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, 2002
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
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CAMCO FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0110823
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6901 Glenn Highway, Cambridge, Ohio 43725
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 435-2020
Securities registered pursuant to Section 12(b) of the Act:
None None
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(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
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(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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act) Yes X No
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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 June
28, 2002, was $112.1 million and as of March 26, 2003, was $121.0 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,
2002, were $76.1 million. 7,562,396 shares of the registrant's
common stock were outstanding on March 26, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of Form 10-K: Portions of the Proxy Statement for the 2003 Annual
Meeting of Stockholders
-1-
PART I
Item 1. Business.
General
Camco Financial Corporation ("Camco") is a savings and loan holding
company which was organized under Delaware law in 1970. Camco is engaged in the
financial services business in Ohio, Kentucky and West Virginia, through its
wholly-owned subsidiaries, Advantage Bank ("Advantage" or the "Bank") and Camco
Title Insurance Agency, Inc. ("Camco Title"), and its second-tier subsidiary,
Camco Mortgage Corporation ("CMC"). In June 2001, Camco completed a
reorganization in which it combined its banking activities under one Ohio
savings bank charter which is now known as Advantage Bank. Prior to the
reorganization, Camco operated five separate banking subsidiaries serving
distinct geographic areas. The branch office groups in each of the regions
previously served by the five subsidiary banks now operate as divisions of
Advantage Bank utilizing the names under which their respective offices were
chartered prior to the restructuring (Cambridge Savings Bank, Marietta Savings
Bank, First Savings Bank, First Bank for Savings and Westwood Homestead Savings
Bank). Hereinafter, the terms "Advantage" or the "Bank" will be used to include
all the preexisting individual financial institutions owned by Camco.
During the periods for which financial information is presented Camco
completed several business combinations. During 2000, Camco completed a business
combination with Westwood Homestead Financial Corporation ("WFC") and its
wholly-owned subsidiary, Westwood Homestead Saving Bank ("Westwood Savings").
The acquisition was accounted for using the purchase method of accounting and,
therefore, the financial statements for prior periods have not been restated. In
November 2001, Camco completed a business combination with Columbia Financial of
Kentucky, Inc. ("Columbia Financial"), and its wholly-owned subsidiary, Columbia
Federal Savings Bank ("Columbia Federal"). The merger was accounted for using
the purchase method of accounting and, therefore, the financial statements for
prior periods have not been restated.
Advantage is regulated by the Ohio Division of Financial Institutions
(the "Division"), and the Federal Deposit Insurance Corporation (the "FDIC"), as
its primary regulators. Advantage Bank is a member of the Federal Home Loan Bank
(the "FHLB") of Cincinnati, and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund (the "SAIF")
administered by the FDIC. Camco is regulated by the Office of Thrift Supervision
(the "OTS") as a savings and loan holding company.
Camco's primary lending activities include the origination of
conventional fixed-rate and variable-rate mortgage loans for the acquisition,
construction or refinancing of single-family homes located in Camco's primary
market areas. Camco also originates construction and permanent mortgage loans on
condominiums, two- to four-family, multi-family (over four units) and
nonresidential properties. In addition to mortgage lending, Camco makes a
variety of consumer loans and commercial loans.
The financial statements for Camco and its subsidiaries are prepared on
a consolidated basis. The principal source of revenue for Camco on an
unconsolidated basis has historically been dividends from the Bank. Payment of
dividends to Camco by the Bank is subject to various regulatory restrictions and
tax considerations.
References in this report to various aspects of the business,
operations and financial condition of Camco may be limited to Advantage, as the
context requires.
Camco's Internet site, http://www.camcofinancial.com, contains a
hyperlink to the Securities and Exchange Commission's website where Camco's
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of
charge on EDGAR as soon as reasonably practicable after Camco has filed the
report with the SEC.
-2-
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 Advantage's 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.
Loan Portfolio Composition. The following table presents certain
information regarding the composition of Camco's loan portfolio, including loans
held for sale, at the dates indicated:
At December 31,
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2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of total of total of total of total of total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Type of loan:
Existing residential
properties(1) $641,464 80.5% $705,056 80.9% $764,828 82.2% $619,621 85.3% $485,107 88.4%
Construction 33,122 4.1 42,666 4.9 56,039 6.0 60,565 8.3 37,169 6.8
Nonresidential real estate 71,908 9.0 70,239 8.1 54,722 5.9 20,831 2.9 15,019 2.7
Developed building lots 535 0.1 5,908 0.7 5,640 0.6 4,649 0.6 3,895 0.7
Consumer and other loans(2) 69,898 8.8 69,116 7.9 73,178 7.9 51,079 7.1 31,931 5.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 816,927 102.5 892,985 102.5 954,407 102.6 756,745 104.2 573,121 104.5
Less:
Undisbursed loans in process (13,089) (1.6) (15,343) (1.8) (19,911) (2.2) (27,569) (3.8) (22,262) (4.1)
Unamortized yield adjustments (1,390) (0.2) (1,940) (0.2) (918) (0.1) (1,088) (0.1) (407) (0.1)
Allowance for loan losses (5,490) (0.7) (4,256) (0.5) (2,906) (0.3) (1,863) (0.3) (1,783) (0.3)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans, net $796,958 100.0% $871,446 100.0% $930,672 100.0% $726,225 100.0% $548,669 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
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(1) Includes loans held for sale.
(2) Includes second mortgage, multifamily and commercial loans.
Camco's loan portfolio was approximately $797.0 million at December 31,
2002, and represented 73.6% of total assets.
-3-
Loan Maturity Schedule. The following table sets forth certain information as of
December 31, 2002, 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 loans having 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
2003 2004-2007 2007 Total
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(In thousands)
Real estate loans (1):
One- to four-family $15,537 $43,711 $543,547 $602,795
Multifamily 577 1,587 39,214 41,378
Nonresidential and commercial 5,168 13,835 65,885 84,888
Consumer and other loans 1,811 15,550 1,923 19,284
------ ------ ------- -------
Total $23,093 $74,683 $650,569 $748,345
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(1) Excludes loans held for sale of $55.5 million and does not consider the
effects of unamortized yield adjustments of $1.4 million and the
allowance for loan losses of $5.5 million.
The following table sets forth at December 31, 2002, the dollar amount
of all loans due after one year from December 31, 2002, which have fixed
interest rates and have floating or adjustable interest rates:
Due after
December 31, 2003
(In thousands)
Fixed rate of interest $271,177
Adjustable rate of interest 454,075
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Total $725,252
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Generally, loans originated by Advantage are on a fully amortized
basis. Advantage has no rollover provisions in its loan documents and
anticipates that loans will be paid in full by the maturity date.
Residential Loans. The primary lending activity of Advantage is the
origination of fixed-rate and adjustable-rate conventional loans for the
acquisition, refinancing or construction of single-family residences. At
December 31, 2002, 80.5% of the total outstanding loans consisted of loans
secured by mortgages on one- to four-family residential properties.
Federal regulations and Ohio law limit the amount which Advantage 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, Advantage generally makes loans on single-family
residences up to 95% of the value of the real estate and improvements. Advantage
generally requires the borrower on each loan which has an LTV in excess of 80%
to obtain private mortgage insurance or a guarantee by a federal agency.
The interest rate adjustment periods on adjustable-rate mortgage loans
("ARMs") offered by Advantage are generally one, three and 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. Advantage has generally used the one-year, three-year and five-year
United States Treasury bill rates, adjusted to a constant maturity, as the index
for their one-year, three-year, five-year and seven-year adjustable-rate loans,
respectively. The initial interest rates for three-year, five-year and
-4-
seven-year ARMs are 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, Advantage originates 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. Advantage attempts to reduce the risk by underwriting such
loans at the fully indexed rate. None of Advantage's ARMs have negative
amortization features.
Residential mortgage loans offered by Advantage are usually for terms
of up 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,
Advantage emphasizes the origination of ARMs and sells 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.
Of the total mortgage loans originated by Advantage during the year
ended December 31, 2002, 33.1% were ARMs and 66.9% were fixed-rate loans.
Adjustable-rate loans comprised 62.5% of Camco's total outstanding loans at
December 31, 2002.
Construction Loans. Advantage offers residential construction loans
both to owner-occupants and to builders for homes being built under contract
with owner-occupants. Advantage also makes loans to persons constructing
projects for investment purposes. At December 31, 2002, a total of $33.1
million, or approximately 4.1% of Advantage's total loans, consisted of
construction loans, primarily for one- to four-family properties.
Construction loans to owner-occupants are seven year balloon or
adjustable-rate long-term loans on which the borrower pays only interest on the
disbursed portion during the construction period. Some construction loans to
builders, however, have terms of up to 24 months at fixed or adjustable rates of
interest.
Construction loans for investment properties involve greater
underwriting and default risks to Advantage 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, Advantage 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, 2002,
Advantage had nine construction loans in the amount of $4.4 million on
investment properties.
Nonresidential Real Estate Loans. Advantage originates loans secured by
mortgages on nonresidential real estate, including retail, office and other
types of business facilities. Nonresidential real estate loans are generally
made on an adjustable-rate basis for terms of up to 25 years. Nonresidential
real estate loans originated by Advantage generally have an LTV of 80% or less.
The largest nonresidential real estate loan outstanding at December 31, 2002,
was a $3.1 million loan secured by a manufacturing and distribution building.
Nonresidential real estate loans comprised 9.0% of total loans at December 31,
2002.
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. Advantage has 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 and cash flow
analysis, the quality and characteristics of the income stream generated by the
property and appraisals supporting the property's valuation.
-5-
Consumer Loans. Advantage makes 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 are generally made
at a variable rate of interest 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, 2002, education, consumer
and other loans constituted 8.8% of Camco's total loans. Included in consumer
and other loans is approximately $41.1 million of multifamily loans of which the
largest is $2.9 million secured by an apartment building.
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, loan brokers and builders; continuing
business with depositors, other borrowers and real estate developers; and
walk-in customers. 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 Advantage's
divisions 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 division originating the loan, after which they
are forwarded to the division's loan department for processing. On new loans,
the Bank 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 Advantage. Upon
the completion of the appraisal and the receipt of all necessary information
regarding the borrower, the loan is approved by the loan officer up to their
maximum loan approval authority. Loans above their maximum receive additional
approval by officers with higher loan approval authority. 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, if applicable, flood and private
mortgage insurance, and to name Advantage 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. Advantage
also evaluates the feasibility of the proposed construction project.
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. Advantage has been actively
originating new 30-year, 15-year and 10-year fixed-rate real estate loans as
well as adjustable-rate real estate loans, consumer loans and commercial loans.
Generally all residential fixed-rate loans made by Advantage are originated with
documentation which will permit a possible sale of such loans to secondary
mortgage market investors. When a mortgage loan is sold to the investor,
Advantage generally services the loan by collecting monthly payments of
principal and interest and forwarding such payments to the investor, net of a
servicing fee. During the year ended December 31, 2002, Advantage also sold
loans with servicing released. Fixed-rate loans not sold and generally all of
the ARMs originated by Advantage are held in Advantage's loan portfolio. During
the year ended December 31, 2002, Advantage sold approximately $240.5 million in
loans. Advantage recognized $2.7 million in mortgage servicing rights during
2002, while amortization of mortgage servicing rights totaled $2.1 million for
the year ended December 31, 2002. During 2002, Advantage recaptured
approximately $640,000 of an impairment charge recorded during the year ended
December 31, 2001, based upon an independent appraisal of the mortgage servicing
rights.
-6-
From time to time, Advantage sells participation interests in mortgage
loans originated by it and purchases whole loans or participation interests in
loans originated by other lenders. Advantage held whole loans and participations
in loans originated by other lenders of approximately $35.2 million at December
31, 2002. Loans which Advantage purchases must meet or exceed the underwriting
standards for loans originated by Advantage.
In recent years, Advantage has purchased mortgage-backed securities
insured or guaranteed by U.S. Government agencies in order to improve Camco's
asset yield by profitably investing excess funds. Advantage intends to continue
to purchase such mortgage-backed securities when conditions favor such an
investment. See "Investment Activities."
The following table presents Advantage's mortgage loan origination,
purchase, sale and principal repayment activity for the periods indicated:
Year ended December 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- -------
(In thousands)
Loans originated:
Construction $ 54,114 $ 35,330 $ 71,929 $ 66,437 $ 49,152
Permanent 447,379 320,973 202,004 324,648 328,046
Consumer and other 70,772 83,126 84,526 34,158 67,243
------- ------- ------- -------- -------
Total loans originated 572,265 359,081 358,459 425,243 444,441
Loans purchased (1) 116,306 17,755 8,639 31,430 18,982
Reductions:
Principal repayments (1) 442,823 276,060 178,663 176,804 194,594
Loans sold (1) 241,636 215,289 124,496 96,892 205,899
Transfers from loans to real estate owned 1,270 3,208 1,432 1,220 477
------- ------- ------- ------- -------
Total reductions 685,729 494,557 304,591 274,916 400,970
Increase (decrease) in other items, net (2) 2,262 (314) (2,552) (277) (3,444)
Increase due to mergers (3) - 81,426 147,196 - -
------- ------- ------- ------- -------
Net increase (decrease) $ 5,104 $(36,609) $207,151 $181,480 $ 59,009
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(1) Includes mortgage-backed securities.
(2) Other items primarily consist of amortization of deferred loan
origination fees, the provision for losses on loans and unrealized
gains on mortgage-backed securities designated as available for sale.
(3) The 2001 increase resulted from the acquisition of Columbia
Financial and the 2000 increase resulted from the acquisition of WFC.
Lending Limit. Federal regulations and Ohio law generally impose a
lending limit on the aggregate amount that a depository institution can lend to
one borrower to an amount equal to 15% of the institution's total capital for
risk-based capital purposes plus any loan reserves not already included in total
capital (the "Lending Limit Capital"). A depository institution may loan to one
borrower an additional amount not to exceed 10% of the institution'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.
The largest amount which Advantage could have loaned to one borrower at
December 31, 2002, was approximately $12.2 million. The largest amount Advantage
had outstanding to one borrower and related persons or entities at December 31,
2002, was $6.3 million, which consisted of five loans secured by personal
residences, commercial properties, leasing business residuals, an apartment
complex, a warehouse and a golf course.
-7-
Loan Origination and Other Fees. In addition to interest earned on
loans, Advantage may receive loan origination fees or "points" of up to 2.0% of
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. Advantage
attempts 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 collection officer contacts the borrower to request payment.
In certain limited instances, Advantage may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his or her
financial affairs. Advantage generally initiates foreclosure proceedings, in
accordance with applicable laws, when it appears that a modification or
moratorium would not be productive.
Real estate which has been acquired by Advantage 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 December 31,
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2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Loans delinquent for:
30 to 89 days $10,524 $14,238 $10,557 $13,792 $10,028
90 or more days 13,625 7,885 4,726 3,975 4,296
------ ------ ------ ------ ------
Total delinquent loans $24,149 $22,123 $15,283 $17,767 $14,324
====== ====== ====== ====== ======
Ratio of total delinquent loans to
total net loans (1) 3.03% 2.54% 1.64% 2.45% 2.61%
==== ==== ==== ==== ====
(1) Total net loans includes loans held for sale.
-8-
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 Advantage's nonaccruing and delinquent loans for the periods
indicated.
At December 31,
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2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential $11,021 $3,677 $3,677 $3,677 $3,677
Nonresidential 1,726 367 197 429 233
Consumer and other 878 393 157 141 64
------ ----- ----- ----- -----
Total nonaccrual loans 13,625 4,437 2,422 2,550 1,625
Accruing loans delinquent 90 days or more:
Real estate:
Residential - 2,564 1,836 1,140 2,030
Nonresidential - 206 - - -
Consumer and other - 678 468 285 641
------ ----- ----- ----- -----
Total loans 90 days past due - 3,448 2,304 1,425 2,671
------ ----- ----- ----- -----
Total nonperforming loans $13,625 $7,885 $4,726 $3,975 $4,296
====== ===== ===== ===== =====
Allowance for loan losses $ 5,490 $4,256 $2,906 $1,863 $1,783
====== ===== ===== ===== =====
Nonperforming loans as a percent of
total net loans 1.71% .90% .51% .55% .78%
==== === === === ===
Allowance for loan losses as a percent of
nonperforming loans 40.3% 54.0% 61.5% 46.9% 41.5%
==== ==== ==== ==== ====
The amount of interest income that would have been recorded had
nonaccrual loans performed in accordance with contractual terms totaled
approximately $940,000 for the year ended December 31, 2002. Interest collected
on such loans and included in net earnings was $127,000.
At December 31, 2002, 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. Management changed the policy for
designating loans as nonaccrual during 2002 to include all loans greater than 90
days past due.
Federal regulations require the Bank 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.
-9-
At December 31, 2002, the aggregate amounts of Camco's
classified assets were as follows:
At December 31, 2002
(In thousands)
Classified assets:
Substandard $12,383
Doubtful 1,057
Loss -
------
Total classified assets $13,440
======
The interpretive guidance of the regulations also includes 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 classifies nonaccrual residential real estate and consumer
loans with a loan to value of 72% or less as a special mention asset. Camco had
assets in the amount of $10.9 million designated as "special mention" at
December 31, 2002.
Allowance for Loan Losses. The allowance for loan losses is maintained
at a level considered appropriate by management based on historical experience,
the volume and type of lending conducted by the Bank, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to the Bank's market areas, and other factors related to
the collectibility of the Bank's loan portfolio. The following table sets forth
an analysis of Camco's allowance for loan losses:
Year ended December 31,
2002 2001 2000 1999 1998
------- ------- ------- -------- --------
(Dollars in thousands)
Balance at beginning of year $4,256 $2,906 $1,863 $1,783 $1,596
Charge-offs:
1-4 family residential real estate 134 66 9 82 9
Multifamily and nonresidential real estate - 12 41 12 -
Consumer and other 73 657 122 79 61
----- ------ ----- ----- -----
Total charge-offs 207 735 172 173 70
----- ------ ----- ----- -----
Recoveries:
1-4 family residential real estate 23 3 - - -
Multifamily and nonresidential real estate - - - 2 -
Consumer and other 249 23 6 4 7
----- ------ ----- ----- -----
Total recoveries 272 26 6 6 7
----- ------ ----- ----- -----
Net recoveries (charge-offs) 65 (709) (166) (167) (63)
Provision for losses on loans 1,169 759 568 247 250
Increase attributable to mergers (1) - 1,300 641 - -
----- ----- ----- ----- -----
Balance at end of year $5,490 $4,256 $2,906 $1,863 $1,783
===== ===== ===== ===== =====
Net recoveries (charge-offs) to average loans .01% (.08)% (.02)% (.03)% (.01)%
=== ===== ===== ===== =====
- ----------------------
(1) The 2001 increase resulted from the acquisition of Columbia Financial and
the 2000 increase resulted from the acquisition of WFC.
-10-
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,
2002 2001 2000 1999 1998
---------------- ---------------- --------------- ---------------- ----------------
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
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at year end
applicable to:
Mortgage loans $4,910 91.3% $3,418 92.1% $2,440 92.1% $1,350 92.9% $1,340 94.1%
Consumer and
other loans 580 8.7 838 7.9 466 7.9 513 7.1 443 5.9
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total $5,490 100.0% $4,256 100.0% $2,906 100.0% $1,863 100.0% $1,783 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Investment and Mortgage-Backed Securities Activities
Federal regulations require that Advantage 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. Advantage
is also permitted to make limited investments in commercial paper, corporate
debt securities and certain mutual funds, as well as other investments permitted
by federal laws and regulations. It has generally been Camco's policy to
maintain liquid assets at Advantage 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
and mortgage-backed securities portfolio, except its stock in the FHLB of
Cincinnati, at the dates indicated:
At December 31,
2002 2001 2000
--------------------------------- -------------------------------- --------------------------------
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 $ 4,233 2.7% $ 4,306 2.7% $18,682 33.0% $18,891 33.1% $16,482 51.4% $16,427 51.3%
Municipal bonds 1,135 .7 1,195 .7 190 .3 192 .3 190 .6 190 .6
Mortgage-backed
securities 20,000 12.6 20,634 12.7 30,765 54.2 30,744 53.9 5,273 16.4 5,247 16.4
------- ----- ------- ------ ------ ----- ------ ----- ------ ----- ------ -----
Total 25,368 16.0 26,135 16.1 49,637 87.5 49,827 87.3 21,945 68.4 21,864 68.3
Available for sale:
U.S. Government
agency obligations 35,557 22.5 36,004 22.2 - - - - - - - -
Municipal bonds 2,414 1.5 2,463 1.5 - - - - - - - -
Corporate equity
securities 330 .2 322 .2 245 .4 305 .5 245 .7 309 1.0
Mortgage-backed
securities 94,641 59.8 97,332 60.0 6,872 12.1 6,975 12.2 9,908 30.9 9,850 30.7
------- ----- ------- ------ ------ ----- ------ ----- ------ ----- ------ -----
Total 132,942 84.0 136,121 83.9 7,117 12.5 7,280 12.7 10,153 31.6 10,159 31.7
------- ----- ------- ------ ------ ----- ------ ----- ------ ----- ------ -----
Total investments and
mortgage-backed
securities $158,310 100.0% $162,256 100.0% $56,754 100.0% $57,107 100.0% $32,098 100.0% $32,023 100.0%
======= ===== ======= ===== ====== ===== ====== ===== ====== ===== ====== =====
-11-
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, 2002:
At December 31, 2002
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 $3,000 5.39% $34,557 2.81% $ 1,500 4.17% $ 733 2.75% $ 39,790 $ 40,310 3.06%
Municipal bonds 106 3.05 1,576 4.25 1,777 5.58 90 6.66 3,549 3,658 5.27
Mortgage-backed
securities 87 6.19 17,378 3.90 64,982 5.04 32,194 4.54 114,641 117,966 4.73
----- ---- ------ ---- ------ ---- ------ ---- ------- ------- ----
Total $3,193 5.34% $53,511 3.21% $68,259 5.03% $33,017 4.50% $157,980 $161,934 4.32%
===== ==== ====== ==== ====== ==== ====== ==== ======= ======= ====
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. As part of Camco's asset and liability management strategy, FHLB
advances and other borrowings are used to fund loan originations and for general
business purposes. FHLB advances are also used on a short-term basis to
compensate for reductions in the availability of funds from other sources.
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 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 Advantage based on its liquidity
requirements, growth goals and interest rates paid by competitors. Interest
rates paid by Advantage on deposits are not limited by federal or state law or
regulation. Advantage generally does not obtain funds through brokers or offer
premiums to attract deposits. Advantage does not have a significant amount of
savings accounts from outside its primary market areas.
-12-
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Advantage at the dates indicated:
At December 31,
2002 2001 2000
------------------- ------------------- -------------------
Weighted-
average Percent Percent Percent
rate at of total of total of total
12/31/02 Amount deposits Amount deposits Amount deposits
(Dollars in thousands)
Withdrawable accounts:
Interest and non-interest bearing
checking accounts .81% $106,875 15.4% $111,649 15.3% $ 90,830 14.4%
Money market demand accounts 2.51 116,206 16.7 64,539 8.8 45,047 7.1
Passbook and statement savings 0.79 78,359 11.3 85,443 11.7 69,706 11.0
---- ------- ----- ------- ----- ------- -----
accounts
Total withdrawable accounts 1.46 301,440 43.4 261,631 35.8 205,583 32.5
Certificate accounts:
Term:
Seven days to one year 1.58 24,537 3.6 51,472 7.0 64,693 10.2
One to two years 2.82 79,172 11.4 136,859 18.8 139,103 22.0
Two to eight years 4.96 179,711 25.9 163,226 22.4 117,146 18.5
Negotiated rate certificates 2.35 40,361 5.8 54,998 7.5 56,552 9.0
Individual retirement accounts 4.27 68,851 9.9 61,889 8.5 49,211 7.8
---- ------- ----- ------- ----- ------- -----
Total certificate accounts 3.93 392,632 56.6 468,444 64.2 426,705 67.5
---- ------- ----- ------- ----- ------- -----
Total deposits 2.86% $694,072 100.0% $730,075 100.0% $632,288 100.0%
==== ======= ===== ======= ===== ======= =====
The following table presents the amount and contractual maturities of
Camco's time deposits at December 31, 2002:
Amount Due
Up to Over
one year 1-3 years 3-5 years 5 years Total
-------- --------- --------- ------- ---------
(Dollars in thousands)
Amount maturing $216,958 $135,282 $37,110 $3,282 $392,632
======= ======= ====== ===== =======
Average rate 3.48% 4.21% 5.36% 5.77% 3.93%
==== ==== ==== ==== ====
The following table sets forth the amount and maturities of Camco's
time deposits in excess of $100,000 at December 31, 2002:
Maturity At December 31, 2002
(In thousands)
Three months or less $27,640
Over three to six months 20,235
Over six to twelve months 13,930
Over twelve months 27,853
------
Total $89,658
======
Borrowings. The twelve regional FHLBs function as central reserve
banks, providing credit for their member institutions. As a member in good
standing of the FHLB of Cincinnati, Advantage is 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
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
-13-
depend upon whether it meets the Qualified Thrift Lender ("QTL") 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, 2002, Advantage 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,
---------------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
Maximum amount outstanding $282,122 $313,472 $357,411
Average amount outstanding $265,614 $280,747 $325,805
Weighted-average interest cost of FHLB
advances based on month end balances 5.83% 6.09% 6.37%
The following table sets forth certain information with respect to
Camco's FHLB advances at the dates indicated:
At December 31,
-----------------------------------------------
2002 2001 2000
-------- -------- --------
(Dollars in thousands)
Amount outstanding $276,276 $258,850 $313,471
Weighted-average interest rate 5.63% 6.02% 6.20%
Competition
Advantage 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, Advantage competes with other
savings banks, savings associations, commercial banks, consumer finance
companies, credit unions and other lenders. Advantage 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.
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 activities. 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, 2002, Advantage had a direct investment in the capital
stock of CMC in the amount of approximately $711,000. The principal business of
CMC is originating first mortgage loans on residential real estate located
primarily in Franklin, Ross, Stark and Tuscarawas Counties, Ohio. Loans
originated by CMC are generally sold to Advantage. CMC originated $152.9 million
of mortgage loans in 2002, $130.7 million of which were sold to Advantage,
compared to $57.9 million which were sold in 2001.
First S&L Corporation, a subsidiary of Advantage, did not conduct any
business during the year ended December 31, 2002, and was capitalized on a
nominal basis at December 31, 2002.
-14-
Employees
As of December 31, 2002, Camco had 265 full-time employees and 49
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.
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. Advantage is subject to
regulation by the Division and the FDIC. Camco and Advantage 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 Advantage are in
compliance with various regulatory requirements and are operating in a safe and
sound manner. Advantage is also subject to certain regulations promulgated by
the Board of Governors of the Federal Reserve System ("FRB").
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies, including Camco, with equity securities registered or that file
reports under the Securities Exchange Act of 1934. The Sarbanes-Oxley Act
establishes, among other things: (i) new requirements for audit committees; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer; (iii) new standards for auditors
and regulations governing audits; (iv) increased disclosure and reporting
obligations for the reporting company and its directors and executive officers;
and (v) new and increased civil and criminal penalties for violations of the
securities laws.
Ohio Regulation
Regulation by the Division affects the internal organization of
Advantage, as well as its savings, mortgage lending and other investment
activities. Ohio law requires that Advantage maintain at least 60% of its assets
in housing-related and other specified investments. At December 31, 2002,
Advantage had at least 60% of its assets in such investments.
Periodic examinations by the Division are usually conducted on a joint
basis with the federal examiners. Ohio law requires that Advantage maintain
federal deposit insurance as a condition of doing business. The ability of Ohio
savings banks to engage in certain state-authorized investments is subject to
oversight and approval by the FDIC. See "Federal Deposit Insurance Corporation -
State Chartered Bank Activities."
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, Advantage is also governed by Ohio corporate law, to
the extent such law does not conflict with the laws specifically governing
savings banks.
Federal Deposit Insurance Corporation
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. The FDIC is an
-15-
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 certain state savings banks and the SAIF for savings associations and
savings banks which were formerly organized as savings associations. As a former
savings association, Advantage is a member of the SAIF and its deposit accounts
are insured by the FDIC, up to the prescribed limits.
The FDIC issues regulations governing the operations of Non-member
Banks, examines such institutions and may initiate enforcement actions against
the institution and their affiliates 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.
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 Advantage 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. Advantage is not required to maintain a specific level of
liquidity; however, the FDIC expects it to maintain adequate liquidity to
protect safety and soundness.
Regulatory Capital Requirements. Advantage is 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 and a risk-based capital requirement.
The leverage capital requirement is a minimum level of Tier 1 capital
to average total consolidated assets of 4%. "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.
The risk-based capital requirement, specified 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.
The FDIC has 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. Advantage's
capital level at December 31, 2002, met the standards for well-capitalized
institutions.
-16-
The following tables present certain information regarding compliance
by Advantage with applicable regulatory capital requirements at December 31,
2002:
At December 31, 2002
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) $81,269 12.7% =>$51,067 =>8.0% =>$63,834 =>10.0%
Tier I capital
(to risk-weighted assets) $75,779 11.9% =>$25,533 =>4.0% =>$38,300 => 6.0%
Tier I leverage $75,779 7.2% =>$42,365 =>4.0% =>$52,956 => 5.0%
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
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance.
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. Advantage
was in compliance with such restrictions at December 31, 2002.
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.
Exemptions from Sections 23A or 23B of the FRA may be granted only by the FRB.
Advantage was in compliance with these requirements at December 31, 2002.
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
-17-
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
As a savings and loan holding company within the meaning of the HOLA,
Camco has registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Except with the prior approval 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 holding company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
As a unitary savings and loan holding company in existence on May 4,
1999, Camco generally has no restrictions on its activities. If the OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness or stability of its subsidiary savings
association, however, the OTS may impose such restrictions as deemed necessary
to address such risk, including limiting (i) payment of dividends by the savings
association, (ii) transactions between the savings association and its
affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of Camco and its affiliates may be
imposed on the savings association. Notwithstanding the foregoing rules as to
permissible business activities of a unitary savings and loan holding company,
if the savings association subsidiary of a holding company is not a qualified
thrift lender ("QTL"), then such unitary savings and loan holding company would
become subject to the activities restrictions applicable to multiple holding
companies.
In order to be a QTL, a savings association must meet one of two tests.
The first test requires a savings association to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
("QTIs"). Generally, QTIs are assets related to domestic residential real estate
and manufactured housing, although they also include credit card, student and
-18-
small business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under
the QTL 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. The second test permits a savings association to qualify as a
QTL by meeting the definition of "domestic building and loan association" under
the Internal Revenue Code of 1986, as amended (the "Code"). In order for an
institution to meet the definition of a "domestic building and loan association"
under the Code, at least 60% of its assets must consist of specified types of
property, including cash, loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. At December 31, 2002,
Advantage met the QTL test.
Federal Reserve Requirements
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $41.3
million (subject to an exemption of up to $5.7 million), and of 10% of net
transaction accounts in excess of $41.3 million. At December 31, 2002, Advantage
was in compliance with its reserve requirements.
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
exemptions. 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.
Certain thrift institutions, such as Advantage, are allowed deductions
for bad debts under methods more favorable than those granted to other
taxpayers. Qualified thrift institutions may compute deductions for bad debts
using either the specific charge-off method of Section 166 of the Code or the
experience method of Section 593 of the Code. The "experience" method is also
available to small banks. Under the "experience" method, a thrift institution is
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.
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 debts 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, 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
-19-
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. Advantage is required to
recapture $1.9 million of its bad debt reserve for which deferred taxes have
been provided. The recapture is being effected over a six year period commencing
in 1998.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) 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 Advantage 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 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,
2002, the pre-1988 reserves for Advantage for tax purposes totaled approximately
$12.8 million. Camco believes Advantage had approximately $15.3 million of
accumulated earnings and profits for tax purposes as of December 31, 2002, 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 Advantage 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 1998. 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 Camco Title 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 8.5% of computed Ohio taxable
income in excess of $50,000 or (ii) .40% 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.
Advantage is a "financial institution" for State of Ohio tax purposes.
As such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.3% of its book net worth
determined in accordance with generally accepted accounting principles. As a
"financial institution," Advantage is not subject to any tax based upon net
income or net profits imposed by the State of Ohio.
CMC is subject to the Ohio Dealers in Intangibles property tax but
currently incurs no liability because CMC is owned by an Ohio financial
institution.
-20-
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. Advantage is subject to an annual ad
valoreum tax which is .1% of Advantage's Kentucky deposit accounts, and
apportioned 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. Advantage and Camco Title are 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 9.0%. 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.
-21-
Item 2. Properties.
The following table provides the location of, and certain other
information pertaining to, Camco's office premises as of December 31, 2002:
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
- --------------- ---------- ------- ----------
134 E. Court Street
Washington Court House, Ohio 1963 Owned (2) $ 807,835
1050 Washington Ave.
Washington Court House, Ohio 1996 Owned 534,648
1 N. Plum Street
Germantown, Ohio 1998 Owned 549,435
687 West Main Street
New Lebanon, Ohio 1998 Owned 86,564
1392 Cherry Bottom Road
Gahanna, Ohio 1999 Leased (3)
3002 Harrison Avenue
Cincinnati, Ohio 2000 Owned 1,584,492
1101 St. Gregory Street
Cincinnati, Ohio 2000 Leased (4)
5071 Glencrossing Way
Cincinnati, Ohio 2000 Leased (5)
126 S. 9th Street
Cambridge, Ohio 1998 Owned 105,941
226 Third Street
Marietta, Ohio 1976 Owned (6) 570,596
1925 Washington Boulevard
Belpre, Ohio 1979 Owned 80,638
478 Pike Street
Marietta, Ohio 1998 Leased (7) 611,465
510 Grand Central Avenue
Vienna, West Virginia 1991 Leased (8)
814 Wheeling Avenue
Cambridge, Ohio 1963 Owned (9) 941,872
- --------------------------
(Footnotes begin on page 24)
-22-
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
- --------------- ---------- ------- ----------
327 E. 3rd Street
Uhrichsville, Ohio 1975 Owned $ 82,251
175 N. 11th Street
Cambridge, Ohio 1981 Owned 439,336
209 Seneca Avenue
Byesville, Ohio 1978 Leased (10)
547 S. James Street
Dover, Ohio 2002 Owned 387,376
2497 Dixie Highway
Ft. Mitchell, Kentucky 2001 Owned 49,164
401-7 Pike Street
Covington, Kentucky 2001 Owned 124,383
3522 Dixie Highway
Erlanger, Kentucky 2001 Owned 607,275
612 Buttermilk Pike
Crescent Springs, Kentucky 2001 Owned 53,622
7550 Dixie Highway
Florence, Kentucky 2001 Owned 529,340
1640 Carter Avenue
Ashland, Kentucky 1996 Owned 799,511
U.S. 60A West
Summit, Kentucky 1996 Owned 648,437
280 Russell Road
Ashland, Kentucky 1996 Owned 92,951
191 Eastern Heights
Shopping Center
Huntington, West Virginia 1997 Leased (11)
6901 Glenn Highway
Cambridge, Ohio 1999 Owned 1,340,570
1320A and 1320 D 4th Street, N.W.
New Philadelphia, Ohio 1985 Owned (12) 201,142
- --------------------------
(Footnotes on following page)
-23-
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
- --------------- ---------- ------- ----------
6269 Frank Ave.
N. Canton, Ohio 1992 Leased (13)
45 West Second Street
Chillicothe, Ohio 1994 Leased (14)
(1) Net book value amounts are for land, buildings and improvements.
(2) The 134 E. Court Street facility also serves as the Camco Title - WCH
office.
(3) The lease expires in 2004 and Advantage has the option to renew for a five
year term. The 1392 Cherry Bottom Road facility also serves as the Camco
Mortgage Corporation - Gahanna office.
(4) The lease is currently on a month to month basis.
(5) The lease expires in April 2006. Advantage has the option to renew for a
five-year term.
(6) The 226 Third Street facility also serves as the Camco Title - Marietta
office.
(7) The lease expires in 2017. Advantage has the option to renew for 2
five-year terms. The lease is for land.
(8) The lease expires in August 2003.
(9) The Wheeling Avenue facility also serves as the Camco Title - Cambridge
office.
(10) The lease expires in 2005. Advantage has the option to renew the lease for
two five-year terms.
(11) The lease expires in March 2005.
(12) The 4th Street facility also serves as the Camco Title - New Philadelphia
office.
(13) The lease expires in June 2003, with an option to renew for a two-year
term.
(14) The lease expires in September 2004.
Camco also owns furniture, fixtures and equipment. The net book value
of Camco's investment in office premises and equipment totaled $14.5 million at
December 31, 2002. See Note E of Notes to Consolidated Financial Statements for
additional information.
Item 3. Legal Proceedings.
Neither Camco nor Advantage is presently engaged in any legal
proceedings of a material nature. From time to time, Advantage 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.
-24-
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
At December 31, 2002, Camco had 7,688,885 shares of common stock
outstanding held by approximately 3,910 recordholders and non-objecting
beneficial owners. Price information for Camco's common stock is quoted on The
Nasdaq National Market ("Nasdaq") under the symbol "CAFI." The table below sets
forth the high and low trade information for the common stock of Camco, together
with the dividends declared per share of common stock, for each quarter of 2002,
2001 and 2000.
Cash
dividends
Year ended December 31, 2002 High Low declared
- ---------------------------- -------- ------- -----------
Quarter ending:
December 31, 2002 $14.30 $12.95 $0.135
September 30, 2002 14.75 13.13 0.135
June 30, 2002 14.61 13.00 0.130
March 31, 2002 13.35 12.10 0.125
Year ended December 31, 2001
Quarter ending:
December 31, 2001 $13.00 $10.95 $0.120
September 30, 2001 13.75 12.01 0.120
June 30, 2001 12.58 10.60 0.120
March 31, 2001 11.38 9.44 0.120
Year ended December 31, 2000
Quarter ending:
December 31, 2000 $10.62 $ 8.52 $0.120
September 30, 2000 10.38 8.18 0.120
June 30, 2000 9.64 8.31 0.120
March 31, 2000 9.51 7.67 0.120
In addition to certain federal income tax considerations, regulations
of OTS impose limitations on the payment of dividends and other capital
distributions by savings associations.
-25-
Item 6. Selected Consolidated Financial Data.
The following tables set forth certain information concerning the
consolidated financial position and results of operations of Camco for the
periods indicated. This selected consolidated financial data should be read in
conjunction with the consolidated financial statements appearing elsewhere in
this report.
SELECTED CONSOLIDATED
FINANCIAL DATA:(1) At December 31,
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
Total amount of:
Assets $1,083,240 $1,102,652 $1,037,856 $813,482 $637,135
Interest-bearing deposits in other financial
institutions 36,807 89,299 4,916 247 22,609
Investment securities available for sale - at market 38,789 305 309 273 1,292
Investment securities held to maturity 5,368 18,872 16,672 16,864 10,962
Mortgage-backed securities available for sale - at market 97,332 6,975 9,850 6,475 3,476
Mortgage-backed securities held to maturity 20,000 30,765 5,273 5,944 5,019
Loans receivable - net (2) 796,958 871,446 930,672 726,225 548,669
Deposits 694,072 730,075 632,288 461,787 443,227
FHLB advances and other borrowings 276,276 258,850 313,471 279,125 125,483
Stockholders' equity - substantially restricted 98,601 95,171 78,750 62,609 60,139
SELECTED CONSOLIDATED
OPERATING DATA: (1) Year ended December 31,
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Total interest income $66,002 $74,372 $75,671 $51,093 $44,283
Total interest expense 38,556 48,433 49,609 29,907 24,852
------ ------ ------ ------ ------
Net interest income 27,446 25,939 26,062 21,186 19,431
Provision for losses on loans 1,169 759 568 247 250
------ ------ ------ ------ ------
Net interest income after provision for losses on loans 26,277 25,180 25,494 20,939 19,181
Other income 10,100 7,153 5,536 5,190 7,552
General, administrative and other expense 21,682 18,948 19,530 17,113 16,319
Restructuring charges (credits) related to charter consolidation (112) 950 - - -
------ ------ ------ ------ ------
Earnings before federal income taxes 14,807 12,435 11,500 9,016 10,414
Federal income taxes 4,802 3,891 3,848 3,076 3,410
------ ------ ------ ------ ------
Net earnings $10,005 $ 8,544 $ 7,652 $ 5,940 $ 7,004
====== ====== ====== ====== ======
Earnings per share: (3)
Basic $1.27 $1.20 $1.11 $1.04 $1.22
==== ==== ==== ==== ====
Diluted $1.25 $1.19 $1.10 $1.02 $1.19
==== ==== ==== ==== ====
Year ended December 31,
2002 2001 2000 1999 1998
----------------------------------------------------
Return on average assets (4) 0.92% 0.80% 0.83% 0.82% 1.16%
Return on average assets excluding restructuring charges (4) 0.90 0.86 0.83 0.82 1.16
Return on average equity (4) 10.33 9.83 10.83 9.68 12.13
Return on average equity excluding restructuring charges (4) 10.17 10.54 10.83 9.68 12.13
Average equity to average assets (4) 8.86 8.13 7.64 8.46 9.56
Dividend payout ratio (5) 41.34 40.00 43.24 44.37 31.23
- -----------------------------
(1) The information as of December 31, 2001 reflects the acquisition of
Columbia Financial of Kentucky, Inc. The information as of December 31,
2000 reflects the acquisition of Westwood Homestead Financial Corporation.
These combinations were accounted for using the purchase method of
accounting.
(Footnotes continued on following page)
-26-
(2) Includes loans held for sale.
(3) Earnings per share has been adjusted to give effect to a 5% stock dividend
which was effected during the year ended December 31, 1999.
(4) Ratios are based upon the mathematical average of the balances at the
beginning and the end of the year. (5) Represents dividends per share
divided by basic earnings per share.
Item 7. 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 Advantage Bank.
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 $1.1 billion of consolidated assets at December
31, 2002. Camco's rate of growth is largely attributable to its acquisitions of
Marietta Savings, First Savings, First Bank for Savings, Germantown Federal,
Westwood Homestead and Columbia Savings and its continued expansion of product
lines from the limited deposit and loan offerings which the Bank 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 Bank's 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 Bank's divisions have the ability to make local decisions for customer
contacts and services, however back-office operations are consolidated and
centralized. Based on consumer preferences, the Bank's management designs
financial service products with a view towards differentiating each of the
constituent divisions from its competition. Management believes that the Bank
divisions' ability 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 mortgage banking income and other fee income. Camco's
operations are also affected by general, administrative and other expenses,
including employee compensation and benefits, occupancy expense, data
processing, franchise taxes, advertising, other operating expenses and federal
income tax expense.
Discussion of Financial Condition Changes from December 31, 2001 to December 31,
2002
At December 31, 2002, Camco's consolidated assets totaled $1.08
billion, a decrease of $19.4 million, or 1.8%, from the December 31, 2001 total.
The decrease in total assets was comprised primarily of a decrease in loans
receivable and a decrease in cash and cash equivalents, which were partially
offset by increases in investment securities and mortgage-backed securities.
During 2002, Camco continued to experience a high rate of loan refinance
activity as the interest rate environment remained at almost unprecedented lows.
Management elected to invest proceeds from loan repayments generally into
investment and mortgage-backed securities designated as available for sale,
which offered higher yields than short-term alternatives.
Cash and interest-bearing deposits in other financial institutions
totaled $57.0 million at December 31, 2002, a decrease of $47.9 million, or
45.7%, from December 31, 2001 levels. Investment securities totaled $44.2
million at December 31, 2002, an increase of $25.0 million, or 130.3%, over the
total at December 31, 2001. Investment securities purchases were comprised of
$63.1 million of intermediate-term U.S. Government agency obligations, $43.1
million of which were callable, with an average yield of 3.41%, and $2.9 million
in municipal securities. Such purchases were partially offset by $41.3 million
of maturities of securities during the year.
-27-
Mortgage-backed securities totaled $117.3 million at December 31, 2002,
an increase of $79.6 million, or 210.9%, over December 31, 2001. Mortgage-backed
securities purchases totaled $113.1 million, while principal repayments totaled
$34.4 million during the year ended December 31, 2002. Purchases of
mortgage-backed securities during the year were comprised primarily of balloon
and ten-year amortizing U.S. Government agency securities yielding 5.02%, which
were classified as available for sale. Purchases of investment and
mortgage-backed securities were funded primarily with proceeds from loan
principal repayments and excess liquidity.
Loans receivable and loans held for sale totaled $797.0 million at
December 31, 2002, a decrease of $74.5 million, or 8.5%, from the total at
December 31, 2001. The decrease resulted primarily from loan sales of $240.5
million and principal repayments of $408.4 million, which were partially offset
by loan disbursements of $572.3 million and purchases of $3.2 million. Loan
origination volume, including purchases of loans, during 2002 exceeded 2001
volume by $213.8 million, or 59.1%, which was primarily attributable to an
increase in refinancing activity following the decreases in the overall level of
long-term interest rates during the two year period ended December 31, 2002.
The allowance for loan losses totaled $5.5 million and $4.3 million at
December 31, 2002 and 2001, respectively, representing 40.3% and 54.0% of
nonperforming loans at those dates. Nonperforming loans (90 days or more
delinquent plus nonaccrual loans) totaled $13.6 million and $7.9 million at
December 31, 2002 and 2001, respectively, constituting 1.71% and .90% of total
net loans, including loans held for sale, at those dates. At December 31, 2002,
nonperforming loans were comprised of $10.2 million of loans secured by one- to
four-family residential real estate, $2.5 million of loans secured by
multi-family and nonresidential real estate, $165,000 of commercial loans and
$713,000 of consumer and other loans. Although management believes that its
allowance for loan losses at December 31, 2002, 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 $694.1 million at December 31, 2002, a decrease of
$36.0 million, or 4.9%, from December 31, 2001 levels. The decrease resulted
primarily from management's decision not to aggressively bid on certificates of
deposit which matured during 2002, due to the current low interest rate
environment. While management has generally pursued a strategy of moderate
growth in the deposit portfolio, Advantage has not historically engaged in
sporadic increases or decreases in interest rates offered, nor has it offered
the highest interest rates available in its market areas. Advances from the
Federal Home Loan Bank ("FHLB") increased by $17.4 million, or 6.7%, to a total
of $276.3 million at December 31, 2002.
Stockholders' equity totaled $98.6 million at December 31, 2002, a $3.4
million, or 3.6%, increase over December 31, 2001. The increase resulted
primarily from net earnings of $10.0 million, proceeds from the exercise of
stock options of $2.1 million and a $2.0 million increase in the unrealized
gains on available for sale securities, which were partially offset by dividends
of $4.1 million and purchases of treasury shares totaling $6.3 million.
The Bank is required to maintain minimum regulatory capital pursuant to
federal regulations. During 2002, management was notified by its supervisory
regulators that Advantage was categorized as well-capitalized under the
regulatory framework for prompt corrective action. At December 31, 2002, the
Bank's regulatory capital exceeded all regulatory capital requirements.
Comparison of Results of Operations for the Years Ended December 31, 2002 and
December 31, 2001
General. Camco's net earnings for the year ended December 31, 2002,
totaled $10.0 million, an increase of $1.5 million, or 17.1%, over the $8.5
million of net earnings reported in 2001. The increase in earnings was primarily
attributable to a one-time charge of $950,000 in pre-tax expense related to the
consolidation of the bank charters in the 2001 period and the recognition of a
$112,000 reversal of this restructuring charge during the 2002 period.
Additionally, net interest income increased by $1.5 million and other income
increased by $2.9 million, while the provision for losses on loans increased by
$410,000, general, administrative and other expense increased by $2.7 million
(excluding the effects of the restructuring charge) and the provision for
federal income taxes increased by $911,000.
Income and expenses for 2002 include the effects of the acquisition of
Columbia Financial, which was acquired by Camco in November 2001 in a
transaction accounted for using the purchase method of accounting.
-28-
Net Interest Income. Total interest income for the year ended December
31, 2002, amounted to $66.0 million, a decrease of $8.4 million, or 11.3%,
compared to 2001, generally reflecting the effects of a decrease of 110 basis
points in the average yield, from 7.49% in 2001 to 6.39% in 2002, which was
partially offset by a $39.4 million, or 4.0%, increase in the average balance of
interest-earning assets outstanding year to year.
Interest income on loans totaled $57.5 million for the year ended
December 31, 2002, a decrease of $12.0 million, or 17.3%, from the comparable
2001 total. The decrease resulted primarily from a $77.7 million, or 8.7%,
decrease in the average balance outstanding and a 72 basis point decrease in the
average yield to 7.07% in 2002. Interest income on mortgage-backed securities
totaled $4.5 million for the year ended December 31, 2002, a $3.5 million, or
327.1%, increase over the 2001 period. The increase was due primarily to an
$81.6 million, or 439.7%, increase in the average balance outstanding, which was
partially offset by a 119 basis point decrease in the average yield to 4.52% in
2002. Interest income on investment securities increased by $849,000, or 122.0%,
due primarily to a $22.3 million increase in the average balance outstanding
year to year, which was partially offset by a 144 basis point decline in the
average yield to 4.55% in the 2002 period. Interest income on other
interest-earning assets decreased by $700,000, or 22.2%, due primarily to a
decrease in the yield of 150 basis points to 2.88% in 2002, which was partially
offset by a $13.1 million, or 18.2%, increase in the average balance outstanding
year to year.
Interest expense on deposits totaled $23.1 million for the year ended
December 31, 2002, a decrease of $8.3 million, or 26.4%, compared to the year
ended December 31, 2001, due primarily to a 151 basis point decrease in the
average cost of deposits, to 3.40% for 2002, which was partially offset by a
$39.2 million, or 6.1%, increase in the average balance of interest-bearing
deposits outstanding year to year. Interest expense on borrowings totaled $15.5
million for the year ended December 31, 2002, a decrease of $1.6 million, or
9.4%, from the 2001 period. The decrease resulted primarily from a $15.1
million, or 5.4%, decrease in the average balance outstanding year to year and a
26 basis point decrease in the average rate, to 5.83% in 2002. Decreases in the
level of average yields on interest-earning assets and average cost of
interest-bearing liabilities were due primarily to the overall decrease in
interest rates in the economy during 2001 and 2002.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $1.5 million, or 5.8%, to a total of
$27.4 million for the year ended December 31, 2002. The interest rate spread
increased to approximately 2.30% at December 31, 2002, from 2.22% at December
31, 2001, while the net interest margin increased to approximately 2.66% for the
year ended December 31, 2002, compared to 2.61% for the 2001 period.
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 Bank, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Bank's market areas, and other factors related to the
collectibility of the Bank's loan portfolio. Based upon an analysis of these
factors, management recorded a provision for losses on loans totaling $1.2
million for the year ended December 31, 2002, an increase of $410,000, or 54.0%,
over the provision recorded in 2001. The 2002 provision generally reflects the
$5.7 million increase in the level of nonperforming loans. The provision also
reflects the increasing percentage of loans secured by nonresidential real
estate and consumer loans in relation to total loans during 2002. Management
believes all nonperforming loans are adequately collateralized, however, there
can be no assurance that the loan loss allowance will be adequate to absorb
losses on known nonperforming assets or that the allowance will be adequate to
cover losses on nonperforming assets in the future.
Other Income. Other income totaled $10.1 million for the year ended
December 31, 2002, an increase of $2.9 million, or 41.2%, compared to 2001. The
increase in other income was primarily attributable to a $1.0 million, or 22.2%,
increase in gains on sale of loans, a $1.6 million increase in loan servicing
fees and an increase of $262,000, or 8.4%, in late charges, rent and other. The
increase in loan servicing fees was due primarily to a decrease in the level of
amortization of mortgage servicing rights and due to the effects of a $1.3
million valuation allowance to recognize impairment on mortgage servicing rights
recorded in the 2001 period, $640,000 of which was recovered in 2002, based upon
the Corporation's ongoing fair value analysis of the mortgage servicing rights
asset. The increase in gain on sale of loans was due primarily to an increase in
the volume of loans sold of $25.3 million, or 11.7%, over the volume of loans
sold in 2001. The increase in late charges, rent and other was due primarily to
an increase in insurance fees, title premiums and other fees on loans and
deposit transactions.
-29-
General, Administrative and Other Expense. General, administrative and
other expense totaled $21.6 million for the year ended December 31, 2002, an
increase of $1.7 million, or 8.4%, compared to 2001. The increase in general,
administrative and other expense was due primarily to an increase of $2.3
million, or 28.9%, in employee compensation and benefits, a $287,000, or 9.0%,
increase in occupancy and equipment, and an increase of $691,000, or 15.1%, in
other operating expense, which were partially offset by the effects of a
nonrecurring restructuring charge totaling $950,000 recorded in 2001 and the
$112,000 restructuring credit recognized in 2002, as well as a $297,000, or
26.6% decrease in franchise taxes, a $167,000, or 12.4%, decrease in data
processing and a $150,000 decrease in goodwill amortization. The increase in
employee compensation and benefits was due primarily to the acquisition of the
Columbia division, an increase in management staffing levels, an increase in
incentive compensation and other benefit plan costs and normal merit
compensation increases, which were partially offset by an increase in deferred
loan origination costs related to the increase in lending volume year to year.
Camco increased its management staffing complement year to year as it continues
to implement its corporate strategy following the 2001 restructuring plan. The
increase in occupancy and equipment resulted primarily from the inclusion of
Columbia. The increase in other operating expense was due primarily to costs
incurred at the Columbia division and increases in legal expense, costs
associated with real estate acquired through foreclosure, office supplies and
costs associated with the increase in lending volume year to year. The decrease
in franchise tax expense reflects the effects of refund claims on prior year tax
filings. The decrease in data processing was due primarily to efficiencies
realized related to the consolidation of the Bank charters. The decrease in
goodwill amortization was due to the adoption of SFAS No. 142, a new accounting
standard which eliminates goodwill amortization. The restructuring credit
resulted from severance charges recorded in 2001 that were not utilized due
primarily to early terminations.
Federal Income Taxes. The provision for federal income taxes totaled
$4.8 million for the year ended December 31, 2002, an increase of $911,000, or
23.4%, compared to the provision recorded in 2001. This increase was primarily
attributable to a $2.4 million, or 19.1%, increase in pre-tax earnings year to
year and the 2001 receipt of refunds claimed for prior years' tax liabilities.
The effective tax rate amounted to 32.4% and 31.3% for the years ended December
31, 2002 and 2001, respectively.
Comparison of Results of Operations for the Years Ended December 31, 2001 and
December 31, 2000
General. Increases in the level of income and expenses during the year
ended December 31, 2001, compared to 2000, include the effects of the
acquisition of Columbia Financial, which was acquired by Camco in November 2001
in a transaction accounted for using the purchase method of accounting.
Camco's net earnings for the year ended December 31, 2001, totaled $8.5
million, an increase of $892,000, or 11.7%, over the $7.7 million of net
earnings reported in 2000. The increase in earnings was primarily attributable
to a $1.6 million increase in other income, which was partially offset by a
$123,000 decrease in net interest income, a $191,000 increase in the provision
for losses on loans, an increase in general, administrative and other expense of
$368,000 and a $43,000 increase in the provision for federal income taxes.
Net Interest Income. Total interest income for the year ended December
31, 2001, amounted to $74.4 million, a decrease of $1.3 million, or 1.7%,
compared to 2000, generally reflecting the effects of a decrease of 37 basis
points in the average yield, from 7.86% in 2000 to 7.49% in 2001, which was
partially offset by a $30.7 million, or 3.2%, increase in the average balance of
interest-earning assets outstanding year to year. The acquisition of Columbia
Financial accounted for approximately $1.2 million of interest income recorded
during 2001.
Interest income on loans and mortgage-backed securities totaled $70.5
million for the year ended December 31, 2001, a decrease of $2.1 million, or
2.9%, compared to the 2000 total. The decrease resulted primarily from a $9.4
million, or 1.0%, decrease in the weighted-average balance outstanding and a 15
basis point decrease in the average yield, to 7.75% in 2001. Interest income on
investments and interest-bearing deposits increased by $825,000, or 27.3%, due
primarily to a $40.0 million, or 91.7%, increase in the weighted-average
outstanding balance, which was partially offset by a 234 basis point decrease in
the average yield, to 4.60% in 2001.
Interest expense on deposits totaled $31.3 million for the year ended
December 31, 2001, an increase of $2.5 million, or 8.5%, over the 2000 total.
The increase was due to an increase in the weighted-average balance of deposits
outstanding of $48.2 million, or 8.2% year to year, and a 2 basis point increase
in the average cost of deposits, from 4.89% in 2000 to 4.91% in 2001. The
-30-
acquisition of Columbia Financial accounted for approximately $559,000 of the
overall increase in interest expense in the 2001 period. Interest expense on
borrowings totaled $17.1 million for the year ended December 31, 2001, a
decrease of $3.6 million, or 17.5%, compared to 2000. The decrease resulted
primarily from a $45.1 million, or 13.8%, decrease in the weighted-average
balance of borrowings outstanding year to year and a decrease of 28 basis points
in the weighted-average cost of borrowings, to 6.09% in 2001.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $123,000, or 0.5%, to a total of $25.9
million for the year ended December 31, 2001, compared to $26.1 million in 2000.
The interest rate spread decreased to approximately 2.22% for the year ended
December 31, 2001, from 2.45% for 2000, while the net interest margin decreased
to approximately 2.61% in 2001, compared to 2.71% in 2000.
Provision for Losses on Loans. Camco recorded a provision for losses on
loans totaling $759,000 for the year ended December 31, 2001, an increase of
$191,000, or 33.6%, over the provision recorded in 2000. The 2001 provision
generally reflects the $3.2 million increase in the level of nonperforming
loans, as well as a $3.7 million, or 34.9%, increase in loans greater than 30
days but less than 90 days delinquent year to year. The provision also reflects
the $15.5 million, or 28.4%, increase in loans secured by nonresidential real
estate during 2001.
Other Income. Other income totaled $7.2 million for the year ended
December 31, 2001, an increase of $1.6 million, or 29.2%, compared to 2000. The
increase in other income was primarily attributable to a $2.5 million, or
120.2%, increase in gains on sale of loans and an increase of $1.1 million, or
52.1%, in late charges, rent and other, which were partially offset by a $2.1
million decrease in loan servicing fees. The increase in gains on sale of loans
primarily reflects the increase in sales volume year to year. The increase in
late charges, rent and other operating income was due primarily to an increase
in revenues at Camco Title Insurance Agency and increased fees on loan and
deposit accounts and transactions year to year. The decrease in loan servicing
fees was due primarily to an increase in amortization and impairment charges
related to the Bank's mortgage servicing rights asset ("MSRs"). During 2001,
amortization of MSRs increased over 2000 by $931,000, or 154.6%, due primarily
to prepayments of loans associated with refinancing activity during the lower
interest rate environment. Additionally, Advantage recorded an impairment charge
in 2001 totaling $1.3 million, based upon an independent appraisal of the MSRs.
General, Administrative and Other Expense. General, administrative and
other expense totaled $19.9 million for the year ended December 31, 2001, an
increase of $368,000, or 1.9%, compared to 2000. Camco recorded a one-time
restructuring charge of $950,000 in the second quarter of 2001, which was
primarily related to compensation charges and professional fees related to
Camco's restructuring to a single bank charter, which occurred in the second
quarter of 2001. The consolidation of operations such as data processing began
in July 2001, and total data processing conversion was completed in May 2002.
Excluding of the effects of the restructuring charges, general,
administrative and other expense decreased year to year by $582,000, or 3.0%,
due primarily to a decrease in employee compensation and benefits of $1.1
million, or 11.9%, resulting primarily from a reduction in staffing levels, and
an increase in deferred loan origination costs attendant to the increase in loan
volume year to year. The decrease in employee compensation and benefits was
partially offset by a $108,000, or 3.5%, increase in office occupancy and
equipment expense, which was due to increased depreciation and increased
building maintenance costs, and an increase in other operating expenses of
$319,000, or 7.5%, primarily as a result of Camco's overall growth year to year.
Federal Income Taxes. The provision for federal income taxes totaled
$3.9 million for the year ended December 31, 2001, an increase of $43,000, or
1.1%, compared to the provision recorded in 2000. This increase was primarily
attributable to a $935,000, or 8.1%, increase in pre-tax earnings year to year,
partially offset by the receipt of refunds claimed for prior years' tax
liabilities. The effective tax rate amounted to 31.3% and 33.5% for the years
ended December 31, 2001 and 2000, respectively.
-31-
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,
2002 2001 2000
Weighted-average yield on:
Loan portfolio (1) 6.87% 7.28% 8.01%
Investment portfolio (2) 3.40 3.61 6.82
Total interest-earning assets 6.52 6.63 7.92
Weighted-average rate paid on:
Deposits 2.86 4.08 5.28
FHLB advances 5.63 6.02 6.20
Total interest-bearing liabilities 3.65 4.59 5.53
---- ---- ----
Interest rate spread 2.87% 2.04% 2.39%
==== ==== ====
- ------------------------------
(1) Includes loans held for sale and excludes the allowance for loan losses.
(2) Includes earnings on FHLB stock and cash surrender value of life insurance.
-32-
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,
2002 2001 2000
------------------------------- ------------------------------ -------------------------------
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
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1) $ 813,541 $57,478 7.07% $891,220 $69,461 7.79% $903,226 $71,524 7.92%
Mortgage-backed
securities(2) 100,165 4,523 4.52% 18,561 1,059 5.71 15,920 1,120 7.04
Investment securities 33,963 1,545 4.55% 11,621 696 5.99 17,529 1,141 6.51
Interest-bearing deposits and
other interest-earning assets 85,189 2,456 2.88% 72,052 3,156 4.38 26,115 1,886 7.22
--------- --------- ------ ------- ------ ------ -------- ------ ------
Total interest-earning
assets $1,032,858 66,002 6.39% $993,454 74,372 7.49 $962,790 75,671 7.86
========= ======= =======
Interest-bearing liabilities:
Deposits $ 677,800 23,060 3.49% $638,581 31,324 4.91 $590,418 28,869 4.89
FHLB advances 265,614 15,496 5.83% 280,747 17,109 6.09 325,805 20,740 6.37
--------- ------ ------ ------- ------ ------ ------- ------ ------
Total interest-bearing
liabilities $ 943,414 38,556 4.09% $919,328 48,433 5.27 $916,223 49,609 5.41
========= ------ ------ ======= ------ ------ ======= ------ ------
Net interest income/Interest
rate spread $27,446 2.30% $25,939 2.22% $26,062 2.45%
====== ====== ====== ====== ====== ======
Net interest margin(3) 2.66% 2.61% 2.71%
====== ====== ======
Average interest-earning
assets to average interest-
bearing liabilities 109.48% 108.06 105.85%
====== ====== ======
- ------------------------
(1) Includes nonaccrual loans and loans held for sale.
(2) Includes securities designated as available for sale.
(3) Net interest income as a percent of average interest-earning assets.
-33-
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.
Year ended December 31,
2002 vs. 2001 2001 vs. 2000
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans receivable (1) $(5,781) $(6,202) $(11,983) $ (944) $(1,119) $(2,063)
Mortgage-backed securities 3,729 (265) 3,464 170 (231) (61)
Investment securities 1,052 (203) 849 (360) (85) (445)
Interest-bearing deposits and other (2) 507 (1,207) (700) 2,251 (981) 1,270
------ ----- ------- ----- ------ ------
Total interest income (493) (7,877) (8,370) 1,117 (2,416) (1,299)
Interest expense attributable to:
Deposits 1,825 (10,089) (8,264) 2,362 93 2,455
Borrowings (900) (713) (1,613) (2,775) (856) (3,631)
------ ------- ------- ----- ------ ------
Total interest expense 925 (10,802) (9,877) (413) (763) (1,176)
------ ------ ------- ------- ------ ------
Increase (decrease) in net interest income $(1,418) $ 2,925 $ 1,507 $ 1,530 $(1,653) $ (123)
===== ====== ====== ====== ======= ======
- ------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The objective of the Bank's asset/liability management function is to
maintain consistent growth in net interest income within the Bank's policy
limits. This objective is accomplished through management of the Bank's balance
sheet composition, liquidity, and interest rate risk exposures arising from
changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or unexpected deposit withdrawals. This is accomplished
by maintaining liquid assets in the form of investment securities, maintaining
sufficient unused borrowing capacity and achieving consistent growth in core
deposits.
Management considers interest rate risk the Bank's most significant
market risk. Interest rate risk is the exposure to adverse changes in net
interest income due to changes in interest rates. Consistency of the Bank's net
interest income is largely dependent upon the effective management of interest
rate risk.
To identify and manage its interest rate risk the Bank employs an
earnings simulation model to analyze net interest income sensitivity to changing
interest rates. The model is based on actual cash flows and repricing
characteristics and incorporates market-based assumptions regarding the effect
of changing interest rates on the prepayment rates of certain assets and
liabilities. The model also includes senior management projections for activity
levels in each of the product lines offered by the Bank. Assumptions based on
the historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the model. Assumptions are inherently
uncertain and the measurement of net interest income or the impact of rate
fluctuations on net interest income cannot be precisely predicted. Actual
-34-
results may differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
The Bank's Asset/Liability Management Committee (ALCO), which includes
senior management representatives and reports to the Board of Directors,
monitors and manages interest rate risk within Board-approved policy limits. The
Bank's current interest rate risk position is determined by measuring the
anticipated change in net interest income over a 12 month horizon assuming a 200
basis point (bp) instantaneous and parallel shift (linear) increase or decrease
in all interest rates. Given the current federal funds rate of 1.25% at December
31, 2002, a linear 100bp decrease was modeled in the estimated earnings
sensitivity profile in place of the linear 200bp decrease in accordance with the
Bank's interest rate risk policy. Current policy limits this exposure to plus or
minus 25% of net interest income for a 12-month horizon.
The following table shows the Bank's estimated earnings sensitivity profile as
of December 31, 2002:
Change in Percentage Change in
Interest Rates Net Interest Income
(basis points) 12 Months
+200 9.5%
-100 (8.0%)
Given a 200bp linear increase in the yield curve used in the simulation
model, it is estimated net interest income for the Bank would increase by 9.5%
over one year. A 100bp linear decrease in interest rates would decrease net
interest income by 8.0% over one year. All of these estimated changes in net
interest income are within the policy guidelines established by the Board of
Directors. Management does not expect any significant adverse effect on net
interest income in 2003 based on the composition of the portfolio and
anticipated upward trends in rates.
In order to reduce the exposure to interest rate fluctuations and to
manage liquidity, the Bank has developed sale procedures for several types of
interest-sensitive assets. Generally, all long-term, fixed-rate single family
residential mortgage loans underwritten according to Federal Home Loan Mortgage
Corporation or Federal National Mortgage Association guidelines are sold for
cash upon origination. In 2002 and 2001, a total of $240.1 million and $215.3
million of such loans, respectively, were sold.
-35-
Item 8. 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, 2002 and 2001, and the related
consolidated statements of earnings, comprehensive income, stockholders' equity
and cash flows for each of the years in the three year period ended December 31,
2002. 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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
As more fully explained in Note A-8, the Corporation changed its method of
accounting for goodwill as of January 1, 2002.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
January 31, 2003
-36-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 2002 2001
Cash and due from banks $ 20,215 $ 15,665
Interest-bearing deposits in other financial institutions 36,807 89,299
--------- ---------
Cash and cash equivalents 57,022 104,964
Investment securities available for sale - at market 38,789 305
Investment securities held to maturity - at cost, approximate market
value of $5,501 and $19,083 as of December 31, 2002 and 2001, respectively 5,368 18,872
Mortgage-backed securities available for sale - at market 97,332 6,975
Mortgage-backed securities held to maturity - at cost, approximate market
value of $20,634 and $30,744 as of December 31, 2002 and 2001, respectively 20,000 30,765
Loans held for sale - at lower of cost or market 55,493 21,445
Loans receivable - net 741,465 850,001
Office premises and equipment - net 14,492 14,849
Real estate acquired through foreclosure 1,589 2,151
Federal Home Loan Bank stock - at cost 23,539 22,481
Accrued interest receivable 4,922 5,769
Prepaid expenses and other assets 2,130 4,779
Cash surrender value of life insurance 17,372 15,751
Goodwill - net of accumulated amortization 2,953 2,953
Prepaid federal income taxes 774 592
--------- ---------
Total assets $1,083,240 $1,102,652
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 694,072 $ 730,075
Advances from the Federal Home Loan Bank 276,276 258,850
Advances by borrowers for taxes and insurance 3,509 3,860
Accounts payable and accrued liabilities 4,298 10,975
Dividends payable 1,046 962
Deferred federal income taxes 5,438 2,759
--------- ---------
Total liabilities 984,639 1,007,481
Commitments - -
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,311,145 and
8,137,039 shares issued at December 31, 2002 and 2001, respectively 8,311 8,137
Additional paid-in capital 54,063 51,722
Retained earnings - substantially restricted 42,497 36,621
Accumulated other comprehensive income - unrealized gains on securities
designated as available for sale, net of related tax effects 2,098 107
Less 622,260 and 126,019 shares of treasury stock at December 31, 2002 and 2001,
respectively - at cost (8,368) (1,416)
--------- ---------
Total stockholders' equity 98,601 95,171
--------- ---------
Total liabilities and stockholders' equity $1,083,240 $1,102,652
========= =========
The accompanying notes are an integral part of these statements.
-37-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 2001 2000
Interest income
Loans $57,478 $69,461 $71,524
Mortgage-backed securities 4,523 1,059 1,120
Investment securities 1,545 696 1,141
Interest-bearing deposits and other 2,456 3,156 1,886
------ ------ ------
Total interest income 66,002 74,372 75,671
Interest expense
Deposits 23,060 31,324 28,869
Borrowings 15,496 17,109 20,740
------ ------ ------
Total interest expense 38,556 48,433 49,609
------ ------ ------
Net interest income 27,446 25,939 26,062
Provision for losses on loans 1,169 759 568
------ ------ ------
Net interest income after provision for losses on loans 26,277 25,180 25,494
Other income (expense)
Late charges, rent and other 3,374 3,112 2,046
Loan servicing fees (costs) 151 (1,421) 665
Service charges and other fees on deposits 1,014 838 733
Gain on sale of loans 5,540 4,532 2,058
Gain (loss) on investment and mortgage-backed securities transactions 29 - (37)
Gain (loss) on sale of real estate acquired through foreclosure (8) 62 56
Gain on sale of premises and equipment - 30 15
------ ------ ------
Total other income 10,100 7,153 5,536
General, administrative and other expense
Employee compensation and benefits 10,168 7,887 8,948
Occupancy and equipment 3,459 3,172 3,064
Data processing 1,178 1,345 1,337
Advertising 794 705 720
Franchise taxes 821 1,118 1,059
Amortization of goodwill - 150 150
Other operating 5,262 4,571 4,252
Restructuring charges (credits) related to charter consolidation (112) 950 -
------ ------ ------
Total general, administrative and other expense 21,570 19,898 19,530
------ ------ ------
Earnings before federal income taxes 14,807 12,435 11,500
Federal income taxes
Current 3,149 2,715 2,102
Deferred 1,653 1,176 1,746
------ ------ ------
Total federal income taxes 4,802 3,891 3,848
------ ------ ------
NET EARNINGS $10,005 $ 8,544 $ 7,652
====== ====== ======
EARNINGS PER SHARE
Basic $1.27 $1.20 $1.11
==== ==== ====
Diluted $1.25 $1.19 $1.10
==== ==== ====
The accompanying notes are an integral part of these statements.
-38-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
Net earnings $10,005 $8,544 $7,652
Other comprehensive income, net of tax:
Unrealized holding gains on securities during the period,
net of taxes of $1,035, $53 and $54 in 2002, 2001
and 2000, respectively 2,010 103 104
Reclassification adjustment for realized (gains) losses included in earnings,
net of taxes (benefits) of $10 and $(13) for the years ended December 31,
2002 and 2000, respectively (19) - 24
------ ----- -----
Comprehensive income $11,996 $8,647 $7,780
====== ===== =====
Accumulated other comprehensive income $ 2,098 $ 107 $ 4
====== ===== =====
The accompanying notes are an integral part of these statements.
-39-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
Unrealized
gains (losses)
on securities
Additional designated Total
Common paid-in Retained as available Treasury stockholders'
stock capital earnings for sale stock equity
Balance at January 1, 2000 $5,752 $30,351 $27,205 $ (124) $ (575) $62,609
Stock options exercised 1 7 - - - 8
Cash dividends declared - $0.48 per share - - (3,327) - - (3,327)
Purchase of Westwood Homestead Financial Corporation 1,305 11,193 23 - (841) 11,680
Net earnings for the year ended December 31, 2000 - - 7,652 - - 7,652
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 128 - 128
----- ------ ------ ----- ------ ------
Balance at December 31, 2000 7,058 41,551 31,553 4 (1,416) 78,750
Stock options exercised 116 1,146 - - - 1,262
Cash dividends declared - $0.48 per share - - (3,476) - - (3,476)
Net earnings for the year ended December 31, 2001 - - 8,544 - - 8,544
Purchase of Columbia Financial of Kentucky, Inc. 963 9,025 - - - 9,988
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 103 - 103
----- ------ ------ ----- ------ ------
Balance at December 31, 2001 8,137 51,722 36,621 107 (1,416) 95,171
Finalization of Columbia Financial acquisition - 432 - - (638) (206)
Stock options exercised 174 1,909 - - - 2,083
Cash dividends declared - $0.525 per share - - (4,129) - - (4,129)
Net earnings for the year ended December 31, 2002 - - 10,005 - - 10,005
Purchase of treasury shares - - - - (6,314) (6,314)
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 1,991 - 1,991
----- ------ ------ ----- ------ ------
Balance at December 31, 2002 $8,311 $54,063 $42,497 $2,098 $(8,368) $98,601
===== ====== ====== ===== ====== ======
The accompanying notes are an integral part of these statements.
-40-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
Cash flows from operating activities:
Net earnings for the year $ 10,005 $ 8,544 $ 7,652
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of goodwill - 150 150
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 828 87 19
Depreciation and amortization 1,714 1,655 1,610
Amortization of purchase accounting adjustments - net 242 303 13
Provision for losses on loans 1,169 759 568
Provision for losses on real estate acquired through foreclosure 131 - -
Amortization of deferred loan origination fees (609) (683) (374)
(Gain) loss on sale of real estate acquired through foreclosure 8 (62) (56)
(Gain) loss on investment and mortgage-backed securities
transactions (29) - 37
Gain on sale of office premises and equipment - (30) (15)
Federal Home Loan Bank stock dividends (1,058) (1,367) (1,320)
Gain on sale of loans (2,811) (2,194) (905)
Loans originated for sale in the secondary market (274,597) (232,499) (120,503)
Proceeds from sale of mortgage loans in the secondary market 243,360 217,483 120,356
Increase (decrease) in cash, net of acquisition of Westwood Homestead
Financial Corporation and Columbia Financial of Kentucky, Inc.,
due to changes in:
Accrued interest receivable 847 893 (972)
Prepaid expenses and other assets 2,649 (2,921) (437)
Accounts payable and other liabilities (6,537) 2,432 2,230
Federal income taxes
Current (182) (248) (1,009)
Deferred 1,653 1,176 1,746
------- ------- -------
Net cash provided by (used in) operating activities (23,217) (6,522) 8,790
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 41,251 19,480 1,040
Proceeds from investment securities transactions 44 - -
Purchase of investment securities designated as available for sale (64,942) - (17)
Purchase of investment securities designated as held to maturity (1,048) (10,495) (840)
Proceeds from sale of mortgage-backed securities designated as
available for sale 1,087 - 5,045
Purchase of mortgage-backed securities designated as available for sale (113,125) - (5,087)
Purchase of mortgage-backed securities designated as held to maturity - (15,228) -
Principal repayments on mortgage-backed securities 34,377 4,865 2,608
Loan disbursements (297,668) (126,582) (237,956)
Purchases of loans (3,181) (2,527) (3,552)
Principal repayments on loans 408,446 271,195 176,055
Purchase of office premises and equipment - net (1,852) (1,711) (1,675)
Proceeds from sale of office premises and equipment 355 119 35
Proceeds from sale of real estate acquired through foreclosure 651 1,806 505
Purchase of Federal Home Loan Bank stock - (100) (2,077)
Proceeds from redemption of Federal Home Loan Bank stock - - 504
Additions to real estate acquired through foreclosure (12) (60) (25)
Purchase of life insurance (825) (9,445) (80)
Net increase in cash surrender value of life insurance (796) (307) (262)
Purchase of Westwood Homestead Financial Corporation - - (1,879)
Purchase of Columbia Financial of Kentucky, Inc. (206) (3,000) -
------- ------- -------
Net cash provided by (used in) investing activities 2,556 128,010 (67,658)
------- ------- -------
Net cash provided by (used in) operating and investing
activities (balance carried forward) (20,661) 121,488 (58,868)
------- ------- -------
-41-
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
Net cash provided by (used in) operating and investing
activities (balance brought forward) $(20,661) $121,488 $(58,868)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (36,003) 16,716 70,185
Proceeds from Federal Home Loan Bank advances 68,500 50,451 243,178
Repayment of Federal Home Loan Bank advances (51,151) (105,072) (244,123)
Dividends paid on common stock (4,045) (3,346) (3,327)
Proceeds from exercise of stock options 2,083 1,262 8
Purchase of treasury shares (6,314) - -
Increase (decrease) in advances by borrowers for taxes and insurance (351) (604) 62
------- ------- -------
Net cash provided by (used in) financing activities (27,281) (40,593) 65,983
------- ------- -------
Net increase (decrease) in cash and cash equivalents (47,942) 80,895 7,115
Cash and cash equivalents at beginning of year 104,964 24,069 16,954
------- ------- -------
Cash and cash equivalents at end of year $ 57,022 $104,964 $ 24,069
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 38,387 $ 48,792 $ 48,952
======= ======= =======
Income taxes $ 2,848 $ 3,528 $ 3,430
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfers from mortgage loans to real estate acquired through foreclosure $ 1,270 $ 3,208 $ 1,432
======= ======= =======
Issuance of mortgage loans upon sale of real estate acquired through
foreclosure $ 1,054 $ 1,182 $ 703
======= ======= =======
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 1,991 $ 103 $ 128
======= ======= =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 2,729 $ 2,338 $ 1,153
======= ======= =======
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid $ 1,046 $ 962 $ 832
======= ======= =======
Fair value of assets received in acquisition of:
Westwood Homestead Financial Corporation $ - $ - $159,698
======= ======= =======
Columbia Financial of Kentucky, Inc. $ - $110,422 $ -
======= ======= =======
The accompanying notes are an integral part of these statements.
-42-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During 2001, the Boards of Directors of Camco Financial Corporation ("Camco"
or the "Corporation") and its wholly-owned subsidiaries, Cambridge Savings
Bank ("Cambridge Savings"), Marietta Savings Bank ("Marietta Savings"),
First Savings Bank of Washington Court House ("First Bank"), First Bank for
Savings ("First Savings") and Westwood Homestead Savings Bank ("Westwood
Homestead"), approved a business plan whereby the subsidiary banks
consolidated charters and operations into one state savings bank charter
under the name Advantage Bank. The combining of charters and operations
resulted in the Corporation incurring a one-time after-tax restructuring
charge totaling $627,000. Hereinafter, the consolidated financial statements
use the terms "Advantage" or the "Bank" to describe all of the preexisting
individual financial institutions owned by the Corporation.
During 2001, Camco's Board of Directors approved a business combination that
was completed in November 2001, whereby Columbia Financial of Kentucky, Inc.
("Columbia Financial"), the parent of Columbia Federal Savings Bank
("Columbia Federal"), was merged into Camco. Following the merger, Columbia
Federal became a division of Advantage. The business combination was
accounted for using the purchase method of accounting. Accordingly, the 2001
consolidated financial statements herein include the accounts of Columbia
Federal only from the November 15, 2001 consummation date through December
31, 2001.
The business activities of Camco are limited primarily to holding the common
stock of the Bank and Camco Title Insurance Agency ("Camco Title") and one
second tier subsidiary, Camco Mortgage Corporation. The Corporation's
results of operations are economically dependent upon the results of
Advantage's operations. Advantage conducts a general banking business within
Ohio, West Virginia and northern 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. Advantage's
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 amounts 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 Advantage
can be significantly influenced by a number of 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 accounting principles generally accepted in the United
States of America ("U.S. GAAP") and general accounting practices within the
financial services industry. In preparing financial statements in accordance
with U.S. 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.
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.
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.
-43-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. 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. Realized gains and losses on sales of securities
are recognized using the specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and costs, capitalized mortgage
servicing rights and the allowance for loan losses.
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, 2002, loans held for sale were carried at cost. At
December 31, 2001, loans held for sale were carried at aggregate fair value,
which resulted in the Bank's recognition of an unrealized loss of $28,000 on
loans held for sale.
The Corporation accounts for mortgage servicing rights in accordance with
SFAS No. 140 "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 must allocate some of the cost of the loans to the mortgage
servicing rights.
SFAS No. 140 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 Bank, calculated in accordance with the provisions of SFAS
No. 140, 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.
-44-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
The Corporation recorded amortization related to mortgage servicing rights
totaling approximately $2.1 million, $1.5 million and $602,000, for the
years ended December 31, 2002, 2001 and 2000, respectively. Additionally,
the Corporation recorded an impairment charge on mortgage servicing rights
totaling $1.3 million in 2001. During 2002, the Corporation recaptured
approximately $640,000 of the impairment based upon an independent appraisal
of the mortgage servicing rights. The carrying value of the Corporation's
mortgage servicing rights, which approximated their fair value, totaled
approximately $6.0 million and $4.7 million at December 31, 2002 and 2001,
respectively.
At December 31, 2002 and 2001, the Bank was servicing mortgage loans of
approximately $575.4 million and $535.5 million, respectively, that have
been sold to the Federal Home Loan Mortgage Corporation and other investors.
4. 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.
5. 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 economic conditions in the Bank's primary market
areas. 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.
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.
-45-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
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, commercial 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, 2002, the Corporation had one loan that was defined as
impaired under SFAS No. 114, with a principal balance of $984,000 and a
related allowance for losses of $282,000. The average balance of this loan
during 2002 was $971,000. Interest income recognized on this loan during
2002 was $50,000. At December 31, 2001, the Corporation had no loans that
would be defined as impaired under SFAS No. 114.
6. 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 fair value of the property 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.
7. 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 method 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.
8. Goodwill
Goodwill resulting from the acquisition of First Savings, totaling
approximately $3.7 million, was being amortized over a twenty-five year
period using the straight-line method for years prior to 2002. It was
management's policy to periodically evaluate the carrying value of
intangible assets in relation to the continuing earnings capacity of the
acquired assets and assumed liabilities.
-46-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Goodwill (continued)
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all
purchased goodwill and intangible assets. Pursuant to SFAS No. 142, acquired
goodwill is not amortized, but is tested for impairment at the reporting
unit level annually and whenever an impairment indicator arises. Goodwill
has been assigned to Advantage Bank as the reporting unit that is expected
to benefit from the goodwill.
Camco evaluated the unamortized goodwill balance of $3.0 million during 2002
in accordance with the provisions of SFAS No. 142 via independent
third-party appraisal. The evaluation showed no indication of impairment.
The adoption of SFAS No. 142 has resulted in the elimination of annual
goodwill amortization of approximately $150,000.
The following table displays the pro forma effects on net earnings and
earnings per share as if SFAS No. 142 had been applicable to the years ended
December 31, 2001 and 2000.
For the year ended December 31,
2002 2001 2000
(In thousands, except per share amounts)
Reported net earnings $10,005 $8,544 $7,652
Add back: goodwill amortization - 150 150
------ ----- -----
Adjusted net earnings $10,005 $8,694 $7,802
====== ===== =====
Basic earnings per share:
Reported net earnings $1.27 $1.20 $1.11
Goodwill amortization - .03 .02
---- ---- ----
Adjusted net earnings $1.27 $1.23 $1.13
==== ==== ====
Diluted earnings per share:
Reported net earnings $1.25 $1.19 $1.10
Goodwill amortization - .02 .02
---- ---- ----
Adjusted net earnings $1.25 $1.21 $1.12
==== ==== ====
-47-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. 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 and costs, mortgage servicing
rights, Federal Home Loan Bank stock dividends, deferred compensation, the
general loan loss allowance and the percentage of earnings bad debt
deductions. A temporary difference is also recognized for depreciation
expense computed using accelerated methods for federal income tax purposes.
10. Earnings Per Share
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the year. Diluted earnings per
common share is computed including the dilutive effect of additional
potential common shares issuable under stock option. The computations were
as follows for the years ended December 31:
2002 2001 2000
Weighted-average common shares
outstanding (basic) 7,908,786 7,096,960 6,915,154
Dilutive effect of assumed exercise
of stock options 97,094 93,546 42,277
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 8,005,880 7,190,506 6,957,431
========= ========= =========
Options to purchase 65,441, 176,714 and 435,295 shares of common stock at
respective weighted-average exercise prices of $14.83, $13.11 and $12.15
were outstanding at December 31, 2002, 2001 and 2000, respectively, but were
excluded from the computation of diluted earnings per share for those years
because the exercise price was greater than the average market price of the
common shares.
-48-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Stock Option Plans
Stockholders of the Corporation have approved four stock option plans. Under
the 1972 Plan, 254,230 common shares were reserved for issuance to officers,
directors, and key employees of the Corporation and its subsidiaries. The
1982 Plan reserved 115,824 common shares for issuance to employees of the
Corporation and its subsidiaries. All of the stock options under the 1972
and 1982 Plans have been granted and were subject to exercise at the
discretion of the grantees through 2002. Under the 1995 Plan, 161,488 shares
were reserved for issuance. Under the 2002 Plan, 400,000 shares were
reserved for issuance. Additionally, in connection with the acquisition of
First Savings, the stock options of First Savings were converted into
options to purchase 174,421 shares of the Corporation's stock at an exercise
price of $7.38 per share, which expire in 2005. In connection with the 2000
acquisition of Westwood Homestead, the stock options of Westwood Homestead
were converted into options to purchase 311,794 shares of the Corporation's
stock at a weighted-average exercise price of $11.89 per share, which expire
in 2008.
The Corporation accounts for its stock option plans in accordance with 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 plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's
stock option plans been determined based on the fair value at the grant
dates for awards under the plans consistent with the accounting method
utilized in SFAS No. 123, the Corporation's net earnings and earnings per
share would have been reported as the pro forma amounts indicated below:
2002 2001 2000
(In thousands, except per share data)
Net earnings As reported $10,005 $8,544 $7,652
Stock-based compensation, net of tax (4) (5) (16)
------ ----- -----
Pro-forma $10,001 $8,539 $7,636
====== ===== =====
Earnings per share
Basic As reported $1.27 $1.20 $1.11
Stock-based compensation, net of tax (.01) - -
---- ---- ----
Pro-forma $1.26 $1.20 $1.10
==== ==== ====
Diluted As reported $1.25 $1.19 $1.10
Stock-based compensation, net of tax - - -
---- ---- ----
Pro-forma $1.25 $1.19 $1.10
==== ==== ====
-49-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. 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
assumptions used for grants during 2002, 2001 and 2000: dividend yield of
3.84%, 4.07% and 2.51%, respectively; expected volatility of 16.34%, 17.06%
and 17.69%, respectively; a risk-free interest rate of 2.00%, 3.00% and
5.00%, respectively, and an expected life of ten years for all grants.
A summary of the status of the Corporation's stock option plans as of
December 31, 2002, 2001 and 2000, and changes during the years ending on
those dates is presented below:
2002 2001 2000
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of year 503,005 $10.16 688,655 $10.53 369,523 $ 9.43
Granted 3,700 14.55 8,500 11.93 10,700 9.07
WHFC options - - - - 309,272 11.89
Exercised (174,106) 10.84 (115,656) 10.91 (840) 9.79
Forfeited (9,308) 11.91 (78,494) 12.50 - -
------- ----- ------- ----- ------- -----
Outstanding at end of year 323,291 $ 9.79 503,005 $10.16 688,655 $10.53
======= ===== ======= ===== ======= =====
Options exercisable at year-end 323,291 $ 9.79 503,005 $10.16 688,655 $10.53
======= ===== ======= ===== ======= =====
Weighted-average fair value of
options granted during the year $ 1.36 $ 1.37 $ 2.24
===== ===== =====
The following information applies to options outstanding at December 31,
2002:
Number outstanding 244,703
Range of exercise prices $7.40 - $9.74
Number outstanding 78,588
Range of exercise prices $11.36 - $16.59
Weighted-average exercise price $9.79
Weighted-average remaining contractual life 4.0 years
-50-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. 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 to equal the amount payable on demand as
of December 31, 2002 and 2001. 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.
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.
-51-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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, 2002 and 2001, 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,
2002 2001
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 57,022 $ 57,022 $ 104,964 $ 104,964
Investment securities 44,157 44,290 19,177 19,388
Mortgage-backed securities 117,332 117,966 37,740 37,719
Loans receivable 796,958 814,539 871,446 879,776
Federal Home Loan Bank stock 23,539 23,539 22,481 22,481
--------- --------- --------- ---------
$1,039,008 $1,057,356 $1,055,808 $1,064,328
========= ========= ========= =========
Financial liabilities
Deposits $ 694,072 $ 704,428 $ 730,075 $ 743,329
Advances from the Federal Home Loan Bank 276,276 309,758 258,850 281,638
Advances by borrowers for taxes and insurance 3,509 3,509 3,860 3,860
--------- --------- --------- ---------
$ 973,857 $1,017,695 $ 992,785 $1,028,827
========= ========= ========= =========
13. 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.
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2002
consolidated financial statement presentation.
-52-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries
over the recognition and measurement provisions in SFAS No. 121.
Accordingly, an entity must recognize an impairment loss if the carrying
value of a long-lived asset or asset group (a) is not recoverable and (b)
exceeds its fair value. Similar to SFAS No. 121, SFAS No. 144 requires an
entity to test an asset or asset group for impairment whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. SFAS No. 144 differs from SFAS No. 121 in that it provides
guidance on estimating future cash flows to test recoverability. An entity
may use either a probability-weighted approach or best-estimate approach in
developing estimates of cash flows to test recoverability. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. Management
adopted SFAS No. 144 effective January 1, 2002, without material effect on
the Corporation's financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 provides financial
accounting and reporting guidance for costs associated with exit or disposal
activities, including one-time termination benefits, contract termination
costs other than for a capital lease, and costs to consolidate facilities or
relocate employees. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 is not expected
to have a material effect on the Corporation's financial condition or
results of operations.
The FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions: An amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No 9," which removes acquisitions of financial institutions
from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions," except for transactions between mutual
enterprises. SFAS No. 147 also requires that the acquisition of a
less-than-whole financial institution, such as a branch, be accounted for as
a business combination if the transferred assets and activities constitute a
business. The adoption of SFAS No. 147 did not have a material impact on the
Corporation's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS No. 148 is effective for fiscal years
beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. SFAS No. 148 is not expected to
have a material effect on the Corporation's financial position or results of
operations.
-53-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements (continued)
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns, or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it has
a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Corporation is currently evaluating the impact of FIN 46
and expects no material effect on its financial statements.
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, 2002 and 2001
are as follows:
2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
U.S. Government agency obligations $ 4,233 $ 73 $ - $ 4,306
Municipal bonds 1,135 60 - 1,195
------ --- --- ------
Total investment securities held to maturity 5,368 133 - 5,501
Available for sale:
U.S. Government agency obligations 35,557 447 - 36,004
Municipal bonds 2,414 65 16 2,463
Corporate equity securities 330 35 43 322
------ --- --- ------
Total investment securities available for sale 38,301 547 59 38,789
------ --- --- ------
Total investment securities $43,669 $680 $ 59 $44,290
====== === === ======
2001
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
U.S. Government agency obligations $18,682 $243 $ 34 $18,891
Municipal bonds 190 2 - 192
------ --- --- ------
Total investment securities held to maturity 18,872 245 34 19,083
Available for sale:
Corporate equity securities 245 89 29 305
------ --- --- ------
Total investment securities $19,117 $334 $ 63 $19,388
====== === === ======
-54-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
The amortized cost and estimated fair value of investment securities at
December 31, 2002 (including securities designated as available for sale) by
contractual term to maturity are shown below.
Estimated
Amortized fair
cost value
(In thousands)
Due in one year or less $ 3,106 $ 3,180
Due after one year through five years 36,133 36,571
Due after five years 4,100 4,217
------ ------
Total investment securities 43,339 43,968
Corporate equity securities 330 322
------ ------
Total $43,669 $44,290
====== ======
During the years ended December 31, 2002 and 2000, proceeds from investment
securities transactions totaled $44,000 and $180,000, respectively,
resulting in gross realized gains of $27,000 and $5,000 in those respective
years.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 2002 and
2001, are as follows:
2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
FNMA $ 11,831 $ 360 $ - $ 12,191
FHLMC 6,614 214 8 6,820
GNMA 1,546 66 - 1,612
Other 9 2 - 11
------- ----- --- -------
Total mortgage-backed securities
held to maturity 20,000 642 8 20,634
Available for sale:
FNMA 55,255 1,821 - 57,076
FHLMC 35,633 779 8 36,404
GNMA 3,753 99 - 3,852
------- ----- --- -------
Total mortgage-backed securities
available for sale 94,641 2,699 8 97,332
------- ----- --- -------
Total mortgage-backed securities $114,641 $3,341 $ 16 $117,966
======= ===== === =======
-55-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(continued)
2001
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
FNMA $17,632 $ 96 $119 $17,609
FHLMC 11,069 51 38 11,082
GNMA 2,052 22 37 2,037
CMOs 3 - - 3
Other 9 4 - 13
------ --- --- ------
Total mortgage-backed securities
held to maturity 30,765 173 194 30,744
Available for sale:
FHLMC 2,553 46 - 2,599
FNMA 1,250 16 - 1,266
GNMA 3,069 41 - 3,110
------ --- --- ------
Total mortgage-backed securities
available for sale 6,872 103 - 6,975
------ --- --- ------
Total mortgage-backed securities $37,637 $276 $194 $37,719
====== === === ======
The amortized cost of mortgage-backed securities, including those designated
as available for sale at December 31, 2002, by contractual terms to
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without
prepayment penalties.
Amortized cost
(In thousands)
Due within one year or less $ 74
Due after one year through five years 17,379
Due after five years through ten years 64,992
Due after ten years 32,196
--------
$114,641
=======
During the year ended December 31, 2002, the Bank sold mortgage-backed
securities totaling $1.1 million resulting in gross realized gains of $7,000
and gross realized losses of $5,000. During the year ended December 31,
2000, the Bank sold mortgage-backed securities totaling $5.1 million
resulting in gross realized losses of $42,000.
-56-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE C - LOANS RECEIVABLE
Loans receivable at December 31 consist of the following:
2002 2001
(In thousands)
Conventional real estate loans:
Existing residential properties $585,971 $683,611
Nonresidential real estate 71,908 70,239
Construction 33,122 42,666
Developed building lots 535 5,908
Consumer, education and other loans 69,898 69,116
------- -------
Total 761,434 871,540
Less:
Undisbursed portion of loans in process 13,089 15,343
Unamortized yield adjustments 1,390 1,940
Allowance for loan losses 5,490 4,256
------- -------
Loans receivable - net $741,465 $850,001
======= =======
As depicted above, the Corporation's lending efforts have historically
focused on loans secured by existing residential properties, which comprise
approximately $586.0 million, or 79%, of the total loan portfolio at
December 31, 2002 and approximately $683.6 million, or 80%, of the total
loan portfolio at December 31, 2001. 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 within Ohio, West Virginia,
and northern Kentucky, thereby impairing collateral values. However,
management believes that residential real estate values in the Corporation's
primary lending areas are presently stable.
The Bank, in the ordinary course of business, has granted loans to certain
of its directors, executive officers, and their related interests. 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 totaled approximately $459,000 and
$1.6 million at December 31, 2002 and 2001, respectively.
-57-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE D - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
2002 2001 2000
(In thousands)
Balance at beginning of year $4,256 $2,906 $1,863
Provision for losses on loans 1,169 759 568
Charge-offs of loans (207) (735) (172)
Recoveries 272 26 6
Allowance resulting from acquisitions - 1,300 641
----- ----- -----
Balance at end of year $5,490 $4,256 $2,906
===== ===== =====
Nonaccrual and nonperforming loans totaled approximately $13.6 million, $7.9
million and $4.7 million at December 31, 2002, 2001 and 2000, respectively.
Interest income that would have been recognized had such nonaccrual loans
performed pursuant to contractual terms totaled approximately $940,000,
$278,000 and $188,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 is summarized as follows:
2002 2001
(In thousands)
Land $ 2,194 $ 2,194
Buildings and improvements 12,973 12,764
Furniture, fixtures and equipment 10,471 9,641
------ ------
25,638 24,599
Less accumulated depreciation and amortization 11,146 9,750
------ ------
$14,492 $14,849
====== ======
-58-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE F - DEPOSITS
Deposit balances by type and weighted-average interest rate at December 31,
2002 and 2001, are summarized as follows:
2002 2001
Amount Rate Amount Rate
(Dollars in thousands)
Noninterest-bearing checking accounts $ 26,313 - % $ 29,903 - %
NOW accounts 80,562 1.07 81,746 1.38
Money market demand accounts 116,206 2.51 64,539 3.59
Passbook and statement savings accounts 78,359 0.79 85,443 1.70
------- ---- ------- ----
Total withdrawable accounts 301,440 1.46 261,631 1.86
Certificates of deposit
Original maturities of:
Six months to one year 24,537 1.58 51,472 3.49
One to two years 79,172 2.82 136,859 5.29
Two to five years 179,711 4.96 163,226 5.95
Negotiated rate certificates 40,361 2.35 54,998 5.13
Individual retirement accounts 68,851 4.27 61,889 5.40
------- ---- ------- ----
Total certificate accounts 392,632 3.93 468,444 5.32
------- ---- ------- ----
Total deposits $694,072 2.86% $730,075 4.08%
======= ==== ======= ====
At December 31, 2002 and 2001, the Corporation had certificate of deposit
accounts with balances in excess of $100,000 totaling $89.7 million and
$123.3 million, respectively.
Interest expense on deposits is summarized as follows for the years ended
December 31:
2002 2001 2000
(In thousands)
Certificate of deposit accounts $19,185 $26,706 $23,249
NOW accounts and money
market demand accounts 3,015 3,059 3,265
Passbook and statement savings
accounts 860 1,559 2,355
------ ------ ------
$23,060 $31,324 $28,869
====== ====== ======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
2002 2001
Year ending December 31: (In thousands)
2002 $ - $312,484
2003 216,958 86,127
2004 74,662 36,764
2005 60,620 13,890
After 2005 40,392 19,179
------- -------
Total certificate of deposit accounts $392,632 $468,444
======= =======
-59-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE F - DEPOSITS (continued)
At December 31, 2002 and 2001, certain savings deposits were collateralized
by a pledge of investment securities, interest-bearing deposits in other
banks and letters of credit with the Federal Home Loan Bank totaling $112.7
million and $78.8 million, respectively.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
2002, by pledges of certain residential mortgage loans totaling $386.7
million and the Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
Maturing year
Interest rate ending December 31, 2002 2001
(Dollars in thousands)
5.33% - 7.31% 2002 $ - $ 24,693
2.48% - 8.20% 2003 14,109 9,650
3.72% - 8.20% 2004 11,388 5,854
4.43% - 7.60% 2005 10,516 4,050
5.05% - 6.40% 2006 5,062 1,559
5.36% - 6.95% 2007 5,624 5,020
3.11% - 7.17% Thereafter 229,577 208,024
------- -------
$276,276 $258,850
======= =======
Weighted-average interest rate 5.63% 6.02%
==== ====
NOTE H - FEDERAL INCOME TAXES
A reconciliation of the effective tax rate to the federal statutory rate is
summarized as follows:
2002 2001 2000
(In thousands)
Federal income taxes computed at the
expected statutory rate $5,082 $4,253 $3,925
Increase (decrease) in taxes resulting from:
Amortization of goodwill - 51 51
Nontaxable dividend and interest income (33) (6) (4)
Increase in cash surrender value of life insurance - net (274) (105) (89)
Nondeductible expenses 36 29 27
Refunds of prior year taxes - (309) -
Other (9) (22) (62)
----- ----- -----
Federal income tax provision per consolidated
financial statements $4,802 $3,891 $3,848
===== ===== =====
-60-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE H - FEDERAL INCOME TAXES (continued)
The components of the Corporation's net deferred tax liability at December
31 are as follows:
Taxes (payable) refundable on temporary
differences at statutory rate: 2002 2001
(In thousands)
Deferred tax liabilities:
FHLB stock dividends $(2,905) $(2,396)
Mortgage servicing rights (2,043) (1,593)
Percentage of earnings bad debt deduction (112) (226)
Book versus tax depreciation (528) (525)
Original issue discount (1,156) (105)
Purchase price adjustments (109) -
Other liabilities, net (25) (49)
Unrealized gains on securities designated as
available for sale (1,081) (56)
------ ------
Total deferred tax liabilities (7,959) (4,950)
Deferred tax assets:
General loan loss allowance 1,867 1,447
Deferred income 363 68
Deferred compensation 282 457
Purchase accounting adjustments - 219
Other assets 9 -
------ ------
Total deferred tax assets 2,521 2,191
------ ------
Net deferred tax liability $(5,438) $(2,759)
====== ======
For years prior to 1996, the Bank was 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 qualified 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 $12.4
million as of December 31, 2002. The amount of the unrecognized deferred tax
liability relating to the cumulative bad debt deduction was approximately
$4.1 million at December 31, 2002.
The Bank is required to recapture as taxable income approximately $1.9
million of its bad debt reserve, which represents post-1987 additions to the
reserve, and is unable to utilize the percentage of earnings method to
compute the reserve in the future. The Bank has provided deferred taxes for
this amount and is amortizing the recapture of the bad debt reserve into
taxable income over a six year period, which commenced in 1998.
-61-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE I - COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its 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
Bank's involvement in such financial instruments.
The Bank's 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
Bank uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At December 31, 2002, the Bank had outstanding commitments to originate and
purchase fixed-rate loans of approximately $8.7 million and adjustable-rate
loans of approximately $1.9 million. Additionally, the Bank had unused lines
of credit under home equity and other loans of $52.1 million at December 31,
2002, and stand by letters of credit of $167,000. Management believes that
all loan commitments are able to be funded through cash flow from operations
and existing liquidity. Fees received in connection with these commitments
have not been recognized in earnings.
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 Bank evaluates 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.
The Corporation has entered into lease agreements for office premises and
equipment under operating leases which expire at various dates through 2010.
The following table summarizes minimum payments due under lease agreements
by year:
Year ending
December 31, (In thousands)
2003 $159
2004 89
2005 52
2006 27
2007 and thereafter 345
---
$672
===
Total rental expense under operating leases was approximately $251,000,
$257,000 and $260,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
-62-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE J - REGULATORY CAPITAL
Advantage Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). 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 the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
The FDIC has adopted risk-based capital ratio guidelines to which Advantage
is 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.
During 2002, management was notified by the FDIC that Advantage was
categorized as "well-capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well-capitalized" Advantage must
maintain minimum capital ratios as set forth in the table that follows.
As of December 31, 2002, management believes that the Bank met all capital
adequacy requirements to which it was subject.
As of December 31, 2002
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) $81,269 12.7% =>$51,067 =>8.0% =>$63,834 =>10.0%
Tier I capital
(to risk-weighted assets) $75,779 11.9% =>$25,533 =>4.0% =>$38,300 => 6.0%
Tier I leverage $75,779 7.2% =>$42,365 =>4.0% =>$52,956 => 5.0%
-63-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE J - REGULATORY CAPITAL (continued)
As of December 31, 2001
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) $88,017 12.5% =>$56,346 =>8.0% =>$70,433 =>10.0%
Tier I capital
(to risk-weighted assets) $83,761 11.9% =>$28,173 =>4.0% =>$42,260 => 6.0%
Tier I leverage $83,761 7.6% =>$43,868 =>4.0% =>$54,835 => 5.0%
The Corporation's management believes that, under the current regulatory
capital regulations, the Bank will continue to meet its 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 Bank's market areas, could adversely affect future earnings
and, consequently, the ability to meet future minimum regulatory capital
requirements.
NOTE K - BENEFIT PLANS
The Corporation has a non-contributory 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 $296,000,
$73,000 and $67,000 during the years ended December 31, 2002, 2001 and 2000,
respectively.
The Corporation also has a 401(k) Salary Savings Plan covering substantially
all employees. Contributions by the employees are voluntary and are subject
to matching contributions by the employer under a fixed percentage, which
may be increased at the discretion of the Board of Directors. Total expense
under this plan was $328,000, $385,000 and $334,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
-64-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION
The following condensed financial statements summarize the financial
position of the Corporation as of December 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the years ended
December 31, 2002, 2001 and 2000:
CAMCO FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
2002 2001
ASSETS
Cash in Bank subsidiary $ 333 $ 271
Interest-bearing deposits in other financial institutions 14,981 7,584
Investment securities designated as available for sale 322 305
Investment in Bank subsidiary 81,437 87,251
Investment in title agency subsidiary 831 1,100
Office premises and equipment - net 1,425 1,786
Cash surrender value of life insurance 1,103 1,054
Prepaid expenses and other assets - 1,946
------- -------
Total assets $100,432 $101,297
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 472 $ 4,812
Dividends payable 1,046 962
Accrued federal income taxes 296 337
Deferred federal income taxes 17 15
------- -------
Total liabilities 1,831 6,126
Stockholders' equity
Common stock 8,311 8,137
Additional paid-in capital 54,063 51,722
Retained earnings - substantially restricted 42,497 36,621
Unrealized gains on securities designated as available for sale,
net of related tax effects 2,098 107
Treasury stock, at cost (8,368) (1,416)
------- -------
Total stockholders' equity 98,601 95,171
------- -------
Total liabilities and stockholders' equity $100,432 $101,297
======= =======
-65-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
2002 2001 2000
Income
Dividends from the Bank $18,006 $9,615 $6,950
Dividends from title agency subsidiary 750 - -
Interest and other income 146 173 159
(Excess distribution from) undistributed net earnings
of the Bank (7,643) (306) 1,836
(Excess distribution from) undistributed earnings
of the title agency subsidiary (270) 406 113
------ ----- -----
Total income 10,989 9,888 9,058
General, administrative and other expense 1,451 2,237 2,092
------ ----- -----
Earnings before federal income tax credits 9,538 7,651 6,966
Federal income tax credits (467) (893) (686)
------ ----- -----
Net earnings $10,005 $8,544 $7,652
====== ===== =====
-66-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
2002 2001 2000
Cash flows from operating activities:
Net earnings for the year $10,005 $ 8,544 $7,652
Adjustments to reconcile net earnings to net cash
flows provided by (used in) operating activities:
Excess distribution from (undistributed net earnings of)
Bank subsidiary 7,643 306 (1,836)
Excess distribution from (undistributed net earnings of)
title agency subsidiary 270 (406) (113)
Depreciation and amortization 112 125 87
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 1,946 (1,710) 421
Accounts payable and other liabilities (4,340) 4,431 351
Accrued federal income taxes (41) (40) 187
Deferred federal income taxes 25 51 (15)
Other - net - 14 (22)
------ ------ -----
Net cash provided by operating activities 15,620 11,315 6,712
Cash flows from investing activities:
Purchase of investment securities (102) - (17)
Proceeds from redemption of available for sale securities 17 - -
Net increase in cash surrender value of life insurance (49) (49) (48)
Purchase of office premises and equipment (98) (381) (374)
Proceeds from sale of office premises and equipment 347 247 -
Increase in interest-bearing deposits in other financial institutions (7,397) (6,209) (758)
Purchase of Westwood Homestead Financial Corporation - net - - (1,879)
Purchase of Columbia Financial of Kentucky, Inc. - net - (3,000) -
------ ------ -----
Net cash used in investing activities (7,282) (9,392) (3,076)
Cash flows from financing activities:
Stock options exercised 2,083 1,262 8
Dividends paid (4,045) (3,476) (3,327)
Purchase of treasury shares (6,314) - -
------ ------ -----
Net cash used in financing activities (8,276) (2,214) (3,319)
------ ------ -----
Net increase (decrease) in cash and cash equivalents 62 (291) 317
Cash and cash equivalents at beginning of year 271 562 245
------ ------ -----
Cash and cash equivalents at end of year $ 333 $ 271 $ 562
====== ====== =====
-67-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE M - RESTRUCTURING CHARGE
In June 2001, Camco recorded a restructuring charge related to the
consolidation of its banking subsidiaries' charters. The restructuring
charge was recorded to accrue for termination of 22 accounting and loan
servicing employees and disbanding local boards of directors. Through
December 31, 2002, fourteen of the identified employees had been terminated.
The remaining employees either terminated prior to the consolidation of the
banking subsidiaries or transferred to other departments. The following
table summarizes activity related to the restructuring charge:
Employee Occupancy
compensation and Other
and benefits equipment operating Total
(In thousands)
Original restructuring charge $643 $150 $295 $1,088
Restructuring charge reversed in 2001 (14) (56) (68) (138)
--- --- --- -----
Net restructuring charge 629 94 227 950
Payments (388) (94) (227) (709)
--- --- --- -----
Remaining accrued restructuring
charge at December 31, 2001 241 - - 241
Payments (109) - - (109)
Restructuring charge reversed in 2002 (112) - - (112)
--- --- --- -----
Accrued restructuring charge at
December 31, 2002 $ 20 $ - $ - $ 20
=== === === =====
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 2002 and 2001.
Three Months Ended
March 31, June 30, September 30, December 31,
2002: (In thousands, except per share data)
Total interest income $16,879 $17,049 $16,461 $15,613
Total interest expense 10,266 9,725 9,528 9,037
------ ------ ------ ------
Net interest income 6,613 7,324 6,933 6,576
Provision for losses on loans 207 207 338 417
Other income 2,253 2,104 2,684 3,059
General, administrative and other expense 5,139 5,573 5,559 5,299
------ ------ ------ ------
Earnings before income taxes 3,520 3,648 3,720 3,919
Federal income taxes 1,145 1,178 1,190 1,289
------ ------ ------ ------
Net earnings $ 2,375 $ 2,470 $ 2,530 $ 2,630
====== ====== ====== ======
Earnings per share:
Basic $0.30 $0.31 $0.32 $0.34
==== ==== ==== ====
Diluted $0.29 $0.31 $0.32 $0.33
==== ==== ==== ====
-68-
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2002, 2001 and 2000
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
Three Months Ended
March 31, June 30, September 30, December 31,
2001: (In thousands, except per share data)
Total interest income $19,440 $19,030 $18,083 $17,819
Total interest expense 12,748 12,451 11,821 11,413
------ ------ ------ ------
Net interest income 6,692 6,579 6,262 6,406
Provision for losses on loans 156 150 152 301
Other income 1,407 1,496 1,920 2,330
General, administrative and other expense 4,717 5,798 4,556 4,827
------ ------ ------ ------
Earnings before income taxes 3,226 2,127 3,474 3,608
Federal income taxes 1,090 593 1,122 1,086
------ ------ ------ ------
Net earnings $ 2,136 $ 1,534 $ 2,352 $ 2,522
====== ====== ====== ======
Earnings per share:
Basic $.31 $.22 $.34 $.33
=== === === ===
Diluted $.30 $.22 $.34 $.33
=== === === ===
-69-
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the captions "Election of Directors,"
"Incumbent Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement for the 2003 Annual
Meeting of Stockholders filed by Camco on March 14, 2003 (the "Proxy Statement")
is incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the Proxy Statement under the caption,
"Board Meetings, Committees and Compensation" and "Compensation of Executive
Officers" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained in the Proxy Statement under the caption
"Ownership of Camco Shares" is incorporated herein by reference.
Camco maintains the Camco Financial Corporation 1995 Stock Option and
Incentive Plan, the First Ashland Financial Corporation 1995 Stock Option and
Incentive Plan, the Westwood Homestead Financial Corporation 1997 Stock Option
Plan and the Camco Financial Corporation 2002 Equity Incentive Plan
(collectively, the "Plans") under which it may issue equity securities to its
directors, officers and employees in exchange for goods or services. Each of the
Plans was approved by Camco's stockholders.
The following table shows, as of December 31, 2002, the number of
common shares issuable upon the exercise of outstanding stock options, the
weighted average exercise price of those stock options, and the number of common
shares remaining for future issuance under the Plans, excluding shares issuable
upon exercise of outstanding stock options.
Equity Compensation Plan Information
- ---------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation plans
exercise of exercise price of (excluding securities
Plan Category outstanding options outstanding options reflected in column (a))
------------- ------------------- ------------------- ------------------------
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders..................... 323,291 $9.79 460,655
- ---------------------------------------------------------------------------------------------------------------------
-70-
Item 13. Certain Relationships and Related Transactions.
Advantage makes loans to executive officers and directors of Camco and
its subsidiaries in the ordinary course of business and on the same terms and
conditions, including interest rates and collateral, as those of comparable
loans to other persons. All outstanding loans to executive officers and
directors were made pursuant to such policy, do not involve more than the normal
risk of collectibility or present other unfavorable features and are current in
their payments.
Item 14. Controls and Procedures.
(a) Camco's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended) as
of a date within ninety days of the filing date of this annual report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that Camco's disclosure controls and procedures are effective.
(b) There were no significant changes in Camco's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits.
3(i) Certificate of Incorporation
3(ii) Bylaws
10(i) Employment Agreement between Camco and
Richard C. Baylor
10(ii) Employment Agreement between Camco and
Larry A. Caldwell
21 Subsidiaries of Camco
23(i) Consent of Grant Thornton LLP regarding
Camco's Consolidated Financial Statements
and Form S-8
23(ii) Consent of Crowe, Chizek and Company LLP
regarding Camco Financial and Subsidiaries
Salary Savings Plan Financial Statements and
Form S-8
99.1 2002 Financial Statements of the Camco
Financial and Subsidiaries Salary Savings
Plan
99.2 Certification of Chief Executive Officer
99.3 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
Camco filed a Form 8-K on January 27, 2003, disclosing its
earnings release for the quarter and year ended December 31,
2002.
-71-
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/ Richard C. Baylor
-------------------------------------------------
Richard C. Baylor,
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/ Larry A. Caldwell By /s/ Robert C. Dix, Jr.
----------------------- -----------------------
Larry A. Caldwell Robert C. Dix, Jr.,
Chairman and Director Director
Date: March 28, 2003 Date: March 28, 2003
By /s/ Samuel W. Speck By /s/ Paul D. Leake
----------------------- -----------------------
Samuel W. Speck, Paul D. Leake,
Director Director
Date: March 28, 2003 Date: March 28, 2003
By /s/ Jeffrey T. Tucker By /s/ Terry A. Feick
----------------------- -----------------------
Jeffrey T. Tucker, Terry A. Feick,
Director Director
Date: March 28, 2003 Date: March 28, 2003
By /s/ Carson K. Miller By /s/ Susan J. Insley
----------------------- -----------------------
Carson K. Miller, Susan J. Insley,
Director Director
Date: March 28, 2003 Date: March 28, 2003
By /s/ Mark A. Severson
-----------------------
Mark A. Severson,
Chief Financial Officer
Date: March 28, 2003
-72-
CERTIFICATION
I, Richard C. Baylor, certify that:
1. I have reviewed this annual report on Form 10-K of Camco Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/Richard C. Baylor
------------------------------
Richard C. Baylor
Chief Executive Officer
CERTIFICATION
I, Mark A. Severson, certify that:
1. I have reviewed this annual report on Form 10-K of Camco Financial
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003 /s/Mark A. Severson
---------------------------
Mark A. Severson
Chief Financial Officer
INDEX TO EXHIBITS
ITEM DESCRIPTION
Exhibit 3(i) Third Restated Certificate of Incorporated by reference to Camco's
Incorporation of Camco Financial Annual Report on Form 10-K for the
Corporation, as amended fiscal year ended December 31, 1999
("1999 Form 10-K"), Exhibit 3(i)
Exhibit 3(ii) 1987 Amended and Restated Incorporated by reference to Camco's
By-Laws of Camco Financial 2002 Proxy Statement filed with the
Corporation SEC on April 22, 2002 ("2002 Proxy"),
Exhibit 3(ii)
Exhibit 10(i) Employment Agreement dated Incorporated by reference to Camco's
January 1, 2001, by and between 2002 Proxy, Exhibit 10(i)
Camco Financial Corporation and
Richard C. Baylor
Exhibit 10(ii) Employment Agreement dated Incorporated by reference to Camco's
November 9, 2001, by and between 2002 Proxy, Exhibit 10(ii)
Camco Financial Corporation and
Larry A. Caldwell
Exhibit 21 Subsidiaries of Camco
Exhibit 23(i) Consent of Grant Thornton LLP
regarding Camco's Consolidated
Financial Statements and Form S-8
Exhibit 23(ii) Consent of Crowe, Chizek and
Company LLP regarding Camco
Financial & Subsidiaries Salary
Savings Plan Financial Statements
and Form S-8
Exhibit 99.1 2002 Financial Statements of the
Camco Financial & Subsidiaries
Salary Savings Plan
Exhibit 99.2 Certification of Chief Executive Officer
Exhibit 99.3 Certification of Chief Financial Officer