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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0110823
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6901 Glenn Highway, Cambridge, Ohio 43725-9757
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 4, 2005, the latest practicable date, 7,678,747 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 23
Camco Financial Corporation
INDEX
Page
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PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Quantitative and Qualitative Disclosures about
Market Risk 19
Controls and Procedures 20
PART II - OTHER INFORMATION 21
SIGNATURES 22
2
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
ASSETS
Cash and due from banks $ 24,551 $ 25,849
Interest-bearing deposits in other financial institutions 15,244 17,045
----------- -----------
Cash and cash equivalents 39,795 42,894
Investment securities available for sale - at market 26,539 19,839
Investment securities held to maturity - at cost, approximate market
value of $1,162 and $4,174 as of March 31, 2005 and December 31,
2004, respectively 1,123 4,123
Mortgage-backed securities available for sale - at market 77,538 80,321
Mortgage-backed securities held to maturity - at cost, approximate market
value of $3,952 and $4,188 as of March 31, 2005 and December 31,
2004, respectively 3,979 4,146
Loans held for sale - at lower of cost or market 4,616 2,837
Loans receivable - net 837,140 833,829
Office premises and equipment - net 11,448 11,647
Real estate acquired through foreclosure 2,087 2,280
Federal Home Loan Bank stock - at cost 26,083 25,797
Accrued interest receivable 4,416 4,503
Prepaid expenses and other assets 1,369 1,530
Cash surrender value of life insurance 20,227 20,042
Goodwill - net of accumulated amortization 6,683 6,736
Prepaid federal income taxes 1,591 5,299
----------- -----------
Total assets $ 1,064,634 $ 1,065,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 674,853 $ 667,778
Advances from the Federal Home Loan Bank 289,302 295,310
Advances by borrowers for taxes and insurance 2,024 3,030
Accounts payable and accrued liabilities 4,402 5,391
Dividends payable 1,114 1,109
Deferred federal income taxes 3,360 3,884
----------- -----------
Total liabilities 975,055 976,502
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; 8,775,272 and
8,759,676 shares issued at March 31, 2005 and December 31, 2004, respectively 8,775 8,760
Additional paid-in capital 59,078 58,935
Retained earnings - substantially restricted 39,335 38,234
Accumulated other comprehensive income (loss) - unrealized gains on securities
designated as available for sale, net of related tax effects (1,264) (263)
Less 1,096,525 and 1,096,523 shares of treasury stock at March 31, 2005
and December 31, 2004, respectively - at cost (16,345) (16,345)
----------- -----------
Total stockholders' equity 89,579 89,321
----------- -----------
Total liabilities and stockholders' equity $ 1,064,634 $ 1,065,823
=========== ===========
3
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(In thousands, except per share data)
2005 2004
-------- --------
Interest income
Loans $ 11,962 $ 11,415
Mortgage-backed securities 751 607
Investment securities 185 182
Interest-bearing deposits and other 607 525
-------- --------
Total interest income 13,505 12,729
Interest expense
Deposits 3,503 3,349
Borrowings 2,634 3,309
-------- --------
Total interest expense 6,137 6,658
-------- --------
Net interest income 7,368 6,071
Provision for losses on loans 240 255
-------- --------
Net interest income after provision for losses on loans 7,128 5,816
Other income
Late charges, rent and other 745 640
Loan servicing fees 378 386
Service charges and other fees on deposits 334 272
Gain on sale of loans 170 276
Increase (decrease) in valuation of mortgage servicing rights - net 51 (102)
Gain (loss) on sale of real estate acquired through foreclosure 9 (13)
Gain on sale of mortgage-backed securities and fixed assets 19 77
-------- --------
Total other income 1,706 1,536
General, administrative and other expense
Employee compensation and benefits 3,446 3,480
Deferred loan origination costs - SFAS No. 91 (482) (484)
Occupancy and equipment 797 874
Data processing 331 342
Advertising 229 254
Franchise taxes 79 214
Other operating 1,165 1,190
-------- --------
Total general, administrative and other expense 5,565 5,870
-------- --------
Earnings before federal income taxes 3,269 1,482
Federal income taxes
Current 1,059 412
Deferred (8) 36
-------- --------
Total federal income taxes 1,051 448
-------- --------
NET EARNINGS $ 2,218 $ 1,034
======== ========
EARNINGS PER SHARE
Basic $ .29 $ .14
======== ========
Diluted $ .29 $ .14
======== ========
Dividends declared per share $ .145 $ .145
======== ========
4
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
2005 2004
------- -------
Net earnings $ 2,218 $ 1,034
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during the period, net of tax
effects (benefits) of $(511) and $167 in 2005 and 2004, respectively (992) 325
Reclassification adjustment for realized gains included in earnings net
of taxes of $4 and $26 in 2005 and 2004, respectively (9) (51)
------- -------
Comprehensive income $ 1,217 $ 1,308
======= =======
Accumulated comprehensive income $(1,264) $ 480
======= =======
5
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
2005 2004
-------- --------
Cash flows from operating activities:
Net earnings for the period $ 2,218 $ 1,034
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees 19 (43)
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 135 346
Amortization of mortgage servicing rights - net 151 438
Depreciation and amortization 320 365
Amortization of loan purchase accounting adjustments, net (22) (22)
Provision for losses on loans 240 255
Loss (gain) on sale of real estate acquired through foreclosure (9) 13
Gain on sale of mortgage-backed securities (13) (77)
Federal Home Loan Bank stock dividends (286) (244)
Gain on sale of loans (170) (276)
Loans originated for sale in the secondary market (16,150) (29,927)
Proceeds from sale of loans in the secondary market 14,541 26,752
Net increase in cash surrender value of life insurance (185) (172)
Tax benefits related to exercise of stock options 32 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable 87 (83)
Prepaid expenses and other assets 214 (190)
Accrued interest and other liabilities (989) 97
Federal income taxes
Current 3,708 412
Deferred (8) 36
-------- --------
Net cash provided by (used in) operating activities 3,833 (1,286)
Cash flows provided by (used in) investing activities:
Purchases of investment securities designated as available for sale (8,978) (8,000)
Proceeds from sale of investments designated as available for sale 27 -
Proceeds from maturities of investment securities 5,000 6,000
Proceeds from sale of mortgage-backed securities designated as available for sale - 12,571
Principal repayments on mortgage-backed securities 4,911 6,095
Purchases of mortgage-backed securities designated as available for sale (3,349) (32,371)
Loan principal repayments 67,526 53,803
Additions to real estate acquired through foreclosre (6) -
Loan disbursements (71,156) (62,388)
Purchases of loans (854) (6,117)
Additions to office premises and equipment (121) (169)
Proceeds from sale of real estate acquired through foreclosure 993 586
-------- --------
Net cash used in investing activities (6,007) (29,990)
-------- --------
Net cash (used in) provided by operating and investing
activities balance carried forward (2,174) (31,276)
-------- --------
6
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
2005 2004
--------- ---------
Net cash (used in) provided by operating and investing
activities (balance brought forward) $ (2,174) $(31,276)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 7,075 (2,228)
Proceeds from Federal Home Loan Bank advances - 25,650
Repayment of Federal Home Loan Bank advances (6,008) (5,106)
Dividends paid on common stock (1,112) (1,064)
Proceeds from exercise of stock options 126 210
Decrease in advances by borrowers for taxes and insurance (1,006) (1,136)
-------- --------
Net cash provided by (used in) financing activities (925) 16,326
-------- --------
Increase (decrease) in cash and cash equivalents (3,099) (14,950)
Cash and cash equivalents at beginning of period 42,894 53,711
-------- --------
Cash and cash equivalents at end of period $ 39,795 $ 38,761
======== ========
Supplemental disclosure of cash flow information: Cash paid
during the period for: Interest on deposits and borrowings $ 6,190 $ 6,787
======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (992) $ 325
======== ========
Transfers from mortgage loans to real estate acquired through foreclosure $ 1,200 $ 1,907
======== ========
Dividends declared but unpaid $ 1,114 $ 1,067
======== ========
7
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended March 31, 2005 and 2004
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America ("US GAAP"). Accordingly, these financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto of Camco Financial Corporation ("Camco" or the "Corporation")
included in Camco's Annual Report on Form 10-K for the year ended December
31, 2004. However, all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of the consolidated financial statements, have been included.
The results of operations for the three month period ended March 31, 2005,
are not necessarily indicative of the results which may be expected for
the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Camco and its two wholly-owned subsidiaries: Advantage Bank ("Advantage"
or the "Bank") and Camco Title Agency, Inc.
3. Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as disclosures found elsewhere in this quarterly
report, are based upon Camco's consolidated financial statements, which
are prepared in accordance with US GAAP. The preparation of these
financial statements requires Camco to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses.
Several factors are considered in determining whether or not a policy is
critical in the preparation of financial statements. These factors
include, among other things, whether the estimates are significant to the
financial statements, the nature of the estimates, the ability to readily
validate the estimates with other information including third parties or
available prices, and sensitivity of the estimates to changes in economic
conditions and whether alternative accounting methods may be utilized
under US GAAP.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses, the valuation of mortgage servicing rights and goodwill
impairment. Actual results could differ from those estimates.
ALLOWANCE FOR LOAN LOSSES
The procedures for assessing the adequacy of the allowance for loan losses
reflect our evaluation of credit risk after careful consideration of all
information available to us. In developing this assessment, we must rely
on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown such as economic factors, developments affecting
companies in specific industries and issues with respect to single
borrowers. Depending on changes in circumstances, future assessments of
credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
8
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
3. Critical Accounting Policies (continued)
ALLOWANCE FOR LOAN LOSSES (continued)
The allowance is regularly reviewed by management to determine whether the
amount is considered adequate to absorb probable losses. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based upon the size,
quality, and concentration characteristics of the various loan portfolios,
adverse situations that may affect a borrower's ability to repay, and
current economic and industry conditions. Also considered as part of that
judgement is a review of the Bank's trends in delinquencies and loan
losses, as well as trends in delinquencies and losses for the region and
nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate
based on management's current judgement about the credit quality of the
loan portfolio. While the Corporation strives to reflect all known risk
factors in its evaluations, judgment errors may occur.
During the year end audit, Camco's previous auditors identified a lack of
comprehensive procedural documentation concerning the asset classification
of specific loans in accordance with FAS No. 114. Management has taken
corrective actions, which it has discussed with the Audit Committee and
the current auditors, and, as of the date of this report, management has
tested Camco's internal control over financial reporting relating to the
FAS No. 114 deficiency and believes that the deficiency that was
considered to be a material weakness as of December 31, 2004 has been
corrected. See Item 4 "Controls and Procedures" for a discussion of the
corrective actions taken.
MORTGAGE SERVICING RIGHTS
To determine the fair value of its mortgage servicing rights ("MSRs") each
reporting quarter, the Corporation transmits information to a third party
provider, representing individual loan information in each pooling period
accompanied by escrow amounts. The third party then evaluates the possible
impairment of MSRs as described below.
Servicing assets are recognized as separate assets when loans are sold
with servicing retained. A pooling methodology in which loans with similar
characteristics are "pooled" together is applied for valuation purposes.
Once pooled, each grouping of loans is evaluated on a discounted earnings
basis to determine the present value of future earnings that a purchaser
could expect to realize from the portfolio. Earnings are projected from a
variety of sources including loan service fees, interest earned on float,
net interest earned on escrow balances, miscellaneous income and costs to
service the loans. The present value of future earnings is the estimated
market value for the pool, calculated using consensus assumptions that a
third party purchaser would utilize in evaluating a potential acquisition
of the servicing. Events that may significantly affect the estimates used
are changes in interest rates and the related impact on mortgage loan
prepayment speeds and the payment performance of the underlying loans. The
interest rate for float, which is supplied by management, takes into
consideration the investment portfolio average yield as well as current
short duration investment yields. Management believes this methodology
provides a reasonable estimate. Mortgage loan prepayment speeds are
calculated by the third party provider utilizing the Economic Outlook as
published by the Office of Chief Economist of Freddie Mac in estimating
prepayment speeds and provides a specific scenario with each evaluation.
Based on the assumptions discussed, pre-tax projections are prepared for
each pool of loans serviced. These earning figures approximate the cash
flow that could be received from the servicing portfolio. Valuation
results are presented quarterly to management.
9
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
3. Critical Accounting Policies (continued)
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 the valuation techniques take into account the
reporting unit's operating history, the current market environment and
future prospects. As of the most recent quarter, the only reporting unit
carrying goodwill is the Bank.
If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and no second
step is required. If not, a second test is required to measure the amount
of goodwill impairment. The second test of the overall goodwill impairment
compares the implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill. The impairment loss shall equal the
excess of carrying value over fair value.
After each testing period, the third party compiles a summary of the test
that is then provided to the Audit Committee and management for review.
SUMMARY
Management believes the accounting estimates related to the allowance for
loan losses, the capitalization, amortization, and valuation of mortgage
servicing rights and the goodwill impairment test are "critical accounting
estimates" because: (1) the estimates are highly susceptible to change
from period to period because they require management to make assumptions
concerning the changes in the types and volumes of the portfolios, rates
of future prepayments, and anticipated economic conditions, and (2) the
impact of recognizing an impairment or loan loss could have a material
effect on Camco's assets reported on the balance sheet as well as its net
earnings. Management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed Camco's disclosures
relating to such matters in the quarterly Management's Discussion and
Analysis.
10
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
4. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Corporation's stock
option plans. The computations are as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2005 2004
--------- ---------
Weighted-average common shares
outstanding (basic) 7,677,795 7,345,340
Dilutive effect of assumed exercise
of stock options 33,638 62,276
--------- ---------
Weighted-average common shares
outstanding (diluted) 7,711,433 7,414,616
========= =========
Anti-dillutive options to purchase 167,879 and 17,705 shares of common
stock with respective weighted-average exercise prices of $16.46 and
$17.17 were outstanding at March 31, 2005 and 2004, respectively, but were
excluded from the computation of common share equivalents for those
respective periods because the exercise prices were greater than the
average market price of the common shares.
5. Stock Option Plans
Under the 1995 Plan, 161,488 shares were reserved for issuance. Under the
2002 Plan, 400,000 shares were reserved for issuance. Additionally, in
connection with the acquisition of First Savings, the stock options of
First Savings were converted into options to purchase 174,421 shares of
the Corporation's stock at an exercise price of $7.38 per share, which
expire in 2005. In connection with the 2000 acquisition of Westwood
Homestead, the stock options of Westwood Homestead were converted into
options to purchase 311,794 shares of the Corporation's stock at a
weighted-average exercise price of $11.89 per share, which expire in 2008.
The Corporation accounts for its stock option plans in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a
fair-value based method for valuing stock-based compensation that entities
may use, that measures compensation cost at the grant date based on the
fair value of the award. Alternatively, SFAS No. 123 permits entities to
continue to account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of net
earnings and earnings per share, as if the fair-value based method of
accounting defined in SFAS No. 123 had been applied.
11
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
5. Stock Option Plans (continued)
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net earnings
and earnings per share for the three-month periods ended March 31, 2005
and 2004, would have been reported as the pro forma amounts indicated
below:
2005 2004
----------- -----------
(In thousands, except per share data)
NET EARNINGS As reported $ 2,218 $ 1,034
Stock-based compensation, net of tax (21) (7)
----------- -----------
Pro-forma $ 2,197 $ 1,027
=========== ===========
EARNINGS PER SHARE
BASIC As reported $ .29 $ .14
Stock-based compensation, net of tax - -
----------- -----------
Pro-forma $ .29 $ .14
=========== ===========
DILUTED As reported $ .29 $ .14
Stock-based compensation, net of tax (.01) -
----------- -----------
Pro-forma $ .28 $ .14
=========== ===========
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 2005 and 2004: dividend yield of 3.80%
and 3.40%, respectively; expected volatility of 18.76% and 21.44%
respectively; a risk-free interest rate of 4.22% and 4.11% respectively,
and an expected life of ten years for all grants.
12
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
5. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of
March 31, 2005 and December 31, 2004, and changes during the periods
ending on those dates is presented below:
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2005 2004
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
------------------- -------------------
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
Outstanding at beginning of year 218,324 $ 12.91 257,072 $ 12.11
Granted 87,240 16.51 17,705 17.17
Exercised (15,595) 8.11 (52,911) 8.83
Forfeited (150) 17.17 (3,542) 15.03
-------- -------- --------
Outstanding at end of year 289,819 $ 11.08 218,324 $ 12.91
======== ======== ======== ========
Options exercisable at year-end 200,483 $ 13.27 175,542 $ 12.05
======== ======== ======== ========
Weighted-average fair value of
options granted during the year $ 2.89 $ 3.59
======== ========
The following information applies to options outstanding at March 31,
2005:
Number outstanding 31,911
Range of exercise prices $ 7.40-8.94
Number outstanding 38,575
Range of exercise prices $ 9.75-11.36
Number outstanding 51,454
Range of exercise prices $12.50-14.65
Number outstanding 167,879
Range of exercise prices $16.13-17.17
Weighted-average exercise price $ 11.08
Weighted-average remaining contractual life 6.9 years
6. Forward Looking Statements
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans,"
"expects," "believes," and similar expressions as they relate to Camco or
its management are intended to identify such forward looking statements.
Camco's actual results, performance or achievements may materially differ
from those expressed or implied in the forward-looking statements. Risks
and uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic conditions,
interest rate environment, competitive conditions in the financial
services industry, changes in law, governmental policies and regulations,
and rapidly changing technology affecting financial services.
13
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three-month periods ended March 31, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to March 31,
2005
At March 31, 2005, Camco's consolidated assets totaled $1.1 billion, a decrease
of $1.2 million, or .1%, from the December 31, 2004 total. The decrease in total
assets was comprised primarily of decreases in prepaid federal income taxes,
mortgage-backed securities available for sale, cash and cash equivalents and
investments held to maturity which were partially offset by an increase in
investments available for sale, loans receivable and loans held for sale.
Cash and interest-bearing deposits in other financial institutions totaled $39.8
million at March 31, 2005, a decrease of $3.1 million, or 7.2%, from December
31, 2004 levels. Investment securities totaled $27.7 million at March 31, 2005,
an increase of $3.7 million, or 15.4%, from the total at December 31, 2004.
Investment securities purchases of $9.0 million were comprised primarily of
intermediate-term callable U.S. Government agency obligations with an average
yield of 3.87%, which were partially offset by $5.0 million of investment
maturities.
Mortgage-backed securities totaled $81.5 million at March 31, 2005, a decrease
of $3.0 million, or 3.5%, from December 31, 2004. Mortgage-backed securities
purchases totaled $3.3 million, while principal repayments totaled $4.9 million
coupled with a decrease in market value of $1.3 million for the three-month
period ended March 31, 2005. Purchases of mortgage-backed securities during the
period were comprised primarily of short duration mortgage-backed securities
yielding 4.17%, all of which were classified as available for sale.
Loans receivable, including loans held for sale, totaled $841.8 million at March
31, 2005, an increase of $5.1 million, or .6%, from December 31, 2004. The
increase resulted primarily from loan disbursements and purchases totaling $88.2
million, which were partially offset by principal repayments of $67.5 million
and loan sales of $14.4 million. The volume of loans originated and purchased
during the first three months of 2005 decreased compared to the 2004 period by
$10.3 million, or 10.4%, while the volume of loan sales decreased by $12.1
million or 45.7% year to year. As interest rates have moved off their historical
lows, loans originated and purchased moved away from fixed rate lending to
adjustable rate lending. Camco has typically held adjustable-rate mortgage loans
in its portfolio as part of its strategy to maintain an asset-sensitive
interest-rate risk position; however as of March 31, 2005 we are slightly
liability sensitive. Loan originations during the three-month period ended March
31, 2005, were comprised primarily of $38.4 million of loans secured by one- to
four-family residential real estate, $30.8 million in loans secured by
commercial real estate and $19.0 million in consumer and other loans. 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 $6.6 million and $6.5 million at March 31,
2005 and December 31, 2004, respectively, representing 61.8% and 66.1% of
nonperforming loans, respectively, at those dates. Nonperforming loans (90 days
or more delinquent plus nonaccrual loans) totaled $10.7 million and $9.8 million
at March 31, 2005 and December 31, 2004, respectively, constituting 1.28% and
1.17% of total net loans, including loans held for sale, at those dates. At
March 31, 2005, nonperforming loans were comprised of $6.3 million in one- to
four-family residential real estate loans, $1.9 million in commercial and
multi-family real estate loans and $2.3 million of consumer and non-residential
loans. Management believes all nonperforming loans are adequately collateralized
and no loss is expected over and above allocated reserves on such loans. Loans
delinquent greater than 30 days but less than 90 days totaled $4.0 million at
March 31, 2005, compared to $12.3 million at December 31, 2004, a decrease of
$8.3 million, or 67.3%. The decrease was primarily due to commercial loans of
approximately $6.0 million being paid current in the first quarter of 2005.
Although management believes that its allowance for loan losses is adequate
based upon the available facts and circumstances at March 31, 2005, there can be
no assurance that increased provisions will not be necessary in future periods,
which could adversely affect Camco's results of operations.
14
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to March 31,
2005 (continued)
Deposits totaled $674.9 million at March 31, 2005, an increase of $7.1 million,
or 1.1%, from the total at December 31, 2004. The increase in deposits was
primarily due to a $15.6 million increase of certificates of deposit resulting
from competitive pricing, which was partially offset by the decrease of $5.2
million in interest bearing checking and $3.1 million of money market and
savings accounts primarily due to the movement to higher yielding certificates
of deposit. FHLB advances totaled $289.3 million at March 31, 2005, a decrease
of $6.0 million, or 2.0%, from the total at December 31, 2004. The decrease in
advances was primarily due to the paydown of repurchase based advances of $3.0
million, a $2.0 million fixed rate advance maturing in March 2005 and continued
amoritization.
Stockholders' equity totaled $89.6 million at March 31, 2005, an increase of
$258,000, or .3%, from December 31, 2004. The increase resulted primarily from
net earnings of $2.2 million, proceeds from the exercise of stock options of
$158,000 which were partially offset by dividends of $1.1 million and a decrease
in the unrealized gains on available for sale securities of $1.0 million.
Camco and the Bank are required to maintain minimum regulatory capital pursuant
to federal regulations. During the first quarter of 2005, management was
notified by its primary regulators that Advantage was categorized as
well-capitalized under the regulatory framework. At March 31, 2005, the
regulatory capital of Camco and the Bank exceeded all regulatory capital
requirements.
The following tables present certain information regarding compliance by
Advantage with applicable regulatory capital requirements at March 31, 2005:
Camco: As of March 31, 2005
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) $90,096 12.54% > or = $57,468 > or = 8.0% N/A N/A
Tier I capital
(to risk-weighted assets) $83,460 11.62% > or = $28,734 > or = 4.0% N/A N/A
Tier I leverage $83,460 7.89% > or = $42,308 > or = 4.0% N/A N/A
Advantage: At March 31, 2005
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) $80,942 11.29% > or = $57,353 > or = 8.0% > or = $71,691 > or = 10.0%
Tier I capital
(to risk-weighted assets) $74,306 10.36% > or = $28,677 > or = 4.0% > or = $43,015 > or = 6.0%
Tier I leverage $74,306 7.09% > or = $41,912 > or = 4.0% > or = $52,390 > or = 5.0%
15
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to March 31,
2005 (continued)
Federal law prohibits a financial institution from making a capital
distribution to anyone or paying management fees to any person having control of
the institution if, after such distribution or payment, the institution would be
undercapitalized. In addition, each company controlling an undercapitalized
institution must guarantee that the institution will comply with its capital
restoration plan until the institution has been adequately capitalized on
average during each of the four preceding calendar quarters and must provide
adequate assurances of performance.
Comparison of Results of Operations for the Three Months Ended March 31, 2005
and 2004
General
Camco's net earnings for the three months ended March 31, 2005 totaled $2.2
million, an increase of $1.2 million, or 114.5%, from the $1.0 million of net
earnings reported in the comparable 2004 period. The increase in earnings was
primarily attributable to a $1.3 million, or 21.4% increase in net interest
income and a decrease of $305,000, or 5.2% in general, administrative and other
expenses, which were partially offset by an increase in federal income tax
expense of $603,000.
Net Interest Income
Total net interest income amounted to $7.4 million for the three months ended
March 31, 2005, an increase of $1.3 million, or 21.4%, compared to the
three-month period ended March 31, 2004, generally reflecting the effects of an
increase in yield on total interest-earning assets of 21 basis points, from
5.15% in the 2004 period to 5.36% in 2005, and a $18.6 million, or 1.9%,
increase in the average balance of interest-earning assets outstanding year to
year.
Interest income on loans totaled $12.0 million for the three months ended March
31, 2005, an increase of $547,000, or 4.8% from the comparable 2004 period. The
increase resulted primarily from an increase of average balance outstanding of
$28.4 million or 3.5% in the 2005 quarter coupled with a 7 basis point increase
in the average yield to 5.69% from 5.62% in 2004. Interest income on
mortgage-backed securities totaled $751,000 for the three months ended March 31,
2005, a $144,000, or 23.7% increase from the 2004 quarter. The increase was due
primarily to a 78 basis point increase in the average yield, to 3.65% for the
2005 period, offset partially by a $2.3 million, or 2.7%, decrease in the
average balance outstanding in the 2005 period. Interest income on investment
securities increased by $3,000, or 1.7%, due primarily to a 40 basis point
increase in the average yield, to 3.04% in the 2005 period offset partially by a
$3.2 million or 11.8% decrease in the average balance outstanding in the 2005
period. Interest income on other interest-earning assets increased by $82,000,
or 15.6%, due primarily to a 78 basis point increase in the average yield, to
4.04% in 2005 partially offset by a decrease of $4.3 million, or 6.7%, in the
average balance outstanding in the 2005 period.
Interest expense on deposits totaled $3.5 million for the three months ended
March 31, 2005, an increase of $154,000, or 4.6%, compared to the same quarter
in 2004, due primarily to a 10 basis point increase in the average cost of
deposits to 2.18% in the current quarter, offset partially by a $1.9 million, or
..3%, decrease in average deposits outstanding. Interest expense on borrowings
totaled $2.6 million for the three months ended March 31, 2005, a decrease of
$675,000, or 20.4%, from the same 2004 three-month period. The decrease resulted
primarily from a 142 basis point decrease in the average cost of borrowings to
3.59%, and a $29.4 million, or 11.1%, decrease in the average
16
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended March 31, 2005
and 2004 (continued)
balance outstanding year to year. Increases in the level of average yields on
interest-earning assets and average costs of interest-bearing liabilities
(deposits) were due primarily to the overall increase in interest rates in the
economy offset partially by a December restructuring of $144.1 million of FHLB
borrowings which carried an average fixed rate of 6.25%. The borrowings were
replaced with various fixed-rate advances having a weighted average rate of
approximately 3.7% as of December 31, 2004. The restructuring transaction
positioned itself well in our balance sheet as a result of our recent and
continuing efforts to manage towards shorter duration assets generated from
commercial and consumer loans.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.3 million, or 21.4%, to a total of $7.4
million for the three months ended March 31, 2005. The interest rate spread
increased to approximately 2.74% at March 31, 2005, from 2.22% at March 31,
2004, while the net interest margin increased to approximately 2.93% for the
three months ended March 31, 2005, compared to 2.46% for the 2004 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 $240,000 for the three months ended March 31, 2005, a
decrease of $15,000, or 5.9%, from the comparable period in 2004. Management
believes all classified loans are adequately collateralized, however, there can
be no assurance that the loan loss allowance will be adequate to absorb losses
on known classified assets or that the allowance will be adequate to cover
losses on classified assets in the future.
Other Income
Other income totaled $1.7 million for the three months ended March 31, 2005, an
increase of $170,000, or 11.1%, from the comparable 2004 period. The increase in
other income was primarily attributable to a $153,000 increase in the valuation
of mortgage servicing rights, a $106,000 increase in late charges, rent and
other. Which was offset partially by a decrease of $106,000 in gain on sale of
loans. The increase in mortgage servicing rights was attributable to slowed
amortization related to the reduction of loan prepayments in the servicing
portfolio in 2005. The increase in late charges, rent and other was due to
prepayment penalty fees, late charge income, offset partially by a decrease in
title premium at Camco Title Agency, Inc. The decrease in gain on sale of loans
was due primarily to a decrease in the volume of loans sold of $12.1 million or
45.7%, from the volume of loans sold in the 2004 period.
17
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended March 31, 2005
and 2004 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $5.6 million for the three
months ended March 31, 2005, a decrease of $305,000, or 5.2%, from the
comparable period in 2004. The decrease in general, administrative and other
expense was due primarily to a decrease of $135,000, or 63.1%, in franchise
taxes and a $77,000, or 8.8%, decrease in occupancy and equipment. The decrease
in franchise tax was primarily due to acquiring London Financial Corporation in
August of 2004 and changing charters to a state chartered commercial bank. This
is a one time savings which will only occur in 2005. The decrease in occupancy
and equipment was due primarily to the sale of the Kentucky division, consisting
of two branches, in December of 2004 and a decrease in depreciation expense.
Federal Income Taxes
The provision for federal income taxes totaled $1.1 million for the three months
ended March 31, 2005, an increase of $603,000, or 134.6%, compared to the three
months ended March 31, 2004. This increase was primarily attributable to a $1.8
million, or 120.6%, increase in pre-tax earnings. The Corporation's effective
tax rates amounted to 32.2% and 30.2% for the three-month periods ended March
31, 2005 and 2004, respectively. Due to the FHLB restructuring of advances in
2004, a net loss was recorded. The tax credit relating to the loss will be
utilized toward 2005 estimated payments.
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 primary sources of funds include deposits, borrowings and principal and
interest repayments on loans. The deposit base includes local and state
deposits. State of Ohio deposits equated to $30.0 million at March 31, 2005 and
December 31, 2004. Other funding sources include Federal Home Loan Bank advances
of which approximately $85.8 million additional borrowing capacity was available
as of March 31, 2005.
18
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended March 31, 2005
and 2004 (continued)
The following table sets forth information regarding the Bank's obligations and
commitments to make future payments under contract as of March 31, 2005.
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 $ 148 $ 208 $ 96 $ 188 $ 640
Advances from the Federal Home Loan Bank (1) 32,046 76,711 86,004 57,574 252,302
Certificates of deposit 203,420 127,866 44,687 1,508 377,481
Amount of commitments expiring per period
Commitments to originate loans:
Overdraft lines of credit 739 - - - 739
Home equity lines of credit 65,081 - - - 65,081
Commercial lines of credit 4,107 - - - 4,107
One- to four-family and multi-family loans 3,453 - - - 3,453
Commercial 2,646 - - - 2,646
Non-residential real estate and land loans 434 - - - 434
-------- -------- -------- -------- --------
Total contractual obligations $312,041 $204,785 $130,787 $ 59,270 $706,883
======== ======== ======== ======== ========
(1) Fully secured asset borrowings totaling $37.0 million are not included.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Corporation's market risk since the
Corporation's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2004.
19
CAMCO FINANCIAL CORPORATION
CONTROLS AND PROCEDURES
For the three-month periods ended March 31, 2005 and 2004
ITEM 4: Controls and Procedures
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 March 31, 2005. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that Camco's disclosure controls and
procedures are effective.
In the first quarter of 2005, Management communicated to appropriate
Company employees detailed written procedures that clearly document 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 using either the fair value of
collateral, present value of future cash flows or an observable market price.
The Company will assure that adequate evidence and documentation exists to
support the decision. These procedures were augmented to assure that adequate
evidence exists to support all decisions made regarding classification of
individual reviewed loans. The Company has tested the actions outlined above and
believes it has corrected the deficiency in internal control that was considered
to be a material weakness at December 31, 2004.
There were no changes in Camco's internal control over financial reporting
that could have materially affected, or are reasonably likely to materially
affect, Camco's internal control over financial reporting.
20
Camco Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits
Exhibit 31(i) Section 302 certification by Chief Executive
Officer
Exhibit 31(ii) Section 302 Certification by Chief Financial
Officer
Exhibit 32(i) Section 1350 certification by Chief Executive
Officer
Exhibit 32(ii) Section 1350 certification by Chief Financial
Officer
:
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 4, 2005 By: /s/ Richard C. Baylor
--------------------------------
Richard C. Baylor
Chief Executive Officer
Date: May 4, 2005 By: /s/ Mark A. Severson
--------------------------------
Mark A. Severson
Chief Financial Officer
22