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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File Number: 0-25196
CAMCO FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0110823
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6901 Glenn Highway, Cambridge, Ohio 43725
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (740) 435-2020
Securities registered pursuant to Section 12(b) of the Act:
None None
- ----------------------------- -------------------------------------------
(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. [X]
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 7,678,748 shares of the registrant's common stock
outstanding on February 18, 2005.
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 financial 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 and Camco Title Insurance Agency, Inc. In June
2001, Camco completed a reorganization in which it combined its banking
activities under one Ohio savings bank charter known as Advantage Bank
("Advantage" or the "Bank"). Prior to the reorganization, Camco operated five
separate banking subsidiaries (Cambridge Savings Bank, Marietta Savings Bank,
First Savings Bank, First Bank for Savings and Westwood Homestead Savings Bank)
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. In 2003, Camco dissolved its second tier subsidiary, Camco
Mortgage Corporation, and converted its offices into branch offices of the Bank.
In August 2004, Camco completed a business combination with London Financial
Corporation ("London") of London, Ohio, and its wholly-owned subsidiary, The
Citizens Bank of London. The acquisition was accounted for using the purchase
method of accounting and, therefore, the financial statements for prior periods
have not been restated. At the time of the merger, Advantage Bank merged into
The Citizens Bank of London and changed the name of the resulting institution to
Advantage Bank. As a result, Camco's subsidiary financial institution is now an
Ohio-chartered commercial bank instead of an Ohio savings bank. Further, Camco
converted from an OTS regulated thrift holding company to a financial holding
company regulated by the Federal Reserve Board.
During the periods for which financial information is presented, Camco
completed several business combinations in addition to the London transaction,
all of which were accounted for using the purchase method of accounting and,
therefore, the financial statements for prior periods have not been restated.
During 2000, Camco completed a business combination with Westwood Homestead
Financial Corporation ("WHFC") and its wholly-owned subsidiary, Westwood
Homestead Savings Bank and 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. In December 2004,
Advantage sold its Ashland, Kentucky division, consisting of two branches.
Advantage is primarily regulated by the State of Ohio Department of
Commerce, Division of Financial Institutions (the "Division"), and the Federal
Deposit Insurance Corporation (the "FDIC"). Advantage is a member of the Federal
Home Loan Bank (the "FHLB") of Cincinnati, and its deposit accounts are insured
up to applicable limits by the Savings Association Insurance Fund (the "SAIF")
administered by the FDIC. Camco is regulated by the Federal Reserve Board.
Advantage'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,
------------------------------------------------------------------------------------------------
2004 2003 2002 2001
---------------------- ---------------------- ---------------------- ---------------------
Percent Percent Percent Percent
of total of total of total of total
Amount loans Amount loans Amount loans Amount loans
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Type of loan:
Existing residential properties(1) $ 603,722 72.1% $ 652,953 81.1% $ 641,464 80.5% $ 705,056 80.9%
Construction 75,055 9.0 44,189 5.5 33,122 4.1 42,666 4.9
Nonresidential real estate 105,247 12.6 51,533 6.4 74,094 9.3 70,239 8.1
Developed building lots 15,854 1.9 1,725 0.2 535 0.1 5,908 0.7
Consumer and other loans(2) 84,550 10.1 78,155 9.7 67,712 8.5 69,116 7.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total 884,428 105.7 828,555 102.9 816,927 102.5 892,985 102.5
Less:
Undisbursed loans in process (40,349) (4.8) (17,022) (2.1) (13,089) (1.6) (15,343) (1.8)
Unamortized yield adjustments (937) (0.1) (810) (0.1) (1,390) (0.2) (1,940) (0.2)
Allowance for loan losses (6,476) (0.8) (5,641) (0.7) (5,490) (0.7) (4,256) (0.5)
--------- --------- --------- --------- --------- --------- --------- ---------
Total loans, net $ 836,666 100.0% $ 805,082 100.0% $ 796,958 100.0% $ 871,446 100.0%
========= ========= ========= ========= ========= ========= ========= =========
At December 31,
----------------------
2000
----------------------
Percent
of total
Amount loans
--------- ---------
(Dollars in thousands)
Type of loan:
Existing residential properties(1) $ 764,828 82.2%
Construction 56,039 6.0
Nonresidential real estate 54,722 5.9
Developed building lots 5,640 0.6
Consumer and other loans(2) 73,178 7.9
--------- ---------
Total 954,407 102.6
Less:
Undisbursed loans in process (19,911) (2.2)
Unamortized yield adjustments (918) (0.1)
Allowance for loan losses (2,906) (0.3)
--------- ---------
Total loans, net $ 930,672 100.0%
========= =========
- -----------------
(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 $836.7 million at December 31,
2004, and represented 78.5% of total assets.
3
LOAN MATURITY SCHEDULE. The following table sets forth certain information as of
December 31, 2004, 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
2005 2006-2010 2010 Total
-------------- ------------ ------------ --------
(In thousands)
Real estate loans (1):
One- to four-family $ 11,447 $ 73,367 $509,121 $593,935
Multifamily 913 2,921 43,418 47,252
Nonresidential 6,100 11,601 87,546 105,247
Commercial 3,297 3,521 9,774 16,592
Consumer and other loans (2) 8,081 11,144 2,394 21,619
Construction 10,162 5,151 34,331 49,644
-------- -------- -------- --------
Total $ 40,000 $107,705 $686,584 $834,289
======== ======== ======== ========
- ------------------
(1) Excludes loans held for sale of $2.8 million and does not consider the
effects of unamortized yield adjustments of $937,000, the allowance for
loan losses of $6.5 million and mortgage-servicing rights totaling $6.9
million.
(2) Includes loans secured by developed building lots.
The following table sets forth at December 31, 2004, 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, 2005
-----------------
(In thousands)
Fixed rate of interest $266,290
Adjustable rate of interest 527,999
--------
Total $794,289
========
Generally, loans originated by Advantage are on a fully amortized basis.
Advantage has no rollover provisions in its loan documents and anticipates that
loans will be paid in full by the maturity date.
RESIDENTIAL LOANS. A significant 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, 2004, 72.1% 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 and five-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 one -
year arms at the fully indexed rate and three-year and five-year arms utilizing
the note rates. None of Advantage's ARMs have negative amortization 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, 2004, 50.9% were ARMs and 49.1% were fixed-rate loans.
Adjustable-rate loans comprised 65.9% of Advantage's total outstanding loans at
December 31, 2004.
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, 2004, a total of $75.1 million, or
approximately 9.0% of Advantage's total loans, consisted of construction loans,
primarily for one- to four-family properties.
Construction loans to owner-occupants are 30 year fixed rate, 15 year
fixed rate, 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, 2004, Advantage had 34
construction loans in the amount of $18.1 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, 2004,
was a $5.8 million loan secured by a nursing home. Nonresidential real estate
loans comprised $105.2 million, or 12.6% of total loans at December 31, 2004.
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 $47.3 million of multifamily loans of which the largest is $2.9
million secured by an apartment building. At December 31, 2004, education,
consumer and other loans, including multi-family loans, constituted $84.6
million, or 10.1% 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 Advantage'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. Advantage'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, 2004, 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, 2004, Advantage sold approximately $117.9
million in loans. Advantage recognized $1.6 million in mortgage servicing rights
during 2004, while amortization of mortgage servicing rights totaled $1.2
million for the year ended December 31, 2004.
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 $43.2 million at December
31, 2004. 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,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands)
Loans originated:
Construction $ 45,826 $ 37,791 $ 54,114 $ 35,330 $ 71,929
Permanent 164,540 422,021 447,379 240,625 202,004
Consumer and other 126,168 147,668 70,772 83,126 84,526
--------- --------- --------- --------- ---------
Total loans originated 336,534 607,480 572,265 359,081 358,459
Loans purchased (1) 70,602 126,006 116,306 17,755 8,639
Reductions:
Principal repayments (1) 243,074 407,521 441,419 273,212 178,663
Loans sold (1) 130,801 337,376 239,636 215,289 124,496
Transfers from loans to real estate owned 6,591 4,010 1,270 3,208 1,432
--------- --------- --------- --------- ---------
Total reductions (380,466) (748,907) (682,325) (491,709) (304,591)
Increase (decrease) in other items, net (2) (2,655) (8,167) (1,142) (3,162) (2,552)
Decrease due to sales (4) (42,634) - - - -
Increase due to mergers (3) 49,050 - - 81,426 147,196
--------- --------- --------- --------- ---------
Net increase (decrease) $ 30,431 $ (23,588) $ 5,104 $ (36,609) $ 207,151
========= ========= ========= ========= =========
- ------------------
(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, the
2000 increase resulted from the acquisition of WHFC and the 2004 increase
resulted from the acquisition of London.
(4) The 2004 decrease resulted from the sale of the Ashland division.
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, 2004, was approximately $12.1 million. The largest amount Advantage
had outstanding to one borrower and related persons or entities at December 31,
2004, was $8.1 million, which consisted of 8 loans secured by real estate,
commercial real estate in development and building lots.
7
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
Advantage may receive loan origination fees or "points" of up to 2.0% of the
loan amount, depending on the type of loan, plus reimbursement of certain other
expenses. Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending and economic conditions. All nonrefundable
loan origination fees and certain direct loan origination costs are deferred and
recognized as an adjustment to yield over the life of the related loan in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 91.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Advantage
attempts to minimize loan delinquencies through the assessment of late charges
and adherence to established collection procedures. Generally, after a loan
payment is 15 days delinquent, a late charge of 5% of the amount of the payment
is assessed and a collection officer contacts the borrower to request payment.
In certain limited instances, Advantage may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his or her
financial affairs. Advantage generally initiates foreclosure proceedings, in
accordance with applicable laws, when it appears that a modification or
moratorium would not be productive.
Real estate which has been acquired by Advantage as a result of
foreclosure or by deed in lieu of foreclosure is classified as "real estate
owned" until it is sold. "Real estate owned" is recorded at the lower of the
book value of the loan or the fair value of the property less estimated selling
expenses at the date of acquisition. Periodically, "real estate owned" is
reviewed to ensure that fair value is not less than carrying value, and any
write-down resulting therefrom is charged to earnings as a provision for losses
on real estate acquired through foreclosure. All costs incurred from the date of
acquisition are expensed in the period paid.
The following table reflects the amount of loans in a delinquent status as
of the dates indicated:
At December 31,
------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Loans delinquent for:
30 to 89 days $12,302 $ 8,682 $10,524 $14,238 $10,557
90 or more days 9,794 13,608 13,625 7,885 4,726
------- ------- ------- ------- -------
Total delinquent loans $22,096 $22,290 $24,149 $22,123 $15,283
======= ======= ======= ======= =======
Ratio of total delinquent loans to
total net loans (1) 2.64% 2.77% 3.03% 2.54% 1.64%
======= ======= ======= ======= =======
- ------------------
(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,
-------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential $ 7,922 $12,135 $11,021 $ 3,677 $ 2,068
Nonresidential 463 357 1,726 367 197
Consumer and other 1,409 1,116 878 393 157
------- ------- ------- ------- -------
Total nonaccrual loans 9,794 13,608 13,625 4,437 2,422
Accruing loans delinquent 90 days or more:
Real estate:
Residential - - - 2,564 1,836
Nonresidential - - - 206 -
Consumer and other - - - 678 468
------- ------- ------- ------- -------
Total loans 90 days past due - - - 3,448 2,304
------- ------- ------- ------- -------
Total nonperforming loans $ 9,794 $13,608 $13,625 $ 7,885 $ 4,726
======= ======= ======= ======= =======
Allowance for loan losses $ 6,476 $ 5,641 $ 5,490 $ 4,256 $ 2,906
======= ======= ======= ======= =======
Nonperforming loans as a percent of
total net loans (1) 1.17% 1.69% 1.71% .90% .51%
======= ======= ======= ======= =======
Allowance for loan losses as a percent of
nonperforming loans 66.1% 41.5% 40.3% 54.0% 61.5%
======= ======= ======= ======= =======
- ------------------
(1) Includes loans held for sale.
The amount of interest income that would have been recorded had nonaccrual
loans performed in accordance with contractual terms totaled approximately
$573,000 for the year ended December 31, 2004. Interest collected on such loans
and included in net earnings was $227,000.
At December 31, 2004, 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, 2004, the aggregate amounts of Camco's classified
assets were as follows:
At December 31, 2004
--------------------
(In thousands)
Classified assets:
Substandard $9,667
Doubtful 129
Loss 129
------
Total classified assets $9,925
======
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 $1.0 million designated as "special mention" at
December 31, 2004.
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,
----------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at beginning of year $ 5,641 $ 5,490 $ 4,256 $ 2,906 $ 1,863
Charge-offs:
1-4 family residential real estate 1,142 509 134 66 9
Multifamily and nonresidential real estate 25 418 - 12 41
Consumer and other 430 392 73 657 122
------- ------- ------- ------- -------
Total charge-offs 1,597 1,319 207 735 172
------- ------- ------- ------- -------
Recoveries:
1-4 family residential real estate 180 17 23 3 -
Consumer and other 9 7 249 23 6
------- ------- ------- ------- -------
Total recoveries 189 24 272 26 6
------- ------- ------- ------- -------
Net recoveries (charge-offs) (1,408) (1,295) 65 (709) (166)
Provision for losses on loans 1,620 1,446 1,169 759 568
Increase attributable to mergers (1) 623 - - 1,300 641
------- ------- ------- ------- -------
Balance at end of year $ 6,476 $ 5,641 $ 5,490 $ 4,256 $ 2,906
======= ======= ======= ======= =======
Net recoveries (charge-offs) to average loans (.17)% (.17)% .01% (.08)% (.02)%
======= ======= ======= ======= =======
- ------------------
(1) The 2004 increase resulted from the acquisition of London Financial, the
2001 increase resulted from the acquisition of Columbia Financial, and the
2000 increase resulted from the acquisition of WHFC.
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,
----------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------------- ----------------- ----------------- ----------------- -----------------
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:
Secured loans $4,915 94.9% $4,452 90.3% $4,910 91.5% $3,418 92.1% $2,440 92.1%
Unsecured loans 1,561 5.1 1,189 9.7 580 8.5 838 7.9 466 7.9
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,476 100.0% $5,641 100.0% $5,490 100.0% $4,256 100.0% $2,906 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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.
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,
-------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
Amortized % of Fair % of Amortized % of Fair % of
cost total value total cost total value total
-------- ------- -------- ------- -------- ------- -------- -------
Held to maturity: (Dollars in thousands)
U.S. Government
agency obligations $ 2,999 2.8% $ 2,997 2.7% $ - -% $ - -%
Municipal bonds 1,124 1.0 1,177 1.1 1,130 1.0 1,204 1.0
Mortgage-backed
securities 4,146 3.8 4,188 3.9 7,704 6.8 7,839 6.9
-------- ------- -------- ------- -------- ------- -------- -------
Total 8,269 7.6 8,362 7.7 8,834 7.8 9,043 7.9
Available for sale:
U.S. Government
agency obligations 18,007 16.6 17,921 16.5 25,640 22.6 25,881 22.7
Municipal bonds 523 0.5 536 0.5 625 0.5 651 0.6
Corporate equity
securities 247 0.2 387 0.4 330 0.3 476 0.4
Treasury 999 0.9 995 0.9 - - - -
Mortgage-backed
securities 80,782 74.2 80,321 74.0 78,017 68.8 77,916 68.4
-------- ------- -------- ------- -------- ------- -------- -------
Total 100,558 92.4 100,160 92.3 104,612 92.2 104,924 92.1
-------- ------- -------- ------- -------- ------- -------- -------
Total investments and
mortgage-backed
securities $108,827 100.0% $108,522 100.0% $113,446 100.0% $113,967 100.0%
======== ===== ======== ===== ======== ===== ======== =====
At December 31,
----------------------------------------
2002
----------------------------------------
Amortized % of Fair % of
cost total value total
-------- ------- -------- --------
Held to maturity: (Dollars in thousands)
U.S. Government
agency obligations $ 4,233 2.7% $ 4,306 2.7%
Municipal bonds 1,135 0.7 1,195 0.7
Mortgage-backed
securities 20,000 12.6 20,634 12.7
-------- ------- -------- --------
Total 25,368 16.0 26,135 16.1
Available for sale:
U.S. Government
agency obligations 35,557 22.5 36,004 22.2
Municipal bonds 2,414 1.5 2,463 1.5
Corporate equity
securities 330 0.2 322 0.2
Treasury - - - -
Mortgage-backed
securities 94,641 59.8 97,332 60.0
-------- ------- -------- --------
Total 132,942 84.0 136,121 83.9
-------- ------- -------- --------
Total investments and
mortgage-backed
securities $158,310 100.0% $162,256 100.0%
======== ======= ======== ========
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, 2004:
At December 31, 2004
--------------------------------------------------------------------------------------------------------------
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)
Treasury $ 999 1.51% $ - -% $ - -% $ - -% $ 999 $ 995 1.51%
U.S. Government
Agency obligations 7,006 2.74 14,000 2.99 - - - - 21,006 20,918 2.91
Municipal bonds 377 2.96 927 3.57 253 4.20 90 6.66 1,647 1,713 3.70
Mortgage-backed
securities 14 8.50 14,205 4.04 48,780 3.77 21,929 4.12 84,928 84,509 3.91
-------- ---- ------- ---- -------- ---- -------- ---- -------- -------- ----
Total $ 8,396 2.61% $29,132 3.52% $ 49,033 3.77% $ 22,019 4.13% $108,580 $108,135 3.69%
======== ==== ======= ==== ======== ==== ======== ==== ======== ======== ====
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,
----------------------------------------------------------------
2004 2003 2002
Weighted- --------------------- ----------------------- ---------------
average rate Percent Percent Percent
at of total of total of total
12/31/04 Amount deposits Amount deposits Amount deposits
------------ -------- -------- ------ -------- ------ --------
(Dollars in thousands)
Withdrawable accounts:
Interest-bearing and non-interest bearing
checking accounts 0.94% $151,847 22.8% $105,469 15.7% $106,875 15.4%
Money market demand accounts 1.25 83,063 12.4 128,938 19.2 116,206 16.7
Passbook and statement savings accounts 0.25 70,959 10.6 74,274 11.1 78,359 11.3
--------- -------- ------ -------- ------ -------- ------
Total withdrawable accounts .87 305,869 45.8 308,681 46.0 301,440 43.4
Certificate accounts:
Term:
Six months to one year 1.76 19,115 2.9 18,966 2.8 24,537 3.6
One to two years 2.13 77,913 11.7 61,186 9.1 79,172 11.4
Two to eight years 3.93 148,351 22.2 174,487 26.0 179,711 25.9
Negotiated rate certificates 2.30 55,845 8.3 40,670 6.1 40,361 5.8
Individual retirement accounts 3.57 60,685 9.1 67,284 10.0 68,851 9.9
--------- -------- ------ -------- ------ -------- ------
Total certificate accounts 3.11 361,909 54.2 362,593 54.0 392,632 56.6
--------- -------- ------ -------- ------ -------- ------
Total deposits 2.08% $667,778 100.0% $671,274 100.0% $694,072 100.0%
========= ======== ====== ======== ====== ======== ======
The following table presents the amount and contractual maturities of
Camco's time deposits at December 31, 2004:
Amount Due
-----------------------------------------------------
Up to Over
one year 1-3 years 3-5 years 5 years Total
-------- --------- --------- ------- -----
(Dollars in thousands)
Amount maturing $193,395 $124,359 $42,550 $1,605 $361,909
Average rate 2.62% 3.54% 4.01% 5.41% 3.11%
The following table sets forth the amount and maturities of Advantage's
time deposits in excess of $100,000 at December 31, 2004:
Maturity At December 31, 2004
- ------------------------- --------------------
(In thousands)
Three months or less $35,184
Over three to six months 25,017
Over six to twelve months 11,666
Over twelve months 27,910
-------
Total $99,777
=======
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.
13
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,
------------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in thousands)
Maximum amount outstanding $ 295,310 $ 280,298 $ 282,122
Average amount outstanding $ 277,576 $ 273,147 $ 265,614
Weighted-average interest cost of FHLB
advances based on month end balances 4.89% 5.56% 5.83%
The following table sets forth certain information with respect to Camco's
FHLB advances at the dates indicated:
At December 31,
-------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in thousands)
Amount outstanding $295,310 $262,735 $276,276
Weighted-average interest rate 3.63% 5.13% 5.63%
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
Advantage has no operating subsidiaries. First S&L Corporation, a
subsidiary, is inactive and was capitalized on a nominal basis at December 31,
2004.
14
EMPLOYEES
As of December 31, 2004, Camco had 264 full-time employees and 31
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 financial holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"), Camco is subject to regulation,
examination and oversight by the Board of Governors of the Federal Reserve
System ("FRB"). Although Camco is recognized as a financial holding company,
most regulations pertaining to bank holding companies also apply to it.
Advantage is a non-member of the FRB and is 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 FRB.
OHIO REGULATION
Regulation by the Division affects the internal organization of Advantage,
as well as its savings, mortgage lending and other investment activities.
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 banks to
engage in certain state-authorized investments is subject to oversight and
approval by the FDIC. See "Federal Deposit Insurance Corporation - State
Chartered Bank Activities."
Any mergers involving, or acquisitions of control of, Ohio banks must be
approved by the Division. The Division may initiate certain supervisory measures
or formal enforcement actions against Ohio savings banks. Ultimately, if the
grounds provided by law exist, the Division may place an Ohio bank in
conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing
banks, Advantage is also governed by Ohio corporate law, to the extent such law
does not conflict with the laws specifically governing banks.
FEDERAL DEPOSIT INSURANCE CORPORATION
SUPERVISION AND EXAMINATION. The FDIC is responsible for the regulation
and supervision of all commercial banks that are not members of the Federal
Reserve System ("Non-member Banks"). The FDIC is an independent federal agency
that insures the deposits, up to prescribed statutory limits, of federally
insured banks and thrifts and safeguards the safety and soundness of the 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.
Non-member Banks 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
15
community reinvestment. Failure to abide by federal laws and regulations
governing community reinvestment could limit the ability of an institution to
open a new branch or engage in a merger transaction.
STATE CHARTERED BANK ACTIVITIES. The ability of Advantage to engage in any
state-authorized activities or make any state-authorized investments, as
principal, is limited if such activity is conducted or investment is made in a
manner different than that permitted for, or subject to different terms and
conditions than those imposed on, national banks. Engaging as a principal in any
such activity or investment not permissible for a national bank is subject to
approval by the FDIC. Such approval will not be granted unless certain capital
requirements are met and there is not a significant risk to the FDIC insurance
fund. Most equity and real estate investments (excluding office space and other
real estate owned) authorized by state law are not permitted for national banks.
Certain exceptions are granted for activities deemed by the FRB to be closely
related to banking and for FDIC-approved subsidiary activities.
LIQUIDITY. Advantage is not required to maintain a specific level of
liquidity; however, the FDIC expects it to maintain adequate liquidity to
protect safety and soundness.
REGULATORY CAPITAL REQUIREMENTS. Camco and Advantage are required by
applicable law and regulations to meet certain minimum capital requirements. The
capital standards include a leverage limit, or core capital requirement, a
tangible capital requirement and a risk-based capital requirement.
The leverage capital requirement is a minimum level of Tier 1 capital to
average total consolidated assets of 4%. "Tier 1" capital includes common
stockholders equity, noncumulative perpetual preferred stock and minority
interest in the equity accounts of consolidated subsidiaries, less all
intangibles, other than includable purchased mortgage servicing rights and
credit card relationships.
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 FRB and FDIC have 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. Camco and
Advantage's capital level at December 31, 2004, met the standards for
well-capitalized institutions.
16
The following tables present certain information regarding compliance by
Camco and Advantage with applicable regulatory capital requirements at December
31, 2004:
Camco: At December 31, 2004
--------------------------------------------------------------------------------
To be "well-
capitalized" under
prompt corrective
For capital ---------------------------
Actual adequacy purposes action provisions
-------------------- ----------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------------- ---------- -------------- -----------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $88,628 12.38% > or = $ 57,292 > or = 8.0% > or = $71,615 > or =10.0%
Tier I capital
(to risk-weighted assets) $82,152 11.47% > or = $ 28,646 > or = 4.0% > or = $42,969 > or = 6.0%
Tier I leverage $82,152 7.54% > or = $ 43,568 > or = 4.0% > or = $54,460 > or = 5.0%
Advantage At December 31, 2004
------------------------------------------------------------------------------
To be "well-
capitalized" under
prompt corrective
For capital ------------------------
Actual adequacy purposes action provisions
-------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ -------------- ----------- -------------- -----------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,373 11.25% > or = $57,177 > or = 8.0% > or = $71,472 > or =10.0%
Tier I capital
(to risk-weighted assets) $73,897 10.34% > or = $28,589 > or = 4.0% > or = $42,883 > or = 6.0%
Tier I leverage $73,897 6.86% > or = $43,118 > or = 4.0% > or = $53,897 > or = 5.0%
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance.
TRANSACTIONS WITH AFFILIATES AND INSIDERS
All transactions between banks and their affiliates must comply with
Sections 23A and 23B of the Federal Reserve Act (the "FRA") and the FRB's
Regulation W. An affiliate is any company or entity which controls, is
controlled by or is under common control with the financial institution. In a
holding company context, the parent holding company of a bank and any companies
that are controlled by such parent holding company are affiliates of the
institution. Generally, Sections 23A and 23B of the FRA (i) limit the extent to
which a financial institution or its subsidiaries may engage in "covered
transactions" with any one affiliate up to an amount equal to 10% of such
institution's capital stock and surplus for any one affiliate and 20% of such
capital stock and surplus for the aggregate of such transactions with all
affiliates, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or the
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar types of transactions. Exemptions from Sections 23A or 23B of the FRA
may be granted only by the FRB. Advantage was in compliance with these
requirements at December 31, 2004.
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
17
power, directly or indirectly, alone or acting in concert, to direct the
management or policies of an insured institution or to vote 25% or more of any
class of securities of such institution. Control exists in situations in which
the acquiring party has direct or indirect voting control of at least 25% of the
institution's voting shares, controls in any manner the election of a majority
of the directors of such institution or is determined to exercise a controlling
influence over the management or policies of such institution. In addition,
control is presumed to exist, under certain circumstances where the acquiring
party (which includes a group "acting in concert") has voting control of at
least 10% of the institution's voting stock. These restrictions do not apply to
holding company acquisitions. See "Holding Company Regulation".
OHIO LAW. A statutory limitation on the acquisition of control of an Ohio
bank requires the written approval of the Division prior to the acquisition by
any person or entity of a controlling interest 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 financial holding company, Camco has registered with the FRB and is
subject to FRB regulations, examination, supervision and reporting requirements.
Because Camco is a bank holding company that has elected to become a financial
holding company, some of the restrictions on its activities are reduced. Camco's
financial holding company status allows Advantage to associate or have
management interlocks with business organizations engaged in securities
activities. In order to maintain status as a financial holding company,
Advantage must be well capitalized and well managed, and must meet Community
Reinvestment Act obligations. Failure to maintain such standards may ultimately
permit the FRB to take certain enforcement actions against Camco.
Financial holding companies are permitted to engage in those activities
that are determined by the FRB to be financial in nature, incidental to an
activity that is financial in nature, or complementary to a financial activity
and that do not pose a safety and soundness risk. Activities defined to be
"financial in nature" include, but are not limited to, the following: providing
financial or investment advice; underwriting; dealing in or making markets in
securities; merchant banking, subject to significant limitations; and any
activities previously found by the FRB to be closely related to banking.
Under FRB policy, a bank holding company is required to act as a source of
financial and managerial strength to its subsidiary banks. Under this policy,
Camco is expected to commit resources to Advantage in circumstances where it
might not do so absent such policy. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and will be entitled to a priority payment.
FEDERAL RESERVE REQUIREMENTS
FRB regulations currently require banks to maintain reserves of 3% of net
transaction accounts (primarily NOW accounts) up to $47.6 million (subject to an
exemption of up to $7.0 million), and of 10% of net transaction accounts in
excess of $47.6 million. At December 31, 2004, Advantage was in compliance with
its reserve requirements.
18
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.
The tax returns of Camco have been audited or closed without audit through
calendar year 2000. 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 financial holding company, Camco is
exempt from Delaware corporate income tax.
KENTUCKY TAXATION. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. Advantage is subject to an annual ad
valoreum tax which is .1% of Advantage's Kentucky deposit accounts, and
apportioned common stock and retained income, with certain deductions for
amounts borrowed by depositors and securities guaranteed by the U.S. Government
or certain of its agencies.
WEST VIRGINIA TAXATION. Advantage and Camco Title are subject to a West
Virginia tax on apportioned adjusted net income and a West Virginia franchise
tax on apportioned adjusted capital. The adjusted net income of each is taxed at
a rate of 9.0%. The franchise tax rate is 0.75% of adjusted capital. The
apportionment is based solely on the ratio of gross receipts derived from West
Virginia as compared to gross receipts everywhere.
19
ITEM 2. PROPERTIES.
The following table provides the location of, and certain other
information pertaining to, Camco's office premises as of December 31, 2004:
Year facility Leased
commenced or Net book
Office Location operations owned value (1)
- --------------- ------------- --------- -----------
134 E. Court Street
Washington Court House, Ohio 1963 Owned (2) $ 745,826
1050 Washington Ave.
Washington Court House, Ohio 1996 Owned 517,695
1 N. Plum Street
Germantown, Ohio 1998 Owned 521,077
687 West Main Street
New Lebanon, Ohio 1998 Owned 76,044
2 East High Street
London, Ohio 2004 Owned 636,907
1392 Cherry Bottom Road
Gahanna, Ohio 1999 Leased (3)
3002 Harrison Avenue
Cincinnati, Ohio 2000 Owned 1,447,603
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 90,433
226 Third Street
Marietta, Ohio 1976 Owned (6) 660,072
1925 Washington Boulevard
Belpre, Ohio 1979 Owned 72,683
478 Pike Street
Marietta, Ohio 1998 Leased (7) 576,621
510 Grand Central Avenue
Vienna, West Virginia 1991 Leased (8)
814 Wheeling Avenue
Cambridge, Ohio 1963 Owned (9) 880,028
327 E. 3rd Street
Uhrichsville, Ohio 1975 Owned 76,179
175 N. 11th Street
Cambridge, Ohio 1981 Owned 397,680
- -------------------------------
(Footnotes begin on page 22)
20
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 $ 379,909
2497 Dixie Highway
Ft. Mitchell, Kentucky 2001 Owned 608,520
401-7 Pike Street
Covington, Kentucky 2001 Owned 108,907
3522 Dixie Highway
Erlanger, Kentucky 2001 Owned 38,675
7550 Dixie Highway
Florence, Kentucky 2001 Owned 491,866
191 Eastern Heights
Shopping Center
Huntington, West Virginia 1997 Leased (11) 1,099
6901 Glenn Highway
Cambridge, Ohio 1999 Owned 1,276,545
1320 D 4th Street, N.W.
New Philadelphia, Ohio 1985 Leased (12)
100 E. Wilson Bridge Road -
Suite #105 & 110 Worthington, Ohio 2004 Leased (13) 83,364
45 West Second Street
Chillicothe, Ohio 1994 Leased (14)
6269 Frank Ave.
N. Canton, Ohio 1992 Leased (15)
1500 Grand Central Ave.
Vienna, West Virginia 2004 Leased (16) 24,447
- -------------------------------
(Footnotes on following page)
21
(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) Operations were moved to the Worthington location in February 2004. The
lease expires in March 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 2005.
(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 lease expires in December 2009.
(13) The lease expires in September 2008. Advantage has the option to renew for
two five-year terms.
(14) The lease is currently on a month to month basis.
(15) The lease expires in August 2005.
(16) The net book value represents construction in process. 510 Grand Central
Avenue will be relocated at this location after construction is final.
Camco also owns furniture, fixtures and equipment. The net book value of
Camco's investment in office premises and equipment totaled $11.6 million at
December 31, 2004. 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.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF COMMON STOCK.
At February 18, 2005, Camco had 7,678,748 shares of common stock
outstanding and held of record by approximately 2,113 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 2004, 2003 and 2002.
Cash
dividends
High Low declared
------ ------ ---------
Year ended December 31, 2004
Quarter ending:
December 31, 2004 $15.79 $14.94 $0.145
September 30, 2004 15.67 14.07 0.145
June 30, 2004 16.93 12.77 0.145
March 31, 2004 17.62 16.40 0.145
Year ended December 31, 2003
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
23
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,
2004 2003 2002 2001 2000
---------- --------- ---------- ---------- ----------
(In thousands)
Total amount of:
Assets $1,065,823 $1,039,151 $1,083,240 $1,102,652 $1,037,856
Interest-bearing deposits in other financial institutions 17,045 30,904 36,807 89,299 4,916
Investment securities available for sale - at market 19,839 27,008 38,789 305 309
Investment securities held to maturity 4,123 1,130 5,368 18,872 16,672
Mortgage-backed securities available for sale - at market 80,321 77,916 97,332 6,975 9,850
Mortgage-backed securities held to maturity 4,146 7,704 20,000 30,765 5,273
Loans receivable - net (2) 836,666 805,082 796,958 871,446 930,672
Deposits 667,778 671,274 694,072 730,075 632,288
FHLB advances and other borrowings 295,310 262,735 276,276 258,850 313,471
Stockholders' equity - substantially restricted 89,321 92,543 98,601 95,171 78,750
SELECTED CONSOLIDATED
OPERATING DATA: (1)
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(In thousands, except per share data)
Total interest income $ 52,948 $ 54,875 $ 66,002 $ 74,372 $ 75,671
Total interest expense 27,512 31,237 38,556 48,433 49,609
-------- -------- -------- -------- --------
Net interest income 25,436 23,638 27,446 25,939 26,062
Provision for losses on loans 1,620 1,446 1,169 759 568
-------- -------- -------- -------- --------
Net interest income after provision for losses on loans 23,816 22,192 26,277 25,180 25,494
Other income 7,082 11,411 10,100 7,153 5,536
Sale of branch deposits and premises, net 6,626 36 - - -
General, administrative and other expense 22,841 22,404 21,682 18,948 19,530
Restructuring charges (credits) related to charter consolidation - - (112) 950 -
FHLB advance prepayment fees 18,879 1,292 - - -
-------- -------- -------- -------- --------
Earnings (loss) before federal income taxes (credits) (4,196) 9,907 14,807 12,435 11,500
Federal income taxes (credits) (1,660) 3,051 4,802 3,891 3,848
-------- -------- -------- -------- --------
Net earnings (loss) (2,536) 6,856 10,005 8,544 7,652
Prepayment fees, restructuring charges (credits) and gain on sale of
Ashland branches (net of related tax effects) 8,440 853 (74) 627 -
-------- -------- -------- -------- --------
Net earnings from operations $ 5,904 $ 7,709 $ 9,931 $ 9,171 $ 7,652
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic $ (.34) $ 0.92 $ 1.27 $ 1.20 $ 1.11
======== ======== ======== ======== ========
Basic from operations (3) $ .79 $ 1.03 $ 1.26 $ 1.29 $ 1.11
======== ======== ======== ======== ========
Diluted N/A $ 0.91 $ 1.25 $ 1.19 $ 1.10
======== ======== ======== ======== ========
Diluted from operations (3) $ .79 $ 1.02 $ 1.24 $ 1.28 $ 1.10
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Return on average assets (4) (0.24)% 0.65% 0.92% 0.80% 0.83%
Return on average assets from operations (4) .56 0.73 0.91 0.86 0.83
Return on average equity (4) (2.79) 7.17 10.33 9.83 10.83
Return on average equity from operations (4) 6.49 8.07 10.25 10.55 10.83
Average equity to average assets (4) 8.64 9.01 8.86 8.13 7.64
Dividend payout ratio (5) N/A(6) 61.96 41.34 40.00 43.24
- -----------------------------
(1) The information as of December 31, 2004 reflects the acquisition of London
Financial Corporation. 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) Represents a pro-forma presentation based upon net earnings from
operations divided by weighted-average basic and diluted shares
outstanding. For 2004, diluted earnings per share from operations is based
on 7,506,742 diluted shares assumed to be outstanding.
(4) Ratios are based upon the mathematical average of the balances at the
beginning and the end of the year.
(5) Represents dividends per share divided by basic earnings per share.
(6) Not meaningful.
24
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. Utilizing
a common marketing theme based on Camco's commitment to personalized customer
service, Camco and its affiliates have grown from $22.4 million of consolidated
assets in 1970 to $1.1 billion of consolidated assets at December 31, 2004.
Camco's rate of growth is largely attributable to its acquisitions of Marietta
Savings, First Savings, First Bank for Savings, Germantown Federal, Westwood
Homestead, Columbia Savings and The Citizens Bank of London, and its continued
expansion of product lines from the limited deposit and loan offerings which the
Bank could offer in the heavily regulated environment of the 1970s to the wider
array of financial service products that commercial banks traditionally offer.
Additionally, Camco has enhanced its operational growth, to a lesser extent, by
chartering a title insurance agency.
Management believes that continued success in the financial services
industry will be achieved by those institutions with a rigorous dedication to
building value-added customer-oriented organizations. Toward this end, each of
the Bank's 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 operations have also been heavily influenced by its level of other
income, including mortgage banking income and other fee income. Camco's
operations are also affected by general, administrative and other expenses,
including employee compensation and benefits, occupancy expense, data
processing, franchise taxes, advertising, other operating expenses and federal
income tax expense.
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.
NON-GAAP FINANCIAL MEASURES
This report includes one or more non-GAAP financial measures within the
meaning of Regulation G. With respect to each, Camco has disclosed the most
directly comparable financial measure calculated and presented in accordance
with GAAP and reconciled the differences between the non-GAAP financial measure
and the most comparable financial measure presented in accordance with GAAP.
Camco believes that the presentation of the non-GAAP financial measures in
this report assist management and investors to compare results period-to-period
in a more meaningful and consistent manner and provide a better measure of
results for Camco's ongoing operations.
25
CRITICAL ACCOUNTING POLICIES
"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'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.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses,
the valuation of mortgage servicing rights and goodwill impairment. Actual
results could differ from those estimates.
ALLOWANCE FOR LOAN LOSSES
The procedures for assessing the adequacy of the allowance for loan losses
reflect our evaluation of credit risk after careful consideration of all
information available to us. In developing this assessment, we must rely on
estimates and exercise judgment regarding matters where the ultimate outcome is
unknown such as economic factors, developments affecting companies in specific
industries and issues with respect to single borrowers. Depending on changes in
circumstances, future assessments of credit risk may yield materially different
results, which may require an increase or a decrease in the allowance for loan
losses.
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 management strives to reflect all known risk factors in its evaluations,
judgment errors may occur.
During its audit, Camco's accountants identified a lack of comprehensive
procedural documentation concerning the asset classification of specific loans
in accordance with FAS No. 114. Management has addressed this issue as discussed
in the Management Report On Internal Control Over Financial Reporting.
MORTGAGE SERVICING RIGHTS
To determine the fair value of its mortgage servicing rights ("MSRs") each
reporting quarter, Advantage transmits information to a third party provider,
representing individual loan information in each pooling period accompanied by
escrow amounts. The third party then evaluates the possible impairment of MSRs
as described below.
Servicing assets are recognized as separate assets when loans are sold
with servicing retained. A pooling methodology to the servicing valuation, in
which loans with similar characteristics are "pooled" together, is applied for
valuation purposes. Once pooled, each grouping of loans is evaluated on a
discounted earnings basis to determine the present value of future earnings that
a purchaser could expect to realize from the portfolio. Earnings are projected
from a variety of sources including loan service fees, interest earned on float,
net interest earned on escrow balances,
26
miscellaneous income and costs to service the loans. The present value of future
earnings is the estimated market value for the pool, calculated using consensus
assumptions that a third party purchaser would utilize in evaluating a potential
acquisition of the servicing. Events that may significantly affect the estimates
used are changes in interest rates and the related impact on mortgage loan
prepayment speeds and the payment performance of the underlying loans. The
interest rate for float, which is supplied by management, takes into
consideration the investment portfolio average yield as well as current short
duration investment yields. Management believes this methodology provides a
reasonable estimate. Mortgage loan prepayment speeds are calculated by the third
party provider utilizing the Economic Outlook as published by the Office of
Chief Economist of Freddie Mac in estimating prepayment speeds and provides a
specific scenario with each evaluation. Based on the assumptions discussed,
pre-tax projections are prepared for each pool of loans serviced. These earning
figures approximate the cash flow that could be received from the servicing
portfolio. Valuation results are presented quarterly to management. At that
time, management reviews the information and mortgage servicing rights are
marked to lower of amortized cost or market for the current quarter.
GOODWILL
We have developed procedures to test goodwill for impairment on an annual
basis using June 30 financial information. This testing procedure is outsourced
to a third party that evaluates possible impairment based on the following:
The test involves assigning tangible assets and liabilities, identified
intangible assets and goodwill to reporting units and comparing the fair value
of each reporting unit to its carrying value including goodwill. The value is
determined assuming a freely negotiated transaction between a willing buyer and
a willing seller, neither being under any compulsion to buy or sell and both
having reasonable knowledge of relevant facts. Accordingly, to derive the fair
value of the reporting unit, the following common approaches to valuing business
combination transactions involving financial institutions are utilized by a
third party selected by Camco: (1) the comparable transactions approach -
specifically based on earnings, book, assets and deposit premium multiples
received in recent sales of comparable thrift franchises; and (2) the discounted
cash flow approach. The application of these valuation techniques takes into
account the reporting unit's operating history, the current market environment
and future prospects. As of the most recent quarter, the only reporting unit
carrying goodwill is the Bank.
If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and no second step is
required. If not, a second test is required to measure the amount of goodwill
impairment. The second test of the overall goodwill impairment compares the
implied fair value of the reporting unit goodwill with the carrying amount of
the goodwill. The impairment loss shall equal the excess of carrying value over
fair value.
After each testing period, the third party compiles a summary of the test
that is then provided to the Audit Committee for review. As of the most recent
testing date, June 30, 2004, the Audit Committee was informed that the fair
value of the reporting unit exceeded its carrying amount.
SUMMARY
Management believes the accounting estimates related to the allowance for
loan losses, the capitalization, amortization, and valuation of mortgage
servicing rights and the goodwill impairment test are "critical accounting
estimates" because: (1) the estimates are highly susceptible to change from
period to period because they require management to make assumptions concerning
the changes in the types and volumes of the portfolios, rates of future
prepayments, and anticipated economic conditions, and (2) the impact of
recognizing an impairment or loan loss could have a material effect on Camco's
assets reported on the balance sheet as well as its net earnings. Management has
discussed the development and selection of these critical accounting estimates
with the Audit Committee of the Board of Directors and the Audit Committee has
reviewed Camco's disclosures relating to such matters in the quarterly
Management's Discussion and Analysis.
27
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM DECEMBER 31, 2003 TO DECEMBER 31,
2004
At December 31, 2004, Camco's consolidated assets totaled $1.1 billion, an
increase of $26.7 million, or 2.6%, from the December 31, 2003 total. The
increase in total assets was primarily due to the acquisition of London in
August 2004, which was accounted for using the purchase method of accounting.
The acquisition resulted in net asset growth of approximately $54.4 million
which was funded principally by an increase of $25.0 million in advances from
the Federal Home Loan Bank ("FHLB"). In December of 2004, Advantage sold its
Ashland division, consisting of two branches, which resulted in a premium of
10.21% on deposits. While all deposits were sold in the Ashland division sale,
Camco retained loan origination capabilities in the Huntington, West Virginia
market. The sale included $42.6 million in loans and $63.7 million of deposits.
The Ashland branch sale was funded by a sale of approximately $15.2 million in
loans.
Cash and interest-bearing deposits in other financial institutions totaled
$42.9 million at December 31, 2004, a decrease of $10.8 million, or 20.1%, from
December 31, 2003 levels. Investment securities totaled $24.0 million at
December 31, 2004, a decrease of $4.2 million, or 14.8%, from the total at
December 31, 2003. Investment securities purchases were comprised of $19.0
million of intermediate and short-term issuances of treasury and agency
securities, with an average yield of 3.13%. Some of the securities purchased
contained call features. Such purchases were offset by maturities of $21.1
million and sales of $1.6 million during the year.
Mortgage-backed securities totaled $84.5 million at December 31, 2004, a
decrease of $1.2 million, or 1.3%, from December 31, 2003. Mortgage-backed
securities purchases totaled $43.3 million, while principal repayments totaled
$30.6 million and sales totaled $13.1 million during the year ended December 31,
2004. Purchases of mortgage-backed securities during the year were comprised
primarily of government agency mortgage-backed securities and collateralized
mortgage obligations yielding 3.95%.
Loans receivable and loans held for sale totaled $836.7 million at
December 31, 2004, an increase of $31.6 million, or 3.9%, over the total at
December 31, 2003. The increase resulted primarily from the acquisition of
London, accounting for an increase of $49.1 million in loans and loan
disbursements and purchases totaling $363.8 million, which were substantially
offset by loan sales of $160.5 million, including $42.6 million of sales
relating to the sale of the Ashland division and principal repayments of $212.5
million. Loan origination volume, including purchases of loans, was lower in
2004 than 2003 by $255.7 million, or 41.3%, which was primarily attributable to
the decline in refinancing activity. As interest rates in the economy have begun
to rise, consumer preference is moving towards adjustable-rate mortgage loans to
fund purchases. Camco has typically held adjustable-rate mortgage loans in its
portfolio as part of its strategy to maintain its asset-sensitive interest rate
risk position. Loan originations during the twelve-month period ended December
31, 2004, were comprised primarily of $209.2 million of loans secured by one- to
four-family residential real estate, $102.6 million in consumer and other loans
and $102.0 million in loans secured by commercial real estate. Management will
continue to expand its consumer and commercial real estate lending in future
periods as a means of increasing the yield on its loan portfolio.
The allowance for loan losses totaled $6.5 million and $5.6 million at
December 31, 2004 and 2003, respectively, representing 66.1% and 41.5% of
nonperforming loans at those dates. Nonperforming loans (90 days or more
delinquent plus nonaccrual loans) totaled $9.8 million and $13.6 million at
December 31, 2004 and December 31, 2003, respectively, constituting 1.17% and
1.69% of total net loans, including loans held for sale, at those dates. At
December 31, 2004, nonperforming loans were comprised of $6.7 million of loans
secured by one- to four-family residential real estate, $2.1 million of loans
secured by multi-family, nonresidential real estate and commercial loans and
$1.0 million of consumer and other loans. Although management believes that its
allowance for loan losses at December 31, 2004 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 $667.8 million at December 31, 2004, a decrease of $3.5
million, or .5%, from December 31, 2003 levels. The decrease resulted primarily
from the sale of Ashland division deposits totaling $63.7 million partially
offset by $45.2 million increase from the London acquisition. The $15.0 million
deposit portfolio growth resulted
28
primarily from the increase of deposits from state and local government agencies
and management's continuing efforts to achieve a moderate rate of growth through
advertising and pricing strategies.
Advances from the FHLB increased by $32.6 million, or 12.4%, to a total of
$295.3 million at December 31, 2004. The increase was due primarily to equity
leveraging transactions of $18.0 million and $18.9 million in fees incurred for
the restructuring of the FHLB borrowings.
In the fourth quarter of 2004, Advantage restructured $144.1 million of
its FHLB borrowings having an average term of 5.5 years and an average fixed
rate of 6.25%, replacing them with fixed-rate advances having a weighted-average
rate of approximately 3.68% at December 31, 2004. The prepayment fee incurred
was $12.5 million on an after-tax basis, but management believes that the
positive after-tax earnings impact in 2005 could approach $2.2 million or $.30
per share in 2005. The transaction positions itself well in our balance sheet as
a result of continued efforts towards shorter duration assets generated from
commercial/commercial real estate and consumer loans.
Stockholders' equity totaled $89.3 million at December 31, 2004, a $3.2
million, or 3.5%, decrease from December 31, 2003. The decrease resulted
primarily from dividends of $4.4 million, a net loss of $2.5 million and a
$469,000 decrease in the unrealized gains on available for sale securities,
which were partially offset by the issuance of $3.6 million in common stock to
shareholders of London and proceeds from the exercise of stock options of
$552,000.
Camco and the Bank are required to maintain minimum regulatory capital
pursuant to federal regulations. During 2004, management was notified by its
primary regulators that Advantage was categorized as well-capitalized under the
regulatory framework for prompt corrective action. At December 31, 2004, the
regulatory capital of Camco and the Bank exceeded all regulatory capital
requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004 AND
DECEMBER 31, 2003
GENERAL. Camco's net loss for the year ended December 31, 2004, totaled
$2.5 million, a decrease of $9.4 million, or 137.0%, from the $6.9 million of
net earnings reported in 2003. The decrease in earnings was primarily
attributable to a one-time charge of $18.9 million in pre-tax expense associated
with the restructuring of a portion of the Bank's FHLB borrowings and a $2.8
million decrease in gain on sale of loans, which were partially offset by a $6.1
million gain due to the sale of the Ashland division and a $4.7 million decrease
in the provision for federal income taxes.
In December 2004 Camco announced the restructuring of $144.1 million in
convertible fixed rate borrowings from the Federal Home Loan Bank. The early
prepayment of the debt resulted in a penalty charge of $18.9 million before tax,
or $12.5 million after-tax. The convertible advances had a weighted average
interest rate of 6.25% and an average term to maturity of approximately 5.61
years. The advances were replaced with maturities ranging up to five years. The
weighted average cost on the restructured borrowings was 3.59%.
The impact of the restructuring is estimated to reduce interest expense
for the Corporation by over $3.33 million pre-tax in 2005, or $2.2 million
after-tax basis. This anticipated decrease in interest bearing liabilities
should increase earnings per share for the Corporation by approximately $.30 in
2005.
In December, 2004 Camco sold its Ashland Division which included $63.7
million in deposits and $42.6 million in loans in the Ashland market as well as
the Ashland and Summit, Kentucky facilities. This transaction was based on a
decision to redirect resources and management attention to other markets that
drive the execution of our long term strategic plan. Our branch strategy
involves narrowing our geographic footprint, building a more efficient branch
network and improving long term shareholder value.
NET INTEREST INCOME. Total interest income for the year ended December 31,
2004, amounted to $52.9 million, a decrease of $1.9 million, or 3.5%, compared
to 2003, generally reflecting the effects of a decrease of 26 basis points in
the average yield, from 5.43% in 2003 to 5.17% in 2004, offset partially by a
$12.7 million, or 1.3%, increase in the average balance of interest-earning
assets outstanding year to year.
29
Interest income on loans totaled $46.9 million for the year ended December
31, 2004, a decrease of $1.1 million, or 2.2%, from the comparable 2003 total.
The decrease resulted primarily from a 58 basis point decrease in the average
yield, from 6.14% in 2003, to 5.56% in 2004, offset partially by a $63.5
million, or 8.1%, increase in the average balance of loans outstanding year to
year. Interest income on mortgage-backed securities totaled $3.0 million for the
year ended December 31, 2004, a $423,000, or 12.3%, decrease from the 2003
period. The decrease was due primarily to a $23.5 million, or 20.8%, decrease in
the average balance outstanding, partially offset by a 33 basis point increase
in the average yield, to 3.36% in 2004. Interest income on investment securities
decreased by $495,000, or 39.1%, due primarily to a $10.9 million decrease in
the average balance outstanding year to year, coupled with a 48 basis point
decline in the average yield, to 2.86% in 2004. Interest income on other
interest-earning assets increased by $41,000, or 1.9%, due primarily to an
increase in the yield of 80 basis points, to 3.59% in 2004, offset partially by
a decrease of $16.3 million, or 20.9%, in the average balance outstanding year
to year.
Interest expense on deposits totaled $13.9 million for the year ended
December 31, 2004, a decrease of $2.1 million, or 13.0%, compared to the year
ended December 31, 2003, due primarily to a 37 basis point decrease in the
average cost of deposits, to 2.09% for 2004, partially offset by a $13.8
million, or 2.1%, increase in the average balance of interest-bearing deposits
outstanding year to year. Interest expense on borrowings totaled $13.6 million
for the year ended December 31, 2004, a decrease of $1.6, or 10.7%, from 2003.
The decrease resulted primarily from a 67 basis point decrease in the average
rate to 4.89% in 2004, partially offset by a $4.4 million, or 1.6%, increase in
the average balance outstanding year to year.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $1.8 million, or 7.6%, to a total of
$25.4 million for the year ended December 31, 2004. The interest rate spread
increased to approximately 2.26% at December 31, 2004, from 2.06% at December
31, 2003, while the net interest margin increased to approximately 2.49% for the
year ended December 31, 2004, compared to 2.34% for the 2003 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 $1.6 million for the year
ended December 31, 2004, an increase of $174,000, or 12.0%, over the provision
recorded in 2003. The provision was predicated primarily on the overall increase
in the loan portfolio, including the increased percentage of loans secured by
nonresidential real estate within the portfolio and an increase in the level of
impaired loans and loan charge-offs year to year. For 2005, we believe the
provision will continue to grow as we anticipate changing our loan mix by
increasing the percentage of nonresidential commercial loans and consumer loans
to total loans. Management believes nonperforming loans are adequately
collateralized or reserved for, 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 loans in
the future.
OTHER INCOME. Other income totaled $13.7 million for the year ended
December 31, 2004, an increase of $2.3 million, or 20.1%, compared to 2003. The
increase in other income was primarily attributable to the sale of our Ashland,
Kentucky banking division which resulted in a pretax gain of $6.1 million.
Excluding the sale of the Ashland banking division, other income would have
decreased from $11.4 million in 2003 to $7.6 million in 2004. This decrease of
$3.8 million was primarily attributable to a $2.8 million or 77.3% decrease in
gain on the sale of loans, as a result of fewer loans being sold into the
secondary market, as well as a reduction of $818,000 or 51.3% in our title
agency revenue, also due to lower residential loan production levels.
The decrease in gain on sale of loans was due primarily to a decrease in
the volume of loans sold of $161.1 million, or 57.8%, from the volume of loans
sold in 2003. During 2004, the Bank recorded MSR's on new loan sales totaling
$1.6 million and amortization of MSR's totaling $1.2 million, which resulted in
net revenue item of $402,000. During 2003, the Bank recorded MSR's on new loan
sales totaling $3.5 million and amortization of MSR's totaling $2.9 million,
which resulted in net revenue of $543,000.
30
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and
other expense totaled $41.7 million for the year ended December 31, 2004, an
increase of $18.0 million, or 76.1%, compared to 2003. The increase was due
primarily to the $18.9 million prepayment fee associated with the restructuring
of a portion of the Bank's FHLB borrowings and a decrease of $1.3 million, or
36.6%, in deferred compensation (SFAS No. 91), offset partially by a decrease of
$713,000 in employee compensation and benefits and a $393,000 or 10.4% decrease
in occupancy and equipment expenses. The decrease in deferred compensation
relates to (SFAS No. 91) and the decline in residential loan production. The
decrease in employee compensation and benefits is due to lower incentives and
commissions on reduced loan production from prior periods. The decrease in
occupancy and equipment was due to management's more efficient utilization of
the current infrastructure and continuing capitalization on past investments in
technology.
FEDERAL INCOME TAXES. Federal income tax credits totaled $1.7 million for
the year ended December 31, 2004, a decrease of $4.7 million, or 154.4%,
compared to the provision recorded in 2003. This decrease was primarily
attributable to a $4.2 million net loss before federal income tax credits. The
effective rate of tax (benefits) amounted to (39.6)% and 30.8% for the years
ended December 31, 2004 and 2003, respectively. The tax-exempt character of
earnings on bank-owned life insurance is the principal difference between the
effective rate of tax (benefits) and the statutory corporate tax rate for the
years ended December 31, 2004 and 2003.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND
DECEMBER 31, 2002
GENERAL. Camco's net operating 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.
31
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.
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 revenue item of $1.4 million.
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 pre-payment 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 proceeds from 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
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,
2004 2003
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) $ 844,660 $ 46,932 5.56% $ 781,175 $ 47,982 6.14%
Mortgage-backed securities (2) 89,863 3,016 3.36 113,392 3,439 3.03
Investment securities (2) 26,987 772 2.86 37,881 1,267 3.34
Interest-bearing deposits and other
interest-earning assets 62,016 2,228 3.59 78,364 2,187 2.79
----------- -------- ------- ------------ -------- -------
Total interest-earning assets $ 1,023,526 52,948 5.17 $ 1,010,812 54,875 5.43
=========== ============
Interest-bearing liabilities:
Deposits $ 666,540 13,945 2.09 $ 652,710 16,037 2.46
FHLB advances 277,576 13,567 4.89 273,147 15,200 5.56
----------- -------- ----------- -------- -------
Total interest-bearing liabilities $ 944,116 27,512 2.91 $ 925,857 31,237 3.37
=========== -------- ------- =========== -------- -------
Net interest income/Interest rate spread $ 25,436 2.26% $ 23,638 2.06%
======== ======= ======== =======
Net interest margin (3) 2.49% 2.34%
======= =======
Average interest-earning assets to average
interest-bearing liabilities 108.41% 109.18%
======= =======
YEAR ENDED DECEMBER 31,
2002
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $ 813,541 $ 57,478 7.07%
Mortgage-backed securities (2) 100,165 4,523 4.52
Investment securities (2) 33,963 1,545 4.55
Interest-bearing deposits and other
interest-earning assets 85,189 2,456 2.88
----------- -------- ------
Total interest-earning assets $ 1,032,858 66,002 6.39
===========
Interest-bearing liabilities:
Deposits $ 677,800 23,060 3.40
FHLB advances 265,614 15,496 5.83
----------- -------- ------
Total interest-bearing liabilities $ 943,414 38,556 4.09
=========== -------- ------
Net interest income/Interest rate spread $ 27,446 2.30%
======== ======
Net interest margin (3) 2.66%
======
Average interest-earning assets to average
interest-bearing liabilities 109.48%
======
- ---------------------------
(1) Includes nonaccrual loans and loans held for sale.
(2) Includes securities designated as available for sale.
(3) Net interest income as a percent of average interest-earning assets.
33
RATE/VOLUME 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,
2004 VS. 2003 2003 VS. 2002
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
(In thousands)
Interest income attributable to:
Loans receivable (1) $ 6,038 $(7,088) $(1,050) $(2,217) $(7,279) $ (9,496)
Mortgage-backed securities (870) 447 (423) 729 (1,813) (1,084)
Investment securities (329) (166) (495) 215 (493) (278)
Interest-bearing deposits and other (2) (109) 150 41 (192) (77) (269)
------- ------- ------- ------ ------- --------
Total interest income 4,730 (6,657) (1,927) (1,465) (9,662) (11,127)
Interest expense attributable to:
Deposits 348 (2,440) (2,092) (826) (6,197) (7,023)
Borrowings 251 (1,884) (1,633) 472 (768) (296)
------- ------- ------- ------- ------- --------
Total interest expense 599 (4,324) (3,725) (354) (6,965) (7,319)
------- ------- ------- ------- ------- --------
Increase (decrease) in net interest income $ 4,131 $(2,333) $ 1,798 $(1,111) $(2,697) $ (3,808)
======= ======= ====== ====== ======= ========
- ------------------------------
(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.
This does not reflect the spread that may eventually be achieved in 2005 or
beyond due to possible changes in weighted-average yields earned on
interest-earning assets and paid on interest-bearing liabilities in the upcoming
year.
AT DECEMBER 31,
2004 2003 2002
Weighted-average yield on:
Loan portfolio (1) 5.78% 5.81% 6.87%
Investment portfolio (2) 3.75 3.40 3.40
Total interest-earning assets 5.45 5.38 6.52
Weighted-average rate paid on:
Deposits 2.10 2.10 2.86
FHLB advances (3) 3.63 5.13 5.63
Total interest-bearing liabilities 2.57 2.96 3.65
---- ---- ----
Interest rate spread 2.88% 2.42% 2.87%
==== ==== ====
- ------------------------------
(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.
(3) Is reflective of the December 2003 and 2004 restructuring of FHLB advances.
34
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 Bank's 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 federal funds rate of 2.25% at December 31,
2004, 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, 2004:
CHANGE IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) 12 MONTHS
- -------------- --------------------
+200 2.33%
-100 (5.37)%
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 2.3%
over one year. A 100bp linear decrease in interest rates would decrease net
interest income by 5.4% 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 2005 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 $117.9 million and
$279.0 million of such loans were sold to the FHLMC, FNMA and other parties
during 2004 and 2003, respectively.
35
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, 2004.
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 $ 166 $ 198 $ 113 $ 194 $ 671
Advances from the Federal Home Loan Bank (1) 22,020 86,208 84,364 62,718 255,310
Certificates of deposit 193,395 124,359 42,550 1,605 361,909
Amount of commitments expiration per period
Commitments to originate loans:
Overdraft lines of credit 728 - - - 728
Home equity/commercial lines of credit 62,759 - - - 62,759
Commercial lines of credit 5,424 - - - 5,424
One- to four-family and multi-family loans 1,440 - - - 1,440
Commercial 2,650 - - - 2,650
Non-residential real estate and land loans 90 - - - 90
----------- ----------- -------- --------- ----------
Total contractual obligations $ 288,672 $ 210,765 $127,027 $ 64,517 $ 690,981
=========== =========== ======== ========= ==========
(1) Fully secured asset borrowings totaling $40.0 million are not included.
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.
State statutes impose certain limitations on the payment of dividends and other
capital distributions by banks. Generally, absent approval of the Superintendent
of Banks, such statutes limit dividend and capital distributions to earnings of
the current and two preceding years. As a result, Camco will need regulatory
approval for dividend distributions in 2005. However, management is of the
opinion that such approval will not be unreasonably withheld given the Bank's
current well-capitalized classification.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Management Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. The
Company's management, including the Chief Executive Officer and Chief Financial
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control -- Integrated
Framework.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
During the course of its audit, Grant Thornton LLP advised management and the
Audit Committee that it had identified a control deficiency, which constituted a
material weakness in the Company's internal control over financial reporting. A
material weakness is a significant deficiency that results in there being more
than a remote likelihood that a material misstatement of the annual or interim
financials statements will not be prevented or detected on a timely basis by
employees in the normal course of their assigned functions. As a result,
management of the Company concluded that the Company's internal control over
financial reporting was not effective as of December 31, 2004 because of the
material weakness described below. The material weakness did not result in an
adjustment to the financial statements.
The material weakness identified relates to a lack of comprehensive procedural
documentation concerning the identification and valuation of specific loans in
accordance with FAS No. 114. Management, with the oversight of the Audit
Committee, has been aggressively addressing this issue and is committed to
effectively remediate this weakness. The Company has completed the following
remediation measures:
- Amplified and communicated to appropriate Company employees a
detailed written policy that clearly documents in detail the
Company's process for identifying and evaluating non-homogeneous
loans under FAS No. 114. The procedures clearly require that once a
loan meets review criteria and is determined to have a probable
loss, such loan will be deemed impaired and the impairment will be
valued via reference to an independent appraisal.
- Augmented procedures to assure that adequate evidence exists to
support all decisions made regarding classification of individual,
reviewed loans.
Management has discussed these corrective actions with the Audit Committee and
Grant Thornton and, as of the date of this annual report on Form 10-K,
management believes the actions outlined above have corrected the deficiencies
in internal controls that are considered to be a material weakness.
Grant Thornton LLP has issued an attestation report on management's assessment
of the Company's internal control over financial reporting. That report appears
on page 38.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Camco Financial Corporation
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that Camco Financial
Corporation (the Corporation) did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of the
material weakness identified in management's assessment, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Corporation's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected. The following material weakness has been identified
and included in management's assessment. The Corporation lacked comprehensive
documentation concerning the identification and valuation of specific loans in
accordance with FAS No. 114. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2004 consolidated financial statements, and this report does not affect
our report dated March 10, 2005, on those financial statements.
38
In our opinion, management's assessment that the Corporation did not maintain
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the control criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Corporation has not
maintained effective internal control over financial reporting as of December
31, 2004, based on Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on management's
statement that they have implemented remediation measures sufficient to correct
the deficiency in internal control that is considered to be a material weakness.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
March 10, 2005
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Camco Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Camco Financial Corporation as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 2004. 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 the auditing standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Camco Financial
Corporation's control over financial reporting at December 31, 2004 based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission and our
report dated March 10, 2005 expressed an unqualified opinion as to management's
assessment that the Corporation did not maintain effective control over
financial reporting as of December 31, 2004, based on control criteria issued by
COSO.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
March 10, 2005
40
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands, except share data)
ASSETS 2004 2003
Cash and due from banks $ 25,849 $ 22,807
Interest-bearing deposits in other financial institutions 17,045 30,904
------------ ------------
Cash and cash equivalents 42,894 53,711
Investment securities available for sale - at market 19,839 27,008
Investment securities held to maturity - at cost, approximate market
value of $4,174 and $1,204 as of December 31, 2004 and 2003, respectively 4,123 1,130
Mortgage-backed securities available for sale - at market 80,321 77,916
Mortgage-backed securities held to maturity - at cost, approximate market
value of $4,188 and $7,839 as of December 31, 2004 and 2003, respectively 4,146 7,704
Loans held for sale - at lower of cost or market 2,837 5,457
Loans receivable - net 833,829 799,625
Office premises and equipment - net 11,647 13,380
Real estate acquired through foreclosure 2,280 1,463
Federal Home Loan Bank stock - at cost 25,797 24,494
Accrued interest receivable 4,503 4,088
Prepaid expenses and other assets 1,530 1,524
Cash surrender value of life insurance 20,042 17,740
Goodwill - net of accumulated amortization 6,736 2,953
Prepaid and refundable federal income taxes 5,299 958
------------ ------------
Total assets $ 1,065,823 $ 1,039,151
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 667,778 $ 671,274
Advances from the Federal Home Loan Bank 295,310 262,735
Advances by borrowers for taxes and insurance 3,030 3,494
Accounts payable and accrued liabilities 5,391 4,102
Dividends payable 1,109 1,063
Deferred federal income taxes 3,884 3,940
------------ ------------
Total liabilities 976,502 946,608
Commitments - -
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares
outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,759,676 and
8,428,946 shares issued at December 31, 2004 and 2003, respectively 8,760 8,429
Additional paid-in capital 58,935 55,132
Retained earnings - restricted 38,234 45,121
Accumulated other comprehensive income (loss) - unrealized gains (losses)
on securities designated as available for sale, net of related tax
effects (263) 206
Less 1,096,523 shares of treasury stock at December 31, 2004 and 2003 -
at cost (16,345) (16,345)
------------ ------------
Total stockholders' equity 89,321 92,543
------------ ------------
Total liabilities and stockholders' equity $ 1,065,823 $ 1,039,151
============ ============
The accompanying notes are an integral part of these statements.
41
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2004, 2003 and 2002
(In thousands, except per share data)
2004 2003 2002
Interest income
Loans $ 46,932 $ 47,982 $ 57,478
Mortgage-backed securities 3,016 3,439 4,523
Investment securities 772 1,267 1,545
Interest-bearing deposits and other 2,228 2,187 2,456
--------- --------- ---------
Total interest income 52,948 54,875 66,002
Interest expense
Deposits 13,945 16,037 23,060
Borrowings 13,567 15,200 15,496
--------- --------- ---------
Total interest expense 27,512 31,237 38,556
--------- --------- ---------
Net interest income 25,436 23,638 27,446
Provision for losses on loans 1,620 1,446 1,169
--------- --------- ---------
Net interest income after provision for losses on loans 23,816 22,192 26,277
Other income
Late charges, rent and other 1,672 1,964 2,115
Title fees 778 1,596 1,259
Loan servicing fees 1,519 1,617 1,554
Gain on sale of loans 819 3,607 2,767
Valuation of mortgage servicing rights - net 402 543 1,370
Service charges and other fees on deposits 1,410 1,157 1,014
Gain on sale of investment and mortgage-backed securities 135 839 29
Gain (loss) on sale of real estate acquired through foreclosure 347 52 (8)
Gain on sale of branch deposits, premises and equipment, net 6,626 36 -
--------- --------- ---------
Total other income 13,708 11,411 10,100
General, administrative and other expense
Employee compensation and benefits 13,313 14,026 13,323
Deferred loan origination costs - SFAS No. 91 (2,227) (3,510) (3,155)
Occupancy and equipment 3,390 3,783 3,459
Data processing 1,318 1,330 1,178
Advertising 1,047 763 794
Franchise taxes 992 1,170 821
Other operating 5,008 4,842 5,150
Federal Home Loan Bank advance prepayment fees 18,879 1,292 -
--------- --------- ---------
Total general, administrative and other expense 41,720 23,696 21,570
--------- --------- ---------
Earnings (loss) before federal income taxes (credits) (4,196) 9,907 14,807
Federal income taxes
Current (1,572) 3,574 3,149
Deferred (88) (523) 1,653
--------- --------- ---------
Total federal income taxes (credits) (1,660) 3,051 4,802
--------- --------- ---------
NET EARNINGS (LOSS) $ (2,536) $ 6,856 $ 10,005
========= ========= =========
EARNINGS (LOSS) PER SHARE
Basic $ (.34) $ .92 $ 1.27
========= ========= =========
Diluted N/A $ .91 $ 1.25
========= ========= =========
The accompanying notes are an integral part of these statements.
42
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 2004, 2003 and 2002
(In thousands)
2004 2003 2002
Net earnings (loss) $ (2,536) $ 6,856 $ 10,005
Other comprehensive income (loss), net of tax effects:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(195), $(689) and $1,035 in 2004, 2003
and 2002, respectively (379) (1,338) 2,010
Reclassification adjustment for realized gains included in operations, net of
taxes of $45, $285 and $10 for the years ended December 31,
2004, 2003 and 2002, respectively (90) (554) (19)
-------- -------- ---------
Comprehensive income (loss) $ (3,005) $ 4,964 $ 11,996
======== ======== =========
Accumulated other comprehensive income (loss) $ (263) $ 206 $ 2,098
======== ======== =========
The accompanying notes are an integral part of these statements.
43
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
(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, 2002 $ 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
benefits - - - (1,892) - (1,892)
-------- ---------- -------- ------------- -------- ------------
Balance at December 31, 2003 8,429 55,132 45,121 206 (16,345) 92,543
Stock options exercised 53 499 - - - 552
Cash dividends declared - $.58 per share - - (4,351) - - (4,351)
Acquisition of London Financial 278 3,304 - - 3,582
Net loss for the year ended December 31, 2004 - - (2,536) - - (2,536)
Unrealized losses on securities designated
as available for sale, net of related tax
benefits - - - (469) - (469)
-------- ---------- -------- ------------- -------- ------------
Balance at December 31, 2004 $ 8,760 $ 58,935 $ 38,234 $ (263) $(16,345) $ 89,321
======== ========== ======== ============= ======== ============
The accompanying notes are an integral part of these statements.
44
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(In thousands)
2004 2003 2002
---------- ---------- ---------
Cash flows from operating activities:
Net earnings (loss) for the year $ (2,536) $ 6,856 $ 10,005
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 980 2,418 828
Amortization of mortgage servicing rights - net 1,184 2,922 1,404
Depreciation and amortization 1,450 1,879 1,714
Amortization of purchase accounting adjustments - net 89 5 242
Provision for losses on loans 1,620 1,446 1,169
Provision for losses on real estate acquired through foreclosure 113 30 131
Amortization of deferred loan origination fees (57) (398) (609)
(Gain) loss on sale of real estate acquired through foreclosure (347) (52) 8
Gain on sale of investment and mortgage-backed securities
transactions (135) (839) (29)
Gain on sale of branch deposits, premises and equipment, net (6,626) (36) -
Federal Home Loan Bank stock dividends (1,032) (955) (1,058)
Gain on sale of loans (819) (3,607) (2,767)
Loans originated for sale in the secondary market (115,266) (228,969) (274,597)
Proceeds from sale of mortgage loans in the secondary market 118,705 282,612 243,316
Tax benefits related to exercise of stock options 84 210 197
Increase (decrease) in cash, net of acquisitions, due to changes in:
Accrued interest receivable 59 834 847
Prepaid expenses and other assets 30 606 2,649
Accounts payable and other liabilities 554 (196) (6,537)
Federal income taxes
Current (3,722) (184) (182)
Deferred (88) (523) 1,653
---------- ---------- ---------
Net cash provided by (used in) operating activities (5,760) 64,059 (21,616)
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 21,100 21,596 41,251
Proceeds from sale of investment securities designated as available for sale 1,638 3,811 44
Purchase of investment securities designated as available for sale (15,997) (10,341) (64,942)
Purchase of investment securities designated as held to maturity (2,991) - (1,048)
Proceeds from sale of mortgage-backed securities designated as
available for sale 13,050 59,111 1,087
Purchase of mortgage-backed securities designated as available for sale (43,301) (112,989) (113,125)
Purchase of mortgage-backed securities designated as held to maturity - (961) -
Principal repayments on mortgage-backed securities 30,624 83,058 34,377
Loan disbursements (221,268) (378,511) (297,668)
Purchases of loans (27,301) (12,056) (3,181)
Principal repayments on loans 212,450 324,463 407,042
Loans transferred in sale of branch offices 42,634 - -
Purchase of branch premises and equipment - net (727) (876) (1,852)
Proceeds from sale of office premises and equipment 8,579 145 355
Proceeds from sale of real estate acquired through foreclosure 4,988 4,158 651
Additions to real estate acquired through foreclosure (76) - (12)
Purchase of life insurance (1,596) - (825)
Proceeds from redemption of life insurance - 422 -
Net increase in cash surrender value of life insurance (706) (790) (796)
Purchase of London Financial Corporation, Inc., net (1,701) - -
Purchase of Columbia Financial of Kentucky, Inc., net - - (206)
---------- ---------- ---------
Net cash provided by (used in) investing activities 19,399 (19,760) 1,152
---------- ---------- ---------
Net cash provided by (used in) operating and investing
activities (balance carried forward) 13,639 44,299 (20,464)
---------- ---------- ---------
45
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 2004, 2003 and 2002
(In thousands)
2004 2003 2002
---------- ---------- ---------
Net cash provided by (used in) operating and investing
activities (balance brought forward) $ 13,639 $ 44,299 $ (20,464)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 14,929 (22,798) (36,003)
Sale of branch deposits (63,657) - -
Proceeds from Federal Home Loan Bank advances 189,650 73,850 68,500
Repayment of Federal Home Loan Bank advances (161,075) (87,432) (51,151)
Dividends paid on common stock (4,305) (4,215) (4,045)
Proceeds from exercise of stock options 468 977 1,886
Purchase of treasury shares - (7,977) (6,314)
Decrease in advances by borrowers for taxes and insurance (466) (15) (351)
---------- ---------- ---------
Net cash used in financing activities (24,456) (47,610) (27,478)
---------- ---------- --------
Net decrease in cash and cash equivalents (10,817) (3,311) (47,942)
Cash and cash equivalents at beginning of year 53,711 57,022 104,964
---------- ---------- ---------
Cash and cash equivalents at end of year $ 42,894 $ 53,711 $ 57,022
========== ========== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings $ 27,673 $ 31,452 $ 38,387
========== ========== =========
Income taxes $ 2,674 $ 3,570 $ 2,848
========== ========== =========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 6,591 $ 4,010 $ 1,270
========== ========== =========
Issuance of mortgage loans upon sale of real estate acquired through
foreclosure $ 1,096 $ 2,399 $ 1,054
========== ========== =========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ (469) $ (1,338) $ 2,010
========== ========== =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 1,586 $ 3,465 $ 2,729
========== ========== =========
Supplemental disclosure of noncash financing activities:
Dividends declared but unpaid $ 1,109 $ 1,063 $ 1,046
========== ========== =========
Fair value of assets acquired in London Financial transaction $ 54,441 $ - $ -
Less fair value of liabilities assumed (50,371) - -
---------- ---------- ---------
Goodwill assigned in acquisition $ 4,070 $ - $ -
========== ========== =========
The accompanying notes are an integral part of these statements.
46
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Camco Financial Corporation ("Camco" or the "Corporation") is a financial
holding company whose business activities are limited primarily to holding
the common stock of Advantage Bank ("Advantage" or the "Bank") and Camco
Title Insurance Agency ("Camco Title") and, prior to October 2003, one
second tier subsidiary, Camco Mortgage Corporation. In October 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.
During 2004, Camco's Board of Directors approved a business combination
that was completed in August 2004, whereby London Financial Corporation
("London Financial") was merged with and into Camco. Coincident with the
merger between Camco and London Financial, Advantage was merged with and
into The Citizens Savings Bank of London, London Financial's wholly-owned
subsidiary ("Citizens"). The resulting financial institution was a
state-chartered commercial bank that was renamed Advantage Bank. The
business combination was accounted for using the purchase method of
accounting. Accordingly, the 2004 consolidated financial statements herein
include the accounts of Citizens only from the August 20, 2004
consummation date forward.
The consolidated financial information presented herein has been prepared
in accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP") and general accounting practices within
the financial services industry. In preparing financial statements in
accordance with U.S. GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting
period. Actual results could differ from such estimates.
The following is a summary of the Corporation's significant accounting
policies which have been consistently applied in the preparation of the
accompanying consolidated financial statements.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
47
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
SFAS No. 115 requires that investments be categorized as held to maturity,
trading, or available for sale. Securities classified as held to maturity
are carried at cost only if the Corporation has the positive intent and
ability to hold these securities to maturity. 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, 2004 and 2003, 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.
48
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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 $1.2 million, $2.9 million and $2.1 million, for
the years ended December 31, 2004, 2003 and 2002, respectively. During
2002, the Corporation recaptured approximately $640,000 of a previously
recorded impairment charge 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 $7.0 million and $6.6 million at December 31, 2004 and 2003,
respectively.
At December 31, 2004 and 2003, the Bank was servicing mortgage loans of
approximately $587.0 million and $587.8 million, respectively, that have
been sold to the Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association 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.
49
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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:
2004 2003
------- --------
(In thousands)
Impaired loans with related allowance $ 1,383 $ -
Impaired loans with no related allowance - 827
------- --------
Total impaired loans $ 1,383 $ 827
======= ========
2004 2003 2002
------- -------- -------
(In thousands)
Allowance on impaired loans
Beginning balance $ - $ 282 $ -
Provision 475 136 282
Charge-offs - (418) -
------- -------- -------
Ending balance $ 475 $ - $ 282
======= ======== =======
Average balance of impaired loans $ 461 $ 809 $ 971
Interest income recognized on impaired loans $ 100 $ 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.
50
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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
The Corporation accounts for acquisitions pursuant to SFAS No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all
purchased goodwill and intangible assets. In accordance with that
Statement, 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 during 2004, 2003 and
2002 in accordance with the provisions of SFAS No. 142 via independent
third-party appraisal. The evaluations showed no indication of impairment.
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.
51
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Federal Income Taxes (continued)
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 and the general loan loss allowance. A temporary difference
is also recognized for depreciation expense computed using accelerated
methods for federal income tax purposes.
10. Earnings (Loss) Per Share
Basic earnings (loss) 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. Diluted earnings per share is not computed for periods in
which an operating loss is sustained. The computations were as follows for
the years ended December 31:
2004 2003 2002
--------- --------- ---------
Weighted-average common shares
outstanding (basic) 7,466,090 7,491,977 7,908,786
Dilutive effect of assumed exercise
of stock options N/A 74,390 97,094
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) N/A 7,566,367 8,005,880
========= ========= =========
Options to purchase 80,789 and 65,441 shares of common stock at respective
weighted-average exercise price of $16.40 and $14.83 were outstanding at
December 31, 2004 and 2002, 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 prior acquisitions, stock options of acquired companies were
converted into options to purchase 174,421 and 311,794 shares of the
Corporation's stock at exercise prices of $7.38 and $11.38 per share,
respectively, which expire through 2008.
52
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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 (loss) and earnings (loss) 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
(loss) and earnings (loss) per share would have been reported as the pro
forma amounts indicated below:
2004 2003 2002
---------- -------- ---------
(In thousands, except per share data)
NET EARNINGS (LOSS) As reported $ (2,536) $ 6,856 $ 10,005
Stock-based compensation, net of tax (28) (20) (4)
--------- -------- --------
Pro-forma $ (2,564) $ 6,836 $ 10,001
========= ======== ========
EARNINGS (LOSS) PER SHARE
BASIC As reported $ (.34) $ .92 $ 1.27
Stock-based compensation, net of tax - (.01) (.01)
--------- -------- --------
Pro-forma $ (.34) $ .91 $ 1.26
========= ======== ========
DILUTED As reported N/A $ .91 $ 1.25
Stock-based compensation, net of tax N/A (.01) -
--------- -------- --------
Pro-forma N/A $ .90 $ 1.25
========= ======== ========
53
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Stock Option Plans (continued)
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
assumptions used for grants during 2004, 2003 and 2002: dividend yield of
3.40%, 3.50% and 3.84%, respectively; expected volatility of 21.44%,
16.88%, and 16.34%, respectively; a risk-free interest rate of 4.11%,
3.95% and 2.00%, respectively; and an expected life of ten years for all
grants.
A summary of the status of the Corporation's stock option plans as of
December 31, 2004, 2003 and 2002, and changes during the years ending on
those dates is presented below:
2004 2003 2002
-------------------- ----------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 257,072 $ 12.11 323,291 $ 9.79 503,005 $ 10.16
Granted 17,705 17.17 56,948 16.13 3,700 14.55
Exercised (52,911) 8.83 (117,800) 7.60 (174,106) 10.84
Forfeited (3,542) 15.03 (5,367) 13.92 (9,308) 11.91
------- --------- ---------- --------- ---------- ---------
Outstanding at end of year 218,324 $ 12.91 257,072 $ 12.11 323,291 $ 9.79
======= ========= ========== ========= ========== =========
Options exercisable at year-end 175,542 $ 12.05 211,780 $ 11.25 323,291 $ 9.79
======= ========= ========== ========= ========== =========
Weighted-average fair value of
options granted during the year $ 3.59 $ 2.60 $ 1.36
========= ========= =========
The following information applies to options outstanding at December 31,
2004:
NUMBER OUTSTANDING RANGE OF EXERCISE PRICES
43,506 $ 7.40 - $ 8.94
42,259 $ 9.75 - $ 11.36
51,770 $ 12.50 - $ 14.65
80,789 $ 16.13 - $ 17.17
-------
218,324 $ 12.91
=======
Weighted-average remaining contractual life 6.2 years
54
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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, 2004 and 2003. 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, 2004, 2003 and 2002
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, 2004 and 2003, the
fair value 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,
2004 2003
----------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets
Cash and cash equivalents $ 42,894 $ 42,894 $ 53,711 $ 53,711
Investment securities 23,962 24,013 28,138 28,212
Mortgage-backed securities 84,467 84,509 85,620 85,755
Loans receivable 836,666 849,303 805,082 810,113
Federal Home Loan Bank stock 25,797 25,797 24,494 24,494
------------ ------------ ---------- ------------
$ 1,013,786 $ 1,026,516 $ 997,045 $ 1,002,285
============ ============ ========== ============
Financial liabilities
Deposits $ 667,778 $ 670,533 $ 671,274 $ 677,953
Advances from the Federal Home Loan Bank 295,310 298,841 262,735 288,732
Advances by borrowers for taxes and insurance 3,030 3,030 3,494 3,494
------------ ------------ ---------- ------------
$ 966,118 $ 972,404 $ 937,503 $ 970,179
============ ============ ========== ============
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 2004
consolidated financial statement presentation.
56
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
16. Effects of Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards ("SFAS")
No. 123 which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains
employee services in share-based transactions. This Statement, SFAS No.
123 (R), requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with limited exceptions. That cost
will be recognized over the period during which an employee is required to
provide services in exchange for the award - the requisite service period.
No compensation cost is recognized for equity instruments for which
employees do not render the requisite service. Employee share purchase
plans will not result in recognition of compensation cost if certain
conditions are met.
Initially, the cost of employee services received in exchange for an award
of liability instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will
be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately
before the modification.
Excess tax benefits, as defined by SFAS No. 123(R) will be recognized as
an addition to additional paid in capital. Cash retained as a result of
those excess tax benefits will be presented in the statement of cash flows
as financing cash inflows. The write-off of deferred tax assets relating
to unrealized tax benefits associated with recognized compensation cost
will be recognized as income tax expense unless there are excess tax
benefits from previous awards remaining in additional paid in capital to
which it can be offset.
Compensation cost is required to be recognized in the beginning of the
first interim or annual period that begins after June 15, 2005, or July 1,
2005 as to the Corporation. Management believes the effect of the
Statement on operations will approximate the economic effects set forth in
the pro-forma stock option disclosure set forth in Note A-11 above.
57
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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, 2004 and 2003 are
as follows:
2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Municipal bonds $ 1,124 $ 53 $ - $ 1,177
U.S. Government agency obligations 2,999 - 2 2,997
--------- ---------- ---------- ---------
Total investment securities held to maturity 4,123 53 2 4,174
AVAILABLE FOR SALE:
U.S. Government agency obligations 18,007 12 98 17,921
Municipal bonds 523 13 - 536
Corporate equity securities 247 140 - 387
Treasury 999 - 4 995
--------- ---------- ---------- ---------
Total investment securities available for sale 19,776 165 102 19,839
--------- ---------- ---------- ---------
Total investment securities $ 23,899 $ 218 $ 104 $ 24,013
========= ========== ========== =========
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
========= ========== ========== =========
58
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities at December
31, 2004 (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 $ 8,382 $ 8,392
Due after one year through five years 14,927 14,860
Due after five years 343 374
--------- ---------
Total investment securities 23,652 23,626
Corporate equity securities 247 387
--------- ---------
Total $ 23,899 $ 24,013
========= =========
Proceeds from sales of investment securities during the years ended December 31,
2004 and 2003, totaled $1.6 million and $3.8 million, respectively, resulting in
gross realized gains of $48,000 and $99,000 in those respective years.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at December 31, 2004 and
2003, are as follows:
2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
FNMA $ 1,985 $ 32 $ 6 $ 2,011
FHLMC 1,128 7 - 1,135
GNMA 576 13 - 589
Other 457 - 4 453
--------- ---------- ---------- ---------
Total mortgage-backed securities
held to maturity 4,146 52 10 4,188
AVAILABLE FOR SALE:
FNMA 42,625 114 386 42,353
FHLMC 38,025 45 239 37,831
GNMA 132 5 - 137
--------- ---------- ---------- ---------
Total mortgage-backed securities
available for sale 80,782 164 625 80,321
--------- ---------- ---------- ---------
Total mortgage-backed securities $ 84,928 $ 216 $ 635 $ 84,509
========= ========== ========== =========
59
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE B - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (continued)
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
========= ========== ========== =========
The amortized cost of mortgage-backed securities, including those designated as
available for sale at December 31, 2004, 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 $ 14
Due after one year through five years 14,205
Due after five years through ten years 48,780
Due after ten years 21,929
--------------
$ 84,928
==============
During the years ended December 31, 2004 and 2003, the Bank sold mortgage-backed
securities totaling $13.0 million and $58.4 million, resulting in gross realized
gains of $87,000 and $740,000.
60
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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, 2004.
LESS THAN 12 MONTHS MORE THAN 12 MONTHS
FAIR UNREALIZED FAIR UNREALIZED
DESCRIPTION OF SECURITIES VALUE LOSSES VALUE LOSSES
(In thousands)
Mortgage-backed securities:
Held to maturity $ 77 $ - $ 685 $ 10
Available for sale 41,298 419 16,691 206
U.S. Government agency:
Held to maturity 2,997 2 - -
Available for sale 11,902 98 - -
Treasury:
Available for sale 999 4 - -
-------- ---------- --------- --------
Total temporarily impaired securities $ 57,273 $ 523 $ 17,376 $ 216
======== ========== ========= ========
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:
2004 2003
(In thousands)
Conventional real estate loans:
Existing residential properties $ 492,387 $ 551,634
Multi-family 47,252 45,116
Nonresidential real estate 105,247 51,533
Construction 75,055 44,189
Developed building lots 15,854 1,725
Commercial 16,592 17,747
Home equity lines of credit 101,545 89,310
Consumer, education and other loans 20,706 15,292
--------- ----------
Total 874,638 816,546
Increase (decrease) due to:
Undisbursed portion of loans in process (40,349) (17,022)
Unamortized yield adjustments (937) (810)
Capitalized mortgage servicing rights 6,953 6,552
Allowance for loan losses (6,476) (5,641)
--------- ----------
Loans receivable - net $ 833,829 $ 799,625
========= ==========
61
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
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 $492.4 million, or 59%, of the total loan portfolio
at December 31, 2004 and approximately $551.6 million, or 69%, of the
total loan portfolio at December 31, 2003. 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
at both December 31, 2004 and 2003.
NOTE D - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
2004 2003 2002
(In thousands)
Balance at beginning of year $ 5,641 $ 5,490 $ 4,256
Provision for losses on loans 1,620 1,446 1,169
Charge-offs of loans (1,597) (1,319) (207)
Recoveries 189 24 272
Allowance resulting from acquisition
of London Financial 623 - -
------- -------- ---------
Balance at end of year $ 6,476 $ 5,641 $ 5,490
======= ======== =========
Nonaccrual and nonperforming loans totaled approximately $9.8 million,
$13.6 million and $13.6 million at December 31, 2004, 2003 and 2002,
respectively. Interest income that would have been recognized had such
nonaccrual loans performed pursuant to contractual terms totaled
approximately $573,000, $808,000 and $940,000 for the years ended December
31, 2004, 2003 and 2002, respectively.
62
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at December 31 is summarized as follows:
2004 2003
(In thousands)
Land $ 2,120 $ 2,169
Buildings and improvements 12,155 13,146
Furniture, fixtures and equipment 9,840 10,963
--------- ---------
24,115 26,278
Less accumulated depreciation and amortization 12,468 12,898
--------- ---------
$ 11,647 $ 13,380
========= =========
NOTE F - DEPOSITS
Deposit balances by type and weighted-average interest rate at December
31, 2004 and 2003, are summarized as follows:
2004 2003
AMOUNT RATE AMOUNT RATE
(Dollars in thousands)
Noninterest-bearing checking accounts $ 24,225 -% $ 22,638 -%
NOW accounts 127,622 1.12 82,831 0.42
Money market demand accounts 83,063 1.25 128,938 1.44
Passbook and statement savings accounts 70,959 0.25 74,274 0.25
--------- ----- ----------- -----
Total withdrawable accounts 305,869 0.87 308,681 0.80
Certificates of deposit
Original maturities of:
Six months to one year 19,115 1.76 18,966 1.08
One to two years 77,913 2.13 61,186 1.88
Two to five years 148,351 3.93 174,487 4.05
Negotiated rate certificates 55,845 2.30 40,670 1.76
Individual retirement accounts 60,685 3.75 67,284 3.47
--------- ----- ----------- -----
Total certificate accounts 361,909 3.11 362,593 3.17
--------- ----- ----------- -----
Total deposits $ 667,778 2.08% $ 671,274 2.08%
========= ===== =========== =====
At December 31, 2004 and 2003, the Corporation had certificate of deposit
accounts with balances in excess of $100,000 totaling $99.8 million and
$87.1 million, respectively.
63
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE F - DEPOSITS (continued)
Interest expense on deposits is summarized as follows for the years ended
December 31:
2004 2003 2002
(In thousands)
Certificate of deposit accounts $11,324 $13,120 $19,185
NOW accounts and money market demand accounts 2,392 2,545 3,015
Passbook and statement savings accounts 229 372 860
------- ------- -------
$13,945 $16,037 $23,060
======= ======= =======
The contractual maturities of outstanding certificates of deposit are
summarized as follows at December 31:
2004 2003
YEAR ENDING DECEMBER 31: (In thousands)
2004 $ - 178,290
2005 193,395 85,268
2006 79,131 61,029
2007 45,228 22,487
After 2007 44,155 15,519
--------- --------
Total certificate of deposit accounts $ 361,909 $362,593
========= ========
At December 31, 2004 and 2003, certain savings deposits were
collateralized by a pledge of investment securities and letters of credit
with the Federal Home Loan Bank totaling $90.2 million and $72.4 million,
respectively.
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at December 31,
2004, by a blanket agreement using 100% of the Bank's 1-4 family and
multi-family mortgage portfolios and the Bank's investment in Federal Home
Loan Bank stock, are summarized as follows:
MATURING YEAR
INTEREST RATE RANGE ENDING DECEMBER 31, 2004 2003
(Dollars in thousands)
0.96% - 8.20% 2004 $ - $ 29,408
1.44% - 7.60% 2005 62,020 47
1.94% - 6.40% 2006 42,534 1,121
2.44% - 6.95% 2007 43,674 1,565
2.90% - 6.05% 2008 46,056 22,157
2.66% - 6.45% 2009 38,308 27,930
2.66% - 7.17% Thereafter 62,718 180,507
-------- --------
$295,310 $262,735
======== ========
Weighted-average interest rate 3.63% 5.13%
======== ========
64
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK (continued)
During December 2004 and 2003, the Corporation elected to prepay $144.1
and $25.4 million of advances bearing weighted-average interest rates of
6.25% and 5.14%, which resulted in the recognition of prepayment fees
totaling $18.9 million and $1.3 million, respectively.
NOTE H - FEDERAL INCOME TAXES (CREDITS)
A reconciliation of the rate of taxes (benefits) which are payable
(refundable) at the federal statutory rate are summarized as follows:
2004 2003 2002
(In thousands)
Federal income taxes (benefits) computed at the
expected statutory rate $(1,427) $3,368 $5,082
Increase (decrease) in taxes resulting from:
Nontaxable dividend and interest income (28) (41) (33)
Increase in cash surrender value of life insurance - net (240) (268) (274)
Other 35 (8) 27
------- ------ ------
Federal income tax provision (credits) per consolidated
financial statements $(1,660) $3,051 $4,802
======= ====== ======
The components of the Corporation's net deferred tax liability at December
31 is as follows:
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT STATUTORY RATE: 2004 2003
(In thousands)
Deferred tax liabilities:
FHLB stock dividends $(3,626) $(3,230)
Mortgage servicing rights (2,364) (2,228)
Book versus tax depreciation (486) (571)
Original issue discount (569) (471)
Purchase price adjustments (381) (242)
Other liabilities, net (55) (7)
Unrealized gains on securities designated as
available for sale - (106)
------- -------
Total deferred tax liabilities (7,481) (6,855)
Deferred tax assets:
General loan loss allowance 2,202 1,918
Deferred income 391 282
Deferred compensation 641 510
Deferred loan fees 199 173
Other assets 29 32
Unrealized losses on securities designated as
available for sale 135 -
------- -------
Total deferred tax assets 3,597 2,915
------- -------
Net deferred tax liability $(3,884) $(3,940)
======= =======
65
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE H - FEDERAL INCOME TAXES (CREDITS) (continued)
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, 2004. The amount of the unrecognized
deferred tax liability relating to the cumulative bad debt deduction was
approximately $4.1 million at December 31, 2004.
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.
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, 2004, the Bank had outstanding commitments to originate
and purchase fixed-rate loans of approximately $677,000 and
adjustable-rate loans of approximately $33.7 million. Additionally, the
Bank had unused lines of credit under home equity and other loans of $63.5
million at December 31, 2004, and stand by letters of credit of $455,000.
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.
66
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE I - COMMITMENTS (continued)
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)
2005 $166
2006 99
2007 99
2008 82
2009 and thereafter 225
----
$671
====
Rental expense under operating leases totaled approximately $259,000,
$234,000 and $251,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
NOTE J - REGULATORY CAPITAL
Camco and Advantage are subject to the regulatory capital requirements of
the Federal Reserve Board (the "FRB") and Advantage is subject to the
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
Corporation's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Corporation and Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The FRB and FDIC have adopted risk-based capital ratio guidelines to which
the Corporation 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.
67
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE J - REGULATORY CAPITAL (continued)
These guidelines divide the capital into two tiers. The first tier ("Tier
I") 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. Banks and financial holding companies are required to maintain
a total risk-based capital ratio of 8%, of which 4% must be Tier I
capital. The regulatory agencies may, however, set higher capital
requirements when particular circumstances warrant. Banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
During 2004, 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" Camco
and Advantage must maintain minimum capital ratios as set forth in the
table that follows.
As of December 31, 2004, management believes that the Corporation met all
capital adequacy requirements to which it was subject.
CAMCO: AS OF DECEMBER 31, 2004
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $88,628 12.38% > or = $57,292 > or = 8.0% > or = $71,615 > or = 10.0%
Tier I capital
(to risk-weighted assets) $82,152 11.47% > or = $28,646 > or = 4.0% > or = $42,969 > or = 6.0%
Tier I leverage $82,152 7.54% > or = $43,568 > or = 4.0% > or = $54,460 > or = 5.0%
ADVANTAGE: AS OF DECEMBER 31, 2004
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- -------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,373 11.25% > or = $57,177 > or = 8.0% > or = $71,472 > or = 10.0%
Tier I capital
(to risk-weighted assets) $73,897 10.34% > or = $28,589 > or = 4.0% > or = $42,883 > or = 6.0%
Tier I leverage $73,897 6.86% > or = $43,118 > or = 4.0% > or = $53,897 > or = 5.0%
68
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE J - REGULATORY CAPITAL (continued)
AS OF DECEMBER 31, 2003
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
Total capital
(to risk-weighted assets) $80,657 12.5% > or = $51,539 > or = 8.0% > or = $64,424 > or = 10.0%
Tier I capital
(to risk-weighted assets) $75,016 11.6% > or = $25,769 > or = 4.0% > or = $38,654 > or = 6.0%
Tier I leverage $75,016 7.4% > or = $40,799 > or = 4.0% > or = $50,999 > or = 5.0%
The Corporation's management believes that, under the current regulatory
capital regulations, Camco 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 future 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
$327,000, $291,000 and $296,000 during the years ended December 31, 2004,
2003 and 2002, 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 $307,000, $297,000 and
$328,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
69
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION
The following condensed financial statements summarize the financial
position of the Corporation as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the years ended
December 31, 2004, 2003 and 2002:
CAMCO FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
December 31,
(In thousands)
2004 2003
ASSETS
Cash in Advantage $ 223 $ 306
Interest-bearing deposits in other financial institutions 5,995 11,315
Investment securities designated as available for sale 387 476
Investment in Advantage 80,973 78,734
Investment in Camco Title 970 805
Office premises and equipment - net 1,338 1,386
Cash surrender value of life insurance 1,187 1,148
Prepaid expenses and other assets 165 105
Deferred federal income tax assets 107 -
---------- ----------
Total assets $ 91,345 $ 94,275
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities $ 404 $ 358
Dividends payable 1,109 1,063
Accrued federal income taxes 511 300
Deferred federal income taxes - 11
---------- ----------
Total liabilities 2,024 1,732
Stockholders' equity
Common stock 8,760 8,429
Additional paid-in capital 58,935 55,132
Retained earnings 38,234 45,121
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects (263) 206
Treasury stock, at cost (16,345) (16,345)
---------- ----------
Total stockholders' equity 89,321 92,543
---------- ----------
Total liabilities and stockholders' equity $ 91,345 $ 94,275
========== ==========
70
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
Year ended December 31,
(In thousands)
2004 2003 2002
Income
Dividends from Advantage $ 3,500 $ 7,504 $ 18,006
Dividends from Camco Title - 700 750
Interest and other income 171 172 146
Gain on sale of investments 45 - -
Distributions in excess of Advantage earnings
or loss (5,595) (709) (7,643)
(Excess distribution from) undistributed earnings
of Camco Title 165 (26) (270)
---------- --------- --------
Total income (loss) (1,714) 7,641 10,989
General, administrative and other expense 1,152 1,129 1,451
---------- --------- --------
Earnings (loss) before federal income tax credits (2,866) 6,512 9,538
Federal income tax credits (330) (344) (467)
---------- --------- --------
Net earnings (loss) $ (2,536) $ 6,856 $ 10,005
========== ========= ========
71
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE L - CAMCO FINANCIAL CORPORATION CONDENSED FINANCIAL
INFORMATION (continued)
CAMCO FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)
2004 2003 2002
Cash flows from operating activities:
Net earnings (loss) for the year $ (2,536) $ 6,856 $ 10,005
Adjustments to reconcile net earnings (loss) to net cash
flows provided by (used in) operating activities:
Distributions in excess of net earnings or loss of Advantage 5,595 709 7,643
Excess distribution from (undistributed net earnings of)
Camco Title (165) 26 270
Gain on sale of office premises and equipment - (1) -
Gain on sale of investments (45) - -
Depreciation and amortization 51 58 112
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (60) (105) 1,946
Accounts payable and other liabilities 46 (114) (4,340)
Accrued federal income taxes 211 4 (41)
Deferred federal income taxes (115) (58) 25
Tax benefits related to exercise of stock options 84 210 197
--------- ---------- ----------
Net cash provided by operating activities 3,066 7,585 15,817
Cash flows from investing activities:
Purchase of investment securities - - (102)
Proceeds from redemption of available for sale securities 127 - 17
Net increase in cash surrender value of life insurance (39) (45) (49)
Purchase of office premises and equipment (3) (32) (98)
Proceeds from sale of office premises and equipment - 14 347
(Increase) decrease in interest-bearing deposits in other
financial institutions 5,320 3,666 (7,397)
Purchase of London Financial - net (4,717) - -
--------- ---------- ----------
Net cash provided by (used in) investing activities 688 3,603 (7,282)
Cash flows from financing activities:
Proceeds from exercise of stock options 468 977 1,886
Dividends paid (4,305) (4,215) (4,045)
Purchase of treasury shares - (7,977) (6,314)
--------- ---------- ----------
Net cash used in financing activities (3,837) (11,215) (8,473)
--------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (83) (27) 62
Cash and cash equivalents at beginning of year 306 333 271
--------- ---------- ----------
Cash and cash equivalents at end of year $ 223 $ 306 $ 333
========= ========== ==========
Ohio state statutes impose certain limitations on the payment of dividends and
other capital distributions by banks. Generally, absent approval of the
Superintendent of Banks, such statutes limit dividend and capital distributions
to earnings of the current and two preceding years. As a result, Camco will need
regulatory approval for dividend distributions in 2005. However, management is
of the opinion that such approval will not be unreasonably withheld given the
Bank's current well-capitalized classification.
72
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE M - BUSINESS COMBINATION
During 2004, the Corporation agreed to acquire London Financial utilizing
the purchase method of accounting. London Financial was merged into Camco
in August 2004 and its banking subsidiary, Citizens Bank of London,
continued operations as a division of Advantage. Camco paid $4.7 million
in cash and issued 277,820 of its common shares, which were valued at
approximately $3.5 million, in connection with the acquisition.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
(In thousands)
Cash and cash equivalents $ 2,948
Mortgage-backed securities 350
Loans receivable 49,050
Prepaid expenses and other assets 2,093
--------
Total assets 54,441
Deposits (45,232)
Other liabilities (5,139)
--------
Net assets acquired $ 4,070
========
Presented below are Camco's pro-forma condensed consolidated statements of
earnings and earnings per share which have been prepared as if the
acquisition had been consummated as of the beginning of each of the years
ended December 31, 2004 and 2003.
2004 2003
(In thousands)
(Unaudited)
Total interest income $ 54,810 $ 58,036
Total interest expense 28,135 32,329
-------- --------
Net interest income 26,675 25,707
Provision for losses on loans 1,877 1,506
Other income 13,820 11,571
General, administrative and other expense 43,712 25,064
-------- --------
Earnings (loss) before income taxes (credits) (5,094) 10,708
Federal income taxes (credits) (1,891) 3,292
-------- --------
Net earnings (loss) $ (3,204) $ 7,416
======== ========
Earnings (loss) per share:
Basic $ (0.42) $ 0.95
======== ========
Diluted N/A $ 0.95
======== ========
73
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2004, 2003 and 2002
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
years ended December 31, 2004 and 2003.
THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2004: (In thousands, except per share data)
Total interest income $ 13,761 $ 13,473 $ 12,985 $ 12,729
Total interest expense 7,078 7,067 6,709 6,658
---------- --------- --------- ---------
Net interest income 6,683 6,406 6,276 6,071
Provision for losses on loans 855 255 255 255
Other income 8,555 1,914 1,703 1,536
General, administrative and other expense 24,429 5,927 5,494 5,870
---------- --------- --------- ---------
Earnings (loss) before income taxes (credits) (10,046) 2,138 2,230 1,482
Federal income taxes (credits) (3,476) 670 698 448
---------- --------- --------- ---------
Net earnings (loss) $ (6,570) $ 1,468 $ 1,532 $ 1,034
========== ========= ========= =========
Earnings (loss) per share:
Basic $ (0.89) $ 0.20 $ 0.21 $ 0.14
========== ========= ========= =========
Diluted N/A $ 0.19 $ 0.21 $ 0.14
========== ========= ========= =========
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
========= ========= ========= =========
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, 2004. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that Camco's
disclosure controls and procedures are effective.
(b) Changes in internal control over financial reporting. There were no
changes in Camco's internal controls over financial reporting that occurred
during the quarter ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the internal control over financial
reporting.
See Managements Report on Internal Control over Financial Reporting on
page 37.
ITEM 9B. OTHER INFORMATION.
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the captions "Election of Directors,"
"Incumbent Directors," "Executive Officers," "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, 2005 (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 AND
RELATED STOCKHOLDER MATTERS.
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, 2004, 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.................. 218,324 $ 12.91 419,266
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.
76
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(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 2002 Salary Continuation Agreement
10(iv) Form of 1996 Salary Continuation Agreement
10(v) Form of Executive Deferred Compensation Agreement
10(vi) First Ashland Financial Corporation 1995 Stock Option and Incentive Plan
10(vii) Incentive Stock Option Award Agreement Pursuant to the First Ashland Financial
Corporation 1995 Stock Option and Incentive Plan
10(viii) Non-Qualified Stock Option Award Agreement Pursuant to the First Ashland Financial
Corporation 1995 Stock Option and Incentive Plan
10(ix) Camco Financial Corporation 2002 Equity Incentive Plan
10(x) Incentive Stock Option Award Agreement Pursuant to the Camco Financial
Corporation 2002 Equity and Incentive Plan
10(xi) Non-Qualified Stock Option Award Agreement Pursuant to the Camco Financial
Corporation 2002 Equity and Incentive Plan
10(xii) Camco Financial Corporation 1995 Stock Option and Incentive Plan
10(xiii) Westwood Homestead Financial Corporation 1997 Stock Option Plan
10(xiv) Incentive Stock Option Award Agreement Pursuant to the Westwood Homestead
Financial Corporation 1997 Stock Option Plan
10(xv) Non-Qualified Stock Option Award Agreement Pursuant to the 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) Certification of Chief Executive Officer
31(ii) Certification of Chief Financial Officer
32(i) Certification of Chief Executive Officer
32(ii) Certification of Chief Financial Officer
(b) Reports on Form 8-K.
Camco filed a Form 8-K on January 21, 2005, disclosing its earnings
release for the quarter and year ended December 31, 2004.
77
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 15, 2005 Date: March 15, 2005
By /s/ Samuel W. Speck By /s/ Paul D. Leake
------------------------- ---------------------------
Samuel W. Speck, Paul D. Leake,
Director Director
Date: March 15, 2005 Date: March 15, 2005
By /s/ Jeffrey T. Tucker By /s/ Terry A. Feick
------------------------- ---------------------------
Jeffrey T. Tucker, Terry A. Feick,
Director Director
Date: March 15, 2005 Date: March 15, 2005
By /s/ Carson K. Miller By /s/ Susan J. Insley
------------------------- ---------------------------
Carson K. Miller, Susan J. Insley,
Director Director
Date: March 15, 2005 Date: March 15, 2005
By /s/ Mark A. Severson
-------------------------
Mark A. Severson,
Chief Financial Officer
Date: March 15, 2005
INDEX TO EXHIBITS
ITEM DESCRIPTION
---- -----------
Exhibit 3(i) Third Restated Certificate of Incorporated by reference to Camco's
Incorporation of Camco Financial Annual Report on Form 10-K for the
Corporation, as amended fiscal year ended December 31, 1999,
Film no. 585779 ("1999 Form 10-K"),
Exhibit 3(i)
Exhibit 3(ii) 1987 Amended and Restated Incorporated by reference to Camco's
By-Laws of Camco Financial 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 Annual Report on Form 10-K for the
Camco Financial Corporation and fiscal year ended December 31, 2001,
Richard C. Baylor Exhibit 10(i)
Exhibit 10(ii) Employment Agreement dated
November 9, 2001, as amended, by
and between Camco Financial
Corporation and Larry A. Caldwell
Exhibit 10(iii) Form of 2002 Salary Continuation Incorporated by reference to Camco's
Agreement, including individualized Annual Report on Form 10-K for the
Schedule A's for each participant fiscal year ended December 31, 2003
("2003 Form 10-K"), Exhibit 10(iv)
Exhibit 10(iv) Form of 1996 Salary Continuation
Agreement, including Schedule A's
for D. Edward Rugg and Edward A.
Wright
Exhibit 10(v) Form of Executive Deferred Incorporated by reference to Camco's
Compensation Agreement 2003 Form 10-K, Exhibit 10(vi)
Exhibit 10(vi) 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(vii) Incentive Stock Option Award
Agreement Pursuant to the First
Ashland Financial Corporation
1995 Stock Option and Incentive
Plan
Exhibit 10(viii) Non-Qualified Stock Option Award
Agreement Pursuant to the First
Ashland Financial Corporation
1995 Stock Option and Incentive
Plan
Exhibit 10(ix) 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(x) Incentive Stock Option Award Incorporated by reference to Camco's
Agreement Pursuant to the Camco Form 8K filed on February 2, 2005,
Financial Corporation 2002 Equity film no. 05570393 ("2005 8-K"),
and Incentive Plan Exhibit 10.5
Exhibit 10(xi) Non-Qualified Stock Option Award
Agreement Pursuant to the Camco
Financial Corporation 2002 Equity
and Incentive Plan
Exhibit 10(xii) 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(xiii) 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 10(xiv) Incentive Stock Option Award Incorporated by reference to the 2005
Agreement Pursuant to the Westwood 8K, Exhibit 10.4
Homestead Financial Corporation
1997 Stock Option Plan
Exhibit 10(xv) Non-Qualified Stock Option Award Incorporated by reference to the 2005
Agreement Pursuant to the Westwood 8K, Exhibit 10.3
Homestead Financial Corporation
1997 Stock Option Plan
Exhibit 21 Subsidiaries of Camco Incorporated by reference to Camco's
2003 Form 10-K, Exhibit 21
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