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Camco Financial 10-K 2009 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission File
Number: 0-25196
CAMCO FINANCIAL
CORPORATION
Registrant’s telephone number, including area code:
(740) 435-2020
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act:
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the 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 þ No o
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the
last sale reported as of June 30, 2008, was
$72.6 million. There were 7,155,595 shares of the
registrant’s common stock outstanding on March 13,
2009.
Part I and Part II of
Form 10-K:
Portions of the 2008 Annual Report to Stockholders
Part III of
Form 10-K:
Portions of the Proxy Statement for the 2009 Annual Meeting of
Stockholders
TABLE OF CONTENTS
Table of Contents
PART I
Camco Financial Corporation (“Camco”) is a financial
services holding company that 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 and Camco Title Agency, Inc.
In June 2001, Camco completed a reorganization in which it
combined its banking activities under one Ohio savings bank
charter known as Advantage Bank (“Advantage” or the
“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 subsidiary banks, except for the
Bank’s Ashland, Kentucky, division, which was sold in 2004,
now operate as regions of Advantage. In 2003, Camco dissolved
its second tier subsidiary, Camco Mortgage Corporation, and
converted its offices into branch offices of the Bank. In August
2004, Camco completed a business combination with London
Financial Corporation of London, Ohio, and its wholly-owned
subsidiary, The Citizens Bank of London. The acquisition was
accounted for using the purchase method of accounting and,
therefore, the financial statements for prior periods have not
been restated. At the time of the merger, Advantage Bank merged
into The Citizens Bank of London and changed the name of the
resulting institution to Advantage Bank. As a result,
Camco’s subsidiary financial institution is now an
Ohio-chartered commercial bank instead of an Ohio savings bank.
Further, Camco converted from a regulated thrift holding company
to a Federal Reserve Board financial services holding company.
On May 7, 2008, Camco entered into an Agreement and Plan of
Merger with First Place Financial Corp. (“First
Place”) that provided for the merger of Camco into First
Place and the subsequent merger of Advantage into First Place
Bank, a federal savings association and wholly-owned subsidiary
of First Place. However, on November 28, 2008, Camco and
First Place mutually decided to terminate the merger agreement.
Advantage is primarily regulated by the State of Ohio Department
of Commerce, Division of Financial Institutions (the
“Division”), and the Federal Deposit Insurance
Corporation (the “FDIC”). Advantage 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
Deposit Insurance Fund (the “DIF”) administered by the
FDIC. Camco is regulated by the Federal Reserve Board.
Advantage’s lending activities include the origination of
commercial real estate and business loans, consumer loans, and
residential 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. Camco continues to
diversify the balance sheet through increasing commercial,
commercial real estate, and consumer loan portfolios as well as
retail and business checking and money market deposit accounts.
The financial statements for Camco and its subsidiaries are
prepared on a consolidated basis. The principal source of
revenue for Camco on an unconsolidated basis has historically
been dividends from the Bank. Payment of dividends to Camco by
the Bank is subject to various regulatory restrictions and tax
considerations.
References in this report to various aspects of the business,
operations and financial condition of Camco may be limited to
Advantage, as the context requires.
Camco’s Internet site,
http://www.camcofinancial.com,
provides Camco’s annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 free of charge as soon as reasonably practicable after
Camco has filed the report with the Securities and Exchange
Commission.
Lending
Activities
General. Camco’s lending activities
include the origination of commercial real estate and business
loans, consumer loans, and conventional fixed-rate and
adjustable-rate mortgage loans for the construction, acquisition
or refinancing of single-family residential homes located in
Advantage’s primary market areas. Construction and
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permanent mortgage loans on condominiums, multifamily (over four
units) and nonresidential properties are also offered by Camco.
Loan Portfolio Composition. The following
table presents certain information regarding the composition of
Camco’s loan portfolio at the dates indicated:
Loan Maturity Schedule. The following table
sets forth certain information as of December 31, 2008,
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.
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The following table sets forth at December 31, 2008, the
dollar amount of all loans due after December 31, 2009,
which have fixed or adjustable interest rates:
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. A large portion of the
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.
Excluding construction loans and home equity lines of credit,
approximately 52.2% of total loans as of December 31, 2008,
consisted of loans secured by mortgages on one- to four-family
residential properties.
Federal regulations and Ohio law limit the amount which
Advantage may lend in relationship to the appraised value of the
underlying real estate at the time of loan origination (the
“Loan-to-Value Ratio” or “LTV”). In
accordance with such regulations and law, Advantage generally
makes loans for its own portfolio on single-family residences up
to 95% of the value of the real estate and improvements.
Advantage generally requires the borrower on each loan with an
LTV in excess of 80% to obtain private mortgage insurance, loan
default insurance or a guarantee by a federal agency. Advantage
permits, on an exception basis, borrowers to exceed a LTV of 80%
without private mortgage insurance, loan default insurance or a
guarantee by a federal agency.
The interest rate adjustment periods on adjustable-rate mortgage
loans (“ARMs”) offered by Advantage are generally one,
three and five years. The interest rates initially charged on
ARMs and the new rates at each adjustment date are determined by
adding a stated margin to a designated interest rate index.
Advantage has generally used one-year and three-year United
States Treasury note yields, adjusted to a constant maturity, as
the index for one-year and three-year adjustable-rate loans,
respectively. Advantage has used the London Interbank Offered
Rate (“LIBOR”) and FHLB advance rates as additional
indices on certain loan programs to diversify its concentrations
of indices that may prove beneficial during repricing of loans
throughout changing economic cycles. The maximum adjustment on
residential loans 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 one-year ARMs at the fully-indexed rate and
three-year and five-year ARMs utilizing the note rates. None of
Advantage’s ARMs have negative amortization or
“payment option” features.
Residential mortgage loans offered by Advantage are usually for
terms of up to 30 years, which could have an adverse effect
upon earnings if the loans do not reprice as quickly as the cost
of funds. To minimize such effect, Advantage generally sells
fixed-rate loans to Freddie Mac and Fannie Mae. 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.
At December 31, 2008, fixed-rate loans comprised 38.9% of
the 1-4 family residential loan portfolio. Approximately 61.1%
of the 1-4 family residential loan portfolio had adjustable
rates tied to U.S. Treasury note yields and LIBOR.
Construction and Development 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. Loans for
developed building lots are generally made on an adjustable-rate
basis for terms of up to three years with an LTV of 80% or less.
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Advantage offers construction loans to owner-occupants at
30-year
fixed rate,
15-year
fixed rate or adjustable-rate long-term loans on which the
borrower pays only interest on the disbursed portion during the
construction period, which is usually 9 months. Some
construction loans to builders, however, have terms of up to
24 months. At December 31, 2008, approximately
$9.6 million, of Advantage’s total loans consisted of
construction loans for 1-4 family properties.
Construction loans for investment properties involve greater
underwriting and default risks than 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 LTV ratios. In the event a default on a
construction loan occurs and foreclosure follows, Advantage
could be adversely affected because it would have to take
control of the project and either arrange for completion of
construction or dispose of the unfinished project. At
December 31, 2008, Advantage had $12.5 million of land
development loans, of which $8.5 million were classified as
impaired and on nonaccrual status.
Nonresidential Real Estate Loans. Advantage
originates loans secured by mortgages on nonresidential real
estate, including retail, office and other types of business
facilities. Nonresidential real estate loans are generally made
on an adjustable-rate basis for terms of up to 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, 2008, was a
$5.4 million loan secured by a strip mall. Nonresidential
real estate loans comprised $129.3 million, or 16.8% of
total loans at December 31, 2008.
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 operating the property, the debt
service ratio and cash flow analysis, the quality and
characteristics of the income stream generated by the property
and appraisals supporting the property’s valuation.
Consumer and Other Loans. Advantage makes
various types of consumer loans, including loans made to
depositors on the security of their savings deposits, automobile
loans, home improvement loans, home equity line of credit loans
and unsecured personal loans. Home equity loans are made at
fixed and variable rates 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.
Advantage’s home equity line of credit loan portfolio
totaled $125.4 million, or 16.2%, of the total loan
portfolio at December 31, 2008. During 2008, management
tightened lending standards on home equity lines of credit in
response to significant economic weakness and declining home
values. These actions included increasing minimum credit scores
and reducing the combined LTV on new loans. At December 31,
2008, education, consumer and other loans constituted
$4.2 million, or .5% of Advantage’s total loans.
Loan Solicitation and Processing. Loan
originations are developed from a number of sources, including:
solicitations by Advantage’s lending staff; referrals from
real estate brokers, loan brokers and builders; participations
with other banks; continuing business with depositors, other
business borrowers and real estate developers; and walk-in
customers. Advantage’s management stresses the importance
of individualized attention to the financial needs of its
customers. During 2008, approximately $27.5 million, of new
consumer and home equity lines of credit were originated through
brokers primarily in Advantage’s market areas, however
these referral sources were discontinued effective
December 31, 2008.
The loan origination process for each of Advantage’s
regions is centralized in the processing and underwriting of
loans. Mortgage loan applications from potential borrowers are
taken by loan officers originating loans, and then forwarded to
the loan department for processing. The Bank typically obtains a
credit report, verification of employment and other
documentation concerning the borrower and orders an appraisal of
the fair market value of the collateral which will secure the
loan. The collateral is thereafter physically inspected and
appraised by a staff
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appraiser or by a designated fee appraiser approved by the Board
of Directors of Advantage. Upon the completion of the appraisal
and the receipt of all necessary information regarding the
borrower, the loan is reviewed by an underwriter with
appropriate loan approval authority. If the loan is approved, an
attorney’s opinion of title or title insurance is obtained
on the real estate which will secure the loan. Borrowers are
required to carry satisfactory fire and casualty insurance and,
if applicable, flood and private mortgage insurance, and to name
Advantage as an insured mortgagee.
The procedure for approval of construction loans is the same as
for residential mortgage loans, except that the appraiser
evaluates the building plans, construction specifications and
construction cost estimates. Advantage also evaluates the
feasibility of the proposed construction project.
Consumer loans are underwritten on the basis of the
borrower’s credit history and an analysis of the
borrower’s income and expenses, ability to repay the loan
and the value of the collateral. Centralized processing and
underwriting are utilized to add adequate controls over the
credit review process.
Loan Originations, Purchases and
Sales. Generally all residential fixed-rate loans
made by Advantage are originated with documentation which will
permit a possible sale of such loans to secondary mortgage
market investors. When a mortgage loan is sold to the investor,
Advantage generally services the loan by collecting monthly
payments of principal and interest and forwarding such payments
to the investor, net of a servicing fee. During the year ended
December 31, 2008, Advantage also sold loans with servicing
released. Fixed-rate loans not sold and generally all of the
ARMs originated by Advantage are held in Advantage’s loan
portfolio. During the year ended December 31, 2008,
Advantage sold approximately $45.3 million in loans. Loans
serviced by Advantage for others totaled $499.5 million at
December 31, 2008.
The Corporation’s lending efforts have historically focused
on loans secured by existing 1-4 family residential properties.
Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically
provided the Corporation with adequate collateral coverage in
the event of default. Nevertheless, Advantage, as with any
lending institution, is subject to the risk that residential
real estate values could deteriorate in its primary lending
areas within Ohio, West Virginia, and northern Kentucky, thereby
impairing collateral values.
Of the total loans originated by Advantage during the year ended
December 31, 2008, 52.2% were ARM and 47.8% were fixed-rate
loans. Adjustable-rate loans comprised 67.8% of Advantage’s
total loans outstanding at December 31, 2008.
From time to time, Advantage sells participation interests in
mortgage loans, business loans and commercial loans originated
by it and purchases whole loans or participation interests in
loans originated by other lenders. Advantage held whole loans
and participations in loans originated by other lenders of
approximately $16.0 million at December 31, 2008.
Loans which Advantage purchases must meet or exceed the
underwriting standards for loans originated by Advantage.
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The following table presents Advantage’s mortgage loan
origination, purchase, sale and principal repayment activity for
the periods indicated:
Lending Limit. Federal regulations and Ohio
law generally impose a lending limit on the aggregate amount
that a depository institution can lend to one borrower to an
amount equal to 15% of the institution’s total capital for
risk-based capital purposes plus any loan reserves not already
included in total capital (the “Lending Limit
Capital”). A depository institution may loan to one
borrower an additional amount not to exceed 10% of the
institution’s Lending Limit Capital, if the additional
amount is fully secured by certain forms of “readily
marketable collateral.” Real estate is not considered
“readily marketable collateral.” In applying this
limit, the regulations require that loans to certain related or
affiliated borrowers be aggregated.
The largest amount which Advantage could have loaned to one
borrower at December 31, 2008, was approximately
$11.8 million. The largest amount Advantage had outstanding
to one borrower and related persons or entities at
December 31, 2008, was $8.7 million, which consisted
of loans secured by 1-4 units within seven subdivisions.
Loan Concentrations. Advantage has
historically originated loans secured by real estate. At
December 31, 2008, approximately 95.6% of total loans were
secured by real estate, with 69.7% of total loans secured by 1-4
family residential real estate. Home equity lines of credit
comprised 16.2% of total loans at December 31, 2008. There
were no concentrations of loans to specific industries that
exceeded 8.5% of total loans at December 31, 2008.
Regulatory guidance suggests that financial institutions not
exceed 3x risk based capital in a concentration of commercial
real estate. At December 31, 2008, Camco’s ratio for
this concentration was 2.5x risk based capital approximately
$34 million under the guidance limitation.
Loan Origination and Other Fees. In addition
to interest earned on loans, Advantage may receive loan
origination fees or “points” of generally up to 1.0%
of the loan amount, depending on the type of loan, plus
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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. Generally, after a loan payment is
15 days delinquent, a late charge of 5% of the amount of
the payment is assessed and a collection officer contacts the
borrower to request payment. In certain limited instances,
Advantage may modify the loan or grant a limited moratorium on
loan payments to enable the borrower to reorganize his or her
financial affairs. Advantage generally initiates foreclosure
proceedings, in accordance with applicable laws, when it appears
that a modification or moratorium would not be productive.
Real estate which has been acquired by Advantage as a result of
foreclosure or by deed in lieu of foreclosure is classified as
“real estate owned” until it is sold. “Real
estate owned” is recorded at the lower of the book value of
the loan or the fair value of the property less estimated
selling expenses at the date of acquisition. Periodically,
“real estate owned” is reviewed to ensure that fair
value is not less than carrying value, and any write-down
resulting from the review 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:
Nonaccrual status denotes loans greater than three payments past
due, 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 collectability of the loan.
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The following table sets forth information with respect to
Advantage’s nonaccrual and delinquent loans for the periods
indicated.
The amount of interest income that would have been recorded had
nonaccrual loans performed in accordance with contractual terms
totaled approximately $2.0 million for the year ended
December 31, 2008. Interest collected on such loans and
included in net earnings was $267,000.
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
of principal and or interest 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. Loans classified and generally charged
off in the month are identified as a loss. Regulations provide
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for the reclassification of assets by examiners. At
December 31, 2008, the aggregate amounts of
Advantage’s classified assets were as follows:
The interpretive guidance of the regulations also includes a
“special mention” category, consisting of assets which
do not currently expose an insured institution to a sufficient
degree of risk to warrant classification, but which possess
credit deficiencies or potential weaknesses deserving
management’s close attention. Advantage had assets in the
amount of $9.8 million designated as “special
mention” at December 31, 2008 compared to $2.1 million
at December 31, 2007.
Allowance for Loan Losses. The allowance for
loan losses is maintained at a level reflecting probable, losses
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 collectability of the Bank’s
loan portfolio. The following table sets forth an analysis of
Advantage’s allowance for loan losses:
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The following table sets forth the allocation of
Advantage’s allowance for loan losses by type of loan at
the dates indicated:
Investment
and Mortgage-Backed Securities Activities
Federal regulations permit Camco to invest liquid assets, in
United States Treasury obligations, securities of various
U.S. Government sponsored enterprises, certificates of
deposit at FDIC insured banks, corporate debt and equity
securities or obligations of state and local political
subdivision’s and municipalities. Camco is also permitted
to make limited investments in commercial paper and certain
mutual funds.
The following table sets forth the composition of Camco’s
investment and mortgage-backed securities portfolio, except its
stock in the FHLB of Cincinnati, at the dates indicated:
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The following table presents the contractual maturities of
Advantage’s investment securities, except its stock in the
FHLB of Cincinnati and corporate equity securities, and the
weighted-average yields for each range of maturities:
Deposits
and Borrowings
General. Deposits are a primary source of
Advantage’s funds for use in lending and other investment
activities. In addition to deposits, Advantage 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
Advantage’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 Advantage’s primary market area through the
offering of a broad selection of deposit instruments, including
interest-bearing and non-interest bearing checking accounts,
money market deposit accounts, regular savings accounts, health
savings accounts, term certificate accounts and retirement
savings plans. In 2006 we began offering brokered certificates
of deposit as an alternative to advances from the FHLB. Interest
rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established
periodically by management of Advantage based on its liquidity
requirements, growth goals and interest rates paid by
competitors. Interest rates paid by Advantage on deposits are
not currently limited by federal or state law or regulation.
The following table sets forth the dollar amount of deposits in
the various types of savings programs offered by Advantage at
the dates indicated:
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The following table sets forth the amount and maturities of
Advantage’s time deposits in excess of $100,000 at
December 31, 2008:
Borrowings. The twelve regional FHLBs function
as central reserve banks, providing credit for their member
institutions. As a member in good standing of the FHLB of
Cincinnati, Advantage is authorized to apply for advances from
the FHLB of Cincinnati, provided certain standards of
creditworthiness have been met. Advances are made pursuant to
several different programs, each having its own interest rate
and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage
of an institution’s regulatory capital or on the
FHLB’s assessment of the institution’s
creditworthiness. Under current regulations, a member
institution must meet certain qualifications to be eligible for
FHLB advances. FHLB advances are secured by a blanket pledge on
Advantage’s 1-4 family and multifamily residential loans,
home equity lines of credit, junior mortgages and FHLB stock.
Borrowings also include repurchase agreements and subordinated
debentures. Repurchase agreements are collateralized by a
portion of Advantage’s investment portfolio.
Advantage competes for deposits with other commercial banks,
savings associations, savings banks, insurance companies 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 commercial banks, savings banks, savings
associations, 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.
Advantage has no operating subsidiaries. First S&L
Corporation, a subsidiary of Advantage, is inactive and was
capitalized on a nominal basis at December 31, 2008.
As of December 31, 2008, Camco had 246 full-time
employees and 30 part-time employees. Camco believes that
relations with its employees are stable and have improved
following the termination of the merger agreement with First
Place. 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
As a financial services holding company registered under the
Bank Holding Company Act of 1956, as amended (the “BHC
Act”), Camco is subject to regulation, examination and
oversight by the Board of Governors of the Federal Reserve
System (“FRB”). Although Camco is recognized as a
financial holding company, most regulations pertaining to bank
holding companies also apply to it. Advantage is a non-member of
the FRB and is
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primarily subject to regulation by the State of Ohio, Department
of Commerce, Division of Ohio Financial Institution 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
annually by the applicable regulators to determine whether Camco
and Advantage are in compliance with various regulatory
requirements and are operating in a safe and sound manner.
Advantage is also subject to certain regulations promulgated by
the FRB.
Regulation by the Division affects the internal organization of
Advantage, as well as its depository, lending and other
investment activities. Periodic examinations by the Division are
usually conducted on a joint basis with the FDIC. Ohio law
requires that Advantage maintain federal deposit insurance as a
condition of doing business. The ability of Ohio chartered banks
to engage in certain state-authorized investments is subject to
oversight and approval by the FDIC. See “Federal Deposit
Insurance Corporation — State Chartered Bank
Activities.”
Any mergers involving, or acquisitions of control of, Ohio banks
must be approved by the Division. The Division may initiate
certain supervisory measures or formal enforcement actions
against Ohio chartered banks. Ultimately, if the grounds
provided by law exist, the Division may place an Ohio chartered
bank in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically
governing banks, Advantage is also governed by Ohio corporate
law, to the extent such law does not conflict with the laws
specifically governing banks.
Supervision and Examination. The FDIC is
responsible for the regulation and supervision of all commercial
banks that are not members of the Federal Reserve System
(“Non-member Banks”). 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 bank and thrift
industries.
Non-member Banks are subject to regulatory oversight under
various state and federal consumer protection and fair lending
laws. These laws govern, among other things,
truth-in-lending
and
truth-in-savings
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. Camco and
Advantage are required by applicable law and regulations to meet
certain minimum capital requirements. The capital standards
include a leverage limit, or core capital requirement, a
tangible capital requirement and a risk-based capital
requirement.
The leverage capital requirement is a minimum level of
Tier 1 capital to average total consolidated assets of 4%.
“Tier 1” capital includes common stockholders
equity, noncumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries,
less all intangibles, other than includable purchased mortgage
servicing rights and credit card relationships.
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The risk-based capital requirement specifies total capital,
which consists of core or Tier 1 capital and certain
general valuation reserves, at a minimum 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.
At December 31, 2008, Camco and Advantage exceeded the
capital requirements to be considered
“well-capitalized.”
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.
All transactions between banks and their affiliates must comply
with Sections 23A and 23B of the Federal Reserve Act (the
“FRA”) and the FRB’s Regulation W. 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 bank
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 up 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, 2008.
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 bank requires the written
approval of the Division prior to the acquisition by any person
or entity of a controlling interest. 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. Ohio
law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%,
331/3%
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
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voting shares by the acquiring shareholder. This statute was
intended, in part, to protect shareholders of Ohio corporations
from coercive tender offers.
As a financial holding company, Camco has registered with the
FRB and is subject to FRB regulations, examination, supervision
and reporting requirements. Because Camco is a bank holding
company that has elected to become a financial services holding
company, some of the restrictions on its activities are reduced.
Camco’s financial services holding company status allows
Advantage to associate or have management interlocks with
business organizations engaged in securities activities. In
order to maintain status as a financial holding company,
Advantage must be well capitalized and well managed, and must
meet Community Reinvestment Act obligations. Failure to maintain
such standards may ultimately permit the FRB to take certain
enforcement actions against Camco.
Federal
Reserve Requirements
FRB regulations currently require banks to maintain reserves of
3% of net transaction accounts (primarily NOW accounts) up to
$34.6 million (subject to an exemption of up to
$9.3 million). At December 31, 2008, Advantage was in
compliance with its reserve requirements.
Like all financial companies, Camco’s business and results
of operations are subject to a number of risks, many of which
are outside of our control. In addition to the other information
in this report, readers should carefully consider that the
following important factors, among others, could materially
impact our business and future results of operations.
The enactment of recent legislation may significantly affect our
financial condition, results of operation, liquidity or stock
price.
The Emergency Economic Stabilization Act of 2008
(“EESA”) was signed into law on October 3, 2008.
As part of EESA, the Treasury established the Troubled Assets
Relief Program, including the Capital Purchase Program
(“CPP”), to provide up to $700 billion of funding
to eligible financial institutions through the purchase of
capital stock and other financial instruments for the purpose of
stabilizing and providing liquidity to the U.S. financial
markets. Then, on February 17, 2009, President Obama signed
the American Recovery and Reinvestment Act (“ARRA”),
as a sweeping economic recovery package intended to stimulate
the economy and provide for broad infrastructure, energy,
health, and education needs. There can be no assurance as to the
actual impact that EESA or its programs, including the CPP, and
ARRA or its programs, will have on the national economy or
financial markets. The failure of these significant legislative
measures to help stabilize the financial markets and a
continuation or worsening of current financial market conditions
could materially and adversely affect our business, financial
condition, results of operations, access to credit or the
trading price of our common shares.
There have been numerous actions undertaken in connection with
or following EESA and ARRA by the Federal Reserve Board,
Congress, the Treasury, the FDIC, the SEC and others in efforts
to address the current liquidity and credit crisis in the
financial industry that followed the sub-prime mortgage market
meltdown which began in late 2007. These measures include
homeowner relief that encourages loan restructuring and
modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment
banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial
paper issuers; and coordinated international efforts to address
illiquidity and other weaknesses in the banking sector. The
purpose of these legislative and regulatory actions is to help
stabilize the U.S. banking system. EESA, ARRA and the other
regulatory initiatives described above may not have their
desired effects. If the volatility in the markets continues and
economic conditions fail to improve or worsen, our business,
financial condition and results of operations could be
materially and adversely affected.
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Dramatic declines in the housing market beginning in the latter
half of 2007, with falling home prices and increasing
foreclosures, unemployment and underemployment, have negatively
impacted the credit performance of mortgage loans and resulted
in significant write-downs of asset values by financial
institutions. The resulting write-downs to assets of financial
institutions have caused many financial institutions to seek
additional capital, to merge with larger and stronger
institutions and, in some cases, to seek government assistance
or bankruptcy protection.
Many lenders and institutional investors have reduced and, in
some cases, ceased to provide funding to borrowers, including to
other financial institutions because of concern about the
stability of the financial markets and the strength of
counterparties. It is difficult to predict how long these
economic conditions will exist, which of our markets, products
or other businesses will ultimately be affected, and whether
management’s actions will effectively mitigate these
external factors. Accordingly, the resulting lack of available
credit, lack of confidence in the financial sector, decreased
consumer confidence, increased volatility in the financial
markets and reduced business activity could materially and
adversely affect the Camco’s business, financial condition
and results of operations.
As a result of the challenges presented by economic conditions,
we may face the following risks in connection with these events:
The capital and credit markets have been experiencing volatility
and disruption for more than a year. In recent months, the
volatility and disruption has reached unprecedented levels. In
some cases, the markets have produced downward pressure on stock
prices and credit availability for certain issuers seemingly
without regard to those issuers’ underlying financial
strength. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that Camco will
not experience an adverse effect, which may be material, on our
ability to access capital and on our business, financial
condition and results of operations.
The market price for Camco’s common stock has been volatile
in the past, and several factors could cause the price to
fluctuate substantially in the future, including:
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Our results of operations depend substantially on our net
interest income, which is the difference between
(i) interest income on interest-earning assets, principally
loans and investment securities, and (ii) interest expense
on deposit accounts and borrowings. These rates are highly
sensitive to many factors beyond our control, including general
economic conditions, inflation, recession, unemployment, money
supply and the policies of various governmental and regulatory
authorities. While we have taken measures intended to manage the
risks of operating in a changing interest rate environment,
there can be no assurance that these measures will be effective
in avoiding undue interest rate risk.
Increases in interest rates can affect the value of loans and
other assets, including our ability to realize gains on the sale
of assets. We originate loans for sale and for our portfolio.
Increasing interest rates may reduce the volume of origination
of loans for sale and consequently the volume of fee income we
earn on such sales. Further, increasing interest rates may
adversely affect the ability of borrowers to pay the principal
or interest on loans and leases, resulting in an increase in
non-performing assets and a reduction of income recognized.
In contrast, decreasing interest rates have the effect of
causing clients to refinance mortgage loans faster than
anticipated. This causes the value of assets related to the
servicing rights on loans sold to be lower than originally
anticipated. If this happens, we may need to write down the
value of our servicing assets faster, which would accelerate our
expense and lower our earnings.
There are inherent risks associated with our lending activities,
including credit risk, which is the risk that borrowers may not
repay outstanding loans or that the value of the collateral
securing loans will decrease. We extend credit to a variety of
customers based on internally set standards and judgment. We
attempt to manage credit risk through a program of underwriting
standards, the review of certain credit decisions and an
on-going process of assessment of the quality of the credit
already extended. However, conditions such as inflation,
recession, unemployment, changes in interest rates, money supply
and other factors beyond our control may increase our credit
risk. Such adverse changes in the economy may have a negative
impact on the ability of borrowers to repay their loans. Because
we have a significant amount of real estate loans, decreases in
real estate values could adversely affect the value of property
used as collateral. In addition, substantially all of our loans
are to individuals and businesses in Ohio. Consequently, any
decline in the economy of this market area could have a
materially adverse effect on our financial condition and results
of operations.
In our market area, we encounter significant competition from
other commercial banks, savings associations, savings banks,
insurance companies, consumer finance companies, credit unions,
other lenders and with the issuers of commercial paper and other
securities, such as shares in money market mutual funds. The
increasingly competitive environment is a result primarily of
changes in regulation and the accelerating pace of consolidation
among financial service providers. Many of our competitors have
substantially greater resources and lending limits than we do
and may offer services that we do not or cannot provide.
In March 2009, we entered into a memorandum of understanding
(“MOU”) with the FRB that prohibits us from paying
dividends without the FRB’s approval. We do not know how
long this restriction will remain in place. Even if we are
permitted to pay a dividend, we are dependent primarily upon the
earnings of our operating subsidiaries for funds to pay
dividends on our common shares. The payment of dividends by our
subsidiaries is
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subject to certain regulatory restrictions. As a result, any
payment of dividends in the future by Camco will be dependent,
in large part, on our subsidiaries’ ability to satisfy
these regulatory restrictions and our subsidiaries’
earnings, capital requirements, financial condition and other
factors. Although our financial earnings and financial condition
have allowed us to declare and pay periodic cash dividends to
our stockholders, there can be no assurance that our dividend
policy or size of dividend distribution will continue in the
future.
Management’s accounting policies and methods are
fundamental to how we record and report our financial condition
and results of operations. Our management must exercise judgment
in selecting and applying many of these accounting policies and
methods in order to ensure that they comply with generally
accepted accounting principles and reflect management’s
judgment as to the most appropriate manner in which to record
and report our financial condition and results of operations.
Two of the most critical estimates are the level of the
allowance of loan losses and the valuation of mortgage servicing
rights. Due to the inherent nature of these estimates, we cannot
provide absolute assurance that we will not significantly
increase the allowance for loan losses or sustain loan losses
that are significantly higher than the provided allowance, nor
that we will not recognize a significant provision for the
impairment of mortgage servicing rights.
Our certificate of incorporation and bylaws contain provisions
that make it more difficult for a third party to gain control or
acquire us. These provisions also could discourage proxy
contests and may make it more difficult for dissident
stockholders to elect representatives as directors and take
other corporate actions. These provisions of our governing
documents may have the effect of delaying, deferring or
preventing a transaction or a change in control that might be in
the best interest of our stockholders.
Technology and other changes are allowing parties to utilize
alternative methods to complete financial transactions that
historically have involved banks. For example, consumers can now
maintain funds in brokerage accounts or mutual funds that would
have historically been held as bank deposits. Consumers can also
complete transactions such as paying bills
and/or
transferring funds directly without the assistance of banks. The
process of eliminating banks as intermediaries could result in
the loss of fee income, as well as the loss of customer deposits
and the related income generated from those deposits. The loss
of these revenue streams and the lower cost deposits as a source
of funds could have a material adverse effect on our financial
condition and results of operations.
Camco or one of its subsidiaries may be named as a defendant
from time to time in a variety of litigation arising in the
ordinary course of their respective businesses. Such litigation
is normally covered by errors and omissions or other appropriate
insurance. However, significant litigation could cause Camco to
devote substantial time and resources to defending its business
or result in judgments or settlements that exceed insurance
coverage, which could have a material adverse effect on
Camco’s financial condition and results of operation.
Further, any claims asserted against Camco, regardless of merit
or eventual outcome, may harm Camco’s reputation and result
in loss of business. In addition, Camco may not be able to
obtain new or difference insurance coverage, or adequate
replacement policies with acceptable terms.
Camco maintains an allowance for loan losses to provide for
probable, inherent and incurred loan losses at each balance
sheet date based on our analysis of the loan portfolio. Although
we increased the allowance for loan losses substantially during
2008, there can be no assurance on the timing or amount of
actual loan losses or that charge-offs in future periods will
not exceed the allowance for loan losses. In addition, federal
and state regulators periodically review Camco’s allowance
for loan losses as part of their examination process and may
require
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management to increase the allowance or recognize further loan
charge-offs based on judgments different than those of
management. Any increase in the provision for loan losses would
decrease Camco’s pretax and net income.
A
material breach in Camco’s security systems may have a
significant effect on Camco’s business and
reputation.
Camco collects, processes and stores sensitive consumer data by
utilizing computer systems and telecommunications networks
operated by both Camco and third party service providers. Camco
has security and backup and recovery systems in place, as well
as a business continuity plan, to ensure the computer systems
will not be inoperable, to the extent possible. Camco also has
security to prevent unauthorized access to the computer systems
and requires its third party service providers to maintain
similar controls. However, management cannot be certain that
these measures will be successful. A security breach of the
computer systems and loss of confidential information, such as
customer account numbers and related information, could result
in a loss of customers’ confidence and, thus, loss of
business.
None.
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The following table provides the location of, and certain other
information pertaining to, Camco’s office premises as of
December 31, 2008, with dollars in thousands:
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Camco also owns furniture, fixtures and equipment. The net book
value of Camco’s investment in office premises and
equipment totaled $11.9 million at December 31, 2008.
See Note E of Notes to Consolidated Financial Statements in
Camco’s 2008 Annual Report to Stockholders, which is filed
as Exhibit 13 to this
Form 10-K
and is herein incorporated by reference.
22
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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.
Not applicable.
At February 28, 2009, Camco had 7,155,595 shares of
common stock with approximately 1,734 holders of record.
Camco’s common stock is listed on The Nasdaq Global Market
(“Nasdaq”) under the symbol “CAFI.” The
table below sets forth the high and low daily closing price for
the common stock of Camco, together with the dividends declared
per share of common stock, for each quarter of 2008 and 2007.
* Beginning in the third quarter of 2008 the timing of dividends
was modified to incorporate actual quarter end results prior to
the declaration of dividends.
The Board of Directors declared the cash dividend for third
quarter on October 13, 2008 and the dividend was paid on
October 31, 2008. The fourth quarter dividend was declared
on January 20, 2009.
See “Liquidity and Capital Resources” in Item 7
of this
Form 10-K
for discussion of restrictions that materially limit
Camco’s ability to pay dividends.
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The following graph compares the cumulative total return on
Camco’s common stock with the cumulative total return of an
index of companies whose shares are traded on Nasdaq and the SNL
All Bank & Thrift Index for the same period.
Camco
Financial Corporation
Total Return Performance 
On January 23, 2009, Camco awarded Mr. James E. Huston
50,000 shares of restricted stock in connection with his
employment as Chief Executive Officer and President of Camco.
The restricted stock vests over four years in equal installments
of 12,500 shares each year, beginning on the first
anniversary of the date of the restricted stock award. The
restricted stock award was a private placement exempt from the
registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.
Camco did not repurchase any stock during the fourth quarter of
2008.
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The following tables set forth certain information concerning
the consolidated financial position and results of operations of
Camco for the periods indicated. This selected consolidated
financial data should be read in conjunction with the
consolidated financial statements appearing elsewhere in this
report.
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Since its incorporation in 1970, Camco Financial Corporation
(“Camco” or the “Corporation”) has evolved
into a full-service provider of financial products through its
subsidiaries, Advantage Bank (“Advantage or
“Bank”) and Camco Title Agency. Utilizing a
common marketing theme based on Camco’s commitment to
personalized customer service, Camco has grown from
$22.8 million of consolidated assets in 1970 to
$1.0 billion of consolidated assets at December 31,
2008. Camco’s rate of growth is largely attributable to its
acquisitions 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 offer. Additionally, Camco has enhanced its
operational growth, 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 regions
has the ability to make local decisions for customer contacts
and services, however back-office operations are consolidated
and centralized. Based on consumer and business preferences, the
Bank’s management designs financial service products with a
view towards differentiating each of the constituent regions
from its competition. Management believes that the Bank
regions’ ability to rapidly adapt to consumer and business
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
operations have also been heavily influenced by its level of
other income, including mortgage banking income and other fee
income. Camco’s operations are also affected by general,
administrative and other expenses, including employee
compensation and benefits, occupancy expense, data processing,
franchise taxes, advertising, other operating expenses and
federal income tax expense.
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During 2008, the economic environment for financial services
companies continued to be disruptive and challenging. We
continued to execute our long-term strategic plan to diversify
the balance sheet by increasing our commercial, commercial real
estate and consumer loan portfolios and improve our funding mix
by reducing borrowings and increasing transaction-based
deposits. The following table summarizes our progress:
We have found that deposit growth continues to be challenging.
Competition for deposits continues to put pressure on marginal
funding costs, despite falling market rates in 2008. During
fiscal 2008, we were able to increase deposits 4.6%. However,
the majority of the growth was certificates of deposit of which
$18.0 million related to brokered deposits. The brokered
deposits were attained to counter the reduction in borrowing
capacity and to ensure we had access to funding in case we
encountered significant losses or liquidity demands, and reduced
borrowings further. This strategy was defensive and had a
negative impact on earnings as funds in excess of our borrowing
reductions were not all deployed into loans or securities.
The real estate market in the Midwest continues to create a very
challenging environment for most financial institutions.
Bankruptcies, foreclosures and unemployment have continued to
rise in Ohio. We are working diligently to manage delinquencies
and work with our loan customers in order to reduce losses for
them, as well as our company. The total loan portfolio decreased
$55.5 million for the full year of 2008 as we tightened
credit standards and became more selective in underwriting new
loans, which reduced new loan production coupled with the
volatile market conditions and the current economic environment.
Nonperforming loans increased to $53.5 million at the end
of 2008 compared to $24.0 million at the end of 2007. We
continued to see increases in nonperforming loans secured by
residential real estate, but saw significant increases in
nonperforming commercial real estate and land development loans.
We continue to deal with the economic challenges in our markets,
through our loan charge-offs and provision for loan losses as we
recognize the results of these current economic conditions. Net
charge offs totaled $5.7 million during 2008, we continue
to aggressively work with borrowers to mitigate additional
losses.
We believe we are taking significant steps forward in managing
our operational efficiency. We are continuing our focus on
improving noninterest income and controlling noninterest expense
by exiting unprofitable lines of business and refining our
operations. We continue to analyze new products to deepen
relationships with our customers and improve the structure of
our balance sheet.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) and this annual
report include forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934
(Exchange Act), as amended, which can be identified by the use
of forward-looking terminology, such as may, might, could,
would, believe, expect, intend, plan, seek, anticipate,
estimate, project or continue or the negative thereof or
comparable terminology. All statements other than statements of
historical fact included in this document regarding our outlook,
financial
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position and results of operation, liquidity, capital resources
and interest rate sensitivity are forward-looking statements.
These forward-looking statements also include, but are not
limited to:
These forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause our
actual results to be materially different from any future
results expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in such
forward-looking statements are reasonable, we can give no
assurance such expectations will prove to have been correct.
Important factors that could cause actual results to differ
materially from those in the forward-looking statements included
herein include, but are not limited to:
This MD&A is intended to give stockholders a more
comprehensive review of the issues facing management than could
be obtained from an examination of the financial statements
alone. This analysis should be read in conjunction with the
consolidated financial statements and related footnotes and the
selected financial data elsewhere in this annual report. As used
herein and except as the context may otherwise require,
references to “Camco,” “the Corporation”,
“we,” “us,” or “our” means,
collectively, Camco Financial Corporation and its wholly owned
subsidiaries, Advantage Bank and Camco Title Agency.
This report includes one or more non-GAAP financial measures
within the meaning of Regulation G. With respect to each,
Camco has disclosed the most directly comparable financial
measure calculated and presented in accordance with GAAP and
reconciled the differences between the non-GAAP financial
measure and the most comparable financial measure presented in
accordance with GAAP.
Camco believes that the presentation of the non-GAAP financial
measures in this report assist management and investors to
compare results period-to-period in a more meaningful and
consistent manner and provide a better measure of results for
Camco’s ongoing operations.
This MD&A, as well as disclosures found elsewhere in this
annual report, are based upon Camco’s consolidated
financial statements, which are prepared in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”). The preparation of these
financial statements requires Camco to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Several factors are
considered in determining whether or not a policy is critical in
the preparation of financial statements. These factors include,
among other things, whether the estimates are significant to the
financial statements, the nature of the estimates, the ability
to readily validate the estimates with other information
including third parties or
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available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting methods
may be utilized under US GAAP.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination
of the allowance for loan losses, the valuation of mortgage
servicing rights and goodwill impairment. Actual results could
differ from those estimates.
Allowance for Loan Losses. The procedures for
assessing the adequacy of the allowance for loan losses reflect
our evaluation of credit risk after careful consideration and
interpretation of relevant information available to us. In
developing this assessment, we must rely on estimates and
exercise judgment regarding matters where the ultimate outcome
is unknown such as economic factors, developments affecting
companies in specific industries and issues with respect to
single borrowers. Depending on changes in circumstances, future
assessments of credit risk may yield materially different
results, which may require an increase or a decrease in the
allowance for loan losses.
The allowance is regularly reviewed by management to determine
whether the amount is considered adequate to absorb probable,
incurred losses. This evaluation includes specific loss
estimates on certain individually reviewed loans, statistical
loss estimates for loan pools that are based on historical loss
experience, and general loss estimates that are based upon the
size, quality, and concentration characteristics of the various
loan portfolios, adverse situations that may affect a
borrower’s ability to repay, and current economic and
industry conditions. Also considered as part of that judgment is
a review of the Bank’s trends in delinquencies and loan
losses, as well as trends in delinquencies and losses for the
region and nationally, and economic factors.
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb probable, incurred
losses inherent in the loan portfolio at the balance sheet dates
presented. Our evaluation of the adequacy of the allowance for
loan losses is an estimate based on management’s current
judgment about the credit quality of the loan portfolio. While
we strive to reflect all known risk factors in our evaluations,
actual results may differ significantly from our estimates.
Mortgage Servicing Rights. To determine the
fair value of our mortgage servicing rights (“MSRs”)
each reporting quarter, we transmit information to a third party
provider who assists us with determining the possible impairment
of MSRs, as described below.
Servicing assets are recognized as separate assets when loans
are sold with servicing retained. A pooling methodology to the
servicing valuation, in which loans with similar characteristics
are “pooled” together, is applied for valuation
purposes. Once pooled, each grouping of loans is evaluated on a
discounted earnings basis to determine the present value of
future earnings that a purchaser could expect to realize from
the portfolio. Earnings are projected from a variety of sources
including loan service fees, interest earned on float, net
interest earned on escrow balances, miscellaneous income and
costs to service the loans. The present value of future earnings
is the estimated market value for the pool, calculated using
consensus assumptions that a third party purchaser would utilize
in evaluating a potential acquisition of the servicing. Events
that may significantly affect the estimates used are changes in
interest rates and the related impact on mortgage loan
prepayment speeds and the payment performance of the underlying
loans. The interest rate for float, which we estimate, takes
into consideration the investment portfolio average yield as
well as current short duration investment yields. We believe
this methodology provides a reasonable estimate. Mortgage loan
prepayment speeds are calculated by the third party provider
utilizing industry standards in estimating prepayment speeds and
provides a specific scenario with each evaluation. Based on the
assumptions discussed, pre-tax projections are prepared for each
pool of loans serviced. These earning figures approximate the
cash flow that could be received from the servicing portfolio.
Valuation results are presented quarterly to management. At that
time, we review the information and MSRs are marked to the lower
of amortized cost or fair value for the current quarter.
Goodwill. We have developed procedures to test
goodwill for impairment on an annual basis using June 30
financial information. This testing procedure is performed with
the assistance of a third party that evaluates possible
impairment based on the following:
The test involves assigning tangible assets and liabilities,
identified intangible assets and goodwill to a reporting unit
and comparing the fair value of this reporting unit to its
carrying value including goodwill. The value
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is determined assuming a freely negotiated transaction between a
willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge
of relevant facts. Accordingly, to derive the fair value of the
reporting unit, the following common approaches to valuing
business combination transactions involving financial
institutions are utilized by a third party selected by Camco:
(1) the comparable transactions approach
— specifically based on earnings, book, assets and
deposit premium multiples received in recent sales of comparable
thrift franchises; and (2) the discounted cash flow
approach. The application of these valuation techniques takes
into account the reporting unit’s operating history, the
current market environment and future prospects. As of the most
recent quarter, the only reporting unit carrying goodwill is the
Bank.
If the fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not
impaired and no second step is required. If not, a second test
is required to measure the amount of goodwill impairment. The
second test of the overall goodwill impairment compares the
implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill. The impairment loss shall equal
the excess of carrying value over fair value.
After each testing period, the third party compiles a summary of
the test that is then provided to the Audit and Risk Management
Committee of the Board of Directors for review. As of the most
recent testing date, September 30, 2008, and utilizing
subsequent events through December 21, 2008, the fair value
of the reporting unit was considered fully impaired and goodwill
was written off as of December 31, 2008.
Summary. We believe the accounting estimates
related to the allowance for loan losses, the capitalization,
amortization, and valuation of mortgage servicing rights and the
goodwill impairment test are “critical accounting
estimates” because: (1) the estimates are highly
susceptible to change from period to period because they require
us to make assumptions concerning the changes in the types and
volumes of the portfolios, rates of future prepayments, and
anticipated economic conditions, and (2) the impact of
recognizing an impairment or loan loss could have a material
effect on Camco’s assets reported on the balance sheet as
well as its net earnings. Management has discussed the
development and selection of these critical accounting estimates
with the Audit and Risk Management Committee of the Board of
Directors and they have reviewed Camco’s disclosures
relating to such matters in this MD&A.
Discussion
of Financial Condition Changes from December 31, 2007 to
December 31, 2008
At December 31, 2008, Camco’s consolidated assets
totaled $1.0 billion, a decrease of $22.8 million, or
2.2%, from the December 31, 2007 total. The decrease in
total assets was comprised primarily of decreases in loans
receivable offset partially by the increase in securities and
cash and cash equivalents. We expect total asset growth to be
limited in the near term as the unemployment rates continue to
rise and the economy continues to struggle. Further
deterioration of the residential loan market in the Midwest may
result in a shift in the loan portfolio toward commercial and
consumer loans. The current decrease in loan rates may
contribute to additional profits relating to the sale of fixed
rate loans. Future growth in deposits would most likely be used
to reduce outstanding borrowings and brokered deposits. We
continue to believe that the distressed economic environment is
expected to continue the reduction in the demand for new loan
growth in 2009.
Cash and interest-bearing deposits in other financial
institutions totaled $52.3 million at December 31,
2008 an increase of $29.3 million, or 127.3%, from
December 31, 2007 levels. This increase is reflective of
our decision to improve our liquidity position in 2008.
Securities totaled $98.8 million at December 31, 2008,
an increase of $7.1 million, or 7.7%, from the total at
December 31, 2007. Investment security purchases totaled
$74.3 million, principal repayments totaling
$64.5 million, sales of $4.3 million and an increase
in the fair market value of securities available for sale of
$1.5 million. The yield on securities purchased during the
period was 3.37%.
Approximately 57.0% of the portfolio is expected to mature or
prepay during 2009. We have kept the duration and average life
of the securities portfolio very short in order to provide
liquidity and to reduce borrowings, when available.
At December 31, 2008, other than $641,000 of municipal
bonds, all of our debt securities were issued and guaranteed by
US Government sponsored enterprises such as Freddie Mac, Fannie
Mae, Ginnie Mae and the Federal Home Loan Banks. We held no
private-label mortgage-backed securities or collateralized debt
obligations.
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Loans receivable and loans held for sale totaled
$758.8 million at December 31, 2008, a decrease of
$56.4 million, or 6.9%, from the total at December 31,
2007. The decrease resulted primarily from repayments of
$229.3 million and loan sales of $45.3 million,
partially offset by loan disbursements and purchases totaling
$242.6 million coupled with the increased provision
relating to our allowance for loan and leases. Loan origination
volume, including purchases of loans, was less than that of the
comparable 2007 period by $55.7 million, or 18.7%, while
the volume of loan sales decreased by $4.6 million year to
year. The number of loans originated for sale in the secondary
market continued to decline as unprecedented disruptions in the
residential real estate market significantly slowed home sales
and new home construction. Instead of selling adjustable rate
loans, we have typically held adjustable-rate mortgage loans for
investment as an integral part of our strategy to manage
interest rate risk.
Loan originations during the 12 month period were comprised
primarily of $128.8 million in commercial loans,
$61.4 million of loans secured by one- to four-family
residential real estate and $52.4 million in consumer and
other loans. Our intent is to continue to expand consumer and
commercial real estate lending in future periods as a means of
increasing the yield on our loan portfolio and continue with our
strategic plan of moving to a more “bank” like
institution. In the near term, however, lending volumes of
acceptable risk have diminished somewhat due to a slowing
economy and loan repayments have been used to reduce borrowings
and build liquidity.
During the fourth quarter of 2008, the yield on loans was 6.31%,
and the portfolio mix continued to shift to higher yielding
consumer and commercial loans. This shift is partially
offsetting lower effective rates in the loan portfolio during
2008 due to rapidly falling interest rates, primarily the Prime
rate. At December 31, 2008, approximately 14% of our loan
portfolio had interest rates tied to the Prime rate and 31.3% of
our loan portfolio was fixed rate. Loan portfolio balances fell
$56.4 million, or 6.9% during the year with conventional
mortgage loans comprising 4.3% of this decrease. The overall
loan portfolio decreased for the full year of 2008 as we
continued to tighten credit standards and became more selective
in underwriting new loans, which significantly reduced new loan
production coupled with economic challenges in our markets,
particularly in the market for residential real estate.
The allowance for loan losses totaled $15.7 million and
$6.6 million at December 31, 2008 and 2007,
respectively, representing 29.4% and 26.0% of nonperforming
loans at those dates. Nonperforming loans (three months or more
delinquent plus nonaccrual loans) totaled $53.5 million and
$25.5 million at December 31, 2008 and 2007,
respectively, constituting 7.05% and 3.13% of total net loans,
including loans held for sale, at those dates. Net charge-offs
totaled $5.7 million for 2008 and were comprised mainly of
1-4 family loans and construction and commercial and industrial
loans.
The following table details delinquent and nonaccrual loans at
December 31, 2008 and 2007:
Although we believe that the allowance for loan losses at
December 31, 2008 is adequate to cover probable, incurred
losses inherent in the loan portfolio at that date based upon
the available facts and circumstances, there can be no assurance
that additions to the allowance for loan losses will not be
necessary in future periods, which could adversely affect our
results of operations. Unemployment rates in our markets, and
Ohio in general, are higher than the national average. Ohio was
registered the nation’s seventh-highest state foreclosure
rate in 2008. Additionally,
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Ohio is experiencing declining values of residential real
estate. However, Ohio in general has not experienced significant
increases in home values over the past five years like many
regions in the U.S., which should comparatively mitigate losses
on loans. Nonetheless, these factors, compounded by a very
uncertain national economic outlook, may continue to increase
the level of future losses beyond our current expectations.
Deposits totaled $724.0 million at December 31, 2008
an increase of $31.8 million, or 4.6% from
December 31, 2007. The following table details our deposit
portfolio balances and the average rate paid on our deposit
portfolio at December 31, 2008, and December 31, 2007:
The increase in certificates of deposits was due to increases in
brokered deposits which were used to reduce borrowings and
improve the Bank’s liquidity position. However, we
acknowledge that brokered deposits are not core,
franchise-enhancing deposits, and we do not intend to stray from
our strategy of improving the long-term funding mix of the
Bank’s deposit portfolio by aggregating small business,
commercial and retail checking accounts. We have implemented a
number of organizational and product development initiatives
including a new suite of commercial and small business checking
accounts, enhancements to our online business cash management
system, and the launch of remote deposit capture solution.
The increase in retail certificates of deposits is due to
customers showing preference toward higher yielding interest
rates. We have reduced the rates offered on our money markets in
2008 due to the prime rate decreasing. We also believe that if
we are able to maintain the certificates of deposit maturing in
2009 the decreased rates will help to further reduce our cost of
funds. To reduce interest rate risk over the long term, we will
increase our efforts to lengthen the duration of our deposit
structure and our FHLB borrowings.
We anticipate using brokered deposits in early 2009 in order to
improve the Bank’s liquidity position. However, we
acknowledge that brokered deposits are not core,
franchise-enhancing deposits, and we do not intend to stray from
our strategy of improving the long-term funding mix of the
Bank’s deposit portfolio by aggregating small business,
commercial and retail checking accounts. To that end, we will
continue our initiatives of increasing our commercial and small
business checking accounts, enhancements to our online business
cash management system, and the launch of a remote deposit
capture solution. We believe these products will help us be more
competitive for business checking accounts. See “Liquidity
and Capital Resources” in this MD&A for further
discussion on our deposit strategy and additional liquidity
risks.
Advances from the FHLB and other borrowings decreased by
$37.1 million, or 16.8%, to a total of $183.8 million
at December 31, 2008. We were able to reduce borrowings as
a result of the increased deposits of $31.8 million and a
net decrease in the loan portfolio of $56.2 million these
decreases also gave us the ability to increase cash balances at
December 31, 2008 by $29.3 million to improve the
bank’s liquidity position. We plan to continue to reduce
FHLB advances further when possible in 2009.
Stockholders’ equity totaled $71.7 million at
December 31, 2008, a decrease of $16.9 million, or
19.1% from December 31, 2007. The decrease resulted
primarily from a net loss of $15.3 million, dividends of
$1.9 million and an adjustment to retained earnings for the
adoption of a new accounting standard regarding split dollar
life insurance benefits totaling $832,000. In addition,
decreasing interest rates increased the fair value of our
investments
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securities, which resulted in a decrease in unrealized losses on
available for sale securities, net of tax, of $1.0 million.
The Bank is required to maintain minimum regulatory capital
pursuant to federal regulations. At December 31, 2008, the
regulatory capital of the Bank exceeded all regulatory capital
requirements.
General. Camco’s net loss for the year
ended December 31, 2008, totaled $15.3 million, a
decrease of $19.8 million, or 440.5%, from the
$4.5 million of net income reported in 2007. The decrease
in earnings was primarily due to the additional
$13.3 million in the provision for loan losses, coupled
with a $6.7 million in goodwill impairment charges,
impairment of $2.6 million in mortgage servicing rights,
$1.0 million relating to write down of real estate owned
and $628,000 expenses relating to the termination of the First
Place Financial Corporation merger which was offset partially by
a $6.9 million decrease in the provision for federal taxes.
Net Interest Income. Net interest income for
the year ended December 31, 2008, amounted to
$25.8 million, a decrease of $2.6 million, or 9.3%,
compared to 2007, generally reflecting the effects of a
$27.0 million decrease in the average balance of interest
earning assets. Net interest margin fell to 2.77% for the twelve
months ending December 31, 2008 compared to 2.97% for the
comparable period in 2007. The compression in net interest
margin during the 2008 period, compared to the same period of
2007, was due, nearly equally, to a lower volume of
interest-earning assets and a lower yield on those assets offset
partially by lower cost of interest-bearing liabilities in the
2008 period.
Margin pressure is due to the yield on assets declining at a
faster rate than the cost of funds. At the same time, the loan
portfolio has not grown sufficiently to offset the tighter
spreads to result in higher net interest income. While loan
production has slowed, we continue to diversify the loan
portfolio by encouraging continued growth in commercial and
consumer loan balances as these types of loans are normally
higher-yielding assets than adjustable rate mortgage loans.
Interest income on loans totaled $50.4 million for the year
ended December 31, 2008, a decrease of $7.5 million,
or 13.0%, from the comparable 2007 total. The decrease resulted
primarily from a 52 basis point decrease in the average
yield, from 7.10% in 2007, to 6.58% in 2008, coupled with a
$49.4 million, or 6.1%, decrease in the average balance of
loans outstanding year to year. Interest income on securities
totaled $4.4 million for the year ended December 31,
2008, a $226,000, or 4.9%, decrease from the 2007 period. The
decrease was due primarily to a $5.8 million, or 5.5%,
decrease in the average balance outstanding, partially offset by
a 3 basis point increase in the average yield, to 4.45% in
2008. Interest income on FHLB stock decreased by $359,000, or
18.9%, due primarily to a 137 basis point decrease in the
average yield, to 5.23% in 2008 offset partially by a $623,000
increase in the average balance outstanding year to year.
Interest income on other interest-bearing deposits was the same
from year to year which included a 415 basis point decrease
in the average yield to 1.21% in 2008 offset by a
$27.6 million, or 342.9% decrease in the average
outstanding balance year to year.
Interest expense on deposits totaled $22.7 million for the
year ended December 31, 2008, a decrease of
$2.7 million, or 10.6%, compared to the year ended
December 31, 2007, due primarily to a 59 basis point
decrease in the average cost of deposits, to 3.31% for 2008,
offset partially by a $33.4 million, or 5.1%, increase in
the average balance of interest-bearing deposits outstanding
year to year. Interest expense on borrowings totaled
$8.2 million for the year ended December 31, 2008, a
decrease of $2.7 million, or 25.0%, from 2007. The decrease
resulted primarily from a $55.3 million, or 22.2%, decrease
in the average balance outstanding year to year coupled with a
16 basis point decrease in the average rate to 4.24% in
2008.
Approximately $289.0 million, or 63.8%, of our certificate
deposit portfolio will mature during 2009. While this presents
an opportunity, to continue to reduce our cost of funds since,
these deposits are re-pricing in a generally lower interest rate
environment we continue to experience competition for deposits
in our market areas, which is limiting our ability to quickly
reduce the marginal cost of deposits to a level reflective of
the general rate environment. Continued decreases in the Prime
rate has compressed our net interest margin due to the lag in
re-pricing between our loan and deposit portfolios. At the same
time, the loan portfolio has not grown to offset these tighter
spreads. As noted earlier, we plan to continue to diversify the
loan portfolio by encouraging growth in
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commercial and consumer loan balances. This strategy should slow
net interest margin compression as these types of loans are
normally higher-yielding assets than conventional mortgage loans
and investment securities.
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 collectability of the
Bank’s loan portfolio. Based upon an analysis of these
factors, management recorded a provision for losses on loans
totaling $14.8 million for the year ended December 31,
2008, an increase of $13.3 million, from the provision recorded
in 2007. The increase in provision was due to economic
conditions relating to higher unemployment statistics,
increasing foreclosures in Ohio and increased charge offs which
was coupled with increased classified assets.
Other Income. Other income totaled
$3.7 million for the year ended December 31, 2008, a
decrease of $2.9 million, or 43.7%, compared to 2007. The
decrease in other income was primarily attributable to a
$2.6 million decrease in the value of our mortgage
servicing rights coupled with a $293,000 decrease in title fee
and rent and other income.
The decrease in mortgage servicing rights was due to increased
volatility in the market, which in turn increased the prepayment
speeds utilized to value the portfolio. At December 31,
2008, we serviced $497.4 million of one-to-four family
residential mortgage loans for others, primarily Freddie Mac and
Fannie Mae, which declined from $516.0 million at
December 31, 2007.
The decrease in rent and other income for 2008 was due to a
decrease in loan prepayment penalties of $187,000 coupled with
decreased income from our title insurance agency which fell
$173,000 in 2008 due to the significant slowdown in home sales
and related mortgage loan volume.
General, Administrative and Other
Expense. General, administrative and other
expense totaled $35.2 million for the year ended
December 31, 2008, an increase of $7.9 million, or
28.9%, compared to 2007. The increase was due primarily to a
$6.7 million impairment charge taken on goodwill coupled
with the write down of real estate owned properties of
$1.0 million and $628,000 in merger and acquisition related
charges. Core noninterest expense excluding merger and goodwill
impairment charges totaled $27.9 million for the year ended
December 31, 2008, an increase of $570,000 or 2.1%
increase. The increase in core non-interest expense was
primarily due to increased FDIC premiums and the write down of
real estate owned which were partially offset by decreases in
advertising, supplies, travel and training and loan and deposit
expenses.
The goodwill impairment charge is reflective of the most recent
testing valuation as of September 30, 2008, and utilizing
subsequent events through December 21, 2008, which
indicated the fair value of the reporting unit was fully
impaired as of December 31, 2008.
The increase in FDIC premiums resulted from increases in premium
rates and deposit balances along with the decreased credits
issuances in 2008 relating to the reorganization of the Deposit
Insurance Fund assessment of premiums by the Federal Deposit
Insurance Corporation.
The increase in real estate owned and other expense is
reflective of falling real estate values that negatively
impacted our portfolio value and caused a write down to fair
market value coupled with additional properties taken in to real
estate owned due to foreclosures in 2008. Approximately one of
every 448 households in Ohio were in foreclosure at
December 31, 2008. Additionally, as noted earlier, home
values in Ohio have continued to decline from previous levels.
These factors, compounded by an uncertain economic outlook and
increasing unemployment, may result in continued expenses in
2009. This was coupled with additional costs relating to bank
paid PMI insurance linked to a new product offering in 2008.
While advertising, supplies and travel and training expenses
have decreased, it is not foreseeable that they will continue to
be at these lower levels due to much of the decrease was related
to the announced merger with First Place that was terminated
November 2008.
Federal Income Taxes. The benefit for Federal
income taxes totaled $5.1 million for the year ended
December 31, 2008, a decrease of $6.9 million,
compared to the provision recorded in 2007. The effective tax
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rates amounted to 25.0% and 28.2% for the years ended
December 31, 2008 and 2007, respectively. The decrease in
federal income tax expense was primarily attributable to a
$26.7 million decrease in pre-tax earnings. Tax credits
related to our investment in affordable housing partnerships
totaled $198,000 in 2008, additionally the tax-exempt character
of earnings on bank-owned life insurance supplements the
difference between the effective rate of tax benefits and the
statutory corporate tax rate for the years ended
December 31, 2008 and 2007.
General. Camco’s net earnings for the
year ended December 31, 2007, totaled $4.5 million, a
decrease of $1.4 million, or 23.4%, from the
$5.9 million of net income reported in 2006. The decrease
in earnings was primarily due to the increase of
$2.3 million in general, administrative and other expenses
coupled with the decrease of $776,000 in net interest income
which was offset partially by an $888,000 increase in other
income and a $866,000 decrease in the provision for federal
taxes.
Net Interest Income. Net interest income for
the year ended December 31, 2007, amounted to
$28.5 million, a decrease of $776,000, or 2.7%, compared to
2006, generally reflecting the effects of an increase of
51 basis points in the cost of funds. This was offset
partially by a $26.1 million decrease in the average
balance of interest bearing liabilities coupled with an increase
of 47 basis points in the average yield, on interest
earning assets, from 6.31% in 2006 to 6.78% in 2007, offset
partially by a $23.1 million decrease in the average
balance of interest-earning assets outstanding year to year.
The increase in the yield on assets resulted from a higher rate
environment during most of 2007, compared to 2006, liabilities
and a shift in the loan portfolio composition from conventional
single family residential loans to higher-yielding commercial
and consumer loans. Additionally, loans comprised 85.3% and
84.2% of interest-earning assets in 2007 and 2006, respectively.
Interest income on loans totaled $58.0 million for the year
ended December 31, 2007, an increase of $2.9 million,
or 5.0%, from the comparable 2006 total. The increase resulted
primarily from a 43 basis point increase in the average
yield, from 6.67% in 2006, to 7.10% in 2007, offset partially by
a $9.3 million, or 1.1%, decrease in the average balance of
loans outstanding year to year. Additionally, we decided in the
first quarter of 2006 to discontinue the accrual of late charges
on commercial loans and recognize late charges as income when
collected. This decision resulted in a decrease in other income
of $166,000 for the 2006 period. Interest income on securities
totaled $4.6 million for the year ended December 31,
2007, a $48,000, or 1.0%, decrease from the 2006 period. The
decrease was due primarily to an $8.6 million, or 7.7%,
decrease in the average balance outstanding, partially offset by
a 30 basis point increase in the average yield, to 4.42% in
2007. Interest income on FHLB stock increased by $284,000, or
17.6%, due primarily to an 80 basis point increase in the
average yield, to 6.60% in 2007 coupled with a $945,000 increase
in the average balance outstanding year to year. Interest income
on other interest-bearing deposits and other decreased by
$319,000, or 42.5%, due primarily to a $6.2 million, or
43.4% decrease in the average outstanding year to year offset
partially by a 8 basis points increase in the average
yield, to 5.36% in 2007.
Interest expense on deposits totaled $25.4 million for the
year ended December 31, 2007, an increase of
$4.2 million, or 19.7%, compared to the year ended
December 31, 2006, due primarily to an 61 basis point
increase in the average cost of deposits, to 3.9% for 2007,
coupled with a $6.4 million, or 1.0%, increase in the
average balance of interest-bearing deposits outstanding year to
year. Interest expense on borrowings totaled $11.0 million
for the year ended December 31, 2007, a decrease of
$531,000, or 4.6%, from 2006. The decrease resulted primarily
from a $32.5 million, or 11.5%, decrease in the average
balance outstanding year to year offset partially by a
32 basis point increase in the average rate to 4.40% in
2007.
At December 31, 2007 approximately $303.1 million, or
73.3%, of our certificate of deposit portfolio was scheduled to
mature during 2008. While this presented an opportunity to
reduce our cost of funds since these deposits were re-pricing in
a generally lower interest rate environment, we continue to
experience strong competition for deposits in our market areas,
which has limited our ability to quickly reduce the marginal
cost of deposits to a level reflective of the general rate
environment at the end of 2007. Decreases in the Prime rate
continued to compress our net interest margin due to the lag in
re-pricing between our loan and deposit portfolios, at
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least in the first half of 2008. At the same time, the loan
portfolio has not grown at a fast enough pace to offset these
tighter spreads.
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 collectability of the
Bank’s loan portfolio. Based upon an analysis of these
factors, management recorded a provision for losses on loans
totaling $1.5 million for the year ended December 31,
2007, an increase of $55,000, or 3.8%, from the provision
recorded in 2006.
Other Income. Other income totaled
$6.6 million for the year ended December 31, 2007, an
increase of $888,000, or 15.6%, compared to 2006. The increase
in other income was primarily attributable to a $481,000
decrease in the net amortization of mortgage servicing rights, a
$385,000 increase in service charges and other fees on deposits.
In fourth quarter of 2006, we updated some of the assumptions
used in estimating the value of capitalized mortgage servicing
rights. We reduced the estimated cost to service a loan and we
reduced the estimated ancillary income to be earned per loan. As
a result, we recorded impairment on capitalized mortgage
servicing rights in 2006. Excluding the 2006 impairment,
amortization increased $49,000 and income from new servicing
rights decreased $24,000 during 2007.
The increase in service charges and other fees on deposits was
primarily due to increased service, overdraft and non-sufficient
fund fees and more checking accounts in 2007. Initiatives to
increase fee collection and improve the Company’s current
fee structure are being implemented to place more emphasis on
this vital revenue stream.
Changes in rent and other income in 2007 was due to an increase
in loan prepayment penalties of $171,000 and an increase in
surcharge and interchange income from automated teller machine
(ATM) activity of $137,000. Other income from our title
insurance agency fell $47,000 in 2007 due to the significant
slowdown in home sales and related mortgage loan volume.
At December 31, 2007, we serviced $516.0 million of
one-to-four family residential mortgage loans for others,
primarily Freddie Mac and Fannie Mae, which declined from
$536.0 million at December 31, 2006. As a result of
this shrinking servicing portfolio, loan servicing income
decreased $37,000 in 2007.
General, Administrative and Other
Expense. General, administrative and other
expense totaled $27.3 million for the year ended
December 31, 2007, an increase of $2.3 million, or
9.2%, compared to 2006. The increase was due primarily to a
$619,000, or 4.9%, increase in employee compensation and
benefits and a $282,000, or 8.9%, increase in occupancy and
equipment. Real estate owned and other expenses increased
$792,000, or 222.5% and loan and expenses increased 279,000, or
23.9%.
The increase in employee compensation and benefits is due to
several key hires within mid-management of the Corporation,
including commercial lenders. Loan collection staff was hired in
2007 to improve our monitoring and collection of delinquent
loans. The Company has launched two banking offices since the
third quarter of 2006, which increased personnel expenses in
2007. We combined two of our retail banking regions and closed
two loan production offices in the third quarter of 2007. While
these closings are expected to decrease compensation expense in
the future, one-time severance costs related to closings totaled
$181,000 in 2007. These increases were offset partially by the
adjustment of a post-retirement accrual due to the departure of
a member of senior management in June 2007.
The occupancy and equipment expense increase is primarily due to
the opening of two banking offices located in Mason and London,
Ohio. Advertising is also higher in 2007 as a result of the
banking office launches coupled with new deposit products and
direct mail campaigns. Management has undertaken a branch
merchandising program to standardize and improve the look and
feel, and ultimately the sales process in the Bank’s
offices. The increase in deposit expenses was primarily due to
correspondent bank service charges and transaction account
expenses.
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While expenses have increased due to the addition of a number of
revenue producing positions and the opening of two banking
offices, we believe these investments in personnel and property
are imperative to Camco’s growth strategy. However, when
new banking offices are opened, some time is needed to absorb
the cost and create more revenue in these new markets.
Data processing expense is lower in 2007 as the Bank underwent a
core processing conversion in 2006. We have also implemented
cost saving initiatives in our telecommunications and
information technology services.
The increase in loan expenses was primarily due to a charge of
$174,000 taken during 2007 related to the repurchase of
$1.3 million of residential real estate loans and a $98,000
increase in insurance premiums for private mortgage and
collateral loss insurance on our mortgage and home equity loans.
The increase in real estate owned and other expenses was due to
higher levels of foreclosures in 2007, which increased
maintenance expenses on those properties and due to write-downs
of real estate owned coupled with the net loss on real estate
acquired through foreclosure can be attributed primarily to a
$334,000 loss on a single commercial property that secured a
loan to which we were a participant. We were unable to directly
control the actions of the bank that originated the loan and
subsequently executed a sale of that property. Excluding this
single event, we realized a net gain on the sale of foreclosed
real estate of $37,000 in 2007. This reflects the diligence of
our Credit Administration team to mitigate losses on
foreclosures. However, approximately 1.8% of the households in
Ohio were in foreclosure at December 31, 2007, an increase
of 64% from December 31, 2006. Additionally, as noted
earlier, home values in Ohio are declining from 2006 levels.
These factors, compounded by an uncertain economic outlook and
increasing unemployment, may result in higher losses on real
estate acquired through foreclosure in 2008 and beyond.
We also commenced the amortization of our investment in
affordable housing partnerships. We receive tax credits and
other tax benefits through our investment in these partnerships.
Federal Income Taxes. Federal income tax
totaled $1.8 million for the year ended December 31,
2007, a decrease of $962,000, or 35.3%, compared to the
provision recorded in 2006. The effective tax rates amounted to
28.2% and 31.7% for the years ended December 31, 2007 and
2006, respectively. The decrease in federal income tax expense
was primarily attributable to a $2.3 million, or 27.2%,
decrease in pre-tax earnings. Tax credits related to our
investment in affordable housing partnerships totaled $110,000
in 2007. We did not record tax credits in 2006. The tax-exempt
character of earnings on bank-owned life insurance is the
principal difference between the effective rate of tax expense
and the statutory corporate tax rate for the years ended
December 31, 2007 and 2006.
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AVERAGE
BALANCE, YIELD, RATE AND VOLUME DATA
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. Some
items in the prior-year financial statements were reclassified
to conform to the current year’s presentation, including
the reclassification of nonaccrual loans, mortgage servicing
rights and the allowance for loan losses from Loans receivable
to Noninterest-earning assets.
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Rate/Volume
Table
The following table describes the extent to which changes in
interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected
Camco’s interest income and expense during the periods
indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (change in volume
multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume) and
(iii) total changes in rate and volume.
The 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. This does not reflect the spread
that may eventually be achieved in 2009 or beyond due to
possible changes in weighted-average yields earned on
interest-earning assets and paid on interest-bearing liabilities
in the upcoming year.
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Liquidity
and Capital Resources
Liquidity is essential to our business. Our primary funding
source is customer deposits which may be directly affected by
the economy. With the significant downturn in economic
conditions our customers in general have experienced reduced
funds available to deposit in their bank. Our customer
relationship deposit balances fell approximately
$4.3 million over the course of 2008. As a result, the
Company has increased its use of wholesale funding including
brokered deposits. In response to the adverse economic
conditions, the Company has been, and will continue to work
toward, reducing the amount of nonperforming assets, adjusting
the balance sheet by reducing loan totals and other assets as
possible, reducing controllable operating costs, and augmenting
deposits while striving to maximize secured borrowing facilities
to improve liquidity and preserve capital over the course of
2009. However, the Company’s inability to successfully
implement its plans or further deterioration in economic
conditions and real estate prices could still have a material
adverse effect on the Company’s liquidity.
Camco is a single bank holding company and its primary ongoing
source of liquidity is from dividends received from the Bank.
Such dividends arise from the cash flow and earnings of the
bank. Banking regulations and authorities may limit the amount
or require certain approvals of the dividend that the Bank may
pay to Camco. Camco currently has $5.0 million outstanding
trust preferred securities with a maturity date of 2037. If
needed Camco’s contract provides for a deferment of up to
20 consecutive quarters without default. If the Company desires
to raise funds in the future the Company may consider engaging
in further offerings of preferred securities, debentures or
other borrowings as well as issuance of capital stock, but any
such strategic decisions would require regulatory approval.
The objective of the Bank’s liquidity management is to
maintain ample cash flows to meet obligations for depositor
withdrawals, fund the borrowing needs of loan customers, and to
fund ongoing operations. Core relationship deposits are the
primary source of the Bank’s liquidity. As such, the Bank
focuses on deposit relationships with local business and
consumer clients with a strategy to increase the number of
services/products per client. The Company views such deposits as
the foundation of its long-term liquidity because it believes
such core deposits are more stable and less sensitive to
changing interest rates and other economic factors compared to
large time deposits or wholesale purchased funds. Over the past
several quarters customer relationship deposits have declined in
tandem with the slowing economy. Accordingly the Bank has
increased its overall use of wholesale funding sources and
anticipates that such will be the case until the economy
rebounds.
We monitor and assess liquidity needs daily in order to meet
deposit withdrawals, loan commitments and expenses. Camco’s
liquidity contingency funding plan identifies liquidity
thresholds and red flags that may evidence liquidity concerns or
future crises. The contingency plan details specific actions to
be taken by management and the Board of Directors. It also
identifies sources of emergency liquidity, both asset and
liability-based, should we encounter a liquidity crisis. In
conjunction with the Corporation’s asset/liability and
interest rate risk management activities, we actively monitor
liquidity risk and analyze various scenarios that could impact
or impair Camco’s ability to access emergency funding
during a liquidity crisis.
Liquid assets consist of cash and interest-bearing deposits in
other financial institutions, investments and mortgage-backed
securities. Approximately $48.2 million, or 48.8%, of our
investment portfolio is expected to mature or prepay during
2009. While these maturities could provide a significant source
of liquidity in the short term, public unit deposits and
repurchase agreements limit our ability to use these funds
freely due to the collateral requirements of such. State and
local political subdivision deposits equaled $60.2 million
at December 31, 2008, and $57.5 million at
December 31, 2007. We may implement additional product
strategies to lessen this restriction on our investment
portfolio to increase our liquidity options.
Additional sources of liquidity include deposits, borrowings and
principal and interest repayments on loans. While scheduled loan
repayments and maturing investments are relatively predictable,
deposit flows and early loan and security prepayments are more
influenced by interest rates, general economic conditions, and
competition and are difficult to predict.
Diversified and reliable sources of wholesale funds are utilized
to augment core deposit funding. Borrowings may be used on a
long or short-term basis to compensate for reduction in other
sources of funds or on a long term
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basis to support lending activities. The Bank utilizes its
investment securities, certain loans and FHLB Stock to provide
collateral to support its borrowing needs. Management believes
that its focus on core relationship deposits coupled with access
to borrowing through reliable counterparties provides reasonable
and prudent assurance that ample liquidity is available.
However, depositor or counterparty behavior could change in
response to competition, economic or market situations or other
unforeseen circumstances, which could have liquidity
implications that may require different strategic or operational
actions. One source of wholesale funding is brokered deposits.
Consistent with its risk management policy and in response to
the general tightening of credit and liquidity conditions in the
financial markets at large, the Bank recently increased its use
of brokered deposits. At December 31, 2008, such deposits
totaled approximately $58.6 million, exclusive of CDARS
deposits.
Approximately $288.8 million of the Corporation’s
certificate of deposit portfolio is scheduled to mature during
2009. Depositors continue a preference toward short-term
certificates or other issuances less than 18 months. This
places additional liquidity pressure on the Corporation as
competition for deposits is very strong in Ohio, Kentucky and
West Virginia. A material loss of these short-term deposits
could force us to seek funding through contingency sources,
which may negatively impact earnings.
Federal Home Loan Bank (FHLB) advances are another funding
source. In the past, Camco has depended heavily on borrowings to
fund balance sheet growth. While significant strategic and
tactical focus is currently being placed on deposit growth,
borrowings and additional borrowing capacity at the FHLB are
still vital sources of liquidity and growth funding. We have
approximately $52.7 million of additional borrowing
capacity available as of December 31, 2008. However, our
total borrowing capacity at the FHLB is dependent on the level
of eligible collateral assets held by the Bank and the
Bank’s credit rating with the FHLB. Our total borrowing
capacity with the FHLB decreased to $219.8 million at
December 31, 2008, from $296.8 million at
December 31, 2007. This capacity has decreased as our one
to four- family loan portfolio, the primary collateral for FHLB
borrowings, has shrunk and the increase in nonperforming loans
has reduced our credit rating (and thereby increased its
collateral requirements) in 2008 compared to 2007. The inability
of the Bank to access contingency funding from the FHLB may
significantly limit our growth and negatively affect earnings.
We have improved on-balance-sheet liquidity and in response to
higher collateral maintenance requirements and decreases in our
overall borrowing capacity.
We plan to continue to monitor our funding sources through
brokered deposits and FHLB borrowings, but recognized that our
current credit risk profile may restrict these sources. Our
Funds Management Group will monitor the deposit rates in our
markets to allow for competitive pricing in order to raise funds
through deposits. Funds in excess of loan demand and available
borrowing repayments will be held in short-term investments or
federal funds sold. We are taking these actions to proactively
prepare for the possibility of continued deterioration in the
credit markets and increases in our nonperforming loans, which
may reduce our borrowing capacity at the FHLB further.
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The following table sets forth information regarding the
Bank’s obligations and commitments to make future payments
under contract as of December 31, 2008.
We anticipate that we will have sufficient funds available to
meet our current loan commitments. Based upon historical deposit
flow data, the Bank’s competitive pricing in its market and
management’s experience, we believe that a significant
portion of our maturing certificates of deposit in 2008 will
remain with the Bank, but recognize the significance of the
risks discussed above.
We engage in off-balance sheet credit-related activities that
could require us to make cash payments in the event that
specified future events occur. The contractual amounts of these
activities represent the maximum exposure to the Bank (as
further described in financial statement footnote
Note I — Commitments). However, certain
off-balance sheet commitments are expected to expire or be only
partially used; therefore, the total amount of commitments does
not necessarily represent future cash requirements. These
off-balance sheet activities are necessary to meet the financing
needs of the Bank’s customers.
Liquidity management is both a daily and long-term management
process. In the event that we should require funds beyond our
ability to generate them internally, additional funds are
available through the use of FHLB advances, brokered deposits,
and through the sales of loans
and/or
securities.
Ohio statutes impose certain limitations on the payment of
dividends and other capital distributions by banks. Generally,
absent approval of the Superintendent of Banks, such statutes
limit dividend and capital distributions to earnings of the
current and two preceding years. As a result of entering into a
memorandum of understanding with the FRB on March 4, 2009,
we are prohibited from paying dividends to our stockholders
without first obtaining the approval of the FRB. Additionally,
our ability to pay dividends to stockholders is dependent on our
net earnings. A continued decline in earnings increases in loan
losses, or higher regulatory capital reserve requirements may
jeopardize our ability to pay dividends at current or historical
levels.
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Our results of operations depend substantially on our net
interest income. Like most financial institutions, our interest
income and cost of funds are affected by general economic
conditions, levels of market interest rates, and by competition,
and in addition, our community banking focus makes our results
from operations particularly dependent on the Ohio economy.
The purpose of asset/liability management is to provide stable
net interest income growth by protecting our earnings from undue
interest rate risk, which arises from changes in interest rates
and changes in the balance sheet mix, and by managing the
risk/return relationships between liquidity, interest rate risk,
market risk, and capital adequacy. Our asset/liability
management objective is to maintain consistent growth in net
interest income within the Board’s policy limits. This
objective is accomplished through management of balance sheet
composition, liquidity, and interest rate risk exposures arising
from changing economic conditions, interest rates and customer
preferences.
We maintain an asset/liability management policy that provides
guidelines for controlling exposure to interest rate risk by
setting tolerance levels for the net interest margin scenario
changes developed simulation models under different interest
rate scenarios to measure the risk to earnings over the next
12-month
period.
The goal of liquidity management is to provide adequate funds to
meet changes in loan demand or unexpected deposit withdrawals.
This is accomplished by maintaining liquid assets in the form of
investment securities, maintaining sufficient unused borrowing
capacity and achieving consistent growth in core deposits.
During 2008 in an effort to maintain higher levels of liquidity,
we held larger cash balances on the balance sheet and limited
our short term investments understanding the affect on earnings.
These efforts resulted from the ever growing competition for
deposits and our credit ratings affect on our FHLB borrowing
capacity and the need provide funding and deposit maturities. We
plan to return to our strategy of short term investments while
monitoring all of our various funding sources. See
“Liquidity and Capital Resources” for additional
discussion on liquidity.
We consider interest rate risk to be Camco’s most
significant market risk. Interest rate risk is the exposure to
adverse changes in net interest income due to changes in
interest rates. Consistency of Camco’s net interest income
is largely dependent upon the effective management of interest
rate risk.
We employ an earnings simulation model to analyze net interest
income sensitivity to changing interest rates. The model is
based on actual cash flows and repricing characteristics and
incorporates market-based assumptions regarding the effect of
changing interest rates on the prepayment rates of certain
assets and liabilities. The model also includes management
projections for activity levels in each of the product lines
offered. Assumptions based on the historical behavior of deposit
rates and balances in relation to changes in interest rates are
also incorporated into the model. Assumptions are inherently
uncertain and the measurement of net interest income or the
impact of rate fluctuations on net interest income cannot be
precisely predicted. Actual results may differ from simulated
results due to timing, magnitude, and frequency of interest rate
changes as well as changes in market conditions and management
strategies.
The Bank’s Asset/Liability Management Committee
(“ALCO”), which includes senior management
representatives and reports to the Bank’s Board of
Directors, monitors and manages interest rate risk within
Board-approved policy limits. The interest rate risk position of
Camco presented below is determined by measuring the anticipated
change in net interest income over a 12 month horizon
assuming an instantaneous and parallel shift (linear) increase
or decrease in all interest rates.
For example, the tables below assume that a decrease in market
rates of 100 basis points will result in an immediate
reduction of our money market deposit accounts rates of
100 basis points. Competitive pressures such as the
environment we are in currently, may limit our ability to
actually reduce money market rates by 100 basis points. The
table below also includes assumptions on loan production and
deposit growth over the next 12 months. Actual results may
significantly differ from those presented below due to the
assumption based nature of the model.
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The following table shows the Corporation’s estimated
earnings sensitivity profile as of December 31, 2008:
The current simulation identifies a decreasing net interest
income in a declining rate environment. A contributing factor to
this decline is the existing higher prepayment speeds
incorporated into our model at year end along with decreased
interest revenue due to higher non-performing loans when
compared to its funding sources. In a rising rate environment
our net interest income increases due to the decrease refinance
opportunities and the significant amount of adjustable rate
loans (14% tied to prime rate) within our loan portfolio. These
assets will adjust faster than liabilities due to the lagging
nature of adjustments in out deposit base.
These estimated changes in net interest income are within the
policy guidelines established by the Board of Directors with the
exception of the 200 basis point rate decrease. We expect
that an improvement in our overall non-performing loans will
increase interest revenue and allow this metric to comply with
the required thresholds. In order to reduce the exposure to
interest rate fluctuations and to manage liquidity, we have
developed sale procedures for several types of
interest-sensitive assets. Generally, all long-term, fixed-rate
single family residential mortgage loans underwritten according
to Freddie Mac and Fannie guidelines are sold upon origination.
A total of $44.6 million and $50.0 million of such
loans were sold to Freddie Mac, Fannie Mae and other parties
during 2008 and 2007, respectively.
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Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting,
(as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Securities Exchange Act of 1934, as amended) that is
designed to produce reliable financial statements in conformity
with accounting principles generally accepted in the United
States. The Company’s internal control over financial
reporting includes those policies and procedures that:
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the
financial statements.
The system of internal control over financial reporting as it
relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a
program of internal audits. Actions are taken to correct
potential deficiencies as they are identified. Any system of
internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be
circumvented or overridden, and misstatements resulting from
error or fraud may occur and not be detected. Also, because of
changes in conditions, internal control effectiveness may vary
over time. Accordingly, even an effective system of internal
control will provide only reasonable assurance with respect to
financial statement preparation.
Management, with the participation of the Company’s Chief
Executive Officer and acting Chief Financial Officer, conducted
an assessment of the effectiveness of the Company’s system
of internal control over financial reporting as of
December 31, 2008, based on criteria for effective internal
control over financial reporting described in “Internal
Control — Integrated Framework,” issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management identified the
following material weaknesses in internal control over financial
reporting as of December 31, 2008:
Management identified that the frequency and detail of certain
valuations and related assumptions were not consistent with the
activities in the existing volatile housing market and the
affects on our Mortgage Servicing Rights and Other Real Estate
Owned portfolio.
Mortgage
Servicing Rights Valuation
The Bank’s mortgage servicing rights asset (MSRs) was
reviewed by a third party on a quarterly basis to determine the
adequacy of the MSR valuation on the balance sheet. This
valuation represents the present value of the future cash flows
earned for servicing the loans of others (e.g. FNMA, FHLMC,
etc.). The valuation was adjusted throughout the year based on
current amortizations
and/or new
originated servicing volume. We have reviewed our valuation as
of December 31, 2008 with our third party vendor and, our
external auditor and we conducted our own industry analysis. We
identified that our 2008 analysis did not provide for a robust
analysis of expected prepayments (more specifically fourth
quarter) which is a significant valuation driver to the extent
of other similar-sized banking institutions. The lower rate
environment, increased refinance activity and the age of our
various sold portfolios were a significant drivers of the needed
adjustments.
Other
Real Estate Owned Valuation
During 2008 we were forced to bring certain real estate back
into our portfolio for remarketing due to the default of our
borrowers. Our prior processes valued the property at the point
of title transfer based on various external valuation sources. A
valuation review was subsequently completed at 6 and
12 months if the property remained in our portfolio.
Working with our auditors, Plante Moran we discovered that
larger than expected losses were being booked upon the sale of
an REO property (approximately 10% of the book value). The
velocity of falling
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real estate values had negatively affected our REO portfolio
value and previous processes may not have allowed for timely
valuations during the holding period.
On February 6, 2009 Camco distributed a press release
announcing its fourth quarter and full year earnings. In light
of the identified control deficiencies a revised earnings
release was provided on March 9, 2009.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial
statements would not be prevented or detected on a timely basis.
As a result of the two material weaknesses above, management has
concluded that the Company’s internal control over
financial reporting was not effective as of December 31,
2008 based on the criteria described in the “Internal
Control — Integrated Framework.”
The effectiveness of our internal control over financial
reporting has been audited by Plante & Moran PLLC, an
independent registered public accounting firm, as stated in
their report which is included herein.
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To the Board of Directors and Stockholders
Camco Financial Corporation
We have audited the accompanying consolidated statement of
financial condition of Camco Financial Corporation as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2008. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Camco Financial Corporation as of
December 31, 2008 and 2007, and the consolidated results of
its operations and its cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the
Public Company Acountng Oversight Board (United States), Camco
Financial Corporation’s internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated March 16, 2009 expressed an adverse opinion on
internal control over financial reporting.
/s/ Plante & Moran PLLC
March 16, 2009
Columbus, Ohio
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To the Board of Directors and Stockholders
Camco Financial Corporation
We have audited Camco Financial Corporation’s internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Camco Financial
Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on Camco
Financial Corporation’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of control
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included
in management’s assessment. The frequency and detail of
certain valuations and related assumptions were not consistent
with the activities in the existing volatile housing market and
the effects on the Mortgage Servicing Rights and Other Real
Estate Owned portfolio.
In our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the
control criteria, Camco Financial Corporation has not maintained
effective internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control — Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Camco Financial Corporation as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, comprehensive income,
stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2008. The
material weakness identified above was considered in determining
the nature, timing, and extent of audit tests applied in our
audit of the 2008 financial statements, and this report does not
affect our report dated March 16, 2009, which expressed an
unqualified opinion on those financial statements.
/s/ Plante & Moran PLLC
March 16, 2009
Columbus, Ohio
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CAMCO
FINANCIAL CORPORATION
The accompanying notes are an integral part of these statements.
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CAMCO
FINANCIAL CORPORATION
For the
years ended December 31, 2008, 2007 and 2006
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