-----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, UgykHe5lGLKqrHSFqplm6fk/OUCoy3B6NGhpz3l16AB9a/xNRYoNtllMJD7Ry6ZL S1oAjS8lUbbzkUupzWNZHA== 0001046386-99-000103.txt : 19990518 0001046386-99-000103.hdr.sgml : 19990518 ACCESSION NUMBER: 0001046386-99-000103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 000-25196 FILM NUMBER: 99625200 BUSINESS ADDRESS: STREET 1: 814 WHEELING AVE CITY: CAMBRIDGE STATE: OH ZIP: 43725 BUSINESS PHONE: 6144325641 10-Q 1 CAMCO FINANCIAL QUARTERLY FINANCIALS FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 -------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File Number 0-25196 CAMCO FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0110823 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 814 Wheeling Avenue Cambridge, Ohio 43725 - ------------------------------------ ---------- (Address of principal (Zip Code) executive office) Registrant's telephone number, including area code: (740) 432-5641 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 10, 1999, the latest practicable date, 5,475,183.5 shares of the registrant's common stock, $1.00 par value, were issued and outstanding. Page 1 of 17 pages Camco Financial Corporation INDEX Page PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition 3 Consolidated Statements of Earnings 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Quantitative and Qualitative Disclosures about Market Risk 15 PART II - OTHER INFORMATION 16 SIGNATURES 17 2 Camco Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data) March 31, December 31, ASSETS 1999 1998 Cash and due from banks $ 11,625 $ 13,206 Interest-bearing deposits in other financial institutions 14,424 22,609 ------- ------- Cash and cash equivalents 26,049 35,815 Investment securities available for sale - at market 306 1,307 Investment securities held to maturity - at cost, approximate market value of $13,938 and $10,998 as of March 31, 1999 and December 31, 1998 13,964 10,962 Mortgage-backed securities available for sale - at market 7,811 3,476 Mortgage-backed securities held to maturity - at cost, approximate market value of $4,550 and $5,102 as of March 31, 1999 and December 31, 1998 4,521 5,019 Loans held for sale - at lower of cost or market 8,558 10,119 Loans receivable - net 572,834 538,550 Office premises and equipment - net 10,657 10,598 Real estate acquired through foreclosure 247 217 Federal Home Loan Bank stock - at cost 9,224 8,250 Accrued interest receivable on loans 3,514 3,576 Accrued interest receivable on mortgage-backed securities 81 61 Accrued interest receivable on investment securities and interest-bearing deposits 300 229 Prepaid expenses and other assets 699 393 Cash surrender value of life insurance 5,323 5,161 Goodwill and other intangible assets 3,365 3,402 ------- ------- Total assets $667,453 $637,135 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $446,041 $443,227 Advances from the Federal Home Loan Bank 151,448 125,483 Advances by borrowers for taxes and insurance 2,127 2,478 Accounts payable and accrued liabilities 3,228 2,679 Dividends payable 616 589 Accrued federal income taxes 647 354 Deferred federal income taxes 2,283 2,186 ------- ------- Total liabilities 606,390 576,996 Stockholders' equity Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - - Common stock - $1 par value; authorized, 8,900,000 shares, 5,480,331 shares issued at March 31, 1999 and December 31, 1998 5,480 5,480 Additional paid-in capital 27,053 27,053 Retained earnings - substantially restricted 28,582 27,628 Treasury stock - at cost (118) (118) Unrealized gains on securities designated as available for sale, net of related tax effects 66 96 ------- ------- Total stockholders' equity 61,063 60,139 ------- ------- Total liabilities and stockholders' equity $667,453 $637,135 ======= =======
3 Camco Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS For the three months ended March 31, (In thousands, except per share data) 1999 1998 Interest income Loans $10,638 $ 9,856 Mortgage-backed securities 137 251 Investment securities 196 311 Interest-bearing deposits and other 435 385 ------ ------ Total interest income 11,406 10,803 Interest expense Deposits 4,701 4,646 Borrowings 1,799 1,194 ------ ------ Total interest expense 6,500 5,840 ------ ------ Net interest income 4,906 4,963 Provision for losses on loans 54 96 ------ ------ Net interest income after provision for losses on loans 4,852 4,867 Other income Late charges, rent and other 615 926 Loan servicing fees 59 72 Service charges and other fees on deposits 112 167 Gain on sale of loans 782 1,147 Gain on sale of fixed assets 1 - Loss on sale of real estate acquired through foreclosure (4) - ------ ------ Total other income 1,565 2,312 General, administrative and other expense Employee compensation and benefits 1,824 1,955 Occupancy and equipment 586 411 Federal deposit insurance premiums 74 73 Data processing 230 197 Advertising 143 129 Franchise taxes 216 162 Amortization of goodwill 37 37 Other operating 938 1,173 ------ ------ Total general, administrative and other expense 4,048 4,137 ------ ------ Earnings before federal income taxes 2,369 3,042 Federal income taxes Current 687 1,101 Deferred 112 (68) ------ ------ Total federal income taxes 799 1,033 ------ ------ NET EARNINGS $ 1,570 $ 2,009 ====== ====== BASIC EARNINGS PER SHARE $.29 $.37 === === DILUTED EARNINGS PER SHARE $.28 $.35 === ===
4 Camco Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three months ended March 31, (In thousands) 1999 1998 Net earnings $1,570 $2,009 Other comprehensive income, net of tax: Unrealized holding gains (losses) during the period, net of tax (30) 34 Reclassification adjustment for gains on sale included in net earnings, net of related taxes - (3) ----- ----- Comprehensive income $1,540 $2,040 ===== =====
5 Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, (In thousands) 1999 1998 Cash flows from operating activities: Net earnings for the period $ 1,570 $ 2,009 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of deferred loan origination fees (88) (553) Amortization of premiums and discounts on investment and mortgage-backed securities - net (3) (4) Amortization of goodwill 37 37 Depreciation and amortization 83 194 Amortization of purchase accounting adjustments, net 9 228 Provision for losses on loans 54 96 (Gain) loss on sale of real estate acquired through foreclosure 4 (4) Federal Home Loan Bank stock dividends (147) (100) Gain on sale of loans (113) (450) Gain on sale of mortgage-backed securities - (5) Loans originated for sale in the secondary market (26,664) (56,010) Proceeds from sale of loans in the secondary market 28,337 56,510 Increase (decrease) in cash due to changes in: Accrued interest receivable - loans 62 111 Accrued interest receivable - mortgage-backed securities (20) - Accrued interest receivable - investments (71) - Prepaid expenses and other assets (306) 647 Accrued interest and other liabilities 576 169 Federal income taxes: Current 293 915 Deferred 112 (68) ------- ------ Net cash provided by operating activities 3,725 3,722 Cash flows provided by (used in) investing activities: Proceeds from maturities of investment securities and interest-bearing deposits 2,500 7,000 Proceeds from sale of investment securities designated as available for sale - 900 Proceeds from sale of mortgage-backed securities designated as available for sale - 4,608 Principal repayments on mortgage-backed securities 1,221 715 Purchases of investment securities (4,521) (3,092) Purchases of mortgage-backed securities (5,080) - Loan principal repayments 68,559 44,081 Loan disbursements (101,836) (45,178) Purchases of loans (1,077) - Additions to office premises and equipment (142) (389) Additions to real estate acquired through foreclosure (13) - Proceeds from sale of real estate acquired through foreclosure 74 42 Purchase of Federal Home Loan Bank stock (827) (413) Proceeds from redemption of life insurance - 569 Net increase in cash surrender value of life insurance (62) (71) Purchase of life insurance (100) - ------- ------ Net cash provided by (used in) investing activities (41,304) 8,772 ------- ------ Net cash provided by (used in) operating and investing activities (balance carried forward) (37,579) 12,494 ------- ------
6 Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the three months ended March 31, (In thousands) 1999 1998 Net cash provided by (used in) operating and investing activities (balance brought forward) $(37,579) $12,494 Cash flows provided by (used in) financing activities: Net increase in deposits 2,814 5,900 Proceeds from advances from the Federal Home Loan Bank and other borrowings 31,842 18,000 Repayment of Federal Home Loan Bank advances and other borrowings (5,876) (20,848) Dividends paid on common stock (616) (504) Proceeds from exercise of stock options - 94 Decrease in advances by borrowers for taxes and insurance (351) (1,444) ------- ------ Net cash provided by financing activities 27,813 1,198 ------- ------ Increase (decrease) in cash and cash equivalents (9,766) 13,692 Cash and cash equivalents at beginning of period 35,815 22,904 ------- ------ Cash and cash equivalents at end of period $ 26,049 $36,596 ======= ====== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest on deposits and borrowings $ 5,726 $ 5,639 ======= ====== Income taxes $ 250 $ - ======= ====== Supplemental disclosure of noncash investing activities: Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (30) $ 31 ======= ====== Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 669 $ 697 ======= ====== Transfer from mortgage loans to real estate acquired through foreclosure $ 95 $ 26 ======= ====== Transfer of mortgage-backed securities from held to maturity classification to available for sale classification $ - $ 1,344 ======= ======
7 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Camco Financial Corporation ("Camco", or the "Corporation") included in Camco's Annual Report on Form 10-K for the year ended December 31, 1998. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three month period ended March 31, 1999, are not necessarily indicative of the results which may be expected for the entire year. 2. Principles of Consolidation Camco has five wholly-owned subsidiaries: Cambridge Savings Bank ("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings"), First Federal Savings Bank of Washington Court House ("First Federal"), First Federal Bank for Savings ("First Savings") (collectively hereinafter "the Banks") and East Ohio Land Title Agency, Inc., as well as two second tier subsidiaries, Camco Mortgage Corporation and WestMar Mortgage Company. All significant intercompany balances and transactions have been eliminated. 3. Earnings Per Share Basic earnings per share for the three month periods ended March 31, 1999 and 1998, is computed based on 5,468,795 and 5,465,783 weighted-average shares outstanding, respectively. 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 5,589,218 and 5,658,176 for the three month periods ended March 31, 1999 and 1998, respectively. There were 120,423 and 192,393 incremental shares related to the assumed exercise of stock options included in the computation of diluted earnings per share for the three month periods ended March 31, 1999 and 1998, respectively. 8 Camco Financial Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Effects of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. The definition of a derivative financial instrument is complex, but in general, it is an instrument with one or more underlyings, such as an interest rate or foreign exchange rate, that is applied to a notional amount, such as an amount of currency, to determine the settlement amount(s). It generally requires no significant initial investment and can be settled net or by delivery of an asset that is readily convertible to cash. SFAS No. 133 applies to derivatives embedded in other contracts, unless the underlying of the embedded derivative is clearly and closely related to the host contract. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On adoption, entities are permitted to transfer held-to-maturity debt securities to the available-for-sale or trading category without calling into question their intent to hold other debt securities to maturity in the future. SFAS No. 133 is not expected to have a material impact on the Corporation's financial statements. 5. Reclassifications Certain reclassifications have been made to the March 31, 1998 consolidated financial statements to conform to the March 31, 1999 presentation. 9 Camco Financial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the three month periods ended March 31, 1999 and 1998 General Camco's profitability depends primarily on the level of its net interest income, which is the difference between interest income on interest-earning assets, principally loans, mortgage-backed securities and investment securities, and interest expense on deposit accounts and borrowings. In recent years, Camco's net earnings have been heavily influenced by the level of other income, including gains on sale of loans, loan servicing fees, and other fees. Camco is currently reducing its loan sales in favor of loan portfolio growth in response to the current interest rate environment. The interest rate risk of adding a limited amount of fixed rate loans to the mortgage portfolio is being managed with matched borrowings from the Federal Home Loan Bank of Cincinnati. Camco's operations are also influenced by the level of general, administrative and other expenses, including employee compensation and benefits, office occupancy and equipment, federal deposit insurance premiums, as well as various other operating expense categories, including federal income tax expense. Since its incorporation in 1970, Camco has evolved into a full service provider of financial products to the communities served by its banking subsidiaries. Utilizing a common marketing theme committed to personalized customer service, Camco and its affiliates have grown from $22.4 million in consolidated assets in 1970 to $667.5 million of consolidated assets at March 31, 1999. Camco's level of growth is largely attributable to the acquisitions of Marietta Savings, First Federal, First Savings, and Germantown Federal and the continued expansion of product lines from the previously limited deposit and loan offerings of a heavily regulated 1970's savings and loan association, to the full array of financial service products that were the previous domain of commercial banks. Additionally, Camco's operational growth has been enhanced by vertical integration of the residential lending function through establishing mortgage banking operations in the Banks' primary market areas and, to a lesser extent, in areas beyond the primary market areas and by chartering a title insurance agency. Management believes that continued success in the financial services industry will be achieved by those institutions with a rigorous dedication to bringing value-added services to their customers. Toward this end, each of the Banks' operations are decentralized, with a separate board of directors and management team focusing on consumer preferences for financial products in the respective communities served. Based on such consumer preferences, Camco's management designs financial service products with a view towards differentiating each of the constituent Banks from the competition. It is management's opinion that the Banks' abilities to rapidly adapt to consumer needs and preferences is essential to community-based financial institutions in order to compete against the larger regional and money-center bank holding companies. 10 Camco Financial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the three month periods ended March 31, 1999 and 1998 Discussion of Financial Condition Changes from December 31, 1998 to March 31, 1999 At March 31, 1999, Camco's consolidated assets totaled $667.5 million, an increase of $30.3 million, or 4.8%, over the December 31, 1998 total. The increase during the current three month period was primarily funded by deposit growth of $2.8 million, an increase of $26.0 million in advances from the Federal Home Loan Bank (the "FHLB") and undistributed net earnings of $954,000. Cash and interest-bearing deposits in other financial institutions totaled $26.0 million at March 31, 1999, a decrease of $9.8 million, or 27.3%, from December 31, 1998 levels. Excess liquidity was used to fund purchases of investment and mortgage-backed securities, as well as to fund loan originations during the quarter. Investment securities totaled $14.3 million at March 31, 1999, an increase of $2.0 million, or 16.3%, over the total at December 31, 1998. During the 1999 period, investment securities totaling $4.5 million were purchased, while maturities amounted to $2.5 million. Mortgage-backed securities totaled $12.3 million at March 31, 1999, an increase of $3.8 million, or 45.2%, over December 31, 1998, due primarily to purchases totaling $5.1 million, offset by principal repayments totaling $1.2 million during the period. Loans receivable and loans held for sale increased by $32.7 million, or 6.0%, during the three months ended March 31, 1999, to a total of $581.4 million. The increase was primarily attributable to loan disbursements totaling $128.5 million, which were partially offset by principal repayments of $68.6 million and loan sales of $28.2 million. Loan origination volume during the 1999 three month period exceeded that of the 1998 period by $27.3 million, or 27.0%, while the volume of loan sales decreased by $27.8 million year to year. Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled $5.4 million and $4.3 million at March 31, 1999 and December 31, 1998, respectively, constituting .93% and .78% of total net loans, including loans held for sale, at those dates. The consolidated allowance for loan losses totaled $1.8 million at both March 31, 1999 and December 31, 1998, representing 33.7% and 41.5% of nonperforming loans, respectively, at those dates. Although management believes that its allowance for loan losses at March 31, 1999, is adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could adversely affect Camco's results of operations. Deposits totaled $446.0 million at March 31, 1999, an increase of $2.8 million, or .6%, over December 31, 1998 levels. The increase resulted primarily from management's continuing efforts to achieve a moderate rate of growth through advertising and pricing strategies. Advances from the FHLB increased by $26.0 million, or 20.7%, to a total of $151.4 million at March 31, 1999. The proceeds from deposit growth and advances from the FHLB were primarily used to fund loan originations for the three month period. The Banks are required to maintain minimum regulatory capital pursuant to federal regulations. At March 31, 1999, the Banks' regulatory capital exceeded all regulatory capital requirements. 11 Camco Financial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the three month periods ended March 31, 1999 and 1998 Comparison of Results of Operations for the Three Months Ended March 31, 1999 and 1998 General Camco's net earnings for the three months ended March 31, 1999 totaled $1.6 million, a decrease of $439,000, or 21.9%, from the $2.0 million of net earnings reported in the comparable 1998 period. The decrease in earnings was primarily attributable to a decrease in other income of $747,000, resulting from decreased gains on loan sales and a decline in late charges, rent and other income which was partially offset by a decrease in general, administrative and other expenses of $89,000. Net Interest Income Total interest income for the three months ended March 31, 1999, increased by $603,000, or 5.6%, generally reflecting the effects of growth in average interest-earning assets outstanding of approximately $91.3 million. Interest income on loans and mortgage-backed securities totaled $10.8 million for the three months ended March 31, 1999, an increase of $668,000, or 6.6%, over the comparable 1998 period. The increase resulted primarily from an $86.7 million, or 17.8%, increase in the average balance outstanding year to year. Interest income on investments and interest-bearing deposits decreased by $65,000, or 9.3%. Interest expense on deposits increased by $55,000, or 1.2%, to a total of $4.7 million for the three months ended March 31, 1999, due primarily to an increase of $27.1 million in the average balance of deposits outstanding. Interest expense on borrowings totaled $1.8 million for the three months ended March 31, 1999, an increase of $605,000, or 50.7%, over the 1998 three month period. The increase resulted primarily from a $57.4 million increase in the average balance outstanding year to year. As a result of the foregoing changes in interest income and interest expense, which included several nonrecurring adjustments to the interest income and expense accounts, net interest income decreased by $57,000, or 1.1%, to a total of $4.9 million for the three months ended March 31, 1999. The interest rate spread decreased to approximately 2.89% for the three months ended March 31, 1999, from 3.47% for the 1998 period, while the net interest margin decreased to approximately 3.52% in 1999, compared to 3.76% in 1998. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Banks, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Banks' market areas, 12 Camco Financial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the three month periods ended March 31, 1999 and 1998 Comparison of Results of Operations for the Three Months Ended March 31, 1999 and 1998 (continued) Provision for Losses on Loans (continued) and other factors related to the collectibility of the Bank's loan portfolio. The provision for losses on loans totaled $54,000 for the three months ended March 31, 1999, a decrease of $42,000, or 43.8%, from the comparable period in 1998. The current period provision generally reflects the overall effects of loan portfolio growth and while nonperforming loans have increased, such nonperforming loans consist primarily of one- to four-family residential properties. It is management's belief that such nonperforming loans are adequately collateralized. There can be no assurance that the allowance for loan losses will be adequate to cover losses on nonperforming assets in the future. Other Income Other income totaled $1.6 million for the three months ended March 31, 1999, a decrease of $747,000, or 32.3%, from the comparable 1998 period. The decrease in other income is primarily attributable to a $365,000, or 31.8%, decrease in gains on sale of loans and a decrease of $311,000, or 33.6%, in late charges, rent and other. The decrease in gains on sale of loans primarily reflects a reduction in sales volume year to year. The decrease in late charges, rent and other was primarily attributable to a gain in the prior period on settlement of life insurance of $99,000. General, Administrative and Other Expense General, administrative and other expense totaled $4.0 million for the three months ended March 31, 1999, a decrease of $89,000, or 2.2%, from the comparable quarter in 1998. This decrease is due primarily to a $235,000, or 20.0%, reduction in other operating costs and a $131,000, or 6.7%, decrease in employee compensation and benefits. Partially offsetting these reductions are increases in office occupancy and equipment of $175,000, or 42.6%, a $33,000, or 16.8%, increase in data processing expenses and a $54,000, or 33.3%, increase in state franchise taxes. The decrease in employee compensation and benefits resulted primarily from the $89,000 reversal of an over accrual to the 401(k) profit sharing plan. The decrease in other operating expenses included $212,000 in merger costs recorded in 1998 related to the merger with GF Bancorp in January 1998. The increase in office occupancy and equipment was due to increased depreciation primarily as a result of the equipment purchases required , to convert all of the Banks to one data processing service bureau, coupled with increased building maintenance costs. The increase in franchise taxes was due primarily to the Corporation's overall growth year to year and a change in Ohio franchise tax law which increased the overall rate of taxation, while the increase in data processing expenses was primarily attributable to the Corporation's conversion to a new data processing system. 13 Camco Financial Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the three month periods ended March 31, 1999 and 1998 Comparison of Results of Operations for the Three Months Ended March 31, 1999 and 1998 (continued) Federal Income Taxes The provision for federal income taxes totaled $799,000 for the three months ended March 31, 1999, a decrease of $234,000, or 22.7%. This decrease is attributable to a $673,000, or 22.1%, decrease in pre-tax earnings. The Corporation's effective tax rate was 33.7% and 34.0% for the three months ended March 31, 1999 and 1998, respectively. Year 2000 Compliance Matters The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits to indicate the year. Such computer systems may be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. In 1996 the Corporation began evaluating the status of all of its technological systems which included its state of readiness in addressing the Y2K issue. After the analysis was completed, a technology plan was developed and implementation of the plan started in mid 1997. As the Corporation is primarily dependent on a third party data processing service bureau for maintaining customer records and financial systems, a task force was formed to identify a service bureau that would meet the current and future technology needs of the Corporation and who would be Y2K compliant. The new service bureau was identified and conversion of all data systems of the Banks was completed in the fourth quarter of 1998. As a part of the conversion process, all of the data processing hardware and software in the Banks was replaced and has been tested as being Y2K compliant. The Corporation has identified other third party vendors and commercial borrowers and if they were deemed critical to the banking operations, a review of their Y2K readiness has been conducted. Contingency plans have been completed in which the Corporation will seek alternative sources for critical services provided by third party vendors who it is deemed will not be Y2K compliant. The Corporation's service bureau has completed the upgrading of its core systems and through testing, the Banks have verified that these systems are Y2K compliant. The Banks have also successfully performed Y2K testing of the electronic services provided by the Federal Reserve Bank of Cleveland and the mortgage servicing systems of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association through the Corporation's service bureau. The Corporation's plan calls for the testing of non-information technology hardware by the end of the third quarter, and where necessary, either the repair or replacement of those systems if they are found not to be Y2K compliant. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the three month periods ended March 31, 1999 and 1998 Year 2000 Compliance Matters (continued) As part of its risk assessment, the Corporation has analyzed its vulnerability to third-party vendors and service providers by conducting a review of their Y2K readiness. The Corporation has received responses from 95% of its vendors and service providers for the Banks and no significant concerns have been identified. The Corporation has also assessed the risk associated with certain of its Bank's customers and contacts are being made on the customer's Y2K preparedness if they were deemed to be sensitive to the Y2K issue. The Corporation estimates that the final cost of converting and replacing information and non-information technology systems will fall within a range of $1.5 million and $1.75 million with at least 75% being capitalized (which relates to a discretionary management decision in 1998 to upgrade existing technology systems). The Corporation had estimated that the total cost to address the Y2K issue would be approximately $75,000, of which $30,000 has been incurred as of March 31, 1999. While management believes its Y2K budget is based on sound assumptions, because of unknown external risks associated with this issue, the Corporation cannot quantify the consequences and uncertainty involved beyond those already identified. However, management believes such remaining external risks will not have a material adverse effect on the Corporation's financial condition or results of operations. Quantitative and Qualitative Disclosures about Market Risk There has been no material change in the Corporation's market risk since the Corporation's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998. 15 Camco Financial Corporation PART II ITEM 1. Legal Proceedings Not applicable ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K Reports on Form 8-K: None. Exhibits: 27 Financial Data Schedule for the three months ended March 31, 1999. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 14, 1999 By: /s/Larry A. Caldwell ------------------------- ------------------------------------ Larry A. Caldwell President and Chief Executive Officer Date: May 14, 1999 By: /s/Gary Crane ------------------------- ------------------------------------ Gary Crane Chief Financial Officer 17 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1999 JAN-01-1998 MAR-31-1999 11,625 14,424 0 0 8,117 18,485 18,488 581,392 1,826 667,453 446,041 0 8,901 151,448 0 0 0 61,063 667,453 10,638 333 435 11,406 4,701 6,500 4,906 54 0 4,048 2,369 1,570 0 0 1,570 .29 .28 3.52 1,975 3,441 0 0 1,783 12 1 1,826 0 0 1,826
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