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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0110823
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6901 Glenn Highway, Cambridge, Ohio 43725-9757
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of November 4, 2004, the latest practicable date, 7,640,505 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 24
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 15
Quantitative and Qualitative Disclosures about
Market Risk 23
Controls and Procedures 24
PART II - OTHER INFORMATION 25
SIGNATURES 26
2
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2004 2003
ASSETS
Cash and due from banks $ 26,077 $ 22,807
Interest-bearing deposits in other financial institutions 19,214 30,904
----------- -----------
Cash and cash equivalents 45,291 53,711
Investment securities available for sale - at market 25,123 27,008
Investment securities held to maturity - at cost, approximate market
value of $1,190 and $1,204 as of September 30, 2004 and December 31,
2003, respectively 1,126 1,130
Mortgage-backed securities available for sale - at market 86,706 77,916
Mortgage-backed securities held to maturity - at cost, approximate market
value of $4,416 and $7,839 as of September 30, 2004 and December 31,
2003, respectively 4,416 7,704
Loans held for sale - at lower of cost or market 4,386 5,457
Loans receivable - net 891,957 799,625
Office premises and equipment - net 13,518 13,380
Real estate acquired through foreclosure 2,507 1,463
Federal Home Loan Bank stock - at cost 25,524 24,494
Accrued interest receivable 4,700 4,088
Prepaid expenses and other assets 1,791 1,524
Cash surrender value of life insurance 19,800 17,740
Goodwill - net of accumulated amortization 7,023 2,953
Prepaid federal income taxes 237 958
----------- -----------
Total assets $ 1,134,105 $ 1,039,151
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 728,918 $ 671,274
Advances from the Federal Home Loan Bank 291,719 262,735
Advances by borrowers for taxes and insurance 2,280 3,494
Accounts payable and accrued liabilities 9,543 4,102
Dividends payable 1,108 1,063
Deferred federal income taxes 3,510 3,940
----------- -----------
Total liabilities 1,037,078 946,608
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,737,028 and
8,428,946 shares issued at September 30, 2004 and December 31, 2003, respectively 8,737 8,429
Additional paid-in capital 58,692 55,132
Retained earnings - substantially restricted 45,912 45,121
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 31 206
Less 1,096,523 shares of treasury stock at both September 30, 2004
and December 31, 2003, respectively - at cost (16,345) (16,345)
----------- -----------
Total stockholders' equity 97,027 92,543
----------- -----------
Total liabilities and stockholders' equity $ 1,134,105 $ 1,039,151
=========== ===========
3
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
Interest income
Loans $ 34,744 $ 36,497 $ 11,860 $ 11,795
Mortgage-backed securities 2,231 2,775 833 736
Investment securities 594 1,016 209 305
Interest-bearing deposits and other 1,618 1,665 571 506
-------- -------- -------- --------
Total interest income 39,187 41,953 13,473 13,342
Interest expense
Deposits 10,222 12,460 3,570 3,827
Borrowings 10,212 11,495 3,497 3,828
-------- -------- -------- --------
Total interest expense 20,434 23,955 7,067 7,655
-------- -------- -------- --------
Net interest income 18,753 17,998 6,406 5,687
Provision for losses on loans 765 930 255 255
-------- -------- -------- --------
Net interest income after provision
for losses on loans 17,988 17,068 6,151 5,432
Other income
Late charges, rent and other 1,863 2,942 623 944
Loan servicing fees 1,138 1,225 373 412
Service charges and other fees on deposits 1,006 878 407 309
Gain on sale of loans 679 3,257 189 547
Valuation of mortgage servicing rights - net 133 188 206 (402)
Gain on sale of investment and mortgage-backed securities 110 716 10 531
Gain on sale of real estate acquired through foreclosure 224 20 106 82
-------- -------- -------- --------
Total other income 5,153 9,226 1,914 2,423
General, administrative and other expense
Employee compensation and benefits 10,162 11,134 3,308 3,647
Deferred compensation (FAS 91) (1,731) (2,956) (545) (1,186)
Occupancy and equipment 2,569 2,792 867 936
Data processing 987 993 320 318
Advertising 822 554 387 190
Franchise taxes 791 959 283 362
Other operating 3,691 3,714 1,307 1,284
-------- -------- -------- --------
Total general, administrative and other expense 17,291 17,190 5,927 5,551
-------- -------- -------- --------
Earnings before federal income taxes 5,850 9,104 2,138 2,304
Federal income taxes
Current 2,430 3,726 1,214 850
Deferred (614) (890) (544) (132)
-------- -------- -------- --------
Total federal income taxes 1,816 2,836 670 718
-------- -------- -------- --------
NET EARNINGS $ 4,034 $ 6,268 $ 1,468 $ 1,586
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ 0.54 $ 0.83 $ 0.20 $ 0.21
======== ======== ======== ========
Diluted $ 0.54 $ 0.82 $ 0.19 $ 0.21
======== ======== ======== ========
4
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
Net earnings $ 4,034 $ 6,268 $ 1,468 $ 1,586
Other comprehensive income, net of tax:
Unrealized holding gains (losses) during the period, net of
related taxes (benefits) of $(54), $(787), $707 and $(556)
for the nine and three months ended September 30,
2004 and 2003, respectively (104) (1,527) 1,367 (1,080)
Reclassification adjustment for realized gains included in
net earnings, net of taxes of $36, $243, $3 and $181
for the respective periods (71) (473) (7) (350)
------- ------- ------- -------
Comprehensive income $ 3,859 $ 4,268 $ 2,828 $ 156
======= ======= ======= =======
Accumulated comprehensive income $ 31 $ 98 $ 31 $ 98
======= ======= ======= =======
5
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 4,034 $ 6,268
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (56) (352)
Amortization of premiums and discounts on investment
and mortgage-backed securities - net 821 1,977
Amortization of purchase accounting adjustments - net 67 66
Depreciation and amortization 1,085 1,352
Provision for losses on loans 765 930
Gain on sale of real estate acquired through foreclosure (224) (20)
Federal Home Loan Bank stock dividends (759) (711)
Gain on sale of investment and mortgage-backed securities (110) (716)
Gain on sale of loans (679) (3,257)
Loans originated for sale in the secondary market (76,262) (205,600)
Proceeds from sale of loans in the secondary market 78,012 256,416
Increase (decrease) in cash, net of London Financial acquisition, due to changes in:
Accrued interest receivable (138) 486
Prepaid expenses and other assets (231) 260
Accrued interest and other liabilities 4,706 177
Federal income taxes:
Current 1,340 73
Deferred (614) (890)
--------- ---------
Net cash provided by operating activities 11,757 56,459
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities 14,000 17,191
Proceeds from sale of investment securities designated as available for sale 1,557 2,043
Proceeds from sale of mortgage-backed securities designated as available for sale 13,060 54,135
Purchase of investment securities designated as available for sale (13,997) (10,341)
Purchase of mortgage-backed securities designated as available for sale (43,301) (112,989)
Purchase of mortgage-backed securities designated as held to maturity - (270)
Purchase of loans (26,712) (9,954)
Loan disbursements (110,369) (295,714)
Principal repayments on loans 88,482 250,816
Principal repayments on mortgage-backed securities 24,442 75,351
Purchase of office premises and equipment (530) (601)
Proceeds from sales of real estate acquired through foreclosure 3,750 3,206
Additions to real estate acquired through foreclosure (29) -
Purchase of cash surrender value of life insurance (1,539) -
Net cash paid for London Financial acquisition (1,769) -
Proceeds from redemption of life insurance - 422
Net increase in cash surrender value of life insurance (521) (597)
--------- ---------
Net cash used in investing activities (53,476) (27,302)
--------- ---------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) (41,719) 29,157
--------- ---------
6
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
2004 2003
Net cash provided by (used in) operating and investing activities
(subtotal brought forward) $(41,719) $ 29,157
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 12,412 (32,552)
Proceeds from Federal Home Loan Bank advances 36,650 44,500
Repayment of Federal Home Loan Bank advances (11,666) (43,013)
Dividends paid on common stock (3,198) (3,144)
Purchase of treasury stock - (7,031)
Proceeds from exercise of stock options 317 1,080
Advances by borrowers for taxes and insurance (1,216) (929)
-------- --------
Net cash used in financing activities 33,299 (41,089)
-------- --------
Net decrease in cash and cash equivalents (8,420) (11,932)
Cash and cash equivalents at beginning of period 53,711 57,022
-------- --------
Cash and cash equivalents at end of period $ 45,291 $ 45,090
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 20,508 $ 22,704
======== ========
Income taxes $ 1,712 $ 3,493
======== ========
Supplemental disclosure of noncash investing activities:
Transfers from mortgage loans to real estate acquired
through foreclosure $ 5,594 $ 2,848
======== ========
Unrealized losses on securities designated as available for sale $ (175) $ (2,000)
======== ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 140 $ 1,030 $ 3,132
======== ========
Issuance of loans upon sale of real estate acquired through foreclosure $ 1,053 $ 1,838
======== ========
Dividends declared but unpaid $ 1,108 $ 1,070
======== ========
Fair value of assets acquired in London Financial transaction $ 54,441 $ -
Less fair value of liabilities assumed (50,371) -
-------- --------
Goodwill assigned in acquisition $ 4,070 $ -
======== ========
Supplemental noncash financing activities:
Common stock issued in acquisition of London Financial $ 3,551 $ -
======== ========
7
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine- and three-month periods ended September 30, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America ("US GAAP"). Accordingly, these financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto of Camco Financial Corporation ("Camco" or the "Corporation")
included in Camco's Annual Report on Form 10-K for the year ended December
31, 2003. 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, 2004, are not necessarily indicative of the results which
may be expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Camco and its two wholly-owned subsidiaries: Advantage Bank ("Advantage"
or the "Bank") and Camco Title Insurance Agency, Inc.
3. Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as disclosures found elsewhere in this quarterly
report, are based upon Camco Financial's consolidated financial
statements, which are prepared in accordance with US GAAP. The preparation
of these financial statements requires Camco to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. Several factors are considered in determining
whether or not a policy is critical in the preparation of financial
statements. These factors include, among other things, whether the
estimates are significant to the financial statements, the nature of the
estimates, the ability to readily validate the estimates with other
information including third parties or available prices, and sensitivity
of the estimates to changes in economic conditions and whether alternative
accounting methods may be utilized under US GAAP.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses, the valuation of mortgage servicing rights and goodwill
impairment. Actual results could differ from those estimates.
ALLOWANCE FOR LOAN LOSSES
The procedures for assessing the adequacy of the allowance for loan losses
reflect our evaluation of credit risk after careful consideration of all
information available to us. In developing this assessment, we must rely
on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown such as economic factors, developments affecting
companies in specific industries and issues with respect to single
borrowers. Depending on changes in circumstances, future assessments of
credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
8
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2004 and 2003
3. Critical Accounting Policies (continued)
ALLOWANCE FOR LOAN LOSSES (continued)
The allowance is regularly reviewed by management to determine whether the
amount is considered adequate to absorb probable losses. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based upon the size,
quality, and concentration characteristics of the various loan portfolios,
adverse situations that may affect a borrower's ability to repay, and
current economic and industry conditions. Also considered as part of that
judgement is a review of the Bank's trends in delinquencies and loan
losses, as well as trends in delinquencies and losses for the region and
nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate
based on management's current judgement about the credit quality of the
loan portfolio. While the Corporation strives to reflect all known risk
factors in its evaluations, judgment errors may occur.
MORTGAGE SERVICING RIGHTS
To determine the fair value of its mortgage servicing rights ("MSRs") each
reporting quarter, the Corporation transmits information to a third party
provider, representing individual loan information in each pooling period
accompanied by escrow amounts. The third party then evaluates the possible
impairment of MSRs as described below.
Servicing assets are recognized as separate assets when loans are sold
with servicing retained. A pooling methodology to the servicing valuation,
in which loans with similar characteristics are "pooled" together, is
applied for valuation purposes. Once pooled, each grouping of loans is
evaluated on a discounted earnings basis to determine the present value of
future earnings that a purchaser could expect to realize from the
portfolio. Earnings are projected from a variety of sources including loan
service fees, interest earned on float, net interest earned on escrow
balances, miscellaneous income and costs to service the loans. The present
value of future earnings is the estimated market value for the pool,
calculated using consensus assumptions that a third party purchaser would
utilize in evaluating a potential acquisition of the servicing. Events
that may significantly affect the estimates used are changes in interest
rates and the related impact on mortgage loan prepayment speeds and the
payment performance of the underlying loans. The interest rate for float,
which is supplied by management, takes into consideration the investment
portfolio average yield as well as current short duration investment
yields. Management believes this methodology provides a reasonable
estimate. Mortgage loan prepayment speeds are calculated by the third
party provider utilizing the Economic Outlook as published by the Office
of Chief Economist of Freddie Mac in estimating prepayment speeds and
provides a specific scenario with each evaluation. Based on the
assumptions discussed, pre-tax projections are prepared for each pool of
loans serviced. These earning figures approximate the cash flow that could
be received from the servicing portfolio. Valuation results are presented
quarterly to management. At that time, management reviews the information
and mortgage servicing rights are marked to lower of amortized cost or
market for the current quarter.
9
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2004 and 2003
3. Critical Accounting Policies (continued)
GOODWILL
We have developed procedures to test goodwill for impairment on an annual
basis using June 30 financial information. This testing procedure is
outsourced to a third party that evaluates possible impairment based on
the following:
The test involves assigning tangible assets and liabilities, identified
intangible assets and goodwill to reporting units and comparing the fair
value of each reporting unit to its carrying value including goodwill. The
value is determined assuming a freely negotiated transaction between a
willing buyer and a willing seller, neither being under any compulsion to
buy or sell and both having reasonable knowledge of relevant facts.
Accordingly, to derive the fair value of the reporting unit, the following
common approaches to valuing business combination transactions involving
financial institutions are utilized by a third party selected by Camco:
(1) the comparable transactions approach - specifically based on earnings,
book, assets and deposit premium multiples received in recent sales of
comparable thrift franchises; and (2) the discounted cash flow approach.
The application of these valuation techniques takes into account the
reporting unit's operating history, the current market environment and
future prospects. As of the most recent quarter, the only reporting unit
carrying goodwill is the Bank.
If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and no second
step is required. If not, a second test is required to measure the amount
of goodwill impairment. The second test of the overall goodwill impairment
compares the implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill. The impairment loss shall equal the
excess of carrying value over fair value.
After each testing period, the third party compiles a summary of the test
that is then provided to the Audit Committee for review. As of the most
recent testing date, June 30, 2004, the Audit Committee was informed that
the fair value of the reporting unit exceeded its carrying amount.
SUMMARY
Management believes the accounting estimates related to the allowance for
loan losses, the capitalization, amortization, and valuation of mortgage
servicing rights and the goodwill impairment test are "critical accounting
estimates" because: (1) the estimates are highly susceptible to change
from period to period because they require management to make assumptions
concerning the changes in the types and volumes of the portfolios, rates
of future prepayments, and anticipated economic conditions, and (2) the
impact of recognizing an impairment or loan loss could have a material
effect on Camco's assets reported on the balance sheet as well as its net
earnings. Management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed Camco's disclosures
relating to such matters in the quarterly Management's Discussion and
Analysis.
10
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2004 and 2003
4. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Corporation's stock
option plans. The computations are as follows:
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 7,406,017 7,537,944 7,513,890 7,417,459
Dilutive effect of assumed exercise
of stock options 51,472 130,045 46,026 82,721
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 7,457,489 7,667,989 7,559,916 7,500,180
========= ========= ========= =========
Options to purchase 80,789 and 7,088 shares of common stock with
respective weighted-average exercise prices of $16.40 and $16.59 were
outstanding at September 30, 2004 and 2003, 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.
5. Stock Option Plans
Stockholders of the Corporation have approved four stock option plans.
Under the 1972 Plan and the 1982 Plan, 370,054 common shares were reserved
for issuance to officers, directors, and key employees of the Corporation
and its subsidiaries. All of the stock options under the 1972 and 1982
Plans have been granted and were subject to exercise at the discretion of
the grantees through 2002. Under the 1995 Plan, 161,488 shares were
reserved for issuance. Under the 2002 Plan, 400,000 shares were reserved
for issuance. Additionally, in connection with the acquisition of First
Federal Bank for Savings in 1996, the stock options of First Savings were
converted into options to purchase 174,421 shares of the Corporation's
stock at an exercise price of $7.38 per share, which expire in 2005. In
connection with the 2000 acquisition of Westwood Homestead Financial
Corporation, the stock options of Westwood Homestead were converted into
options to purchase 311,794 shares of the Corporation's stock at a
weighted-average exercise price of $11.89 per share, which expire in 2008.
The Corporation accounts for its stock option plans in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a
fair-value based method for valuing stock-based compensation that entities
may use, that measures compensation cost at the grant date based on the
fair value of the award. 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.
11
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended September 30, 2004 and 2003
5. Stock Option Plans (continued)
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net earnings
and earnings per share for the three- and nine-month periods ended
September 30, 2004 and 2003, would have been reported as the pro forma
amounts indicated below:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
Net earnings (In thousands) As reported $ 4,034 $ 6,268 $ 1,468 $ 1,586
Stock-based compensation, net of tax (21) (15) (7) (5)
----------- ----------- ----------- -----------
Pro-forma $ 4,013 $ 6,253 $ 1,461 $ 1,581
=========== =========== =========== ===========
Earnings per share
Basic As reported $ .54 $ .83 $ .20 $ .21
Stock-based compensation, net of tax - - (.01) -
----------- ----------- ----------- -----------
Pro-forma $ .54 $ .83 $ .19 $ .21
=========== =========== =========== ===========
Diluted As reported $ .54 $ .82 $ .19 $ .21
Stock-based compensation, net of tax - - - -
----------- ----------- ----------- -----------
Pro-forma $ .54 $ .82 $ .19 $ .21
=========== =========== =========== ===========
The fair value of each option grant is estimated on the date of grant
using the modified Black-Scholes options-pricing model with the following
assumptions used for grants during 2004, 2003 and 2002: dividend yield of
3.40%, 3.50%, and 3.84%, respectively; expected volatility of 21.44%,
16.88% and 16.34% respectively; a risk-free interest rate of 4.11%, 3.95%
and 2.00% respectively; and an expected life of ten years for all grants.
12
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the n- and three-month periods ended September 30, 2004 and 2003
5. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of
September 30, 2004 and December 31, 2003 and 2002, and changes during the
periods ending on those dates is presented below:
SIX MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 257,072 12.11 323,291 $ 9.79 503,005 $10.16
Granted 17,705 17.17 56,948 16.13 3,700 14.55
Exercised (29,765) 9.08 (117,800) 7.60 (174,106) 10.84
Forfeited (3,017) 15.10 (5,367) 13.92 (9,308) 11.91
------- ------ -------- ------ -------- ------
Outstanding at end of year 241,995 $12.50 257,072 $12.11 323,291 $ 9.79
======= ====== ======== ====== ======== ======
Options exercisable at year-end 195,672 $11.56 211,780 $11.25 323,291 $ 9.79
======= ====== ======== ====== ======== ======
Weighted-average fair value of
options granted during the year $ 3.59 $ 2.60 $ 1.36
====== ====== ======
The following information applies to options outstanding at September 30,
2004:
Number outstanding 55,823
Range of exercise prices $ 7.40 - 8.94
Number outstanding 53,088
Range of exercise prices $ 9.75 - 11.36
Number outstanding 52,295
Range of exercise prices $12.50 - 14.65
Number outstanding 80,789
Range of exercise prices $16.13 - 17.17
Weighted-average exercise price $ 12.50
Weighted-average remaining contractual life 6.7 years
6. Forward Looking Statements
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans,"
"expects," "believes," and similar expressions as they relate to Camco or
its management are intended to identify such forward looking statements.
Camco's actual results, performance or achievements may materially differ
from those expressed or implied in the forward-looking statements. Risks
and uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic conditions,
interest rate environment, competitive conditions in the financial
services
13
industry, changes in law, governmental policies and regulations, and
rapidly changing technology affecting financial services.
14
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, 2004 and 2003
Discussion of Financial Condition Changes from December 31, 2003 to September
30, 2004
At September 30, 2004, Camco's consolidated assets totaled $1.13 billion, an
increase of $95.0 million, or 9.1%, from the December 31, 2003 total. The
increase in total assets was primarily due to the acquisition of London
Financial Corporation which Camco acquired in August 2004 in a transaction
accounted for using the purchase method of accounting. The acquisition resulted
in net asset growth of approximately $58.5 million. The additional increase in
total assets was achieved primarily through internal growth in loans receivable
of $43.3 million which was funded principally by an increase of $25.0 million in
advances from the Federal Home Loan Bank ("FHLB") and deposit growth of $12.4
million.
Cash and interest-bearing deposits in other financial institutions totaled $45.3
million at September 30, 2004, a decrease of $8.4 million, or 15.7%, from
December 31, 2003 levels. Investment securities totaled $26.2 million at
September 30, 2004, a decrease of $1.9 million, or 6.7%, from the total at
December 31, 2003. Investment securities purchases, which were comprised
primarily of $14.0 million of intermediate-term callable U.S. Government agency
obligations with an average yield of 3.34%, were offset by $14.0 million of
maturities and sales of $1.6 million.
Mortgage-backed securities totaled $91.1 million at September 30, 2004, an
increase of $5.5 million, or 6.4%, from December 31, 2003. Mortgage-backed
securities purchases totaled $43.3 million, while principal repayments totaled
$24.4 million and sales totaled $13.0 million during the nine-month period ended
September 30, 2004. Purchases of mortgage-backed securities during the period
were comprised primarily of short duration mortgage-backed securities and
collateralized mortgage obligations yielding 3.95%, which were classified as
available for sale.
Loans receivable, including loans held for sale, totaled $896.3 million at
September 30, 2004, an increase of $91.3 million, or 11.3%, from December 31,
2003. The increase resulted primarily from loans of $49.1 million acquired
through the London Financial acquisition and loan disbursements and purchases
totaling $213.3 million, which were partially offset by principal repayments of
$88.5 million and loan sales of $78.0 million. The volume of loans originated
and purchased during the first nine months of 2004 was less than that of the
comparable 2003 period by $297.9 million, or 58.3%, while the volume of loan
sales decreased by $175.8 million year to year. As interest rates in the economy
have begun to rise, consumer preference is moving towards adjustable-rate
mortgage loans to fund home purchases. Camco has typically held adjustable-rate
mortgage loans in its portfolio as part of its strategy to maintain its
asset-sensitive interest-rate risk position. Loan originations during the
nine-month period ended September 30, 2004, were comprised primarily of $145.7
million of loans secured by one- to four-family residential real estate, $43.7
million in consumer and other loans and $73.0 million in loans secured by
commercial real estate. Management will continue to expand its consumer and
commercial real estate lending in future periods as a means of increasing the
yield on its loan portfolio.
The allowance for loan losses totaled $6.4 million and $5.6 million at September
30, 2004 and December 31, 2003, respectively, representing 63.2% and 41.5% of
nonperforming loans, respectively, at those dates. Nonperforming loans (90 days
or more delinquent plus nonaccrual loans) totaled $10.1 million and $13.6
million at September 30, 2004 and December 31, 2003, respectively, constituting
1.13% and 1.69% of total net loans, including loans held for sale, at those
dates. At September 30, 2004, nonperforming loans were comprised of $7.2 million
in one- to four-family residential real estate loans, $1.6 million in commercial
real estate loans and $1.3 million 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 $7.6 million at September 30, 2004, compared
to $8.7 million at December 31, 2003, a decrease of $1.1 million, or 12.6%.
Although management believes that its allowance for loan losses is adequate
15
based upon the available facts and circumstances at September 30, 2004, there
can be no assurance that increased provisions will not be necessary in future
periods, which could adversely affect Camco's results of operations.
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, 2004 and 2003
Discussion of Financial Condition Changes from December 31, 2003 to September
30, 2004 (continued)
Deposits totaled $728.9 million at September 30, 2004, an increase of $57.6
million, or 8.6%, from the total at December 31, 2003. The increase resulted
primarily from deposits of $45.2 million in the London Financial acquisition
coupled with deposit portfolio growth of $12.4 million, or 1.9%, which resulted
primarily from management's continuing efforts to achieve a moderate rate of
growth through advertising and pricing strategies. Advances from the FHLB
increased by $29.0 million, or 11.0% to a total of $291.7 million at September
30, 2004. The increase was due primarily to net borrowings totaling $25.0
million, coupled with advances of $4.0 million assumed in the London Financial
transaction. The proceeds from deposit growth and FHLB advances were primarily
used to fund loan originations during the nine month period.
Stockholders' equity totaled $97.0 million at September 30, 2004, an increase of
$4.5 million, or 4.8%, from December 31, 2003. The increase resulted primarily
from net earnings of $4.0 million, the issuance of $3.5 million in common stock
to shareholders of London Financial and $317,000 in proceeds from the exercise
of stock options, which were partially offset by dividends of $3.2 million and a
$175,000 decrease in the unrealized gains on available for sale securities.
Advantage is required to maintain minimum regulatory capital pursuant to federal
regulations. At September 30, 2004, the Bank's regulatory capital exceeded all
regulatory capital requirements.
The following tables present certain information regarding compliance by
Advantage with applicable regulatory capital requirements at September 30, 2004:
At September 30, 2004
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
----------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ --------- ------ --------- -------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $87,999 11.84% > or =$59,441 > or =8.0% > or =$74,301 > or =10.0%
Tier I capital
(to risk-weighted assets) $81,601 10.98% > or =$29,721 > or =4.0% > or =$44,581 > or = 6.0%
Tier I leverage $81,601 7.46% > or =$43,782 > or =4.0% > or =$54,728 > or = 5.0%
Federal law prohibits a financial institution from making a capital distribution
to anyone or paying management fees to any person having control of the
institution if, after such distribution or payment, the institution would be
undercapitalized.
17
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, 2004 and 2003
Comparison of Results of Operations for the Nine Months Ended September 30, 2004
and 2003
General
The inclusion of the accounts of London Financial did not significantly
contribute to the level of income and expenses during the nine months ended
September 30, 2004, compared to the nine months ended September 30, 2003.
Camco's net earnings for the nine months ended September 30, 2004 totaled $4.0
million, a decrease of $2.2 million, or 35.6%, from the $6.3 million of net
earnings reported in the comparable 2003 period. The decrease in earnings was
primarily due to the decrease of $2.6 million in gain on sale of loans and a
$1.1 million reduction in late charges, rent and other.
Net Interest Income
Total interest income amounted to $39.2 million for the nine months ended
September 30, 2004, a decrease of $2.8 million, or 6.6%, compared to the
nine-month period ended September 30, 2003, generally reflecting the effects of
a decrease in yield on total interest-earning assets of 37 basis points, from
5.50% in the 2003 period to 5.13% in the 2004 period, offset partially by a $1.9
million, or .2%, increase in the average balance of interest-earning assets
outstanding year to year.
Interest income on loans totaled $34.7 million for the nine months ended
September 30, 2004, a decrease of $1.8 million, or 4.8%, from the comparable
2003 period. The decrease resulted primarily from a 76 basis point decrease in
the average yield, to 5.53% in the 2004 period, offset partially by a $64.2
million, or 8.3%, increase in the average balance outstanding. Interest income
on mortgage-backed securities totaled $2.2 million for the nine months ended
September 30, 2004, a $544,000, or 19.6%, decrease year to year. The decrease
was due primarily to a $30.3 million, or 25.0%, decrease in the average balance
outstanding, partially offset by a 22 basis point increase in the average yield,
to 3.28% in the 2004 period. Interest income on investment securities decreased
by $422,000, or 41.5%, due primarily to a $12.4 million decrease in the average
balance outstanding, coupled with a decline in the average yield, to 2.84% in
the 2004 period. Interest income on other interest-earning assets decreased by
$47,000, or 2.8%, due primarily to a decrease of $19.5 million, or 23.8%, in the
average balance outstanding period to period partially offset by an increase in
the average yield to 3.45% in the 2004 period.
Interest expense on deposits totaled $10.2 million for the nine months ended
September 30, 2004, a decrease of $2.2 million, or 18.0%, compared to the 2003
period, due primarily to a 47 basis point decrease in the average cost of
deposits, to 2.06% in the 2004 period, offset partially be a $5.0 million, or
.8%, increase in the average balance of deposits outstanding year to year.
Interest expense on borrowings totaled $10.2 million for the nine months ended
September 30, 2004, a decrease of $1.3 million, or 11.2%, from the 2003
nine-month period. The decrease resulted primarily from a 67 basis point
decrease in the average cost of borrowings to 4.89% in the 2004 period, which
was partially offset by a $2.7 million, or 1.0%, increase in the average balance
outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $755,000, or 4.2%, to a total of $18.8 million
for the nine months ended September 30, 2004. The interest rate spread increased
to approximately 2.23% at September 30, 2004, from 2.07% at September 30, 2003,
while the net interest margin increased to approximately 2.45% for the nine
months ended September 30, 2004, compared to 2.36% for the 2003 nine month
period.
The acquisition of London Financial accounted for approximately $163,000 or .9%,
of the net interest income for the nine months ended September 30, 2004.
18
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, 2004 and 2003
Comparison of Results of Operations for the Nine Months Ended September 30, 2004
and 2003 (continued)
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 $765,000 for the nine months ended September 30, 2004,
an decrease of $165,000, or 17.7%, to the comparable period in 2003. Management
believes all classified loans are adequately collateralized, however, there can
be no assurance that the loan loss allowance will be adequate to absorb losses
on known classified assets or that the allowance will be adequate to cover
losses on classified assets in the future.
Other Income
Other income totaled $5.2 million for the nine months ended September 30, 2004,
a decrease of $4.1 million, or 44.1%, comparable to the 2003 period. The
decrease in other income was primarily attributable to a $2.6 million decrease
in the gain on sale of loans, a $1.1 million, or 36.7%, decrease in late
charges, rent and other and a $606,000 decrease in gain on sale of investment
and mortgage-backed securities, which were partially offset by a $128,000, or
14.6%, increase in income from service charges and other fees on deposits. The
decrease in the gain on sale of loans was due to a $175.8 million, or 69.5%,
decrease in sales volume. The decline in late charges, rent and other was due
primarily to a reduction in title premiums due to the decrease in originations.
The increase in income from service charges and other fees on deposits was
primarily due to the new expanded overdraft product.
The acquisition of London Financial accounted for approximately $14,000 increase
in other income for the nine month period ended September 30, 2004.
General, Administrative and Other Expense
General, administrative and other expense totaled $17.3 million for the nine
months ended September 30, 2004, an increase of $101,000, or .6%, over the
comparable period in 2003. The increase in general, administrative and other
expense was due primarily to a decrease of $1.2 million or 41.4% in direct loan
origination costs (FAS 91), offset partially by a decrease of $972,000 in
employee compensation and benefits and a $223,000 decrease in occupancy and
equipment. The decline in loan origination costs pursuant to FAS 91 relates
solely to the reduction in residential loan production period to period. The
decrease in employee compensation and benefits was primarily due to a reduction
in commissions incentive accruals and continued efforts to contain personnel
costs through operating efficiencies. The decrease in occupancy and equipment
was primarily due to the closing of the Russell, Kentucky branch and a decrease
in depreciation expense.
The acquisition of London Financial accounted for approximately $89,000, or
88.1%, of the total increase in general, administrative and other expenses.
19
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, 2004 and 2003
Comparison of Results of Operations for the Nine Months Ended September 30, 2004
and 2003 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $1.8 million for the nine months
ended September 30, 2004, a decrease of $1.0 million, or 36.0%, compared to the
nine months ended September 30, 2003. This decrease was primarily attributable
to a $3.3 million, or 35.7%, decrease in pre-tax earnings. The Corporation's
effective tax rates amounted to 31.0% and 31.2% for the nine-month periods ended
September 30, 2004 and 2003, respectively. The Corporation's effective tax rate
differs from the 34% statutory corporate tax rate due to the tax-exempt nature
of earnings on bank-owned life insurance.
Comparison of Results of Operations for the Three Months Ended September 30,
2004 and 2003
General
Camco's net earnings for the three months ended September 30, 2004 totaled $1.5
million, a decrease of $118,000, or 7.4%, from the $1.6 million of net earnings
reported in the comparable 2003 period. The decrease in earnings was primarily
attributable to a decrease of $509,000 in other income and an increase of
general, administrative and other expense of $376,000 which were partially
offset by an increase in net interest income of $719,000 and a decrease in
federal income tax expense of $48,000.
Net Interest Income
Total interest income amounted to $13.5 million for the three months ended
September 30, 2004, an increase of $131,000, or 1.0%, compared to the
three-month period ended September 30, 2003, generally reflecting the effects of
an increase in average balance of interest-earning assets outstanding quarter to
quarter of $46.6 million or 4.6% offset partially by a decrease in yield on
total interest-earning assets of 19 basis points, from 5.31% in the 2003 period
to 5.12% in the 2004 period.
Interest income on loans totaled $11.9 million for the three months ended
September 30, 2004, an increase of $65,000, or .6%, from the comparable 2003
period. The increase resulted primarily from a $85.2 million, or 10.9%, increase
in the average balance outstanding offset partially by a 56 basis point decrease
in the average yield to 5.46% in the 2004 period. Interest income on
mortgage-backed securities totaled $833,000 for the three months ended September
30, 2004, a $97,000, or 13.2%, increase from the 2003 quarter. The increase was
due primarily to a 118 basis point increase in the average yield, to 3.58% for
the 2004 period, offset partially by a $29.6 million, or 24.1%, decrease in the
average balance outstanding in the 2004 period. Interest income on investment
securities decreased by $96,000, or 31.5%, due primarily to an $10.6 million
decrease in the average balance outstanding, coupled with a 15 basis point
decrease in the average yield to 3.06% in the 2004 period. Interest income on
other interest-earning assets increased by $65,000, or 12.8%, due primarily to
an increase in the average yield to 3.66% in the 2004 quarter as compared to
3.33% for the three months ended September 30, 2003, coupled with an increase in
the average balance outstanding of $1.6 million, or 2.7%.
20
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, 2004 and 2003
Comparison of Results of Operations for the Three Months Ended September 30,
2004 and 2003 (continued)
Net Interest Income (continued)
Interest expense on deposits totaled $3.6 million for the three months ended
September 30, 2004, a decrease of $257,000, or 6.7%, compared to the same
quarter in 2003, due primarily to a 28 basis point decrease in the average cost
of deposits to 2.09% in the current quarter, and a $37.2 million, or 5.8%,
increase in average deposits outstanding. Interest expense on borrowings totaled
$3.5 million for the three months ended September 30, 2004, a decrease of
$331,000, or 8.7%, from the same 2003 three-month period. The decrease resulted
primarily from a 74 basis point decrease in the average cost of borrowings to
4.79%, partially offset by a $14.8 million, or 5.3%, increase in the average
balance outstanding year to year. The decline in interest expense on FHLB
advances was due primarily to a December 2003 debt restructuring of $25.4
million of FHLB borrowings which carried an average fixed rate of 5.41%. The
borrowings were replaced with variable rate advances having a weighted average
rate of approximately 1.88% as of September 30, 2004.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $719,000, or 12.6%, to a total of $6.4 million
for the three months ended September 30, 2004. The interest rate spread
increased to approximately 2.22% at September 30, 2004, from 1.99% at September
30, 2003, while the net interest margin increased to approximately 2.44% for the
three months ended September 30, 2004, compared to 2.26% for the 2003 period.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market areas,
and other factors related to the collectibility of the Bank's loan portfolio.
Based upon an analysis of these factors, management recorded a provision for
losses on loans totaling $255,000 for the three months ended September 30, 2004,
which is equal to the provision in the 2003 quarter. Management believes all
classified loans are adequately collateralized, however, there can be no
assurance that the loan loss allowance will be adequate to absorb losses on
known classified assets or that the allowance will be adequate to cover losses
on classified assets in the future.
Other Income
Other income totaled $1.9 million for the three months ended September 30, 2004,
a decrease of $509,000, or 21.0%, from the comparable 2003 period. The decrease
in other income was primarily attributable to a $358,000 decrease in gain on
sale of loans, a $321,000 decrease in late charges, rent and other. The decrease
in gain on sale of loans was due primarily to the $28.6 million, or 59.3%,
decrease in sales volume. The reduction in late charges, rent and other was due
primarily to reduced title premiums and other fees on loans due to the decline
in loans originated in 2004. The Corporation's gain on sale of loans are subject
to the cyclical changes in the overall level of interest rates in the economy.
Management believes that the rise in home mortgage interest rates from the
historical lows over the last nine months has had a dampening effect on the
Corporation's net earnings. Management believes that higher home
21
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, 2004 and 2003
Comparison of Results of Operations for the Three Months Ended September 30,
2004 and 2003 (continued)
Other Income (continued)
mortgage rates will continue to reduce the Corporation's originations of
primarily fixed rate mortgage loans and also probably will diminish the gains
derived from the sale of those loans in the secondary market. The origination of
adjustable rate home loans generally increases during a period of rising
interest rates and, after a period of time, borrowers have historically come
back into the home purchase and construction market using fixed rate loans to
finance their homes. As evidenced in the most recent quarter, over time, this
shift in assets transfer earnings from gains on sales to net interest income for
the Bank.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.9 million for the three
months ended September 30, 2004, an increase of $376,000, or 6.8%, from the
comparable quarter in 2003. The increase was primarily due to a $641,000, or
54.0% decrease in direct loan origination costs (FAS 91), an increase of
$197,000 or 103.7% in advertising, offset partially by a decrease of $339,000 or
9.3%, in employee compensation and benefits, a decrease of $79,000, or 21.8%, in
franchise taxes and a decrease of $69,000, or 7.4%, in occupancy and equipment.
The decline in direct loan origination costs pursuant to FAS 91 relates directly
to the decline in residential loan production. The increase in advertising was
primarily due to hiring an advertising agency to better manage the Corporation's
marketing effort to uniformly promote our brand and key product offerings. The
decrease in employee compensation and benefits was primarily due to a reduction
in commissions incentive accruals and continued efforts to contain personnel
costs through operating efficiencies. The decrease in franchise tax was due to a
lower taxable capital base in 2004 compared to the 2003 quarter. The decrease in
occupancy and equipment was primarily due to the closing of the Russell,
Kentucky branch and a reduction in depreciation expense.
Federal Income Taxes
The provision for federal income taxes totaled $670,000 for the three months
ended September 30, 2004, a decrease of $48,000, or 6.7%, compared to the three
months ended September 30, 2003. This decrease was primarily attributable to a
$166,000, or 7.2%, decrease in pre-tax earnings. The Corporation's effective tax
rates amounted to 31.3% and 31.2% for the three-month periods ended September
30, 2004 and 2003, respectively. The Corporation's effective tax rate differs
from the statutory corporate rate due to the tax-exempt nature of earnings on
bank owned life insurance.
Subsequent Event
During the month of October 2004, the Bank sold two properties that generated a
pre-tax gain of $535,000. Both properties were associated with our continued
effort to consolidate in our markets where appropriate. One office was in our
Cincinnati/Northern Kentucky marketplace, and involved the moving of deposits to
another office within close proximity. In this case, the sale involved the
building and not loans or deposits. The other office was in our Dover/New
Philadelphia marketplace, and involved moving our loan production office staff
into available space within an existing branch office. We believe these
consolidation efforts will increase efficiencies and customer services, while at
the same time reduce unnecessary expenses associated with these additional
offices.
22
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, 2004 and 2003
Liquidity and Capital Resources
Camco, like other financial institutions, is required under applicable federal
regulations to maintain sufficient funds to meet deposit withdrawals, loan
commitments and expenses. Liquid assets consist of cash and interest-bearing
deposits in other financial institutions, investments and mortgage-backed
securities. Management monitors and assesses liquidity needs daily in order to
meet deposit withdrawals, loan commitments and expenses.
The primary sources of funds include deposits, borrowings and principal and
interest repayments on loans. Other funding sources include Federal Home Loan
Bank advances.
The following table sets forth information regarding the Bank's obligations and
commitments to make future payments under contract as of September 30, 2004.
PAYMENTS DUE BY PERIOD
LESS MORE
THAN 1-3 3-5 THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
(In thousands)
Contractual obligations:
Operating lease obligations $ 178 $ 192 $ 118 $ 200 $ 688
Advances from the Federal Home Loan (1) 8,612 11,824 35,782 193,501 249,719
Certificates of deposit 206,031 151,456 44,887 1,772 404,146
Amount of commitments expiring per period
Commitments to originate loans:
Overdraft lines of credit 778 - - - 778
Home equity lines of credit 67,160 - - - 67,160
Commercial lines of credit 5,066 - - - 5,066
One- to four-family and multi-family loans 2,342 - - - 2,342
Non-residential real estate and land loans 192 - - - 192
-------- -------- ------- -------- --------
Total contractual obligations $290,359 $163,472 $80,787 $195,473 $730,091
======== ======== ======= ======== ========
(1) Fully secured asset borrowings totaling $42.0 million are not included.
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
There has been no material change in the Corporation's market risk since the
Corporation's Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2003.
23
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, 2004 and 2003
ITEM 4: Controls and Procedures
(a) Camco's Chief Executive Officer and Chief Financial Officer evaluated
the effectiveness of the disclosure controls and procedures (as defined under
Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as
amended) as of September 30, 2004. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that Camco's
disclosure controls and procedures are effective.
(b) There were no changes in Camco's internal control over financial
reporting during the quarter ended September 30, 2004, which materially affected
or are reasonably likely to materially affect the internal controls over
financial reporting.
24
Camco Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits
Exhibits:
Exhibit 10 Purchase and Assumption Agreement between Advantage
Bank and Peoples Bank, National Association
Exhibit 31(i) Section 302 certification by Chief Executive Officer
Exhibit 31(ii) Section 302 Certification by Chief Financial Officer
Exhibit 32(i) Section 1350 certification by Chief Executive Officer
Exhibit 32(ii) Section 1350 certification by Chief Financial Officer
25
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 5, 2004 By: /s/ Richard C. Baylor
-------------------------
Richard C. Baylor
Chief Executive Officer
Date: November 5, 2004 By: /s/ Mark A. Severson
-------------------------
Mark A. Severson
Chief Financial Officer
26