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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-25196
CAMCO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0110823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6901 Glenn Highway, Cambridge, Ohio 43725
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 435-2020
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of Each Class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value per share
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |X| No | |
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,
2004, was $116.1 million. (The exclusion from such amount of the market value of
the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
There were 7,351,150 shares of the registrant's common stock outstanding on
March 10, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of Form 10-K: Portions of the Proxy Statement for the 2004 Annual
Meeting of Stockholders
1
PART I
ITEM 1. BUSINESS.
GENERAL
Camco Financial Corporation ("Camco") is a savings and loan holding
company which was organized under Delaware law in 1970. Camco is engaged in the
financial services business in Ohio, Kentucky and West Virginia, through its
wholly-owned subsidiaries, Advantage Bank ("Advantage" or the "Bank") and Camco
Title Insurance Agency, Inc. ("Camco Title"), and its second-tier subsidiary,
Camco Mortgage Corporation ("CMC"). Effective October 1, 2003, CMC was dissolved
and its operations became part of the Bank. In June 2001, Camco completed a
reorganization in which it combined its banking activities under one Ohio
savings bank charter which is now known as Advantage Bank. Prior to the
reorganization, Camco operated five separate banking subsidiaries serving
distinct geographic areas. The branch office groups in each of the regions
previously served by the five subsidiary banks now operate as divisions of
Advantage Bank utilizing the names under which their respective offices were
chartered prior to the restructuring (Cambridge Savings Bank, Marietta Savings
Bank, First Savings Bank, First Bank for Savings and Westwood Homestead Savings
Bank). Hereinafter, the terms "Advantage" or the "Bank" will be used to include
all the preexisting individual financial institutions owned by Camco.
During the periods for which financial information is presented, Camco
completed two business combinations. During 2000, Camco completed a business
combination with Westwood Homestead Financial Corporation ("WFC") and its
wholly-owned subsidiary, Westwood Homestead Saving Bank ("Westwood Savings"). In
November 2001, Camco completed a business combination with Columbia Financial of
Kentucky, Inc. ("Columbia Financial"), and its wholly-owned subsidiary, Columbia
Federal Savings Bank ("Columbia Federal"). Both mergers were accounted for using
the purchase method of accounting and, therefore, the financial statements for
prior periods have not been restated.
Advantage is regulated by the Ohio Division of Financial Institutions (the
"Division") and the Federal Deposit Insurance Corporation (the "FDIC"), as its
primary regulators. Advantage Bank is a member of the Federal Home Loan Bank
(the "FHLB") of Cincinnati, and its deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund (the "SAIF")
administered by the FDIC. Camco is regulated by the Office of Thrift Supervision
(the "OTS") as a savings and loan holding company.
Camco's primary lending activities include the origination of conventional
fixed-rate and variable-rate mortgage loans for the acquisition, construction or
refinancing of single-family homes located in Camco's primary market areas.
Camco also originates construction and permanent mortgage loans on condominiums,
two- to four-family, multi-family (over four units) and nonresidential
properties. In addition to mortgage lending, Camco makes a variety of consumer
and commercial loans.
The financial statements for Camco and its subsidiaries are prepared on a
consolidated basis. The principal source of revenue for Camco on an
unconsolidated basis has historically been dividends from the Bank. Payment of
dividends to Camco by the Bank is subject to various regulatory restrictions and
tax considerations.
References in this report to various aspects of the business, operations
and financial condition of Camco may be limited to Advantage, as the context
requires.
Camco's Internet site, http://www.camcofinancial.com, contains a hyperlink
to the Securities and Exchange Commission's EDGAR website where Camco's annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 are available free of charge as
soon as reasonably practicable after Camco has filed the report with the SEC.
2
LENDING ACTIVITIES
GENERAL. Camco's primary lending activities include the origination of
conventional fixed-rate and variable-rate mortgage loans for the construction,
acquisition or refinancing of single-family homes located in Advantage's primary
market areas. Construction and permanent mortgage loans on condominiums,
multifamily (over four units) and nonresidential properties are also offered by
Camco. In addition to mortgage lending, Camco makes a variety of commercial and
consumer loans.
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information regarding the composition of Camco's loan portfolio, including loans
held for sale, at the dates indicated:
At December 31,
-------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Type of loan:
Existing residential properties(1) $ 652,953 81.1% $ 641,464 80.5% $ 705,056 80.9%
Construction 44,189 5.5 33,122 4.1 42,666 4.9
Nonresidential real estate 51,533 6.4 74,094 9.3 70,239 8.1
Developed building lots 1,725 0.2 535 0.1 5,908 0.7
Consumer and other loans(2) 78,155 9.7 67,712 8.5 69,116 7.9
--------- ----- --------- ----- --------- -----
Total 828,555 102.9 816,927 102.5 892,985 102.5
Less:
Undisbursed loans in process (17,022) (2.1) (13,089) (1.6) (15,343) (1.8)
Unamortized yield adjustments (810) (0.1) (1,390) (0.2) (1,940) (0.2)
Allowance for loan losses (5,641) (0.7) (5,490) (0.7) (4,256) (0.5)
--------- ----- --------- ----- --------- -----
Total loans, net $ 805,082 100.0% $ 796,958 100.0% $ 871,446 100.0%
========= ===== ========= ===== ========= =====
At December 31,
----------------------------------------------------
2000 1999
----------------------- ---------------------
Percent Percent
of total of total
Amount loans Amount loans
------ ----- ------ -----
(Dollars in thousands)
Type of loan:
Existing residential properties(1) $ 764,828 82.2% $ 619,621 85.3%
Construction 56,039 6.0 60,565 8.3
Nonresidential real estate 54,722 5.9 20,831 2.9
Developed building lots 5,640 0.6 4,649 0.6
Consumer and other loans(2) 73,178 7.9 51,079 7.1
--------- ----- --------- -----
Total 954,407 102.6 756,745 104.2
Less:
Undisbursed loans in process (19,911) (2.2) (27,569) (3.8)
Unamortized yield adjustments (918) (0.1) (1,088) (0.1)
Allowance for loan losses (2,906) (0.3) (1,863) (0.3)
--------- ----- --------- -----
Total loans, net $ 930,672 100.0% $ 726,225 100.0%
========= ===== ========= =====
- ----------
(1) Includes loans held for sale, home equity lines of credit and mortgage
servicing rights.
(2) Includes second mortgage, multifamily and commercial loans.
Camco's loan portfolio was approximately $805.1 million at December 31,
2003, and represented 77.5% of total assets.
3
LOAN MATURITY SCHEDULE. The following table sets forth certain information as of
December 31, 2003, regarding the dollar amount of loans maturing in Camco's
portfolio based on the contractual terms to maturity of the loans. Demand loans,
loans having no stated schedule of repayments and loans having no stated
maturity, are reported as due in one year or less.
Due during the
year ending Due in
December 31, Due in years years after
2004 2005-2009 2009 Total
-------------- ------------ ----------- --------
(In thousands)
Real estate loans(1):
One- to four-family $14,717 $47,959 $578,268 $640,944
Multifamily 421 3,922 40,773 45,116
Nonresidential 2,397 8,908 40,228 51,533
Commercial 1,136 3,045 13,566 17,747
Consumer and other loans(2) 2,267 11,933 2,817 17,017
Construction 3,063 3,309 20,795 27,167
------- ------- -------- --------
Total $24,001 $79,076 $696,447 $799,524
======= ======= ======== ========
- ----------
(1) Excludes loans held for sale of $5.5 million and does not consider the
effects of unamortized yield adjustments of $810,000, the allowance for
loan losses of $5.6 million and mortgage-servicing rights totaling $6.6
million.
(2) Includes developed building lots.
The following table sets forth at December 31, 2003, the dollar amount of
all loans due after one year from December 31, 2004, which have fixed or
adjustable interest rates:
Due after
December 31, 2004
-----------------
(In thousands)
Fixed rate of interest $319,515
Adjustable rate of interest 456,008
--------
Total $775,523
========
Generally, loans originated by Advantage are on a fully amortized basis.
Advantage has no rollover provisions in its loan documents and anticipates that
loans will be paid in full by the maturity date.
RESIDENTIAL LOANS. The primary lending activity of Advantage is the
origination of fixed-rate and adjustable-rate conventional loans for the
acquisition, refinancing or construction of single-family residences. At
December 31, 2003, 81.1% of the total outstanding loans consisted of loans
secured by mortgages on one- to four-family residential properties.
Federal regulations and Ohio law limit the amount which Advantage may lend
in relationship to the appraised value of the underlying real estate at the time
of loan origination (the "Loan-to-Value Ratio" or "LTV"). In accordance with
such regulations and law, Advantage generally makes loans on single-family
residences up to 95% of the value of the real estate and improvements. Advantage
generally requires the borrower on each loan which has an LTV in excess of 80%
to obtain private mortgage insurance or a guarantee by a federal agency.
The interest rate adjustment periods on adjustable-rate mortgage loans
("ARMs") offered by Advantage are generally one, three and five years. The
interest rates initially charged on ARMs and the new rates at each adjustment
date are determined by adding a stated margin to a designated interest rate
index. Advantage has generally used the one-year,
4
three-year and five-year United States Treasury bill rates, adjusted to a
constant maturity, as the index for their one-year, three-year, five-year and
seven-year adjustable-rate loans, respectively. Advantage has introduced the use
of LIBOR as our additional index on certain loan programs to begin to diversify
its concentrations of indices that may prove beneficial during repricing of
loans throughout changing economic cycles. The initial interest rates for
three-year and five-year ARMs are set slightly higher than for the one-year ARM
to compensate for the reduced interest rate sensitivity. The maximum adjustment
at each adjustment date for ARMs is usually 2%, with a maximum adjustment of 6%
over the term of the loan.
From time to time, Advantage originates ARMs which have an initial
interest rate that is lower than the sum of the specified index plus the margin.
Such loans are subject to increased risk of delinquency or default due to
increasing monthly payments as the interest rates on such loans increase to the
fully indexed level. Advantage attempts to reduce the risk by underwriting such
loans at the fully indexed rate. None of Advantage's ARMs have negative
amortization features.
Residential mortgage loans offered by Advantage are usually for terms of
up to 30 years, which could have an adverse effect upon earnings if the loans do
not reprice as quickly as the cost of funds. To minimize such effect, Advantage
emphasizes the origination of ARMs and generally sells fixed-rate loans when
conditions favor such a sale. Furthermore, experience reveals that, as a result
of prepayments in connection with refinancings and sales of the underlying
properties, residential loans generally remain outstanding for periods which are
substantially shorter than the maturity of such loans.
Of the total mortgage loans originated by Advantage during the year ended
December 31, 2003, 32% were ARMs and 68% were fixed-rate loans. Adjustable-rate
loans comprised 57% of Advantage's total outstanding loans at December 31, 2003.
CONSTRUCTION LOANS. Advantage offers residential construction loans both
to owner-occupants and to builders for homes being built under contract with
owner-occupants. Advantage also makes loans to persons constructing projects for
investment purposes. At December 31, 2003, a total of $44.2 million, or
approximately 5.5% of Advantage's total loans, consisted of construction loans,
primarily for one- to four-family properties.
Construction loans to owner-occupants are either fixed rate, 30, 15 or
seven year balloon loans or adjustable-rate long-term loans on which the
borrower pays only interest on the disbursed portion during the construction
period. Some construction loans to builders, however, have terms of up to 24
months at fixed or adjustable rates of interest.
Construction loans for investment properties involve greater underwriting
and default risks to Advantage than do loans secured by mortgages on existing
properties or construction loans for single-family residences. Loan funds are
advanced upon the security of the project under construction, which is more
difficult to value in the case of investment properties before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate precisely the total
loan funds required to complete a project and the related Loan-to-Value Ratios.
In the event a default on a construction loan occurs and foreclosure follows,
Advantage could be adversely affected in that it would have to take control of
the project and attempt either to arrange for completion of construction or
dispose of the unfinished project. At December 31, 2003, Advantage had six
construction loans in the amount of $3.6 million on investment properties.
NONRESIDENTIAL REAL ESTATE LOANS. Advantage originates loans secured by
mortgages on nonresidential real estate, including retail, office and other
types of business facilities. Nonresidential real estate loans are generally
made on an adjustable-rate basis for terms of up to 25 years. Nonresidential
real estate loans originated by Advantage generally have an LTV of 80% or less.
The largest nonresidential real estate loan outstanding at December 31, 2003,
was a $3.3 million loan secured by a manufacturing and distribution building.
Nonresidential real estate loans comprised 6.4% of total loans at December 31,
2003.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Advantage has endeavored to reduce
this risk by carefully evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management
constructing or operating
5
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 LOANS. Advantage makes various types of consumer loans, including
loans made to depositors on the security of their savings deposits, automobile
loans, education loans, home improvement loans, home equity line of credit loans
and unsecured personal loans. Home equity loans are generally made at a variable
rate of interest for terms of up to 10 years. Most other consumer loans are
generally made at fixed rates of interest for terms of up to 10 years. The risk
of default on consumer loans during an economic recession is greater than for
residential mortgage loans. Included in consumer and other loans is
approximately $45.1 million of multifamily loans of which the largest is $2.9
million secured by an apartment building. .At December 31, 2003, education,
consumer and other loans, excluding multi-family loans, constituted 4.1% of
Camco's total loans.
DEVELOPED BUILDING LOTS. Advantage originates loans secured by developed
building lots and generally are made on an adjustable-rate basis for terms of up
to five years. Developed building lots generally have an LTV of 75% or less.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including: solicitations by Camco's lending staff; referrals
from real estate brokers, loan brokers and builders; continuing business with
depositors, other borrowers and real estate developers; and walk-in customers.
Camco's management stresses the importance of individualized attention to the
financial needs of its customers.
The loan origination process is decentralized, with each of Advantage's
divisions having autonomy in loan processing and approval for its respective
market area. Mortgage loan applications from potential borrowers are taken by
one of the loan officers of the division originating the loan, after which they
are forwarded to the division's loan department for processing. On new loans,
the Bank typically obtains a credit report, verification of employment and other
documentation concerning the borrower and orders an appraisal of the fair market
value of the real estate which will secure the loan. The real estate is
thereafter physically inspected and appraised by a staff appraiser or by a
designated fee appraiser approved by the Board of Directors of Advantage. Upon
the completion of the appraisal and the receipt of all necessary information
regarding the borrower, the loan is approved by the loan officer up to such
officer's maximum loan approval authority. Loans above the maximum receive
additional approval by officers with higher loan approval authority. If the loan
is approved, an attorney's opinion of title or title insurance is obtained on
the real estate which will secure the loan. Borrowers are required to carry
satisfactory fire and casualty insurance and, if applicable, flood and private
mortgage insurance, and to name Advantage as an insured mortgagee.
The procedure for approval of construction loans is the same as for
residential mortgage loans, except that the appraiser evaluates the building
plans, construction specifications and construction cost estimates. Advantage
also evaluates the feasibility of the proposed construction project.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
LOAN ORIGINATIONS, PURCHASES AND SALES. Advantage has been actively
originating new 30-year, 15-year, 10-year fixed-rate and seven-year balloon real
estate loans as well as adjustable-rate real estate loans, consumer loans and
commercial loans. Generally all residential fixed-rate loans made by Advantage
are originated with documentation which will permit a possible sale of such
loans to secondary mortgage market investors. When a mortgage loan is sold to
the investor, Advantage generally services the loan by collecting monthly
payments of principal and interest and forwarding such payments to the investor,
net of a servicing fee. During the year ended December 31, 2003, 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, 2003, Advantage sold approximately $279.0
million in loans. Advantage recognized $3.5 million in mortgage servicing rights
during 2003, while amortization of mortgage servicing rights totaled $2.9
million for the year ended December 31, 2003.
6
From time to time, Advantage sells participation interests in mortgage
loans originated by it and purchases whole loans or participation interests in
loans originated by other lenders. Advantage held whole loans and participations
in loans originated by other lenders of approximately $33.5 million at December
31, 2003. Loans which Advantage purchases must meet or exceed the underwriting
standards for loans originated by Advantage.
In recent years, Advantage has purchased mortgage-backed securities
insured or guaranteed by U.S. Government agencies in order to improve Camco's
asset yield by profitably investing excess funds. Advantage intends to continue
to purchase such mortgage-backed securities when conditions favor such an
investment. See "Investment Activities."
The following table presents Advantage's mortgage loan origination,
purchase, sale and principal repayment activity for the periods indicated:
Year ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- -------- --------- --------- ---------
(In thousands)
Loans originated:
Construction $ 37,791 $ 54,114 $ 35,330 $ 71,929 $ 66,437
Permanent 422,021 447,379 240,625 202,004 324,648
Consumer and other 147,668 70,772 83,126 84,526 34,158
--------- -------- --------- --------- ---------
Total loans originated 607,480 572,265 359,081 358,459 425,243
Loans purchased(1) 126,006 116,306 17,755 8,639 31,430
Reductions:
Principal repayments(1) 407,521 441,419 273,212 178,663 176,804
Loans sold(1) 337,376 239,636 215,289 124,496 96,892
Transfers from loans to real estate owned 4,010 1,270 3,208 1,432 1,220
--------- -------- --------- --------- ---------
Total reductions 748,907 682,325 491,709 304,591 274,916
Increase(decrease) in other items, net(2) (8,167) 2,262 (3,162) (2,552) (277)
Increase due to mergers(3) -- -- 81,426 147,196 --
--------- -------- --------- --------- ---------
Net increase(decrease) $ (23,588) $ 5,104 $ (36,609) $ 207,151 $ 181,480
========= ======== ========= ========= =========
- ----------
(1) Includes mortgage-backed securities.
(2) Other items primarily consist of amortization of deferred loan origination
fees, the provision for losses on loans and unrealized gains on
mortgage-backed securities designated as available for sale.
(3) The 2001 increase resulted from the acquisition of Columbia Financial and
the 2000 increase resulted from the acquisition of WFC.
LENDING LIMIT. Federal regulations and Ohio law generally impose a lending
limit on the aggregate amount that a depository institution can lend to one
borrower to an amount equal to 15% of the institution's total capital for
risk-based capital purposes plus any loan reserves not already included in total
capital (the "Lending Limit Capital"). A depository institution may loan to one
borrower an additional amount not to exceed 10% of the institution's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." In applying this limit, the regulations require that
loans to certain related or affiliated borrowers be aggregated.
The largest amount which Advantage could have loaned to one borrower at
December 31, 2003, was approximately $12.1 million. The largest amount Advantage
had outstanding to one borrower and related persons or entities at December 31,
2003, was $5.3 million, which consisted of five loans secured by personal
residences, commercial properties and multi-family units.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
Advantage may receive loan origination fees or "points" of up to 2.0% of the
loan amount, depending on the type of loan, plus reimbursement of
7
certain other expenses. Loan origination fees and other fees are a volatile
source of income, varying with the volume of lending and economic conditions.
All nonrefundable loan origination fees and certain direct loan origination
costs are deferred and recognized as an adjustment to yield over the life of the
related loan in accordance with Statement of Financial Accounting Standards
("SFAS") No. 91.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Advantage
attempts to minimize loan delinquencies through the assessment of late charges
and adherence to established collection procedures. Generally, after a loan
payment is 15 days delinquent, a late charge of 5% of the amount of the payment
is assessed and a collection officer contacts the borrower to request payment.
In certain limited instances, Advantage may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his or her
financial affairs. Advantage generally initiates foreclosure proceedings, in
accordance with applicable laws, when it appears that a modification or
moratorium would not be productive.
Real estate which has been acquired by Advantage as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until it is sold. "Real estate owned" is recorded at the lower of the
book value of the loan or the fair value of the property less estimated selling
expenses at the date of acquisition. Periodically, "real estate owned" is
reviewed to ensure that fair value is not less than carrying value, and any
write-down resulting therefrom is charged to earnings as a provision for losses
on real estate acquired through foreclosure. All costs incurred from the date of
acquisition are expensed in the period paid.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
At December 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in thousands)
Loans delinquent for:
30 to 89 days $ 8,682 $10,524 $14,238 $10,557 $13,792
90 or more days 13,608 13,625 7,885 4,726 3,975
------- ------- ------- ------- -------
Total delinquent loans $22,290 $24,149 $22,123 $15,283 $17,767
======= ======= ======= ======= =======
Ratio of total delinquent loans to
total net loans(1) 2.77% 3.03% 2.54% 1.64% 2.45%
======= ======= ======= ======= =======
- ----------
(1) Total net loans includes loans held for sale.
8
Nonaccrual status denotes loans for which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet nonaccrual
criteria as established by regulatory authorities. Payments received on a
nonaccrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
collectibility of the loan. The following table sets forth information with
respect to Advantage's nonaccruing and delinquent loans for the periods
indicated.
At December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------ ------ ------
(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential $12,135 $11,021 $3,677 $2,068 $1,980
Nonresidential 357 1,726 367 197 429
Consumer and other 1,116 878 393 157 141
------- ------- ------ ------ ------
Total nonaccrual loans 13,608 13,625 4,437 2,422 2,550
Accruing loans delinquent 90 days or more:
Real estate:
Residential -- -- 2,564 1,836 1,140
Nonresidential -- -- 206 -- --
Consumer and other -- -- 678 468 285
------- ------- ------ ------ ------
Total loans 90 days past due -- -- 3,448 2,304 1,425
------- ------- ------ ------ ------
Total nonperforming loans $13,608 $13,625 $7,885 $4,726 $3,975
======= ======= ====== ====== ======
Allowance for loan losses $ 5,641 $ 5,490 $4,256 $2,906 $1,863
======= ======= ====== ====== ======
Nonperforming loans as a percent of
total net loans 1.69% 1.71% .90% .51% .55%
======= ======= ====== ====== ======
Allowance for loan losses as a percent of
nonperforming loans 41.5% 40.3% 54.0% 61.5% 46.9%
======= ======= ====== ====== ======
The amount of interest income that would have been recorded had nonaccrual
loans performed in accordance with contractual terms totaled approximately
$808,000 for the year ended December 31, 2003. Interest collected on such loans
and included in net earnings was $343,000.
At December 31, 2003, there were no loans which were not classified as
nonaccrual, 90 days past due or restructured which management considered
classifying in the near future due to concerns as to the ability of the
borrowers to comply with repayment terms. Management changed the policy for
designating loans as nonaccrual during 2002 to include all loans greater than 90
days past due.
Federal regulations require the Bank to classify its assets on a regular
basis. Problem assets are to be classified as either (i) "substandard," (ii)
"doubtful" or (iii) "loss." Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
Doubtful assets have the same weaknesses as substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full highly questionable and improbable on the basis of existing facts,
conditions and value. Assets classified as "loss" are considered uncollectible
and of such little value that their treatment as assets without the
establishment of a specific reserve is unwarranted. Federal regulations provide
for the reclassification of real estate assets by federal examiners.
9
At December 31, 2003, the aggregate amounts of Camco's classified
assets were as follows:
At December 31, 2003
--------------------
(In thousands)
Classified assets:
Substandard $14,225
Doubtful 200
Loss 380
-------
Total classified assets $14,805
=======
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 classifies nonaccrual residential real estate and consumer
loans with a loan to value of 72% or less as a special mention asset. Advantage
had assets in the amount of $6.6 million designated as "special mention" at
December 31, 2003.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at
a level considered appropriate by management based on historical experience, the
volume and type of lending conducted by the Bank, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to the Bank's market areas, and other factors related to
the collectibility of the Bank's loan portfolio. The following table sets forth
an analysis of Advantage's allowance for loan losses:
Year ended December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
------- ------ ------- ------- -------
(Dollars in thousands)
Balance at beginning of year $ 5,490 $4,256 $ 2,906 $ 1,863 $ 1,783
Charge-offs:
1-4 family residential real estate 509 134 66 9 82
Multifamily and nonresidential real estate 418 -- 12 41 12
Consumer and other 392 73 657 122 79
------- ------ ------- ------- -------
Total charge-offs 1,319 207 735 172 173
------- ------ ------- ------- -------
Recoveries:
1-4 family residential real estate 17 23 3 -- --
Multifamily and nonresidential real estate -- -- -- -- 2
Consumer and other 7 249 23 6 4
------- ------ ------- ------- -------
Total recoveries 24 272 26 6 6
------- ------ ------- ------- -------
Net recoveries (charge-offs) (1,295) 65 (709) (166) (167)
Provision for losses on loans 1,446 1,169 759 568 247
Increase attributable to mergers (1) -- -- 1,300 641 --
------- ------ ------- ------- -------
Balance at end of year $ 5,641 $5,490 $ 4,256 $ 2,906 $ 1,863
======= ====== ======= ======= =======
Net recoveries (charge-offs) to average loans (.17)% .01% (.08)% (.02)% (.03)%
- ----------
(1) The 2001 increase resulted from the acquisition of Columbia Financial and
the 2000 increase resulted from the acquisition of WFC.
10
The following table sets forth the allocation of Advantage's allowance for
loan losses by type of loan at the dates indicated:
At December 31,
--------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------- ------------------ ------------------ ----------------- ----------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at year end
applicable to:
Mortgage loans $4,452 90.3% $4,910 91.5% $3,418 92.1% $2,440 92.1% $1,350 92.9%
Consumer and
other loans 1,189 9.7 580 8.5 838 7.9 466 7.9 513 7.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $5,641 100.0% $5,490 100.0% $4,256 100.0% $2,906 100.0% $1,863 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
INVESTMENT AND MORTGAGE-BACKED SECURITIES ACTIVITIES
Federal regulations require that Advantage maintain a minimum amount of
liquid assets, which may be invested in United States Treasury obligations,
securities of various agencies of the federal government, certificates of
deposit at insured banks, bankers' acceptances and federal funds sold. Advantage
is also permitted to make limited investments in commercial paper, corporate
debt securities and certain mutual funds, as well as other investments permitted
by federal laws and regulations. It has generally been Advantage's policy to
maintain liquid assets at Advantage in excess of regulatory requirements in
order to shorten the maturities of the investment portfolios and improve the
matching of short-term investments and interest rate sensitive savings deposit
liabilities.
The following table sets forth the composition of Camco's investment and
mortgage-backed securities portfolio, except its stock in the FHLB of
Cincinnati, at the dates indicated:
At December 31,
------------------------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------------- ----------------------------------- ---------------------------------
Amortized % of Fair % of Amortized % of Fair % of Amortized % of Fair % of
cost total value total cost total value total cost total value total
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
Held to maturity: (Dollars in thousands)
U.S. Government
agency obligations $ -- --% $ -- --% $ 4,233 2.7% $ 4,306 2.7% $18,682 33.0% $18,891 33.1%
Municipal bonds 1,130 1.0 1,204 1.0 1,135 .7 1,195 .7 190 .3 192 .3
Mortgage-backed
securities 7,704 6.8 7,839 6.9 20,000 12.6 20,634 12.7 30,765 54.2 30,744 53.9
-------- ----- -------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total 8,834 7.8 9,043 7.9 25,368 16.0 26,135 16.1 49,637 87.5 49,827 87.3
Available for sale:
U.S. Government
agency obligations 25,640 22.6 25,881 22.7 35,557 22.5 36,004 22.2 -- -- -- --
Municipal bonds 625 .5 651 .6 2,414 1.5 2,463 1.5 -- -- -- --
Corporate equity
securities 330 .3 476 .4 330 .2 322 .2 245 .4 305 .5
Mortgage-backed
securities 78,017 68.8 77,916 68.4 94,641 59.8 97,332 60.0 6,872 12.1 6,975 12.2
-------- ----- -------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total 104,612 92.2 104,924 92.1 132,942 84.0 136,121 83.9 7,117 12.5 7,280 12.7
-------- ----- -------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total investments and
mortgage-backed
securities $113,446 100.0% $113,967 100.0% $158,310 100.0% $162,256 100.0% $56,754 100.0% $57,107 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======= ===== ======= =====
11
The following table presents the contractual maturities or terms to
repricing of Camco's investment securities, except its stock in the FHLB of
Cincinnati and corporate equity securities, and the weighted-average yields at
December 31, 2003:
At December 31, 2003
--------------------------------------------------------------------------------------------------------------
After one After five
One year or less through five years through ten years After ten years Total
------------------ ------------------ ------------------ ------------------- -----------------------------
Weighted-
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair average
cost yield cost yield cost yield cost yield cost value yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- ---- -------
(Dollars in thousands)
U.S. Government
agency obligations $14,110 2.54% $11,030 2.80% $ 500 4.50% $ -- --% $ 25,640 $ 25,881 2.69%
Municipal bonds 101 2.47 1,211 3.36 353 4.11 90 6.66 1,755 1,855 3.63
Mortgage-backed
securities 18 6.46 19,107 3.50 52,468 3.61 14,128 3.78 85,721 85,755 3.61
------- ---- ------- ---- ------- ---- ------- ---- -------- -------- ----
Total $14,229 2.54% $31,348 3.25% $53,321 3.62% $14,218 3.80% $113,116 $113,491 3.40%
======= ==== ======= ==== ======= ==== ======= ==== ======== ======== ====
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the 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, term
certificate accounts and retirement savings plans. Interest rates paid, maturity
terms, service fees and withdrawal penalties for the various types of accounts
are established periodically by management of Advantage based on its liquidity
requirements, growth goals and interest rates paid by competitors. Interest
rates paid by Advantage on deposits are not limited by federal or state law or
regulation. Advantage generally does not obtain funds through brokers or offer
premiums to attract deposits. Advantage does not have a significant amount of
savings accounts from outside its primary market areas.
12
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Advantage at the dates indicated:
At December 31,
-------------------------------------------------------------------
2003 2002 2001
Weighted- -------------------- ------------------- --------------------
average Percent Percent Percent
rate at of total of total of total
12/31/03 Amount deposits Amount deposits Amount deposits
-------- ------ -------- ------ -------- ------ --------
Withdrawable accounts: (Dollars in thousands)
Interest-bearing and non-interest bearing
checking accounts 0.33% $105,469 15.7% $106,875 15.4% $111,649 15.3%
Money market demand accounts 1.44 128,938 19.2 116,206 16.7 64,539 8.8
Passbook and statement savings accounts 0.25 74,274 11.1 78,359 11.3 85,443 11.7
----- -------- ----- -------- ----- -------- -----
Total withdrawable accounts 0.80 308,681 46.0 301,440 43.4 261,631 35.8
Certificate accounts:
Term:
Seven days to one year 1.08 18,966 2.8 24,537 3.6 51,472 7.0
One to two years 1.88 61,186 9.1 79,172 11.4 136,859 18.8
Two to five years 4.12 174,487 26.0 179,711 25.9 163,226 22.4
Negotiated rate certificates 1.76 40,670 6.1 40,361 5.8 54,998 7.5
Individual retirement accounts 3.47 67,284 10.0 68,851 9.9 61,889 8.5
----- -------- ----- -------- ----- -------- -----
Total certificate accounts 3.17 362,593 54.0 392,632 56.6 468,444 64.2
----- -------- ----- -------- ----- -------- -----
Total deposits 2.10% $671,274 100.0% $694,072 100.0% $730,075 100.0%
===== ======== ===== ======== ===== ======== =====
The following table presents the amount and contractual maturities of
Camco's time deposits at December 31, 2003:
Amount Due
------------------------------------------------------------------------------
Up to Over
one year 1-3 years 3-5 years 5 years Total
-------- --------- --------- ------- -----
(Dollars in thousands)
Amount maturing $178,290 $146,297 $37,420 $586 $362,593
Average rate 2.52% 3.52% 4.83% 5.62% 3.17%
The following table sets forth the amount and maturities of Advantage's
time deposits in excess of $100,000 at December 31, 2003:
Maturity At December 31, 2003
-------- --------------------
(In thousands)
Three months or less $27,620
Over three to six months 21,419
Over six to twelve months 8,902
Over twelve months 29,155
-------
Total $87,096
=======
BORROWINGS. The twelve regional FHLBs function as central reserve banks,
providing credit for their member institutions. As a member in good standing of
the FHLB of Cincinnati, Advantage is authorized to apply for advances from the
FHLB of Cincinnati, provided certain standards of creditworthiness have been
met. Advances are made pursuant to several different programs, each having its
own interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's regulatory capital or on the FHLB's assessment of the
institution's creditworthiness. Under current regulations, a member institution
must meet certain qualifications to be eligible for FHLB advances. The extent to
which an association is eligible for such advances will depend upon whether it
meets the Qualified Thrift Lender ("QTL") test. If an institution meets the QTL
13
test, it will be eligible for 100% of the advances it would otherwise be
eligible to receive. If an institution does not meet the QTL test, it will be
eligible for such advances only to the extent it holds QTL test assets. At
December 31, 2003, Advantage met the QTL test.
The following table sets forth the maximum amount of Camco's FHLB advances
outstanding at any month end during the periods shown and the average aggregate
balances of FHLB advances for such periods:
Year ended December 31,
-------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Maximum amount outstanding $280,298 $282,122 $313,472
Average amount outstanding $273,147 $265,614 $280,747
Weighted-average interest cost of FHLB
advances based on month end balances 5.56% 5.83% 6.09%
The following table sets forth certain information with respect to Camco's
FHLB advances at the dates indicated:
At December 31,
-------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Amount outstanding $262,735 $276,276 $258,850
Weighted-average interest rate 5.13% 5.63% 6.02%
COMPETITION
Advantage competes for deposits with other savings associations, savings
banks, commercial banks and credit unions and with the issuers of commercial
paper and other securities, such as shares in money market mutual funds. The
primary factors in competing for deposits are interest rates and convenience of
office location. In making loans, Advantage competes with other savings banks,
savings associations, commercial banks, consumer finance companies, credit
unions and other lenders. Advantage competes for loan originations primarily
through the interest rates and loan fees it charges and through the efficiency
and quality of the services it provides to borrowers. Competition is affected
by, among other things, the general availability of lendable funds, general and
local economic conditions, current interest rate levels and other factors which
are not readily predictable.
SERVICE CORPORATION ACTIVITIES
Federal regulations permit savings associations to invest an amount up to
2% of their assets in the stock, paid-in surplus and unsecured obligations of
subsidiary service corporations engaged in certain activities. In addition,
federal regulations generally authorize such institutions which meet the minimum
regulatory capital requirements to invest up to 50% of their regulatory capital
in conforming first mortgage loans made by service corporations.
First S&L Corporation, a subsidiary of Advantage, did not conduct any
business during the year ended December 31, 2003, and was capitalized on a
nominal basis at December 31, 2003.
14
EMPLOYEES
As of December 31, 2003, Camco had 275 full-time employees and 25
part-time employees. Camco believes that relations with its employees are good.
Camco offers health and disability benefits and a 401(k) salary savings plan.
None of the employees of Camco are represented by a collective bargaining unit.
REGULATION
GENERAL
As a savings and loan holding company within the meaning of the Home
Owners' Loan Act of 1933, as amended (the "HOLA"), Camco is subject to
regulation, examination and oversight by the OTS. Advantage is subject to
regulation by the Division and the FDIC. Camco and Advantage must file periodic
reports with these governmental agencies, as applicable, concerning their
activities and financial condition. Examinations are conducted periodically by
the applicable regulators to determine whether Camco and Advantage are in
compliance with various regulatory requirements and are operating in a safe and
sound manner. Advantage is also subject to certain regulations promulgated by
the Board of Governors of the Federal Reserve System ("FRB").
OHIO REGULATION
Regulation by the Division affects the internal organization of Advantage,
as well as its savings, mortgage lending and other investment activities. Ohio
law requires that Advantage maintain at least 60% of its assets in
housing-related and other specified investments. At December 31, 2003, Advantage
had at least 60% of its assets in such investments.
Periodic examinations by the Division are usually conducted on a joint
basis with the federal examiners. Ohio law requires that Advantage maintain
federal deposit insurance as a condition of doing business. The ability of Ohio
savings banks to engage in certain state-authorized investments is subject to
oversight and approval by the FDIC. See "Federal Deposit Insurance Corporation -
State Chartered Bank Activities."
Any mergers involving, or acquisitions of control of, Ohio savings banks
must be approved by the Division. The Division may initiate certain supervisory
measures or formal enforcement actions against Ohio savings banks. Ultimately,
if the grounds provided by law exist, the Division may place an Ohio savings
bank in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing
savings banks, Advantage is also governed by Ohio corporate law, to the extent
such law does not conflict with the laws specifically governing savings banks.
FEDERAL DEPOSIT INSURANCE CORPORATION
SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation
and supervision of all commercial banks and state savings banks that are not
members of the Federal Reserve System ("Non-member Banks. The FDIC is an
independent federal agency that insures the deposits, up to prescribed statutory
limits, of federally insured banks and thrifts and safeguards the safety and
soundness of the banking and thrift industries. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and certain state savings banks and the Savings Association Insurance Fund
("SAIF") for savings associations and savings banks which were formerly
organized as savings associations. As a former savings association, Advantage is
a member of the SAIF and its deposit accounts are insured by the FDIC, up to the
prescribed limits.
The FDIC issues regulations governing the operations of Non-member Banks,
examines such institutions and may initiate enforcement actions against the
institution and their affiliates for violations of laws and regulations or for
engaging in unsafe or unsound practices. If the grounds provided by law exist,
the FDIC may appoint a conservator or a receiver for a Non-member Bank.
15
Non-member Banks and savings associations are subject to regulatory
oversight under various consumer protection and fair lending laws. These laws
govern, among other things, truth-in-lending disclosure, equal credit
opportunity, fair credit reporting and community reinvestment. Failure to abide
by federal laws and regulations governing community reinvestment could limit the
ability of an institution to open a new branch or engage in a merger
transaction.
STATE CHARTERED BANK ACTIVITIES. The ability of Advantage to engage in any
state-authorized activities or make any state-authorized investments, as
principal, is limited if such activity is conducted or investment is made in a
manner different than that permitted for, or subject to different terms and
conditions than those imposed on, national banks. Engaging as a principal in any
such activity or investment not permissible for a national bank is subject to
approval by the FDIC. Such approval will not be granted unless certain capital
requirements are met and there is not a significant risk to the FDIC insurance
fund. Most equity and real estate investments (excluding office space and other
real estate owned) authorized by state law are not permitted for national banks.
Certain exceptions are granted for activities deemed by the FRB to be closely
related to banking and for FDIC-approved subsidiary activities.
LIQUIDITY. Advantage is not required to maintain a specific level of
liquidity; however, the FDIC expects it to maintain adequate liquidity to
protect safety and soundness.
REGULATORY CAPITAL REQUIREMENTS. Advantage is required by applicable law
and regulations to meet certain minimum capital requirements. The capital
standards include a leverage limit, or core capital requirement, a tangible
capital requirement and a risk-based capital requirement.
The leverage capital requirement is a minimum level of Tier 1 capital to
average total consolidated assets of 4%. "Tier 1" capital includes common
stockholders equity, noncumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries, less all
intangibles, other than includable purchased mortgage servicing rights and
credit card relationships.
The risk-based capital requirement specifies total capital, which consists
of core or Tier 1 capital and certain general valuation reserves, as 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.
The FDIC has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations and Non-member Banks. At each successively lower defined capital
category, an institution is subject to more restrictive and numerous mandatory
or discretionary regulatory actions or limits, and the applicable agency has
less flexibility in determining how to resolve the problems of the institution.
In addition, the agency generally can downgrade an institution's capital
category, notwithstanding its capital level, if, after notice and opportunity
for hearing, the institution is deemed to be engaging in an unsafe or unsound
practice, because it has not corrected deficiencies that resulted in it
receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. Advantage's
capital level at December 31, 2003, met the standards for well-capitalized
institutions.
16
The following tables present certain information regarding compliance by
Advantage with applicable regulatory capital requirements at December 31, 2003:
At December 31, 2003
---------------------------------------------------------------------------------
For capital
Actual adequacy purposes
---------------- ---------------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,657 12.5% (Greater Than or Equal to)$51,539 (Greater Than or Equal to)8.0%
Tier I capital
(to risk-weighted assets) $75,016 11.6% (Greater Than or Equal to)$25,769 (Greater Than or Equal to)4.0%
Tier I leverage $75,016 7.4% (Greater Than or Equal to)$40,799 (Greater Than or Equal to)4.0%
At December 31, 2003
--------------------------------------
To be "well-
capitalized" under
prompt corrective
action provisions
--------------------------------------
Amount Ratio
------ -----
(Dollars in thousands)
Total capital
(to risk-weighted assets) (Greater Than or Equal to)$64,424 (Greater Than or Equal to)10.0%
Tier I capital
(to risk-weighted assets) (Greater Than or Equal to)$38,654 (Greater Than or Equal to) 6.0%
Tier I leverage (Greater Than or Equal to)$50,999 (Greater Than or Equal to) 5.0%
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
Loans to executive officers, directors and principal shareholders and
their related interests must conform to the lending limit on loans to one
borrower, and the total of such loans to executive officers, directors,
principal shareholders and their related interests cannot exceed the
association's Lending Limit Capital (or 200% of Lending Limit Capital for
qualifying institutions with less than $100 million in assets). Most loans to
directors, executive officers and principal shareholders must be approved in
advance by a majority of the "disinterested" members of the board of directors
of the association with any "interested" director not participating. All loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions with the
general public or as offered to all employees in a company-wide benefit program,
and loans to executive officers are subject to additional limitations. Advantage
was in compliance with such restrictions at December 31, 2003.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA") and the
Federal Reserve Board'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
savings association and any companies that are controlled by such parent holding
company are affiliates of the institution. Generally, Sections 23A and 23B of
the FRA (i) limit the extent to which a financial institution or its
subsidiaries may engage in "covered transactions" with any one affiliate 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, 2003.
CHANGE IN CONTROL
FEDERAL LAW. The Federal Deposit Insurance Act (the "FDIA") provides that
no person, acting directly or indirectly or in concert with one or more persons,
shall acquire control of any insured depository institution or holding company,
unless 60-days prior written notice has been given to the primary federal
regulator for that institution and such regulator has not issued a notice
disapproving the proposed acquisition. Control, for purposes of the FDIA, means
the power, directly or indirectly, alone or acting in concert, to direct the
management or policies of an insured institution or to
17
vote 25% or more of any class of securities of such institution. Control exists
in situations in which the acquiring party has direct or indirect voting control
of at least 25% of the institution's voting shares, controls in any manner the
election of a majority of the directors of such institution or is determined to
exercise a controlling influence over the management or policies of such
institution. In addition, control is presumed to exist, under certain
circumstances where the acquiring party (which includes a group "acting in
concert") has voting control of at least 10% of the institution's voting stock.
These restrictions do not apply to holding company acquisitions. See "Holding
Company Regulation".
OHIO LAW. A statutory limitation on the acquisition of control of an Ohio
savings bank requires the written approval of the Division prior to the
acquisition by any person or entity of a controlling interest in an Ohio
association. Control exists, for purposes of Ohio law, when any person or entity
which, either directly or indirectly, or acting in concert with one or more
other persons or entities, owns, controls, holds with power to vote, or holds
proxies representing, 15% or more of the voting shares or rights of an
association, or controls in any manner the election or appointment of a majority
of the directors. A director will not be deemed to be in control by virtue of an
annual solicitation of proxies voted as directed by a majority of the board of
directors. Ohio law also requires that certain acquisitions of voting securities
that would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the
outstanding voting securities of Camco must be approved in advance by the
holders of at least a majority of the outstanding voting shares represented at a
meeting at which a quorum is present and a majority of the portion of the
outstanding voting shares represented at such a meeting, excluding the voting
shares by the acquiring shareholder. This statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers. Under
certain circumstances, interstate mergers and acquisitions involving savings
banks incorporated under Ohio law are permitted by Ohio law. A financial
institution or financial institution holding company with its principal place of
business in another state may acquire a savings and loan association or savings
and loan holding company incorporated under Ohio law if, in the discretion of
the Division, the laws of such other state give an Ohio institution or an Ohio
holding company reciprocal rights.
HOLDING COMPANY REGULATION
As a savings and loan holding company within the meaning of the HOLA,
Camco has registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such holding company's stock may also
acquire control of any savings institution, other than a subsidiary institution,
or any other savings and loan holding company.
As a unitary savings and loan holding company in existence on May 4, 1999,
Camco generally has no restrictions on its activities. If the OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, however,
the OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of Camco and its affiliates may be imposed on the savings
association. Notwithstanding the foregoing rules as to permissible business
activities of a unitary savings and loan holding company, if the savings
association subsidiary of a holding company is not a qualified thrift lender
("QTL"), then such unitary savings and loan holding company would become subject
to the activities restrictions applicable to multiple holding companies.
In order to be a QTL, a savings association must meet one of two tests.
The first test requires a savings association to maintain a specified level of
investments in assets that are designated as qualifying thrift investments
("QTIs"). Generally, QTIs are assets related to domestic residential real estate
and manufactured housing, although they also include credit card, student and
small business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under
the QTL test, 65% of an institution's "portfolio assets" (total assets less
goodwill and other intangibles, property used to conduct business and 20% of
liquid assets) must consist of QTI on a monthly average basis in nine out of
every 12 months. The second test permits a savings association to qualify as a
QTL by meeting the definition of "domestic
18
building and loan association" under the Internal Revenue Code of 1986, as
amended (the "Code"). In order for an institution to meet the definition of a
"domestic building and loan association" under the Code, at least 60% of its
assets must consist of specified types of property, including cash, loans
secured by residential real estate or deposits, educational loans and certain
governmental obligations. The OTS may grant exceptions to the QTL tests under
certain circumstances. At December 31, 2003, Advantage met the QTL test.
FEDERAL RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $45.4
million (subject to an exemption of up to $6.6 million), and of 10% of net
transaction accounts in excess of $45.4 million. At December 31, 2003, Advantage
was in compliance with its reserve requirements.
FEDERAL TAXATION
Camco and its subsidiaries are each subject to the federal tax laws and
regulations which apply to corporations generally. In addition to the regular
income tax, Camco and its subsidiaries may be subject to the alternative minimum
tax which is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemptions. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years.
Certain thrift institutions, such as Advantage, are allowed deductions for
bad debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions may compute deductions for bad debts using either
the specific charge-off method of Section 166 of the Code or the experience
method of Section 593 of the Code. The "experience" method is also available to
small banks. Under the "experience" method, a thrift institution is generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year.
Thrift institutions that are treated as small banks are allowed to utilize
the experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific charge-off
method.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, beginning with the first taxable
year beginning after 1995, subject to the residential loan requirement described
below. In the case of a thrift institution that is treated as a large bank, the
amount of the institution's applicable excess reserves generally is the excess
of (i) the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that
is treated as a small bank, the amount of the institution's applicable excess
reserves generally is the excess of (i) the balances of its reserve for losses
on qualifying real property loans and its reserve for losses on nonqualifying
loans as of the close of its last taxable year beginning before January 1, 1996,
over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what
the thrift's reserves would have been at the close of its last year beginning
before January 1, 1996, had the thrift always used the experience method.
19
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift meets the residential loan requirement if, for the tax year, the
principal amount of residential loans made by the thrift during the year is not
less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property. Advantage was required to
recapture $1.9 million of its bad debt reserve for which deferred taxes had been
provided. The recapture was effected over a six year period that concluded in
2003.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) which require recapture in the case of certain excessive
distributions to shareholders. The pre-1988 reserves may not be utilized for
payment of cash dividends or other distributions to a shareholder (including
distributions in dissolution or liquidation) or for any other purpose (except to
absorb bad debt losses). Distribution of a cash dividend by a thrift institution
to a shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by Advantage to Camco is deemed paid out of its pre-1988 reserves under these
rules, the pre-1988 reserves would be reduced and the gross income of Camco for
tax purposes would be increased by the amount which, when reduced by the income
tax, if any, attributable to the inclusion of such amount in its gross income,
equals the amount deemed paid out of the pre-1988 reserves. As of December 31,
2003, the pre-1988 reserves for Advantage for tax purposes totaled approximately
$12.8 million. Camco believes Advantage had approximately $14.6 million of
accumulated earnings and profits for tax purposes as of December 31, 2003, which
would be available for dividend distributions, provided regulatory restrictions
applicable to the payment of dividends are met. No representation can be made as
to whether Advantage will have current or accumulated earnings and profits in
subsequent years.
The tax returns of Camco have been audited or closed without audit through
calendar year 1999. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Camco.
OHIO TAXATION. Camco and Camco Title are subject to the Ohio corporation
franchise tax, which, as applied to them, is a tax measured by both net earnings
and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000
of computed Ohio taxable income and 8.5% of computed Ohio taxable income in
excess of $50,000 or (ii) .40% times taxable net worth.
A special litter tax is also applicable to all corporations, including
Camco, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
..22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Advantage is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.3% of its book net worth
determined in accordance with generally accepted accounting principles. As a
"financial institution," Advantage is not subject to any tax based upon net
income or net profits imposed by the State of Ohio.
DELAWARE TAXATION. As a Delaware corporation, Camco is subject to an
annual franchise tax based on the quantity and par value of its authorized
capital stock and its gross assets. As a savings and loan holding company, Camco
is exempt from Delaware corporate income tax.
KENTUCKY TAXATION. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. Advantage is subject to an annual ad
valoreum tax which is .1% of Advantage's Kentucky deposit accounts, and
apportioned common stock and retained income, with certain deductions for
amounts borrowed by depositors and securities guaranteed by the U.S. Government
or certain of its agencies.
20
WEST VIRGINIA TAXATION. Advantage and Camco Title are subject to a West
Virginia tax on apportioned adjusted net income and a West Virginia franchise
tax on apportioned adjusted capital. The adjusted net income of each is taxed at
a rate of 9.0%. The franchise tax rate is 0.75% of adjusted capital. The
apportionment is based solely on the ratio of gross receipts derived from West
Virginia as compared to gross receipts everywhere.
21
ITEM 2. PROPERTIES.
The following table provides the location of, and certain other
information pertaining to, Camco's office premises as of December 31, 2003:
Year facility Leased
commenced or Net book
Office Location operations owned value(1)
- --------------- ---------- ----- ---------
134 E. Court Street
Washington Court House, Ohio 1963 Owned(2) 790,107
1050 Washington Ave.
Washington Court House, Ohio 1996 Owned 526,170
1 N. Plum Street
Germantown, Ohio 1998 Owned 535257
687 West Main Street
New Lebanon, Ohio 1998 Owned 81,304
1392 Cherry Bottom Road
Gahanna, Ohio 1999 Leased(3)
3002 Harrison Avenue
Cincinnati, Ohio 2000 Owned 1,507,046
1101 St. Gregory Street
Cincinnati, Ohio 2000 Leased(4)
5071 Glencrossing Way
Cincinnati, Ohio 2000 Leased(5)
126 S. 9th Street
Cambridge, Ohio 1998 Owned 99,186
226 Third Street
Marietta, Ohio 1976 Owned(6) 650,461
1925 Washington Boulevard
Belpre, Ohio 1979 Owned 75,751
478 Pike Street
Marietta, Ohio 1998 Leased(7) 593,995
510 Grand Central Avenue
Vienna, West Virginia 1991 Leased(8)
814 Wheeling Avenue
Cambridge, Ohio 1963 Owned(9) 949,936
327 E. 3rd Street
Uhrichsville, Ohio 1975 Owned 79,452
175 N. 11th Street
Cambridge, Ohio 1981 Owned 419,961
- ----------
(Footnotes begin on page 24)
22
Year facility Leased
commenced or Net book
Office Location operations owned value(1)
- --------------- ---------- ----- --------
209 Seneca Avenue
Byesville, Ohio 1978 Leased(10)
547 S. James Street
Dover, Ohio 2002 Owned 374,828
2497 Dixie Highway
Ft. Mitchell, Kentucky 2001 Owned 618,195
401-7 Pike Street
Covington, Kentucky 2001 Owned 114,471
3522 Dixie Highway
Erlanger, Kentucky 2001 Owned 41,748
612 Buttermilk Pike
Crescent Springs, Kentucky 2001 Owned 42,374
7550 Dixie Highway
Florence, Kentucky 2001 Owned 508,424
1640 Carter Avenue
Ashland, Kentucky 1996 Owned 767,109
U.S. 60A West
Summit, Kentucky 1996 Owned 632,187
191 Eastern Heights
Shopping Center
Huntington, West Virginia 1997 Leased(11) 1,495
6901 Glenn Highway
Cambridge, Ohio 1999 Owned 1,308,558
1320A and 1320 D 4th Street, N.W.
New Philadelphia, Ohio 1985 Owned(12) 195,575
100 E. Wilson Bridge Road - Suite #105 & 110
Worthington, Ohio 2004 Leased(13) 91,330
45 West Second Street
Chillicothe, Ohio 1994 Leased(14)
6269 Frank Ave.
N. Canton, Ohio 1992 Leased(15)
- --------------------------
(Footnotes on following page)
23
(1) Net book value amounts are for land, buildings, improvements and
construction in progress.
(2) The 134 E. Court Street facility also serves as the Camco Title - WCH
office.
(3) The lease expires in March 2004. Operations were moved to the Worthington
location in February 2004.
(4) The lease is currently on a month to month basis.
(5) The lease expires in November 2005. Advantage has the option to renew for
a five-year term.
(6) The 226 Third Street facility also serves as the Camco Title - Marietta
office.
(7) The lease expires in November 2017. Advantage has the option to renew for
2 five-year terms. The lease is for land only.
(8) The lease expires in August 2004.
(9) The net book value above includes construction in progress of $59,523.
(10) The lease expires in September 2005. Advantage has the option to renew the
lease for two five-year terms.
(11) The lease expires in March 2005.
(12) The 4th Street facility also serves as the Camco Title - New Philadelphia
office.
(13) The lease expires in September 2008. Advantage has the option to renew for
two five-year terms. The net book value above represents construction in
progress of $91,330.
(14) The lease expires in September 2004.
(15) The lease expires in August 2004. Advantage has the option to renew for
two five-year terms.
Camco also owns furniture, fixtures and equipment. The net book value of
Camco's investment in office premises and equipment totaled $13.4 million at
December 31, 2003. See Note E of Notes to Consolidated Financial Statements for
additional information.
ITEM 3. LEGAL PROCEEDINGS.
Neither Camco nor Advantage is presently engaged in any legal proceedings
of a material nature. From time to time, Advantage is involved in legal
proceedings to enforce its security interest in collateral taken as security for
its loans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
At February 18, 2004, Camco had 7,351,150 shares of common stock
outstanding and held of record by approximately 2,056 stockholders. Price
information for Camco's common stock is quoted on The Nasdaq National Market
("Nasdaq") under the symbol "CAFI." The table below sets forth the high and low
trade information for the common stock of Camco, together with the dividends
declared per share of common stock, for each quarter of 2003, 2002 and 2001.
Cash
dividends
Year ended December 31, 2003 High Low declared
---- --- --------
Quarter ending:
December 31, 2003 $18.39 $17.06 $0.145
September 30, 2003 18.23 15.90 0.145
June 30, 2003 17.00 15.00 0.140
March 31, 2003 17.08 14.21 0.140
Year ended December 31, 2002
Quarter ending:
December 31, 2002 $14.30 $12.95 $0.135
September 30, 2002 14.75 13.13 0.135
June 30, 2002 14.61 13.00 0.130
March 31, 2002 13.35 12.10 0.125
Year ended December 31, 2001
Quarter ending:
December 31, 2001 $13.00 $10.95 $0.120
September 30, 2001 13.75 12.01 0.120
June 30, 2001 12.58 10.60 0.120
March 31, 2001 11.38 9.44 0.120
25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following tables set forth certain information concerning the
consolidated financial position and results of operations of Camco for the
periods indicated. This selected consolidated financial data should be read in
conjunction with the consolidated financial statements appearing elsewhere in
this report.
SELECTED CONSOLIDATED
FINANCIAL DATA:(1) AT DECEMBER 31,
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Total amount of:
Assets $1,039,151 $1,083,240 $1,102,652 $1,037,856 $813,482
Interest-bearing deposits in other financial
institutions 30,904 36,807 89,299 4,916 247
Investment securities available for sale - at market 27,008 38,789 305 309 273
Investment securities held to maturity 1,130 5,368 18,872 16,672 16,864
Mortgage-backed securities available for sale - at market 77,916 97,332 6,975 9,850 6,475
Mortgage-backed securities held to maturity 7,704 20,000 30,765 5,273 5,944
Loans receivable - net(2) 805,082 796,958 871,446 930,672 726,225
Deposits 671,274 694,072 730,075 632,288 461,787
FHLB advances and other borrowings 262,735 276,276 258,850 313,471 279,125
Stockholders' equity - substantially restricted 92,543 98,601 95,171 78,750 62,609
SELECTED CONSOLIDATED
OPERATING DATA:(1) YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Total interest income $54,875 $66,002 $74,372 $75,671 $51,093
Total interest expense 31,237 38,556 48,433 49,609 29,907
------- ------- ------- ------- -------
Net interest income 23,638 27,446 25,939 26,062 21,186
Provision for losses on loans 1,446 1,169 759 568 247
------- ------- ------- ------- -------
Net interest income after provision for losses on loans 22,192 26,277 25,180 25,494 20,939
Other income 11,411 10,100 7,153 5,536 5,190
General, administrative and other expense 22,404 21,682 18,948 19,530 17,113
Restructuring charges(credits) related to charter consolidation -- (112) 950 -- --
FHLB advance prepayment fees 1,292 -- -- -- --
------- ------- ------- ------- -------
Earnings before federal income taxes 9,907 14,807 12,435 11,500 9,016
Federal income taxes 3,051 4,802 3,891 3,848 3,076
------- ------- ------- ------- -------
Net earnings 6,856 10,005 8,544 7,652 5,940
Prepayment fees and restructuring charges(credits)(net of tax) 853 (74) 627 -- --
------- ------- ------- ------- -------
Net earnings from operations $ 7,709 $ 9,931 $ 9,171 $ 7,652 $ 5,940
------- ------- ------- ------- -------
Earnings per share:
Basic $ 0.92 $ 1.27 $ 1.20 $ 1.11 $ 1.04
Basic from operations $ 1.03 $ 1.26 $ 1.29 $ 1.11 $ 1.04
Diluted $ 0.91 $ 1.25 $ 1.19 $ 1.10 $ 1.02
Diluted from operations $ 1.02 $ 1.24 $ 1.28 $ 1.10 $ 1.02
YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
-------------------------------------------------------------
Return on average assets(3) 0.65% 0.92% 0.80% 0.83% 0.82%
Return on average assets from operations(3) 0.73 0.91 0.86 0.83 0.82
Return on average equity(3) 7.17 10.33 9.83 10.83 9.68
Return on average equity from operations(3) 8.07 10.25 10.55 10.83 9.68
Average equity to average assets(3) 9.01 8.86 8.13 7.64 8.46
Dividend payout ratio(4) 61.96 41.34 40.00 43.24 44.37
- ----------
(1) The information as of December 31, 2001 reflects the acquisition of
Columbia Financial of Kentucky, Inc. The information as of December 31,
2000 reflects the acquisition of Westwood Homestead Financial Corporation.
These combinations were accounted for using the purchase method of
accounting.
(2) Includes loans held for sale.
(3) Ratios are based upon the mathematical average of the balances at the
beginning and the end of the year.
(4) Represents dividends per share divided by basic earnings per share.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Since its incorporation in 1970, Camco has evolved into a full-service
provider of financial products to the communities served by Advantage Bank.
Utilizing a common marketing theme based on Camco's commitment to personalized
customer service, Camco and its affiliates have grown from $22.4 million of
consolidated assets in 1970 to $1.04 billion of consolidated assets at December
31, 2003. Camco's rate of growth is largely attributable to its acquisitions of
Marietta Savings, First Savings, First Bank for Savings, Germantown Federal,
Westwood Homestead and Columbia Savings and its continued expansion of product
lines from the limited deposit and loan offerings which the Bank could offer in
the heavily regulated environment of the 1970s to the wider array of financial
service products that commercial banks traditionally offered. Additionally,
Camco has enhanced its operational growth by integrating its residential lending
function through establishing mortgage-banking operations in the Bank's primary
market areas and, to a lesser extent, by chartering a title insurance agency.
Management believes that continued success in the financial services
industry will be achieved by those institutions with a rigorous dedication to
building value-added customer-oriented organizations. Toward this end, each of
the Bank's divisions have the ability to make local decisions for customer
contacts and services, however back-office operations are consolidated and
centralized. Based on consumer preferences, the Bank's management designs
financial service products with a view towards differentiating each of the
constituent divisions from its competition. Management believes that the Bank
divisions' ability to rapidly adapt to consumer needs and preferences is
essential to them as community-based financial institutions competing against
the larger regional and money-center bank holding companies.
Camco's profitability depends primarily on its level of net interest
income, which is the difference between interest income on interest-earning
assets, principally loans, mortgage-backed securities and investment securities,
and interest expense on deposit accounts and borrowings. In recent years,
Camco's net earnings have also been heavily influenced by its level of other
income, including mortgage banking income and other fee income. Camco's
operations are also affected by general, administrative and other expenses,
including employee compensation and benefits, occupancy expense, data
processing, franchise taxes, advertising, other operating expenses and federal
income tax expense.
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.
CRITICAL ACCOUNTING POLICIES
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as well as disclosures found elsewhere in this annual
report, are based upon Camco Financial'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 available prices, and sensitivity of the
estimates to changes in economic conditions and whether alternative accounting
methods may be utilized under US GAAP.
27
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 assets 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.
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 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 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 judgment 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 ASSETS
To determine the fair value of its mortgage servicing rights ("MSRs") each
reporting quarter, management 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.
This process is 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 the Federal
Home Loan Mortgage Corporation ("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 the mortgage servicing asset
is marked to lower of amortized cost or market for the current quarter.
28
GOODWILL
We have developed procedures to test goodwill for impairment on an annual
basis using June financial data. 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 approach. The application of the valuation techniques takes into
account the reporting unit's operating history, the current market environment
and future prospects. As of the most recent period, 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 valuations of mortgage
servicing assets 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 them in this annual report.
29
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 2002 TO DECEMBER 31,
2003
At December 31, 2003, Camco's consolidated assets totaled $1.04 billion, a
decrease of $44.1 million, or 4.1%, from the December 31, 2002 total. The
decrease in total assets was comprised primarily of a decrease in investment
securities and mortgage-backed securities, which were partially offset by an
increase in loans receivable.
Cash and interest-bearing deposits in other financial institutions totaled
$53.7 million at December 31, 2003, a decrease of $3.3 million, or 5.8%, from
December 31, 2002 levels. Investment securities totaled $28.1 million at
December 31, 2003, a decrease of $16.0 million, or 36.3%, from the total at
December 31, 2002. Investment securities purchases were comprised of $10.3
million of intermediate-term FHLB and FNMA bonds, all were callable, with an
average yield of 2.95%. Such purchases were offset by maturities of $21.6
million and sales of $3.8 million during the year.
Mortgage-backed securities totaled $85.6 million at December 31, 2003, a
decrease of $31.7 million, or 27.0%, from December 31, 2002. Mortgage-backed
securities purchases totaled $114.0 million, while principal repayments totaled
$83.1 million and sales totaled $59.1 million during the year ended December 31,
2003. Purchases of mortgage-backed securities during the year were comprised
primarily of balloon and ten-year amortizing U.S. Government agency securities
yielding 3.56%, which were classified as available for sale.
Loans receivable and loans held for sale totaled $805.1 million at
December 31, 2003, an increase of $8.1 million, or 1.0%, over the total at
December 31, 2002. The increase resulted primarily from loan disbursements and
purchases totaling $619.5 million, which were substantially offset by loan sales
of $279.0 million and principal repayments of $324.5 million. Loan origination
volume, including purchases of loans, during 2003 exceeded 2002 volume by $44.1
million, or 7.7%, which was primarily attributable to an increase in refinancing
activity following the decreases in the overall level of long-term interest
rates during the two year period ended December 31, 2003. During 2003, Camco
continued to experience a high rate of loan refinance activity as the interest
rate environment remained at almost unprecedented lows. However, as 2003 came to
a close, our production levels had decreased approximately 60% from mid-year
2003. We anticipate current levels of production to continue into 2004.
The allowance for loan losses totaled $5.6 million and $5.5 million at
December 31, 2003 and 2002, respectively, representing 41.5% and 40.3% of
nonperforming loans at those dates. Nonperforming loans (90 days or more
delinquent plus nonaccrual loans) totaled $13.6 million at both December 31,
2003 and 2002, constituting 1.69% and 1.71% of total net loans, including loans
held for sale, at those dates. At December 31, 2003, nonperforming loans were
comprised of $11.4 million of loans secured by one- to four-family residential
real estate, $1.6 million of loans secured by multi-family, nonresidential real
estate and commercial loans and $557,000 of consumer and other loans. Although
management believes that its allowance for loan losses at December 31, 2003, is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to such allowance will not be necessary in future
periods, which could adversely affect Camco's results of operations.
Deposits totaled $671.3 million at December 31, 2003, a decrease of $22.8
million, or 3.3%, from December 31, 2002 levels. The decrease resulted primarily
from management's decision not to aggressively bid on certificates of deposit
which matured during 2003, to manage interest rate risk in the current low
interest rate environment. While management has generally pursued a strategy of
moderate growth in the deposit portfolio, Advantage has not historically engaged
in sporadic increases or decreases in interest rates offered, nor has it offered
the highest interest rates available in its market areas.
Advances from the Federal Home Loan Bank ("FHLB") decreased by $13.5
million, or 4.9%, to a total of $262.7 million at December 31, 2003.
In the 2003 fourth quarter management restructured $25.4 million of FHLB
borrowings having an average term of 19 months and an average fixed rate of
5.41%, replacing them with variable-rate advances having a weighted-average rate
of approximately 1.00% at December 31, 2003. The prepayment fee incurred was
$853,000 on an after-tax basis, but management believes that the positive net
earnings impact in 2004 could approach $740,000, or $.10 per share, as a result
of the reduced borrowing cost.
30
Stockholders' equity totaled $92.5 million at December 31, 2003, a $6.1
million, or 6.1%, decrease from December 31, 2002. The decrease resulted
primarily from purchases of treasury shares totaling $8.0 million, dividends of
$4.2 million and a $1.9 million decrease in the unrealized gains on available
for sale securities, which were partially offset by net earnings of $6.9 million
and proceeds from the exercise of stock options of $1.0 million. The increase in
treasury shares represented purchases under the 5% stock repurchase plan that
was announced in October 2002.
The Bank is required to maintain minimum regulatory capital pursuant to
federal regulations. During 2003, management was notified by its supervisory
regulators that Advantage was categorized as well-capitalized under the
regulatory framework for prompt corrective action. At December 31, 2003, the
Bank's regulatory capital exceeded all regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
DECEMBER 31, 2002
GENERAL. Camco's net earnings for the year ended December 31, 2003,
totaled $6.9 million, a decrease of $3.1 million, or 31.5%, from the $10.0
million of net earnings reported in 2002. The decrease in earnings was primarily
attributable to a $3.8 million decrease in net interest income, a one-time
charge of $1.3 million in pre-tax expense associated with the restructuring of a
portion of the Bank's FHLB borrowings, an increase in the provision for losses
on loans of $277,000 and an $834,000 increase in general, administrative and
other expense, which were partially offset by an increase of $1.3 million in
other income and a $1.8 million decrease in the provision for federal income
taxes.
NET INTEREST INCOME. Total interest income for the year ended December 31,
2003, amounted to $54.9 million, a decrease of $11.1 million, or 16.9%, compared
to 2002, generally reflecting the effects of a decrease of 96 basis points in
the average yield, from 6.39% in 2002 to 5.43% in 2003, and a $22.0 million, or
2.1%, decrease in the average balance of interest-earning assets outstanding
year to year.
Interest income on loans totaled $48.0 million for the year ended December
31, 2003, a decrease of $9.5 million, or 16.5%, from the comparable 2002 total.
The decrease resulted primarily from a $32.4 million, or 4.0%, decrease in the
average balance outstanding and a 93 basis point decrease in the average yield,
to 6.14% in 2003. Interest income on mortgage-backed securities totaled $3.4
million for the year ended December 31, 2003, a $1.1 million, or 24.0%, decrease
from the 2002 period. The decrease was due primarily to a 149 basis point
decrease in the average yield, to 3.03% in 2003, which was partially offset by a
$13.2 million, or 13.2%, increase in the average balance outstanding. Interest
income on investment securities decreased by $278,000, or 18.0%, due primarily
to a 121 basis point decline in the average yield, to 3.34% in 2003, which was
partially offset by a $3.9 million increase in the average balance outstanding
year to year. Interest income on other interest-earning assets decreased by
$269,000, or 11.0%, due primarily to a decrease in the yield of 9 basis points,
to 2.79% in 2003, and a $6.8 million, or 8.0%, decrease in the average balance
outstanding year to year.
Interest expense on deposits totaled $16.0 million for the year ended
December 31, 2003, a decrease of $7.0 million, or 30.5%, compared to the year
ended December 31, 2002, due primarily to a 94 basis point decrease in the
average cost of deposits, to 2.46% for 2003, and a $25.1 million, or 3.7%,
decrease in the average balance of interest-bearing deposits outstanding year to
year. Interest expense on borrowings totaled $15.2 million for the year ended
December 31, 2003, a decrease of $296,000, or 1.9%, from 2002. The decrease
resulted primarily from a 27 basis point decrease in the average rate, to 5.56%
in 2003, partially offset by a $7.5 million, or 2.8%, increase in the average
balance outstanding year to year. Decreases in the level of average yields on
interest-earning assets and average cost of interest-bearing liabilities were
due primarily to the overall decrease in interest rates in the economy during
2002 and 2003.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $3.8 million, or 13.9%, to a total of
$23.6 million for the year ended December 31, 2003. The interest rate spread
decreased to approximately 2.06% at December 31, 2003, from 2.30% at December
31, 2002, while the net interest margin decreased to approximately 2.34% for the
year ended December 31, 2003, compared to 2.66% for the 2002 period.
31
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged
to earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Bank's market areas, and other factors related to the collectibility of the
Bank's loan portfolio. Based upon an analysis of these factors, management
recorded a provision for losses on loans totaling $1.4 million for the year
ended December 31, 2003, an increase of $277,000, or 23.7%, over the provision
recorded in 2002. The provision was predicated primarily on the overall increase
in the loan portfolio, including the increased percentage of loans secured by
commercial real estate within the loan portfolio and an increase in the level of
loan charge-offs year to year. For 2004, we believe the provision will continue
to grow as we anticipate changing our loan mix by increasing the percentage of
commercial loans and consumer loans to total loans. Management believes all
nonperforming loans are adequately collateralized, however, there can be no
assurance that the loan loss allowance will be adequate to absorb losses on
known nonperforming assets or that the allowance will be adequate to cover
losses on nonperforming assets in the future.
OTHER INCOME. Other income totaled $11.4 million for the year ended
December 31, 2003, an increase of $1.3 million, or 13.0%, compared to 2002. The
increase in other income was primarily attributable to an $810,000 increase in
gain on sale of investment and mortgage-backed securities, an increase of
$337,000, or 26.8%, in title fees, a combined increase of $96,000 in gains on
sale of premises and equipment and real estate acquired through foreclosure, and
an overall increase of $76,000, or 1.3%, in mortgage-banking related income,
partially offset by a $151,000, or 7.1%, decrease in late charges, rent and
other income. The increase in title fees was due primarily to an increase in
production related to the low interest rate environment.
The increase in mortgage-banking income was comprised of an $840,000, or
30.4%, increase in gain on sale of loans, a $63,000, or 4.1%, increase in loan
servicing fees and a net decrease in the valuation of mortgage servicing rights
of $827,000, or 60.4%. The increase in gain on sale of loans was due primarily
to an increase in the volume of loans sold of $38.5 million, or 16.0%, over the
volume of loans sold in 2002. During 2003, the Bank recorded mortgage servicing
rights on new loan sales totaling $3.5 million and amortization of mortgage
servicing rights totaling $2.9 million, which resulted in a net income item of
$543,000. During 2002, the Bank recorded mortgage servicing rights on new loan
sales totaling $2.7 million, amortization of mortgage servicing rights totaling
$2.1 million and recapture of an impairment charge of $640,000, all of which
resulted in a net income item of $1.4 million. Due to an anticipated drop in
fixed rate residential one- to four-family loan production, we expect a
reduction in mortgage banking income in 2004.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $23.7 million for the year ended December 31, 2003, an
increase of $2.1 million, or 9.9%, compared to 2002. The increase was due
primarily to the $1.3 million fee associated with the restructuring of a portion
of the Bank's FHLB borrowings and an increase of $348,000, or 3.4%, in employee
compensation and benefits, a $349,000 or 42.5% increase in franchise taxes, a
$324,000, or 9.4%, increase in occupancy and equipment and the absence of
$112,000 related to the reversal of the restructuring charge recognized in 2001.
The increase in employee compensation and benefits was due primarily to an
increase in incentive compensation and health insurance costs, as well as normal
merit increases, which were partially offset by an increase in deferred loan
origination costs related to the increase in lending volume year to year. The
increase in franchise tax expense reflects the effects of refund claims recorded
in 2002. The increase in occupancy and equipment was due primarily to an
increase in office repairs and maintenance expenses, as well as costs associated
with the new Dover office location.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $3.1
million for the year ended December 31, 2003, a decrease of $1.8 million, or
36.5%, compared to the provision recorded in 2002. This decrease was primarily
attributable to a $4.9 million, or 33.1%, decrease in pre-tax earnings and the
non-taxable redemption of a life insurance policy. The effective tax rate
amounted to 30.8% and 32.4% for the years ended December 31, 2003 and 2002,
respectively.
32
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND
DECEMBER 31, 2001
GENERAL. Camco's net earnings for the year ended December 31, 2002,
totaled $10.0 million, an increase of $1.5 million, or 17.1%, over the $8.5
million of net earnings reported in 2001. The increase in earnings was primarily
attributable to a one-time charge of $950,000 in pre-tax expense related to the
consolidation of the bank charters in the 2001 period and the recognition of a
$112,000 reversal of this restructuring charge during the 2002 period.
Additionally, net interest income increased by $1.5 million and other income
increased by $2.9 million, while the provision for losses on loans increased by
$410,000, general, administrative and other expense increased by $2.7 million
(excluding the effects of the restructuring charge) and the provision for
federal income taxes increased by $911,000.
Income and expenses for 2002 include the effects of the acquisition of
Columbia Financial, which was acquired by Camco in November 2001 in a
transaction accounted for using the purchase method of accounting.
NET INTEREST INCOME. Total interest income for the year ended December 31,
2002, amounted to $66.0 million, a decrease of $8.4 million, or 11.3%, compared
to 2001, generally reflecting the effects of a decrease of 110 basis points in
the average yield, from 7.49% in 2001 to 6.39% in 2002, which was partially
offset by a $39.4 million, or 4.0%, increase in the average balance of
interest-earning assets outstanding year to year.
Interest income on loans totaled $57.5 million for the year ended December
31, 2002, a decrease of $12.0 million, or 17.3%, from the comparable 2001 total.
The decrease resulted primarily from a $77.7 million, or 8.7%, decrease in the
average balance outstanding and a 72 basis point decrease in the average yield
to 7.07% in 2002. Interest income on mortgage-backed securities totaled $4.5
million for the year ended December 31, 2002, a $3.5 million, or 327.1%,
increase over the 2001 period. The increase was due primarily to an $81.6
million, or 439.7%, increase in the average balance outstanding, which was
partially offset by a 119 basis point decrease in the average yield to 4.52% in
2002. Interest income on investment securities increased by $849,000, or 122.0%,
due primarily to a $22.3 million increase in the average balance outstanding
year to year, which was partially offset by a 144 basis point decline in the
average yield to 4.55% in the 2002 period. Interest income on other
interest-earning assets decreased by $700,000, or 22.2%, due primarily to a
decrease in the yield of 150 basis points to 2.88% in 2002, which was partially
offset by a $13.1 million, or 18.2%, increase in the average balance outstanding
year to year.
Interest expense on deposits totaled $23.1 million for the year ended
December 31, 2002, a decrease of $8.3 million, or 26.4%, compared to the year
ended December 31, 2001, due primarily to a 151 basis point decrease in the
average cost of deposits, to 3.40% for 2002, which was partially offset by a
$39.2 million, or 6.1%, increase in the average balance of interest-bearing
deposits outstanding year to year. Interest expense on borrowings totaled $15.5
million for the year ended December 31, 2002, a decrease of $1.6 million, or
9.4%, from the 2001 period. The decrease resulted primarily from a $15.1
million, or 5.4%, decrease in the average balance outstanding year to year and a
26 basis point decrease in the average rate, to 5.83% in 2002. Decreases in the
level of average yields on interest-earning assets and average cost of
interest-bearing liabilities were due primarily to the overall decrease in
interest rates in the economy during 2001 and 2002.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $1.5 million, or 5.8%, to a total of
$27.4 million for the year ended December 31, 2002. The interest rate spread
increased to approximately 2.30% at December 31, 2002, from 2.22% at December
31, 2001, while the net interest margin increased to approximately 2.66% for the
year ended December 31, 2002, compared to 2.61% for the 2001 period.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged
to earnings to bring the total allowance for loan losses to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
the Bank's market areas, and other factors related to the collectibility of the
Bank's loan portfolio. Based upon an analysis of these factors, management
recorded a provision for losses on loans totaling $1.2 million for the year
ended December 31, 2002, an increase of $410,000, or 54.0%, over the provision
recorded in 2001. The 2002 provision generally reflects the $5.7 million
increase in the level of
33
nonperforming loans. The provision also reflects the increasing percentage of
loans secured by nonresidential real estate and consumer loans in relation to
total loans during 2002.
OTHER INCOME. Other income totaled $10.1 million for the year ended
December 31, 2002, an increase of $2.9 million, or 41.2%, compared to 2001. The
increase in other income was primarily attributable to a combined increase of
$2.6 million, or 82.9%, in mortgage-banking related income, an increase of
$140,000, or 7.1%, in late charges, rent and other and a $176,000, or 21.0%,
increase in service charges and other fees on deposits, partially offset by a
combined decrease of $100,000 in gain on sale of premises and equipment and real
estate acquired through foreclosure.
The increase in mortgage-banking income was comprised of a $1.8 million
increase in the valuation of mortgage servicing rights, a $573,000, or 26.1%,
increase in gain on sale of loans and a $176,000, or 12.8%, increase in loan
servicing fees. During 2002, the Bank recorded mortgage servicing rights on new
loan sales totaling $2.7 million, amortization of mortgage servicing rights
totaling $2.1 million and recapture of an impairment charge of $640,000, all of
which resulted in a net income item of $1.4 million. During 2001, the Bank
recorded mortgage servicing rights on new loan sales totaling $2.3 million,
amortization of mortgage servicing rights totaling $1.5 million and an
impairment charge of $1.3 million, all of which resulted in an expense totaling
$500,000. The increase in the gain on sale of loans was due primarily to an
increase in the volume of loans sold of $25.3 million, or 11.7%, over the volume
of loans sold in 2001. The increase in loan servicing fees was primarily due to
an increase in the amount of loans being serviced. The increase in service
charges and other fees on deposits is primarily due to an increase in service
fees on transaction accounts and check cashing fees. The increase in late
charges, rent and other is due to income from credit card and ATM activity, fees
for commercial loans and insurance fees earned.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $21.6 million for the year ended December 31, 2002, an
increase of $1.7 million, or 8.4%, compared to 2001. The increase in general,
administrative and other expense was due primarily to an increase of $2.3
million, or 28.9%, in employee compensation and benefits, a $287,000, or 9.0%,
increase in occupancy and equipment, and an increase of $691,000, or 15.1%, in
other operating expense, which were partially offset by the effects of a
nonrecurring restructuring charge totaling $950,000 recorded in 2001 and the
$112,000 restructuring credit recognized in 2002, as well as a $297,000, or
26.6% decrease in franchise taxes, a $167,000, or 12.4%, decrease in data
processing and a $150,000 decrease in goodwill amortization. The increase in
employee compensation and benefits was due primarily to the acquisition of the
Columbia division, an increase in management staffing levels, an increase in
incentive compensation and other benefit plan costs and normal merit
compensation increases, which were partially offset by an increase in deferred
loan origination costs related to the increase in lending volume year to year.
Camco increased its management staffing complement year to year as it continues
to implement its corporate strategy following the 2001 restructuring plan. The
increase in occupancy and equipment resulted primarily from the inclusion of
Columbia. The increase in other operating expense was due primarily to costs
incurred at the Columbia division and increases in legal expense, costs
associated with real estate acquired through foreclosure, office supplies and
costs associated with the increase in lending volume year to year. The decrease
in franchise tax expense reflects the effects of refund claims on prior year tax
filings. The decrease in data processing was due primarily to efficiencies
realized related to the consolidation of the Bank charters. The decrease in
goodwill amortization was due to the adoption of SFAS No. 142, a new accounting
standard which eliminates goodwill amortization. The restructuring credit
resulted from severance charges recorded in 2001 that were not utilized due
primarily to early terminations.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $4.8
million for the year ended December 31, 2002, an increase of $911,000, or 23.4%,
compared to the provision recorded in 2001. This increase was primarily
attributable to a $2.4 million, or 19.1%, increase in pre-tax earnings year to
year and the 2001 receipt of refunds claimed for prior years' tax liabilities.
The effective tax rate amounted to 32.4% and 31.3% for the years ended December
31, 2002 and 2001, respectively.
34
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.
YEAR ENDED DECEMBER 31,
2003 2002
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1) $ 781,175 $47,982 6.14% $ 813,541 $57,478 7.07%
Mortgage-backed securities(2) 113,392 3,439 3.03 100,165 4,523 4.52
Investment securities(2) 37,881 1,267 3.34 33,963 1,545 4.55
Interest-bearing deposits and other
interest-earning assets 78,364 2,187 2.79 85,189 2,456 2.88
---------- ------- ------ ---------- ------- ------
Total interest-earning assets $1,010,812 54,875 5.43 $1,032,858 66,002 6.39
========== ==========
Interest-bearing liabilities:
Deposits $ 652,710 16,037 2.46 $ 677,800 23,060 3.40
FHLB advances 273,147 15,200 5.56 265,614 15,496 5.83
---------- ------- ------ ---------- ------- ------
Total interest-bearing liabilities $ 925,857 31,237 3.37 $ 943,414 38,556 4.09
========== ------- ------ ========== ------- ------
Net interest income/Interest rate spread $23,638 2.06% $27,446 2.30%
======= ====== ======= ======
Net interest margin(3) 2.34% 2.66%
====== ======
Average interest-earning assets to average
interest-bearing liabilities 109.18% 109.48%
====== ======
YEAR ENDED DECEMBER 31,
2001
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
(Dollars in thousands)
Interest-earning assets:
Loans receivable(1) $891,220 $69,461 7.79%
Mortgage-backed securities(2) 18,561 1,059 5.71
Investment securities(2) 11,621 696 5.99
Interest-bearing deposits and other
interest-earning assets 72,052 3,156 4.38
-------- ------- ------
Total interest-earning assets $993,454 74,372 7.49
========
Interest-bearing liabilities:
Deposits $638,581 31,324 4.91
FHLB advances 280,747 17,109 6.09
-------- ------- ------
Total interest-bearing liabilities $919,328 48,433 5.27
======== ------- ------
Net interest income/Interest rate spread $25,939 2.22%
======= ======
Net interest margin(3) 2.61%
======
Average interest-earning assets to average
interest-bearing liabilities 108.06%
======
- ----------
(1) Includes nonaccrual loans and loans held for sale.
(2) Includes securities designated as available for sale.
(3) Net interest income as a percent of average interest-earning assets.
35
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.
YEAR ENDED DECEMBER 31,
2003 VS. 2002 2002 VS. 2001
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
(In thousands)
Interest income attributable to:
Loans receivable(1) $(2,217) $(7,279) $ (9,496) $(5,781) $ (6,202) $(11,983)
Mortgage-backed securities 729 (1,813) (1,084) 3,729 (265) 3,464
Investment securities 215 (493) (278) 1,052 (203) 849
Interest-bearing deposits and other(2) (192) (77) (269) 507 (1,207) (700)
------- ------- -------- ------- -------- --------
Total interest income (1,465) (9,662) (11,127) (493) (7,877) (8,370)
Interest expense attributable to:
Deposits (826) (6,197) (7,023) 1,825 (10,089) (8,264)
BORROWINGS 472 (768) (296) (900) (713) (1,613)
------- ------- -------- ------- -------- --------
Total interest expense (354) (6,965) (7,319) 925 (10,802) (9,877)
------- ------- -------- ------- -------- --------
Increase(decrease) in net interest income $(1,111) $(2,697) $ (3,808) $(1,418) $ 2,925 $ 1,507
======= ======= ======== ======= ======== ========
- ----------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits.
YIELDS EARNED AND RATES PAID
The following table sets forth the weighted-average yields earned on Camco's
interest-earning assets, the weighted-average interest rates paid on Camco's
interest-bearing liabilities and the interest rate spread between the
weighted-average yields earned and rates paid by Camco at the dates indicated.
AT DECEMBER 31,
2003 2002 2001
Weighted-average yield on:
Loan portfolio(1) 5.81% 6.87% 7.28%
Investment portfolio(2) 3.40 3.40 3.61
Total interest-earning assets 5.38 6.52 6.63
Weighted-average rate paid on:
Deposits 2.10 2.86 4.08
FHLB advances 5.13 5.63 6.02
Total interest-bearing liabilities 2.96 3.65 4.59
---- ---- ----
Interest rate spread 2.42% 2.87% 2.04%
==== ==== ====
- ----------
(1) Includes loans held for sale and excludes the allowance for loan losses.
(2) Includes earnings on FHLB stock and cash surrender value of life
insurance.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The objective of the Bank's asset/liability management function is to
maintain consistent growth in net interest income within the Bank's policy
limits. This objective is accomplished through management of the Bank's balance
sheet composition, liquidity, and interest rate risk exposures arising from
changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or unexpected deposit withdrawals. This is accomplished
by maintaining liquid assets in the form of investment securities, maintaining
sufficient unused borrowing capacity and achieving consistent growth in core
deposits.
Management considers interest rate risk the Bank's most significant market
risk. Interest rate risk is the exposure to adverse changes in net interest
income due to changes in interest rates. Consistency of the Bank's net interest
income is largely dependent upon the effective management of interest rate risk.
To identify and manage its interest rate risk the Bank employs an earnings
simulation model to analyze net interest income sensitivity to changing interest
rates. The model is based on actual cash flows and repricing characteristics and
incorporates market-based assumptions regarding the effect of changing interest
rates on the prepayment rates of certain assets and liabilities. The model also
includes senior management projections for activity levels in each of the
product lines offered by the Bank. Assumptions based on the historical behavior
of deposit rates and balances in relation to changes in interest rates are also
incorporated into the model. Assumptions are inherently uncertain and the
measurement of net interest income or the impact of rate fluctuations on net
interest income cannot be precisely predicted. Actual results may differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes as well as changes in market conditions and management strategies.
The Bank's Asset/Liability Management Committee ("ALCO"), which includes
senior management representatives and reports to the Board of Directors,
monitors and manages interest rate risk within Board-approved policy limits. The
Bank's current interest rate risk position is determined by measuring the
anticipated change in net interest income over a 12 month horizon assuming a 200
basis point (bp) instantaneous and parallel shift (linear) increase or decrease
in all interest rates. Given the current federal funds rate of 1.0% at December
31, 2003, a linear 100bp decrease was modeled in the estimated earnings
sensitivity profile in place of the linear 200bp decrease in accordance with the
Bank's interest rate risk policy. Current policy limits this exposure to plus or
minus 25% of net interest income for a 12-month horizon.
The following table shows the Bank's estimated earnings sensitivity
profile as of December 31, 2003:
CHANGE IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) 12 MONTHS
-------------- ---------
+200 8.6%
-100 (6.8)%
Given a 200bp linear increase in the yield curve used in the simulation
model, it is estimated net interest income for the Bank would increase by 8.6%
over one year. A 100bp linear decrease in interest rates would decrease net
interest income by 6.8% over one year. All of these estimated changes in net
interest income are within the policy guidelines established by the Board of
Directors. Management does not expect any significant adverse effect on net
interest income in 2003 based on the composition of the portfolio and
anticipated upward trends in rates.
In order to reduce the exposure to interest rate fluctuations and to
manage liquidity, the Bank has developed sale procedures for several types of
interest-sensitive assets. Generally, all long-term, fixed-rate single family
residential mortgage loans underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines are sold for cash upon origination. A total of $279.0 million and
$240.5 million of such loans were sold to the FHLMC, FNMA and other parties
during 2003 and 2002, respectively.
37
LIQUIDITY AND CAPITAL RESOURCES
Camco, like other financial institutions, is required under applicable federal
regulations to maintain sufficient funds to meet deposit withdrawals, loan
commitments and expenses. Liquid assets consist of cash and interest-bearing
deposits in other financial institutions, investments and mortgage-backed
securities. Management monitors and assesses liquidity needs daily in order to
meet deposit withdrawals, loan commitments and expenses.
The following table sets forth information regarding the Bank's obligations and
commitments to make future payments under contract as of December 31, 2003.
PAYMENTS DUE BY PERIOD
LESS MORE
THAN 1-3 3-5 THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
(In thousands)
Contractual obligations:
Operating lease obligations $ 205 $ 229 $ 169 $ 219 $ 822
Advances from the Federal Home Loan Bank 29,408 1,168 23,722 208,437 262,735
Certificates of deposit 178,290 146,297 37,420 586 362,593
Amount of commitments expiration per period
Commitments to originate loans:
Overdraft lines of credit 892 -- -- -- 892
Home equity/commercial lines of credit 58,937 -- -- -- 58,937
One- to four-family and multi-family loans 4,237 -- -- -- 4,237
Non-residential real estate and land loans 11,227 -- -- -- 11,227
-------- -------- -------- -------- --------
Total contractual obligations $283,196 $147,694 $ 61,311 $209,242 $701,443
======== ======== ======== ======== ========
Advantage Bank anticipates that it will have sufficient funds available to meet
its current loan commitments. Based upon historical deposit flow data, the
Bank's competitive pricing in its market and management's experience, management
believes that a significant portion of maturing certificates of deposit will
remain with the Bank.
The Bank engages in off-balance sheet credit-related activities that could
require Advantage 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. 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 function of Advantage's
management strategy. In the event that the Bank should require funds beyond its
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.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Camco Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Camco Financial Corporation as of December 31, 2003 and 2002, and the related
consolidated statements of earnings, comprehensive income, stockholders' equity
and cash flows for each of the years in the three year period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Camco Financial
Corporation as of December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
February 5, 2004
39
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 2003 2002
Cash and due from banks $ 22,807 $ 20,215
Interest-bearing deposits in other financial institutions 30,904 36,807
----------- -----------
Cash and cash equivalents 53,711 57,022
Investment securities available for sale - at market 27,008 38,789
Investment securities held to maturity - at cost, approximate market
value of $1,204 and $5,501 as of December 31, 2003 and 2002, respectively 1,130 5,368
Mortgage-backed securities available for sale - at market 77,916 97,332
Mortgage-backed securities held to maturity - at cost, approximate market
value of $7,839 and $20,634 as of December 31, 2003 and 2002, respectively 7,704 20,000
Loans held for sale - at lower of cost or market 5,457 55,493
Loans receivable - net 799,625 741,465
Office premises and equipment - net 13,380 14,492
Real estate acquired through foreclosure 1,463 1,589
Federal Home Loan Bank stock - at cost 24,494 23,539
Accrued interest receivable 4,088 4,922
Prepaid expenses and other assets 1,524 2,130
Cash surrender value of life insurance 17,740 17,372
Goodwill - net of accumulated amortization 2,953 2,953
Prepaid federal income taxes 958 774
----------- -----------
Total assets $ 1,039,151 $ 1,083,240
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 671,274 $ 694,072
Advances from the Federal Home Loan Bank 262,735 276,276
Advances by borrowers for taxes and insurance 3,494 3,509
Accounts payable and accrued liabilities 4,102 4,298
Dividends payable 1,063 1,046
Deferred federal income taxes 3,940 5,438
----------- -----------
Total liabilities 946,608 984,639
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; 8,428,946 and
8,311,145 shares issued at December 31, 2003 and 2002, respectively 8,429 8,311
Additional paid-in capital 55,132 54,063
Retained earnings - substantially restricted 45,121 42,497
Accumulated other comprehensive income - unrealized gains on securities
designated as available for sale, net of related tax effects 206 2,098
Less 1,096,523 and 622,260 shares of treasury stock at December 31, 2003 and 2002,
respectively - at cost (16,345) (8,368)
----------- -----------
Total stockholders' equity 92,543 98,601
----------- -----------
Total liabilities and stockholders' equity $ 1,039,151 $ 1,083,240
=========== ===========
The accompanying notes are an integral part of these statements.
40
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
2003 2002 2001
Interest income
Loans $ 47,982 $ 57,478 $ 69,461
Mortgage-backed securities 3,439 4,523 1,059
Investment securities 1,267 1,545 696
Interest-bearing deposits and other 2,187 2,456 3,156
-------- -------- --------
Total interest income 54,875 66,002 74,372
Interest expense
Deposits 16,037 23,060 31,324
Borrowings 15,200 15,496 17,109
-------- -------- --------
Total interest expense 31,237 38,556 48,433
-------- -------- --------
Net interest income 23,638 27,446 25,939
Provision for losses on loans 1,446 1,169 759
-------- -------- --------
Net interest income after provision for losses on loans 22,192 26,277 25,180
Other income
Late charges, rent and other 1,964 2,115 1,975
Title fees 1,596 1,259 1,137
Loan servicing fees 1,617 1,554 1,378
Gain on sale of loans - net 3,607 2,767 2,194
Valuation of mortgage servicing rights - net 543 1,370 (461)
Service charges and other fees on deposits 1,157 1,014 838
Gain on sale of investment and mortgage-backed securities 839 29 --
Gain (loss) on sale of real estate acquired through foreclosure 52 (8) 62
Gain on sale of premises and equipment 36 -- 30
-------- -------- --------
Total other income 11,411 10,100 7,153
General, administrative and other expense
Employee compensation and benefits 10,516 10,168 7,887
Occupancy and equipment 3,783 3,459 3,172
Data processing 1,330 1,178 1,345
Advertising 763 794 705
Franchise taxes 1,170 821 1,118
Amortization of goodwill -- -- 150
Other operating 4,842 5,262 4,571
Federal Home Loan Bank advance prepayment fees 1,292 -- --
Restructuring charges (credits) related to charter consolidation -- (112) 950
-------- -------- --------
Total general, administrative and other expense 23,696 21,570 19,898
-------- -------- --------
Earnings before federal income taxes 9,907 14,807 12,435
Federal income taxes
Current 3,574 3,149 2,715
Deferred (523) 1,653 1,176
-------- -------- --------
Total federal income taxes 3,051 4,802 3,891
-------- -------- --------
NET EARNINGS $ 6,856 $ 10,005 $ 8,544
======== ======== ========
EARNINGS PER SHARE
Basic $ .92 $ 1.27 $ 1.20
======== ======== ========
Diluted $ .91 $ 1.25 $ 1.19
======== ======== ========
The accompanying notes are an integral part of these statements.
41
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Net earnings $ 6,856 $ 10,005 $8,544
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(689), $1,035 and $53 in 2003, 2002
and 2001, respectively (1,338) 2,010 103
Reclassification adjustment for realized gains included in earnings,
net of taxes of $285 and $10 for the years ended December 31,
2003 and 2002, respectively (554) (19) --
------- -------- ------
Comprehensive income $ 4,964 $ 11,996 $8,647
======= ======== ======
Accumulated other comprehensive income $ 206 $ 2,098 $ 107
======= ======== ======
The accompanying notes are an integral part of these statements.
42
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(In thousands, except per share data)
UNREALIZED
GAINS (LOSSES)
ON SECURITIES
ADDITIONAL DESIGNATED TOTAL
COMMON PAID-IN RETAINED AS AVAILABLE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE STOCK EQUITY
Balance at January 1, 2001 $7,058 $41,551 $ 31,553 $ 4 $ (1,416) $ 78,750
Stock options exercised 116 1,146 -- -- -- 1,262
Cash dividends declared - $.48 per share -- -- (3,476) -- -- (3,476)
Net earnings for the year ended December 31, 2001 -- -- 8,544 -- -- 8,544
Purchase of Columbia Financial of Kentucky, Inc. 963 9,025 -- -- -- 9,988
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- 103 -- 103
------ ------- -------- ------- -------- --------
Balance at December 31, 2001 8,137 51,722 36,621 107 (1,416) 95,171
Finalization of Columbia Financial acquisition -- 432 -- -- (638) (206)
Stock options exercised 174 1,909 -- -- -- 2,083
Cash dividends declared - $.525 per share -- -- (4,129) -- -- (4,129)
Net earnings for the year ended December 31, 2002 -- -- 10,005 -- -- 10,005
Purchase of treasury shares -- -- -- -- (6,314) (6,314)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- 1,991 -- 1,991
------ ------- -------- ------- -------- --------
Balance at December 31, 2002 8,311 54,063 42,497 2,098 (8,368) 98,601
Stock options exercised 118 1,069 -- -- -- 1,187
Cash dividends declared - $.57 per share -- -- (4,232) -- -- (4,232)
Net earnings for the year ended December 31, 2003 -- -- 6,856 -- -- 6,856
Purchase of treasury shares -- -- -- -- (7,977) (7,977)
Unrealized losses on securities designated as
available for sale, net of related tax effects -- -- -- (1,892) -- (1,892)
------ ------- -------- ------- -------- --------
Balance at December 31, 2003 $8,429 $55,132 $ 45,121 $ 206 $(16,345) $ 92,543
====== ======= ======== ======= ======== ========
The accompanying notes are an integral part of these statements.
43
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Cash flows from operating activities:
Net earnings for the year $ 6,856 $ 10,005 $ 8,544
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of goodwill -- -- 150
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 2,418 828 87
Amortization of mortgage servicing rights - net 2,922 1,404 2,848
Depreciation and amortization 1,879 1,714 1,655
Amortization of purchase accounting adjustments - net 5 242 303
Provision for losses on loans 1,446 1,169 759
Provision for losses on real estate acquired through foreclosure 30 131 --
Amortization of deferred loan origination fees (398) (609) (683)
(Gain) loss on sale of real estate acquired through foreclosure (52) 8 (62)
Gain on sale of investment and mortgage-backed securities
transactions (839) (29) --
Gain on sale of office premises and equipment (36) -- (30)
Federal Home Loan Bank stock dividends (955) (1,058) (1,367)
Gain on sale of loans (3,607) (2,767) (2,194)
Loans originated for sale in the secondary market (228,969) (274,597) (232,499)
Proceeds from sale of mortgage loans in the secondary market 282,612 243,316 217,483
Tax benefits related to exercise of stock options 210 197 --
Increase (decrease) in cash, net of acquisition of Columbia Financial
of Kentucky, Inc., due to changes in:
Accrued interest receivable 834 847 893
Prepaid expenses and other assets 606 2,649 (2,921)
Accounts payable and other liabilities (196) (6,537) 2,432
Federal income taxes
Current (184) (182) (248)
Deferred (523) 1,653 1,176
--------- --------- ---------
Net cash provided by (used in) operating activities 64,059 (21,616) (3,674)
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 21,596 41,251 19,480
Proceeds from sale of investment securities designated as available for sale 3,811 44 --
Purchase of investment securities designated as available for sale (10,341) (64,942) --
Purchase of investment securities designated as held to maturity -- (1,048) (10,495)
Proceeds from sale of mortgage-backed securities designated as
available for sale 59,111 1,087 --
Purchase of mortgage-backed securities designated as available for sale (112,989) (113,125) --
Purchase of mortgage-backed securities designated as held to maturity (961) -- (15,228)
Principal repayments on mortgage-backed securities 83,058 34,377 4,865
Loan disbursements (378,511) (297,668) (126,582)
Purchases of loans (12,056) (3,181) (2,527)
Principal repayments on loans 324,463 407,042 268,347
Purchase of office premises and equipment - net (876) (1,852) (1,711)
Proceeds from sale of office premises and equipment 145 355 119
Proceeds from sale of real estate acquired through foreclosure 4,158 651 1,806
Additions to real estate acquired through foreclosure -- (12) (60)
Purchase of Federal Home Loan Bank stock -- -- (100)
Purchase of life insurance -- (825) (9,445)
Proceeds from redemption of life insurance 422 -- --
Net increase in cash surrender value of life insurance (790) (796) (307)
Purchase of Columbia Financial of Kentucky, Inc. -- (206) (3,000)
--------- --------- ---------
Net cash provided by (used in) investing activities (19,760) 1,152 125,162
--------- --------- ---------
Net cash provided by (used in) operating and investing
activities (balance carried forward) 44,299 (20,464) 121,488
--------- --------- ---------
44
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 2003, 2002 and 2001
(In thousands)
2003 2002 2001
Net cash provided by (used in) operating and investing
activities (balance brought forward) $ 44,299 $ (20,464) $ 121,488
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (22,798) (36,003) 16,716
Proceeds from Federal Home Loan Bank advances 73,850 68,500 50,451
Repayment of Federal Home Loan Bank advances (87,432) (51,151) (105,072)
Dividends paid on common stock (4,215) (4,045) (3,346)
Proceeds from exercise of stock options 977 1,886 1,262
Purchase of treasury shares (7,977) (6,314) --
Decrease in advances by borrowers for taxes and insurance (15) (351) (604)
-------- --------- ---------
Net cash used in financing activities (47,610) (27,478) (40,593)
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,311) (47,942) 80,895
Cash and cash equivalents at beginning of year 57,022 104,964 24,069
-------- --------- ---------
Cash and cash equivalents at end of year $ 53,711 $ 57,022 $ 104,964
======== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 31,452 $ 38,387 $ 48,792
======== ========= =========
Income taxes $ 3,570 $ 2,848 $ 3,528
======== ========= =========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 4,010 $ 1,270 $ 3,208
======== ========= =========
Issuance of mortgage loans upon sale of real estate acquired through
foreclosure $ 2,399 $ 1,054 $ 1,182
======== ========= =========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ (1,338) $ 2,010 $ 103
======== ========= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 3,465 $ 2,729 $ 2,338
======== ========= =========
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid $ 1,063 $ 1,046 $ 962
======== ========= =========
Fair value of assets received in acquisition of
Columbia Financial of Kentucky, Inc. $ -- $ -- $ 110,422
======== ========= =========
The accompanying notes are an integral part of these statements.
45
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During 2001, the Boards of Directors of Camco Financial Corporation
("Camco" or the "Corporation") and its wholly-owned subsidiaries,
Cambridge Savings Bank ("Cambridge Savings"), Marietta Savings Bank
("Marietta Savings"), First Savings Bank of Washington Court House ("First
Bank"), First Bank for Savings ("First Savings") and Westwood Homestead
Savings Bank ("Westwood Homestead"), approved a business plan whereby the
subsidiary banks consolidated charters and operations into one state
savings bank charter under the name Advantage Bank. The combining of
charters and operations resulted in the Corporation incurring a one-time
after-tax restructuring charge totaling $627,000. Hereinafter, the
consolidated financial statements use the terms "Advantage" or the "Bank"
to describe all of the preexisting individual financial institutions owned
by the Corporation.
During 2001, Camco's Board of Directors approved a business combination
that was completed in November 2001, whereby Columbia Financial of
Kentucky, Inc. ("Columbia Financial"), the parent of Columbia Federal
Savings Bank ("Columbia Federal"), was merged into Camco. Following the
merger, Columbia Federal became a division of Advantage. The business
combination was accounted for using the purchase method of accounting.
Accordingly, the 2001 consolidated financial statements herein include the
accounts of Columbia Federal only from the November 15, 2001 consummation
date.
The business activities of Camco are limited primarily to holding the
common stock of the Bank and Camco Title Insurance Agency ("Camco Title")
and one second tier subsidiary, Camco Mortgage Corporation. Effective
October 1, 2003, Camco Mortgage Corporation was dissolved and its
operations became a part of the Bank. The Corporation's results of
operations are economically dependent upon the results of Advantage's
operations. Advantage conducts a general banking business within Ohio,
West Virginia and northern Kentucky which consists of attracting deposits
from the general public and applying those funds to the origination of
loans for residential, consumer and nonresidential purposes. Advantage's
profitability is significantly dependent on net interest income, which is
the difference between interest income generated from interest-earning
assets (i.e. loans and investments) and the interest expense paid on
interest-bearing liabilities (i.e. customer deposits and borrowed funds).
Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by Advantage can be significantly influenced by a number of
factors, such as governmental monetary policy, that are outside of
management's control.
The consolidated financial information presented herein has been prepared
in accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and general accounting practices within
the financial services industry. In preparing financial statements in
accordance with U.S. GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
46
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned and, for periods prior to October 1,
2003, its second tier subsidiaries. All significant intercompany balances
and transactions have been eliminated.
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
SFAS No. 115 requires that investments be categorized as held to maturity,
trading, or available for sale. Securities classified as held to maturity
are carried at cost only if the Corporation has the positive intent and
ability to hold these securities to maturity. Securities designated as
available for sale are carried at fair value with resulting unrealized
gains or losses recorded to stockholders' equity. Investment and
mortgage-backed securities are classified as held to maturity or available
for sale upon acquisition. Realized gains and losses on sales of
securities are recognized using the specific identification method.
3. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees and costs, capitalized
mortgage servicing rights and the allowance for loan losses.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued and not received, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments has returned to normal, in which case the
loan is returned to accrual status.
Loans held for sale are carried at the lower of cost (less principal
payments received) or fair value (market value), calculated on an
aggregate basis. At December 31, 2003 and 2002, loans held for sale were
carried at cost.
The Corporation accounts for mortgage servicing rights in accordance with
SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," which requires that the Corporation
recognize, as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. An
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained must allocate some of the cost of the loans to
the mortgage servicing rights.
SFAS No. 140 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. The mortgage servicing rights
recorded by the Bank, calculated in accordance with the provisions of SFAS
No. 140, were segregated into pools for valuation purposes, using as
pooling criteria the loan term and coupon rate.
47
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
Once pooled, each grouping of loans was evaluated on a discounted earnings
basis to determine the present value of future earnings that a purchaser
could expect to realize from each portfolio. Earnings were projected from
a variety of sources including loan servicing fees, interest earned on
float, net interest earned on escrows, miscellaneous income, and costs to
service the loans. The present value of future earnings is the "economic"
value for the pool, i.e., the net realizable present value to an acquirer
of the acquired servicing.
The Corporation recorded amortization related to mortgage servicing rights
totaling approximately $2.9 million, $2.1 million and $1.5 million, for
the years ended December 31, 2003, 2002 and 2001, respectively.
Additionally, the Corporation recorded an impairment charge on mortgage
servicing rights totaling $1.3 million in 2001. During 2002, the
Corporation recaptured approximately $640,000 of the impairment based upon
an independent appraisal of the mortgage servicing rights. The carrying
value of the Corporation's mortgage servicing rights, which approximated
their fair value, totaled approximately $6.6 million and $6.0 million at
December 31, 2003 and 2002, respectively.
At December 31, 2003 and 2002, the Bank was servicing mortgage loans of
approximately $587.8 million and $575.4 million, respectively, that have
been sold to the Federal Home Loan Mortgage Corporation and other
investors.
4. Loan Origination and Commitment Fees
The Corporation accounts for loan origination fees and costs in accordance
with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Pursuant to the provisions of SFAS No. 91, all loan origination fees
received, net of certain direct origination costs, are deferred on a
loan-by-loan basis and amortized to interest income using the interest
method, giving effect to actual loan prepayments. Additionally, SFAS No.
91 generally limits the definition of loan origination costs to the direct
costs attributable to originating a loan, i.e., principally actual
personnel costs.
Fees received for loan commitments are deferred and amortized over the
life of the related loan using the interest method.
5. Allowance for Loan Losses
It is the Corporation's policy to provide valuation allowances for
estimated losses on loans based upon past loss experience, current trends
in the level of delinquent and problem loans, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions in the Bank's
primary market areas. When the collection of a loan becomes doubtful, or
otherwise troubled, the Corporation records a charge-off or an allowance
equal to the difference between the fair value of the property securing
the loan and the loan's carrying value. Such provision is based on
management's estimate of the fair value of the underlying collateral,
taking into consideration the current and currently anticipated future
operating or sales conditions. As a result, such estimates are
particularly susceptible to changes that could result in a material
adjustment to results of operations in the near term. Recovery of the
carrying value of such loans is dependent to a great extent on economic,
operating, and other conditions that may be beyond the Corporation's
control.
48
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
The Corporation accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest
rate or, as an alternative, at the loan's observable market price or fair
value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Corporation
considers its investment in one- to four-family residential loans and
consumer installment loans to be homogeneous and therefore excluded from
separate identification for evaluation of impairment. With respect to the
Corporation's investment in multi-family, commercial and nonresidential
loans, and its evaluation of any impairment thereon, such loans are
generally collateral-dependent and as a result are carried as a practical
expedient at the lower of cost or fair value.
It is the Corporation's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral-dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
The Bank's impaired loan information is as follows at December 31:
2003 2002
(In thousands)
Impaired loans with related allowance $ -- $ 984
Impaired loans with no related allowance 827 --
----- -----
Total impaired loans $ 827 $ 984
===== =====
2003 2002 2001
(In thousands)
Allowance on impaired loans
Beginning balance $ 282 $ -- $ --
Provision 136 282 --
Charge-off (418) -- --
----- ----- -----
Ending balance $ -- $ 282 $ --
===== ===== =====
Average balance of impaired loans $ 809 $ 971 $ --
Interest income recognized on impaired loans $ 98 $ 50 $ --
The allowance for impaired loans is included in the Bank's overall
allowance for credit losses. The provision necessary to increase this
allowance is included in the Bank's overall provision for losses on loans.
49
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated
selling expenses at the date of acquisition. Real estate loss provisions
are recorded if the fair value of the property subsequently declines below
the amount determined at the recording date. In determining the lower of
cost or fair value at acquisition, costs relating to development and
improvement of property are capitalized. Costs relating to holding real
estate acquired through foreclosure, net of rental income, are charged
against earnings as incurred.
7. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line method
over the useful lives of the assets, estimated to be ten to fifty years
for buildings and improvements and three to twenty-five years for
furniture, fixtures and equipment. An accelerated depreciation method is
used for tax reporting purposes.
8. Goodwill
Goodwill resulting from the acquisition of First Savings, totaling
approximately $3.7 million, was being amortized over a twenty-five year
period using the straight-line method for years prior to 2002. It was
management's policy to periodically evaluate the carrying value of
intangible assets in relation to the continuing earnings capacity of the
acquired assets and assumed liabilities.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all
purchased goodwill and intangible assets. Pursuant to SFAS No. 142,
acquired goodwill is not amortized, but is tested for impairment at the
reporting unit level annually and whenever an impairment indicator arises.
Goodwill has been assigned to Advantage Bank as the reporting unit that is
expected to benefit from the goodwill.
Camco evaluated the unamortized goodwill balance of $3.0 million during
both 2003 and 2002 in accordance with the provisions of SFAS No. 142 via
independent third-party appraisal. The evaluations showed no indication of
impairment. The adoption of SFAS No. 142 has resulted in the elimination
of annual goodwill amortization of approximately $150,000.
50
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Goodwill (continued)
The following table displays the pro forma effects on net earnings and
earnings per share as if SFAS No. 142 had been applicable to the year
ended December 31, 2001.
FOR THE YEAR ENDED DECEMBER 31,
2003 2002 2001
(In thousands, except per share amounts)
Reported net earnings $6,856 $10,005 $8,544
Add back: goodwill amortization -- -- 150
------ ------- ------
Adjusted net earnings $6,856 $10,005 $8,694
====== ======= ======
BASIC EARNINGS PER SHARE:
As reported $ .92 $ 1.27 $ 1.20
Goodwill amortization -- -- .03
------ ------- ------
As adjusted $ .92 $ 1.27 $ 1.23
====== ======= ======
DILUTED EARNINGS PER SHARE:
As reported $ .91 $ 1.25 $ 1.19
Goodwill amortization -- -- .02
------ ------- ------
As adjusted $ .91 $ 1.25 $ 1.21
====== ======= ======
9. Federal Income Taxes
The Corporation accounts for federal income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its
reported amount in the financial statements that will result in taxable or
deductible amounts in future periods. Deferred tax assets are recorded
only to the extent that the amount of net deductible temporary differences
or carryforward attributes may be utilized against current period
earnings, carried back against prior years' earnings, offset against
taxable temporary differences reversing in future periods, or utilized to
the extent of management's estimate of future taxable income. A valuation
allowance is provided for deferred tax assets to the extent that the value
of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
Deferral of income taxes results primarily from different methods of
accounting for deferred loan origination fees and costs, mortgage
servicing rights, Federal Home Loan Bank stock dividends, deferred
compensation, the general loan loss allowance and the percentage of
earnings bad debt deductions. A temporary difference is also recognized
for depreciation expense computed using accelerated methods for federal
income tax purposes.
51
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the year.
Diluted earnings per common share is computed including the dilutive
effect of additional potential common shares issuable under outstanding
stock options. The computations were as follows for the years ended
December 31:
2003 2002 2001
Weighted-average common shares
outstanding (basic) 7,491,977 7,908,786 7,096,960
Dilutive effect of assumed exercise
of stock options 74,390 97,094 93,546
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 7,566,367 8,005,880 7,190,506
========= ========= =========
Options to purchase 65,441 and 176,714 shares of common stock at
respective weighted-average exercise prices of $14.83 and $13.11 were
outstanding at December 31, 2002 and 2001, respectively, but were excluded
from the computation of diluted earnings per share for those years because
the exercise price was greater than the average market price of the common
shares. There were no anti-dilutive options outstanding for the year ended
December 31, 2003.
11. Stock Option Plans
Stockholders of the Corporation have approved four stock option plans.
Under the 1972 Plan, 254,230 common shares were reserved for issuance to
officers, directors, and key employees of the Corporation and its
subsidiaries. The 1982 Plan reserved 115,824 common shares for issuance to
employees of the Corporation and its subsidiaries. All of the stock
options under the 1972 and 1982 Plans have been granted and were subject
to exercise at the discretion of the grantees through 2002. Under the 1995
Plan, 161,488 shares were reserved for issuance. Under the 2002 Plan,
400,000 shares were reserved for issuance. Additionally, in connection
with the acquisition of First Savings, the stock options of First Savings
were converted into options to purchase 174,421 shares of the
Corporation's stock at an exercise price of $7.38 per share, which expire
in 2005. In connection with the 2000 acquisition of Westwood Homestead,
the stock options of Westwood Homestead were converted into options to
purchase 311,794 shares of the Corporation's stock at a weighted-average
exercise price of $11.89 per share, which expire in 2008.
52
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Stock Option Plans (continued)
The Corporation accounts for its stock option plans in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a
fair-value based method for valuing stock-based compensation that entities
may use, which measures compensation cost at the grant date based on the
fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net earnings and earnings per share, as if the
fair-value based method of accounting defined in SFAS No. 123 had been
applied.
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net earnings
and earnings per share would have been reported as the pro forma amounts
indicated below:
2003 2002 2001
(In thousands, except per share data)
NET EARNINGS As reported $6,856 $10,005 $8,544
Stock-based compensation, net of tax (20) (4) (5)
------ ------- ------
Pro-forma $6,836 $10,001 $8,539
====== ======= ======
EARNINGS PER SHARE
BASIC As reported $ .92 $ 1.27 $ 1.20
Stock-based compensation, net of tax (.01) (.01) --
------ ------- ------
Pro-forma $ .91 $ 1.26 $ 1.20
------ ------- ------
DILUTED As reported $ .91 $ 1.25 $ 1.19
Stock-based compensation, net of tax (.01) -- --
------ ------- ------
Pro-forma $ .90 $ 1.25 $ 1.19
====== ======= ======
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 2003, 2002 and 2001: dividend yield of
3.50%, 3.84% and 4.07%, respectively; expected volatility of 16.88%,
16.34% and 17.06%, respectively; a risk-free interest rate of 3.95%, 2.00%
and 3.00%, respectively; and an expected life of ten years for all grants.
53
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of
December 31, 2003, 2002 and 2001, and changes during the years ending on
those dates is presented below:
2003 2002 2001
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 323,291 $ 9.79 503,005 $10.16 688,655 $10.53
Granted 56,948 16.13 3,700 14.55 8,500 11.93
Exercised (117,800) 7.60 (174,106) 10.84 (115,656) 10.91
Forfeited (5,367) 13.92 (9,308) 11.91 (78,494) 12.50
-------- ------ -------- ------ -------- ------
Outstanding at end of year 257,072 $12.11 323,291 $ 9.79 503,005 $10.16
======== ====== ======== ====== ======== ======
Options exercisable at year-end 211,780 $11.25 323,291 $ 9.79 503,005 $10.16
======== ====== ======== ====== ======== ======
Weighted-average fair value of
options granted during the year $ 2.60 $ 1.36 $ 1.37
====== ====== ======
The following information applies to options outstanding at December 31,
2003:
NUMBER OUTSTANDING RANGE OF EXERCISE PRICES
65,726 $7.40 - $9.74
134,398 $9.75 - $14.55
56,948 $16.13
-------
257,072 $12.11
------- ======
Weighted-average remaining contractual life 5.9 years
54
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated statement of financial
condition, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and Cash Equivalents: The carrying amount reported in the
consolidated statements of financial condition for cash and
cash equivalents is deemed to approximate fair value.
Investment Securities and Mortgage-backed Securities: Fair
values for investment securities and mortgage-backed
securities are based on quoted market prices and dealer
quotes.
Loans Receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential real estate, multi-family residential
real estate, installment and other. These loan categories were
further delineated into fixed-rate and adjustable-rate loans.
The fair values for the resultant loan categories were
computed via discounted cash flow analysis, using current
interest rates offered for loans with similar terms to
borrowers of similar credit quality.
Federal Home Loan Bank stock: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value.
Deposits: The fair values of deposits with no stated maturity,
such as money market demand deposits, savings and NOW
accounts, are deemed to equal the amount payable on demand as
of December 31, 2003 and 2002. The fair value of fixed-rate
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining
maturities.
Advances from the Federal Home Loan Bank: The fair value of
these advances is estimated using the rates currently offered
for similar advances of similar remaining maturities or, when
available, quoted market prices.
Advances by Borrowers for Taxes and Insurance: The carrying
amount of advances by borrowers for taxes and insurance is
deemed to approximate fair value.
55
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
Commitments to Extend Credit: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. At December 31, 2003 and 2002, the
difference between the fair value and notional amount of loan
commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Corporation's financial instruments are as follows:
DECEMBER 31,
2003 2002
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets
Cash and cash equivalents $ 53,711 $ 53,711 $ 57,022 $ 57,022
Investment securities 28,138 28,212 44,157 44,290
Mortgage-backed securities 85,620 85,755 117,332 117,966
Loans receivable 805,082 810,113 796,958 814,539
Federal Home Loan Bank stock 24,494 24,494 23,539 23,539
---------- ---------- ---------- ----------
$ 997,045 $1,002,285 $1,039,008 $1,057,356
========== ========== ========== ==========
Financial liabilities
Deposits $ 671,274 $ 677,953 $ 694,072 $ 704,428
Advances from the Federal Home Loan Bank 262,735 288,732 276,276 309,758
Advances by borrowers for taxes and insurance 3,494 3,494 3,509 3,509
---------- ---------- ---------- ----------
$ 937,503 $ 970,179 $ 973,857 $1,017,695
========== ========== ========== ==========
13. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and due from banks and
interest-bearing deposits in other financial institutions with original
maturities of three months or less.
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2003
consolidated financial statement presentation.
56
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS No. 146 provides financial accounting and reporting
guidance for costs associated with exit or disposal activities, including
one-time termination benefits, contract termination costs other than for a
capital lease, and costs to consolidate facilities or relocate employees.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. Management adopted SFAS No. 146 effective January 1,
2003, as required, without material effect on the Corporation's financial
condition or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns, or both. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it
has a significant variable interest. The consolidation requirements of FIN
46 apply immediately to variable interest entities created after January
31, 2003. The consolidation requirements apply to existing entities in the
first fiscal year or interim period beginning after June 15, 2003. Certain
of the disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest entity
was established. Camco has no variable interest entities. The Corporation
adopted FIN 46 effective July 1, 2003, as required, without material
effect on its financial position and results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," which clarifies certain
implementation issues raised by constituents and amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," to include
the conclusions reached by the FASB on certain FASB Staff Implementation
Issues that, while inconsistent with Statement 133's conclusions, were
considered by the Board to be preferable; amends SFAS No. 133's discussion
of financial guarantee contracts and the application of the shortcut
method to an interest-rate swap agreement that includes an embedded option
and amends other pronouncements.
The guidance in Statement 149 is effective for new contracts entered into
or modified after June 30, 2003 and for hedging relationships designated
after that date. Management adopted SFAS No. 149 effective July 1, 2003,
as required, without material effect on the Corporation's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity," which changes the classification in the statement of financial
position of certain common financial instruments from either equity or
mezzanine presentation to liabilities and requires an issuer of those
financial statements to recognize changes in fair value or redemption
amount, as applicable, in earnings. SFAS No. 150 requires an issuer to
classify certain financial instruments as liabilities, including
mandatorily redeemable preferred and common stocks.
57
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, with one exception, is effective at the
beginning of the first interim period beginning after June 15, 2003 (July
1, 2003 as to the Corporation). The effect of adopting SFAS No. 150 must
be recognized as a cumulative effect of an accounting change as of the
beginning of the period of adoption. Restatement of prior periods is not
permitted. Management adopted SFAS No. 150 effective July 1, 2003, as
required, without material effect on the Corporation's financial condition
or results of operations.
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of investment securities at December 31, 2003 and
2002 are as follows:
2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Municipal bonds $ 1,130 $ 74 $ -- $ 1,204
AVAILABLE FOR SALE:
U.S. Government agency obligations 25,640 241 -- 25,881
Municipal bonds 625 26 -- 651
Corporate equity securities 330 146 -- 476
-------- -------- -------- --------
Total investment securities available for sale 26,595 413 -- 27,008
-------- -------- -------- --------
Total investment securities $ 27,725 $ 487 $ -- $ 28,212
======== ======== ======== ========
2002
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
U.S. Government agency obligations $ 4,233 $ 73 $ -- $ 4,306
Municipal bonds 1,135 60 -- 1,195
-------- -------- -------- --------
Total investment securities held to maturity 5,368 133 -- 5,501
AVAILABLE FOR SALE:
U.S. Government agency obligations 35,557 447 -- 36,004
Municipal bonds 2,414 65 16 2,463
Corporate equity securities 330 35 43 322
-------- -------- -------- --------
Total investment securities available for sale 38,301 547 59 38,789
-------- -------- -------- --------
Total investment securities $ 43,669 $ 680 $ 59 $ 44,290
======== ======== ======== ========
58
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities at
December 31, 2003 (including securities designated as available for sale)
by contractual term to maturity are shown below.
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
Due in one year or less $14,211 $14,322
Due after one year through five years 12,241 12,419
Due after five years 943 995
------- -------
Total investment securities 27,395 27,736
Corporate equity securities 330 476
------- -------
Total $27,725 $28,212
======= =======
Proceeds from sales of investment securities during the years ended
December 31, 2003 and 2002, totaled $3.8 million and $44,000,
respectively, resulting in gross realized gains of $99,000 and $27,000 in
those respective years.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 2003
and 2002, are as follows:
2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
FNMA $ 3,865 $ 103 $ 9 $ 3,959
FHLMC 2,437 27 11 2,453
GNMA 875 27 1 901
Other 527 -- 1 526
-------- -------- -------- --------
Total mortgage-backed securities
held to maturity 7,704 157 22 7,839
AVAILABLE FOR SALE:
FNMA 29,853 68 276 29,645
FHLMC 48,122 209 108 48,223
GNMA 42 6 -- 48
-------- -------- -------- --------
Total mortgage-backed securities
available for sale 78,017 283 384 77,916
-------- -------- -------- --------
Total mortgage-backed securities $ 85,721 $ 440 $ 406 $ 85,755
======== ======== ======== ========
59
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
2002
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
FNMA $ 11,831 $ 360 $ -- $ 12,191
FHLMC 6,614 214 8 6,820
GNMA 1,546 66 -- 1,612
Other 9 2 -- 11
-------- -------- -------- --------
Total mortgage-backed securities
held to maturity 20,000 642 8 20,634
AVAILABLE FOR SALE:
FNMA 55,255 1,821 -- 57,076
FHLMC 35,633 779 8 36,404
GNMA 3,753 99 -- 3,852
-------- -------- -------- --------
Total mortgage-backed securities
available for sale 94,641 2,699 8 97,332
-------- -------- -------- --------
Total mortgage-backed securities $114,641 $ 3,341 $ 16 $117,966
======== ======== ======== ========
The amortized cost of mortgage-backed securities, including those
designated as available for sale at December 31, 2003, by contractual
terms to maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers generally may prepay obligations
without prepayment penalties.
AMORTIZED COST
(In thousands)
Due within one year or less $ 18
Due after one year through five years 19,107
Due after five years through ten years 52,468
Due after ten years 14,128
-------
$85,721
-------
During the year ended December 31, 2003, the Bank sold mortgage-backed
securities totaling $58.4 million resulting in gross realized gains of
$740,000. During the year ended December 31, 2002, the Bank sold
mortgage-backed securities totaling $1.1 million resulting in gross
realized gains of $7,000 and gross realized losses of $5,000.
60
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2003. The
Corporation had no securities in an unrealized loss position for a period
greater than 12 months as of December 31, 2003.
LESS THAN 12 MONTHS
FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES
(In thousands)
Mortgage-backed securities
Held to maturity $ 1,513 $ 22
Available for sale 32,532 384
-------- --------
Total temporarily impaired securities $ 34,045 $ 406
======== ========
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to
an increase in market interest rates. The fair values are expected to
recover as securities approach maturity dates.
NOTE C - LOANS RECEIVABLE
Loans receivable at December 31 consist of the following:
2003 2002
(In thousands)
Conventional real estate loans:
Existing residential properties $ 551,634 $ 509,778
Multi-family 45,116 41,379
Nonresidential real estate 51,533 74,094
Construction 44,189 33,122
Developed building lots 1,725 535
Commercial 17,747 7,570
Home equity lines of credit 89,310 70,184
Consumer, education and other loans 15,292 18,763
--------- ---------
Total 816,546 755,425
Increase (decrease) due to:
Undisbursed portion of loans in process (17,022) (13,089)
Unamortized yield adjustments (810) (1,390)
Capitalized mortgage servicing rights 6,552 6,009
Allowance for loan losses (5,641) (5,490)
--------- ---------
Loans receivable - net $ 799,625 $ 741,465
========= =========
61
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE C - LOANS RECEIVABLE (continued)
As depicted above, the Corporation's lending efforts have historically
focused on loans secured by existing residential properties, which
comprise approximately $551.6 million, or 69%, of the total loan portfolio
at December 31, 2003 and approximately $509.8 million, or 69%, of the
total loan portfolio at December 31, 2002. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio,
which has historically provided the Corporation with adequate collateral
coverage in the event of default. Nevertheless, the Corporation, as with
any lending institution, is subject to the risk that residential real
estate values could deteriorate in its primary lending areas within Ohio,
West Virginia, and northern Kentucky, thereby impairing collateral values.
However, management believes that residential real estate values in the
Corporation's primary lending areas are presently stable.
The Bank, in the ordinary course of business, has granted loans to certain
of its directors, executive officers, and their related interests. Such
loans are made on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. The
aggregate dollar amount of these loans totaled approximately $1.4 million
and $459,000 at December 31, 2003 and 2002, respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
2003 2002 2001
(In thousands)
Balance at beginning of year $ 5,490 $ 4,256 $ 2,906
Provision for losses on loans 1,446 1,169 759
Charge-offs of loans (1,319) (207) (735)
Recoveries 24 272 26
Allowance resulting from acquisition -- -- 1,300
------- ------- -------
Balance at end of year $ 5,641 $ 5,490 $ 4,256
======= ======= =======
Nonaccrual and nonperforming loans totaled approximately $13.6 million,
$13.6 million and $7.9 million at December 31, 2003, 2002 and 2001,
respectively. Interest income that would have been recognized had such
nonaccrual loans performed pursuant to contractual terms totaled
approximately $808,000, $940,000 and $278,000 for the years ended December
31, 2003, 2002 and 2001, respectively.
62
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 is summarized as follows:
2003 2002
(In thousands)
Land $ 2,169 $ 2,194
Buildings and improvements 13,146 12,973
Furniture, fixtures and equipment 10,963 10,471
------- -------
26,278 25,638
Less accumulated depreciation and amortization 12,898 11,146
------- -------
$13,380 $14,492
======= =======
NOTE F - DEPOSITS
Deposit balances by type and weighted-average interest rate at December
31, 2003 and 2002, are summarized as follows:
2003 2002
AMOUNT RATE AMOUNT RATE
(Dollars in thousands)
Noninterest-bearing checking accounts $ 22,638 --% $ 26,313 --%
NOW accounts 82,831 0.42 80,562 1.07
Money market demand accounts 128,938 1.44 116,206 2.51
Passbook and statement savings accounts 74,274 0.25 78,359 0.79
-------- ---- -------- ----
Total withdrawable accounts 308,681 0.80 301,440 1.46
Certificates of deposit
Original maturities of:
Six months to one year 18,966 1.08 24,537 1.58
One to two years 61,186 1.88 79,172 2.82
Two to five years 174,487 4.05 179,711 4.96
Negotiated rate certificates 40,670 1.76 40,361 2.35
Individual retirement accounts 67,284 3.47 68,851 4.27
-------- ---- -------- ----
Total certificate accounts 362,593 3.17 392,632 3.93
-------- ---- -------- ----
Total deposits $671,274 2.08% $694,072 2.86%
======== ==== ======== ====
At December 31, 2003 and 2002, the Corporation had certificate of deposit
accounts with balances in excess of $100,000 totaling $87.1 million and
$89.7 million, respectively.
63
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE F - DEPOSITS (continued)
Interest expense on deposits is summarized as follows for the years ended
December 31:
2003 2002 2001
(In thousands)
Certificate of deposit accounts $13,120 $19,185 $26,706
NOW accounts and money
market demand accounts 2,545 3,015 3,059
Passbook and statement savings
accounts 372 860 1,559
------- ------- -------
$16,037 $23,060 $31,324
======= ======= =======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
2003 2002
YEAR ENDING DECEMBER 31: (In thousands)
2003 $ -- $216,958
2004 178,290 74,662
2005 85,268 60,620
2006 61,029 17,180
After 2006 38,006 23,212
-------- --------
Total certificate of deposit accounts $362,593 $392,632
======== ========
At December 31, 2003 and 2002, certain savings deposits were
collateralized by a pledge of investment securities, interest-bearing
deposits in other banks and letters of credit with the Federal Home Loan
Bank totaling $72.4 million and $112.7 million, respectively.
64
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
2003, by pledges of certain residential mortgage loans totaling $354.7
million and the Bank's investment in Federal Home Loan Bank stock, are
summarized as follows:
MATURING YEAR
INTEREST RATE RANGE ENDING DECEMBER 31, 2003 2002
(Dollars in thousands)
2.48% - 8.20% 2003 $ -- $ 14,109
0.96% - 8.20% 2004 29,408 11,388
4.43% - 7.60% 2005 47 10,516
5.05% - 6.40% 2006 1,121 5,062
5.36% - 6.95% 2007 1,565 5,624
4.52% - 6.05% 2008 22,157 21,964
2.66% - 7.17% Thereafter 208,437 207,613
-------- --------
$262,735 $276,276
======== ========
Weighted-average interest rate 5.13% 5.63%
-------- --------
During December 2003, the Corporation elected to prepay $25.4 million of
advances bearing a fixed weighted-average interest rate of 5.41%, which
resulted in the recognition of a prepayment fee totaling $1.3 million.
NOTE H - FEDERAL INCOME TAXES
A reconciliation of the effective tax rate to the federal statutory rate
is summarized as follows:
2003 2002 2001
(In thousands)
Federal income taxes computed at the
expected statutory rate $ 3,368 $ 5,082 $ 4,253
Increase (decrease) in taxes resulting from:
Amortization of goodwill -- -- 51
Nontaxable dividend and interest income (41) (33) (6)
Increase in cash surrender value of life insurance - net (268) (274) (105)
Nondeductible expenses 31 36 29
Refunds of prior year taxes -- -- (309)
Nontaxable proceeds from life insurance policy (62) -- --
Other 23 (9) (22)
------- ------- -------
Federal income tax provision per consolidated
financial statements $ 3,051 $ 4,802 $ 3,891
======= ======= =======
65
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE H - FEDERAL INCOME TAXES (continued)
The components of the Corporation's net deferred tax liability at December
31 are as follows:
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: 2003 2002
(In thousands)
Deferred tax liabilities:
FHLB stock dividends $(3,230) $(2,905)
Mortgage servicing rights (2,228) (2,043)
Percentage of earnings bad debt deduction -- (112)
Book versus tax depreciation (571) (528)
Original issue discount (471) (1,156)
Purchase price adjustments (242) (109)
Other liabilities, net (7) (25)
Unrealized gains on securities designated as
available for sale (106) (1,081)
------- -------
Total deferred tax liabilities (6,855) (7,959)
Deferred tax assets:
General loan loss allowance 1,918 1,867
Deferred income 455 363
Deferred compensation 510 282
Other assets 32 9
------- -------
Total deferred tax assets 2,915 2,521
------- -------
Net deferred tax liability $(3,940) $(5,438)
======= =======
For years prior to 1996, the Bank was allowed a special bad debt deduction
generally limited to 8% of otherwise taxable income, subject to certain
limitations based on aggregate loans and savings account balances at the
end of the year. If the amounts that qualified as deductions for federal
income taxes are later used for purposes other than for bad debt losses,
including distributions in liquidation, such distributions will be subject
to federal income taxes at the then current corporate income tax rate. The
percentage of earnings bad debt deduction had accumulated to approximately
$12.1 million as of December 31, 2003. The amount of the unrecognized
deferred tax liability relating to the cumulative bad debt deduction was
approximately $4.1 million at December 31, 2003.
The Bank was required to recapture as taxable income approximately $1.9
million of its bad debt reserve, which represented post-1987 additions to
the reserve, and is unable to utilize the percentage of earnings method to
compute the reserve in the future. The Bank had provided deferred taxes
for this amount and completed the amortization of the recapture of the bad
debt reserve into taxable income in 2003.
66
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE I - COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated statement of financial
condition. The contract or notional amounts of the commitments reflect the
extent of the Bank's involvement in such financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as those utilized for on-balance-sheet
instruments.
At December 31, 2003, the Bank had outstanding commitments to originate
and purchase fixed-rate loans of approximately $13.5 million and
adjustable-rate loans of approximately $1.9 million. Additionally, the
Bank had unused lines of credit under home equity and other loans of $59.8
million at December 31, 2003, and stand by letters of credit of $147,000.
Management believes that all loan commitments are able to be funded
through cash flow from operations and existing liquidity. Fees received in
connection with these commitments have not been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral on loans may vary but the preponderance of loans granted
generally include a mortgage interest in real estate as security.
The Corporation has entered into lease agreements for office premises and
equipment under operating leases which expire at various dates through the
year ended December 31, 2010. The following table summarizes minimum
payments due under lease agreements by year:
YEAR ENDING
DECEMBER 31, (In thousands)
2004 $205
2005 136
2006 93
2007 93
2008 and thereafter 295
----
$822
====
Rental expense under operating leases totaled approximately $234,000,
$251,000 and $257,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
67
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE J - REGULATORY CAPITAL
Advantage Bank is subject to the regulatory capital requirements of the
Federal Deposit Insurance Corporation (the "FDIC"). Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The FDIC has adopted risk-based capital ratio guidelines to which
Advantage is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based
capital ratios are determined by allocating assets and specified
off-balance sheet commitments to four risk-weighting categories, with
higher levels of capital being required for the categories perceived as
representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit
card relationships, subject to certain limitations). Supplementary ("Tier
II") capital includes, among other items, cumulative perpetual and
long-term limited-life preferred stock, mandatory convertible securities,
certain hybrid capital instruments, term subordinated debt and the
allowance for loan losses, subject to certain limitations, less required
deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which 4% must be Tier 1 capital. The FDIC may,
however, set higher capital requirements when particular circumstances
warrant. Savings banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions,
well above the minimum levels.
During 2003, management was notified by the FDIC that Advantage was
categorized as "well-capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well-capitalized"
Advantage must maintain minimum capital ratios as set forth in the table
that follows.
As of December 31, 2003, management believes that the Bank met all capital
adequacy requirements to which it was subject.
AS OF DECEMBER 31, 2003
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- -----------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,657 12.5% (Greater Than or Equal to)$51,539 (Greater Than or Equal to)8.0%
Tier I capital
(to risk-weighted assets) $75,016 11.6% (Greater Than or Equal to)$25,769 (Greater Than or Equal to)4.0%
Tier I leverage $75,016 7.4% (Greater Than or Equal to)$40,799 (Greater Than or Equal to)4.0%
AS OF DECEMBER 31, 2003
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) (Greater Than or Equal to)$64,424 (Greater Than or Equal to)10.0%
Tier I capital
(to risk-weighted assets) (Greater Than or Equal to)$38,654 (Greater Than or Equal to) 6.0%
Tier I leverage (Greater Than or Equal to)$50,999 (Greater Than or Equal to) 5.0%
68
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE J - REGULATORY CAPITAL (continued)
AS OF DECEMBER 31, 2002
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
--------------- ---------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $81,269 12.7% (Greater Than or Equal to)$51,067 (Greater Than or Equal to)8.0%
Tier I capital
(to risk-weighted assets) $75,779 11.9% (Greater Than or Equal to)$25,533 (Greater Than or Equal to)4.0%
Tier I leverage $75,779 7.2% (Greater Than or Equal to)$42,365 (Greater Than or Equal to)4.0%
AS OF DECEMBER 31, 2002
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-------------------------------------
AMOUNT RATIO
Total capital
(to risk-weighted assets) (Greater Than or Equal to)$63,834 (Greater Than or Equal to)10.0%
Tier I capital
(to risk-weighted assets) (Greater Than or Equal to)$38,300 (Greater Than or Equal to) 6.0%
Tier I leverage (Greater Than or Equal to)$52,956 (Greater Than or Equal to) 5.0%
The Corporation's management believes that, under the current regulatory
capital regulations, the Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Corporation, such as increased interest rates or a downturn in the
economy in the Bank's market areas, could adversely affect future earnings
and, consequently, the ability to meet future minimum regulatory capital
requirements.
NOTE K - BENEFIT PLANS
The Corporation has a non-contributory retirement plan which provides
benefits to certain key officers. The Corporation's obligations under the
plan have been provided for via the purchase of single premium key man
life insurance of which the Corporation is the beneficiary. The
Corporation recorded expense related to the plan totaling approximately
$291,000 $296,000 and $73,000 during the years ended December 31, 2003,
2002 and 2001, respectively.
The Corporation also has a 401(k) Salary Savings Plan covering
substantially all employees. Contributions by the employees are voluntary
and are subject to matching contributions by the employer under a fixed
percentage, which may be increased at the discretion of the Board of
Directors. Total expense under this plan was $297,000, $328,000 and
$385,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.
69
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION
The following condensed financial statements summarize the financial
position of the Corporation as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the years ended
December 31, 2003, 2002 and 2001:
CAMCO FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
2003 2002
ASSETS
Cash in Bank subsidiary $ 306 $ 333
Interest-bearing deposits in other financial institutions 11,315 14,981
Investment securities designated as available for sale 476 322
Investment in Bank subsidiary 78,734 81,437
Investment in title agency subsidiary 805 831
Office premises and equipment - net 1,386 1,425
Cash surrender value of life insurance 1,148 1,103
Prepaid expenses and other assets 105 --
--------- ---------
Total assets $ 94,275 $ 100,432
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 358 $ 472
Dividends payable 1,063 1,046
Accrued federal income taxes 300 296
Deferred federal income taxes 11 17
--------- ---------
Total liabilities 1,732 1,831
Stockholders' equity
Common stock 8,429 8,311
Additional paid-in capital 55,132 54,063
Retained earnings 45,121 42,497
Unrealized gains on securities designated as available for sale,
net of related tax effects 206 2,098
Treasury stock, at cost (16,345) (8,368)
--------- ---------
Total stockholders' equity 92,543 98,601
--------- ---------
Total liabilities and stockholders' equity $ 94,275 $ 100,432
========= =========
70
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended December 31,
(In thousands)
2003 2002 2001
Income
Dividends from Bank subsidiary $7,504 $18,006 $9,615
Dividends from title agency subsidiary 700 750 --
Interest and other income 172 146 173
Distributions in excess of net earnings of the Bank (709) (7,643) (306)
(Excess distribution from) undistributed earnings
of the title agency subsidiary (26) (270) 406
------ ------- ------
Total income 7,641 10,989 9,888
General, administrative and other expense 1,129 1,451 2,237
------ ------- ------
Earnings before federal income tax credits 6,512 9,538 7,651
Federal income tax credits (344) (467) (893)
------ ------- ------
Net earnings $6,856 $10,005 $8,544
====== ======= ======
71
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
2003 2002 2001
Cash flows from operating activities:
Net earnings for the year $ 6,856 $ 10,005 $ 8,544
Adjustments to reconcile net earnings to net cash
flows provided by (used in) operating activities:
Distributions in excess of net earnings of Bank subsidiary 709 7,643 306
Excess distribution from (undistributed net earnings of)
title agency subsidiary 26 270 (406)
Gain on sale of office premises and equipment (1) -- --
Depreciation and amortization 58 112 125
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (105) 1,946 (1,710)
Accounts payable and other liabilities (114) (4,340) 4,301
Accrued federal income taxes 4 (41) (40)
Deferred federal income taxes (58) 25 51
Tax benefits related to exercise of stock options 210 197 --
Other - net -- -- 14
-------- -------- --------
Net cash provided by operating activities 7,585 15,817 11,185
Cash flows from investing activities:
Purchase of investment securities -- (102) --
Proceeds from redemption of available for sale securities -- 17 --
Net increase in cash surrender value of life insurance (45) (49) (49)
Purchase of office premises and equipment (32) (98) (381)
Proceeds from sale of office premises and equipment 14 347 247
(Increase) decrease in interest-bearing deposits in other
financial institutions 3,666 (7,397) (6,209)
Purchase of Columbia Financial of Kentucky, Inc. - net -- -- (3,000)
-------- -------- --------
Net cash provided by (used in) investing activities 3,603 (7,282) (9,392)
Cash flows from financing activities:
Proceeds from exercise of stock options 977 1,886 1,262
Dividends paid (4,215) (4,045) (3,346)
Purchase of treasury shares (7,977) (6,314) --
-------- -------- --------
Net cash used in financing activities (11,215) (8,473) (2,084)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (27) 62 (291)
Cash and cash equivalents at beginning of year 333 271 562
-------- -------- --------
Cash and cash equivalents at end of year $ 306 $ 333 $ 271
-------- -------- --------
72
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE M - RESTRUCTURING CHARGE
In June 2001, Camco recorded a restructuring charge related to the
consolidation of its banking subsidiaries' charters. The restructuring
charge was recorded to accrue for termination of 22 accounting and loan
servicing employees and disbanding local boards of directors. Through
December 31, 2002, fourteen of the identified employees had been
terminated. The remaining employees either terminated prior to the
consolidation of the banking subsidiaries or transferred to other
departments. The following table summarizes activity related to the
restructuring charge:
EMPLOYEE OCCUPANCY
COMPENSATION AND OTHER
AND BENEFITS EQUIPMENT OPERATING TOTAL
(In thousands)
Original restructuring charge $ 643 $ 150 $ 295 $ 1,088
Restructuring charge reversed in 2001 (14) (56) (68) (138)
-------- -------- -------- --------
Net restructuring charge 629 94 227 950
Payments (388) (94) (227) (709)
-------- -------- -------- --------
Remaining accrued restructuring
charge at December 31, 2001 241 -- -- 241
Payments (109) -- -- (109)
Restructuring charge reversed in 2002 (112) -- -- (112)
-------- -------- -------- --------
Accrued restructuring charge at
December 31, 2002 $ 20 $ -- $ -- $ 20
-------- -------- -------- --------
During 2003, Camco paid $16,000 of the accrued liability and reversed the
remaining $4,000 to operations.
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 2003 and 2002.
THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2003: (In thousands, except per share data)
Total interest income $ 12,922 $ 13,342 $ 13,918 $ 14,693
Total interest expense 7,282 7,655 7,973 8,327
-------- -------- -------- --------
Net interest income 5,640 5,687 5,945 6,366
Provision for losses on loans 516 255 255 420
Other income 2,185 2,423 3,348 3,455
General, administrative and other expense 6,506 5,551 5,860 5,779
-------- -------- -------- --------
Earnings before income taxes 803 2,304 3,178 3,622
Federal income taxes 215 718 950 1,168
-------- -------- -------- --------
Net earnings $ 588 $ 1,586 $ 2,228 $ 2,454
======== ======== ======== ========
Earnings per share:
Basic $ 0.09 $ 0.21 $ 0.30 $ 0.32
======== ======== ======== ========
Diluted $ 0.09 $ 0.21 $ 0.29 $ 0.32
======== ======== ======== ========
73
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2003, 2002 and 2001
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2002: (In thousands, except per share data)
Total interest income $15,613 $16,461 $17,049 $16,879
Total interest expense 9,037 9,528 9,725 10,266
------- ------- ------- -------
Net interest income 6,576 6,933 7,324 6,613
Provision for losses on loans 417 338 207 207
Other income 3,059 2,684 2,104 2,253
General, administrative and other expense 5,299 5,559 5,573 5,139
------- ------- ------- -------
Earnings before income taxes 3,919 3,720 3,648 3,520
Federal income taxes 1,289 1,190 1,178 1,145
------- ------- ------- -------
Net earnings $ 2,630 $ 2,530 $ 2,470 $ 2,375
======= ======= ======= =======
Earnings per share:
Basic $ 0.34 $ 0.32 $ 0.31 $ 0.30
======= ======= ======= =======
Diluted $ 0.33 $ 0.32 $ 0.31 $ 0.29
======= ======= ======= =======
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the captions "Election of Directors,"
"Incumbent Directors," "Executive Officers," "Board Meetings, Committees and
Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed by
Camco on or about March 22, 2004 (the "Proxy Statement") is incorporated herein
by reference.
Camco has adopted a Code of Ethics that applies to all directors and
employees. The Code of Ethics is available upon request.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Proxy Statement under the caption, "Board
Meetings, Committees and Compensation" and "Compensation of Executive Officers"
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the Proxy Statement under the caption
"Ownership of Camco Shares" is incorporated herein by reference.
Camco maintains the Camco Financial Corporation 1995 Stock Option and
Incentive Plan, the First Ashland Financial Corporation 1995 Stock Option and
Incentive Plan, the Westwood Homestead Financial Corporation 1997 Stock Option
Plan and the Camco Financial Corporation 2002 Equity Incentive Plan
(collectively, the "Plans") under which it may issue equity securities to its
directors, officers and employees. Each of the Plans was approved by Camco's
stockholders.
The following table shows, as of December 31, 2003, the number of common
shares issuable upon the exercise of outstanding stock options, the
weighted-average exercise price of those stock options, and the number of common
shares remaining for future issuance under the Plans, excluding shares issuable
upon exercise of outstanding stock options.
75
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
------------- ------------------- ------------------- ------------------------
Equity compensation plans
approved by security
holders.................. 257,072 $12.11 433,389
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Advantage makes loans to executive officers and directors of Camco and its
subsidiaries in the ordinary course of business and on the same terms and
conditions, including interest rates and collateral, as those of comparable
loans to other persons. All outstanding loans to executive officers and
directors were made pursuant to such policy, do not involve more than the normal
risk of collectibility or present other unfavorable features and are current in
their payments.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information contained under the caption "Audit Committee Report" is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits.
3(i) Certificate of Incorporation
3(ii) Bylaws
10(i) Employment Agreement between Camco and Richard C. Baylor
10(ii) Employment Agreement between Camco and Larry A. Caldwell
10(iii) Form of Change of Control Agreement
10(iv) Form of 2002 Salary Continuation Agreement
10(v) 1996 Salary Continuation Agreement between Advantage
and D. Edward Rugg
10(vi) Form of Executive Deferred Compensation Agreement
10(vii) First Ashland Financial Corporation 1995 Stock Option
and Incentive Plan
10(viii) Camco Financial Corporation 2002 Equity Incentive Plan
10(ix) Camco Financial Corporation 1995 Stock Option and
Incentive Plan
10(x) Westwood Homestead Financial Corporation 1997 Stock
Option Plan
21 Subsidiaries of Camco
23 Consent of Grant Thornton LLP regarding Camco's
Consolidated Financial Statements and Form S-8
31(i) Section 302 Certification of Chief Executive Officer
31(ii) Section 302 Certification of Chief Financial Officer
32(i) Section 1350 Certification of Chief Executive Officer
32(ii) Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
Camco filed a Form 8-K on October 30, 2003, disclosing its
earnings release for the quarter ended September 30, 2003.
Camco filed a Form 8-K on on November 26, 2003, reporting
the declaration of a cash dividend. Camco filed a Form 8-K
on January 26, 2004, disclosing its earnings release for
the quarter and year ended December 31, 2004.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Camco Financial Corporation
By /s/ Richard C. Baylor
-------------------------------------------------
Richard C. Baylor,
President, Chief Executive Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Larry A. Caldwell By /s/ Robert C. Dix, Jr.
---------------------------- ----------------------------
Larry A. Caldwell Robert C. Dix, Jr.,
Chairman and Director Director
Date: March 10, 2004 Date: March 10, 2004
By /s/ Samuel W. Speck By /s/ Paul D. Leake
---------------------------- ----------------------------
Samuel W. Speck, Paul D. Leake,
Director Director
Date: March 10, 2004 Date: March 10, 2004
By /s/ Jeffrey T. Tucker By /s/ Terry A. Feick
---------------------------- ----------------------------
Jeffrey T. Tucker, Terry A. Feick,
Director Director
Date: March 10, 2004 Date: March 10, 2004
By /s/ Carson K. Miller By /s/ Susan J. Insley
---------------------------- ----------------------------
Carson K. Miller, Susan J. Insley,
Director Director
Date: March 10, 2004 Date: March 10, 2004
By /s/ Mark A. Severson
----------------------------
Mark A. Severson,
Chief Financial Officer
Date: March 10, 2004
77
INDEX TO EXHIBITS
ITEM DESCRIPTION
- ---- -----------
Exhibit 3(i) Restated Certificate of
Incorporation of Camco Financial
Corporation
Exhibit 3(ii) 1987 Amended and Restated Incorporated by reference to Camco's
By-Laws of Camco Financial Form 10-Q for the quarter ended
Corporation September 30, 2003, Exhibit 3
Exhibit 10(i) Employment Agreement dated Incorporated by reference to Camco's
January 1, 2001, by and between 2002 Proxy, Exhibit 10(i)
Camco Financial Corporation and
Richard C. Baylor
Exhibit 10(ii) Employment Agreement dated Incorporated by reference to Camco's
November 9, 2001, by and between 2002 Proxy, Exhibit 10(ii)
Camco Financial Corporation and
Larry A. Caldwell
Exhibit 10(iii) Form of Change of Control Agreement
Exhibit 10(iv) Form of 2002 Salary Continuation
Agreement, including individualized
Schedule A's for each participant
Exhibit 10(v) 1996 Salary Continuation Agreement
Between Advantage and D. Edward Rugg
Exhibit 10(vi) Form of Executive Deferred
Compensation Agreement
Exhibit 10(vii) First Ashland Financial Corporation Incorporated by reference to Camco's
1995 Stock Option and Incentive Plan Form S-8 filed on June 10, 2002, File Number
333-90142, Exhibit 4.01
Exhibit 10(viii) Camco Financial Corporation 2002 Incorporated by reference to Camco's
Equity Incentive Plan Form S-8 filed on June 10, 2002, File
Number 333-90152, Exhibit 4.01
Exhibit 10(ix) Camco Financial Corporation 1995 Incorporated by reference to Camco's
Stock Option and Incentive Plan Form S-8 filed on June 10, 2002, File
Number 333-90166, Exhibit 4.01
Exhibit 10(x) Westwood Homestead Financial Incorporated by reference to Camco's
Corporation 1997 Stock Option Plan Form S-8 filed on January 5, 2000, File Number
333-94113, Exhibit 4.01
Exhibit 21 Subsidiaries of Camco
Exhibit 23 Consent of Grant Thornton LLP
regarding Camco's Consolidated
Financial Statements and Form S-8
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