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CAFI > SEC Filings for CAFI > Form 10-Q on 12-Aug-2013All Recent SEC Filings

Show all filings for CAMCO FINANCIAL CORP

Form 10-Q for CAMCO FINANCIAL CORP


12-Aug-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;

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.

Overview

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. Additionally, we will soon be offering a debit rewards program that will allow our customers to earn Buzz Points for using their Advantage Bank Debit Card for everyday purchases. These points can then be redeemed for gift cards, merchant gift certificates or even charitable donations. This will coincide with our strategy of improving customer relationships because the program will reward our customers for buying local and banking at Advantage Bank.


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Management has continued its focus on managing credit, while reducing risk and concentrations within the loan portfolio and maintaining sufficient liquidity while increasing capital levels. Advantage 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 due to improved borrower financial performance combined, in some cases, with restructured credit facilities, which has resulted in lower provisions for loan losses.

Current results included disposal of the largest real estate owned property in the second quarter of 2013, which resulted in a loss of approximately $400,000 including all expenses. This sale contributed to the decrease of our classified assets and will result in a reduction of future expenses related to managing the property, taxes and upkeep.

Non-accruals have decreased $36.4 million, or 69.9%, to $15.7 million at June 2013 since the peak of $52.1 million at December 31, 2008 and $3.9 million, or 19.9% since December 31, 2012. Additionally, charge offs have decreased from $22.8 million for the twelve months ending December 31, 2009 to $2.0 million for the six months ending June 30, 2013. While the charge offs contributed to the decrease in non-accrual loans, it is important to note that $30.8 million of the charge offs were related to commercial originations from 2005 through 2008. Yet commercial originations from 2009 through 2013 only have losses of $926,000. We acknowledge that the loans originated in 2012 and 2013 are not seasoned but the trending has positive attributes and significant differences that relate to loan policy underwriting changes initiated by the Bank's new executive management team, coupled with changes in the commercial credit department and added oversight of the special assets department. If, as we expect, charge offs continue to stabilize and credit quality improves, less allowance for loan and lease losses will be required to maintain an adequate reserve. See Note 7 Allowance for Loan Losses for additional schedules related to trending and progress.

Camco and Advantage have reversed their deferred tax asset ("DTA") valuation allowance of approximately $5.9 million in the second quarter of 2013. As a result, net income increased by approximately $0.43 per share. The DTA valuation allowance recovery is the result of sustained profitability and improving credit quality that has led to significantly lower credit costs. This, along with a reasonable expectation of continued profitability, has prompted management to determine that the tax assets would more likely than not be recovered through future taxable income and that maintaining the valuation allowance was no longer necessary. The DTA includes a gross net operating loss carry forward of approximately $4.3 million, which will be used in future periods to reduce income tax payments.

Advantage implemented an interest rate protection program for commercial loan customers, which began in the second quarter of 2013 and generated $58,000 of income. 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, and has contracted a third party to administer the program. These interest rate swaps do not qualify as designated hedges, therefore, each swap will be accounted for as a standalone derivative.

On August 1, 2013, Advantage became 49% owner of a title company named AB Title Agency LLC. The controlling interest of 51% is owned by MJM Title Agency LLC. The title company is located in Washington Court House, Ohio and offers title insurance to customers of Advantage Bank.

Discussion of Financial Condition Changes from December 31, 2012 to June 30, 2013

At June 30, 2013, Camco's consolidated assets totaled $756.8 million, a decrease of $7.5 million, or 1.0%, from December 31, 2012. The decrease in total assets resulted from decreased cash levels as a result of decreased deposit balances, partially offset by increased loans receivable and investments available for sale and recording 100% of the DTA.

Residential and commercial loan production increased in 2013 due primarily to additional residential lenders hired in the Columbus, Ohio market area and the renewed ability to generate commercial loans as Advantage previously reduced concentration limits and is now within all concentration policy limits and regulatory standards. This increased production has only slightly increased our portfolio growth which has been offset by payoffs. This has also affected our yield on loans, 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.


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Cash and interest-bearing deposits in other financial institutions totaled $27.1 million at June 30, 2013, a decrease of $31.3 million, or 53.5%, from December 31, 2012. Cash has been deployed into loans and investments that are available for sale to improve interest income while ensuring that liquidity remains adequate.

As of June 30, 2013, securities totaled $103.5 million, an increase of $17.3 million, or 20.1%, from December 31, 2012, due to the purchase of $72.5 million in securities, which was offset partially by the sale of $24.0 million in securities, coupled with principal repayments and maturities of $29.2 million and a decrease in the market value of $2.0 million. The sold securities locked in $61,000 of gains in the six months of 2013, and the cash related to the sale was transferred to the Federal Reserve account which earned 25 basis points. As of June 30, 2013, the Bank has reinvested the majority of liquid funds in securities in order to obtain higher yields while maintaining adequate liquidity.

Loans receivable, including loans held for sale, totaled $563.6 million at June 30, 2013, an increase of $2.5 million, or 0.4%, from December 31, 2012. The increase resulted primarily from loan disbursements totaling $152.8 million offset partially by principal repayments of $87.3 million, loan sales of $60.7 million and $2.0 million of loans transferred to real estate owned. Additionally, a decrease of approximately $300,000 was due to $200,000 of amortization and recording $100,000 of allowance for loan and lease losses.

Loan originations during the six-month period ended June 30, 2013 included $72.3 million of commercial loans, $72.3 million in loans secured by one- to four-family residential real estate and $8.2 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. The slight increase in residential real estate loan balances is due to an increased interest in adjustable rate loans and, 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.

During the first six months of 2013, the average yield on loans was 4.80%, a decrease of 41 basis points as compared to 5.21% 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 we originate new loans in the current low rate environment, we expect the yield on loans to continue to decrease slightly throughout 2013.

The allowance for loan losses totaled $10.6 million and $12.1 million at June 30, 2013 and December 31, 2012, respectively, representing 67.3% and 62.0% of nonperforming loans, respectively, at those dates. Nonperforming loans (loans with more than three payments delinquent plus nonaccrual loans) totaled $15.7 million and $19.6 million at June 30, 2013 and December 31, 2012, respectively, constituting 2.7% and 3.4% of total net loans, respectively, 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 $1.7 million and $1.5 million for the six months ended June 30, 2013 and June 30, 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 June 30, 2013, the Corporation's other real estate owned (REO) consisted of 130 repossessed properties with a net book value of $6.9 million, a decrease of $3.7 million, compared to December 31, 2012, due to increased sales, including the sale of a golf course and land lots for $3.2 million. Initial loss and the write down to market value 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.


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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.

Prepaid expenses and other assets increased $7.0 million primarily due to the reversal of the Corporation's DTA valuation allowance of approximately $6.5 million. The DTA valuation allowance recovery is the result of sustained profitability and improving credit quality that has led to significantly lower credit costs. This, along with a reasonable expectation of continued profitability, has prompted management to determine that the tax assets would more likely than not be recovered through future taxable income and that maintaining the entire valuation allowance was no longer necessary. The DTA includes a gross net operating loss carry forward of approximately $4.3 million, which will be used in future periods to reduce income tax payments.

Deposits totaled $614.6 million at June 30, 2013, a decrease of $12.6 million, or 2.0%, 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 June 30, 2013 and December 31, 2012:

                                            June 30, 2013            December 31, 2012                 Change
(Dollars in thousands)                    Balance       Rate         Balance        Rate        Balance        Rate
Noninterest-bearing demand               $  75,338       0.00 %    $    76,490       0.00 %    $  (1,152 )       0.00 %
Interest-bearing demand                     74,256       0.13           70,472       0.13          3,784         0.00
Money market demand accounts               120,633       0.25          121,437       0.24           (804 )       0.01
Savings accounts                            55,013       0.05           54,726       0.05            287         0.00
Total certificate accounts                 289,383       1.23          304,099       1.28        (14,716 )      (0.05 )

Total deposits                           $ 614,623       0.65 %    $   627,224       0.69 %    $ (12,601 )      (0.04 )%

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 Bank 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 $65.8 million at June 30, 2013, an increase of $1.6 million, or 2.4%, from the total at December 31, 2012. The increase in borrowings was primarily due to increased balances in repurchase agreements which we believe is related to the timing of customer needs.

Stockholders' equity totaled $65.9 million at June 30, 2013, an increase of $6.2 million, or 10.4%, from December 31, 2012. The increase resulted primarily from the tax benefit associated with the reversal of their DTA valuation allowance of approximately $5.9 million, coupled with before tax earnings of $779,000, $421,000 of additional capital related to the exercise of warrants, $418,000 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 $1.3 million. See the consolidated statement of stockholders' equity for additional information.


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Comparison of Results of Operations for the Six Months Ended June 30, 2013 and 2012

Camco's net earnings for the six months ended June 30, 2013, totaled $6.7 million, an increase of $5.8 million, from the net earnings of $895,000 reported in the comparable 2012 period. On a diluted per share basis, net earnings for the six months ended June 30, 2013 were $0.45, compared to $0.12 in the six months ended June 30, 2012. The increase in earnings was primarily attributable to the reversal of our DTA. The DTA valuation allowance recovery is the result of sustained profitability and improving credit quality that has led to significantly lower credit costs. This, along with a reasonable expectation of continued profitability, has prompted management to determine that the tax assets would more likely than not be recovered through future taxable income and that maintaining the entire valuation allowance was no longer necessary.

Net Interest Income

Net interest income totaled $10.9 million for the six months ended June 30, 2013, a decrease of $1.3 million or 10.3%, compared to the six month period ended June 30, 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 69 basis points to 3.93% for the six months ended June 30, 2013 compared to 4.62% for the six months ended June 30, 2012. This decrease was partially offset by a 37 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 $10.0 million 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, 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.

                                                               2013                                          2012
                                                Average        Interest      Average          Average        Interest      Average
Six Months Ended June 30,                     outstanding      earned /       yield/        outstanding      earned /       yield/
(Dollars in thousands)                          balance          paid          rate           balance          paid          Rate
Interest-earning assets:
Loans receivable (1)                         $     549,025     $  13,181         4.80 %    $     610,973     $  15,912         5.21 %
Securities                                          83,231           290         0.70 %           55,720           219         0.79 %
FHLB stock                                           9,888           209         4.23 %            9,888           216         4.37 %
Other interest-bearing accounts                     56,278            61         0.22 %           30,613             2         0.01 %

Total interest-earning assets                      698,422        13,741         3.93 %          707,194        16,349         4.62 %
Noninterest-earning assets (2)                      61,420                                        68,192

Total average assets                         $     759,842                                 $     775,386

Interest-bearing liabilities:
Deposits                                     $     547,815     $   2,033         0.74 %          574,069     $   2,956         1.03 %
FHLB advances and other                             64,534           855         2.65 %           75,724         1,291         3.41 %

Total interest-bearing liabilities                 612,349         2,888         0.94 %          649,793         4,247         1.31 %
Noninterest-bearing deposits                        74,813                                        66,279
Noninterest-bearing liabilities                     11,569                                        13,262

Total average liabilities                          698,731                                       729,334
Total average stockholders' equity                  61,111                                        46,052

Total liabilities and stockholders' equity   $     759,842                                 $     775,386

Net interest income/Interest rate spread                       $  10,853         2.99 %                      $  12,102         3.31 %

Net interest margin (3)                                                          3.11 %                                        3.42 %
Average interest-earning assets to average
interest-bearing liabilities                                                    114.1 %                                       108.8 %

(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 $13.2 million for the six months ended June 30, 2013, a decrease of $2.7 million, or 17.2%, from the comparable 2012 period. The decrease resulted primarily from a decrease in the average balance outstanding of $61.9 million, or 10.1%, 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 existing loans with higher rates being paid-off and new loans with lower interest rates being originated. This created a 41 basis point decrease in the average yield on loans.


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Interest income on securities totaled $290,000 for the six months ended June 30, 2013, an increase of $71,000, or 32.4%, from the first six months of 2012. The increase was due primarily to a $27.5 million, or 49.4%, increase in the average balance from the comparable 2012 period which was offset partially by a 9 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 have purchased new investments with additional cash on hand. These investments will are somewhat longer in term to help support the margin.

Dividend income on FHLB stock is paid a quarter in arrears and decreased 14 basis points from the first six 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 June 30, 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 $2.0 million for the six months ended June 30, 2013, a decrease of $923,000, or 31.2%, compared to the same period in 2012 due primarily to a 29 basis point decrease in the average cost of interest bearing deposits to 0.74% in the current period, coupled with a $26.3 million, or 4.6%, 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.

Interest expense on borrowings totaled $855,000 for the six months ended June 30, 2013, a decrease of $436,000, or 33.8%, from the same six month period of 2012. The decrease resulted primarily from a $11.2 million, or 14.8%, decrease in the average borrowings outstanding, coupled by a 76 basis point decrease in the average cost of borrowings to 2.65%. This decrease is due to the restructure of some of our FHLB advances in 2012. In July 2013, we restructured $25.0 million of advances with an average yield of 4.02%. We replaced these advances with $25.0 million of advances with a yield of 1.49%. The restructure included a prepayment fee of $444,000, which is amortized over the life of the advances, which increases the effective interest rate on the advances to 3.27%, a decrease of 75 basis points below the previous yield. This will be a monthly savings of approximately $15,000.

Provision for Losses on Loans

A provision for losses on loans is charged to earnings to bring the total . . .

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