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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-25196
CAMCO FINANCIAL CORPORATION
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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_____
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. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the last sale reported as of March
21, 2002, was $103.9 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, 2001, were $81.5 million. 7,964,119 shares of the
registrant's common stock were outstanding on March 21, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of Form 10-K: Portions of the Proxy Statement for the 2002 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 subsidiaries,
Camco Mortgage Corporation ("CMC") and WestMar Mortgage Company ("WestMar"). 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. In 1998, Camco acquired GF Bancorp,
Inc, and its wholly-owned subsidiary, Germantown Federal Savings Bank in a
combination accounted for as a pooling-of-interests ("Germantown Merger").
Accordingly, the financial information for 1997 had previously been restated to
give effect to the combination as of January 1, 1997. 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 Department of Financial
Institutions, Division of Savings Banks (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.
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.
-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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2001 2000 1999 1998 1997
----------------- --------------- ------------------- ----------------- ----------------
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:
Construction $ 42,666 4.9% $ 56,039 6.0% $ 60,565 8.3% $ 37,169 6.8% $ 14,505 3.0%
Existing residential
properties (1) 705,056 80.9 764,828 82.2 619,621 85.3 485,107 88.4 431,646 89.7
Nonresidential real estate 70,239 8.1 54,722 5.9 20,831 2.9 15,019 2.7 11,294 2.3
Developed building lots 5,908 0.7 5,640 0.6 4,649 0.6 3,895 0.7 1,870 0.4
Education loans 1,198 0.1 1,459 0.2 1,847 0.3 2,096 0.4 2,224 0.5
Consumer and other loans (2) 67,918 7.8 71,719 7.7 49,232 6.8 29,835 5.5 32,430 6.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total 892,985 102.5 954,407 102.6 756,745 104.2 573,121 104.5 493,969 102.6
Less:
Undisbursed loans in (15,343) (1.8) (19,911) (2.2) (27,569) (3.8) (22,262) (4.1) (10,059) (2.1)
process
Unamortized yield (1,940) (0.2) (918) (0.1) (1,088) (0.1) (407) (0.1) (813) (0.2)
adjustments
Allowance for loan losses (4,256) (0.5) (2,906) (0.3) (1,863) (0.3) (1,783) (0.3) (1,596) (0.3)
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans, net $871,446 100.0% $930,672 100.0% $726,225 100.0% $548,669 100.0% $481,501 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
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(1) Includes loans held for sale.
(2) Includes second mortgage loans.
Camco's loan portfolio was approximately $871.4 million at December 31,
2001, and represented 79.0% of total assets.
-3-
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 2001, 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
2002 2003-2007 2007 Total
---------------- ------------- -------- -------
(In thousands)
Real estate loans (1):
One- to four- family $ 7,873 $42,163 $617,797 $667,833
Multifamily and nonresidential 6,003 15,642 97,603 119,248
Consumer and other loans 13,796 31,882 23,438 69,116
------ ------ ------- -------
Total $27,672 $89,687 $738,838 $856,197
====== ====== ======= =======
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(1) Excludes loans held for sale of $21.4 million and does not consider the
effects of unamortized yield adjustments of $1.9 million and the allowance
for loan losses of $4.3 million.
The following table sets forth at December 31, 2001, the dollar amount
of all loans due after one year from December 31, 2001, which have predetermined
interest rates and have floating or adjustable interest rates:
Due after
December 31, 2002
(In thousands)
Fixed rate of interest $319,666
Adjustable rate of interest 508,859
-------
Total $828,525
=======
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, 2001, 74.8% of the total outstanding loans consisted of loans
secured by mortgages on one- to four-family residential properties. Advantage
also originates loans on multifamily housing (over four units) and condominiums.
Each of such loans is secured by a mortgage on the underlying real estate and
improvements thereon.
Federal regulations and Ohio law limit the amount which 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 makes loans on single-family residences
up to 100% 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.
-4-
The interest rate adjustment periods on adjustable-rate mortgage loans
("ARMs") offered by Advantage are generally one, three, five or seven years. The
interest rates initially charged on ARMs and the new rates at each adjustment
date are determined by adding a stated margin to a designated interest rate
index. For the past several years, Advantage has used the one-year, three-year,
five-year and seven-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 rate for a
three-year, a five-year and a seven-year ARM is set slightly higher than for the
one-year ARM to compensate for the reduced interest rate sensitivity. The
maximum adjustment at each adjustment date for ARMs is usually 2%, with a
maximum adjustment of 6% over the term of the loan.
From time to time, 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 10 to 30 years, which could have an adverse effect upon earnings if the loans
do not reprice as quickly as the cost of funds. To minimize such effect,
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, 2001, 26.3% were ARMs and 73.7% were fixed-rate loans.
Adjustable-rate loans comprised 58.6% of Camco's total outstanding loans at
December 31, 2001.
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, 2001, a total of $42.7
million, or approximately 4.9% of Advantage's total loans, consisted of
construction loans, primarily for one- to four-family properties.
Construction loans to owner-occupants are typically adjustable-rate
long-term loans on which the borrower pays only interest 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, Camco could be adversely affected in that it would have to
take control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. At December 31, 2001,
Advantage had 11 construction loans in the amount of $8.8 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 and apartment projects containing 36 or more units.
Nonresidential real estate loans are generally made on an adjustable-rate basis
for terms of up to 20 years. Nonresidential real estate loans originated by
Advantage generally have an LTV of 80% or less. The largest nonresidential real
estate loan outstanding at December 31, 2001, was a $4.5 million loan secured by
an apartment complex, commercial properties, and leasing business residuals.
Nonresidential real estate loans comprised 8.1% of total loans at December 31,
2001.
-5-
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, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation.
Federal law limits an association's investment in nonresidential real
estate loans to 400% of the association's capital. At December 31, 2001,
Advantage's investment in nonresidential real estate loans was approximately
80.5% of its total capital.
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 and unsecured 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, 2001, education, consumer and other loans constituted 7.9% of Camco's total
loans.
Loan Solicitation and Processing. Loan originations are developed from
a number of sources, including: solicitations by Camco's lending staff;
referrals from real estate brokers and builders; continuing business with
depositors, other borrowers and real estate developers; and walk-in customers.
Camco does not use loan brokers. Camco's management stresses the importance of
individualized attention to the financial needs of its customers.
The loan origination process is decentralized, with each of 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 Bank originating the loan, after which they are
forwarded to the Bank's loan department for processing. On new loans, the loan
department typically obtains a credit report, verification of employment and
other documentation concerning the borrower and orders an appraisal of the fair
market value of the real estate which will secure the loan. The real estate is
thereafter physically inspected and appraised by a staff appraiser or by a
designated fee appraiser approved by the Board of Directors of Advantage. Upon
the completion of the appraisal and the receipt of all necessary information
regarding the borrower, the mortgage loan application is submitted to the Bank's
underwriter for approval. If the loan is approved, an attorney's opinion of
title or title insurance is obtained on the real estate which will secure the
loan. Borrowers are required to carry satisfactory fire and casualty insurance
and flood insurance, if applicable, and to name 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 and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Loan Originations, Purchases and Sales. 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 and consumer loans. Generally all
residential fixed-rate loans made by Advantage are originated on documentation
-6-
which will permit a possible sale of such loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") or other secondary mortgage market participants.
When a mortgage loan is sold to the FHLMC, Advantage generally services the loan
by collecting monthly payments of principal and interest and forwarding such
payments to the FHLMC, net of a servicing fee. During the year ended December
31, 2001, Advantage also sold loans with servicing released. Fixed-rate loans
not sold to the FHLMC and substantially all of the ARMs originated by Advantage
are held in Advantage's loan portfolios. During the year ended December 31,
2001, Camco sold approximately $295.6 million in loans to the FHLMC and others.
Gross income from loans serviced by Camco for others was $1.4 million, which was
offset by the amortization and impairment of mortgage servicing rights of $2.8
million for the year ended December 31, 2001.
From time to time, Advantage sells participation interests in mortgage
loans originated by them 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 $21.7 million at December
31, 2001. Loans which Advantage purchases must meet or exceed the underwriting
standards for loans originated by Advantage.
In recent years, Camco 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. Camco intends to continue to
purchase such mortgage-backed securities when conditions favor such an
investment. See "Investment Activities."
The following table presents Camco's mortgage loan origination,
purchase, sale and principal repayment activity for the periods indicated:
Year ended December 31,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(In thousands)
Loans originated:
Construction $ 35,330 $ 71,929 $ 66,437 $ 49,152 $ 34,293
Permanent 320,973 202,004 324,648 328,046 168,519
Consumer and other 83,126 84,526 34,158 67,243 54,351
------- ------- ------- ------- -------
Total loans originated 439,429 358,459 425,243 444,441 257,163
------- ------- ------- ------- -------
Loan purchased (1) 17,755 8,639 31,430 18,982 12,514
Reductions:
Principal repayments (1) 276,060 178,663 176,804 194,594 134,794
Loans sold (1) 295,637 124,496 96,892 205,899 77,665
Transfers from loans to real estate owned 3,208 1,432 1,220 477 978
------- ------- ------- ------- -------
Total reductions 574,905 304,591 274,916 400,970 213,437
Increase (decrease) in other items, net (2) (314) (2,552) (277) (3,444) 137
Increase due to mergers (3) 81,426 147,196 - - -
------- ------- ------- ------- -------
Net increase (decrease) $(36,609) $207,151 $181,480 $ 59,009 $ 56,377
======= ======= ======= ======= =======
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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 merger with Columbia Financial and the
2000 increase resulted from the merger with WFC.
-7-
Lending Limit. Federal regulations and Ohio law generally impose a
lending limit on the aggregate amount that a savings association can lend to one
borrower to an amount equal to 15% of the association's total capital for
risk-based capital purposes plus any loan reserves not already included in total
capital (the "Lending Limit Capital"). A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated. An exception to
this limit permits loans of any type to one borrower of up to $500,000.
The largest amount which Advantage could have loaned to one borrower at
December 31, 2001, was approximately $13.1 million. The largest amount Advantage
had outstanding to one borrower and related persons or entities at December 31,
2001, was $6.8 million, which consisted of five loans secured by personal
residences, commercial properties, leasing business residuals, and an apartment
complex, a warehouse and a golf course. These loans are not in violation of the
applicable federal regulation.
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 by mail or phone 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 or will be 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,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Loans delinquent for:
30 to 89 days $14,238 $10,557 $13,792 $10,028 $6,723
90 or more days 7,885 4,726 3,975 4,296 1,939
------ ------ ------ ------ -----
Total delinquent loans $22,123 $15,283 $17,767 $14,324 $8,662
====== ====== ====== ====== =====
Ratio of total delinquent loans to
total net loans (1) 2.54% 1.64% 2.45% 2.61% 1.80%
==== ==== ==== ==== ====
(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 Camco's nonaccruing and delinquent loans for the periods indicated.
At December 31,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential $3,677 $2,068 $1,980 $1,328 $ 830
Nonresidential 367 197 429 233 27
Consumer and other 393 157 141 64 79
----- ----- ----- ----- -----
Total nonaccrual loans 4,437 2,422 2,550 1,625 936
----- ----- ----- ----- -----
Accruing loans delinquent 90 days or more:
Real estate:
Residential 2,564 1,836 1,140 2,030 710
Nonresidential 206 -- -- -- --
Consumer and other 678 468 285 641 293
----- ----- ----- ----- -----
Total loans 90 days past due 3,448 2,304 1,425 2,671 1,003
----- ----- ----- ----- -----
Total nonperforming loans $7,885 $4,726 $3,975 $4,296 $1,939
===== ===== ===== ===== =====
Allowance for loan losses $4,256 $2,906 $1,863 $1,783 $1,596
===== ===== ===== ===== =====
Nonperforming loans as a percent of total net
loans .90% .51% .55% .78% .40%
=== === === === ===
Allowance for loan losses as a percent of
nonperforming loans 54.0% 61.5% 46.9% 41.5% 82.3%
==== ==== ==== ==== ====
The amount of interest income that would have been recorded had
nonaccrual loans performed in accordance with contractual terms totaled
approximately $278,000 for the year ended December 31, 2001. Interest collected
on such loans and included in net earnings was $54,000.
At December 31, 2001, there were no loans which were not classified as
nonaccrual, 90 days past due or restructured which management considered
classifying in the near future due to concerns as to the ability of the
borrowers to comply with repayment terms.
Federal regulations require 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, 2001, the aggregate amounts of Camco's
classified assets were as follows:
At December 31, 2001
(In thousands)
Classified assets:
Substandard $7,775
Doubtful 27
Loss 83
-----
Total classified assets $7,885
=====
The regulations also include a "special mention" category, consisting
of assets which do not currently expose an insured institution to a sufficient
degree of risk to warrant classification, but which possess credit deficiencies
or potential weaknesses deserving management's close attention. Camco had assets
in the amount of $4.4 million designated as "special mention" at December 31,
2001.
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,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in thousands)
Balance at beginning of year $2,906 $1,863 $1,783 $1,596 $1,373
Charge-offs:
1-4 family residential real estate 66 9 82 9 30
Multifamily and nonresidential real estate 12 41 12 - 124
Consumer and other 657 122 79 61 22
----- ----- ----- ----- -----
Total charge-offs 735 172 173 70 176
----- ----- ----- ----- -----
Recoveries:
1-4 family residential real estate 3 - - - 2
Multifamily and nonresidential real estate - - 2 - 4
Consumer and other 23 6 4 7 8
----- ----- ----- ----- -----
Total recoveries 26 6 6 7 14
----- ----- ----- ----- -----
Net charge-offs (709) (166) (167) (63) (162)
Provision for losses on loans 759 568 247 250 385
Increase attributable to mergers (1) 1,300 641 - - -
----- ----- ----- ----- -----
Balance at end of year $4,256 $2,906 $1,863 $1,783 $1,596
===== ===== ===== ===== =====
Net charge-offs to average loans .08% .02% .03% .01% .04%
=== === === === ===
(1) The 2001 increase resulted from the merger with Columbia Financial and the
2000 increase resulted from the merger with 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,
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- ----------------
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 $3,418 92.1% $2,440 92.1% $1,350 92.9% $1,340 94.1% $1,030 92.8%
Consumer and other 838 7.9 466 7.9 513 7.1 443 5.9 566 7.2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
loans
Total $4,256 100.0% $2,906 100.0% $1,863 100.0% $1,783 100.0% $1,596 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Investment 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
securities portfolio, except its stock in the FHLB of Cincinnati, at the dates
indicated:
At December 31,
2001 2000 1999
---------------------------------- -------------------------------- --------------------------------
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 $18,682 33.0% $18,891 33.1% $16,482 51.4% $16,427 51.3% $16,584 55.8% $16,166 55.7%
Municipal bonds 190 .3 192 .3 190 .6 190 .6 280 .9 286 1.0
Mortgage-backed 30,765 54.2 30,744 53.9 5,273 16.4 5,247 16.4 5,944 20.0 5,818 20.0
------ ---- ------ ---- ------ ----- ------ ------ ------ ---- ------ ----
securities
Total 49,637 87.5 49,827 87.3 21,945 68.4 21,864 68.3 22,808 76.7 22,270 76.7
Available for sale:
Corporate equity 245 .4 305 .5 245 .7 309 1.0 228 .8 273 1.0
securities
Mortgage-backed
securities 6,872 12.1 6,975 12.2 9,908 30.9 9,850 30.7 6,704 22.5 6,475 22.3
------ ---- ------ ---- ------ ----- ------ ------ ------ ---- ------ ----
Total 7,117 12.5 7,280 12.7 10,153 31.6 10,159 31.7 6,932 23.3 6,748 23.3
------ ---- ------ ---- ------ ----- ------ ------ ------ ---- ------ ----
Total investments and
mortgage-backed
securities $56,754 100.0%$57,107 100.0% $32,098 100.0% $32,023 100.00% $29,740 100.0% $29,018 100.0%
====== ===== ====== ===== ====== ===== ====== ====== ====== ===== ====== =====
-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, 2001:
At December 31, 2001
--------------------------------------------------------------------------------------------------------
After one After five
One year or less through five years through ten years After ten years Total
------------------ ------------------ ------------------ ----------------- -------------------------
Weighted-
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair average
cost yield cost yield cost yield cost yield cost value yield
------ ------- ------ ------- ------ ------- --------- ------ ------ ------ -----
(Dollars in thousands)
U.S. Government
agency obligations $1,000 5.98% $16,867 5.26% $ - - % $ 815 4.75% $18,682 $18,891 5.28%
Municipal bonds 100 4.10 - - - - 90 6.66 190 192 5.31
Mortgage-backed
securities 115 7.54 8,592 5.06 7,979 5.97 20,951 6.09 37,637 37,719 5.83
----- ---- ------ ---- ----- ---- ------ ---- ------ ------ ----
Total $1,215 5.97% $25,459 5.19% $7,979 5.97% $21,856 6.04% $56,509 $56,802 5.65%
===== ==== ====== ==== ===== ==== ====== ==== ====== ====== =====
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 passbook savings accounts, term
certificate accounts and retirement savings plans. Interest rates paid, maturity
terms, service fees and withdrawal penalties for the various types of accounts
are established periodically by management of Advantage based on its liquidity
requirements, growth goals and interest rates paid by competitors. Interest
rates paid by Camco on deposits are not limited by federal or state law or
regulation. Camco generally does not obtain funds through brokers or offer
premiums to attract deposits. Camco does not have a significant amount of
savings accounts from outside its primary market area.
-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,
---------------------------------------------------------------------
2001 2000 1999
Weighted- ------------------- ------------------- -------------------
average Percent Percent Percent
rate at of total of total of total
12/31/01 Amount deposits Amount deposits Amount deposits
(Dollars in thousands)
Withdrawable accounts:
Interest and non-interest bearing
checking accounts 0.99% $111,649 15.3% $ 90,830 14.4% $ 71,582 15.5%
Money market demand accounts 3.59 64,539 8.8 45,047 7.1 26,898 5.8
Passbook and statement savings
accounts 1.70 85,443 11.7 69,706 11.0 71,128 15.4
---- ------- ----- ------- ----- ------- -----
Total withdrawable accounts 1.86 261,631 35.8 205,583 32.5 169,608 36.7
Certificates accounts:
Term:
Seven days to one year 3.49 51,472 7.0 64,693 10.2 41,093 8.9
One to two years 5.29 136,859 18.8 139,103 22.0 108,118 23.4
Two to eight years 5.95 163,226 22.4 117,146 18.5 83,299 18.1
Negotiated rate certificates 5.13 54,998 7.5 56,552 9.0 28,618 6.2
Individual retirement accounts 5.40 61,889 8.5 49,211 7.8 31,051 6.7
---- ------- ----- ------- ----- ------- -----
Total certificate accounts 5.32 468,444 64.2 426,705 67.5 292,179 63.3
---- ------- ----- ------- ----- ------- -----
Total deposits 4.08% $730,075 100.0% $632,288 100.0% $461,787 100.0%
==== ======= ===== ======= ===== ======= =====
The following table presents the amount and contractual maturities of
Camco's time deposits at December 31, 2001:
Amount Due
-------------------------------------------------------------------------
Up to Over
one year 1-3 years 3-5 years 5 years Total
-------- --------- --------- ------- --------
(Dollars in thousands)
Amount maturing $312,484 $122,891 $24,670 $8,399 $468,444
======= ======= ====== ===== =======
Average rate 5.20% 5.47% 5.56% 6.91% 5.32%
==== ==== ==== ==== ====
The following table sets forth the amount and maturities of Camco's
time deposits in excess of $100,000 at December 31, 2001:
Maturity At December 31, 2001
-------- --------------------
(In thousands)
Three months or less $ 39,023
Over three to six months 26,700
Over six to twelve months 23,649
Over twelve months 33,885
-------
Total $123,257
=======
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
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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
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, 2001, 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,
2001 2000 1999
------ ------ ------
(Dollars in thousands)
Maximum amount outstanding $313,472 $357,411 $279,125
Average amount outstanding $280,747 $325,805 $200,285
Weighted-average interest cost of FHLB advances
based on month end balances 6.09% 6.37% 5.39%
The following table sets forth certain information with respect to
Camco's FHLB advances at the dates indicated:
At December 31,
2001 2000 1999
------ ------ ------
(Dollars in thousands)
Amount outstanding $258,850 $313,471 $279,125
Weighted-average interest rate 6.02% 6.20% 5.71%
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,
-14-
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, 2001, Advantage had a direct investment in the capital
stock of CMC in the amount of approximately $1.9 million. The principal business
of CMC is originating first mortgage loans on residential real estate located
primarily in Coshocton, Muskingum, Stark and Tuscarawas Counties, Ohio. Loans
originated by CMC are generally sold to Advantage. CMC originated $104.6 million
of mortgage loans in 2001, $57.9 million of which were sold to Advantage,
compared to $88.1 million which were sold in 2000.
Advantage had a direct investment in the capital stock of WestMar in
the amount of approximately $509,000 at December 31, 2001. The principal
business of WestMar is originating first mortgage loans on residential real
estate located in Wood County, West Virginia. WestMar originated $15.3 million
of mortgage loans in 2001, $13.0 million of which were sold to Advantage,
compared to $7.6 million of mortgage loans sold in 2000. Advantage is in the
process of converting the WestMar office into a limited purpose branch of
Advantage.
First S&L Corporation did not conduct any business during the year
ended December 31, 2001, and was capitalized on a nominal basis at December 31,
2001.
Employees
As of December 31, 2001, Camco had 235 full-time employees and 47
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 a member of the FHLB of Cincinnati and is also
subject to certain regulations promulgated by the Board of Governors of the
Federal Reserve System ("FRB").
Ohio Regulation
As a savings bank incorporated under Ohio law, Advantage is subject to
regulation by the Division. Such regulation 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, 2001,
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."
-15-
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"), including Advantage.
The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of federally insured banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF")
for commercial banks and state savings banks and the SAIF for savings
associations. 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
such institutions and certain persons affiliated with them for violations of
laws and regulations or for engaging in unsafe or unsound practices. If the
grounds provided by law exist, the FDIC may appoint a conservator or a receiver
for a Non-member Bank.
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 3%, if Advantage has the highest
regulatory examination rating, well diversified risk and minimal anticipated
growth or expansion, and between 4% and 5% of average total consolidated assets
if it does not meet those criteria. "Tier 1" capital includes common
-16-
stockholders equity, noncumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries, less all
intangibles, other than includable purchased mortgage servicing rights and
credit card relationships.
Pursuant to the risk-based capital requirement, Advantage must maintain
total capital, which consists of core or Tier 1 capital and certain general
valuation reserves, of 8% of risk-weighted assets. For purposes of computing
risk-based capital, assets and certain off-balance sheet items are weighted at
percentage levels ranging from 0% to 100%, depending on their relative risk.
The following tables present certain information regarding compliance
by Advantage with applicable regulatory capital requirements at December 31,
2001:
At December 31, 2001
--------------------------------------------------------------------------------------
To be "well-capitalized"
For capital under 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 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. An
undercapitalized institution must submit a capital restoration plan to the
applicable agency within 45 days after it becomes undercapitalized. Such
institution will be subject to increased monitoring and asset growth
restrictions and will be required to obtain prior approval for acquisitions,
branching and engaging in new lines of business. Furthermore, critically
undercapitalized institutions must be placed in conservatorship or receivership
within 90 days of reaching that capitalization level, except under limited
circumstances. Advantage's capital level at December 31, 2001, met the standards
for well-capitalized institutions.
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
institution's total assets at the time it became undercapitalized or (b) the
amount necessary to bring the institution into compliance with all capital
standards applicable to such institution at the time the institution fails to
comply with its capital restoration plan.
-17-
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, 2001.
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, 2001.
Change in Control
Federal Law. The Federal Deposit Insurance Act (the "FDIA") provides
that no person, acting directly or indirectly or in concert with one or more
persons, shall acquire control of any insured depository institution or holding
company, unless 60-days prior written notice has been given to the primary
federal regulator for that institution and such regulator has not issued a
notice disapproving the proposed acquisition. Control, for purposes of the FDIA,
means the power, directly or indirectly, alone or acting in concert, to direct
the management or policies of an insured institution or to vote 25% or more of
any class of securities of such institution. Control exists in situations in
which the acquiring party has direct or indirect voting control of at least 25%
of the institution's voting shares, controls in any manner the election of a
majority of the directors of such institution or is determined to exercise a
controlling influence over the management or policies of such institution. In
addition, control is presumed to exist, under certain circumstances where the
acquiring party (which includes a group "acting in concert") has voting control
of at least 10% of the institution's voting stock. These restrictions do not
apply to holding company acquisitions. See "Holding Company Regulation".
Ohio Law. A statutory limitation on the acquisition of control of an
Ohio savings bank requires the written approval of the Division prior to the
acquisition by any person or entity of a controlling interest in an Ohio
association. Control exists, for purposes of Ohio law, when any person or entity
which, either directly or indirectly, or acting in concert with one or more
other persons or entities, owns, controls, holds with power to vote, or holds
proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors. A director will not be deemed to be in control by virtue of an
annual solicitation of proxies voted as directed by a majority of the board of
directors. Ohio law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the
outstanding voting securities of Camco must be approved in advance by the
holders of at least a majority of the outstanding voting shares represented at a
meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting, excluding the voting
-18-
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. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by Camco.
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
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, 2001,
Advantage met the QTL test.
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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, 2001, Advantage
was in compliance with its reserve requirements.
Federal Home Loan Bank System
The FHLBs provide credit to their members in the form of advances. As a
member of the FHLB of Cincinnati, Advantage is required to maintain an
investment in the capital stock of the FHLB of Cincinnati in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of its
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB of Cincinnati.
Advantage is in compliance with this requirement with an investment in FHLB of
Cincinnati stock of $22.5 million at December 31, 2001.
Generally, the FHLB is not permitted to make new advances to a member
without positive tangible capital. Upon the origination or renewal of a loan or
advance, the FHLB of Cincinnati is required to obtain and to maintain a security
interest in collateral in one or more of the following categories: fully
disbursed, whole first mortgage loans on improved residential property or
securities representing a whole interest in such loans; securities issued,
insured or guaranteed by the United States Government or an agency thereof;
deposits in any FHLB; or other real estate related collateral (up to 30% of the
member's capital) acceptable to the applicable FHLB, if such collateral has a
readily ascertainable value and the FHLB can perfect its security interest in
the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance. The FHLBs have established the
"Affordable Housing Program" to subsidize the interest rate on advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Advantage has participated in this program.
Federal Taxation
Camco and its subsidiaries are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, Camco and its subsidiaries may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
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
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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
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,
2001, the pre-1988 reserves for Advantage for tax purposes totaled approximately
$12.8 million. Camco believes Advantage had approximately $24.3 million of
accumulated earnings and profits for tax purposes as of December 31, 2001, which
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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 1997. 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) .400% times taxable net worth.
A special litter tax is also applicable to all corporations, including
Camco, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
..22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
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 and WestMar are subject to the Ohio Dealers in Intangibles property
tax but currently incur no liability because they are owned by an Ohio financial
institution.
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, Camco Title and WestMar 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.
-22-
Item 2. Properties.
The following table provides the location of, and certain other
information pertaining to, Camco's office premises as of December 31, 2001:
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
--------------- ---------- ------ ------
134 E. Court Street
Washington Court House, Ohio 1963 Owned (2) $ 621,564
45 West Second Street
Chillicothe, Ohio 1994 Leased (3)
1050 Washington Ave.
Washington Court House, Ohio 1996 Owned 543,658
1 N. Plum Street
Germantown, Ohio 1998 Owned 563,951
687 West Main Street
New Lebanon, Ohio 1998 Owned 81,327
1392 Cherry Bottom Road
Gahanna, Ohio 1999 Leased (4)
3002 Harrison Avenue
Cincinnati, Ohio 2000 Owned 1,644,735
1101 St. Gregory Street
Cincinnati, Ohio 2000 Leased (5)
5071 Glencrossing Way
Cincinnati, Ohio 2000 Leased (6)
290 1/2Front St.
Marietta, Ohio 1996 Leased (7)
126 S. 9th Street
Cambridge, Ohio 1998 Owned 109,641
226 Third Street
Marietta, Ohio 1976 Owned 541,143
1925 Washington Boulevard
Belpre, Ohio 1979 Owned 133,226
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478 Pike Street
Marietta, Ohio 1998 Leased (8) $ 628,936
814 Wheeling Avenue (9)
Cambridge, Ohio 1963 Owned 1,128,755
327 E. 3rd Street
Uhrichsville, Ohio 1975 Owned 44,219
175 N. 11th Street
Cambridge, Ohio 1981 Owned 359,845
209 Seneca Avenue
Byesville, Ohio 1978 Leased (10)
2497 Dixie Highway
Ft. Mitchell, Kentucky 2001 Owned 389,360
401-7 Pike Street
Covington, Kentucky 2001 Owned 115,996
3522 Dixie Highway
Erlanger, Kentucky 2001 Owned 23,592
612 Buttermilk Pike
Crescent Springs, Kentucky 2001 Owned 35,675
7550 Dixie Highway
Florence, Kentucky 2001 Owned 683,473
1640 Carter Avenue
Ashland, Kentucky 1996 Owned 831,914
U.S. 60A West
Summit, Kentucky 1996 Owned 664,688
280 Russell Road
Ashland, Kentucky 1996 Owned 95,675
191 Eastern Heights
Shopping Center
Huntington, West Virginia 1997 Leased (11) 2,287
--------------------------
(Footnotes on following page)
-24-
6901 Glenn Highway 1999 Owned $1,372,583
Cambridge, Ohio
1320A and 1320 D 4th Street, N.W.
New Philadelphia, Ohio 1985 Owned (12) 207,131
6269 Frank Ave.
N. Canton, Ohio 1992 Leased (13)
343 W. Milltown Road
Wooster, Ohio 2000 Leased (14)
510 Grand Central Avenue
Vienna, West Virginia 1991 Leased (15)
(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 September 2004.
(4) The lease expires in 2004 and Advantage has the option to renew for a five
year term.
(5) The lease is currently on a month to month basis.
(6) The lease expires in April 2006. Advantage has the option to renew for a
five-year term.
(7) The lease expires in May 2002.
(8) The lease expires in 2017. Advantage has the option to renew for 2
five-year terms. The lease is for land.
(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 2003.
(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 March 2003, with an option to renew for two three-year
terms.
(15) The lease expires in August 2002.
-25-
Camco also owns furniture, fixtures and equipment. The net book value
of Camco's investment in office premises and equipment totaled $14.8 million at
December 31, 2001. 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.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
At December 31, 2001, Camco had 8,011,020 shares of common stock
outstanding and held of record by approximately 1,300 stockholders. 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 1999, 2000 and 2001.
Cash
dividends
Year ended December 31, 2001 High Low declared
---------------------------- -------- ------- -----------
Quarter ending:
December 31, 2001 $13.00 $10.95 $0.1200
September 30, 2001 13.75 12.01 0.1200
June 30, 2001 12.58 10.60 0.1200
March 31, 2001 11.38 9.44 0.1200
Year ended December 31, 2000 Quarter ending:
December 31, 2000 $10.62 $ 8.52 $0.1200
September 30, 2000 10.38 8.18 0.1200
June 30, 2000 9.64 8.31 0.1200
March 31, 2000 9.51 7.67 0.1200
Year ended December 31, 1999(1) Quarter ending:
December 31, 1999 $12.38 $ 9.56 $0.1200
September 30, 1999 13.50 10.31 0.1200
June 30, 1999 13.33 12.43 0.1143
March 31, 1999 14.88 13.10 0.1071
----------------------------
(1) Amounts have been restated to give effect to the 5% stock dividend which
was effected in July 1999.
In addition to certain federal income tax considerations, regulations
of OTS imposes limitations on the payment of dividends and other capital
distributions by savings associations.
-26-
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
herein.
SELECTED CONSOLIDATED
FINANCIAL DATA:(1) At December 31,
2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
(In thousands)
Total amount of:
Assets $1,102,652 $1,037,856 $813,482 $637,135 $570,170
Interest-bearing deposits in other financial
institutions 89,299 4,916 247 22,609 10,473
Investment securities available for sale - at market 305 309 273 1,292 3,572
Investment securities held to maturity 18,872 16,672 16,864 10,962 17,489
Mortgage-backed securities available for sale - at market 6,975 9,850 6,475 3,476 8,447
Mortgage-backed securities held to maturity 30,765 5,273 5,944 5,019 8,207
Loans receivable - net (2) 871,446 930,672 726,225 548,669 481,501
Deposits 730,075 632,288 461,787 443,227 422,368
FHLB advances and other borrowings 258,850 313,471 279,125 125,483 82,319
Stockholders' equity - substantially restricted 95,171 78,750 62,609 60,139 55,331
SELECTED CONSOLIDATED
OPERATING DATA: (1) Year ended December 31,
2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Total interest income $74,372 $75,671 $51,093 $44,283 $41,217
Total interest expense 48,433 49,609 29,907 24,852 22,778
------ ------ ------ ------ ------
Net interest income 25,939 26,062 21,186 19,431 18,439
Provision for losses on loans 759 568 247 250 385
------ ------ ------ ------ ------
Net interest income after provision for losses on loans 25,180 25,494 20,939 19,181 18,054
Other income 7,153 5,536 5,190 7,552 3,945
General, administrative and other expense 18,948 19,530 17,113 16,319 13,733
Restructuring charges related to charter consolidation 950 - - - -
------ ------ ------ ------ ------
Earnings before federal income taxes 12,435 11,500 9,016 10,414 8,266
Federal income taxes 3,891 3,848 3,076 3,410 2,922
------ ------ ------ ------ ------
Net earnings $ 8,544 $ 7,652 $ 5,940 $ 7,004 $ 5,344
====== ====== ====== ====== ======
Earnings per share: (3)
Basic $1.20 $1.11 $1.04 $1.22 $0.93
==== ==== ==== ==== ====
Diluted $1.19 $1.10 $1.02 $1.19 $0.91
==== ==== ==== ==== ====
For the year ended December 31,
2001 2000 1999 1998 1997
----------------------------------------------------
Return on average assets (4) 0.80% 0.83% 0.82% 1.16% 0.98%
Return on average assets excluding restructuring charges (4) 0.86 0.83 0.82 1.16 0.98
Return on average equity (4) 9.83 10.83 9.68 12.13 10.01
Return on average equity excluding restructuring charges (4) 10.54 10.83 9.68 12.13 10.01
Average equity to average assets (4) 8.13 7.64 8.46 9.56 9.81
Dividend payout ratio (5) 40.00 43.24 44.37 31.23 51.34
-----------------------------
(1) The information for the year ended December 31, 2001 reflects the
acquisition of Columbia Financial. 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)
-27-
(2) Includes loans held for sale.
(3) Earnings per share has been adjusted to give effect to the Germantown
Merger, and a three-for-two stock split, which were effected during 1998,
and 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, 2001. 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 operate autonomously in making local decisions for customer
contacts and services, however back-office operations are being 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 fees. Camco's operations are
also influenced 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, 2000 to December 31,
2001
At December 31, 2001, Camco's consolidated assets totaled $1.1 billion,
an increase of $64.8 million, or 6.2%, over the December 31, 2000 total. The
increase was primarily due to the acquisition of Columbia Financial in November
2001, which resulted in net asset growth of approximately $110.4 million. Before
consideration of the effects of the acquisition, total assets declined year to
year by $45.6 million, primarily due to loan sales and through principal
repayments on loans. This extra liquidity, coupled with an increase in deposits
of $16.7 million and an increase in stockholders' equity of $6.4 million, was
applied to decrease advances from the Federal Home Loan Bank by $54.6 million.
-28-
Cash and interest-bearing deposits in other financial institutions
totaled $105.0 million at December 31, 2001, an increase of $80.9 million, or
336.1%, over December 31, 2000 levels. This increase reflects the continued
payoff of loans in a low interest rate environment, which has caused borrowers
to refinance to fixed-rate loans which were sold in the secondary market.
Investment securities totaled $19.2 million at December 31, 2001, an increase of
$2.2 million, or 12.9%, over the total at December 31, 2000. During 2001,
investment securities totaling $10.5 million were purchased and $11.2 million
were acquired through the Columbia Financial acquisition, while maturities
amounted to $19.5 million. Mortgage-backed securities totaled $37.7 million at
December 31, 2001, an increase of $22.6 million, or 149.6%, over December 31,
2000, due primarily to the $12.2 million of mortgage-backed securities acquired
in the Columbia Financial acquisition and purchases of $15.2 million, which were
partially offset by principal repayments totaling $4.9 million.
Loans receivable and loans held for sale totaled $871.4 million at
December 31, 2001, a decrease of $59.2 million, or 6.4%, from the total at
December 31, 2000. The decrease resulted primarily from loan sales of $295.6
million and principal repayments of $271.2 million, which were partially offset
by loans acquired through the Columbia Financial acquisition totaling $69.2
million and loan disbursements, including loan purchases and loans originated
for sale, totaling $442.0 million. Loan origination volume, including the
purchases of loans, during 2001 exceeded 2000 volume by $79.9 million, or 22.1%,
while the volume of loan sales increased by $176.2 million year to year. The
increase in loan origination and sales volume was primarily attributable to an
increase in refinancing activity following the decrease in the overall level of
long-term interest rates during the year.
The allowance for loan losses totaled $4.3 million and $2.9 million at
December 31, 2001 and 2000, respectively, representing 54.0% and 61.5% of
nonperforming loans at those dates. The allowance for loan losses was increased
by $1.3 million as a result of the allowance maintained by Columbia Savings
prior to the acquisition. Nonperforming loans (90 days or more delinquent plus
nonaccrual loans) totaled $7.9 million and $4.7 million at December 31, 2001 and
2000, respectively, constituting .90% and .51% of total net loans, including
loans held for sale, at those dates. At December 31, 2001, nonperforming loans
were comprised of $6.5 million of loans secured by one- to four-family
residential real estate, $1.1 million of commercial loans and $278,000 of loans
secured by multi-family and nonresidential real estate. Although management
believes that its allowance for loan losses at December 31, 2001, 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 $730.1 million at December 31, 2001, an increase of
$97.8 million, or 15.5%, over December 31, 2000 levels. The increase resulted
primarily from deposits of $81.1 million acquired in the Columbia Financial
acquisition, coupled with deposit portfolio growth of $16.7 million, or 2.6%,
which resulted primarily from management's continuing efforts to increase
deposits through marketing and pricing strategies. Advances from the FHLB
totaled $258.9 million at December 31, 2001, a decrease of $54.6 million, or
17.4%, compared to December 31, 2000. Advances were repaid primarily with funds
generated through loan sales and through principal repayments on loans.
Stockholders' equity totaled $95.2 million at December 31, 2001, an
increase of $16.4 million, or 20.9%, over December 31, 2000. The increase was
due primarily to common shares issued in the purchase of Columbia Financial,
which resulted in a $10.0 million increase, coupled with net earnings of $8.5
million and proceeds from stock option exercises totaling $1.3 million, which
were partially offset by dividends of $3.5 million.
The Bank is required to maintain minimum regulatory capital pursuant to
federal regulations. During 2001, 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, 2001, the
Bank's regulatory capital exceeded all regulatory capital requirements.
-29-
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, reflect 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 $69.7 million, or 11.8% year to year, partially offset by a 14
basis point decrease in the average cost of deposits, from 4.89% in 2000 to 4.75
% in 2001. The 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 2.34% 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. 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 $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
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28.4%, increase in loans secured by nonresidential real estate during 2001.
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 $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. Camco anticipated that the approximate savings from the
restructuring, coupled with other 2001 personnel reductions, would add earnings
of $.14 per basic share in the four quarters immediately following the charge,
while enhancing the basic per share earnings level by $.17 in 2002. The
consolidation of operations such as data processing began in July 2001, and
total data processing conversion will be 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
$313,000, or 7.6%, 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.
Comparison of Results of Operations for the Years Ended December 31, 2000 and
December 31, 1999
General. Increases in the level of income and expenses during the year
ended December 31, 2000, compared to 1999, were significantly influenced by the
inclusion of the accounts of Westwood Homestead, which was acquired by Camco in
January 2000 in a transaction accounted for using the purchase method of
accounting. Accordingly, the statement of earnings for the year ended December
31, 1999, was not restated for the acquisition.
Camco's net earnings for the year ended December 31, 2000, totaled $7.7
million, an increase of $1.7 million, or 28.8%, over the $5.9 million of net
earnings reported in 1999. The increase in earnings was primarily attributable
to a $4.9 million increase in net interest income and an increase in other
income of $346,000, which were partially offset by a $321,000 increase in the
provision for losses on loans, an increase in general, administrative and other
expense of $2.4 million and a $772,000 increase in the provision for federal
income taxes.
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Net Interest Income. Total interest income for the year ended December
31, 2000, amounted to $75.7 million, an increase of $24.6 million, or 48.1%,
over 1999, generally reflecting the effects of the $272.0 million, or 39.4%, of
growth in weighted-average interest-earning assets outstanding year to year, and
the increase of 46 basis points in the average yield, from 7.40% in 1999 to
7.86% in 2000. The acquisition of Westwood Homestead accounted for approximately
$12.3 million of interest income during the year ended December 31, 2000.
Interest income on loans and mortgage-backed securities totaled $72.6
million for the year ended December 31, 2000, an increase of $24.0 million, or
49.3%, over the comparable 1999 period. The increase resulted primarily from a
$270.2 million, or 41.6%, increase in the weighted-average balance outstanding
year to year. Interest income on investments and interest-bearing deposits
increased by $597,000, or 24.6%, due primarily to an increase in the
weighted-average outstanding balances of $1.8 million, or 4.3%, and an increase
in the average yield.
Interest expense on deposits amounted to $28.9 million for the year
ended December 31, 2000, an increase of $9.8 million, or 51.0%, over the 1999
total. The increase was due to an increase in the weighted-average balance of
deposits outstanding of $137.5 million, or 30.4% year to year, and a 67 basis
point increase in the average rate paid from 4.22% in 1999 to 4.89% in 2000. The
acquisition of Westwood Homestead accounted for approximately $5.3 million of
the overall increase in the 2000 period. Interest expense on borrowings totaled
$20.7 million for the year ended December 31, 2000, an increase of $10.0
million, or 92.3%, over 1999. The increase resulted primarily from a $125.5
million increase in the weighted-average balance of borrowings outstanding year
to year and an increase of 98 basis points in the weighted-average cost of
borrowings.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $4.9 million, or 23.0%, to a total of
$26.1 million for the year ended December 31, 2000, compared to $21.2 million in
1999. The interest rate spread decreased to approximately 2.45% for the year
ended December 31, 2000, from 2.82% for 1999, while the net interest margin
decreased to approximately 2.71% in 2000, compared to 3.07% in 1999.
Provision for Losses on Loans. The provision for losses on loans
totaled $568,000 for the year ended December 31, 2000, an increase of $321,000,
or 130.0%, over the provision recorded in 1999. The 2000 provision generally
reflects the effects of loan portfolio growth, coupled with an increase of
$751,000 in the level of nonperforming loans year to year.
Other Income. Other income totaled $5.5 million for the year ended
December 31, 2000, an increase of $346,000, or 6.7%, compared to 1999. The
increase in other income was primarily attributable to a $297,000, or 16.9%,
increase in gains on sale of loans and an increase of $159,000, or 27.7%, in
service charges and other fees on deposits, which were partially offset by a
$41,000, or 5.8%, decrease in loan servicing fees and an $87,000, or 4.1%,
decrease in late charges, rent and other. The increase in gains on sale of loans
primarily reflects an increase in sales volume year to year.
General, Administrative and Other Expense. General, administrative and
other expense totaled $19.5 million for the year ended December 31, 2000, an
increase of $2.4 million, or 14.1%, compared to 1999. The acquisition of
Westwood Homestead accounted for $2.7 million of the increase in general,
administrative and other expenses. Excluding the effects of the Westwood
Homestead acquisition, office occupancy and equipment expense increased by
$172,000, or 7.0%, which was due to increased depreciation and increased
building maintenance costs, and data processing expense increased by $354,000,
or 42.4%, due to costs related to a conversion to an internal wide area network.
These increases were partially offset by a decrease in employee compensation and
benefits of $323,000, or 4.1%, resulting primarily from a decline in staffing
levels, and a decrease of $166,000, or 63.1%, in federal deposit insurance
premiums, due to a decrease in FDIC premium rates. Other operating expenses
increased primarily as a result of the Corporation's overall growth year to
year.
Federal Income Taxes. The provision for federal income taxes totaled
$3.8 million for the year ended December 31, 2000, an increase of $772,000 or
25.1%, compared to the provision recorded in 1999. This increase was primarily
-32-
attributable to a $2.5 million, or 27.6%, increase in pre-tax earnings year to
year. The effective tax rate amounted to 33.5% and 34.1% for the years ended
December 31, 2000 and 1999, respectively.
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,
2001 2000 1999
Weighted-average yield on:
Loan portfolio (1) 7.28% 8.01% 7.47%
Investment portfolio (2) 3.61 6.82 6.17
Total interest-earning assets 6.63 7.92 7.39
Weighted-average rate paid on:
Deposits 4.08 5.28 4.39
FHLB advances 6.02 6.20 5.71
Total interest-bearing liabilities 4.59 5.53 4.81
---- ---- ----
Interest rate spread 2.04% 2.39% 2.58%
==== ==== ====
(1) Includes loans held for sale and excludes the allowance for loan losses.
(2) Includes interest on mortgage-backed securities and earnings on FHLB stock
and cash surrender value of life insurance.
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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,
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
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) $891,220 $69,461 7.79% $903,226 $71,524 7.92% $637,755 $47,904 7.51%
Mortgage-backed
securities(2) 18,561 1,059 5.71 15,920 1,120 7.04 11,173 759 6.79
Investment securities 11,621 696 5.99 17,529 1,141 6.51 14,963 896 5.99
Interest-bearing deposits and
other interest-earning assets 72,052 3,156 4.38 26,115 1,886 7.22 26,896 1,534 5.70
------- ------ ---- ------- ------ ---- ------- ------ ----
Total $993,454 74,372 7.49 $962,790 75,671 7.86 $690,787 51,093 7.40
======= ======= =======
interest-earning assets
Interest-bearing liabilities:
Deposits $660,106 31,324 4.75 $590,418 28,869 4.89 $452,939 19,119 4.22
FHLB advances 280,747 17,109 6.09 325,805 20,740 6.37 200,285 10,788 5.39
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities $940,853 48,433 5.15 $916,223 49,609 5.41 $653,224 29,907 4.58
======= ------ ---- ======= ------ ---- ======= ------ ----
Net interest income/
Interest rate spread $25,939 2.34% $26,062 2.45% $21,186 2.82%
====== ==== ====== ==== ====== ====
Net interest margin(3) 2.61% 2.71% 3.07%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 105.59% 105.85% 105.75%
====== ====== ======
------------------------
(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.
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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 September 30,
2001 vs. 2000 2000 vs. 1999
Increase Increase
(decrease) (decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans receivable (1) $ (944) $(1,119) $(2,063) $20,897 $ 2,723 $23,620
Mortgage-backed securities 170 (231) (61) 332 29 361
Investment securities (360) (85) (445) 163 82 245
Interest-bearing deposits and other (2) 2,251 (981) 1,270 (46) 398 352
----- ------ ------ ------ ------ ------
Total interest income 1,117 (2,416) (1,299) 21,346 3,232 24,578
Interest expense attributable to:
Deposits 3,327 (872) 2,455 6,407 3,343 9,750
Borrowings (2,775) (856) (3,631) 7,714 2,238 9,952
----- ------ ------ ------ ------ ------
Total interest expense 552 (1,728) (1,176) 14,121 5,581 19,702
----- ------ ------ ------ ------ ------
Increase (decrease) in net interest income $ 565 $ (688) $ (123) $ 7,225 $(2,349) $ 4,876
===== ======= ====== ====== ====== ======
------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits.
Effect of Recent Accounting Pronouncements.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations," which requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method. The
pooling-of-interests method of accounting is prohibited except for combinations
initiated before June 30, 2001. The remaining provisions of SFAS No. 141
relating to business combinations accounted for by the purchase method,
including identification of intangible assets, accounting for negative goodwill,
financial statement presentation and disclosure, are effective for combinations
completed after June 30, 2001. Management adopted SFAS No. 141 effective July 1,
2001, as required, without material effect on Camco's financial position or
results of operations.
In June 2001, the FASB 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. All goodwill should be assigned to reporting
units that are expected to benefit from the goodwill. When an entity reorganizes
its reporting structure, goodwill should be reallocated to reporting units based
on the relative fair values of the units. Goodwill impairment should be tested
with a two-step approach. First, the fair value of the reporting unit should be
compared to its carrying value, including goodwill. If the reporting unit's
carrying value exceeds its fair value, then any goodwill impairment should be
measured as the excess of the goodwill's carrying value over its implied fair
value. The implied fair value of goodwill should be calculated in the same
manner as goodwill is calculated for a business combination, using the reporting
units' fair value as the "purchase price." Therefore, the goodwill's implied
fair value will be the excess of the "purchase price" over the amounts allocated
to assets, including unrecognized intangible assets, and liabilities of the
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reporting unit. Goodwill impairment losses should be reported in the income
statement as a separate line item within operations, except for such losses
included in the calculation of a gain or loss from discontinued operations.
An acquired intangible asset, other than goodwill, should be
amortized over its useful economic life. The useful life of an intangible asset
is indefinite if it extends beyond the foreseeable horizon. If an asset's life
is indefinite, the asset should not be amortized until the life is determined to
be finite. Intangible assets being amortized should be tested for impairment.
Intangible assets not being amortized should be tested for impairment, annually
and whenever there are indicators of impairment, by comparing the asset's fair
value to its carrying amount.
SFAS No. 142 is effective for Camco beginning January 1, 2002. As
of the date SFAS No. 142 is adopted and based on the Corporation's current
reporting structure, reporting units will be established; net assets should be
assigned to reporting units, unless they do not relate to a reporting unit; and
goodwill should be assigned to one or more reporting units. Within nine months
of adopting SFAS No. 142, Camco must have completed the first step of the
goodwill transitional impairment test: a comparison, as of the beginning of the
fiscal year, of each reporting unit's fair value with its carrying value. If the
carrying value exceeds fair value, the second step - calculating the amount of
goodwill impairment as of the beginning of the year - would be required as soon
as possible, but no later than the end of the year. Any transitional impairment
loss would be reported as a change in accounting principle in the first interim
period financial statements of the implementation year, regardless of when the
loss measurement is completed. After completion of the first step of the
transitional test, Camco will disclose which segments might have to recognize
any impairment loss and when any potential loss would be measured. If an
impairment indicator arises before the completion of the transition testing, a
full impairment test would be required as soon as possible. Any goodwill
impairment resulting from this test should be reported as an impairment loss,
not as a change in accounting principle. The adoption of SFAS No. 142 will
result in the elimination of Camco's annual goodwill amortization charges
totaling approximately $150,000 beginning in 2002.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Net interest income, the difference between asset yields and the cost
of interest-bearing liabilities, is the principal component of Camco's net
earnings. The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rate levels. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which a financial institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets repricing during a specified interval. Generally, during a
period of rising interest rates, a negative gap within shorter maturities would
adversely affect net interest income, while a positive gap within shorter
maturities would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap within shorter
maturities would result in an increase in net interest income, while a positive
gap within shorter maturities would have the opposite effect.
In recognition of the foregoing factors, the Board of Directors of each
of Advantage has implemented an asset and liability management strategy directed
toward improving each Bank's interest rate sensitivity. The principal common
elements of such strategies include (1) meeting the consumer preference for
fixed-rate loans over the past several years by selling such loans in the
secondary market, (2) originating adjustable-rate mortgage loans ("ARMs") as
demand increases coincident with the overall rise in interest rates in the
economy, (3) maintaining higher levels of liquid assets, such as cash,
-36-
short-term interest bearing deposits and short-term investment securities as a
hedge against rising interest rates in a lower interest rate environment, and
(4) utilizing FHLB advances and longer term certificates of deposit as funding
sources when available.
The following table contains information regarding the amounts of
various categories of assets and liabilities repricing within the periods
indicated:
December 31, 2001
--------------------------------------------------------
Within 1 year 1-5 years Over 5 years Total
------------- ---------- ------------- -------
(In thousands)
Interest-earning assets: (1)
Interest-bearing deposits in other banks $ 89,299 $ - $ - $ 89,299
Investment securities (2) 14,919 4,000 - 18,919
Mortgage-backed securities 15,965 17,841 3,886 37,692
Loans receivable (3) 401,329 312,509 135,736 849,574
------- ------- ------- -------
Total 521,512 334,350 139,622 995,484
------- ------- ------- -------
Interest-bearing liabilities: (1)
Deposits 479,047 229,956 21,072 730,075
FHLB advances 35,732 37,669 185,449 258,850
------ ------- ------- -------
Total 514,779 267,625 206,521 988,925
------- ------- ------- -------
Excess (deficiency) of interest sensitive assets over
interest sensitive liabilities $ 6,733 $ 66,725 $(66,899) $ 6,559
======= ======= ======= =======
Cumulative excess (deficiency) of interest sensitive assets
over interest sensitive liabilities $ 6,733 $115,577 $ 6,559
======= ======= =======
Cumulative interest rate sensitivity gap to total assets 6.66% .59%
---------------------------
(1) Interest-earning assets and interest-bearing liabilities are shown as
repricing based on contractual terms to repricing, without consideration of
loan prepayments or deposit decay assumptions.
(2) Does not include corporate equity securities or FHLB stock.
(3) Represents loans receivable totals before consideration of net items and
excluding loans held for sale.
In addition to the gap method of monitoring interest rate sensitivity,
Camco also employs computer model simulations. Interest rate risk ("IRR")
management has various sources and it is not simply the risk from rates rising
and falling. In fact, there are four sources of IRR: repricing risk, basis risk,
yield curve risk, and option risk. Gap modeling only focuses on repricing risk.
Income simulations that incorporate cash flow analysis: (1) measure the size and
direction of interest rate exposure under a variety of interest rate and yield
curve shape scenarios; (2) provides the opportunity to capture all critical
elements such as volume, maturity dates, repricing dates, prepayment volumes,
and hidden options such as caps, floors, puts, and calls; (3) utilizes the data
to clearly focus attention on critical variables; (4) are dynamic; and (5)
reflect changes in prevailing interest rates which affect different assets and
liabilities in different ways. These simulations are run on a quarterly basis
using an interest rate shocking technique to determine the effects on Camco's
net interest income, assuming an immediate change in interest rates of +/- 200
basis points. Camco has an interest rate risk management policy that limits the
amount of deterioration in net interest income associated with an assumed
interest rate shock of +/-200 points change in interest rates, to no more than a
(25)% change in net interest income. The model results as of December 31, 2001
are as follows:
Changes in Interest Rate Assumption
(Dollars in thousands)
+200bp -200bp
Net interest income - increase (decrease) $1,949 $(2,341)
Net interest income - % change 6.6 (8.0)
-37-
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 "Board of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement
for the 2002 Annual Meeting of Stockholders to be filed by Camco no later than
120 days after the end of the fiscal year (the "Proxy Statement") is
incorporated herein by reference.
Item 11. Executive Compensation.
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" 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
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information contained in the Proxy Statement under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
-38-
PART IV
Item 14. 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 2001 Financial Statements of the Camco Financial and
Subsidiaries Salary Savings Plan
(b) Reports on Form 8-K.
Camco filed a Form 8-K on November 30, 2001, disclosing the
acquisition of Columbia Financial.
-39-
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/ Anthony J. Popp By /s/ Larry A. Caldwell
------------------------------- ---------------------
Anthony J. Popp, Larry A. Caldwell
Director Chairman and Director
Date: March 19, 2002 Date: March 19, 2002
By /s/ Samuel W. Speck By /s/ Robert C. Dix, Jr.
------------------------------- -----------------------
Samuel W. Speck, Robert C. Dix, Jr.,
Director Director
Date: March 19, 2002 Date: March 19, 2002
By /s/ Jeffrey T. Tucker By /s/ Paul D. Leake
------------------------------- ------------------
Jeffrey T. Tucker, Paul D. Leake,
Director Director
Date: March 19, 2002 Date: March 19, 2002
By /s/ Eric Spann By /s/ Terry A. Feick
------------------------------- -------------------
Eric Spann, Terry A. Feick,
Director Director
Date: March 19, 2002 Date: March 19, 2002
By /s/ Kenneth R. Elshoff By /s/ Susan J. Insley
------------------------------- --------------------
Kenneth R. Elshoff, Susan J. Insley,
Director Director
Date: March 19, 2002 Date: March 19, 2002
By /s/ Mark A. Severson By /s/ Carson K. Miller
------------------------------- ---------------------
Mark A. Severson, Carson K. Miller,
Chief Financial Officer Director
Date: March 19, 2002 Date: March 19, 2002
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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 fiscal
Corporation, as amended year ended December 31, 1999 ("1999 Form
10-K"), Exhibit 3(i)
Exhibit 3(ii) 1987 Amended and Restated By-Laws of
Camco Financial Corporation
Exhibit 10(i) Employment Agreement dated January 1,
2001, by and between Camco Financial
Corporation and Richard C. Baylor
Exhibit 10(ii) Employment Agreement dated November 9,
2001, by and between Camco Financial
Corporation and Larry A. Caldwell
Exhibit 21 Subsidiaries of Camco Incorporated by reference to the 1999 Form 10-K,
Exhibit 21
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 2001 Financial Statements of the Camco
Financial & Subsidiaries Salary Savings
Plan
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