (69) Net amortization, deferral and other (40) ---- Net pension cost $303 Assumptions for the plan valuations for the year ended December 31, 1996 include: Weighted average discount rate 7.71% Annual rate of increase in compensation levels N/A Expected long-term rate of return on assets 8.00% Coincident with the termination of the plan, the Corporation undertook a retirement plan which provides benefits to certain key officers. The Corporation's obligations under the plan have been provided for via the purchase of single premium key man life insurance of which the Corporation is the beneficiary. The Corporation recorded expense related to the plan totaling approximately $42,000 and $66,000 during the years ended December 31, 1998 and 1997, respectively. The Corporation also has a 401(k) Salary Savings Plan covering substantially all employees. Total expense under this plan was $783,000, $140,000 and $93,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 76 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE L - STOCK OPTION PLANS Stockholders of the Corporation have approved three stock option plans. Under the 1972 Plan, 242,124 common shares were reserved for issuance to officers, directors, and key employees of the Corporation and its subsidiaries. The 1982 Plan reserved 110,309 common shares for issuance to employees of the Corporation and its subsidiaries. At December 31, 1997, all of the stock options under the 1972 and 1982 Plans had been granted and were subject to exercise at the discretion of the grantees through 2002. Under the 1995 Plan, 153,798 shares were reserved for issuance. At December 31, 1998, no options under the 1995 Plan have been exercised. The foregoing number of shares under option have been adjusted to reflect the three-for-two stock split effected during 1998 and the 5% stock dividend effected during 1997. Additionally, in connection with the acquisition of First Ashland Financial Corporation ("First Ashland"), the stock options of First Ashland were converted into options to purchase 166,115 shares of the Corporation's stock at an exercise price of $7.75 per share which expire in 2005. In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair-value based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Corporation utilizes APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 (In thousands, except share data) Net earnings As reported $7,004 $5,344 $3,210 ===== ===== ===== Pro-forma $6,853 $5,344 $3,210 ===== ===== ===== Earnings per share Basic As reported $1.28 $0.98 $0.75 ==== ==== ==== Pro-forma $1.25 $0.98 $0.75 ==== ==== ==== Diluted As reported $1.25 $0.96 $0.73 ==== ==== ==== Pro-forma $1.22 $0.96 $0.73 ==== ==== ====
77 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE L - STOCK OPTION PLANS (continued) The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following weighted-average assumptions used for grants: dividend yield of 2.04%, expected volatility of 10.0%, a risk-free interest rate of 5.5% and expected lives of seven years. A summary of the status of the Corporation's stock option plan as of December 31, 1998, 1997 and 1996, and changes during the periods ending on those dates is presented below:
1998 1997 1996 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 364,935 $ 8.54 405,862 $8.56 188,028 $9.23 Granted 62,300 15.58 - - - - First Ashland options - - - - 226,608 7.75 Exercised 21,975 8.13 40,927 7.64 8,774 3.28 Forfeited 53,335 8.80 - - - - -------- ------ --------- ---- --------- ---- Outstanding at end of year 351,925 $ 9.91 364,935 $8.54 405,862 $8.56 ======= ====== ======= ==== ======= ==== Options exercisable at year-end 351,925 $ 9.91 364,935 $8.54 405,862 $8.56 ======= ====== ======= ==== ======= ==== Weighted-average fair value of options granted during the year $3.85 N/A N/A ==== === ===
The following information applies to options outstanding at December 31, 1998: Number outstanding 351,925 Range of exercise prices $7.77 - $17.42 Weighted-average exercise price $9.91 Weighted-average remaining contractual life 7.3 years 78 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION The following condensed financial statements summarize the financial position of the Corporation as of December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the years ended December 31, 1998, 1997 and 1996: Camco Financial Corporation
STATEMENTS OF FINANCIAL CONDITION December 31, (In thousands) 1998 1997 (Restated) ASSETS Cash in subsidiary Banks $ 785 $ 1,343 Interest-bearing deposits in other financial institutions 968 83 Investment securities designated as available for sale 288 141 Investment in Bank subsidiaries utilizing the equity method 57,121 53,434 Investment in title agency subsidiary 683 352 Cash surrender value of life insurance 786 749 Prepaid expenses and other assets 286 217 Prepaid federal income taxes 231 3 -------- ---------- Total assets $61,148 $56,322 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and other accrued liabilities $ 163 $ 480 Dividends payable 589 491 Deferred federal income taxes 257 20 -------- --------- Total liabilities 1,009 991 Stockholders' equity Common stock 5,480 3,640 Additional paid-in capital 27,053 26,915 Retained earnings - substantially restricted 27,628 24,645 Unrealized gains on securities designated as available for sale, net of related tax effects 96 131 Treasury stock (118) - -------- ------- Total stockholders' equity 60,139 55,331 ------ ------ Total liabilities and stockholders' equity $61,148 $56,322 ====== ======
79 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION (continued)
Camco Financial Corporation STATEMENTS OF EARNINGS Year ended December 31, (In thousands) 1998 1997 1996 (Restated) (Restated) Income: Dividends from Bank subsidiaries $3,700 $2,118 $2,264 Dividends from title agency subsidiary - 100 - Interest and other income 305 144 94 Equity in undistributed net earnings of the Bank subsidiaries 3,641 4,059 1,333 Equity in undistributed net earnings of title agency subsidiary 331 13 107 ------ ------- ------ Total income 7,977 6,434 3,798 General, administrative and other expense 1,300 1,364 940 ----- ----- ------ Earnings before federal income tax credits 6,677 5,070 2,858 Federal income tax credits (327) (274) (352) ------ ------ ------ Net earnings $7,004 $5,344 $3,210 ===== ===== =====
80 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE M - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION (continued)
Camco Financial Corporation STATEMENTS OF CASH FLOWS Year ended December 31, (In thousands) 1998 1997 1996 (Restated) (Restated) Cash flows from operating activities: Net earnings for the year $7,004 $5,344 $3,210 Adjustments to reconcile net earnings to net cash flows provided by (used in) operating activities: Undistributed net earnings of Bank subsidiaries (3,641) (4,059) (1,333) Undistributed net earnings of title agency subsidiary (331) (13) (107) Decrease (increase) in other assets (69) (209) 40 Increase (decrease) in accounts payable and other liabilities (219) (769) 1,362 Increase (decrease) in current federal income taxes 228 119 (194) Other - net (297) (48) (272) ------ ------- ------ Net cash provided by operating activities 2,675 365 2,706 Cash flows used in investing activities: Purchase of investment securities (150) - (20) Purchase of cash surrender value of life insurance - (85) (614) Net increase in cash surrender value of life insurance (37) (33) (17) (Increase) decrease in interest-bearing deposits in other financial institutions (885) 1,147 (1,230) ------ ----- ----- Net cash provided by (used in) investing activities (1,072) 1,029 (1,881) Cash flows provided by (used in) financing activities: Proceeds from other borrowing - - 5,465 Repayment of other borrowing - - (5,465) Common stock options exercised 110 1 29 Dividends paid (2,195) (1,891) (1,257) Purchase of treasury shares (76) - - Proceeds from reissuance of treasury shares - 365 - ----- ------ ----- Net cash used in financing activities (2,161) (1,525) (1,228) ----- ----- ----- Net decrease in cash and cash equivalents (558) (131) (403) Cash and cash equivalents at beginning of year 1,343 1,474 1,877 ----- ----- ----- Cash and cash equivalents at end of year $ 785 $1,343 $1,474 ====== ===== =====
81 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE N - BUSINESS COMBINATIONS On October 4, 1996, the Corporation acquired First Ashland utilizing the purchase method of accounting. First Ashland was dissolved upon consummation, with First Ashland's banking subsidiary, Ashland, continuing operations as a wholly owned subsidiary of the Corporation. The results of Ashland's operations subsequent to October 4, 1996 are included in the consolidated financial statements. The Corporation paid $13.2 million in cash and issued 987,247 of its common shares in connection with the acquisition, with the $3.7 million excess of the fair value of liabilities assumed over assets received, assigned to goodwill. Presented below are pro-forma condensed consolidated statements of earnings and earnings per share which have been prepared as if the acquisition had been consummated as of the beginning of the year ended December 31, 1996.
1996 (In thousands, except share data) (Unaudited) Total interest income $33,956 Total interest expense 18,504 Net interest income 15,452 Provision for losses on loans 161 Other income 3,749 General, administrative and other expense 14,435 ------ Earnings before income taxes 4,605 Federal income taxes 1,617 Net earnings $ 2,988 ======= Earnings per share $.56 ===
During 1997, the Corporation's Board of Directors approved a business combination whereby GF Bancorp, Inc., the parent company of Germantown Federal Savings Bank, would merge with and into the Corporation, and Germantown Federal Savings Bank would merge with and into First Federal. The merger was approved by regulatory authorities in 1997, and was completed in January 1998. The Corporation issued split-adjusted shares in the merger. The business combination was accounted for as a pooling of interests and, accordingly, the assets, liabilities and capital of the respective combining companies were added together at historic carrying value. As stated previously, the Corporation's consolidated financial statements have been restated to reflect this combination as of January 1, 1996. 82 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE O - LEGISLATIVE MATTERS The deposit accounts of the Banks and of other savings associations are insured by the FDIC through the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund were used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in May 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks by approximately $.19 per $100 in deposits in 1995. Legislation was enacted to recapitalize the SAIF that provided for a special assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. In connection with this legislation, the Banks paid an assessment of approximately $2.1 million, or $1.4 million after tax, which was charged to operations in 1996. A component of the recapitalization plan provided for the merger of the SAIF and BIF on January 1, 2000. However, the SAIF recapitalization legislation currently provides for an elimination of the thrift charter or of the separate federal regulation of thrifts prior to the merger of the deposit insurance funds. As a result, First Federal and Ashland would be regulated as banks under federal laws which would subject these subsidiaries to the more restrictive activity limits imposed on national banks. Under separate legislation related to the recapitalization plan, the Banks are required to recapture as taxable income approximately $1.9 million of their bad debt reserve, which represents the post-1987 additions to the reserve, and will be unable to utilize the percentage of earnings method to compute the reserve in the future. The Banks have provided deferred taxes for this amount and are amortizing the recapture of the bad debt reserve in taxable income over a six year period commencing in 1998. 83 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the years ended December 31, 1998 and 1997.
Three Months Ended March 31, June 30, September 30, December 31, 1998: (In thousands, except per share data) Total interest income $10,803 $10,944 $11,192 $11,344 Total interest expense 5,840 6,057 6,495 6,460 ------- ------- ------- ------- Net interest income 4,963 4,887 4,697 4,884 Provision for losses on loans 96 41 49 64 Other income 2,312 1,637 1,689 1,915 General, administrative and other expense 4,137 3,911 3,957 4,315 ------- ------- ------- ------- Earnings before income taxes 3,042 2,572 2,380 2,420 Federal income taxes 1,033 820 769 788 ------- -------- -------- -------- Net earnings $ 2,009 $ 1,752 $ 1,611 $ 1,632 ======= ======= ======= ======= Earnings per share: Basic $.36 $.32 $.29 $.31 === === === === Diluted $.35 $.31 $.28 $.31 === === === ===
Three Months Ended March 31, June 30, September 30, December 31, 1997: (Restated) (In thousands, except per share data) Total interest income $9,741 $10,098 $10,502 $10,876 Total interest expense 5,383 5,536 5,845 6,014 ----- ------- ------- ------- Net interest income 4,358 4,562 4,657 4,862 Provision for losses on loans 51 60 58 216 Other income 738 1,037 1,196 974 General, administrative and other expense 3,113 3,209 3,165 4,246 ----- ------- ------- ------- Earnings before income taxes 1,932 2,330 2,630 1,374 Federal income taxes 637 783 870 632 ------ -------- -------- -------- Net earnings $1,295 $ 1,547 $ 1,760 $ 742 ===== ======= ======= ======== Earnings per share: Basic $.23 $.28 $.32 $.15 === === === === Diluted $.23 $.27 $.31 $.15 === === === ===
84 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of The Exchange Act. The information contained under the captions "Board of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed by Camco no later than 120 days after the end of the fiscal year (the "Proxy Statement") is incorporated herein by reference. Item 10. Executive Compensation. The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information contained in the Proxy Statement under the caption "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. Item 12. Certain Relationships and Related Transactions. The information contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. PART IV Item 13. Exhibits and Reports on Form 8-K (a) Exhibits (3)(i) Certificate of Incorporation (3)(ii) Bylaws (10)(ii)-1 Employment Agreement between Camco and Larry A. Caldwell (10)(ii)-2 Employment Agreement between Camco and Anthony J. Popp (10)(ii)-3 Employment Agreement between Marietta Savings and Anthony J. Popp (21) Subsidiaries of Camco (23.1) Consent of Grant Thornton LLP regarding Camco's Consolidated Financial Statements and Form S-8 (23.2) Consent of Grant Thornton LLP regarding Camco's 401(k) Salary Savings Plan Financial Statements and Form S-8 (27.1) Financial Data Schedule (27.2) Restated 1997 Financial Data Schedule (27.3) Restated 1996 Financial Data Schedule (99) 1997 Financial Statements of the Camco Financial Corporation 401(k) Salary Savings Plan 85 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Camco Financial Corporation By /s/ Larry A. Caldwell Larry A. Caldwell, President, Chief Executive Officer and a Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By /s/ Anthony J. Popp By /s/ James R. Hanawalt Anthony J. Popp, James R. Hanawalt, Senior Vice President and Director Director Date: March 23, 1999 Date: March 23, 1999 By /s/ Samuel W. Speck By /s/ Robert C. Dix, Jr. Samuel W. Speck, Robert C. Dix. Jr., Director Director Date: March 23, 1999 Date: March 23, 1999 By /s/ Jeffrey T. Tucker By /s/ Paul D. Leake Jeffrey R. Tucker, Paul D. Leake, Director Director Date: March 23, 1999 Date: March 23, 1999 By /s/ Eric G. Spann By /s/ Gary E. Crane Eric Spann, Gary E. Crane, Director Chief Financial Officer and Treasurer (Principal Financial Officer) Date: March 23, 1999 Date: March 23, 1999 By /s/ Kenneth R. Elshoff Kenneth R. Elshoff, Director Date: March 23, 1999
86 INDEX TO EXHIBITS
ITEM DESCRIPTION Exhibit (3)(i) Third Restated Certificate of Incorporation of Camco Financial Corporation, as amended Exhibit (3)(ii) 1987 Amended and Restated By-Laws of Incorporated by reference to Camco's Annual Camco Financial Corporation Report on Form 10-KSB for the fiscal year ended December 31, 1995, filed with the Securities and Exchange Commission on April 1, 1996 (the "1995 Form 10-KSB"), Exhibit 3(iii). Exhibit (10)(ii)-1 Employment Agreement dated January 22, Incorporated by reference to the 1995 Form 10KSB, 1996, by and between Camco and Larry A. Exhibit 10(ii)-1 Caldwell Exhibit (10)(ii)-2 Employment Agreement dated January 28, Incorporated by reference to Camco's Annual 1994, by and between Camco and Anthony Report on Form 10-KSB for the fiscal year ended J. Popp December 31, 1993, filed with the SEC on March 31, 1994 (the "1994 Form 10-KSB"), Exhibit 10(ii)-1. Exhibit (10)(ii)-3 Employment Agreement dated January 28, Incorporated by reference to the 1994 Form 1994, by and between Marietta Savings 10-KSB, Exhibit 10(ii)-2. Bank and Anthony J. Popp Exhibit 21 Subsidiaries of Camco Exhibit 23.1 Consent of Grant Thornton LLP regarding Camco's Consolidated Financial Statements and Form S-8 Exhibit 23.2 Consent of Grant Thornton LLP regarding Camco's 401(k) Salary Savings Plan Financial Statements and Form S-8 Exhibit 27.1 Financial Data Schedule Exhibit 27.2 Restated 1997 Financial Data Schedule Exhibit 27.3 Restated 1996 Financial Data Schedule Exhibit 99 1997 Financial Statements of the Camco Financial Corporation 401(k) Salary Savings Plan
87 EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION THIRD RESTATED CERTIFICATE OF INCORPORATION OF CAMCO FINANCIAL CORPORATION (A Delaware Corporation) As Adopted May 26, 1987 The following provisions constitute the Third Restated Certificate of Incorporation of Camco Financial Corporation, which was originally incorporation on October 19, 1970 under the name First Cambridge Corporation: FIRST: The name of the corporation is Camco Financial Corporation. SECOND: The address of the corporation's registered office in the State of Delaware is: Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. The name of its registered agent at such address is the Corporation Trust Company. THIRD: The purposes of the corporation are: (1) To acquire and own savings and loan associations; and (2) To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the corporation shall have authority to issue is two million (2,000,000), of which stock one million nine hundred thousand (1,900,000) shares shall be common shares of the par value of One Dollar ($1) each, amounting in the aggregate to One Million Nine Hundred Thousand Dollars ($1,900,000), and one hundred thousand (100,000) shares shall be preferred shares of the par value of One Dollar ($1) each, amounting in the aggregate to One Hundred Thousand Dollars ($100,000). There is hereby granted to the Board of Directors of the corporation the authority to fix by resolution or resolutions any and all powers, designations, preferences and relative, participating, optional or other rights, or the qualifications, limitations or restrictions thereof, of shares of the preferred stock, or of any series of the preferred stock, of the corporation that are permitted by the General Corporation Law of Delaware to be fixed by the Board of Directors, and such grant of authority shall include the power to specify the number of shares of any series of the preferred stock of the corporation. FIFTH: The corporation is to have perpetual existence. SIXTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or a class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization or this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. SEVENTH: No election of Directors need be by written ballot. EIGHTH: Any Director or the entire Board of Directors may be removed only by the affirmative vote of not less than 80% of the outstanding stock entitled to vote at an election of Directors, and such removal may be effected only for cause; provided, however, that if any class or series of stock shall entitle the holders thereof to elect one or more Directors, any Director or all the Directors elected by such holders may be removed only by the affirmative vote of not less than 80% of the outstanding stock of such class or series entitled to vote at an election of such Directors, and such removal may be effected only for cause. Any such removal shall be deemed to create a vacancy in the Board of Directors. NINTH: When used in the Certificate of Incorporation: (1) An "Affiliate" of a specified Person is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. (2) The term "Associate" used to indicate a relationship with any person shall mean (A) any corporation or organization (other than this corporation or a Subsidiary) of which such Person in an officer or partner or is, direct or indirectly, the beneficial owner of ten percent (10%) or more of any class of Equity 2 Security, (B) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person serves as trustee or in a similar fiduciary capacity, and (C) any relative or spouse of such Person, or any relative or such spouse, who has the same home as such Person, or is an officer or director of any corporation controlling or controlled by such Person. (3) "Beneficial Ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision) or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on May 26, 1987; provided, however, that a Person shall in any event, also be deemed to be the "Beneficial Owner" of any shares of Voting Stock: (A) that such Person or any of its Affiliates or Associates beneficially own, directly or indirectly; or (B) that such Person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any shares of voting stock solely by reason of an agreement, arrangement or understanding with the corporation to effect a Business Combination) or upon the exercise of conversion rights, exchange rights, warrants, or options, or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such Person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (C) that are beneficially owned, directly or indirectly, by any other Person with which such first mentioned Person or any of its Affiliates or Associates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding voting or disposing of any shares of capital stock of the corporation; and provided further, however, that (i) no Director or officer of the corporation, nor any Associate or Affiliate of any such Director or officer, shall, solely by reason of any or all such Directors and officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own by any other such Director or officer (or any Associate or Affiliate thereof), and (ii) no employee stock ownership or similar plan of the corporation or any Subsidiary nor any trustee with respect thereto, nor any Associate or Affiliate of any such trustee, shall, solely be reason of such capacity of such trustee, be deemed, for any purposes hereof, to beneficially own any shares of Voting Stock held under any such plan. 3 For purposes of computing the percentage Beneficial Ownership of shares of Voting Stock of a Person in order to determine whether such Person is Substantial Stockholder, the outstanding shares of Voting Stock shall include shares deemed owned by such Person through application of this paragraph (3) but shall not include any other shares of Voting Stock which may be issuable by the corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding shares of Voting Stock shall include only shares of Voting Stock then outstanding and shall not include any shares of Voting Stock which may be issuable by the corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. (4) The term ("Business Combination") shall mean any transaction which is described in any one or more of the clauses (A) through (E) of paragraph (1) of Article ELEVENTH of the Certificate of Incorporation. (5) "Continuing Director" shall mean a Person who was a member of the Board of Directors of the corporation as of May 26, 1987, or thereafter elected by the stockholders or appointed by the Board of Directors of the corporation prior to the date as of which the Substantial Stockholder in question became a Substantial Stockholder, or a Person designated (before his initial election or appointment as a director) as a Continuing Director by Three-fourths (3/4 of the Whole Board, but only if a majority of the Whole Board shall then consist of Continuing Directors. (6) "Equity Security" shall have the meaning given to such term under the Rule 3a11-1 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on May 26, 1987. (7) A "Person" shall mean nay individual, firm, corporation or other entity. (8) "Subsidiary" shall mean any corporation of which a majority of any class of Equity Security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Substantial Stockholder set forth in paragraph (10) of this ARTICLE NINTH, the term "Subsidiary" shall mean only a corporation of which a majority of each class of Equity Security is owned, directly or indirectly, by the corporation. (9) "Substantial Part" shall mean assets having a book value (determined in accordance with generally accepted accounting principles) in excess of ten percent (10%) of the book value (determined in accordance with generally accepted accounting principles) of the total consolidated assets of the corporation, at the end of its most recent fiscal year ending prior to the time the determination is made. 4 (10) "Substantial Stockholder" shall mean any Person who or which, as of the record date for the determination of stockholders entitled to notice of and to vote on any Business Combination, or immediately prior to the consummation of any such Business Combination: (A) is the Beneficial Owner, directly or indirectly, of more than fifteen percent (15%) of the shares of Voting Stock [determined solely on the basis of the total number of shares of Voting Stock so Beneficially Owned (and without giving effect to the number or percentage of votes entitled to be cast in respect of such shares) in relation to the total number of shares of Voting Stock then issued and outstanding], of (B) is an Affiliate of the corporation and at any time within three years prior thereto was the Beneficial Owner, directly or indirectly, of more than fifteen percent (15%) of the then outstanding Voting Stock (determined as aforesaid), or (C) Is an assignee of or has otherwise succeeded to any shares of capital stock of the corporation which were at any time within three years prior thereto Beneficially Owned by any Substantial Stockholder, and such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. Notwithstanding the foregoing, a Substantial Stockholder shall not include (a) the corporation or any Subsidiary or (b) any profit-sharing, employee share ownership or other employee benefit plan of the corporation or any Subsidiary, or any trustee of or fiduciary with respect to any such plan when acting in such capacity. (11) "Voting Stock" shall mean any shares of capital stock of the corporation entitled to vote generally in the election of directors. (12) "Whole Board" shall mean the total number of Directors which the corporation would have it there were no vacancies; i.e., the whole authorized number of Directors. TENTH: Any action required or permitted to be taken by the stockholders of the corporation must be taken pursuant to a vote of such stockholders at an annual or special meeting of such stockholders that is duly held pursuant to notice. No action required or permitted to be taken by the stockholders of the corporation at any annual or special meeting of such stockholders may be taken pursuant to one or more consents in writing signed by the holders of all or any other portion of the outstanding stock entitled to vote on such action. Except as otherwise required by law and subject to any rights afforded by any provision of the Certificate of Incorporation to holders of any class or series of capital stock of the corporation having a preference over the common stock as to dividends or upon liquidation, special meetings of stockholders of the corporation having a preference over the common stock as to dividends or upon liquidation, special meetings of stockholders of the corporation may be called only by the President or by the Board of Directors pursuant to a resolution duly adopted by a majority of the Whole Board or by a writing signed by a majority of the Whole Board. 5 ELEVENTH: (1) In addition to any vote required by law or under any other provision of the Certificate of Incorporation or any resolution or resolutions adopted by the Board of Directors pursuant to its authority under Article FOURTH of the Certificate of Incorporation, and except as otherwise expressly provided in this Article ELEVENTH: (A) any merger or consolidation of the corporation or any Subsidiary with or into (i) any Substantial Stockholder or (ii) any other corporation (whether or not itself a Substantial Stockholder) which, after such merger or consolidation, would be an Affiliate of a Substantial Stockholder, or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of related transactions) to or with any Substantial Stockholder of any Substantial Part of the assets of the corporation or of any Subsidiary, or (C) the issuance or transfer by the corporation or by any Subsidiary (in one transaction or a series of related transactions) of any Equity Securities of the corporation or any Subsidiary to any Substantial Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value equal to or in excess of sixty percent (60%) of the amount of stockholders' equity reflected on the corporation's audited balance sheet as of the end of its most recent fiscal year (which shall be prepared on a consolidated basis by the corporation's independent certified public accountants in accordance with generally accepted accounting principles), or (D) the adoption of any plan or proposal for the liquidation or dissolution of the corporation if, as of the record date for the determination of stockholders entitled to notice thereof and to vote thereon, any person shall be a Substantial Stockholder, or (E) any reclassification of securities (including any reverse stock split) or recapitalization of the corporation, or any reorganization, merger or consolidation of the corporation with any of its Subsidiaries or any similar transaction (whether or not with or into or otherwise involving a Substantial Stockholder) that has the effect, directly or indirectly, of increasing the proportionate share of the outstanding securities of any class of equity securities of the corporation or any Subsidiary which is directly or indirectly Beneficially Owned by any Substantial Stockholder. shall (except as otherwise expressly provided in the Certificate of Incorporation) require the affirmative vote of not less than 80% of all 6 outstanding shares of Voting Stock; provided that such affirmative vote must include the affirmative vote of a majority of all outstanding shares of Voting Stock not beneficially owned by the Substantial Stockholder in question. Each such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that some lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. (2) The provisions of this Article ELEVENTH shall not be applicable to any Business Combination, the terms of which shall be approved, either in advance of or subsequent to a Substantial Stockholder having become a Substantial Stockholder, by three-fourths (3/4) of the Whole Board, but only if a majority of the members of the Board of Directors in office and acting upon such matter shall be Continuing Directors. (3) A majority of the Continuing Directors then in office shall have the power to determine for the purpose of this Article ELEVENTH, on the basis of information known to them: (A) The number of shares of Voting Stock beneficially owned by any Person; (B) Whether a Person is an Affiliate or Associate of another; (C) Whether the assets subject to any Business Combination constitute a Substantial Part of the assets of the corporation in question; and/or (D) Any other factual matter relating to the applicability or effect of this Article ELEVENTH. (4) A majority of the Continuing Directors then in office shall have the right to demand that any Person who is reasonably believed to be a Substantial Stockholder (or holder of record shares of Voting Stock beneficially owned by any Substantial Stockholder) supply to the corporation complete information as to: (A) The record owner(s) of all shares beneficially owned by such Person who is reasonably believed to be a Substantial Stockholder; (B) The number of, and each class or series of, shares Beneficially Owned by such Person who is reasonably believed to be a Substantial Stockholder and held of record by each such record owner and the number(s) of the stock certificate(s) evidencing such shares; and (C) Any other factual matter relating to the applicability or effect of this Article ELEVENTH as may be reasonably requested of such Person, and such Person shall furnish such information within 10 days after receipt of such demand. 7 (5) Any determination made by the Board of Directors, or by the Continuing Directors, as the case may be, pursuant to this Article ELEVENTH in good faith and on the basis of such information and assistance as was then reasonably available for such purpose shall be conclusive and binding upon the corporation and its stockholders, including any Substantial Stockholder. (6) Nothing contained in this Article ELEVENTH shall be construed to relieve any Substantial Stockholder from any fiduciary obligation imposed by law. 8 CERTIFICATE OF AMENDMENT OF THIRD RESTATED CERTIFICATE OF INCORPORATION Camco Financial Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Camco Financial Corporation, resolutions were duly adopted setting forth a proposed amendment to the Third Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that the amendment be considered at a special meeting of the stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article Fourth of the Corporation's Third Restated Certificate of Incorporation be amended to read as follows: FOURTH: The total number of shares of stock which the corporation shall have authority to issue is Two Million Six Hundred Thousand (2,600,000), of which stock Two Million Five Hundred Thousand (2,500,000) shares shall be common shares of the par value of One Dollar ($1) each, amounting in the aggregate to Two Million Five Hundred Thousand Dollars ($2,500,000), and one hundred thousand (100,000) shares shall be preferred shares of the par value of One Dollar ($1) each, amounting in the aggregate to One Hundred Thousand Dollars ($100,000). There is hereby granted to the Board of Directors of the corporation the authority to fix by resolution or resolutions any and all powers, designations, preferences and relative, participating, optional or other rights, or the qualifications, limitations or restrictions thereof, of shares of the preferred stock, or of any series of the preferred stock, of the corporation that are permitted by the General Corporation Law of Delaware to be fixed by the Board of Directors, and such grant of authority shall include the power to specify the number of shares to any series of the preferred stock of the corporation. SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Camco Financial Corporation has caused this certificate to be signed by Larry A. Caldwell, its President, and attested by Anthony J. Popp, its Secretary, this 12th day of July, 1999. By: /s/ Larry A. Caldwell Larry A. Caldwell, President ATTEST: By: /s/ Anthony J. Popp Anthony J. Popp, Secretary 2 CERTIFICATE OF AMENDMENT OF THIRD RESTATED CERTIFICATE OF INCORPORATION Camco Financial Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Camco Financial Corporation, resolutions were duly adopted setting forth a proposed amendment to the Third Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that the amendment be considered at a special meeting of the stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article Fourth of the Corporation's Third Restated Certificate of Incorporation be amended to read as follows: FOURTH: The total number of shares of stock which the corporation shall have authority to issue is Five Million (5,000,000), of which stock Four Million Nine Hundred Thousand (4,900,000) shares shall be common shares of the par value of One Dollar ($1) each, amounting in the aggregate to Four Million Nine Hundred Thousand Dollars ($4,900,000), and one hundred thousand (100,000) shares shall be preferred shares of the par value of One Dollar ($1) each, amounting in the aggregate to One Hundred Thousand Dollars ($100,000). There is hereby granted to the Board of Directors of the corporation the authority to fix by resolution or resolutions any and all powers, designations, preferences and relative, participating, optional or other rights, or the qualifications, limitations or restrictions thereof, of shares of the preferred stock, or of any series of the preferred stock, of the corporation that are permitted by the General Corporation Law of Delaware to be fixed by the Board of Directors, and such grant of authority shall include the power to specify the number of shares to any series of the preferred stock of the corporation. SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Camco Financial Corporation has caused this certificate to be signed by Larry A. Caldwell, its President, and attested by Anthony J. Popp, its Secretary, this 23rd day of September, 1999. By: /s/ Larry A. Caldwell Larry A. Caldwell, President ATTEST: By: /s/ Anthony J. Popp Anthony J. Popp, Secretary 2 CERTIFICATE OF AMENDMENT OF THIRD RESTATED CERTIFICATE OF INCORPORATION Camco Financial Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Camco Financial Corporation, a resolution was duly adopted setting forth a proposed amendment to the Third Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that the amendment be considered at the 1998 annual meeting of the stockholders. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Article Fourth of the Corporation's Third Restated Certificate of Incorporation be amended to read as follows: FOURTH: The total number of shares of stock which the corporation shall have the authority to issue is Nine Million (9,000,000), of which stock Eight Million Nine Hundred Thousand (8,900,000) shares shall be common shares of the par value of One Dollar ($1) each, amounting in the aggregate to Eight Million Nine Hundred Thousand Dollars ($8,900,000), and one hundred thousand (100,000) shares shall be preferred shares of the par value of One Dollar ($1) each, amounting in the aggregate to One Hundred Thousand Dollars ($100,000). There is hereby granted to the Board of Directors of the corporation the authority to fix by resolution or resolutions any and all powers, designations, preferences and relative, participating, optional or other rights, or the qualifications, limitations or restrictions thereof, of shares of the preferred stock, or of any series of the preferred stock, of the corporation that are permitted by the General Corporation Law of Delaware to be fixed by the Board of Directors, and such grant of authority shall include the power to specify the number of shares to any series of the preferred stock of the corporation. SECOND: That thereafter, at the 1998 annual meeting of stockholders of said corporation, which was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation law of the State of Delaware. IN WITNESS WHEREOF, Camco Financial Corporation has caused this certificate to be signed by Larry A. Caldwell, its President, and attested by Anthony J. Popp, its Secretary, this 29th day of May, 1998. By: /s/ Larry A. Caldwell Larry A. Caldwell, President ATTEST: By: /s/ Anthony J. Popp Anthony J. Popp, Secretary 2 EX-21 3 SUBSIDIARIES OF CAMCO
SUBSIDIARIES OF CAMCO State of Name Incorporation Ownership Cambridge Savings Bank Ohio 100% Marietta Savings Bank Ohio 100% First Federal Savings Bank of Washington Court House United States 100% First Federal Bank for United States 100% Savings East Ohio Land Title Agency Ohio 100% SUBSIDIARIES OF CAMBRIDGE SAVINGS Camco Mortgage Corporation Ohio 50% SUBSIDIARIES OF MARIETTA SAVINGS Camco Mortgage Corporation Ohio 50% WestMar Mortgage Company Ohio 100% SUBSIDIARIES OF FIRST SAVINGS First S&L Corporation Kentucky 100%
EX-23.1 4 CONSENT OF GRANT THORNTON ON FINANCIAL STATEMENTS ACCOUNTANTS' CONSENT We have issued our report dated February 25, 1999, accompanying the consolidated financial statements of Camco Financial Corporation which are incorporated within the Annual Report on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in Camco's Form S-8 (33-88072). /s/Grant Thornton LLP Cincinnati, Ohio March 29, 1999 EX-23.2 5 CONSENT OF GRANT THORNTON ON 401(K) FINANCIALS ACCOUNTANTS' CONSENT We have issued our report dated February 25, 1999, accompanying the financial statements of Camco Financial Corporation 401(k) Salary Savings Plan which are incorporated within the Annual Report on Form 10-K for the year ended December 31, 1998. We hereby consent to the incorporation by reference of said report in Camco's Form S-8 (33-88072). /s/Grant Thornton LLP Cincinnati, Ohio March 29, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 13,206 22,609 0 0 4,783 15,981 16,100 548,669 1,783 637,135 443,227 0 8,286 125,483 0 0 5,480 54,659 637,135 40,478 1,816 1,989 44,283 19,538 24,852 19,431 250 12 16,319 10,414 7,004 0 0 7,004 1.28 1.25 3.48 1,625 2,671 0 0 1,596 70 7 1,783 0 0 1,783
EX-27.2 7 RESTATED 1997 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 12,436 10,473 0 0 12,019 25,696 25,847 481,501 1,596 570,170 422,368 0 10,152 82,319 0 0 3,640 51,691 570,170 37,060 2,946 1,211 41,217 18,899 22,778 18,439 385 0 13,733 8,266 5,344 0 0 5,344 .98 .96 3.61 936 1,003 0 0 1,373 176 14 1,596 0 0 1,596
EX-27.3 8 RESTATED 1996 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 10,102 10,875 0 0 17,325 32,544 32,557 420,818 1,373 517,488 398,161 0 4,553 58,354 0 0 3,467 47,924 517,488 29,106 2,651 1,055 32,812 15,639 17,811 15,001 141 0 13,762 4,798 3,210 0 0 3,210 .75 .73 3.69 1,781 775 0 0 1,128 9 4 1,373 0 0 1,373
EX-99 9 CAMCO 401(K) FINANCIAL STATEMENTS FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CAMCO FINANCIAL CORPORATION 401(K) SALARY SAVINGS PLAN December 31, 1998, 1997 and 1996 CONTENTS Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3 FINANCIAL STATEMENTS STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS 4 STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS 6 NOTES TO FINANCIAL STATEMENTS 9 SUPPLEMENTAL INFORMATION SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES 14 SCHEDULE OF REPORTABLE TRANSACTIONS 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Trustees Camco Financial Corporation 401(k) Salary Savings Plan We have audited the accompanying statements of net assets available for plan benefits of Camco Financial Corporation 401(k) Salary Savings Plan as of December 31, 1998 and 1997, and the related statements of changes in net assets available for plan benefits for the years ended December 31, 1998, 1997 and 1996. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Plan as of December 31, 1998 and 1997, and the changes in net assets available for plan benefits for the years ended December 31, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of assets held for investment purposes and reportable transactions are presented for the purpose of additional analysis and are not a required part of the basic financial statements but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/GRANT THORNTON LLP Cincinnati, Ohio February 19, 1999
Camco Financial Corporation 401(k) Salary Savings Plan STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 1998 Fidelity Vanguard Vanguard Cambridge Blue Chip Templeton Index Wellington Savings Growth Acorn Foreign Trust Balanced Certificates ASSETS Fund Fund Fund Fund Fund of Deposit Investments at current value: Common stock $ - $ - $ - $ - $ - $ - Mutual funds 639,824 1,257,233 215,383 1,040,260 543,220 - Certificates of deposit - - - - - 914,191 U.S. Treasury obligations - - - - - 32,300 Notes receivable - - - - - - ------- --------- ------- --------- ------- ------- Total investments 639,824 1,257,233 215,383 1,040,260 543,220 946,491 Accrued interest receivable 105 217 35 169 116 12,632 Contribution receivable - employer 1,535 3,350 1,323 2,839 1,635 968 Contribution receivable - participants' 3,462 6,645 2,237 5,555 2,857 1,989 ------- --------- ------- --------- ------- ------- Total receivable 5,102 10,212 3,595 8,563 4,608 15,589 Cash and cash equivalents - - - - - 4 ------- --------- ------- --------- ------- ------- Net assets available for Plan benefits $644,926 $1,267,445 $218,978 $1,048,823 $547,828 $962,084 ======= ========= ======= ========= ======= ======= Camco Financial Loan Corporation ASSETS Fund Stock Total Investments at current value: Common stock $ - $2,225,153 $2,225,153 Mutual funds - - 3,695,920 Certificates of deposit - - 914,191 U.S. Treasury obligations - 6,220 38,520 Notes receivable 77,226 - 77,226 ------ --------- ---------- Total investments 77,226 2,231,373 6,951,010 Accrued interest receivable - 373 13,647 Contribution receivable - employer - 9,557 21,207 Contribution receivable - participants' - 16,876 39,621 ------ --------- ---------- Total receivable - 26,806 74,475 Cash and cash equivalents - 5 9 ------ --------- --------- Net assets available for Plan benefits $77,226 $2,258,184 $7,025,494 ====== ========= =========
The accompanying notes are an integral part of these statements. 4
Camco Financial Corporation 401(k) Salary Savings Plan STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS (CONTINUED) December 31, 1997 Fidelity Vanguard Vanguard Cambridge Blue Chip Templeton Index Wellington Savings Growth Acorn Foreign Trust Balanced Certificates ASSETS Fund Fund Fund Fund Fund of Deposit Investments at current value: Common stock $ - $ - $ - $ - $ - $ - Mutual funds 379,213 1,019,827 340,484 754,594 482,109 - Certificates of deposit - - - - - 921,297 U.S. Treasury obligations 6,900 90,900 2,500 8,800 - 9,200 Notes receivable - - - - - - ------- --------- ------- ------- ------- ------- Total investments 386,113 1,110,727 342,984 763,394 482,109 930,497 Accrued interest receivable 34 168 15 52 33 14,280 Contribution receivable - employer 1,456 2,952 966 1,754 1,374 1,070 Contribution receivable - participants' 2,467 5,897 1,831 3,498 2,994 1,841 ------- --------- ------- ------- ------- ------- Total receivable 3,957 9,017 2,812 5,304 4,401 17,191 Cash and cash equivalents 18 88 5,815 81 - 7 ------- --------- ------- ------- ------- ------- Net assets available for Plan benefits $390,088 $1,119,832 $351,611 $768,779 $486,510 $947,695 ======= ========= ======= ======= ======= ======= Camco Financial Loan Corporation ASSETS Fund Stock Total Investments at current value: Common stock $ - $908,642 $ 908,642 Mutual funds - - 2,976,227 Certificates of deposit - - 921,297 U.S. Treasury obligations - - 118,300 Notes receivable 51,106 - 51,106 ------ ------- --------- Total investments 51,106 908,642 4,975,572 Accrued interest receivable - 46 14,628 Contribution receivable - employer - 2,173 11,745 Contribution receivable - participants' - 3,931 22,459 ------ ------- --------- Total receivable - 6,150 48,832 Cash and cash equivalents - 38 6,047 ------ ------- --------- Net assets available for Plan benefits $51,106 $914,830 $5,030,451 ====== ======= =========
The accompanying notes are an integral part of these statements. 5
Camco Financial Corporation 401(k) Salary Savings Plan STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS For the year ended December 31, 1998 Fidelity Vanguard Vanguard Blue Chip Templeton Index Wellington Growth Acorn Foreign Trust Balanced Fund Fund Fund Fund Fund Additions to net assets attributed to: Interest and dividends $ 24,321 $ 76,077 $ 25,158 $ 15,590 $ 60,227 Net appreciation (depreciation) 119,242 4,635 (37,118) 203,984 2,982 Contributions - employer 28,836 73,969 19,571 49,507 34,110 Contributions - participants' 37,296 78,935 22,335 53,656 33,889 Rollovers 28,714 26,122 3,532 27,249 14,798 ------- --------- ------- --------- ------- Total contributions 94,846 179,026 45,438 130,412 82,797 ------- --------- ------- --------- ------- Total additions 238,409 259,738 33,478 349,986 146,006 Deductions from net assets attributed to: Benefit payments 16,968 20,536 5,161 16,666 14,091 ------- --------- ------- --------- ------- Net increase before transfers 221,441 239,202 28,317 333,320 131,915 Interfund transfers 33,397 (91,589) (160,950) (53,276) (70,597) ------- --------- ------- --------- ------- Net increase (decrease) 254,838 147,613 (132,633) 280,044 61,318 Net assets available for plan benefits: Beginning of year 390,088 1,119,832 351,611 768,779 486,510 ------- --------- ------- --------- ------- End of year $644,926 $1,267,445 $218,978 $1,048,823 $547,828 ======= ========= ======= ========= ======= Cambridge Camco Savings Financial Certificates Loan Corporation of Deposit Fund Stock Total Additions to net assets attributed to: Interest and dividends $ 55,136 $ 6,337 $ 36,364 $ 299,210 Net appreciation (depreciation) - - (61,627) 232,098 Contributions - employer 28,896 - 246,798 481,687 Contributions - participants' 23,274 - 140,404 389,789 Rollovers 32,126 - 589,542 722,083 ------- ------ --------- --------- Total contributions 84,296 - 976,744 1,593,559 ------- ------ --------- --------- Total additions 139,432 6,337 951,481 2,124,867 Deductions from net assets attributed to: Benefit payments 32,746 2,832 20,824 129,824 ------- ------ --------- --------- Net increase before transfers 106,686 3,505 930,657 1,995,043 Interfund transfers (92,297) 22,615 412,697 - ------- ------ --------- --------- Net increase (decrease) 14,389 26,120 1,343,354 1,995,043 Net assets available for plan benefits: Beginning of year 947,695 51,106 914,830 5,030,451 ------- ------ --------- --------- End of year $962,084 $77,226 $2,258,184 $7,025,494 ======= ====== ========= =========
The accompanying notes are an integral part of these statements. 6
Camco Financial Corporation 401(k) Salary Savings Plan STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS (CONTINUED) For the year ended December 31, 1997 Fidelity Vanguard Vanguard Blue Chip Templeton Index Wellington Growth Acorn Foreign Trust Balanced Fund Fund Fund Fund Fund Additions to net assets attributed to: Interest and dividends $ 18,259 $ 105,412 $ 38,637 $ 14,879 $ 39,372 Net appreciation (depreciation) 56,199 115,963 (20,679) 156,286 44,272 Contributions - employer 13,967 35,181 12,908 20,512 16,788 Contributions - participants' 24,143 70,151 23,900 38,992 30,116 Rollovers 186,552 190,024 120,898 215,180 137,732 ------- --------- ------- ------- ------- Total contributions 224,662 295,356 157,706 274,684 184,636 ------- --------- ------- ------- ------- Total additions 299,120 516,731 175,664 445,849 268,280 Deductions from net assets attributed to: Benefit payments 5,829 18,608 13,586 21,755 5,439 ------- --------- ------- ------- ------- Net increase before transfers 293,291 498,123 162,078 424,094 262,841 Interfund transfers (22,659) 6,403 17,035 56,018 (14,494) ------- --------- ------- ------- ------- Net increase (decrease) 270,632 504,526 179,113 480,112 248,347 Net assets available for plan benefits: Beginning of year 119,456 615,306 172,498 288,667 238,163 ------- --------- ------- ------- ------- End of year $390,088 $1,119,832 $351,611 $768,779 $486,510 ======= ========= ======= ======= ======= Cambridge Camco Savings Financial Certificates Loan Corporation of Deposit Fund Stock Total Additions to net assets attributed to: Interest and dividends $ 49,367 $ 5,768 $ 14,699 $ 286,393 Net appreciation (depreciation) - - 351,004 703,045 Contributions - employer 14,753 - 26,536 140,645 Contributions - participants' 20,795 - 46,779 254,876 Rollovers 531,912 - 231,235 1,613,533 ------- ------ ------- --------- Total contributions 567,460 - 304,550 2,009,054 ------- ------ ------- --------- Total additions 616,827 5,768 670,253 2,998,492 Deductions from net assets attributed to: Benefit payments 21,676 1,211 3,854 91,958 ------- ------ ------- --------- Net increase before transfers 595,151 4,557 666,399 2,906,534 Interfund transfers (25,536) (12,361) (4,406) - ------- ------ ------- --------- Net increase (decrease) 569,615 (7,804) 661,993 2,906,534 Net assets available for plan benefits: Beginning of year 378,080 58,910 252,837 2,123,917 ------- ------ ------- --------- End of year $947,695 $51,106 $914,830 $5,030,451 ======= ====== ======= =========
The accompanying notes are an integral part of these statements. 7
Camco Financial Corporation 401(k) Salary Savings Plan STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS (CONTINUED) For the year ended December 31, 1996 Fidelity Vanguard Peoples Blue Chip Templeton Index Balanced Growth Acorn Foreign Trust Fund Fund Fund Fund Fund Additions to net assets attributed to: Interest and dividends $ - $ 7,901 $ 58,185 $ 7,462 $ 6,997 Net appreciation (depreciation) - 3,229 43,997 15,438 42,486 Contributions - employer - 6,295 21,198 9,201 12,368 Contributions - participants' - 10,735 58,191 22,516 30,561 Rollovers - 18,058 14,665 6,339 9,852 ------- ------- ------- ------- ------- Total contributions - 35,088 94,054 38,056 52,781 ------- ------- ------- ------- ------- Total additions - 46,218 196,236 60,956 102,264 Deductions from net assets attributed to: Benefit payments - - 19,789 5,636 6,224 ------- ------- ------- ------- ------- Net increase (decrease) before transfers - 46,218 176,447 55,320 96,040 Interfund transfers (238,221) 73,238 (318) 13,112 (7,781) ------- ------- ------- ------- ------- Net increase (decrease) (238,221) 119,456 176,129 68,432 88,259 Net assets available for plan benefits: Beginning of year 238,221 - 439,177 104,066 200,408 ------- ------- ------- ------- ------- End of year $ - $119,456 $615,306 $172,498 $288,667 ======= ======= ======= ======= ======= Vanguard Cambridge Camco Wellington Savings Financial Balanced Certificates Loan Corporation Fund of Deposit Fund Stock Total Additions to net assets attributed to: Interest and dividends $ 22,908 $ 24,196 $ - $ 5,517 $ 133,166 Net appreciation (depreciation) 21,522 - - (19,443) 107,229 Contributions - employer 11,511 13,739 - 17,297 91,609 Contributions - participants' 29,242 31,332 - 43,679 226,256 Rollovers 14,650 703 - 17,476 81,743 ------- ------- ------ ------- --------- Total contributions 55,403 45,774 - 78,452 399,608 ------- ------- ------ ------- --------- Total additions 99,833 69,970 - 64,526 640,003 Deductions from net assets attributed to: Benefit payments 38,115 21,406 4,461 6,235 101,866 ------- ------- ------ ------- --------- Net increase (decrease) before transfers 61,718 48,564 (4,461) 58,291 538,137 Interfund transfers 176,445 (79,459) 6,700 56,284 - ------- ------- ------ ------- --------- Net increase (decrease) 238,163 (30,895) 2,239 114,575 538,137 Net assets available for plan benefits: Beginning of year - 408,975 56,671 138,262 1,585,780 ------- ------- ------ ------- --------- End of year $238,163 $378,080 $58,910 $252,837 $2,123,917 ======= ======= ====== ======= =========
The accompanying notes are an integral part of these statements. 8 Camco Financial Corporation 401(k) Salary Savings Plan NOTES TO FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 NOTE A - DESCRIPTION OF PLAN The following description of the Camco Financial Corporation 401(k) Salary Savings Plan ("Plan") provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. 1. General The Plan is a defined contribution plan covering all full-time employees of the Company who have one year of service (1,000 hours or more) and are age twenty-one or older. Effective July 31, 1997, the Plan was amended to remove any service or age requirement for deferral elections. The Plan was further amended to require one year of service (1,000 hours or more) to share in the matching Company contribution. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). 2. Contributions Each year, participants may contribute up to 15 percent of pretax annual compensation, as defined in the Plan. Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans. In 1995, the Company contributed 50 percent of the first four percent of base compensation that a participant contributed to the Plan. On July 1, 1996, the Plan sponsor amended the Plan so that the Company contributes 100 percent of the first three percent of base compensation and contributes 50 percent of the next two percent of base compensation. Contributions are subject to certain Internal Revenue Code ("IRC") limitations. During 1997, various participants received distributions from the Company's pension plan, which was terminated. Participants had the option of rolling these funds into the 401(k) Plan and direct them in various investment options. Total rollovers in 1998 were $722,083. Total rollovers in 1997, including those from the Company's Pension Plan, totaled $1,613,533. 3. Participant Accounts Each participant's account is credited with the participant's contribution and allocations of (a) the Company's contribution and, (b) Plan earnings. Allocations are based on each account balance, as defined. Forfeited balances of terminated participants' nonvested accounts are used to reduce future Company contributions. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. 9 Camco Financial Corporation 401(k) Salary Savings Plan NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - DESCRIPTION OF PLAN (continued) 4. Vesting Participants are immediately vested in their contributions plus actual earnings thereon. Vesting in the Company's matching and discretionary contribution portion of their accounts plus actual earnings thereon is based on years of continuous service. A participant is 100 percent vested after five years of participation as follows:
Vesting Year of Participation Percent One year 20% Two years 40% Three years 60% Four years 80% Five years 100%
5. Investment Options Upon enrollment in the Plan, a participant may direct contributions in various investment options. o Fidelity Blue Chip Growth Fund -- The fund invests approximately 60 percent of its assets in common stock of Blue Chip companies. o Acorn Fund -- An aggressive growth mutual fund that invests in primarily stocks of smaller companies. o Templeton Foreign Fund -- An aggressive growth mutual fund that invests primarily in stocks of foreign companies. o Vanguard Index Trust Fund -- A mutual fund that invests primarily in Blue Chip companies. o Vanguard Wellington Balanced Fund -- A mutual fund that seeks conservation of capital and reasonable income and invests in common stocks and preferred stock debt securities. o Cambridge Savings Certificate of Deposit Fund -- Funds are invested in certificates of deposit with a subsidiary of Camco Financial Corporation. o Camco Financial Corporation Stock -- Funds are invested in stock of the Plan sponsor's Camco Financial Corporation common stock. Participants may change their investment options quarterly. 10 Camco Financial Corporation 401(k) Salary Savings Plan NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE A - DESCRIPTION OF PLAN (continued) 6. Participant Notes Receivable Participants may borrow from their fund accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50 percent of their account balance. Loan transactions are treated as a transfer to (from) the investment fund from (to) the Loan Fund. Loan terms range from 1-5 years. The loans are secured by the balance in the participant's account and bear interest at a rate of 2% over the prime rate. 7. Payment of Benefits On termination of service due to death, disability or retirement, a participant will receive a lump-sum amount equal to the value of the participants' vested interest in his or her account. For termination of service due to other reasons, a participant may receive the value of the vested interest in his or her account as a lump-sum distribution. NOTE B - SUMMARY OF ACCOUNTING POLICIES 1. Basis of Accounting The financial statements of the Plan are prepared under the accrual method of accounting. 2. Investment Valuation and Income Recognition The Plan's investments are stated at fair value. Participant notes receivable are valued at cost which approximates fair value. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Investments that represent five percent or more of the Plan's net assets at December 31, 1998 and 1997 are separately identified.
1998 1997 Camco Financial Corporation stock $2,225,153 $ 908,642 Fidelity Blue Chip Growth Fund 639,824 379,213 Acorn Fund 1,257,233 1,019,827 Templeton Foreign Fund 215,383 340,484 Vanguard Index Trust Fund 1,040,260 754,594 Vanguard Wellington Fund 543,220 482,109 Cambridge Savings Certificates of Deposit 914,191 921,297
During 1998, 1997 and 1996, the Plan's investments (including investments bought, sold, and held during the year) appreciated in value by $232,098, $703,045 and $107,229, respectively. 11 Camco Financial Corporation 401(k) Salary Savings Plan NOTES TO FINANCIAL STATEMENTS (CONTINUED) December 31, 1998, 1997 and 1996 NOTE B - SUMMARY OF ACCOUNTING POLICIES (continued) 3. Payment of Benefits Benefits are recorded when paid. 4. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent asset and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. NOTE C - PLAN TERMINATION Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will become 100 percent vested in their accounts. NOTE D - TAX STATUS The Internal Revenue Service has determined and informed the Company by a letter dated August 9, 1995, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (IRC). The Plan has been amended since receiving the determination letter. However, the Plan administrator and the Plan's tax counsel believe that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. Therefore, they believe that the Plan was qualified and the related trust was tax-exempt as of the financial statement date. NOTE E- ADMINISTRATIVE EXPENSES Administrative expenses of the Plan are paid by the Plan sponsor. NOTE F - RELATED PARTY TRANSACTIONS The Plan offers participants the option of investing in shares of stock of the Plan sponsor, Camco Financial Corporation. The Plan also offers participants the option of investing in certificates of deposit with subsidiaries of Camco Financial Corporation and, therefore, these transactions qualify as party-in-interest. 12 SUPPLEMENTAL INFORMATION
Camco Financial Corporation 401(k) Salary Savings Plan Form 5500 E.I.N. 51-0110823 Plan No. - 002 Item 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES December 31, 1998 (a) (b) (c) (d) (e) Identity of issue, Description of investment including borrower, lessor, or maturity date, rate of interest; Current similar party collateral, par or maturity value Cost value Common Stock Shares * Camco Financial Corporation stock 148,344 $1,960,140 $2,225,153 Mutual Funds Fidelity Blue Chip Growth Fund 12,710 475,947 639,824 Acorn Fund 74,613 1,107,094 1,257,233 Templeton Foreign Fund 25,671 258,753 215,383 Vanguard Index Trust Fund 9,129 639,531 1,040,260 Vanguard Wellington Fund 18,508 526,522 543,220 --------- --------- 3,007,847 3,695,920 Certificates of Deposit * Cambridge Savings Certificates of Deposit 803,350 803,350 * First Federal Washington Court House 110,841 110,841 --------- --------- 914,191 914,191 U.S. Treasury Obligations Fidelity U.S. Treasury Income Portfolio 38,520 38,520 38,520 Note Receivable * Participants' notes - 77,226 --------- --------- $5,920,698 $6,951,010 ========= =========
* Party-in-interest 14
Camco Financial Corporation 401(k) Salary Savings Plan Form 5500 E.I.N. 51-0110823 Plan No. - 002 ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS Year ended December 31, 1998 (a) (b) (c) (d) (e) (f) (g) (h) (i) Current value Identity of Expense of asset on party Purchase Selling Lease incurred with Cost of transaction Net involved Description of asset price price rental transaction asset date gain * Camco Financial Corporation Stock Purchases $1,033,966 $ - $ - $ - $1,033,966 $1,033,966 $ - Sales - 91,893 - - 71,021 91,893 20,872 Fidelity Blue Chip Growth Fund Purchases 203,593 - - - 203,593 203,593 - Sales - 62,088 - - 47,518 62,088 14,570 Acorn Fund Purchases 436,749 - - - 436,749 436,749 - Sales - 203,837 - - 163,562 203,837 40,275 Vanguard Index Trust Fund Purchases 200,418 - - - 200,418 200,418 - Sales - 118,596 - - 73,012 118,596 45,584 Vanguard Wellington Fund Purchases 256,604 - - - 256,604 256,604 - Sales - 198,336 - - 155,108 198,336 43,228
* Party-in-interest 15 -----END PRIVACY-ENHANCED MESSAGE-----