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| CAFI > SEC Filings for CAFI > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
To determine the fair value of our mortgage servicing rights ("MSRs") each reporting quarter, we provide information to a third party valuation firm who assists us with determining the possible impairment of MSRs, as described below.
MSRs 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 the Bank 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 fair 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 we estimate, takes into consideration the investment portfolio average yield as well as current short duration investment yields. We believe 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 earnings figures approximate the cash flow that could be received from the servicing portfolio. Valuation results are presented quarterly to management. At that time, we review the information and MSRs are marked to the lower of amortized cost or fair value for the current quarter.
4. Earnings Per Share
Basic earnings per common share are 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,
2009 2008 2009 2008
"In thousands, except per share data"
BASIC:
Net Earnings (loss) $ 237 $ (630 ) $ 2 $ 373
Weighted average common shares
outstanding 7,199 7,156 7,206 7,156
Basic earnings (loss) per share $ .03 $ (0.09 ) $ .00 $ .05
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DILUTED: Net Earnings (loss) $ 237 $ (630 ) $ 2 $ 373 Weighted average common shares outstanding 7,199 7,156 7,206 7,156 Dilutive effect of stock options 1 0 6 8 Total common shares and dilutive potential common shares 7,200 7,156 7,212 7,164 Earnings (Loss) per share - Diluted $ .03 $ (0.09 ) $ .00 $ .05 |
Effective January 1, 2006, the Corporation adopted SFAS No. 123R, "Accounting for Stock-Based Compensation," which contains a fair-value based method for valuing stock-based compensation is recognized based on the grant date at the fair value of the award.
The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model. The following table details the fair value and assumptions used to value stock options as of the grant date that were granted in 2009 and 2008:
2009 2008
Fair value, calculated $ 1.43 $ 0.58
Exercise Price $ 2.46 $ 8.92
Risk-free interest rate 2.66 % 3.52 %
Expected stock price volatility 61.00 % 15.75 %
Expected dividend yield 1.63 % 6.00 %
Expected Life 10 years 10 years
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A summary of the status of the Corporation's stock option plans as of June 30, 2009 and December 31, 2008, and changes during the periods ending on those dates is presented below:
Six months ended Year ended
June 30, December 31,
2009 2008
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 260,703 $ 14.11 318,238 $ 15.10
Granted 80,000 2.46 47,167 9.07
Exercised - - - -
Expired - - (39,429 ) 14.88
Forfeited (17,065 ) 10.37 (65,273 ) 14.82
Outstanding at end of period 323,638 $ 11.43 260,703 $ 14.11
Options exercisable at end of period 220,990 $ 14.51 195,717 $ 15.01
Weighted-average fair value of options
granted during the period $ 1.43 $ 0.74
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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, 2009 and 2008
The following information applies to options outstanding at June 30, 2009:
Options outstanding Options Exercisable
Weighted-Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
$ 1.89 - $ 2.50 80,000 9.6 2.46 80,000 2.46
$ 8.92 - $ 9.75 30,927 6.6 8.99 16,746 9.04
$ 11.36 - $14.16 93,035 4.3 13.52 79,568 13.58
$ 14.55 - $17.17 119,676 2.6 16.42 119,676 16.42
323,638 6.4 11.43 295,990 14.51
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6. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents : The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is deemed to approximate fair value.
Investment Securities : Fair values for investment securities are based on quoted market prices and dealer quotes.
Loans Held for Sale: Fair value for loans held for sale is the contracted sale price of loans committed for delivery, which is determined on the date of sale commitment.
Loans Receivable : The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential real estate, multi-family residential real estate, installment and other. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality.
Federal Home Loan Bank stock : The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.
Accrued Interest Receivable and Payable: The carrying value for accrued interest approximates fair value.
Advances from the Federal Home Loan Bank : The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.
Repurchase Agreements: The fair value of repurchase agreements is based on the discounted value of contractual cash flows using rates currently offered for similar maturities.
Advances by Borrowers for Taxes and Insurance : The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value.
Commitments to Extend Credit : For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At June 30, 2009 and December 31, 2008, the fair value of loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments are as follows:
June 30, 2009 December 31, 2008
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 82,126 $ 81,820 $ 52,285 $ 52,285
Investment securities available for sale 75,938 85,532 85,352 85,352
Investment securities held to maturity 2,224 2,265 13,406 13,530
Loans held for sale 5,370 5,417 2,185 2,205
Loans receivable 696,477 687,547 756,641 713,447
Federal Home Loan Bank stock 29,888 29,888 29,888 29,888
Accrued interest receivable 3,990 3,990 4,118 4,118
Financial liabilities
Deposits 711,603 721,176 $ 723,956 $ 733,322
Advances from the Federal Home Loan Bank 132,659 138,048 167,106 175,246
Repurchase agreements 8,777 8,777 11,727 11,727
Subordinated debentures 5,000 5,457 5,000 4,997
Advances by borrowers for taxes and insurance 219 219 2,458 2,458
Accrued interest payable 1,703 1,703 1,801 1,801
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Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of "matrix pricing" used to value debt securities absent the exclusive use of quoted prices.
Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting, etc.
Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Corporation looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Corporation looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Camco must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.
The following table presents financial assets and liabilities measured on a recurring basis:
Fair Value Measurements at Reporting Date Using
(in thousands) June 30, 2009 Level 1 Level 2 Level 3
Securities available for sale $ 75,938 $ $ 75,938 $
The following table presents financial assets and liabilities measured on a
non-recurring basis:
Fair Value Measurements at Reporting Date Using
(in thousands) June 30, 2009 Level 1 Level 2 Level 3
Impaired loans $ 39,070 $ $ $ 39,070
Loans held for sale 5,370 5,370
Mortgage servicing rights 4,000 4,000
Real estate acquired through foreclosure 5,963 5,963
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Impaired loans, which are measured for impairment using the fair value of the collateral at June 30, 2009, had a carrying amount of $46.3 million, with a valuation allowance of $7.2 million, resulting in an additional provision for loan losses of $1.6 million during the first half of 2009.
Mortgage servicing rights 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 the bank 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 fair value for the pool, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing.
Fair value for real estate acquired through foreclosure is determined by
obtaining recent appraisals on the properties. The fair value under such
appraisals is determined by using one of the following valuation techniques:
income, cost or comparable sales. The fair value is then reduced by
management's estimate for the direct costs expected to be incurred in order
to sell the property. Holding costs or maintenance expenses are recorded as
period costs when occurred and are not included in the fair value estimate.
7. Recent Accounting Prouncements In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the standard is based on the same principles as those that currently exist in the auditing standards. The standard also includes a required disclosure of the date through which the entity has evaluated subsequent events and whether the evaluation date is the date of issuance or the date the financial statements were available to be issued. The standard is effective for interim or annual periods ending after June 15, 2009. The Corporation has complied with the disclosure requirements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Corporation will comply with the requirements of the Statement beginning in the third quarter of 2009.
8. Subsequent Events In accordance with Statement of Financial Accounting Standards ("SFAS") No. 165, Subsequent Events, we have evaluated subsequent events through the date of this filing. We do not believe there are any material subsequent events which would require further disclosure.
• anticipated changes in general interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;
• retention of our existing customer base and our ability to attract new customers;
• the development of new products and services and their success in the marketplace;
• the adequacy of the allowance for loan losses; and
• statements regarding our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results to be materially different
from any future results expressed or implied by such forward-looking statements.
Although we believe the expectations reflected in such forward-looking
statements are reasonable, we can give no assurance such expectations will prove
to have been correct, and undue reliance should not be placed on such
statements. Important factors that could cause actual results to differ
materially from those in the forward-looking statements included herein include,
but are not limited to:
• competition in the industry and markets in which we operate;
• levels of nonperforming assets;
• changes in general interest rates;
• loan demand;
• rapid changes in technology affecting the financial services industry;
• real estate values;
• changes in government regulation; and
• general economic and business conditions.
Overview
This MD&A is intended to give stockholders a more comprehensive review of the
issues facing management than could be obtained from an examination of the
financial statements alone. This analysis should be read in conjunction with the
consolidated financial statements and related footnotes and the selected
financial data elsewhere in this annual report. As used herein and except as the
context may otherwise require, references to "Camco," "the Corporation", "we,"
"us," or "our" means, collectively, Camco Financial Corporation and its wholly
owned subsidiaries, Advantage Bank and Camco Title Agency.
Earnings during the 2nd quarter of 2009 were significantly affected by an
accrual for industry-wide FDIC special assessment totaling $448,000 and
increased federal income taxes of $433,000 related to the surrender of bank
owned life insurance, both being nonrecurring in nature. We decreased our
concentration levels in bank owned life insurance in order to comply with
regulatory guidance.
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