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 September 30, 2002
-----------------------------------------------
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 [ ]
Indicated 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 November 12, 2002, the latest practicable date, 7,800,875 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 21
Camco Financial Corporation
INDEX
Page
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 11
Quantitative and Qualitative Disclosures about
Market Risk 17
Controls and Procedures 17
PART II - OTHER INFORMATION 18
SIGNATURES 19
CERTIFICATIONS 20
2
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2002 2001
Cash and due from banks $ 23,477 $ 15,665
Interest-bearing deposits in other financial institutions 17,706 89,299
--------- ---------
Cash and cash equivalents 41,183 104,964
Investment securities available for sale - at market 46,792 305
Investment securities held to maturity - at cost, approximate market value of
$8,169 and $19,083 as of September 30, 2002 and December 31, 2001, respectively 7,993 18,872
Mortgage-backed securities available for sale - at market 107,525 6,975
Mortgage-backed securities held to maturity - at cost, approximate market value of
$23,343 and $30,744 as of September 30, 2002 and December 31, 2001, respectively 23,865 30,765
Loans held for sale - at lower of cost or market 24,984 21,445
Loans receivable - net 776,541 850,001
Office premises and equipment - net 14,736 14,849
Real estate acquired through foreclosure 1,634 2,151
Federal Home Loan Bank stock - at cost 23,275 22,481
Accrued interest receivable 5,471 5,769
Prepaid expenses and other assets 2,251 4,779
Cash surrender value of life insurance 17,180 15,751
Goodwill and other intangible assets 2,953 2,953
Prepaid federal income taxes 455 592
--------- ---------
Total assets $1,096,838 $1,102,652
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 703,218 $ 730,075
Advances from the Federal Home Loan Bank 282,122 258,850
Advances by borrowers for taxes and insurance 2,611 3,860
Accounts payable and accrued liabilities 4,625 10,975
Dividends payable 1,051 962
Deferred federal income taxes 5,064 2,759
--------- ---------
Total liabilities 998,691 1,007,481
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares;
no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares, 8,278,635 and
8,137,039 shares issued at September 30, 2002 and December 31, 2001, respectively 8,279 8,137
Additional paid-in capital 53,604 51,722
Retained earnings - substantially restricted 40,914 36,621
Accumulated comprehensive income, unrealized gains on securities designated
as available for sale, net of related tax effects 1,675 107
Less 477,760 and 126,019 shares of treasury stock at September 30, 2002 and
December 31, 2001, respectively - at cost (6,325) (1,416)
--------- ---------
Total stockholders' equity 98,147 95,171
--------- ---------
Total liabilities and stockholders' equity $1,096,838 $1,102,652
========= =========
3
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2002 2001 2002 2001
Interest income
Loans $44,047 $53,087 $13,868 $16,899
Mortgage-backed securities 3,295 706 1,489 223
Investment securities 929 447 438 110
Interest-bearing deposits and other 2,118 2,313 666 851
------ ------ ------ ------
Total interest income 50,389 56,553 16,461 18,083
Interest expense
Deposits 18,008 23,918 5,544 7,729
Borrowings 11,511 13,102 3,984 4,092
------ ------ ------ ------
Total interest expense 29,519 37,020 9,528 11,821
------ ------ ------ ------
Net interest income 20,870 19,533 6,933 6,262
Provision for losses on loans 752 458 338 152
------ ------ ------ ------
Net interest income after provision
for losses on loans 20,118 19,075 6,595 6,110
Other income
Late charges, rent and other 2,368 2,084 901 739
Loan servicing fees (costs) 523 (715) 60 (250)
Service charges and other fees on deposits 718 650 276 227
Gain on sale of loans 3,301 2,718 1,448 1,163
Gain on investment securities transactions 27 - - -
Gain on disposition of premises and equipment - 30 - 27
Gain (loss) on sale of real estate acquired through foreclosure 104 56 (1) 14
------ ------ ------ ------
Total other income 7,041 4,823 2,684 1,920
General, administrative and other expense
Employee compensation and benefits 7,767 5,854 2,712 1,895
Occupancy and equipment 2,555 2,366 857 780
Federal deposit insurance premiums 94 90 29 30
Data processing 937 1,063 378 309
Advertising 605 539 123 167
Franchise taxes 612 855 326 289
Amortization of goodwill - 112 - 37
Other operating 3,813 3,104 1,134 1,049
Restructuring charges (credits) (112) 1,088 - -
------ ------ ------ ------
Total general, administrative and other expense 16,271 15,071 5,559 4,556
------ ------ ------ ------
Earnings before federal income taxes 10,888 8,827 3,720 3,474
Federal income taxes
Current 2,001 2,348 (764) 734
Deferred 1,512 457 1,954 388
------ ------ ------ ------
Total federal income taxes 3,513 2,805 1,190 1,122
------ ------ ------ ------
NET EARNINGS $ 7,375 $ 6,022 $ 2,530 $ 2,352
======= ======= ======= =======
EARNINGS PER SHARE
Basic $0.93 $0.87 $0.32 $0.34
==== ==== ==== ====
Diluted $0.92 $0.85 $0.32 $0.33
==== ==== ==== ====
4
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended Three months ended
September 30, September 30,
2002 2001 2002 2001
Net earnings $7,375 $6,022 $2,530 $2,352
Unrealized gains (losses) on securities:
Unrealized holding gains during the period, net of
related taxes of $817, $50, $435 and $32
for the nine and three months ended September 30,
2002 and 2001, respectively 1,586 97 845 62
Reclassification adjustment for realized gains included in
net earnings, net of taxes of $9 (18) - - -
----- ----- ----- -----
Comprehensive income $8,943 $6,119 $3,375 $2,414
===== ===== ===== =====
Accumulated comprehensive income $1,675 $ 101 $1,675 $ 101
===== ===== ===== =====
5
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
2002 2001
Cash flows from operating activities:
Net earnings for the period $ 7,375 $ 6,022
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (504) (739)
Amortization of premiums and discounts on investment
and mortgage-backed securities - net 317 49
Amortization of goodwill - 112
Amortization of purchase accounting adjustments - net 189 233
Depreciation and amortization 989 1,057
Provision for losses on loans 752 458
Gain on sale of real estate acquired through foreclosure (104) (56)
Federal Home Loan Bank stock dividends (794) (1,060)
Gain on investment securities transactions (27) -
Gain on sale of loans (1,667) (1,339)
Gain on sale of premises and equipment - (30)
Loans originated for sale in the secondary market (142,001) (129,171)
Proceeds from sale of loans in the secondary market 140,129 127,568
Increase (decrease) in cash due to changes in:
Accrued interest receivable 298 314
Prepaid expenses and other assets 2,528 (825)
Accrued interest and other liabilities (6,261) (1,124)
Federal income taxes:
Current 137 1,259
Deferred 1,512 457
------- -------
Net cash provided by operating activities 2,868 3,185
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 21,567 17,230
Proceeds from sale of investment securities designated as available for sale 44 -
Purchase of investment securities designated as held to maturity (1,048) (6,995)
Purchase of investment securities designated as available for sale (55,864) -
Purchase of mortgage-backed securities designated as available for sale (108,411) -
Purchase of mortgage-backed securities designated as held to maturity - (5,517)
Purchase of loans (2,125) (6,886)
Loan disbursements (197,883) (118,716)
Principal repayments on loans 271,943 208,801
Principal repayments on mortgage-backed securities 16,525 3,349
Purchase of office premises and equipment (876) (681)
Proceeds from sales of real estate acquired through foreclosure 1,795 1,570
Additions to real estate acquired through foreclosure (21) (87)
Purchase of Federal Home Loan Bank stock - (100)
Purchase of cash surrender value of life insurance (825) -
Net increase in cash surrender value of life insurance (604) (213)
------- -------
Net cash provided by (used in) investing activities (55,783) 91,755
------- -------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) (52,915) 94,940
------- -------
6
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
2002 2001
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $(52,915) $94,940
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (26,857) 16,992
Proceeds from Federal Home Loan Bank advances 68,500 38,250
Repayment of Federal Home Loan Bank advances (45,293) (88,827)
Dividends paid on common stock (3,082) (2,514)
Purchase of treasury stock (4,478) -
Proceeds from exercise of stock options 1,593 1,201
Advances by borrowers for taxes and insurance (1,249) (1,910)
------- ------
Net cash used in financing activities (10,866) (36,808)
------- ------
Net increase (decrease) in cash and cash equivalents (63,781) 58,132
Cash and cash equivalents at beginning of period 104,964 24,069
------- ------
Cash and cash equivalents at end of period $ 41,183 $82,201
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 28,200 $35,634
======= ======
Income taxes $ 1,903 $ 2,544
======= ======
Supplemental disclosure of noncash investing activities:
Transfers from mortgage loans to real estate acquired
through foreclosure $ 1,168 $ 2,251
======= ======
Unrealized gains on investments and mortgage-backed
securities designated as available for sale $ 1,568 $ 97
======= ======
Recognition of mortgage servicing rights in
accordance with SFAS No. 140 $ 1,634 $ 1,379
======= ======
Issuance of loans upon sale of real estate acquired through foreclosure $ 594 $ 162
======= ======
Supplemental disclosure of noncash financing activities:
Treasury shares received from settlement of Columbia Financial's
Employee Stock Ownership Plan $ 639 $ -
======= ======
7
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine- and three-month periods ended September 30, 2002 and 2001
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. 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, 2001. 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 nine
and three month periods ended September 30, 2002, are not necessarily
indicative of the results which may be expected for the entire year.
On June 1, 2001 Camco's five wholly-owned community bank subsidiaries,
Cambridge Savings Bank, Marietta Savings Bank, First Federal Savings
Bank of Washington Court House, First Federal Bank for Savings and
Westwood Homestead Savings Bank, merged under the Cambridge Savings
Bank charter. At the effective time of the merger, Cambridge Savings
Bank was re-named Advantage Bank ("Advantage" or the "Bank"). Advantage
is headquartered in Cambridge, Ohio and each of the former banks
operates as a separate division of Advantage.
In November 2001, the Corporation acquired Columbia Financial of
Kentucky, Inc. ("Columbia Financial") utilizing the purchase method of
accounting (the "Merger"). Columbia Financial was merged into the
Corporation upon consummation of the Merger and Columbia Financial's
banking subsidiary, Columbia Federal Savings Bank ("Columbia"), merged
into, and operates as a division of, Advantage.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Camco and its two wholly-owned subsidiaries: Advantage Bank and
Camco Title Insurance Agency, Inc., as well as two second tier
subsidiaries, Camco Mortgage Corporation and WestMar Mortgage Company.
All significant intercompany balances and transactions have been
eliminated.
3. 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 plan. The computations are as follows:
For the nine months ended For the three months ended
September 30, September 30,
2002 2001 2002 2001
Weighted-average common shares
outstanding (basic) 7,947,311 6,961,160 7,897,051 6,987,461
Dilutive effect of assumed exercise
of stock options 107,509 92,530 111,444 115,460
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 8,054,820 7,053,690 8,008,495 7,102,921
========= ========= ========= =========
8
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
3. Earnings Per Share (continued)
Options to purchase 65,441 and 252,152 shares of common stock with
respective weighted-average exercise prices of $14.83 and $13.11 were
outstanding at September 30, 2002 and 2001, respectively, but were
excluded from the computation of common share equivalents for the nine
and three month periods then ended, because the exercise prices were
greater than the average market price of the common shares.
4. Effects of Recent Accounting Pronouncements
In September 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 142
"Goodwill and Intangible Assets," which prescribes accounting for all
purchased goodwill and intangible assets. Pursuant to SFAS No. 142,
acquired goodwill is not amortized, but is tested for impairment at the
reporting unit level annually and whenever an impairment indicator
arises. All goodwill should be assigned to reporting units that are
expected to benefit from the goodwill. When an entity reorganizes its
reporting structure, goodwill should be reallocated to reporting units
based on the relative fair values of the units. Goodwill impairment
should be tested with a two-step approach. First, the fair value of the
reporting unit should be compared to its carrying value, including
goodwill. If the reporting unit's carrying value exceeds its fair
value, then any goodwill impairment should be measured as the excess of
the goodwill's carrying value over its implied fair value. The implied
fair value of goodwill should be calculated in the same manner as
goodwill is calculated for a business combination, using the reporting
units' fair value as the "purchase price." Therefore, the goodwill's
implied fair value will be the excess of the "purchase price" over the
amounts allocated to assets, including unrecognized intangible assets,
and liabilities of the reporting unit. Goodwill impairment losses
should be reported in the income statement as a separate line item
within operations, except for such losses included in the calculation
of a gain or loss from discontinued operations.
An acquired intangible asset, other than goodwill, should be amortized
over its useful economic life. The useful life of an intangible asset
is indefinite if it extends beyond the foreseeable horizon. If an
asset's life is indefinite, the asset should not be amortized until the
life is determined to be finite. Intangible assets being amortized
should be tested for impairment in accordance with SFAS No. 144.
Intangible assets not being amortized should be tested for impairment,
annually and whenever there are indicators of impairment, by comparing
the asset's fair value to its carrying amount.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. Prior to adoption of SFAS No. 142, existing goodwill continued
to be amortized and tested for impairment under previously existing
standards. Upon adoption of SFAS No. 142, Camco designated Advantage
as a reporting unit. All of Camco's goodwill relates to Advantage.
Management adopted SFAS No. 142 effective January 1, 2002, as required.
The adoption of SFAS No. 142 will result in the elimination of annual
goodwill amortization charges of approximately $150,000. Camco recorded
goodwill amortization totaling $112,000 and $37,000 for the nine- and
three-month periods ended September 30, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries
over the recognition and measurement provisions in SFAS No. 121.
Accordingly, an entity must recognize an impairment loss if the
carrying value of a long-lived asset or asset group (a) is not
recoverable and (b) exceeds its fair value. Similar to SFAS No. 121,
SFAS No. 144 requires an entity to test an asset or asset group for
impairment whenever events or changes in circumstances indicate
9
Camco Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
4. Effects of Recent Accounting Pronouncements (continued)
that its carrying amount may not be recoverable. SFAS No. 144 differs
from SFAS No. 121 in that it provides guidance on estimating future
cash flows to test recoverability. An entity may use either a
probability-weighted approach or best-estimate approach in developing
estimates of cash flows to test recoverability. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years.
Management adopted SFAS No. 144 effective January 1, 2002, without
material effect on the Corporation's financial condition or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides
financial accounting and reporting guidance for costs associated with
exit or disposal activities, including one-time termination benefits,
contract termination costs other than for a capital lease, and costs to
consolidate facilities or relocate employees. SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002. SFAS
No. 146 is not expected to have a material effect on the Corporation's
financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain
Financial Institutions: An Amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9," which removes acquisitions of
financial institutions from the scope of SFAS No. 72, "Accounting for
Certain Acquisitions of Banking and Thrift Institutions," exceptfor
transactions between mutual enterprises. Accordingly, the excess of
the fair value of liabilities assumed over the fair value of tangible
and intangible assets acquired in a business combination should be
recognized and accounted for as goodwill in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets."
SFAS No. 147 also requires that the acquisition of a less-than-whole
financial institution, such as a branch, be accounted for as a business
combination if the transferred assets and activities constitute a
business. Otherwise, the acquisition should be accounted for as the
acquisition of net assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term
customer relationship assets of financial institutions (including
mutual enterprises) such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible
assets and the acquisition of a less-than-whole financial institution
are effective for acquisitions for which the date of acquisition is on
or after October 1, 2002. The provisions related to impairment of
long-term customer relationship assets are effective October 1, 2002.
Transition provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002, with earlier
application permitted.
SFAS No. 147 is not expected to have a material effect on the
Corporation's financial condition or results of operations.
10
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the nine- and three-month periods ended September 30, 2002 and 2001
Discussion of Financial Condition Changes from December 31, 2001 to September
30, 2002
At September 30, 2002, Camco's consolidated assets totaled $1.1 billion, a
decrease of $5.8 million, or .5%, from the December 31, 2001 total. The decrease
in total assets was comprised primarily of a decrease in loans receivable and a
decrease in cash and cash equivalents, which were partially offset by increases
in investment securities and mortgage-backed securities. This shift was due to
the investing of excess cash after year end and the paydown of the one- to
four-family portfolio due to high prepayments in a low interest rate
environment.
Cash and interest-bearing deposits in other financial institutions totaled $41.2
million at September 30, 2002, a decrease of $63.8 million, or 60.8%, from
December 31, 2001 levels. Investment securities totaled $54.8 million at
September 30, 2002, an increase of $35.6 million, or 185.7%, over the total at
December 31, 2001. Investment securities purchases, which were comprised
primarily of $52.9 million of intermediate-term callable U.S. Government agency
obligations with an average yield of 3.60% and $2.9 million in municipal
securities, were partially offset by $21.6 million of maturities.
Mortgage-backed securities totaled $131.4 million at September 30, 2002, an
increase of $93.7 million, or 248.1%, over December 31, 2001. Mortgage-backed
securities purchases totaled $108.4 million, while principal repayments totaled
$16.5 million during the nine-month period ended September 30, 2002. Purchases
of mortgage-backed securities during the period were comprised primarily of
balloon and ten-year amortizing U.S. Government agency securities yielding
5.13%, which were classified as available for sale. Purchases of investment and
mortgage-backed securities were funded with proceeds from loan principal
repayments and excess liquidity.
Loans receivable, including loans held for sale, totaled $801.5 million at
September 30, 2002, a decrease of $69.6 million, or 8.0%, from December 31,
2001. The decrease resulted primarily from principal repayments of $271.9
million and loan sales of $138.5 million, which were partially offset by loan
disbursements and purchases totaling $342.0 million. The volume of loans
originated and purchased during the 2002 nine-month period was greater than that
of the comparable 2001 period by $87.2 million, or 34.2%, while the volume of
loan sales increased by $12.2 million year to year. As interest rates in the
economy have remained low, consumer preference continues to favor long-term
fixed-rate mortgage loans to fund home purchases and to refinance current loans.
Camco will continue its interest-rate risk management strategy of selling
low-yielding, long-term, fixed-rate loans. Loan originations during the nine
month period ended September 30, 2002, were comprised primarily of $246.3
million of loans secured by one- to four-family residential real estate, $69.0
million in consumer and other loans and $26.7 million in loans secured by
commercial real estate. Management intends to expand its commercial real estate
lending in future periods as a means of increasing the yield on its loan
portfolio.
The allowance for loan losses totaled $4.9 million and $4.3 million at September
30, 2002 and December 31, 2001, respectively, representing 47.3% and 54.0% of
nonperforming loans, respectively, at those dates. Nonperforming loans (90 days
or more delinquent plus nonaccrual loans) totaled $10.4 million and $7.9 million
at September 30, 2002 and December 31, 2001, respectively, constituting 1.30%
and .90% of total net loans, including loans held for sale, at those dates. At
September 30, 2002, nonperforming loans were comprised of $9.1 million in one-
to four-family residential real estate loans, $231,000 in nonresidential real
estate loans, $182,000 in commercial real estate loans and $952,000 of consumer
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 $8.0 million at
September 30, 2002, compared to $14.2 million at December 31, 2001, a decrease
of $6.2 million, or 43.7%. Although management believes that its allowance for
loan losses is adequate based upon the available facts and circumstances at
September 30, 2002, 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.
11
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Discussion of Financial Condition Changes from December 31, 2001 to September
30, 2002 (continued)
Deposits totaled $703.2 million at September 30, 2002, a decrease of $26.9
million, or 3.7%, from the total at December 31, 2001. The decrease resulted
primarily from management's decision not to aggressively bid on certificates of
deposit which matured during the nine month period, due to the current low
interest rate environment. While management has generally pursued a strategy of
moderate growth in the deposit portfolio, Advantage has not historically offered
the highest interest rates available in its market areas. Advances from the
Federal Home Loan Bank ("FHLB") increased by $23.3 million, or 9.0%, to a total
of $282.1 million at September 30, 2002.
Stockholders' equity totaled $98.1 million at September 30, 2002, a $3.0
million, or 3.1%, increase over December 31, 2001. The increase resulted
primarily from net earnings of $7.4 million, proceeds from the exercise of stock
options of $2.0 million and a $1.6 million increase in the unrealized gains on
available for sale securities, which were partially offset by dividends of $3.1
million and an increase in treasury shares totaling $4.9 million. The increase
in treasury shares represented the receipt of shares in settlement of the
employee stock ownership plan from the Columbia Financial acquisition coupled
with purchases under the 5% stock repurchase plan that was announced in April
2002.
Advantage is required to maintain minimum regulatory capital pursuant to federal
regulations. At September 30, 2002, the Bank's regulatory capital exceeded all
regulatory capital requirements.
Comparison of Results of Operations for the Nine Months Ended September 30, 2002
and 2001
General
The acquisition of Columbia Financial, which was completed in November 2001 in a
transaction accounted for using the purchase method, provided increases in the
level of income and expenses during the nine month period ended September 30,
2002, compared to 2001.
Camco's net earnings for the nine months ended September 30, 2002 totaled $7.4
million, an increase of $1.4 million, or 22.5%, over the net earnings reported
in the comparable 2001 period. The increase in earnings was primarily
attributable to a one-time charge of $1.1 million in pre-tax expense related to
the consolidation of the bank charters in the 2001 period and the recognition of
a $112,000 reversal of this restructuring charge during the 2002 period.
Additionally, net interest income increased by $1.3 million and other income
increased by $2.2 million, while the provision for losses on loans increased by
$294,000, general, administrative and other expense increased by $1.2 million
and the provision for federal income taxes increased by $708,000.
Net Interest Income
Total interest income for the nine months ended September 30, 2002, amounted to
$50.4 million, a decrease of $6.2 million, or 10.9%, compared to the nine-month
period ended September 30, 2001, generally reflecting the effects of a decrease
in the yield on total interest-earning assets of 116 basis points, from 7.67% in
the 2001 period to 6.51% in the 2002 period, which was partially offset by a
$47.9 million, or 4.9%, increase in the average balance outstanding year to
year.
12
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Nine Months Ended September 30, 2002
and 2001 (continued)
Net Interest Income (continued)
Interest income on loans totaled $44.0 million for the nine months ended
September 30, 2002, a decrease of $9.0 million, or 17.0%, from the comparable
2001 period. The decrease resulted primarily from an $82.3 million, or 9.1%,
decrease in the average balance outstanding and a 68 basis point decrease in the
average yield, to 7.18% in the 2002 period. Interest income on mortgage-backed
securities totaled $3.3 million for the nine months ended September 30, 2002, a
$2.6 million, or 366.7%, increase over the 2001 period. The increase was due
primarily to a $77.8 million, or 504.9%, increase in the average balance
outstanding, which was partially offset by a 139 basis point decrease in the
average yield, to 4.71% in the 2002 period. Interest income on investment
securities increased by $482,000, or 107.8%, due primarily to a $21.7 million
increase in the average balance outstanding year to year, which was partially
offset by a 201 basis point decline in the average yield, to 3.89% in the 2002
period. Interest income on other interest-earning assets decreased by $195,000,
or 8.4%, due primarily to a decrease in the yield of 218 basis points, to 3.21%
in 2002, which was partially offset by a $30.7 million, or 53.6%, increase in
the average balance outstanding year to year.
Interest expense on deposits totaled $18.0 million for the nine months ended
September 30, 2002, a decrease of $5.9 million, or 24.7%, compared to the nine
months ended September 30, 2001, due primarily to a 153 basis point decrease in
the average cost of deposits, to 3.40% for the 2002 period, which was partially
offset by a $59.0 million, or 9.1%, increase in average balance of deposits
outstanding year to year. Interest expense on borrowings totaled $11.5 million
for the nine months ended September 30, 2002, a decrease of $1.6 million, or
12.1%, from the 2001 nine-month period. The decrease resulted primarily from a
$25.1 million, or 8.8%, decrease 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 2001. This low interest rate
environment continued through the first nine months of 2002.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.3 million, or 6.8%, to a total of $20.9
million for the nine months ended September 30, 2002. The interest rate spread
increased to approximately 2.45% at September 30, 2002, from 2.38% at September
30, 2001, while the net interest margin increased to approximately 2.70% for the
nine months ended September 30, 2002, compared to 2.65% for the 2001 period.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market areas
and other factors related to the collectibility of the Bank's loan portfolio.
Based on an analysis of these factors, management elected to record a provision
for losses on loans totaling $752,000 for the nine months ended September 30,
2002, an increase of $294,000, or 64.2%, over the comparable period in 2001. The
current period provision was predicated primarily on the increase in the level
of nonperforming loans and the increased percentage of loans secured by
commercial real estate within the loan portfolio. There can be no assurance that
the allowance for loan losses will be adequate to cover losses on nonperforming
assets in the future.
13
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Nine Months Ended September 30, 2002
and 2001 (continued)
Other Income
Other income totaled $7.0 million for the nine months ended September 30, 2002,
an increase of $2.2 million, or 46.0%, over the comparable 2001 period. The
increase in other income was primarily attributable to a $1.2 million increase
in loan servicing fees, a $583,000, or 21.4%, increase in gain on sale of loans
and a $284,000, or 13.6%, increase in late charges, rent and other. The increase
in loan servicing fees was due primarily to a decrease in the level of
amortization of mortgage servicing rights and due to the effects of a valuation
allowance to recognize impairment on mortgage servicing rights recorded in the
2001 period, which was partially recovered in the current period, based upon the
Corporation's ongoing fair value analysis of the mortgage servicing rights
asset. The increase in gain on sale of loans was due to the increase in sales
volume as Advantage continued to sell fixed-rate loans originated in this low
interest rate environment. The increase in late charges, rent and other was due
primarily to an increase in insurance fees, title premiums and other fees on
loans and deposit transactions.
General, Administrative and Other Expense
General, administrative and other expense totaled $16.3 million for the nine
months ended September 30, 2002. The acquisition of Columbia Financial in
November 2001 resulted in increased general, administrative and other expense
during the 2002 period, as compared to the 2001 period. Including the operating
costs of the Columbia division, general, administrative and other expense
increased year to year by $1.2 million, or 8.0%. The overall increase in
general, administrative and other expense was due primarily to an increase of
$1.9 million, or 32.7%, in employee compensation and benefits and an increase of
$709,000, or 22.8%, in other operating costs, which were partially offset by the
effects of a nonrecurring restructuring charge totaling $1.1 million recorded in
the 2001 period and the $112,000 restructuring credit recognized in the 2002
period, as well as a $243,000, or 28.4%, decrease in franchise taxes, a
$126,000, or 11.9%, decrease in data processing and a $112,000 decrease in
goodwill amortization. The increase in employee compensation and benefits was
due primarily to the acquisition of the Columbia division, an increase in
management staffing levels and normal merit compensation increases. Camco
increased its management staffing complement year to year as it continues to
implement its corporate strategy following the 2001 restructuring plan. The
increase in other operating expense was due primarily to costs incurred at the
Columbia division and increases in legal expense, costs associated with real
estate acquired through foreclosure, office supplies and costs associated with
the increase in lending volume year to year. The decrease in franchise tax
expense reflects the effects of refund claims on prior year tax filings. The
decrease in data processing was due primarily to efficiencies related to the
consolidation of the Bank charters. The decrease in goodwill amortization was
due to the adoption of SFAS No. 142, a new accounting standard which eliminates
goodwill amortization. The restructuring credit resulted from severance charges
recorded as part of the 2001 restructuring charge that were not utilized due
primarily to early terminations.
Federal Income Taxes
The provision for federal income taxes totaled $3.5 million for the nine months
ended September 30, 2002, an increase of $708,000, or 25.2%, compared to the
nine months ended September 30, 2001. This increase was primarily attributable
to a $2.1 million, or 23.3%, increase in pre-tax earnings. The Corporation's
effective tax rate amounted to 32.3% and 31.8% for the nine-month periods ended
September 30, 2002 and 2001, respectively.
14
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Three Months Ended September 30,
2002 and 2001
General
Camco's net earnings for the three months ended September 30, 2002 totaled $2.5
million, an increase of $178,000, or 7.6%, over the $2.4 million of net earnings
reported in the comparable 2001 period. The increase in earnings was primarily
attributable to an increase of $671,000 in net interest income and an increase
in other income of $764,000, which were partially offset by an increase in
general, administrative and other expense of $1.0 million, an increase in the
provision for losses on loans of $186,000 and an increase in federal income tax
expense of $68,000. The acquisition of Columbia Financial, which was completed
in November 2001 in a transaction accounted for using the purchase method,
contributed to increases in the level of income and expenses during the three
month period ended September 30, 2002, compared to 2001.
Net Interest Income
Total interest income amounted to $16.5 million for the three months ended
September 30, 2002, a decrease of $1.6 million, or 9.0%, compared to the
three-month period ended September 30, 2001, generally reflecting the effects of
a decrease in yield on total interest-earning assets of 114 basis points, from
7.45% in the 2001 period to 6.31% in the 2002 period, which was partially offset
by a $72.6 million, or 7.5%, increase in the average balance of interest-earning
assets outstanding year to year.
Interest income on loans totaled $13.9 million for the three months ended
September 30, 2002, a decrease of $3.0 million, or 17.9%, from the comparable
2001 period. The decrease resulted primarily from a $77.5 million, or 8.9%,
decrease in the average balance outstanding and a 77 basis point decrease in the
average yield, to 6.99% in the 2002 period. Interest income on mortgage-backed
securities totaled $1.5 million for the three months ended September 30, 2002, a
$1.3 million, or 567.7%, increase over the 2001 quarter. The increase was due
primarily to a $112.7 million, or 684.4%, increase in the average balance
outstanding, which was partially offset by a 78 basis point decrease in the
average yield, to 4.61% in the 2002 period. Interest income on investment
securities increased by $328,000, or 298.2%, due primarily to a $42.3 million
increase in the average balance outstanding, which was partially offset by a
decline in the average yield year to year. Interest income on other
interest-earning assets decreased by $185,000, or 21.7%, due primarily to a
decrease in the average yield, to 3.80% in the 2002 period, coupled with a
decrease of $4.9 million, or 6.6%, in the average balance outstanding year to
year.
Interest expense on deposits totaled $5.5 million for the three months ended
September 30, 2002, a decrease of $2.2 million, or 28.3%, compared to the same
quarter in 2001, due primarily to a 156 basis point decrease in the average cost
of deposits, to 3.15% in the current quarter, which was partially offset by a
$48.2 million, or 7.3%, increase in average deposits outstanding. Interest
expense on borrowings totaled $4.0 million for the three months ended September
30, 2002, a decrease of $108,000, or 2.6%, from the 2001 three-month period. The
decrease resulted primarily from a $9.2 million, or 3.5%, decrease in the
average balance outstanding year to year, coupled with a 36 basis point decrease
in the average cost to 5.78%. Decreases in the level of average yields on
interest-earning assets and average cost of interest-bearing liabilities were
due primarily to the overall decrease in interest rates in the economy during
2001. This low interest rate environment continued through the first nine months
of 2002.
15
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Three Months Ended September 30,
2002 and 2001 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $671,000, or 10.7%, to a total of $6.9 million
for the three months ended September 30, 2002. The interest rate spread
increased to approximately 2.42% at September 30, 2002, from 2.33% at September
30, 2001, while the net interest margin increased to approximately 2.66% for the
three months ended September 30, 2002, compared to 2.58% for the 2001 period.
Provision for Losses on Loans
Management elected to record a provision for losses on loans totaling $338,000
for the three months ended September 30, 2002, an increase of $186,000, or
122.4%, over the comparable period in 2001. The current period provision was
predicated primarily on the increase in the level of nonperforming loans and the
increased percentage of loans secured by commercial real estate within the loan
portfolio. There can be no assurance that the allowance for loan losses will be
adequate to cover losses on nonperforming assets in the future.
Other Income
Other income totaled $2.7 million for the three months ended September 30, 2002,
an increase of $764,000, or 39.8%, over the comparable 2001 period. The increase
in other income was primarily attributable to a $310,000 increase in loan
servicing fees, a $285,000, or 24.5% increase in gain on sale of loans and a
$162,000, or 21.9%, increase in late charges, rent and other. The increase in
loan servicing fees was due primarily to a decrease in the level of amortization
of mortgage servicing rights and the effects of a valuation allowance to
recognize impairment on mortgage servicing rights recorded in the 2001 period,
which was partially recovered in the 2002 quarter, based upon the Corporation's
ongoing fair value analysis of the mortgage servicing rights asset. The increase
in gain on sale of loans was due to the increase in sales volume, as Advantage
continued to sell fixed-rate loans originated in this low interest rate
environment. The increase in late charges, rent and other was due primarily to
an increase in insurance fees and other fees on loans and deposit transactions.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.6 million for the three
months ended September 30, 2002, an increase of $1.0 million, or 22.0%, over the
comparable period in 2001. The acquisition of Columbia Financial in November
2001 contributed to increased general, administrative and other expense during
the 2002 quarter, as compared to the 2001 quarter. The increase in general,
administrative and other expense was due primarily to an $817,000, or 43.1%,
increase in employee compensation and benefits, an increase of $85,000, or 8.1%,
in other operating costs and an increase of $69,000 or 22.3%, in data processing
expense, which were partially offset by a $44,000, or 26.3%, decrease in
advertising expense and a $37,000 decrease in goodwill amortization. The
increase in employee compensation and benefits was comprised of expense incurred
due to the acquisition of Columbia and an increase in management staffing levels
and normal merit compensation increases. Camco increased its management staffing
complement year to year as it continues to implement its corporate strategy
following the restructuring plan. The increase in other operating costs was due
primarily to costs associated with the increase in lending volume quarter to
16
Camco Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the nine- and three-month periods ended September 30, 2002 and 2001
Comparison of Results of Operations for the Three Months Ended September 30,
2002 and 2001 (continued)
General, Administrative and Other Expense (continued)
quarter. The increase in data processing expense was primarily due to costs
incurred in connection with the conversion of the Columbia data processing
system. The decrease in advertising was due primarily to efficiencies gained as
a result of the 2001 charter consolidation. The decrease in goodwill
amortization was due to the adoption of SFAS No. 142, a new accounting standard
which eliminated goodwill amortization.
Federal Income Taxes
The provision for federal income taxes totaled $1.2 million for the three months
ended September 30, 2002, an increase of $68,000, or 6.1%, compared to the three
months ended September 30, 2001. This increase was primarily attributable to a
$246,000, or 7.1%, increase in pre-tax earnings. The Corporation's effective tax
rates amounted to 32.0% and 32.3% for the three-month periods ended September
30, 2002 and 2001, respectively.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Corporation's market risk since the
Corporation's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2001.
ITEM 4: Controls and Procedures
(a) The Corporation's Chief Executive Officer and Chief Financial
Officer evaluated 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 a date within ninety days of the filing date of this quarterly report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that the Corporation's disclosure controls and procedures are
effective.
(b) There were no significant changes in the Corporation's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
17
Camco Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in 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 and Reports on Form 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K: None.
18
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: November 14, 2002 By: /s/Richard C. Baylor
------------------------------ ---------------------------
Richard C. Baylor
Chief Executive Officer
Date: November 14, 2002 By: /s/Mark A. Severson
------------------------------ ---------------------------
Mark A. Severson
Chief Financial Officer
19
CERTIFICATION
I, Richard C. Baylor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Camco Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Richard C. Baylor
-----------------------------------------
Richard C. Baylor, Chief Executive Officer
20
CERTIFICATION
I, Mark A. Severson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Camco Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Mark A. Severson
------------------------------------------
Mark A. Severson, Chief Financial Officer
21