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CAFI > SEC Filings for CAFI > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for CAMCO FINANCIAL CORP


13-May-2013

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;


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

Overview

During 2012, the economic environment for financial services companies improved slightly, but continued to be challenging. Bankruptcies, foreclosures and prolonged unemployment have continued and the oversupply of housing has limited appreciation of property values.

We will continue to execute our long-term strategic plan to diversify the balance sheet, and improve delinquency, loan quality and our funding mix by reducing borrowings, if possible, and continue to build relationships by increasing transaction-based deposits.

In 2012 and into 2013, we continued our goal of decreasing higher yielding certificates of deposits while increasing "core" deposit growth related to a number of organizational and product development initiatives, which included our suite of commercial and small business checking accounts, online business cash management system, and remote deposit capture solutions. Competition for deposits continues to put pressure on marginal funding costs, despite continued low rates in 2012 and 2013, but our goal is to continue our strategy and build core customer accounts that are normally a lower cost of funding.

Camco has experienced improving trends in asset quality metrics over the past few years. Nonperforming loans continue to decrease, which demonstrates our continued diligence in managing our delinquencies and working with our loan customers in order to reduce losses for them as well as our Corporation. Additionally, the amount of classified loans has decreased not only due to charge offs and sales of various assets, but also due to upgrading the loan quality ratings of various commercial loans related to improved borrower financial performance combined, in some cases, with restructured credit facilities, which has resulted in lower provisions for loan losses.

On November 8, 2012, Camco announced the successful closing of a $10.0 million rights and private offering. Net proceeds of $9.4 million, net of offering costs of $619,000, were invested in Advantage to improve its regulatory capital position in November of 2012 and an additional $345,000 was invested related to the exercise of warrants in first quarter of 2013. Camco plans to continue to build Advantage's capital levels through earnings in 2013. Additionally, the Corporation has been profitable in the past two years and as we continue to have core profits generating taxable income, our ability to realize our deferred tax assets is being analyzed for possible reversal of some or all of the valuation allowance which in turn would credit income tax expense. This action will occur when circumstances warrant and the likelihood that our net operating loss carry forward and deferred tax assets will more likely than not be realized from future taxable income.


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Advantage will be implementing an interest rate protection program for commercial loan customers, which should begin in the second quarter of 2013. Under this program, Advantage will provide its customer with a fixed-rate loan while creating a variable-rate asset for Advantage when the customer enters into an interest rate swap with Advantage on terms that match the loan. Advantage will offset its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty. These interest rate swaps do not qualify as designated hedges, therefore, each swap will be accounted for as a standalone derivative.

Discussion of Financial Condition Changes from December 31, 2012 to March 31, 2013

At March 31, 2013, Camco's consolidated assets totaled $763.3 million, a decrease of $897,000, or 0.1%, from December 31, 2012. The decrease in total assets resulted primarily from decreases in investment securities and loans receivable, offset partially by increases in federal reserve balances. Loans receivable decreased in the first quarter of 2013, primarily due to the continued pay-downs on loans which have been higher than new production levels.

Residential loan production increased slightly in the first quarter of 2013 due primarily to additional residential lenders hired in the Columbus market area. The continued low interest rate environment resulted in some new residential home loan purchases and additional refinancing in the first quarter of 2013.

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 challenging economic environment. Continuous progress is being made on addressing these issues, but we expect the economic environment to continue throughout 2013.

Cash and interest-bearing deposits in other financial institutions totaled $118.2 million at March 31, 2013, an increase of $59.8 million, or 102.5%, from December 31, 2012. Cash is currently at higher levels as we continue to review balance sheet structure and ways to improve our capital position in conjunction with ensuring that liquidity is adequate. With this in mind, a significant amount of liquid assets from called and sold securities in the first Quarter were placed in the Federal Reserve account because it is a safer, yet liquid, earning asset.

As of March 31, 2013, securities totaled $39.4 million, a decrease of $46.8 million, or 54.3%, from December 31, 2012, due to the sale of $24.0 million in securities coupled with principal repayments and maturities of $24.1 million. This decrease was offset partially by the purchase of $1.5 million in securities. The sold securities locked in $61,000 of gains, and the cash related to this sale was transferred to the Federal Reserve account which is currently earning 25 basis points. In April 2013, the Bank reinvested the majority of liquid funds in securities, once again to obtain higher yields while maintaining adequate liquidity.

Loans receivable, including loans held for sale, totaled $547.5 million at March 31, 2013, a decrease of $13.6 million, or 2.4%, from December 31, 2012. The decrease resulted primarily from principal repayments of $75.8 million, loan sales of $30.0 million and $1.0 million of loans transferred to real estate owned offset partially by loan disbursements totaling $93.2 million. Principal repayments and payoffs are higher than 2012 as a few large commercial loans were paid off in the first quarter of 2013. The reduction in residential real estate loan balances continues to be affected by the secondary market offering low long-term fixed rates during the first quarter of 2013. Most new purchase customers are currently choosing fixed rate loans and due to the fact that Advantage normally sells fixed rate loans and does not hold them, the portfolio balance of residential loans continues to decrease. As previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, Advantage is continuing to hold approximately $500,000 of new originations per month of 15 year fixed-rate residential loans to reduce run-off of the portfolio and stabilize margin.

Loan originations during the three-month period ended March 31, 2013 included $55.4 million of commercial loans, $34.2 million in loans secured by one- to four-family residential real estate and $3.6 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 in the future and continue with our strategic plan of generating additional lending opportunities and core relationships.


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During the first three months of 2013, the average yield on loans was 4.85% a decrease of 43 basis points as compared to 5.28% for the same period in 2012. The decrease in yield is due to lower effective rates in the loan portfolio during 2013 in connection with the low interest rate environment. As we continue to have payoffs and adjustable rate loans re-price and originate new loans in the current lower rate environment we expect the yield on loans to continue to decrease slightly throughout 2013.

The allowance for loan losses totaled $11.5 million and $12.1 million at March 31, 2013, and December 31, 2012, representing 61.8% and 62.0% of nonperforming loans, respectively, at those dates. Nonperforming loans (loans with three payments delinquent plus nonaccrual loans) totaled $18.6 million and $19.6 million at March 31, 2013 and December 31, 2012, respectively, constituting 3.3% and 3.4% of total net loans, including loans held for sale. See Note 7. Allowance for Loan Losses above for additional information related to change in allowance and delinquency. Net charge-offs totaled $715,000 and $583,000 for the three months ended March 31, 2013 and March 31, 2012, respectively.

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 March 31, 2013, the Corporation's other real estate owned (REO) consisted of 135 repossessed properties with a net book value of $9.1 million, a decrease of $1.4 million, compared to December 31, 2012, due to increased sales, including one large sale of $770,000. 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. The Corporation 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 Corporation works with borrowers to avoid foreclosure if possible. Furthermore, if it becomes inevitable that a borrower will not be able to retain ownership of the property, the Corporation 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.

Deposits totaled $626.7 million at March 31, 2013, a decrease of $483,000, or 0.1%, from the total at December 31, 2012. The following table details our deposit portfolio balances and the average rate paid on our deposit portfolio at March 31, 2013 and December 31, 2012:

                                             March 31, 2013           December 31, 2012                Change
(Dollars in thousands)                     Balance       Rate         Balance        Rate       Balance        Rate
Noninterest-bearing demand                $  75,269       0.00 %    $    76,490       0.00 %    $ (1,221 )       0.00 %
Interest-bearing demand                      75,483       0.14           70,472       0.13         5,011         0.01
Money market demand accounts                124,322       0.25          121,437       0.24         2,885         0.01
Savings accounts                             56,765       0.05           54,726       0.05         2,039         0.00
Total certificate accounts                  294,902       1.25          304,099       1.28        (9,197 )      (0.03 )

Total deposits                            $ 626,741       0.66 %    $   627,224       0.69 %    $   (483 )      (0.03 )%

The decrease in certificates of deposit was primarily due to decreases in non-core customers (customers who only have a certificate of deposit account with the Bank). We continue to focus and implement our strategy of improving the long-term funding mix of the Bank's deposit portfolio by developing "core relationships" with customers within our communities, and adding commercial and retail checking accounts. The Corporation is focused 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 Corporation believes that this cost advantage makes core deposits a superior funding source, in addition to providing cross-selling opportunities and fee income possibilities.

Advances from the FHLB and other borrowings totaled $64.0 million at March 31, 2013, a decrease of $238,000, or 0.4%, from the total at December 31, 2012. The decrease in borrowings was primarily due to balances in repurchase agreements which we believe is related to the timing of customer needs.


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Stockholders' equity totaled $60.7 million at March 31, 2013, an increase of $984,000, or 1.6%, from December 31, 2012. The increase resulted primarily from net earnings of $499,000 and $379,000 of additional capital related to the exercise of warrants, $213,000 related to restricted stock awards and net changes related to the unearned compensation offset partially by other comprehensive income related to the fair value of our investment securities in the amount of $106,000.

Comparison of Results of Operations for the Three Months Ended March 31, 2013 and 2012

Camco's net earnings for the three months ended March 31, 2013, totaled $499,000, an increase of $86,000, from the net earnings of $413,000 reported in the comparable 2012 period. On a diluted per share basis, net earnings for the three months ended March 31, 2013 were $0.03, compared to $0.06 in the three months ended March 31, 2012. The increase in earnings was primarily attributable to increased gain on sale of loans and investments, decreased expense related to provision for losses on loans offset partially by decreased net interest income and increased employee compensation and benefits.

Net Interest Income

Net interest income totaled $5.4 million for the three months ended March 31, 2013, a decrease of $790,000 or 12.8%, compared to the three month period ended March 31, 2012, generally reflecting the effects of the balance sheet movement in the different types of earning assets, their respective average balances and the average yield. Due to these changes the yield on earning assets decreased 80 basis points for the three months ended March 31, 2013 compared to March 31, 2012. This decrease was partially offset by a 41 basis point decrease in interest bearing liabilities. The decrease was primarily related to decreased certificates of deposit average balances which have higher costs than core deposits coupled with the maturity and payoff of advances in 2012.

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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                                                                  2013                                           2012
                                                   Average         Interest      Average          Average         Interest      Average
Three Months Ended March 31,                     outstanding       earned /       yield/        outstanding       earned /       yield/
(Dollars in thousands)                             balance           paid          rate           balance           paid          Rate
Interest-earning assets:
Loans receivable (1)                            $     543,218     $    6,590         4.85 %    $     622,459     $    8,213         5.28 %
Securities                                             68,341            119         0.70 %           41,303             87         0.84 %
FHLB stock                                              9,888            106         4.29 %            9,888            112         4.53 %
Other interest-bearing accounts                        70,539             43         0.24 %           32,969              1          .01 %

Total interest-earning assets                         691,986          6,858         3.96 %          706,619          8,413         4.76 %
Noninterest-earning assets (2)                         70,853                                         68,022

Total average assets                            $     762,839                                  $     774,641

Interest-bearing liabilities:
Deposits                                        $     552,626     $    1,033         0.75 %    $     573,826     $    1,551         1.08 %
FHLB advances and other                                63,759            426         2.67 %           78,691            673         3.42 %

Total interest-bearing liabilities                    616,385          1,459         0.95 %          652,517          2,224         1.36 %
Noninterest-bearing deposits                           74,394                                         64,970
Noninterest-bearing liabilities                        11,893                                         11,381

Total average liabilities                             702,672                                        728,868
Total average stockholders' equity                     60,167                                         45,773

Total liabilities and stockholders' equity      $     762,839                                  $     774,641

Net interest income/Interest rate spread                          $    5,399         3.01 %                      $    6,189         3.40 %

Net interest margin (3)                                                              3.12 %                                         3.50 %
Average interest-earning assets to average
interest-bearing liabilities                                                        112.3 %                                        108.3 %

(1) Includes loans held for sale. Loan fees are immaterial.

(2) Includes nonaccrual loans, mortgage servicing rights and allowance for loan losses.

(3) Net interest income as a percent of average interest-earning assets.

Interest income on loans totaled $6.6 million for the three months ended March 31, 2013, a decrease of $1.6 million, or 19.8%, from the comparable 2012 period. The decrease resulted primarily from a decrease in the average balance outstanding of $79.2 million, or 12.7%, from the comparable 2012 period. This is primarily related to slower commercial production in 2012 coupled with large payoffs that outpaced the rates of the new production. The decrease in average loans is causing part of the decreased yield due to the new loans being generated in our current lower interest rate environment. This created a 43 basis point decrease in the average yield on loans.

Interest income on securities totaled $119,000 for the three months ended March 31, 2013, an increase of $32,000, or 36.8%, from the first three months of 2012. The increase was due primarily to a $27.0 million, or 65.5%, increase in the average balance from the comparable 2012 period which was offset partially by a 14 basis point decrease in the average yield to 0.70% for the 2013 period. In March, 2013 we sold $24.0 million of investments for a gain on sale of $61,000 and are planning to purchase new investments with additional cash on hand. These investments will be somewhat longer in term to help support the margin.

Dividend income on FHLB stock is paid a quarter in arrears and decreased 24 basis points from the first three months of 2012. Interest income on other interest bearing accounts increased as excess cash was moved to the Federal Reserve, which paid 25 basis points on the balance through March 31, 2013. We will continue to deploy cash when available by paying down advances and borrowings in order to generate additional income.

Interest expense on deposits totaled $1.0 million for the three months ended March 31, 2013, a decrease of $518,000, or 33.4%, compared to the same period in 2012 due primarily to a 33 basis point decrease in the average cost of interest bearing deposits to 0.75% in the current period, coupled with a $21.2 million, or 3.7%, decrease in average interest bearing deposits outstanding. While the cost of deposits was lower in 2013 compared to 2012, the cost of funds in 2013 is expected to stabilize as rates have been at low levels for the past few years. However, we will continue to re-price certificates of deposit in the current lower interest rate environment in 2013, which should decrease costs slightly if rates continue to be at the current low levels. Although, competitive pressures may limit our ability to reduce interest rates paid on deposits.


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Interest expense on borrowings totaled $426,000 for the three months ended March 31, 2013, a decrease of $247,000, or 36.7%, from the same three month period of 2012. The decrease resulted primarily from a $14.9 million, or 19.0%, decrease in the average borrowings outstanding, coupled by a 41 basis point decrease in the average cost of borrowings to 2.67%. This decrease is due to the restructure of some of our FHLB advances in 2012. Due to the high pre-payment penalties we have not made the decision to restructure or pay-down any additional advances at this time but will continue to review for possible decreased interest expense.

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 collectability of the Bank's loan portfolio.

During 2012 and the first quarter of 2013, Camco experienced improving trends in asset quality metrics. Nonperforming loans decreased $5.3 million, or 21.4% from December 31, 2011 to December 31, 2012 balances, and an additional $947,000, or 4.8% to $18.6 million from December 31, 2012 to March 31, 2013. Additionally, the amount of classified loans has decreased not only due to charge offs and sales of various assets, but also due to upgrading the loan quality ratings of various commercial loans related to improved borrower financial performance combined, in some cases, with restructured credit facilities, which has resulted in lower provisions for loan losses. See Note 7. Allowance Loan Losses and related tables above in the notes to consolidated financial statements.

Camco's net loan charge-offs and provision for loan losses in recent years has been impacted by ongoing workout efforts on existing impaired loans. The efforts have included negotiating reduced payoffs and the sale of underlying collateral-or short sales coupled with charging down values to net realizable or fair value of the underlying collateral. Management believes these actions continue to be prudent during the current economic environment.

Based upon an analysis of these factors, the continued economic outlook and new production, we recorded a provision for losses on loans of $100,000 for the three months ended March 31, 2013. We believe our loans are adequately reserved for probable losses inherent in our loan portfolio at March 31, 2013. However, there can be no assurance that the loan loss allowance will be adequate to absorb actual losses. See Note 7. Allowance for Loan Losses above in the notes to consolidated financial statements for additional information.

Other Income

Other income totaled $2.1 million for the three months ended March 31, 2013, an increase of $122,000, or 6.2%, from the comparable 2012 period. The increase in other income was primarily attributable to a $125,000, or 22.2%, increase in gain on sale of loans. The increase in the gain on sale of loans was primarily due to an additional $3.8 million of sales in the first quarter of 2013 compared to the first quarter of 2012 and higher margins on the 2013 quarter sales.

General, Administrative and Other Expense

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