FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0110823
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6901 Glenn Highway, Cambridge, Ohio 43725-9757
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 3, 2004, the latest practicable date, 7,357.887 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 23
Camco Financial Corporation
INDEX
Page
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PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15
Quantitative and Qualitative Disclosures about
Market Risk 18
Controls and Procedures 18
PART II - OTHER INFORMATION 19
SIGNATURES 20
2
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2004 2003
ASSETS
Cash and due from banks $ 20,621 $ 22,807
Interest-bearing deposits in other financial institutions 18,140 30,904
------------ ------------
Cash and cash equivalents 38,761 53,711
Investment securities available for sale - at market 28,928 27,008
Investment securities held to maturity - at cost, approximate market
value of $1,217 and $1,204 as of March 31, 2004 and December 31,
2003, respectively 1,128 1,130
Mortgage-backed securities available for sale - at market 93,324 77,916
Mortgage-backed securities held to maturity - at cost, approximate market
value of $6,234 and $7,839 as of March 31, 2004 and December 31,
2003, respectively 6,193 7,704
Loans held for sale - at lower of cost or market 8,908 5,457
Loans receivable - net 811,792 799,625
Office premises and equipment - net 13,184 13,380
Real estate acquired through foreclosure 2,771 1,463
Federal Home Loan Bank stock - at cost 24,738 24,494
Accrued interest receivable 4,171 4,088
Prepaid expenses and other assets 1,714 1,524
Cash surrender value of life insurance 17,912 17,740
Goodwill - net of accumulated amortization 2,953 2,953
Prepaid federal income taxes 546 958
------------ ------------
Total assets $ 1,057,023 $ 1,039,151
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 669,046 $ 671,274
Advances from the Federal Home Loan Bank 283,280 262,735
Advances by borrowers for taxes and insurance 2,358 3,494
Accounts payable and accrued liabilities 4,199 4,102
Dividends payable 1,067 1,063
Deferred federal income taxes 4,080 3,940
------------ ------------
Total liabilities 964,030 946,608
Commitments - -
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,448,674 and
8,428,946 shares issued at March 31, 2004 and December 31, 2003, respectively 8,449 8,429
Additional paid-in capital 55,322 55,132
Retained earnings - substantially restricted 45,087 45,121
Accumulated other comprehensive income - unrealized gains on securities
designated as available for sale, net of related tax effects 480 206
Less 1,096,523 shares of treasury stock at both March 31, 2004
and December 31, 2003, respectively - at cost (16,345) (16,345)
------------ ------------
Total stockholders' equity 92,993 92,543
------------ ------------
Total liabilities and stockholders' equity $ 1,057,023 $ 1,039,151
============ ============
3
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(In thousands, except per share data)
2004 2003
Interest income
Loans $ 11,415 $ 12,723
Mortgage-backed securities 607 1,048
Investment securities 182 344
Interest-bearing deposits and other 525 578
---------- --------
Total interest income 12,729 14,693
Interest expense
Deposits 3,349 4,484
Borrowings 3,309 3,843
---------- --------
Total interest expense 6,658 8,327
---------- --------
Net interest income 6,071 6,366
Provision for losses on loans 255 420
---------- --------
Net interest income after provision for losses on loans 5,816 5,946
Other income
Late charges, rent and other 640 848
Loan servicing fees 386 401
Service charges and other fees on deposits 272 266
Gain on sale of loans 276 1,439
Increase (decrease) in valuation of mortgage servicing rights - net (102) 500
Gain (loss) on sale of real estate acquired through foreclosure (13) 1
Gain on sale of mortgage-backed securities 77 -
---------- --------
Total other income 1,536 3,455
General, administrative and other expense
Employee compensation and benefits 2,996 2,918
Occupancy and equipment 874 940
Data processing 342 303
Advertising 254 177
Franchise taxes 214 276
Other operating 1,190 1,165
---------- --------
Total general, administrative and other expense 5,870 5,779
---------- --------
Earnings before federal income taxes 1,482 3,622
Federal income taxes
Current 412 911
Deferred 36 257
---------- --------
Total federal income taxes 448 1,168
---------- --------
NET EARNINGS $ 1,034 $ 2,454
========== ========
EARNINGS PER SHARE
Basic $ .14 $ .32
========== ========
Diluted $ .14 $ .32
========== ========
Dividends declared per share $ .145 $ .140
========== ========
4
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
2004 2003
Net earnings $ 1,034 $2,454
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during the period, net of tax
effects (benefits) of $167 and ($202) in 2004 and 2003, respectively 325 (392)
Reclassification adjustment for realized gains included in earnings net
of taxes of $26 in 2004 (51) -
------- ------
Comprehensive income $ 1,308 $2,062
======= ======
Accumulated comprehensive income $ 480 $1,706
======= ======
5
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 1,034 $ 2,454
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (43) (113)
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 346 532
Depreciation and amortization 365 438
Amortization of purchase accounting adjustments, net (22) 20
Provision for losses on loans 255 420
Loss (gain) on sale of real estate acquired through foreclosure 13 (1)
Gain on sale of mortgage-backed securities (77) -
Federal Home Loan Bank stock dividends (244) (232)
Gain on sale of loans (276) (1,439)
Loans originated for sale in the secondary market (29,927) (56,539)
Proceeds from sale of loans in the secondary market 26,752 93,110
Increase (decrease) in cash due to changes in:
Accrued interest receivable (83) 469
Prepaid expenses and other assets (190) (17)
Accrued interest and other liabilities 97 (233)
Federal income taxes
Current 412 925
Deferred 36 257
--------- --------
Net cash provided by (used in) operating activities (1,552) 40,051
Cash flows provided by (used in) investing activities:
Purchases of investment securities designated as available for sale (8,000) (2,000)
Proceeds from maturities of investment securities 6,000 7,138
Proceeds from sale of mortgage-backed securities designated as available for sale 12,571 -
Principal repayments on mortgage-backed securities 6,095 20,978
Purchases of mortgage-backed securities designated as available for sale (32,371) (33,184)
Loan principal repayments 54,241 83,047
Loan disbursements (62,388) (85,954)
Purchases of loans (6,117) (2,112)
Additions to office premises and equipment (169) (289)
Proceeds from sale of real estate acquired through foreclosure 586 613
Net increase in cash surrender value of life insurance (172) (200)
--------- --------
Net cash used in investing activities (29,724) (11,963)
--------- --------
Net cash (used in) provided by operating and investing
activities balance carried forward (31,276) 28,088
------ ------
6
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
2004 2003
Net cash (used in) provided by operating and investing
activities (balance brought forward) $ (31,276) $28,088
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (2,228) 320
Proceeds from Federal Home Loan Bank advances 25,650 1,500
Repayment of Federal Home Loan Bank advances (5,106) (2,948)
Dividends paid on common stock (1,064) (1,051)
Proceeds from exercise of stock options 210 426
Purchase of treasury shares - (3,002)
Decrease in advances by borrowers for taxes and insurance (1,136) (1,235)
--------- -------
Net cash provided by (used in) financing activities 16,326 (5,990)
--------- -------
Increase (decrease) in cash and cash equivalents (14,950) 22,098
Cash and cash equivalents at beginning of period 53,711 57,022
--------- ------
Cash and cash equivalents at end of period $ 38,761 $79,120
========= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 6,787 $ 7,014
========= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 325 $ (392)
========= ========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 336 $ 1,188
========= =======
Transfers from mortgage loans to real estate acquired through foreclosure $ 1,907 $ 189
========= =======
Dividends declared but unpaid $ 1,067 $ 1,059
========= =======
7
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended March 31, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America ("US GAAP"). Accordingly, these financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto of Camco Financial Corporation
("Camco" or the "Corporation") included in Camco's Annual Report on
Form 10-K for the year ended December 31, 2003. However, all
adjustments (consisting only of normal recurring accruals) which, in
the opinion of management, are necessary for a fair presentation of the
consolidated financial statements, have been included. The results of
operations for the three month period ended March 31, 2004, are not
necessarily indicative of the results which may be expected for the
entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Camco and its two wholly-owned subsidiaries: Advantage Bank
("Advantage" or the "Bank") and Camco Title Insurance Agency, Inc.
3. Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures found elsewhere in this
quarterly report, are based upon Camco Financial's consolidated
financial statements, which are prepared in accordance with 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 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 of all 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.
8
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
3. Critical Accounting Policies (continued)
ALLOWANCE FOR LOAN LOSSES (continued)
The allowance is regularly reviewed by management to determine whether
the amount is considered adequate to absorb probable 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 judgement 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 believed
adequate by management to absorb probable losses inherent in the loan
portfolio. Management's evaluation of the adequacy of the allowance is
an estimate based on management's current judgement about the credit
quality of the loan portfolio. While the Corporation strives to reflect
all known risk factors in its evaluations, judgment errors may occur.
MORTGAGE SERVICING RIGHTS
To determine the fair value of its mortgage servicing rights ("MSRs")
each reporting quarter, the Corporation transmits information to a
third party provider, representing individual loan information in each
pooling period accompanied by escrow amounts. The third party then
evaluates 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 is supplied
by management, takes into consideration the investment portfolio
average yield as well as current short duration investment yields.
Management believes this methodology provides a reasonable estimate.
Mortgage loan prepayment speeds are calculated by the third party
provider utilizing the Economic Outlook as published by the Office of
Chief Economist of Freddie Mac 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, management reviews the
information and mortgage servicing rights are marked to lower of
amortized cost or market for the current quarter.
9
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
3. Critical Accounting Policies (continued)
GOODWILL
We have developed procedures to test goodwill for impairment on an
annual basis using June 30 financial information. This testing
procedure is outsourced to 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 reporting units and comparing the
fair value of each reporting unit to its carrying value including
goodwill. The value 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 ("DCF") approach. The
application of the valuation techniques take 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 Committee for review.
SUMMARY
Management believes 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
management 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 Committee of the Board of Directors and the Audit
Committee has reviewed Camco's disclosures relating to such matters in
the quarterly Management's Discussion and Analysis.
10
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
4. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Corporation's
stock option plans. The computations are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
Weighted-average common shares
outstanding (basic) 7,345,340 7,674,434
Dilutive effect of assumed exercise
of stock options 69,276 95,112
--------- ---------
Weighted-average common shares
outstanding (diluted) 7,414,616 7,769,546
========= =========
Options to purchase 17,705 and 7,088 shares of common stock with
respective weighted-average exercise prices of $17.17 and $16.59 were
outstanding at March 31, 2004 and 2003, respectively, but were excluded
from the computation of common share equivalents for those respective
periods because the exercise prices were greater than the average
market price of the common shares.
5. Stock Option Plans
Stockholders of the Corporation have approved four stock option plans.
Under the 1972 Plan, 254,230 common shares were reserved for issuance
to officers, directors, and key employees of the Corporation and its
subsidiaries. The 1982 Plan reserved 115,824 common shares for issuance
to employees of the Corporation and its subsidiaries. All of the stock
options under the 1972 and 1982 Plans have been granted and were
subject to exercise at the discretion of the grantees through 2002.
Under the 1995 Plan, 161,488 shares were reserved for issuance. Under
the 2002 Plan, 400,000 shares were reserved for issuance. Additionally,
in connection with the acquisition of First Savings, the stock options
of First Savings were converted into options to purchase 174,421 shares
of the Corporation's stock at an exercise price of $7.38 per share,
which expire in 2005. In connection with the 2000 acquisition of
Westwood Homestead, the stock options of Westwood Homestead were
converted into options to purchase 311,794 shares of the Corporation's
stock at a weighted-average exercise price of $11.89 per share, which
expire in 2008.
The Corporation accounts for its stock option plans in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which contains
a fair-value based method for valuing stock-based compensation that
entities may use, that measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for
stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of
net earnings and earnings per share, as if the fair-value based method
of accounting defined in SFAS No. 123 had been applied.
11
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
5. Stock Option Plans (continued)
The Corporation utilizes APB Opinion No. 25 and related Interpretations
in accounting for its stock option plans. Accordingly, no compensation
cost has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair
value at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net
earnings and earnings per share for the three-month periods ended March
31, 2004 and 2003, would have been reported as the pro forma amounts
indicated below:
2004 2003
(In thousands, except per share data)
NET EARNINGS As reported $ 1,034 $ 2,454
Stock-based compensation, net of tax (7) (20)
--------------- -----------------
Pro-forma $ 1,027 $ 2,434
=============== =================
EARNINGS PER SHARE
BASIC As reported $ .14 $ .32
Stock-based compensation, net of tax - -
--------------- -----------------
Pro-forma $ .14 $ .32
=============== =================
DILUTED As reported $ .14 $ .32
Stock-based compensation, net of tax - (.01)
--------------- -----------------
Pro-forma $ .14 $ .31
=============== =================
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the
following assumptions used for grants during 2004, 2003 and 2002:
dividend yield of 3.40%, 3.50%, and 3.84%, respectively; expected
volatility of 21.44%, 16.88% and 16.34% respectively; a risk-free
interest rate of 4.11%, 3.95% and 2.00% respectively, and an expected
life of ten years for all grants.
12
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
5. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of
March 31, 2004 and December 31, 2003 and 2002, and changes during the
periods ending on those dates is presented below:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 257,072 $ 12.11 323,291 $ 9.79 503,005 $ 10.16
Granted 17,705 17.17 56,948 16.13 3,700 14.55
Exercised (19,728) 8.72 (117,800) 7.60 (174,106) 10.84
Forfeited (1,050) 14.65 (5,367) 13.92 (9,308) 11.91
------- --------- -------- --------- --------- ------------
Outstanding at end of year 253,999 $ 12.41 257,072 $ 12.11 323,291 $ 9.79
======= ========= ======== ========= ========= ============
Options exercisable at year-end 206,839 $ 11.50 211,780 $ 11.25 323,291 $ 9.79
======= ========= ======== ========= ========= ============
Weighted-average fair value of
options granted during the year $ 3.59 $ 2.60 $ 1.36
========= ========= ============
The following information applies to options outstanding at March 31, 2004:
Number outstanding 55,823
Range of exercise prices $ 7.40-8.94
Number outstanding 63,125
Range of exercise prices $ 9.75-11.36
Number outstanding 6,280
Range of exercise prices $12.50-12.98
Number outstanding 128,771
Range of exercise prices $14.55-17.17
Weighted-average exercise price $ 12.41
Weighted-average remaining contractual life 6.9 years
6. Forward Looking Statements
Certain statements contained in this report that are not historical
facts are forward looking statements that are subject to certain risks
and uncertainties. When used herein, the terms "anticipates," "plans,"
"expects," "believes," and similar expressions as they relate to Camco
or its management are intended to identify such forward looking
statements. Camco's actual results, performance or achievements may
materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law,
governmental policies and regulations, and rapidly changing technology
affecting financial services.
13
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three-month periods ended March 31, 2004 and 2003
Discussion of Financial Condition Changes from December 31, 2003 to March 31,
2004
At March 31, 2004, Camco's consolidated assets totaled $1.06 billion, an
increase of $17.9 million, or 1.7%, from the December 31, 2003 total. The
increase in total assets was comprised primarily of increases in mortgage-backed
securities available for sale, loans receivable, and loans held for sale, which
were partially offset by a decrease in cash and cash equivalents.
Cash and interest-bearing deposits in other financial institutions totaled $38.8
million at March 31, 2004, a decrease of $15.0 million, or 27.8%, from December
31, 2003 levels. Investment securities totaled $30.1 million at March 31, 2004,
an increase of $1.9 million, or 6.8%, from the total at December 31, 2003.
Investment securities purchases of $8.0 million were comprised primarily of
intermediate-term callable U.S. Government agency obligations with an average
yield of 3.49%, which were partially offset by $6.0 million of investment
maturities.
Mortgage-backed securities totaled $99.5 million at March 31, 2004, an increase
of $13.9 million, or 16.2%, from December 31, 2003. Mortgage-backed securities
purchases totaled $32.4 million, while principal repayments totaled $6.1 million
and sales totaled $12.5 million during the three-month period ended March 31,
2004. Purchases of mortgage-backed securities during the period were comprised
primarily of short duration mortgage-backed securities yielding 3.87%, all of
which were classified as available for sale.
Loans receivable, including loans held for sale, totaled $820.7 million at March
31, 2004, an increase of $15.6 million, or 1.9%, from December 31, 2003. The
increase resulted primarily from loan disbursements and purchases totaling $98.4
million, which were partially offset by principal repayments of $54.2 million
and loan sales of $26.8 million. The volume of loans originated and purchased
during the first three months of 2004 decreased compared to the 2003 period by
$46.2 million, or 31.9%, while the volume of loan sales decreased by $65.2
million year to year. As interest rates have moved off their historical lows,
loans originated and purchased moved away from fixed rate lending to adjustable
rate lending. This has caused origination and purchases to be lower while at the
same time has allowed our portfolio to grow. Camco has typically held
adjustable-rate mortgage loans in its portfolio as an integral part of its
strategy to maintain an asset-sensitive interest-rate risk position. Loan
originations during the three-month period ended March 31, 2004, were comprised
primarily of $48.6 million of loans secured by one- to four-family residential
real estate, $18.8 million in consumer and other loans and $31.0 million in
loans secured by commercial real estate. Management will continue to expand its
consumer and commercial real estate lending in future periods as a means of
increasing the yield and diversifying the portfolio to a less dominated
proportion of one- to four-family residential real estate loans.
The allowance for loan losses totaled $5.5 million and $5.6 million at March 31,
2004 and December 31, 2003, respectively, representing 43.0% and 41.5% of
nonperforming loans, respectively, at those dates. Nonperforming loans (90 days
or more delinquent plus nonaccrual loans) totaled $12.7 million and $13.6
million at March 31, 2004 and December 31, 2003, respectively, constituting
1.55% and 1.69% of total net loans, including loans held for sale, at those
dates. At March 31, 2004, nonperforming loans were comprised of $10.7 million in
one- to four-family residential real estate loans, $1.2 million in commercial
and multi-family real estate loans and $777,000 of consumer and non-residential
loans. Management believes all nonperforming loans are adequately collateralized
and no loss is expected over and above allocated reserves on such loans. Loans
delinquent greater than 30 days but less than 90 days totaled $7.0 million at
March 31, 2004, compared to $8.7 million at December 31, 2003, a decrease of
$1.7 million, or 20.0%. Although management believes that its allowance for loan
losses is adequate based upon the available facts and circumstances at March 31,
2004, there can be no assurance that increased provisions will not be necessary
in future periods, which could adversely affect Camco's results of operations.
14
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
Discussion of Financial Condition Changes from December 31, 2003 to March 31,
2004 (continued)
Deposits totaled $669.0 million at March 31, 2004, a decrease of $2.2 million,
or .33%, from the total at December 31, 2003. The decrease in deposits was due
to a $7.9 million decrease of interest bearing deposits which were offset
partially by the increase of $4.0 million of certificates of deposit.
Stockholders' equity totaled $93.0 million at March 31, 2004, an increase of
$450,000, or .49%, from December 31, 2003. The increase resulted primarily from
net earnings of $1.0 million, an increase in the unrealized gains on available
for sale securities of $274,000, and proceeds from the exercise of stock options
of $210,000 which were partially offset by dividends of $1.1 million.
Advantage is required to maintain minimum regulatory capital pursuant to federal
regulations. At March 31, 2004, the Bank's regulatory capital exceeded all
regulatory capital requirements and is considered "well capitalized".
The following tables present certain information regarding compliance
by Advantage with applicable regulatory capital requirements at March 31, 2004:
To be "well-
At March 31, 2004 capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- ---------------------------- ------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------------- ----------- -------------- ------------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,670 12.18% > or = $52,996 > or = 8.0% > or = $66,245 > or = 10.0%
Tier I capital
(to risk-weighted assets) $75,210 11.35% > or = $26,498 > or = 4.0% > or = $39,747 > or = 6.0%
Tier I leverage $75,210 7.41% > or = $40,610 > or = 4.0% > or = $50,763 > or = 5.0%
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance.
Comparison of Results of Operations for the Three Months Ended March 31, 2004
and 2003
General
Camco's net earnings for the three months ended March 31, 2004 totaled $1.0
million, a decrease of $1.4 million, or 57.9%, from the $2.5 million of net
earnings reported in the comparable 2003 period. The decrease in earnings was
primarily attributable to a $1.9 million, or 55.5% decrease in other income and
a decrease of $295,000, or 4.6% in net interest income, which were partially
offset by a decrease in the provision for losses on loans of $165,000 and a
decrease in federal income tax expense of $720,000.
15
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
Comparison of Results of Operations for the Three Months Ended March 31, 2004
and 2003 (continued)
Net Interest Income
Total net interest income amounted to $6.1 million for the three months ended
March 31, 2004, a decrease of $295,000, or 4.6%, compared to the three-month
period ended March 31, 2003, generally reflecting the effects of a decrease in
yield on total interest-earning assets of 54 basis points, from 5.69% in the
2003 period to 5.15% in 2004, and a $43.7 million, or 4.2%, decrease in the
average balance of interest-earning assets outstanding year to year.
Interest income on loans totaled $11.4 million for the three months ended March
31, 2004, a decrease of $1.3 million, or 10.3% from the comparable 2003 period.
The decrease resulted primarily from a 94 basis point decrease in the average
yield to 5.62% from 6.56% in 2003 which was partially offset by the increase of
average balance outstanding of $36.9 million or 4.8% in the 2004 quarter.
Interest income on mortgage-backed securities totaled $607,000 for the three
months ended March 31, 2004, a $441,000, or 42.1% decrease from the 2003
quarter. The decrease was due primarily to a 66 basis point decrease in the
average yield, to 2.87% for the 2004 period, coupled with a $34.0 million, or
28.7%, decrease in the average balance outstanding in the 2004 period. Interest
income on investment securities decreased by $162,000, or 47.1%, due primarily
to a $14.2 million decrease in the average balance outstanding, coupled with a
65 basis point decrease in the average yield, to 2.64% in the 2004 period.
Interest income on other interest-earning assets decreased by $53,000, or 9.2%,
due primarily to a $32.4 million, or 33.5%, decrease in the average balance
outstanding which was partially offset by an 87 basis point increase in the
average yield, to 3.26% compared to 2.39% for the three months ended March 31,
2003.
Interest expense on deposits totaled $3.3 million for the three months ended
March 31, 2004, a decrease of $1.1 million, or 25.3%, compared to the same
quarter in 2003, due primarily to a 62 basis point decrease in the average cost
of deposits to 2.08% in the current quarter, and a $21.0 million, or 3.2%,
decrease in average deposits outstanding. Interest expense on borrowings totaled
$3.3 million for the three months ended March 31, 2004, a decrease of $534,000,
or 13.9%, from the same 2003 three-month period. The decrease resulted primarily
from a 56 basis point decrease in the average cost of borrowings to 5.01%, and a
$11.9 million, or 4.3%, decrease in the average balance outstanding year to
year. Decreases in the level of average yields on interest-earning assets and
average costs of interest-bearing liabilities were due primarily to the overall
decrease in interest rates in the economy coupled with a December restructuring
of $25.4 million of FHLB borrowings which carried an average fixed rate of
5.41%. The borrowings were replaced with variable rate advances having a
weighted average rate of approximately 1% as of March 31, 2004.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $295,000, or 4.6%, to a total of $6.1 million
for the three months ended March 31, 2004. The interest rate spread increased to
approximately 2.22% at March 31, 2004, from 2.15% at March 31, 2003, while the
net interest margin decreased to approximately 2.46% for the three months ended
March 31, 2004, compared to 2.47% for the 2003 period.
16
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
Comparison of Results of Operations for the Three Months Ended March 31, 2004
and 2003 (continued)
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market areas,
and other factors related to the collectibility of the Bank's loan portfolio.
Based upon an analysis of these factors, management recorded a provision for
losses on loans totaling $255,000 for the three months ended March 31, 2004, a
decrease of $165,000, or 39.3%, from the comparable period in 2003. The decrease
in the current period provision compared to the 2003 period was predicated
primarily on a $1.7 million, or 8.0% decrease in the level of classified loans
year to year. Management believes all classified loans are adequately
collateralized, however, there can be no assurance that the loan loss allowance
will be adequate to absorb losses on known classified assets or that the
allowance will be adequate to cover losses on classified assets in the future.
Other Income
Other income totaled $1.5 million for the three months ended March 31, 2004, a
decrease of $1.9 million, or 55.5%, from the comparable 2003 period. The
decrease in other income was primarily attributable to a $1.2 million decrease
in gain on sale of loans, a $602,000 decrease in the valuation of mortgage
servicing rights and a decrease of $208,000, in late charges, rent and other.
The decrease in gain on sale of loans was due to the decrease of $65.2 million
in the volume of loan sales. The decline in mortgage servicing rights was
attributable to amortization related to the high level of loan prepayments in
the servicing portfolio in 2003. The reduction in late charges, rent and other
was due primarily to a decrease in title premiums and other fees on loans due to
the $46.2 million decrease of loans originated and purchased in 2004 compared to
the 2003 period. The Corporation's mortgage banking income, largely comprised of
gains on sale of loans, servicing revenue, and title premiums are subject to the
cyclical changes in the overall level of interest rates in the economy. The rise
in home mortgage interest rates off the historical lows over the last six months
have had a dampening effect on the Corporation's net earnings. The higher home
mortgage rates will decrease the Company's originations for primarily fixed rate
mortgage loans which will diminish the fee income derived from the sale of those
loans in the secondary market. The origination of adjustable rate home loans
generally increase during these interest rate cycles and after a period of time,
borrowers have typically come back into the home purchase and construction
market using those types of loans to finance their homes. Over time, this will
shift earnings from fees to net interest margin income for the Bank.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.9 million for the three
months ended March 31, 2004, an increase of $91,000, or 1.6%, from the
comparable period in 2003. The increase in general, administrative and other
expense was due primarily to an increase of $77,000, or 43.5%, in advertising
and a $25,000, or 2.1%, increase in other operating costs, which were partially
offset by a reduction of $66,000, or 7.0%, in occupancy and equipment and
$62,000 in franchise taxes. The increase in advertising was primarily due to
hiring an advertising agency to better manage the Company's marketing effort to
uniformly promote our brand, key product offerings and better manage our costs.
The increase in other operating costs were attributable to higher compliance
costs as a result of Sarbanes/Oxley. The decrease in occupancy and equipment was
due primarily to the closing of the Russell, Kentucky branch and a decrease in
depreciation expense. The decrease in franchise tax was due to the receipt of
refunds.
17
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2004 and 2003
Comparison of Results of Operations for the Three Months Ended March 31, 2004
and 2003 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $448,000 for the three months
ended March 31, 2004, a decline of $720,000, or 61.6%, compared to the three
months ended March 31, 2003. This reduction was primarily attributable to a $2.1
million, or 59.1%, decrease in pre-tax earnings as well as the non-taxable
nature of increases in cash surrender value of life insurance. The Corporation's
effective tax rates amounted to 30.2% and 32.2% for the three-month periods
ended March 31, 2004 and 2003, respectively.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Corporation's market risk since the
Corporation's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2003.
ITEM 4: Controls and Procedures
(a) Camco's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the disclosure controls and procedures (as
defined under Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934, as amended) as of December 31, 2003. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that Camco's
disclosure controls and procedures are effective.
(b) There were no significant changes in Camco's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
18
Camco Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 27, 2004, Camco held its Annual Meeting of Stockholders. The
only matter that was submitted to stockholders was the election of two
directors for terms expiring in 2007, as follows:
For Withheld
Terry A. Feick 6,045,666 248,138
Susan J. Insley 6,046,348 247,456
The following directors terms continued after the meeting: Richard C.
Baylor, Robert C. Dix, Paul D. Leake, Larry A. Caldwell, Carson K.
Miller, Samuel W. Speck and Jeffrey T. Tucker.
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 31(i) Section 302 certification by Chief Executive
Officer
Exhibit 31(ii) Section 302 Certification by Chief Financial
Officer
Exhibit 32(i) Section 1350 certification by Chief Executive
Officer
Exhibit 32(ii) Section 1350 certification by Chief Financial
Officer
Reports on Form 8-K: On January 26, 2004, a Form 8-K was filed to
report net earnings for the quarter and year
ended December 31, 2003
On March 25, 2004, a Form 8-K was filed to
report the declaration of a cash dividend.
On March 29, 2004 a Form 8-K was filed to
report the execution of an agreement to
acquire London Financial Corporation.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 3, 2004 By: /s/Richard C. Baylor
----------------------------------
Richard C. Baylor
Chief Executive Officer
Date: May 3, 2004 By: /s/Mark A. Severson
----------------------------------
Mark A. Severson
Chief Financial Officer
20