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, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0110823
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6901 Glenn Highway, Cambridge, Ohio 43725-9757
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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 May 8, 2003, the latest practicable date, 7,527,063.10 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 20
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 12
Quantitative and Qualitative Disclosures about
Market Risk 16
Controls and Procedures 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
CERTIFICATIONS 19
2
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
------------ ------------
Cash and due from banks $ 22,876 $ 20,215
Interest-bearing deposits in other financial institutions 56,244 36,807
------------ ------------
Cash and cash equivalents 79,120 57,022
Investment securities available for sale - at market 34,717 38,789
Investment securities held to maturity - at cost, approximate market
value of $4,347 and $5,501 as of March 31, 2003 and December 31,
2002, respectively 4,227 5,368
Mortgage-backed securities available for sale - at market 113,629 97,332
Mortgage-backed securities held to maturity - at cost, approximate market
value of $15,235 and $20,634 as of March 31, 2003 and December 31,
2002, respectively 14,857 20,000
Loans held for sale - at lower of cost or market 20,361 55,493
Loans receivable - net 745,881 741,465
Office premises and equipment - net 14,343 14,492
Real estate acquired through foreclosure 1,265 1,589
Federal Home Loan Bank stock - at cost 23,771 23,539
Accrued interest receivable 4,910 4,922
Prepaid expenses and other assets 1,690 2,130
Cash surrender value of life insurance 17,572 17,372
Goodwill - net of accumulated amortization 2,953 2,953
Prepaid federal income taxes - 774
------------ ------------
Total assets $1,079,296 $1,083,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 694,392 $ 694,072
Advances from the Federal Home Loan Bank 274,839 276,276
Advances by borrowers for taxes and insurance 2,274 3,509
Accounts payable and accrued liabilities 4,052 4,298
Dividends payable 1,059 1,046
Accrued federal income taxes 61 -
Deferred federal income taxes 5,493 5,438
------------ ------------
Total liabilities 982,170 984,639
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,367,482 and
8,311,145 shares issued at March 31, 2003 and December 31, 2002, respectively 8,367 8,311
Additional paid-in capital 54,524 54,063
Retained earnings - substantially restricted 43,899 42,497
Accumulated other comprehensive income - unrealized gains on securities
designated as available for sale, net of related tax effects 1,706 2,098
Less 800,321 and 622,260 shares of treasury stock at March 31, 2003 and
December 31, 2002, respectively - at cost (11,370) (8,368)
------------ ------------
Total stockholders' equity 97,126 98,601
------------ ------------
Total liabilities and stockholders' equity $1,079,296 $1,083,240
============ ============
3
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended March 31,
(In thousands, except per share data)
2003 2002
------- -------
Interest income
Loans $12,723 $15,344
Mortgage-backed securities 1,048 569
Investment securities 344 218
Interest-bearing deposits and other 578 748
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Total interest income 14,693 16,879
Interest expense
Deposits 4,484 6,537
Borrowings 3,843 3,729
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Total interest expense 8,327 10,266
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Net interest income 6,366 6,613
Provision for losses on loans 420 207
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Net interest income after provision for losses on loans 5,946 6,406
Other income
Late charges, rent and other 848 694
Loan servicing fees 401 374
Service charges and other fees on deposits 266 208
Gain on sale of loans 1,439 440
Valuation of mortgage servicing rights - net 500 479
Gain on sale of real estate acquired through foreclosure 1 58
------- -------
Total other income 3,455 2,253
General, administrative and other expense
Employee compensation and benefits 2,918 2,601
Occupancy and equipment 940 812
Data processing 303 319
Advertising 177 185
Franchise taxes (refunds) 276 (23)
Other operating 1,165 1,245
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Total general, administrative and other expense 5,779 5,139
------- -------
Earnings before federal income taxes 3,622 3,520
Federal income taxes
Current 911 1,446
Deferred 257 (301)
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Total federal income taxes 1,168 1,145
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NET EARNINGS $ 2,454 $ 2,375
======= =======
EARNINGS PER SHARE
Basic $ .32 $ .30
======= =======
Diluted $ .32 $ .29
======= =======
Dividends declared per share $ .140 $.125
======= =======
4
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31,
(In thousands)
2003 2002
------ ------
Net earnings $2,454 $2,375
Other comprehensive loss, net of tax:
Unrealized holding losses during the period, net of tax
benefits of $202 and $52 in 2003 and 2002, respectively (392) (100)
------ ------
Comprehensive income $2,062 $2,275
====== ======
Accumulated comprehensive income $1,706 $ 7
====== ======
5
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
(In thousands)
2003 2002
-------- --------
Cash flows from operating activities:
Net earnings for the period $ 2,454 $ 2,375
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (113) (174)
Amortization of premiums and discounts on investment and
mortgage-backed securities - net 532 (28)
Depreciation and amortization 438 382
Amortization of purchase accounting adjustments, net 20 77
Provision for losses on loans 420 207
Gain on sale of real estate acquired through foreclosure (1) (58)
Federal Home Loan Bank stock dividends (232) (249)
Gain on sale of loans (1,439) (440)
Loans originated for sale in the secondary market (56,539) (48,985)
Proceeds from sale of loans in the secondary market 93,110 52,931
Increase (decrease) in cash due to changes in:
Accrued interest receivable 469 340
Prepaid expenses and other assets (17) 2,237
Accrued interest and other liabilities (233) (6,486)
Federal income taxes
Current 925 1,432
Deferred 257 (301)
-------- --------
Net cash provided by operating activities 40,051 3,260
Cash flows provided by (used in) investing activities:
Purchases of investment securities (2,000) (40)
Proceeds from maturities of investment securities 7,138 5,255
Principal repayments on mortgage-backed securities 20,978 2,872
Purchases of mortgage-backed securities designated as available for sale (33,184) (30,510)
Loan principal repayments 83,047 92,916
Loan disbursements (85,954) (47,362)
Purchases of loans (2,112) -
Additions to office premises and equipment (289) (19)
Additions to real estate acquired through foreclosure - (17)
Proceeds from sale of real estate acquired through foreclosure 613 791
Net increase in cash surrender value of life insurance (200) (193)
-------- --------
Net cash provided by (used in) investing activities (11,963) 23,693
-------- --------
Net cash provided by operating and investing
activities (balance carried forward) 28,088 26,953
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6
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended March 31,
(In thousands)
2003 2002
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Net cash provided by operating and investing
activities (balance brought forward) $28,088 $ 26,953
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 320 (32,507)
Proceeds from Federal Home Loan Bank advances 1,500 -
Repayment of Federal Home Loan Bank advances (2,948) (19,129)
Dividends paid on common stock (1,051) (996)
Proceeds from exercise of stock options 426 53
Purchase of treasury shares (3,002) -
Decrease in advances by borrowers for taxes and insurance (1,235) (1,441)
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Net cash used in financing activities (5,990) (54,020)
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Increase (decrease) in cash and cash equivalents 22,098 (27,067)
Cash and cash equivalents at beginning of period 57,022 104,964
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Cash and cash equivalents at end of period $79,120 $ 77,897
======= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 7,014 $ 10,195
======= =========
Income taxes $ - $ 400
======= =========
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (392) $ (100)
======= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 1,188 $ 624
======= =========
Transfers from mortgage loans to real estate acquired through foreclosure $ 189 $ 415
======= =========
Supplemental disclosure of noncash financing activities:
Treasury shares received from settlement of Columbia Financial's
Employee Stock Ownership Plan $ - $ 639
======= =========
Dividends declared but unpaid $ 1,059 $ 996
======= =========
7
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended March 31, 2003 and 2002
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, 2002. 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, 2003, 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 two wholly-owned subsidiaries: Advantage Bank ("Advantage" or the
"Bank") and Camco Title Insurance Agency, Inc., as well as a second tier
subsidiary, Camco Mortgage Corporation. 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 plans. The
computations are as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------
2003 2002
--------- ---------
Weighted-average common shares
outstanding (basic) 7,674,434 7,966,767
Dilutive effect of assumed exercise
of stock options 95,112 115,828
--------- ---------
Weighted-average common shares
outstanding (diluted) 7,769,546 8,082,595
========= =========
Options to purchase 7,088 and 68,416 shares of common stock with respective
weighted-average exercise prices of $16.59 and $14.76 were outstanding at
March 31, 2003 and 2002, 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.
8
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2003 and 2002
4. Stock Option Plans
Camco presently has options outstanding under four stock option plans.
Under the 1995 Plan and the 2002 Plan, 161,488 and 400,000 shares,
respectively, were reserved for issuance. Additionally, in connection with
the 1996 acquisition of First Savings, 265,876 shares were reserved for
issuance. In connection with the 2000 acquisition of Westwood Homestead,
311,794 shares were reserved for issuance.
The Corporation accounts for its stock option plans in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a
fair-value based method for valuing stock-based compensation that entities
may use, that measures compensation cost at the grant date based on the
fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the
fair-value based method of accounting defined in SFAS No. 123 had been
applied.
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value at
the grant dates for awards under the plans consistent with the accounting
method utilized in SFAS No. 123, the Corporation's net earnings and
earnings per share would have been reported as the pro forma amounts
indicated below for the three months ended March 31:
2003 2002
------ ------
(In thousands, except
per share data)
NET EARNINGS As reported $2,454 $2,375
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Stock-based compensation, net of tax (20) (1)
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Pro-forma $2,434 $2,374
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EARNINGS PER SHARE
BASIC As reported $ .32 $ .30
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Stock-based compensation, net of tax - -
Pro-forma $ .32 $ .30
====== ======
DILUTED As reported $ .32 $ .29
Stock-based compensation, net of tax (.01) -
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Pro-forma $ .31 $ .29
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9
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2003 and 2002
4. Stock Option Plans (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
assumptions used for grants during 2003, 2002 and 2001: dividend yield of
3.50%, 3.84% and 4.07%, respectively; expected volatility of 16.88%,
16.34%, and 17.06%, respectively; a risk-free interest rate of 3.95%, 2.00%
and 3.00%, respectively, and an expected life of ten years for all grants.
A summary of the status of the Corporation's stock option plans as of March
31, 2003 and December 31, 2002 and 2001, and changes during the periods
ending on those dates is presented below:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------------------------
2003 2002 2001
---------------------- ------------------------ ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- ---------- ------- ----------
Outstanding at beginning of period 323,291 $ 9.79 503,005 $ 10.16 688,655 $ 10.53
Granted 56,948 16.13 3,700 14.55 8,500 11.93
Exercised (56,336) 7.57 (174,106) 10.84 (115,656) 10.91
Forfeited (4,103) 13.78 (9,308) 11.91 (78,494) 12.50
------- --------- ------- --------- ------- ---------
Outstanding at end of period 319,800 $ 11.27 323,291 $ 9.79 503,005 $ 10.16
======= ========= ======= ========= ======= =========
Options exercisable at period-end 274,508 $ 10.47 323,291 $ 9.79 503,005 $ 10.16
======= ========= ======= ========= ======= =========
Weighted-average fair value of
options granted during the period $ 2.60 $ 1.36 $ 1.37
========= ========= =========
The following information applies to options outstanding at March 31, 2003:
Number outstanding 188,256
Range of exercise prices $7.40 - $9.79
Number outstanding 131,544
Range of exercise prices $11.36 - $16.59
Weighted-average exercise price $11.27
Weighted-average remaining contractual life 5.0 years
5. Effects of Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS No. 146
provides financial accounting and reporting guidance for costs associated
with exit or disposal activities, including one-time termination benefits,
contract termination costs other than for a capital lease, and costs to
consolidate facilities or relocate employees. SFAS No. 146 is effective for
exit or disposal activities initiated after December 31, 2002. Management
adopted SFAS No. 146 effective January 1, 2002, without material effect on
the Corporation's financial condition or results of operations.
10
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended March 31, 2003 and 2002
5. Effects of Recent Accounting Pronouncements (continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. The expanded annual
disclosure requirements and the transition provisions are effective for
fiscal years ending after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The
Corporation adopted the disclosure provisions of SFAS No. 148 effective
December 31, 2002, without material effect on the Corporation's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a
guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for the
fair value of the obligation undertaken in issuing the guarantee. Camco has
financial letters of credit which require Camco to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
FIN 45 requires Camco to record a liability generally equal to fees
received for these letters of credit when guaranteeing obligations. FIN 45
applies prospectively to guarantees Camco issues or modifies subsequent to
December 31, 2002.
The maximum potential undiscounted amount of future payments of these
letters of credit as of March 31, 2003 is $167,000. Such letters of credit
have terms of one year. Amounts due under these letters of credit would be
reduced by any proceeds that Camco would be able to obtain in liquidating
the collateral for the loans, which varies depending on the customer.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Corporation adopted the disclosure requirements of FIN 46
effective January 31, 2003, without material effect on its financial
statements.
11
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the three-month periods ended March 31, 2003 and 2002
Discussion of Financial Condition Changes from December 31, 2002 to March 31,
2003
At March 31, 2003, Camco's consolidated assets totaled $1.079 billion, a
decrease of $3.9 million, or .4%, from the December 31, 2002 total. The decrease
in total assets was comprised primarily of a decrease in loans receivable and a
decrease in investment securities, which were partially offset by increases in
cash and cash equivalents and mortgage-backed securities.
Cash and interest-bearing deposits in other financial institutions totaled $79.1
million at March 31, 2003, an increase of $22.1 million, or 38.8%, over December
31, 2002 levels. Investment securities totaled $38.9 million at March 31, 2003,
a decrease of $5.2 million, or 11.8%, from the total at December 31, 2002.
Investment securities purchases, which were comprised primarily of $2.0 million
of intermediate-term callable U.S. Government agency obligations with an average
yield of 2.36%, were offset by $7.1 million of maturities.
Mortgage-backed securities totaled $128.5 million at March 31, 2003, an increase
of $11.2 million, or 9.5%, over December 31, 2002. Mortgage-backed securities
purchases totaled $33.2 million, while principal repayments totaled $21.0
million during the three-month period ended March 31, 2003. Purchases of
mortgage-backed securities during the period were comprised primarily of balloon
and seven- to ten-year amortizing U.S. Government agency securities yielding
3.32%, which were classified as available for sale. Purchases of mortgage-backed
securities were funded primarily with proceeds from loan principal repayments.
Loans receivable, including loans held for sale, totaled $766.2 million at March
31, 2003, a decrease of $30.7 million, or 3.9%, from December 31, 2002. The
decrease resulted primarily from principal repayments of $83.0 million and loan
sales of $91.7 million, which were partially offset by loan disbursements and
purchases totaling $144.6 million. The volume of loans originated and purchased
during the 2003 three-month period was greater than that of the comparable 2002
period by $48.3 million, or 50.1%, while the volume of loan sales increased by
$39.2 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 three-month period ended March
31, 2003, were comprised primarily of $118.3 million of loans secured by one- to
four-family residential real estate, $19.8 million in consumer and other loans
and $6.5 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 $5.7 million and $5.5 million at March 31,
2003 and December 31, 2002, respectively, representing 38.8% and 40.3% of
nonperforming loans, respectively, at those dates. Nonperforming loans (90 days
or more delinquent plus nonaccrual loans) totaled $14.6 million and $13.6
million at March 31, 2003 and December 31, 2002, respectively, constituting
1.90% and 1.71% of total net loans, including loans held for sale, at those
dates. At March 31, 2003, nonperforming loans were comprised of $10.7 million in
one- to four-family residential real estate loans, $2.5 million in
nonresidential real estate loans, $879,000 in commercial real estate loans and
$461,000 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 $12.5 million at March 31, 2003, compared to $10.5 million at
December 31, 2002, an increase of $2.0 million, or 19.3%. Although management
believes that its allowance for loan losses is adequate based upon the available
facts and circumstances at March 31, 2003, there can be no assurance that
increased provisions will not be necessary in future periods, which could
adversely affect Camco's results of operations.
12
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2003 and 2002
Discussion of Financial Condition Changes from December 31, 2002 to March 31,
2003 (continued)
Deposits totaled $694.4 million at March 31, 2003, an increase of $320,000, or
..1%, over the total at December 31, 2002. While management has generally pursued
a strategy of moderate growth in the deposit portfolio, Advantage has not
historically engaged in sporadic increases or decreases in interest rates
offered, nor has it offered the highest interest rates available in its market
areas.
Stockholders' equity totaled $97.1 million at March 31, 2003, a $1.5 million, or
1.5%, decrease from December 31, 2002. The decrease resulted primarily from
dividends of $1.1 million, purchases of treasury shares totaling $3.0 million
and a $392,000 decrease in the unrealized gains on available for sale
securities, which were partially offset by net earnings of $2.5 million and
proceeds from the exercise of stock options of $426,000. The increase in
treasury shares represented purchases under the 5% stock repurchase plan that
was announced in October 2002.
Advantage is required to maintain minimum regulatory capital pursuant to federal
regulations. At March 31, 2003, the Bank's regulatory capital exceeded all
regulatory capital requirements.
Comparison of Results of Operations for the Three Months Ended March 31, 2003
and 2002
General
Camco's net earnings for the three months ended March 31, 2003 totaled $2.5
million, an increase of $79,000, or 3.3%, over the $2.4 million of net earnings
reported in the comparable 2002 period. The increase in earnings was primarily
attributable to an increase in other income of $1.2 million, which was partially
offset by a decrease of $247,000 in net interest income, an increase in the
provision for losses on loans of $213,000, an increase in general,
administrative and other expense of $640,000 and an increase in federal income
tax expense of $23,000.
Net Interest Income
Total interest income amounted to $14.7 million for the three months ended March
31, 2003, a decrease of $2.2 million, or 13.0%, compared to the three-month
period ended March 31, 2002, generally reflecting the effects of a decrease in
yield on total interest-earning assets of 93 basis points, from 6.62% in the
2002 period to 5.69% in the 2003 period, which was partially offset by a $12.2
million, or 1.2%, increase in the average balance of interest-earning assets
outstanding year to year.
13
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the three-month periods ended March 31, 2003 and 2002
Comparison of Results of Operations for the Three Months Ended March 31, 2003
and 2002 (continued)
Net Interest Income (continued)
Interest income on loans totaled $12.7 million for the three months ended March
31, 2003, a decrease of $2.6 million, or 17.1%, from the comparable 2002 period.
The decrease resulted primarily from a $71.6 million, or 8.5%, decrease in the
average balance outstanding and a 69 basis point decrease in the average yield,
to 6.56% in the 2003 period. Interest income on mortgage-backed securities
totaled $1.0 million for the three months ended March 31, 2003, a $479,000, or
84.2%, increase over the 2002 quarter. The increase was due primarily to a $70.3
million, or 145.1%, increase in the average balance outstanding, which was
partially offset by a 117 basis point decrease in the average yield, to 3.53% in
the 2003 period. Interest income on investment securities increased by $126,000,
or 57.8%, due primarily to a $24.9 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 $170,000,
or 22.7%, due primarily to a decrease in the average yield, to 2.39% in the 2003
period, coupled with a decrease of $11.4 million, or 10.5%, in the average
balance outstanding year to year.
Interest expense on deposits totaled $4.5 million for the three months ended
March 31, 2003, a decrease of $2.1 million, or 31.4%, compared to the same
quarter in 2002, due primarily to a 112 basis point decrease in the average cost
of deposits, to 2.70% in the current quarter, and a $44.3 million, or 6.2%,
decrease in average deposits outstanding. Interest expense on borrowings totaled
$3.8 million for the three months ended March 31, 2003, an increase of $114,000,
or 3.1%, over the 2002 three-month period. The increase resulted primarily from
a $29.9 million, or 12.1%, increase in the average balance outstanding year to
year, partially offset by a 49 basis point decrease in the average cost to
5.57%. 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.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $247,000, or 3.7%, to a total of $6.4 million
for the three months ended March 31, 2003. The interest rate spread decreased to
approximately 2.15% at March 31, 2003, from 2.21% at March 31, 2002, while the
net interest margin decreased to approximately 2.47% for the three months ended
March 31, 2003, compared to 2.59% for the 2002 period.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market areas,
and other factors related to the collectibility of the Bank's loan portfolio.
Based upon an analysis of these factors, management recorded a provision for
losses on loans totaling $420,000 for the three months ended March 31, 2003, an
increase of $213,000, or 102.9%, over the comparable period in 2002. 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. Management believes all nonperforming
loans are adequately collateralized, however, there can be no assurance that the
loan loss allowance will be adequate to absorb losses on known nonperforming
assets or that the allowance will be adequate to cover losses on nonperforming
assets in the future.
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, 2003 and 2002
Comparison of Results of Operations for the Three Months Ended March 31, 2003
and 2002 (continued)
Other Income
Other income totaled $3.5 million for the three months ended March 31, 2003, an
increase of $1.2 million, or 53.4%, over the comparable 2002 period. The
increase in other income was primarily attributable to a $999,000 increase in
gain on sale of loans and a $154,000, or 22.2%, increase in late charges, rent
and other. The increase in gain on sale of loans was due to the $39.2 million,
or 74.6%, increase in sales volume, as Advantage continued to sell fixed-rate
loans originated in the low interest rate environment. Additionally, the loan
sales resulted in a greater gain recognition in the 2003 period, both from an
increase in sales prices and a higher fair value in appraised mortgage servicing
rights year to year. The increase in late charges, rent and other was due
primarily to an increase in title fees and other fees on loans.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.8 million for the three
months ended March 31, 2003, an increase of $640,000, or 12.5%, over the
comparable period in 2002. The increase in general, administrative and other
expense was due primarily to a $317,000, or 12.2%, increase in employee
compensation and benefits, an increase of $299,000, in franchise tax and an
increase of $128,000 or 15.8%, in occupancy and equipment, which were partially
offset by an $80,000, or 6.4%, decrease in other operating costs. The increase
in employee compensation and benefits was due primarily to an increase in
incentive compensation and 401(k) plan costs, as well as normal merit increases.
The increase in franchise tax expense reflects the effects of refund claims in
2002. The increase in occupancy and equipment was due primarily to an increase
in office repairs and maintenance expenses, as well as costs associated with the
new Dover office location. The decrease in other operating costs was due
primarily to a decrease in long distance telephone costs following a change in
service providers and a decrease in FHLB charges due to use of bonds as pledged
collateral versus letters of credit.
Federal Income Taxes
The provision for federal income taxes totaled $1.2 million for the three months
ended March 31, 2003, an increase of $23,000, or 2.0%, compared to the three
months ended March 31, 2002. This increase was primarily attributable to a
$102,000, or 2.9%, increase in pre-tax earnings. The Corporation's effective tax
rates amounted to 32.3% and 32.5% for the three-month periods ended March 31,
2003 and 2002, respectively.
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, 2003 and 2002
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, 2002.
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.
16
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
On April 22, 2003, Camco held its Annual Meeting of Stockholders. The
only matter that was submitted to stockholders was the election of
three directors with terms expiring in 2006, as follows:
FOR WITHHELD
--- --------
Richard C. Baylor 6,418,801 140,849
Robert C. Dix 6,419,070 140,580
Paul D. Leake 6,387,630 172,020
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: On January 27, 2003, a Form 8-K was filed
to report earnings for the year and
fourth quarter ended December 31, 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003 By: /s/ Richard C. Baylor
----------------------- -----------------------------------
Richard C. Baylor
Chief Executive Officer
Date: May 13, 2003 By: /s/ Mark A. Severson
----------------------- -----------------------------------
Mark A. Severson
Chief Financial Officer
18
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: May 13, 2003 /s/ Richard C. Baylor
------------------------------------------
Richard C. Baylor, Chief Executive Officer
19
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: May 13, 2003 /s/ Mark A. Severson
-----------------------------------------
Mark A. Severson, Chief Financial Officer
20