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 June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0110823
-------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6901 Glenn Highway, Cambridge, Ohio 43725-9757
--------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of August 3, 2005, the latest practicable date, 7,639,782 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 26
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 (Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Quantitative and Qualitative Disclosures about
Market Risk 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)
JUNE 30, DECEMBER 31,
2005 2004
ASSETS
Cash and due from banks $ 22,979 $ 25,849
Interest-bearing deposits in other financial institution 13,799 17,045
----------- -----------
Cash and cash equivalents 36,778 42,894
Investment securities available for sale - at market 35,786 19,839
Investment securities held to maturity - at cost, approximate market
value of $1,167 and $4,174 as of June 30, 2005 and December 31,
2004, respectively 1,122 4,123
Mortgage-backed securities available for sale - at market 72,882 80,321
Mortgage-backed securities held to maturity - at cost, approximate market
value of $3,707 and $4,188 as of June 30, 2005 and December 31,
2004, respectively 3,728 4,146
Loans held for sale - at lower of cost or market 3,441 2,837
Loans receivable - net 841,191 833,829
Office premises and equipment - net 11,500 11,647
Real estate acquired through foreclosure 2,238 2,280
Federal Home Loan Bank stock - at cost 26,400 25,797
Accrued interest receivable 4,710 4,503
Prepaid expenses and other assets 1,765 1,530
Cash surrender value of life insurance 20,416 20,042
Goodwill - net of accumulated amortization 6,683 6,736
Prepaid federal income taxes 717 5,299
----------- -----------
Total assets $ 1,069,357 $ 1,065,823
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 669,283 $ 667,778
Advances from the Federal Home Loan Bank 298,295 295,310
Advances by borrowers for taxes and insurance 1,182 3,030
Accounts payable and accrued liabilities 5,069 5,391
Dividends payable 1,108 1,109
Deferred federal income taxes 3,764 3,884
----------- -----------
Total liabilities 978,701 976,502
Stockholders' equity
Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding - -
Common stock - $1 par value; authorized 14,900,000 shares; 8,785,272 and
8,759,676 shares issued at June 30, 2005 and December 31, 2004, respectively 8,785 8,760
Additional paid-in capital 59,163 58,935
Retained earnings - substantially restricted 40,267 38,234
Accumulated other comprehensive income (loss) - unrealized gains (losses) on
securities designated as available for sale, net of related tax effects (591) (263)
Less 1,141,525 and 1,096,523 shares of treasury stock at June 30, 2005
and December 31, 2004, respectively - at cost (16,968) (16,345)
----------- -----------
Total stockholders' equity 90,656 89,321
----------- -----------
Total liabilities and stockholders' equity $ 1,069,357 $ 1,065,823
=========== ===========
3
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
Interest income
Loans $ 24,273 $ 22,884 $ 12,311 $ 11,469
Mortgage-backed securities 1,493 1,398 742 791
Investment securities 442 385 257 203
Interest-bearing deposits and other 1,258 1,047 651 522
-------- -------- -------- --------
Total interest income 27,466 25,714 13,961 12,985
Interest expense
Deposits 7,289 6,652 3,786 3,303
Borrowings 5,280 6,715 2,646 3,406
-------- -------- -------- --------
Total interest expense 12,569 13,367 6,432 6,709
-------- -------- -------- --------
Net interest income 14,897 12,347 7,529 6,276
Provision for losses on loans 600 510 360 255
-------- -------- -------- --------
Net interest income after provision for
losses on loans 14,297 11,837 7,169 6,021
Other income
Late charges, rent and other 1,460 1,240 715 600
Loan servicing fees 749 765 371 379
Service charges and other fees on deposits 720 599 386 327
Mortgage servicing rights - net 9 (73) (42) 29
Gain on sale of loans 349 490 179 214
Gain (loss) on sale of real estate acquired through foreclosure 34 118 25 131
Gain on sale of fixed assets 6 3 - 3
Gain on investment securities transactions 13 97 - 20
-------- -------- -------- --------
Total other income 3,340 3,239 1,634 1,703
General, administrative and other expense
Employee compensation and benefits 6,873 6,854 3,427 3,374
Deferred compensation and benefits (FAS 91) (1,098) (1,186) (616) (702)
Occupancy and equipment 1,560 1,702 763 828
Data processing 678 667 347 325
Advertising 532 435 303 181
Franchise taxes 146 507 67 294
Other operating 2,685 2,385 1,519 1,194
-------- -------- -------- --------
Total general, administrative and other expense 11,376 11,364 5,810 5,494
-------- -------- -------- --------
Earnings before federal income taxes 6,261 3,712 2,993 2,230
Federal income taxes
Current 2,053 1,085 994 674
Deferred (49) 60 (41) 24
-------- -------- -------- --------
Total federal income taxes 2,004 1,145 953 698
-------- -------- -------- --------
NET EARNINGS $ 4,258 $ 2,567 $ 2,040 $ 1,532
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ .56 $ .35 $ .27 $ .21
======== ======== ======== ========
Diluted $ .55 $ .35 $ .26 $ .21
======== ======== ======== ========
4
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
Net earnings $ 4,258 $ 2,567 $ 2,040 $ 1,532
Other comprehensive income (loss), net of related tax effects:
Unrealized holding gains(losses) during the period, net of tax
benefits of $(165), $(758), $347 and $(925) for the respective
periods (319) (1,471) 673 (1,796)
Reclassification adjustment for realized gains included in earnings,
net of taxes of $4 and $33 for the respective six month periods and
$0 and $7 for each of the three month periods ended June 30, 2005
and 2004, respectively (9) (64) - (13)
------- ------- ------- -------
Comprehensive income (loss) $ 3,930 $ 1,032 $ 2,713 $ (277)
======= ======= ======= =======
5
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 4,258 $ 2,567
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Amortization of deferred loan origination fees 31 (58)
Amortization of premiums and discounts on investment and mortgage-backed
securities - net 254 624
Amortization of mortgage servicing rights - net 456 823
Amortization of purchase accounting adjustments - net (44) (44)
Depreciation and amortization 621 725
Provision for losses on loans 600 510
Federal Home Loan Bank stock dividends (603) (490)
(Gain) loss on sale of real estate acquired through foreclosure (34) (118)
Gain on sale of office premises and equipment (6) (3)
Gain on investment securities transactions (13) (97)
Gain on sale of loans (349) (490)
Loans originated for sale in the secondary market (33,825) (57,063)
Proceeds from sale of loans in the secondary market 33,570 58,205
Increase (decrease) in cash due to changes in:
Accrued interest receivable (207) (73)
Prepaid expenses and other assets (182) (541)
Accrued interest and other liabilities (271) 140
Federal income taxes:
Current 4,582 872
Deferred 49 (60)
--------- ---------
Net cash provided by operating activities 8,887 5,429
Cash flows provided by (used in) investing activities:
Proceeds from maturities of investment securities and interest-bearing deposits 8,000 11,500
Proceeds from sale of mortgage-backed securities designated as available for sale 12,748
Proceeds from sale of investment securities designated as available for sale 27 1,561
Purchase of investment securities designated as available for sale (21,088) (13,997)
Purchase of mortgage-backed securities designated as held to maturity -
Purchase of mortgage-backed securities designated as available for sale (3,348) (43,301)
Principal repayments on mortgage-backed securities 10,582 17,698
Loan principal repayments 147,045 116,386
Loan disbursements (152,313) (137,954)
Purchase of loans (4,730) (16,943)
Additions to office premises and equipment (475) (430)
Additions to real estate acquired through foreclosure (23) (17)
Proceeds from sale of real estate acquired through foreclosure 1,693 2,897
Proceeds from sale of office premises and equipment 7 3
Net increase in cash surrender value of life insurance (374) (346)
--------- ---------
Net cash used in investing activities (14,997) (50,195)
--------- ---------
Net cash provided by (used in) operating and investing activities
(balance carried forward) (6,110) (44,766)
--------- ---------
6
CAMCO FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2005 2004
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ (6,110) $(44,766)
Cash flows provided by (used in) financing activities:
Net decrease in deposits 1,505 6,293
Proceeds from Federal Home Loan Bank advances 10,000 33,150
Repayment of Federal Home Loan Bank advances (7,015) (6,173)
Dividends paid on common stock (2,225) (2,136)
Purchase of treasury stock (623) -
Proceeds from exercise of stock options 200 284
Decrease in advances by borrowers for taxes and insurance (1,848) (2,171)
-------- --------
Net cash provided by (used in) financing activities (6) 29,247
-------- --------
Net decrease in cash and cash equivalents (6,116) (15,519)
Cash and cash equivalents at beginning of period 42,894 53,711
-------- --------
Cash and cash equivalents at end of period $ 36,778 $ 38,192
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings $ 14,389 $ 13,484
======== ========
Income taxes $ - $ 290
======== ========
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available for sale,
net of related tax benefits $ (319) $ (1,535)
======== ========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 466 $ 750
======== ========
Transfers from loans to real estate acquired through foreclosure $ 2,390 $ 3,734
======== ========
Issuance of loans upon sale of real estate acquired through foreclosure $ 796 $ 690
======== ========
Dividends declared but unpaid $ 1,108 $ 1,067
======== ========
7
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six- and three-month periods ended June 30, 2005 and 2004
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-Q and, therefore, do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with accounting principles generally accepted in the United States of
America ("US GAAP"). Accordingly, these financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto of Camco Financial Corporation ("Camco" or the "Corporation")
included in Camco's Annual Report on Form 10-K for the year ended December
31, 2004. However, all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of the consolidated financial statements, have been included.
The results of operations for the six- and three-month periods ended June
30, 2005, are not necessarily indicative of the results which may be
expected for the entire year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Camco and its two wholly-owned subsidiaries: Advantage Bank ("Advantage"
or the "Bank") and Camco Title Agency, Inc.
3. Critical Accounting Policies
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as disclosures found elsewhere in this quarterly
report, are based upon Camco's consolidated financial statements, which
are prepared in accordance with US GAAP. The preparation of these
financial statements requires Camco to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses.
Several factors are considered in determining whether or not a policy is
critical in the preparation of financial statements. These factors
include, among other things, whether the estimates are significant to the
financial statements, the nature of the estimates, the ability to readily
validate the estimates with other information including third parties or
available prices, and sensitivity of the estimates to changes in economic
conditions and whether alternative accounting methods may be utilized
under US GAAP.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses, the valuation of mortgage servicing rights and goodwill
impairment. Actual results could differ from those estimates.
ALLOWANCE FOR LOAN LOSSES
The procedures for assessing the adequacy of the allowance for loan losses
reflect our evaluation of credit risk after careful consideration of all
information available to us. In developing this assessment, we must rely
on estimates and exercise judgment regarding matters where the ultimate
outcome is unknown such as economic factors, developments affecting
companies in specific industries and issues with respect to single
borrowers. Depending on changes in circumstances, future assessments of
credit risk may yield materially different results, which may require an
increase or a decrease in the allowance for loan losses.
8
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
3. Critical Accounting Policies (continued)
ALLOWANCE FOR LOAN LOSSES (continued)
The allowance is regularly reviewed by management to determine whether the
amount is considered adequate to absorb probable losses. This evaluation
includes specific loss estimates on certain individually reviewed loans,
statistical loss estimates for loan pools that are based on historical
loss experience, and general loss estimates that are based upon the size,
quality, and concentration characteristics of the various loan portfolios,
adverse situations that may affect a borrower's ability to repay, and
current economic and industry conditions. Also considered as part of that
judgement is a review of the Bank's trends in delinquencies and loan
losses, as well as trends in delinquencies and losses for the region and
nationally, and economic factors.
The allowance for loan losses is maintained at a level believed adequate
by management to absorb probable losses inherent in the loan portfolio.
Management's evaluation of the adequacy of the allowance is an estimate
based on management's current judgement about the credit quality of the
loan portfolio. While the Corporation strives to reflect all known risk
factors in its evaluations, judgment errors may occur.
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 six- and three-month periods ended June 30, 2005 and 2004
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 ("DCF")
approach. The application of the valuation techniques take into account
the reporting unit's operating history, the current market environment and
future prospects. As of the most recent quarter, the only reporting unit
carrying goodwill is the Bank.
If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and no second
step is required. If not, a second test is required to measure the amount
of goodwill impairment. The second test of the overall goodwill impairment
compares the implied fair value of the reporting unit goodwill with the
carrying amount of the goodwill. The impairment loss shall equal the
excess of carrying value over fair value.
After each testing period, the third party compiles a summary of the test
that is then provided to the Audit Committee for review.
SUMMARY
Management believes the accounting estimates related to the allowance for
loan losses, the capitalization, amortization, and valuation of mortgage
servicing rights and the goodwill impairment test are "critical accounting
estimates" because: (1) the estimates are highly susceptible to change
from period to period because they require management to make assumptions
concerning the changes in the types and volumes of the portfolios, rates
of future prepayments, and anticipated economic conditions, and (2) the
impact of recognizing an impairment or loan loss could have a material
effect on Camco's assets reported on the balance sheet as well as its net
earnings. Management has discussed the development and selection of these
critical accounting estimates with the Audit Committee of the Board of
Directors and the Audit Committee has reviewed Camco's disclosures
relating to such matters in the quarterly Management's Discussion and
Analysis.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
4. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Corporation's stock
option plans. The computations are as follows:
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
Weighted-average common shares
outstanding (basic) 7,668,909 7,351,487 7,660,120 7,357,635
Dilutive effect of assumed exercise
of stock options 23,719 55,269 21,066 46,294
--------- --------- --------- ----------
Weighted-average common shares
outstanding (diluted) 7,692,628 7,406,756 7,681,186 7,403,929
========= ========= ========= ==========
Anti-dilutive options to purchase 167,879 and 80,789 shares of common
stock with respective weighted-average exercise prices of $16.46 and
$16.40 were outstanding at June 30, 2005 and 2004, respectively, but were
excluded from the computation of common share equivalents for each of the
six month periods then ended, because the exercise prices were greater
than the average market price of the common shares.
Anti-dilutive options to purchase 211,650 and 80,789 shares of common
stock with respective weighted-average exercise prices of $16.08 and
$16.40 were outstanding at June 30, 2005 and 2004, respectively, but were
excluded from the computation of common share equivalents for each of the
three month periods then ended, because the exercise prices were greater
than the average market price of the common shares.
5. Stock Option Plans
Under the 2002 Stock OptionPlan, 400,000 shares were reserved for
issuance. Additionally, in connection with the acquisition of First
Savings, the stock options of First Savings were converted into options to
purchase 174,421 shares of the Corporation's stock at an exercise price of
$7.38 per share, which expire in 2005. In connection with the 2000
acquisition of Westwood Homestead 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
5. Stock Option Plans (continued)
The Corporation utilizes APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for the plans. Had compensation cost for the
Corporation's stock option plans been determined based on the fair value
at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net earnings
and earnings per share for the three-month periods ended June 30, 2005 and
2004, would have been reported as the pro forma amounts indicated below:
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
Net earnings (In thousands) As reported $4,258 $ 2,567 $2,040 $ 1,532
Stock-based compensation, net of tax (42) (14) (21) (7)
------ -------- ------ --------
Pro-forma $4,216 $ 2,553 $2,019 $ 1,525
====== ======== ====== ========
Earnings per share
Basic As reported $ .56 $ .35 $ .27 $ .21
Stock-based compensation, net of tax (.01) - (.01) -
------ -------- ------ --------
Pro-forma $ .55 $ .35 $ .26 $ .21
====== ======== ====== ========
Diluted As reported $ .55 $ .35 $ .26 $ .21
Stock-based compensation, net of tax - (.01) - -
------ -------- ------ --------
Pro-forma $ .55 $ .34 $ .26 $ .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 2005 and 2004: dividend yield of 3.80%,
and 3.40% respectively; expected volatility of 18.76% and 21.44%
respectively; a risk-free interest rate of 4.22% and 4.11% respectively,
and an expected life of ten years for all grants.
12
CAMCO FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
5. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of June
30, 2005 and December 31, 2004, and changes during the periods ending on
those dates is presented below:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2005 2004
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
Outstanding at beginning of year 218,324 $ 12.91 257,072 $ 12.11
Granted 87,240 16.51 17,705 17.17
Exercised (25,595) 7.83 (52,911) 8.83
Forfeited (1,553) 14.89 (3,542) 15.03
------- --------- ------- ---------
Outstanding at end of year 278,416 $ 14.49 218,324 $ 12.91
======= ========= ======= =========
Options exercisable at year-end 189,080 $ 13.57 175,542 $ 12.05
======= ========= ======= =========
Weighted-average fair value of
options granted during the year $ 2.89 $ 3.59
========= =========
The following information applies to options outstanding at June 30, 2005:
Number outstanding 21,911
Range of exercise prices $ 7.40 - 8.94
Number outstanding 38,575
Range of exercise prices $ 9.75 - 11.36
Number outstanding 50,051
Range of exercise prices $12.50 - 14.65
Number outstanding 167,879
Range of exercise prices $16.13 - 17.17
Weighted-average exercise price $ 14.49
Weighted-average remaining contractual life 6.9 years
6. Forward Looking Statements
Certain statements contained in this report that are not historical facts
are forward looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans,"
"expects," "believes," and similar expressions as they relate to Camco or
its management are intended to identify such forward looking statements.
Camco's actual results, performance or achievements may materially differ
from those expressed or implied in the forward-looking statements. Risks
and uncertainties that could cause or contribute to such material
differences include, but are not limited to, general economic conditions,
interest rate environment, competitive conditions in the financial
services industry, changes in law, governmental policies and regulations,
and rapidly changing technology affecting financial services.
13
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six- and three-month periods ended June 30, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to June 30,
2005
At June 30, 2005, Camco's consolidated assets totaled $1.1 billion, an increase
of $3.5 million, or .3%, from the December 31, 2004 total. The increase in total
assets was comprised primarily of increases in investments available for sale
and loans receivable, as excess cash was redeployed into higher interest earning
assets.
Cash and interest-bearing deposits in other financial institutions totaled $36.8
million at June 30, 2005, a decrease of $6.1 million, or 14.3%, from December
31, 2004 levels. Investment securities totaled $36.9 million at June 30, 2005,
an increase of $12.9, or 54.0%, from the total at December 31, 2004. Investment
securities purchases totaled $21.1 million, while maturities totaled $8.0
million and sales totaled $13,000. Purchases were comprised primarily of
intermediate-term callable U.S. Government agency obligations with an average
yield of 3.96%. Investments available for sale have been purchased during the
first six months in order to take advantage of shorter duration assets in a
rising interest rate environment.
Mortgage-backed securities totaled $76.6 million at June 30, 2005, a decrease of
$7.9 million, or 9.3%, from December 31, 2004. Mortgage-backed securities
purchases totaled $3.3 million, while principal repayments totaled $10.6 million
during the six-month period ended June 30, 2005. Purchases of mortgage-backed
securities during the period were comprised primarily of short duration
mortgage-backed securities yielding 4.17%, all of which were classified as
available for sale.
Loans receivable, including loans held for sale, totaled $844.6 million at June
30, 2005, an increase of $8.0 million, or 1.0%, from December 31, 2004. The
increase resulted primarily from loan disbursements and purchases totaling
$190.9 million, which were partially offset by principal repayments of $147.0
million and loan sales of $33.2 million. The volume of loans originated and
purchased during the first six months of 2005 decreased compared to the 2004
period by $21.1 million, or 10.0%, and the volume of loan sales also decreased
by $24.5 million, or 42.4%, period to period. The decrease in total loans
originated and purchased is primarily attributable to a decrease in loans
originated for sale in the secondary market. As long term rates have risen,
production levels have dropped on fixed rate loans with an increase in the
production of adjustable rate loans for portfolio. Camco has typically held
adjustable-rate mortgage loans in its portfolio as an integral part of its
strategy to build interest rate sensitive assets for interest rate risk
purposes. Loan originations during the six-month period ended June 30, 2005,
were comprised primarily of $80.0 million of loans secured by one- to
four-family residential real estate, $46.6 million in consumer and other loans
and $64.3 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.
14
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the six- and three-month periods ended June 30, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to June 30,
2005 (continued)
The allowance for loan losses totaled $6.5 million at June 30, 2005 and December
31, 2004, representing 69.7% and 66.1% of nonperforming loans, respectively, at
those dates. Nonperforming loans (90 days or more delinquent plus nonaccrual
loans) totaled $9.4 million and $9.8 million at June 30, 2005 and December 31,
2004, respectively, constituting 1.11% and 1.17% of total net loans, including
loans held for sale, at those dates. At June 30, 2005, nonperforming loans were
comprised of $5.0 million in one- to four-family residential real estate loans,
$2.6 million of consumer and non-residential loans and $1.8 million in
commercial and multi-family real estate 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 $5.8 million at June 30, 2005, compared to
$12.3 million at December 31, 2004, a decrease of $6.5 million, or 52.8%. The
decrease was primarily due to loans being paid current in the six month period
ending June 30, 2005. Although management believes that its allowance for loan
losses is adequate based upon the available facts and circumstances at June 30,
2005, there can be no assurance that increased provisions will not be necessary
in future periods, which could adversely affect Camco's results of operations.
Deposits totaled $669.3 million at June 30, 2005, an increase of $1.5 million,
or .2%, from the total at December 31, 2004. The increase in deposits was due to
a $19.1 million increase of certificates of deposit and $3.0 million in non
interest bearing checking accounts, partially offset by a $12.5 million decrease
in interest bearing checking accounts, $5.4 million decrease in money market
accounts and $2.8 million decrease in passbook and statement savings. The
increase in certificates of deposit is a result of the Bank actively pursuing
the extension of deposit maturities in a rising rate environment, while the
decrease in interest bearing checking accounts, money market accounts and
savings was due to highly competitive pricing in the Bank's market area.
Stockholders' equity totaled $90.7 million at June 30, 2005, an increase of
$1.3, or 1.5%, from December 31, 2004. The increase resulted primarily from net
earnings of $4.3 million and proceeds from the exercise of stock options of
$253,000, offset partially by dividends of $2.2 million, the purchase of
$623,000 in treasury shares and a increase in the unrealized losses on
securities of $328,000.
15
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Discussion of Financial Condition Changes from December 31, 2004 to June 30,
2005 (continued)
Camco and the Bank are required to maintain minimum regulatory capital pursuant
to federal regulations. At June 30, 2005, the regulatory capital of Camco and
the Bank exceeded all regulatory capital requirements.
The following tables present certain information regarding compliance by
Advantage with applicable regulatory capital requirements at June 30, 2005:
Camco: At June 30, 2005
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- -------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------------- ---------- ------- --------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $90,408 12.5% > or = $58,051 > or = 8.0% N/A N/A
Tier I capital
(to risk-weighted assets) $83,868 11.6% > or = $29,026 > or = 4.0% N/A N/A
Tier I leverage $83,868 7.9% > or = $42,378 > or = 4.0% N/A N/A
Advantage: At June 30, 2005
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- -------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------------- ---------- -------------- -----------
(Dollars in thousands)
Total capital
(to risk-weighted assets) $81,005 11.2% > or = $57,928 > or = 8.0% > or = $72,410 > or = 10.0%
Tier I capital
(to risk-weighted assets) $74,465 10.3% > or = $28,964 > or = 4.0% > or = $43,446 > or = 6.0%
Tier I leverage $74,465 7.1% > or = $41,967 > or = 4.0% > or = $52,459 > 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.
Comparison of Results of Operations for the Six Months Ended June 30, 2005 and
2004
General
Camco's net earnings for the six months ended June 30, 2005 totaled $4.3
million, an increase of $1.7 million, or 65.9%, from the $2.6 million of net
earnings reported in the comparable 2004 period. The increase in earnings was
primarily attributable to a $2.6 million or 20.7% increase in net interest
income, which was partially offset by an increase in the provision for loan
losses of $90,000 or 17.6%, a $858,000 or 74.9% increase in the provision of
federal income tax and a $301,000 or 12.9% increase in other operating costs.
16
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Six Months Ended June 30, 2005 and
2004 (continued)
Net Interest Income
Total interest income amounted to $27.5 million for the six months ended June
30, 2005, an increase of $1.8 million, or 6.8%, compared to the six-month period
ended June 30, 2004, generally reflecting the effects of an increase in yield on
total interest-earning assets of 30 basis points, from 5.14% in the 2004 period
to 5.44% in 2005, and a $8.8 million or .9%, increase in the average balance of
interest-earning assets outstanding year to year.
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table presents for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resulting
yields, and the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. The table does
not reflect any effect of income taxes. Balances are based on the average of
month-end balances which, in the opinion of management, do not differ materially
from daily balances.
FOR SIX MONTHS ENDED JUNE 30,
2005 2004
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $ 842,347 $ 24,273 5.76% $ 850,536 $ 22,884 5.58%
Mortgage-backed securities (2) 80,439 1,493 3.71 90,241 1,398 3.10
Investment securities (2) 27,529 442 3.21 28,228 385 2.73
Interest-bearing deposits and other
interest-earning assets 59,437 1,258 4.23 31,903 1,047 3.38
----------- -------- ----------- --------
Total interest-earning assets $ 1,009,752 27,466 5.44 $ 1,000,908 25,714 5.14
=========== ===========
Interest-bearing liabilities:
Deposits $ 644,082 7,289 2.26 $ 647,686 6,652 2.05
FHLB advances 291,590 5,280 3.62 272,416 6,715 4.93
----------- -----------
Total interest-bearing liabilities $ 935,672 12,569 2.69 $ 920,102 13,367 2.91
=========== -------- ---- =========== --------
Net interest income/Interest rate spread $ 14,897 2.75% $ 12,347 2.23%
======== ==== ======== =====
NET INTEREST MARGIN (3) 2.95% 2.47%
==== =====
Average interest-earning assets to average
interest-bearing liabilities 107.9% 108.8%
===== =====
---------------------------
(1) Includes nonaccrual loans and loans held for sale.
(2) Includes securities designated as available for sale.
(3) Net interest income as a percent of average interest-earning assets.
17
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Six Months Ended June 30, 2005 and
2004 (continued)
Interest income on loans totaled $24.3 million for the six months ended June 30,
2005, an increase of $1.4 million or 6.1% from the comparable 2004 period. The
increase resulted primarily from an 18 basis point increase in the average yield
to 5.76% from 5.58% in 2004, coupled with the increase of average balance
outstanding of $21.8 million or 2.7% in the 2004 period. Interest income on
mortgage-backed securities totaled $1.5 million for the six months ended June
30, 2005, a $95,000 or 6.8% increase from the 2004 period. The increase was due
primarily to a 61 basis point increase in the average yield, to 3.71% for the
2005 period, offset partially by a $9.8 million or 10.9%, decrease in the
average balance outstanding in the 2005 period. Interest income on investment
securities increased by $57,000 or 14.8%, due primarily to a a 48 basis point
increase in the average yield, to 3.21% in the 2005 period offset partially by a
decrease of $699,000 or 2.5% in the average balance outstanding. Interest income
on other interest-earning assets increased by $211,000 or 20.2%, due primarily
to a 85 basis point increase in the average yield, to 4.23% compared to 3.38%
for the six months ended June 30, 2004 which was partially offset by a $2.5
million or 4.0%, decrease in the average balance outstanding.
Interest expense on deposits totaled $7.3 million for the six months ended June
30, 2005, an increase of $637,000 or 9.6%, compared to the same period in 2004,
due primarily to a 21 basis point increase in the average cost of deposits to
2.26% in the current period offset partially by a $3.6 million or .6%, decrease
in average deposits outstanding. Interest expense on borrowings totaled $5.3
million for the six months ended June 30, 2005, a decrease of $1.4 million or
21.4%, from the same 2004 six-month period. The decrease resulted primarily from
a 131 basis point decrease in the average cost of borrowings to 3.62%, offset
partially by a $19.2 million or 7.0%, increase in the average balance
outstanding year to year. The large decrease in the average cost of borrowings
was the result of the December 2004 restructuring of $144.1 million of FHLB
borrowings which carried an average fixed rate of 6.25%. The borrowings were
replaced with various fixed-rate advances having a weighted average rate of
approximately 3.7%. The restructuring transaction positioned itself well in the
balance sheet as a result of recent and continuing efforts to manage towards
shorter duration assets generated from commercial and consumer loans.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $2.6 million or 20.7%, to a total of $14.9
million for the six months ended June 30, 2005. The interest rate spread
increased to approximately 2.75% at June 30, 2005 from 2.23% at June 30, 2004,
while the net interest margin increased to approximately 2.95% for the six
months ended June 30, 2005 compared to 2.47% for the 2004 period.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the Bank,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to the Bank's market areas,
and other factors related to the collectibility of the Bank's loan portfolio.
Based upon an analysis of these factors, management recorded a provision for
losses on loans totaling $600,000 for the six months ended June 30, 2005.
Management believes all classified loans are adequately collateralized or
reserved. 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.
18
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Six Months Ended June 30, 2005 and
2004 (continued)
Other Income
Other income totaled $3.3 million for the six months ended June 30, 2005, an
increase of $101,000, or 3.1%, from the comparable 2004 period. The increase in
other income was primarily attributable to a $220,000 increase in late charges,
rent and other and a $121,000 increase in service charges and other fees on
deposits, and a $82,000 or 112.3% increase in the value of mortgage servicing
rights, which were partially offset by a decrease of $141,000 in gain on sale of
loans and a decrease of $84,000 in gain on sale of real estate acquired through
foreclosure.
The increase in late charges, rent and other was primarily attributable to
prepayment fees, late charge income, and loan fees. The increase in service
charges and other fees was attributable to income related to a new extended
overdraft product. The increase in mortgage servicing rights was due to the slow
down of repayment speeds and the increased value of new production. The decrease
in gain on sale of loans was due to the slowdown in production sold into the
secondary market in the first half of 2005 versus the first half of 2004. During
the first half of 2005, $33.8 million was sold in the secondary market versus
$57.1 million in the first half of 2004. The decrease in gain on sale of real
estate was due to 24 properties sold in 2005 compared to 33 properties sold in
the 2004 period.
General, Administrative and Other Expense
General, administrative and other expense totaled $11.4 million for the six
months ended June 30, 2005, an increase of $12,000 or .1%, from the comparable
period in 2004. The increase in general, administrative and other expense was
due primarily to a $301,000 or 12.9% increase in other operating expense, a
$88,000, or 7.4%, increase in FAS 91 deferred compensation and an increase of
$97,000 or 22.3% in advertising. The increase was partially offset by a decrease
of $361,000 or 71.2% in franchise tax, and a $142,000 or 8.3% decrease in
occupancy and equipment. The increase in other operating expense was primarily
due to the accrual of $275,000 for the proposed settlement of litigation. The
increase in deferred compensation relates to FAS 91 and the decline in
residential loan production and the increase in advertising is primarily due to
hiring an advertising agency to better manage the Company's marketing effort to
uniformly promote our brand and key product offerings. The decrease in frachise
tax was primarily due to acquiring London Financial Corporation in August of
2004 and changing charters to a state chartered commercial bank. This is a one
time savings which will only occur in 2005. The decrease in occupancy and
equipment was due primarily to the sale of our Kentucky division, consisting of
two branches, in December of 2004 and a decrease in depreciation expense.
Federal Income Taxes
The provision for federal income taxes totaled $2.0 million for the six months
ended June 30, 2005, an increase of $858,000 or 74.9%, compared to the six
months ended June 30, 2004. This increase was primarily attributable to a $2.6
million, or 68.7%, increase in pre-tax earnings. The Corporation's effective tax
rates amounted to 32.0% and 30.9% for the six-month periods ended June 30, 2005
and 2004, respectively.
19
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended June 30, 2005 and
2004
General
Camco's net earnings for the three months ended June 30, 2004 totaled $2.0
million, an increase of $508,000 or 33.2%, from the $1.5 million of net earnings
reported in the comparable 2004 period. The increase in earnings was primarily
attributable to a $1.3 million, or 20.0% increase in net interest income
partially offset by a decrease of $69,000 or 4.1% in other income, and an
increase in general administration and other expense of $316,000 and a increase
in federal income tax expense of $255,000.
Net Interest Income
Total interest income amounted to $14.0 million for the three months ended June
30, 2005, an increase of $976,000 or 7.5%, compared to the three-month period
ended June 30, 2004, generally reflecting the effects of an increase in yield on
total interest-earning assets of 40 basis points, from 5.11% in the 2004 period
to 5.51% in 2005.
Interest income on loans totaled $12.3 million for the three months ended June
30, 2005, an increase of $842,000 or 7.3% from the comparable 2004 period. The
increase resulted primarily from a 30 basis point increase in the average yield
to 5.83% from 5.53% in 2004 coupled with the increase of average balance
outstanding of $15.0 million or 1.8% in the 2005 quarter. Interest income on
mortgage-backed securities totaled $742,000 for the three months ended June 30,
2005, a $49,000 or 6.2% decrease from the 2004 quarter. The decrease was due
primarily to a $19.4 million or 19.8%, decrease in the average balance
outstanding in the 2005 period, partially offset by a 55 basis point increase in
the average yield, to 3.77% for the 2005 period. Interest income on investment
securities increased by $54,000 or 26.6%, due primarily to a 58 basis point
increase in the average yield, to 3.35% in the 2005 period coupled with a $1.4
million increase in the average balance outstanding. Interest income on other
interest-earning assets increased by $129,000 or 24.7%, due primarily to an 86
basis point increase in the average yield, to 4.39% compared to 3.53% for the
three months ended June 30, 2004 coupled with a $184,000 or .3%, increase in the
average balance outstanding.
Interest expense on deposits totaled $3.8 million for the three months ended
June 30, 2005, an increase of $483,000 or 14.6%, compared to the same quarter in
2004, due primarily to a 31 basis point increase in the average cost of deposits
to 2.34% in the current quarter, offset partially by a $3.8 million or .6%,
decrease in average deposits outstanding. Interest expense on borrowings totaled
$2.6 million for the three months ended June 30, 2005, a decrease of $760,000 or
22.3%, from the same 2004 three-month period. The decrease resulted primarily
from a 115 basis point decrease in the average cost of borrowings to 3.66%,
partially offset by a $5.7 million or 2.0%, increase in the average balance
outstanding year to year. The large decrease in the average cost of borrowings
was the result of the December 2004 restructuring of $144.1 million of FHLB
borrowings which carried an average fixed rate of 6.25%. The borrowings were
replaced with various fixed-rate advances having a weighted average rate of
approximately 3.7% as of December 31, 2004. The restructuring transaction
positioned itself well in our balance sheet as a result of our recent and
continuing efforts to manage towards shorter duration assets generated from
commercial and consumer loans.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $1.3 million, or 20.0%, to a total of $7.5
million for the three months ended June 30, 2005. The interest rate spread
increased to approximately 2.76% at June 30, 2005, from 2.24% at June 30, 2004,
while the net interest margin increased to approximately 2.97% for the three
months ended June 30, 2005, compared to 2.47% for the 2004 period.
20
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended June 30, 2005 and
2004 (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 $360,000 for the three months ended June 30, 2005, an
increase of $105,000 or 41.2%, for the comparable period in 2004. The increase
was primarily due to the continued shift in loan portfolio composition to more
commercial and consumer loans that require higher reserve allocations.
Management believes all classified loans are adequately collateralized or
reserved. 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 $1.6 million for the three months ended June 30, 2005, a
decrease of $69,000 or 4.1%, from the comparable 2004 period. The decrease in
other income was primarily attributable to a $106,000 or 80.9%, decrease in gain
on sale of real estate acquired through foreclosure, a decrease of $71,000 or
244.8%, in mortgage servicing rights and a decrease of $35,000 or 16.4%, in gain
on sale of loans. The decreases were partially offset by the increase of
$115,000 or 19.2%, in late charges rent and other. The decrease in gain on sale
of real estate was primarily due to eight less properties sold in 2005. The
decrease in mortgage servicing rights and gain on sale of loans was due to the
decrease in the volume of loans sold of $12.5 million or 39.9%, from the volume
of loans sold in the 2004 period coupled with the slowing of prepayment on the
portfolio. The overall value of mortgage servicing rights increased to 1.26%
from 1.15% as a percent of loans serviced. The increase in late charges, rent
and other was due to prepayment penalty fees, loan fees, and late charge income,
offset partially by a decrease in title insurance premiums at Camco Title
Agencys, Inc.
General, Administrative and Other Expense
General, administrative and other expense totaled $5.8 million for the three
months ended June 30, 2005, an increase of $316,000 or 5.8%, from the comparable
period in 2004. The increase in general, administrative and other expense was
due primarily to an increase of $302,000 or 25.3% in other operating expense, an
increase of $122,000 or 67.4%, in advertising, an $86,000 or 12.3%, increase in
FAS 91 deferred compensation and a $53,000 or 1.6% increase in employee
compensation and benefits, which were partially offset by a $227,000 or 77.2%,
decrease in franchise taxes. The increase in other operating expense was
primarily due to the accrual of $275,000 for the proposed settlement of
ligitagion. The increase in advertising was primarily due to hiring an
advertising agency to better manage the Company's marketing effort to uniformly
promote our brand and key product offerings. The increase in deferred
compensation relates to FAS 91 and the decline in residential loan production
while the increase in employee compensation and benefits was due primarily to an
increase in accruals for end of year incentive and 401(k) profit sharing, as
well as directors compensation. The decrease in frachise tax was primarily due
to acquiring London Financial Corporation in August of 2004 and changing
charters to a state chartered commercial bank. This is a one time savings which
will only occur in 2005.
21
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Comparison of Results of Operations for the Three Months Ended June 30, 2005
and 2004 (continued)
Federal Income Taxes
The provision for federal income taxes totaled $953,000 for the three months
ended June 30, 2004, an increase of $255,000 or 36.5%, compared to the three
months ended June 30, 2004. This increase was primarily attributable to a
$763,000 or 34.2%, increase in pre-tax earnings. The Corporation's effective tax
rates amounted to 31.8% and 31.3% for the three-month periods ended June 30,
2005 and 2004, respectively.
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 included Federal Home Loan
Bank advances and the sale of loans.
The following table sets forth information regarding the Bank's obligations and
commitments to make future payments under contract as of June 30, 2005.
PAYMENTS DUE BY PERIOD
LESS MORE
THAN 1-3 3-5 THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
(In thousands)
Contractual obligations:
Operating lease obligations $ 127 $ 208 $ 76 $ 182 $ 593
Advances from the Federal Home Loan Bank 89,006 82,529 69,293 57,467 298,295
Certificates of deposit 216,557 118,416 44,616 1,394 380,983
Amount of commitments expiration per period
Commitments to originate loans:
Overdraft lines of credit 717 - - - 717
Home equity lines of credit 66,724 - - - 68,978
Commercial lines of credit 10,041 - - - 10,041
One- to four-family and multi-family loans 11,187 - - - 8,933
Non-residential real estate and land loans 442 - - - 442
-------- -------- -------------- ------- --------
Total contractual obligations $394,801 $201,153 $ 113,985 $59,043 $768,982
======== ======== ============== ======= ========
22
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
The objective of the Bank's asset/liability management function is to
maintain consistent growth in net interest income within the Bank's policy
limits. This objective is accomplished through management of the Bank's balance
sheet composition, liquidity, and interest rate risk exposures arising from
changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or unexpected deposit withdrawals. This is accomplished
by maintaining liquid assets in the form of investment securities, maintaining
sufficient unused borrowing capacity and achieving consistent growth in core
deposits.
Management considers interest rate risk the Bank's most significant market
risk. Interest rate risk is the exposure to adverse changes in net interest
income due to changes in interest rates. Consistency of the Bank's net interest
income is largely dependent upon the effective management of interest rate risk.
To identify and manage its interest rate risk, the Bank employs an
earnings simulation model to analyze net interest income sensitivity to changing
interest rates. The model is based on actual cash flows and repricing
characteristics and incorporates market-based assumptions regarding the effect
of changing interest rates on the prepayment rates of certain assets and
liabilities. The model also includes management projections for activity levels
in each of the product lines offered by the Bank. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the model. Assumptions are inherently
uncertain and the measurement of net interest income or the impact of rate
fluctuations on net interest income cannot be precisely predicted. Actual
results may differ from simulated results due to timing, magnitude, and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
The Bank's Asset/Liability Management Committee ("ALCO"), which includes
senior management representatives and reports to the Bank's Board of Directors,
monitors and manages interest rate risk within Board-approved policy limits. The
Bank's current interest rate risk position is determined by measuring the
anticipated change in net interest income over a 12 month horizon assuming a 200
basis point (bp) instantaneous and parallel shift (linear) increase or decrease
in all interest rates. Current policy limits this exposure to plus or minus 25%
of net interest income for a 12-month horizon.
The following table shows the Bank's estimated earnings sensitivity
profile as of June 30, 2005:
CHANGE IN PERCENTAGE CHANGE IN
INTEREST RATES NET INTEREST INCOME
(BASIS POINTS) 12 MONTHS
-------------- --------------------
+200 -12.04%
-200 -11.72%
23
CAMCO FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the six- and three-month periods ended June 30, 2005 and 2004
Given a 200bp linear increase in the yield curve used in the simulation
model, it is estimated net interest income for the Bank would decrease by 12.04%
over one year. A 200bp linear decrease in interest rates would decrease net
interest income by 11.72% over one year. These estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
The Bank's ALCO also monitors the economic value of equity (EVE) ratio, measured
on a static basis at the current period end. Current policy limits the EVE ratio
to a minimum of 4.0%.
The following table shows the EVE ratios as of June 30, 2005:
CHANGE IN
INTEREST RATES
(BASIS POINTS) EVE RATIO
-------------- ---------
+200 6.75%
0 7.98%
-200 7.85%
In order to reduce the exposure to interest rate fluctuations and to
manage liquidity, the Bank has developed sale procedures for several types of
interest-sensitive assets. Generally, all long-term, fixed-rate single family
residential mortgage loans underwritten according to Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA")
guidelines are sold for cash upon origination. A total of $33.2 million and
$57.7 million of such loans were sold to the FHLMC, FNMA and other parties
during the six months ended 2005 and 2004, respectively.
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 June 30, 2005. 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 June 30, 2005, 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
All purchases of shares during the quarter related to the 5% stock
repurchase program announced April 26, 2005.
Maximum Number of
Shares that May yet be
Number of shares Average price paid per Purchased Under the
Period of Repurchase purchased share Program
-------------------- ---------------- ---------------------- ----------------------
April 1 - April 30 0 N/A 383,937
May 1 - 31 45,000 $13.83 338,937
June 1 - 30 0 N/A 338,937
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 26, 2005, Camco held its Annual Meeting of Stockholders. The
only matter that was submitted to stockholders was the election of four
directors for terms expiring in 2008, as follows:
For Withheld
Larry A. Caldwell 6,746,609 144,879
Carson K. Miller 6,742,821 148,667
Samuel W. Speck 6,734,781 156,707
Jeffrey T. Tucker 6,737,612 153,876
The following directors terms continued after the meeting: Richard C.
Baylor, Robert C. Dix, Jr., Terry A. Feick, Susan J. Insley and Paul D.
Leake.
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits
Exhibit 3 Bylaws, as amended
Exhibit 31.1 Section 302 certification by Chief Executive Officer
Exhibit 31.2 Section 302 certification by Chief Financial Officer
Exhibit 32.1 Section 1350 certification by Chief Executive Officer
Exhibit 32.2 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: August 4, 2005 By: /s/ Richard C. Baylor
--------------------------------
Richard C. Baylor
Chief Executive Officer
Date: August 4, 2005 By: /s/ Mark A. Severson
--------------------------------
Mark A. Severson
Chief Financial Officer
26