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CAFI > SEC Filings for CAFI > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for CAMCO FINANCIAL CORP



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and this Form 10-Q include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934 (Exchange Act), as amended, which can be identified by the use of forward-looking terminology, such as may, might, could, would, believe, expect, intend, plan, seek, anticipate, estimate, project or continue or the negative thereof or comparable terminology. All statements other than statements of historical fact included in this document regarding our outlook, financial position and results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements. These forward-looking statements also include, but are not limited to:

anticipated changes in industry conditions created by state and federal legislation and regulations;

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. Important factors that could cause actual results to differ materially from those in the forward-looking statements also include, but are not limited to:

competition in the industry and markets in which we operate;

changes in general interest rates;

rapid changes in technology affecting the financial services industry;

changes in government regulation; and

general economic and business conditions

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 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 subsidiary, Advantage Bank, and through March 31, 2011, its formerly wholly-owned subsidiary, Camco Title Agency.


Camco is a full-service provider of financial products through its subsidiary, Advantage Bank. Products and services include traditional banking products, such as deposit accounts and lending products within Ohio, Kentucky and West Virginia. Services are provided through 22 financial offices, 20 ATMs and telephone and internet-based banking. Brokerage services are offered exclusively through an unaffiliated registered broker-dealer at certain locations.

Summary of Transactions and Events

The following is a summary of transactions or events that have impacted or are expected to impact Camco's results of operations or financial condition:

Since early 2009, Camco's loan quality has been negatively impacted by adverse conditions within the commercial real estate market and economy as a whole. The deterioration in the economic conditions of the country has created challenges for the Corporation, including the following:

Volatile equity markets that declined significantly

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Stress on the banking industry with significant financial assistance to many financial institutions, extensive regulatory and congressional scrutiny and regulatory requirements

Low interest rate environment particularly given the government involvement in the financial markets, and

Continued high levels of unemployment nationally and in our local markets

The above factors resulted in the continued movement of loans to nonperforming status during the past few years. In addition, many of these loans are collateral dependent real estate loans that the Bank is required to write down to fair value less estimated costs to sell, with the fair values determined primarily based on third party appraisals. Beginning in 2009 and continuing through 2012, the Corporation has made noted improvements. See Note 7. Allowance for Loan Losses and related tables above and Note C in the 10-K for the period ending December 31, 2011.

The Corporation continues to address credit quality issues by directing the efforts of experienced workout specialists solely to manage the resolution of nonperforming assets. We continue to deal with the economic challenges in our markets, as we continue to recognize the results of difficult economic conditions. The real estate market continues to create a very challenging environment as bankruptcies, foreclosures and unemployment continues to be higher than pre-2008 in Ohio. It is the Corporation's goal to remove the majority of the nonperforming assets from its balance sheet while still obtaining reasonable value for these assets. Given the current conditions in the real estate market, accomplishing this goal is a significant undertaking, requiring both time and considerable effort of staff. We believe that we are taking the appropriate steps forward in managing our classified assets. We have devoted and will continue to devote substantial management resources toward the resolution of all delinquent and non-performing assets, but no assurance can be made that management's efforts will be successful.

In 2011, the Corporation took steps to improve capital ratios through the reduction of assets and borrowings. Assets were reduced through the sale of $27.2 million in investments that created a gain of $1.3 million. The Bank used the proceeds of the sale to pay $21.0 million in FHLB borrowings, including a prepayment penalty of $216,000. Additionally, Camco launched a rights offering on September 24, 2012 with a subsequent public offering to sell up to an aggregate of $10.0 million in Camco common stock, which offerings closed on November 7, 2012. Although the offerings were successful in raising $10.0 million in additional capital, we cannot provide any assurance that we will not need to seek additional financing or engage in additional capital offerings in the future. Based on our capital ratios at September 30, 2012, with the fully subscribed offerings we will not meet the capital requirements imposed by Advantage's regulators, as described below.

Net interest income, the amount by which interest income exceeds interest expense, is affected by various factors, including changes in market interest rates due to the Federal Reserve Board's monetary policy, the level and degree of pricing competition for both loans and deposits in our markets and the amount and composition of earning assets and interest-bearing liabilities. We have found that "core" deposit growth coupled with decreased balances and re-pricing of our certificates of deposit have decreased the cost of deposits 34 basis points since September 2011, while the average cost of borrowings has increased to 3.32% due to a higher mix of longer term FHLB advances with higher rates. We will continue to pay off maturing advances and review possible restructuring to decrease related expenses. The extended low rate environment and increased competition for deposits continue to put pressure on marginal funding costs, despite the continuing low market rates. Earnings related to net interest income continue to be challenged as net interest income and margin are impacted by changes in market interest rates based upon actions taken by the Federal Reserve either directly or through its Open Market Committee.

Discussion of Financial Condition Changes from December 31, 2011 to September 30, 2012

At September 30, 2012, Camco's consolidated assets totaled $754.2 million, a decrease of $12.8 million, from December 31, 2011. The decrease in total assets resulted primarily from decreases in loans and loans held for sale and cash and cash equivalents, offset partially by increases in securities available for sale. Loans receivable has continued to decrease in 2012, primarily due to the slowed portfolio production in the first six months of 2012, which increased slightly in the 3rd quarter of 2012. This decrease was coupled with expected payoffs, which in turn has decreased our concentration levels.

Advantage continues to monitor certain types of commercial loan growth related to regulatory guidance that suggests financial institutions not exceed 3x risk based capital in a concentration of commercial real estate. At September 30, 2012, Advantage's ratio for this concentration was 3.23x risk based capital, approximately $13.4 million over the guidance limitation. Advantage continues to monitor and control our concentration exposure through our concentration management plan that was implemented in 2011. Further, Camco intends to contribute a significant portion of the additional capital raised from the rights and public offerings to the Bank to help eliminate the exposure and concentration limits.

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Residential loan production increased slightly in the third quarter of 2012. High unemployment rates in Ohio have fallen from 10.0% in 2010 to 7.2% at September 30, 2012. This coupled with a slight decrease in loan rates in 2012 has resulted in some new residential home purchases and additional refinancing in the first nine months of 2012.

Management's continued focus at the Bank has been on managing credit, reducing risk and concentrations within the loan portfolio and maintaining sufficient liquidity and capital in a distressed economic environment. These efforts have contributed to a $7.3 million, or 30.5% decrease in total past due loans to $16.7 million at September 30, 2012. The majority of the decrease relates to a decrease in subprime residential loans of $8.9 million, or 53.0%. This decrease is significant because subprime refers to the credit quality of particular borrowers, who have weakened credit histories and are characterized with a higher risk of loan default than prime borrowers. We will continue our efforts to address each of these issues, but we expect the distressed economic environment to continue through the remainder of 2012 and into 2013.

Cash and interest-bearing deposits in other financial institutions totaled $26.9 million at September 30, 2012, a decrease of $11.5 million, or 29.8%, from December 31, 2011. Cash was previously held at higher levels as we continued to restructure the balance sheet by decreasing assets and liabilities when possible to improve our capital position in conjunction with ensuring that liquidity continues to be adequate.

As of September 30, 2012, securities totaled $80.6 million, an increase of $59.7 million, or 285.4%, from December 31, 2011, due to the purchase of $76.2 million in securities at a weighted rate of 0.71%, offset partially by principal repayments and maturities of $16.6 million. The decreases of $59.7 million in the loan portfolio created additional liquidity that was utilized to purchase securities in the first nine months of 2012.

Loans receivable, including loans held for sale, totaled $585.9 million at September 30, 2012, a decrease of $61.4 million, or 9.5%, from December 31, 2011. The decrease resulted primarily from principal repayments of $207.3 million, loan sales of $79.2 million, $4.7 million of loans transferred to real estate owned, and an addition of $1.6 million provision for losses on loans, all of which was offset partially by loan disbursements/additions totaling $232.1 million. Principal repayments and payoffs on loans were higher than 2011, which have decreased the portfolio balances and improved our concentration levels related to commercial production. The reduction in residential real estate loan balances was intensified by the secondary market offering historically low long-term fixed rates during the current year. New purchase customers are currently more likely to choose fixed rate loans during this low rate environment. Due to the fact that Advantage normally sells fixed rate loans and does not hold them, the portfolio balance of residential loans continued to decrease. In September of 2012, the Bank held in portfolio approximately $500,000, of ten and fifteen year fixed residential loans that were secondary market quality. The Bank plans to continue to build the portfolio in the fourth quarter of 2012 to approximately $2.0 million in the fourth quarter of 2012 to stabilize margin.

Loan originations during the nine-month period ended September 30, 2012 included $129.5 million of commercial loans, $91.2 million in loans secured by one- to four-family residential real estate and $11.4 million in consumer and other loans. Our intent is to continue to service our communities in one- to four-family residential, consumer and commercial real estate lending and continue with our strategic plan of generating additional lending opportunities and core relationships.

The Bank continues to originate fixed-rate, single-family loans in its marketplace, with most originated for sale in the secondary market rather than for its portfolio. The origination and sale of fixed-rate loans has historically generated gains on sale and allowed the Bank to manage its investment in loans serviced, without assuming the interest-rate risk associated with holding long-term fixed-rate assets, which facilitates the maintenance of liquidity levels. Mortgage application volume has remained elevated in the current quarter, due to a low interest rate environment, and consisted predominantly of loan refinancing highly correlated to interest rate movements and levels. New home sales continue to remain somewhat weak in the current economic environment, limiting new home financing opportunities.

During the first nine months of 2012, the average yield on loans was 5.19% a decrease of 35 basis points as compared to 5.54% for the same period in 2011. The decrease in yield is due to lower mix of loan balances coupled with effective rates in the loan portfolio during 2012. As we continue to have payoffs and adjustable rate loans re-price and originate new loans at the current lower rate environment we expect the yield on loans to continue to decrease slightly throughout 2012 and into 2013.

The allowance for loan losses totaled $14.5 million and $14.5 million at September 30, 2012, and December 31, 2011, respectively, representing 63.7% and 58.3% of nonperforming loans, respectively, at those dates. Nonperforming loans (loans

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with three payments delinquent plus nonaccrual loans) totaled $22.8 million and $24.9 million at September 30, 2012 and December 31, 2011, respectively, constituting 3.8% of total net loans for September 30, 2012 and December 31, 2011, including loans held for sale. See Note 7. Allowance for Loan Losses above for additional information related to change in allowance and portfolio balances. Net charge-offs totaled $1.6 million and $2.3 million for the nine months ended September 30, 2012 and September 30, 2011 respectively.

The following table sets forth information with respect to Advantage's nonperforming assets for the periods indicated.

Loans accounted for on nonaccrual
basis:                                 September 30,          December 31,          December 31,          December 31,          December 31,
(dollars in thousands)                     2012                   2011                  2010                  2009                  2008
Total nonperforming loans             $        22,787        $       24,918        $       33,779        $       36,449        $       53,528
Other real estate owned                        11,886                10,888                10,096                 9,660                 5,841

Total nonperforming assets            $        34,673        $       35,806        $       43,875        $       46,109        $       59,369

Allowance for loan losses             $        14,508        $       14,532        $       16,870        $       16,099        $       15,747

Nonperforming loans as a percent
of total net loans                               3.84 %                3.85 %                4.92 %                5.40 %                6.91 %
Nonperforming assets to total
assets                                           4.60 %                4.67 %                5.38 %                5.47 %                5.93 %
Allowances for loan losses as a
percent of nonperforming loans                   63.7 %                58.3 %                49.9 %                44.2 %                29.4 %
Memo section:
Troubled debt restructurings
Loans and leases restructured and
in compliance with modified terms     $        14,420        $       16,095        $        7,122        $       16,645        $       11,440

Loans and leases restructured and
not in compliance with modified
terms                                 $         6,904        $        7,161        $        9,276        $        4,783        $       12,882

Nonaccrual status denotes loans greater than three payments past due, loans for which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet nonaccrual criteria as established by regulatory authorities. Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as an asset which holds the interest income, depending on management's assessment of the collectability of the loan.

At September 30, 2012, the Bank's other real estate owned (REO) consisted of 170 repossessed properties with a net book value of $11.9 million, an increase of $1.0 million, compared to December 31, 2011. Initial loss is recorded as a charge to the allowance for loan losses. Thereafter, if there is a further deterioration in value, a specific valuation allowance is established and charged to operations. Charge downs related to the real estate owned properties for the nine months of 2012 were $874,000 compared to $550,000 for the first nine months of 2011. The charge downs are primarily due to decreased appraisal values and lack of market absorption. The Bank reflects costs to carry REO as period costs. When property is acquired through foreclosure or deed in lieu of foreclosure, it is initially recorded at the fair value of the related assets at the date of foreclosure, less estimated costs to sell the property.

The Bank works with borrowers to avoid foreclosure if possible. Furthermore, if it becomes inevitable that a borrower will not be able to retain ownership of their property, the Bank often seeks a deed in lieu of foreclosure in order to gain control of the property earlier in the recovery process. The strategy of pursuing deeds in lieu of foreclosure more aggressively should result in a reduction in the holding period for nonperforming assets and ultimately reduce economic losses.

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Deposits totaled $630.3 million at September 30, 2012, an increase of $1.0 million, or 0.2%, from the total at December 31, 2011. The following table details our deposit portfolio balances and the average rate paid on our deposit portfolio at September 30, 2012 and December 31, 2011:

(Dollars in thousands)                    September 30, 2012           December 31, 2011                 Change
                                          Balance         Rate         Balance        Rate        Balance        Rate
Noninterest-bearing demand              $     69,775       0.00 %    $    62,881       0.00 %    $   6,894         0.00 %
Interest-bearing demand                       69,167       0.14           64,213       0.18          4,954        (0.04 )
Money market                                 120,756       0.31          114,503       0.45          6,253        (0.14 )
Savings                                       53,131       0.05           42,417       0.10         10.714        (0.05 )
Certificates of deposit                      317,475       1.32          345,245       1.65        (27,770 )      (0.33 )

Total deposits                          $    630,304       0.74 %    $   629,259       1.01 %    $   1,045        (0.27 )%

The decline in retail certificates of deposit continues to be strategically directed as part of management's relationship pricing initiative which targets rate sensitive, non-relationship deposits for reduction, coupled with an emphasis on increasing "core relationships" and commercial deposits. The Bank continues to focus on its collection of core deposits. Core deposit balances, generated from customers throughout the Bank's branch network, are generally a stable source of funds similar to long-term funding, but core deposits such as checking and savings accounts are typically less costly than alternative fixed-rate funding. The Bank believes that this cost advantage makes core deposits a superior funding source, in addition to providing cross-selling opportunities and fee income possibilities. Management will continue to modify its noncore deposit strategies to support the funding needs of the Bank's loan activities, while maintaining appropriate liquidity levels, as it executes its strategies to diversify its funding mix by expanding "core deposit relationships" and building business deposits. To the extent the Bank is able to grow its core deposits and continues to pay down borrowings and higher cost funds such as certificates of deposits, the costs related to these liabilities should decrease.

In 2010, we implemented a number of organizational and product development initiatives including a new suite of commercial and small business checking accounts, enhancements to our online business cash management system, and the launch of remote deposit capture solution. We believe these products will continue to help us be more competitive for business checking accounts. Additionally, in 2011 we implemented paperless statements that are less costly to the Bank, more efficient for many customers, and strategically add convenient products to enhance our banking products with current technology.

Effective January 1, 2010, interest rates paid by Advantage on deposits became subject to limitations as a result of a consent order Advantage entered into with the FDIC and Ohio Division of Financial Institutions in July 2009 ("Prior Consent Order"). Deposits solicited by the Bank cannot significantly exceed the prevailing rates in our market areas. The FDIC has implemented by regulation the statutory language "significantly exceeds" as meaning more than 75 basis points. Although the rule became effective January 1, 2010, Advantage has complied with these standards since mid-year 2009.

Advances from the FHLB and other borrowings totaled $64.5 million at September 30, 2012, a decrease of $15.8 million, or 19.7%, from the total at December 31, 2011. The decrease in borrowings was due to decreased balances in repurchase agreements which is timing related to customer needs coupled with the payoff of $10.0 million of matured advances.

The decrease in advances from borrowers for taxes and insurance of $0.5 million for the period ended September 30, 2012 was attributable to timing differences between the collection and payment of taxes and insurance. The increase of $0.7 million in accrued expenses and other liabilities was primarily the result of accruals related to trust preferred interest, incentives and compensation and professional services rendered but not yet billed.

Stockholders' equity totaled $47.4 million at September 30, 2012, an increase of $1.8 million, or 4.0%, from December 31, 2011. The increase resulted primarily from net earnings of $1.4 million, coupled with $260,000 of restricted stock awards related to the 2011 officer incentive plan and an increase in other comprehensive income of $151,000 related to the fair value of our investment securities. This was partially offset by $28,000 of net changes related to stock based compensation.

Comparison of Results of Operations for the Nine Months Ended September 30, 2012 and 2011

Camco's net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and interest paid on interest-bearing liabilities. Net interest income is determined by
(i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest-rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. Camco's interest-rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, the collectability of loans, and deposit flows. Net interest income also includes amortization of loan origination fees, net of origination costs.

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Camco's net income is also affected by the generation of non-interest income, which primarily consists of loan servicing income, service fees on deposit accounts and gains on sales of loans held for sale. In addition, net income is affected by the level of operating expenses, loan loss provisions, and costs associated with the acquisition, maintenance and disposal of real estate.

Camco recognized net earnings for the nine months ended September 30, 2012, of $1.4 million, an increase of $2.0 million, or 312.8%, from the net loss of $(648,000) reported in the comparable 2011 period. On a per share basis, the net earnings were $0.19, compared to $(.09) per share in the first nine months of 2012 and 2011 respectively. The increase in earnings was primarily attributable to the additional $1.4 million of provision for loan losses recorded in the 2011 period compared to the 2012 period.

Net Interest Income

Net interest income totaled $18.1 million for the nine months ended September 30, 2012, a decrease of $1.4 million or 7.3%, compared to the nine month period ended September 30, 2011, generally reflecting the effects of a $11.4 million decrease in the average balance of interest earning assets coupled with the decrease of average yield on earning assets of 58 basis points. This was partially offset by a $36.6 million decrease in interest-bearing liabilities and a decrease of 33 basis points related to the cost of funding. Due to these changes, the net interest margin decreased 21 basis points to 3.45% in 2012 compared to 3.66% in 2011.

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.

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