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Camco Financial 10-Q 2011 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2011
OR
For the transition period from to
Commission File Number 0-25196
CAMCO FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
814 Wheeling Avenue, Cambridge, Ohio 43725-9757
(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (740) 435-2020
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting Corporation. See the definitions of “large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No þ
As of August 8, 2011, the latest practicable date, 7,205,595 shares of the registrant’s common
stock, $1.00 par value, were outstanding.
Camco Financial Corporation
INDEX
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Item 1. Financial Statements
Camco Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
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Camco Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
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Camco Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
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Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
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Camco Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
For the six months ended June 30,
(In thousands)
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Anti-dilutive options to purchase 604,583 and 480,092 shares of common stock with respective
weighted-average exercise prices of $4.97 and $13.86 were outstanding at June 30, 2011 and
2010, respectively, but were excluded from
the computation of common share equivalents for
each of the six months ended, because the exercise prices were greater than the average
market price of the common shares.
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Anti-dilutive options to purchase 609,583 and 480,092 shares of common stock with respective
weighted-average exercise prices of $4.93 and $13.86 were outstanding at June 30, 2011 and
2010, respectively, but were excluded from the computation of common share equivalents for
each of the three month periods, because the exercise prices were greater than the average
market price of the common shares.
A summary of the status of the Corporation’s stock option plans as of June 30, 2011 and
December 31, 2010, and changes during the periods ending on those dates is presented below:
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The following information applies to options outstanding at June 30, 2011:
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 value for investment securities is based on
quoted market prices and dealer quotes.
Loans Held for Sale: Fair value for loans held for sale is the contracted
sales 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.
Deposits: The fair values of deposits with no stated maturity, such as money
market demand deposits, savings and NOW accounts have been analyzed by management and
assigned estimated maturities and cash flows which are then discounted to derive a
value. The fair value of fixed-rate certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
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.
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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.
Subordinated Debentures: The fair value of subordinated debentures is based
on the discounted value of contractual cash flows using rates currently offered for
smaller 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.
Based on the foregoing methods and assumptions, the carrying value and fair value of the
Corporation’s financial instruments are as follows:
Listed below are three levels of inputs that Camco uses to measure fair value:
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.
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The following table presents financial assets and liabilities measured on a recurring basis:
The following table presents financial assets and liabilities measured on a non-recurring
basis:
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Change in the allowance for loan losses for the year ended December 31, 2010 and loan balances as
of December 31, 2010 are summarized as follows:
Non-accrual and Past Due Loans. Loans are considered past due if the required principal and
interest payments have not been received as of the date such payments were due. Loans are placed
on non-accrual status when, the loan is more than three payments past due as well as when
required by regulatory provisions. Loans may be placed on non-accrual status regardless of
whether or not such loans are considered past due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is recognized when the loan is returned to
accrual status and all the principal and interest amounts
contractually due are brought current
for a minimum of six months or future payments are reasonably assured.
The following table details non-accrual loans at June 30, 2011 and December 31, 2010:
An age analysis of past due loans, segregated by class of loans were as follows:
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Although we believe that the allowance for loan losses at June 30, 2011 is adequate to cover losses
inherent in the loan portfolio at that date based upon the available facts and circumstances, there
can be no assurance that additions to the allowance for loan losses will not be necessary in future
periods, which could adversely affect our results of operations. Unemployment rates in our markets
and Ohio in general, are close
to the National average, but we are still experiencing some decline in values of residential real
estate. Ohio in general has not experienced significant increases in home values over the past
five years like many regions in the U.S., which should comparatively mitigate losses on loans.
Nonetheless, these factors, compounded by a very uncertain national economic outlook, may continue
to increase the level of future losses beyond our current expectations.
Impaired loans. Loans are considered impaired when, based on current information and events, it is
probable Advantage will be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreement, including scheduled principal and interest payments.
Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual
loan basis for other larger commercial credits. If a loan is impaired, a specific valuation
allowance is allocated, if necessary, so that the loan is reported net, of collateral if payment is
expected solely from the collateral or at the present value of estimated future cash flows using
the loan’s existing rate or at the loan’s fair sale value. Interest payments on impaired loans are
typically applied to principal unless collectability of the principal amount is reasonably assured
in which case interest is recognized on an accrual basis. Impaired loans or portions of loans are
charged off when deemed uncollectible.
We have included the following information with respect to impairment measurements relating to
collateral-dependent loans for better understanding of our process and procedures relating to fair
value of financial instruments:
•
Based on policy, a loan is typically deemed impaired (non-performing) once it has gone over
three payments or 90 days delinquent. Our management of the troubled credit will vary as will
the timing of valuations, loan loss provision and charge offs based on a multitude of factors
such as, cash flow of the business/borrower, responsiveness of the borrower, communication
with the commercial banker, property inspections, property deterioration, and delinquency.
Typically, a nonperforming, non-homogeneous collateral dependent loan will be valued and
adjusted (if needed) within a time frame as short as 30 days or as many as 180 days after
determination of impairment. If impaired, the collateral is then evaluated and an updated
appraisal is most typically ordered. Upon receipt of an appraisal or other valuation, we
complete an analysis to determine if the impaired loan requires a specific reserve or to be
charged down to estimated net realizable value. The time frame may be as short as 30 days or
as much as 180 days, when an appraisal is ordered.
•
Camco’s credit risk management process consistently monitors key performance metrics across
both the performing and non-performing assets to identify any further degradation of credit
quality. Additionally, impaired credits are monitored in weekly loan committee asset quality
discussions, monthly Asset Classification Committee meetings and quarterly loan loss reserve
reviews. Strategy documents and exposure projections are completed on a monthly basis to ensure
that the current status of the troubled asset is clearly understood and reported.
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•
The Asset Classification Committee oversees the management of all impaired loans and any
subsequent loss provision or charge off that is considered. When a loan is deemed impaired, the
valuation is obtained to determine any existing loss that
may be present as of the valuation date. Policy dictates that any differences from fair market
value, less costs to sell, are to be recognized as loss during the current period (loan loss
provision or charge off). Any deviations from this policy will be identified by amount and
contributing reasons for the policy departure during our quarterly reporting process.
•
Camco’s policies dictate that an impaired loan subject to partial charge off will remain in
a nonperforming status until it is brought current. Typically, this occurs when a loan is paid
current and completes a period of on-time payments that demonstrate that the loan can perform
and/or there is some certainty payments will continue. Camco monitors through various system
reports any loan whose terms have been modified. These reports identify troubled debt
restructures, modifications, and renewals.
•
When circumstances do not allow for an updated appraisal or Camco determines that an
appraisal is not needed, the underlying collateral’s fair market value is estimated in the
following ways:
Impaired loans are set forth in the following table:
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The Corporation categorizes loans and leases into risk categories based on relevant information
about the ability of borrowers to service their debt such as: current financial information,
historical payment experience, credit documentation, public information, and current economic
trends, among other factors. The Corporation analyzes loans and leases individually by classifying
the loans and leases as to credit risk. The loans monitored utilizing the risk categories listed
below refer to commercial, commercial and industrial, construction, land, farmland and agriculture
loans. All non-homogeneous loans are monitored through delinquency reporting. This analysis is
performed on a quarterly basis. The Corporation uses the following definitions for risk ratings:
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Loans and leases not meeting the criteria above that are analyzed individually as part of the above
described process are considered to be pass rated loans and leases.
Based on the most recent analysis performed, the risk category of non-homogenous loans and leases
is as follows:
Homogeneous loans are monitored at 60+ days delinquent. See the above schedule related to change
in allowance for loans which includes all class of loans including the loans related to residential
and consumer.
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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:
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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 included herein include, but are not limited to:
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 subsidiay, Advantage
Bank, and through March 31, 2011, its formerly wholly-owned subsidiary, Camco Title Agency.
Overview
Management’s Discussion and Analysis 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 in the 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 (“Advantage” or the “Bank”) and, through March 31, 2011, Camco Title
Agency.
The deterioration in the economic conditions of the country that began in 2008 and continues today
has created challenges for the Corporation, including the following:
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
2011 appraised values decreased significantly. As a result, the Bank’s evaluation of the loan
portfolio and allowance for loan losses resulted in higher than normal net charge-offs and the need
to record higher provision for loan losses over the past few years.
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 $1.2 million. The Bank used the proceeds of the sale to pay $21.0 million in FHLB
borrowings including a prepayment penalty of $216,000.
The Corporation is addressing 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, through our loan charge-offs and provision for loan losses as
we recognize the results of these current economic conditions and issues related to higher than
normal unemployment. The real estate market continues to create a very challenging environment as
bankruptcies, foreclosures and unemployment continue to be high 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 tremendous undertaking, requiring both time and
considerable effort of staff. We believe that we are taking 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.
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We have found that “core” deposit growth continues to be challenging but have continued to work
with commercial borrowers to build banking relationships. The extended low rate environment and
increased competition for deposits continue to put pressure on marginal funding costs, despite
continued lower rates in 2010 and 2011.
Discussion of Financial Condition Changes from December 31, 2010 to June 30, 2011
At June 30, 2011, Camco’s consolidated assets totaled $767.5 million, a decrease of $47.4 million,
or 5.8%, from December 31, 2010. The decrease in total assets resulted primarily from decreases in
investment securities and loans receivable and the redemption of FHLB stock, which were offset
partially by increases in cash and cash equivalents. Further deterioration of the residential loan
market and fewer new purchases may continue to shift the loan portfolio toward commercial loans.
The current loan rates may continue to slow residential lending and the sale of fixed rate loans,
therefore it is likely that the gain on sale will continue to be less in 2011 than was previously
experienced in 2010. Additionally, in the second quarter of 2011 we sold three portfolio loans at
a loss of $433,000 which was offset by our current year to date gain on the sale of mortgage loans
of $433,000. When comparing the six months ended June 2011 versus 2010 the gain on sale of
mortgage loans decreased $57,000. Any growth in deposits would most likely be used to reduce
outstanding borrowings and brokered deposits or fund commercial loan volume. Loan volume
increased in June and we have a larger pipeline going into the second half of 2011. Management’s
overall focus at the Bank has been on managing credit, reducing risk within the loan portfolio and
enhancing liquidity and capital in a distressed economic environment. Continuous progress is being
made on addressing these issues, but we expect the distressed economic environment to continue
through 2011.
Cash and interest-bearing deposits in other financial institutions totaled $42.4 million at June
30, 2011, an increase of $13.3 million, or 45.6%, from December 31, 2010. Cash has increased as
we have begun to restructure the balance sheet by decreasing assets and liabilities when possible
to improve our capital position.
As of June 30, 2011 securities totaled $14.6 million, a decrease of $20.1 million, or 58.0%, from
December 31, 2010, due to the sale of $27.2 million in securities, principal repayments and
maturities of $5.3 million and the change in the fair value of securities available for sale of
$1.6 million for the six-month period ended June 30, 2011. These were offset partially by purchases
of $12.6 million which were primarily investment securities at a weighted rate of 1.28%.
Additionally, $20.0 million of FHLB stock was redeemed during the first quarter 2011.
Loans receivable, including loans held for sale, totaled $645.0 million at June 30, 2011, a
decrease of $25.1 million, or 3.7%, from December 31, 2010. The decrease resulted primarily from
principal repayments of $108.2 million and loan sales of $33.1 million offset partially by loan
disbursements totaling $125.1 million. Principal repayments are slightly higher than 2010 on
loans and our ability to originate new loans has not been as strong as 2010 in the first half of
2011. The reduction in residential real estate loan balances was intensified by the secondary
market offering historically low long-term fixed rates during most of 2010.
Loan originations during the six-month period ended June 30, 2011, included $71.8 million of
commercial loans, $45.7 million in loans secured by one- to four-family residential real estate and
$7.5 million in consumer and other loans. Our intent is to continue to service our communities in
1-4 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. However,
we have currently seen lending volumes of acceptable risk diminished somewhat due to a slowing
economy and competition in the market areas. Loan repayments are being used to reduce borrowings
and maintain current liquidity levels.
During 2011, the yield on loans was 5.57% a decrease of 10 basis points as compared to 5.67% for
2010. The decrease in yield is due to lower average loan balances coupled with lower effective
rates in the loan portfolio during 2011. We continue to have adjustable rate loans re-price at the
current lower rate environment and new loans are originated at the current lower market rates.
The allowance for loan losses totaled $16.8 million and $16.9 million at June 30, 2011, and
December 31, 2010, representing 64.3% and 49.9% of nonperforming loans,
respectively, at those dates. Nonperforming loans (loans with three payments delinquent plus
nonaccrual loans) totaled $26.1 million and $33.8 million at June 30, 2011 and December 31, 2010,
respectively, constituting 3.9% and 4.9% of total net loans, including loans held for sale. The
decrease in non-accrual loan
balances is due to credit quality efforts that are discussed above.
During 2011 provision for loan losses decreased slightly while the balance in the allowance was
comparative to the December balance. See the Allowance for loan losses footnote above for
additional information related to change in allowance, delinquency and etc. Net charge-offs
totaled $1.3 million for the six months ended June 30, 2011.
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The following table sets forth information with respect to Advantage’s nonperforming assets for the
periods indicated.
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 interest income,
depending on management’s assessment of the collectability of the loan.
At June 30, 2011, the Corporation’s other real estate owned (REO) consisted of 185 repossessed
properties with a net book value of $14.2 million, an increase of $4.1 million due primarily to two
large relationships. 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
in operations when incurred. 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 their 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 $631.6 million at June 30, 2011, a decrease of $20.2 million, or 3.1%, from the
total at December 31, 2010. The following table details our deposit portfolio balances and the
average rate paid on our deposit portfolio at June 30, 2011 and December 31, 2010:
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The decrease in certificates of deposits was primarily due to decreases in public funds and
brokered deposits coupled with non-core customers (only certificate of deposit account). 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, small
businesses 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. To the extent the Bank grows its core deposits, the cost of funds should decrease,
thereby increasing the Bank’s net interest margin.
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 plan to implement paperless statements which will be less costly and more
efficient for many customers.
We anticipate an additional $6.4 million in maturities of brokered deposits throughout the
remainder of 2011, this will help to maintain the Bank’s margin. Further, by growing core deposits
we will improve the long-term funding mix of the Bank’s deposit portfolio by aggregating small
business, commercial and retail checking accounts.
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 (“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 utilized these standards since
mid year 2009.
Advances from the FHLB and other borrowings totaled $68.8 million at June 30, 2011, a decrease of
$24.2 million, or 26.0%, from the total at December 31, 2010. The decrease in borrowings was
primarily due to early payoff of $21.0 million of borrowings that had a prepayment penalty of
$216,000. The sale of investments provided the cash to pay off such borrowings and decrease
reliance on this non core funding.
Stockholders’ equity totaled $46.1 million at June 30, 2011 and December 31, 2010. Net changes
included the decrease from the sale of investments which decreased accumulated other comprehensive
income related to the fair value of our investment securities in the amount of $1.0 million offset
partially by net earnings of $789,000.
Comparison of Results of Operations for the Six Months Ended June 30, 2011 and 2010
Camco’s net earnings for the six months ended June 30, 2011, totaled $789,000, an increase of $4.8
million, from the net loss of $4.0 million reported in the comparable 2010 period. On a per share
basis, the net earnings during the first half of 2011 were $0.11, compared to $(0.55) per share in
the first half of 2010. The increase in earnings was primarily attributable to decreased provision
for losses on loans, increased gain on sale of investments which was offset partially by increased
general, administrative and other expenses.
Net Interest Income
Net interest income totaled $13.0 million for the six months ended June 30, 2011, an increase of
$417,000, or 3.3%, compared to the six month period ended June 30, 2010, generally reflecting the
effects of a $47.9 million decrease in the average balance
of interest bearing liabilities coupled
with the average cost of funding decreasing by 44 basis points year to year. Net interest margin
increased to 3.62% in 2011 compared to 3.32% of 2010.
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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.
Interest income on loans totaled $17.7 million for the six months ended June 30, 2011, a decrease
of $821,000, or 4.4%, from the comparable 2010 period. The decrease resulted primarily from a
decrease in the average balance outstanding of $17.1 million, or 2.6%, from the comparable 2010
period. As discussed previously this is primarily related to the sale of securities and the
redemption of FHLB stock in the first quarter of 2011. A 10 basis point decrease in the average
yield in the 2011 period also negatively impacted interest income on loans.
Interest income on securities totaled $439,000 for the six months ended June 30, 2011, a decrease
of $634,000, or 59.1%, from the first half of 2010. The decrease was due primarily to a $26.3
million decrease in the average balance coupled with a 60 basis point decrease in the average
yield, to 3.68% for the 2011 period.
Dividend income on FHLB stock is paid a quarter in arrears, therefore, due to our redemption of
$20.0 million in January 2011 the yield is inflated for the current period by the number of days of
interest received in January related to the extra $20.0 million
of stock. Interest income will decrease in the 3rd quarter and we believe the yield on the asset
will be comparable to previous year quarter. Interest income on other interest bearing accounts
continues to be low due to higher balances needed to compensate for charges at correspondent banks,
leaving less balance for interest calculation offset partially by a slight increase in rates. We
have increased cash on hand balances due to the sale of investments at the end of June 2011. We
will continue to
deploy cash when available by paying down advances, borrowings and higher cost
brokered deposits in order to generate additional income.
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Interest expense on deposits totaled $4.1 million for the six months ended June 30, 2011, a
decrease of $1.6 million, or 27.8%, compared to the same period in 2010 due primarily to a 49 basis
point decrease in the average cost of deposits to 1.37% in the current period, coupled with a $13.0
million, or 2.1%, decrease in average interest bearing deposits outstanding. While the cost of
deposits was lower in 2011 compared to 2010, the cost of funds in 2011 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 2011, 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 $1.5 million for the six months ended June 30, 2011 a
decrease of $460,000, or 23.1%, from the same 2010 six month period. The decrease resulted
primarily from a $34.9 million, or 28.0%, decrease in the average borrowings outstanding, offset
partially by a 21 basis point increase in the average cost of borrowings to 3.40%.
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.
Camco’s loan quality has been negatively impacted by conditions within our market areas which has
caused declines in real estate values and deterioration in the financial condition of some of our
borrowers. These conditions have led Camco to downgrade the loan quality ratings on various loans
through our loan review process. In addition, some of our loans became under-collateralized due to
reductions in the estimated net realizable fair value of the underlying collateral. As a result,
Camco’s provision for loan losses, net charge-offs and nonperforming loans have been significantly
higher than historical levels since 2008.
Camco’s net loan charge-offs and provision for loan losses in recent quarters 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 are
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 to $1.2 million for the six months ended June 30, 2011,
compared to $6.1 million for the same period in 2010. We believe our loans are adequately reserved
for probable losses inherent in our loan portfolio at June 30, 2011. However, there can be no
assurance that the loan loss allowance will be adequate to absorb actual losses.
Other Income
Other income totaled $4.1 million for the six months ended June 30, 2011, an increase of $738,000,
or 22.2%, from the comparable 2010 period. The increase in other income was primarily attributable
to a $1.3 million increase in gain on sale of investments, offset partially by the decrease in gain
on sale of loans.
Gain on sale of loans decreased due to the sale of three portfolio loans at a loss of $433,000
which was offset by our current year to date gain on the sale of or mortgage banking activity of
$433,000, which was a slight decrease of $57,000 from the 2010 period.
General, Administrative and Other Expense
General, administrative and other expense totaled $14.6 million for the six months ended June 30,
2011 an increase of $651,000 or 4.7%, from the comparable period in 2010. The increase in general,
administrative and other expense was due to increases in real estate owned and loan expenses,
partially offset by decreases in franchise taxes.
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The increase in real estate owned expense of $824,000 and loan expenses of $345,000 is reflective
of the large real estate owned portfolio and expenses related to ownership such as real estate
taxes, and upkeep of properties. These expenses were coupled with the continued decrease in real
estate values that have negatively impacted our portfolio values and caused a write down to fair
market value. The increase in loan expenses are reflective of additional expenses related to
classified assets and the legal aspects related to collection efforts or litigation.
The decrease in franchise taxes is calculated utilizing equity levels. The decrease in expense
relates to decreased equity levels. Camco filed a Form S-1 on July 11, 2011 for a potential rights
offering with a proposed maximum aggregate offering price of $22.5 million. If Camco pursues the
rights offering its franchise taxes will increase due to an increase in equity.
Federal income taxes totaled $537,000 for the six months ended June 30, 2011, an increase of
$652,000 compared to the six months ended June 30, 2010. This increase reflects the change for
2011 in the valuation allowance against the Corporation’s net deferred tax asset. In 2011, the
Corporation sold available for sale investments that were no longer carrying a deferred position
and recorded tax expense related to such transactions.
The Corporation recorded a 100% valuation allowance against the net deferred tax asset in 2010
considering, based on the available evidence, it is more-likely-than-not that some portion or the
entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. In making such judgments, significant weight is given to evidence
that can be objectively verified. A cumulative tax loss position is considered significant
negative evidence in assessing the realization of a net deferred tax asset, which is difficult to
overcome. Reversal of the valuation allowance can be realized in the future based on estimates of
projected taxable income.
The Corporation has a net operating loss carryforward for tax purposes of approximately $1 million
at June 30, 2011. This compares to a net operating loss carryforward of approximately $13.0 million
at December 31, 2010. The net operating loss carryforward was substantially reduced during the six
months ended June 30, 2011 as the Corporation generated approximately $12.0 million of taxable
income during that period, primarily due to the redemption of the FHLB stock which resulted in
taxable income of approximately $10.0 million. As the Corporation executes plans to return to
profitability future earnings may benefit from the current operating loss carry-forwards.
Comparison of Results of Operations for the Three Months Ended June 30, 2011 and 2010
Camco’s net earnings for the three months ended June 30, 2011, totaled $137,000, an increase of
$4.2 million, from the net loss of $4.1 million, reported in the comparable 2010 period. On a per
share basis, the net earnings during the second quarter of 2011 were $0.02, compared to a loss of
$(0.57) per share in the second quarter of 2010. The increase in earnings was primarily
attributable to a decreased provision for loan and lease losses of $5.0 million. As previously
stated the allowance for loan and lease losses totaled $16.8 million and $16.9 million at June 30,
2011 and December 31, 2010, representing 64.3% and 49.9% of nonperforming loans, respectively, at
those dates.
Net Interest Income
Net interest income totaled $6.4 million for the three months ended June 30, 2011, an increase of
$63,000, or 1.0%, compared to the three-month period ended June 30, 2010, generally reflecting the
effects of a $61.6 million decrease in the average balance of interest bearing liabilities coupled
with the average cost of funding decreasing by 46 basis points year to year. Net interest margin
increased to 3.61% in the second quarter of 2011 compared to 3.39% in the second quarter of 2010.
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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Interest income on loans totaled $8.8 million for the three months ended June 30, 2011, a decrease
of $442,000, or 4.8%, from the comparable 2010 period. The decrease resulted primarily from a
decrease in the average balance outstanding of $20.1 million, or 3.1%, from the comparable 2010
period. As discussed previously this is primarily related to the sale of securities and the
redemption of FHLB stock in the first quarter of 2011. A 10 basis point decrease in the average
yield in the 2011 period also negatively impacted interest income on loans.
Interest income on securities totaled $84,000 for the three months ended June 30, 2011, a decrease
of $411,000, or 83.0%, from the second quarter of 2010. The decrease was due primarily to a $28.5
million decrease in the average balance coupled with a 236 basis point decrease in the average
yield, to 2.04% for the 2011 period.
Dividend income on FHLB stock was consistent with the previous year. Interest on such stock is
paid a quarter in arrears, therefore, due to our redemption of $20.0 million in January 2011 the
yield is inflated for the current period. We believe the yield on the asset will be comparable to
the third quarter of 2010 from the third quarter of 2011. Interest income on other interest
bearing accounts continues to be low due to higher balances needed to compensate for charges at
correspondent banks leaving less balance for interest calculation, which is offset partially by a
slight increase in rates. Cash on hand balances were increased due to the sale of investments at
the end of June 2011 but we continue to deploy the cash by paying down advances, borrowings and
higher cost brokered deposits when available in order to generate additional income.
Interest expense on deposits totaled $1.9 million for the three months ended June 30, 2011, a
decrease of $826,000, or 30.1%, compared to the same quarter in 2010 due primarily to a 51 basis
point decrease in the average cost of deposits to 1.29% in the current quarter, coupled with a
$15.1 million, or 2.5%, decrease in average interest bearing deposits outstanding. While the cost
of deposits was lower in the second quarter of 2011 compared to the second quarter of 2010, the
cost in 2011 is expected to stabilize as rates have been at low levels over the past two years.
However, we will continue to re-price certificates of deposit in
2011, which should decrease costs slightly if rates continue to be at the current low levels.
However, competitive pressures may limit our ability to reduce interest rates paid on deposits.
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Interest expense on borrowings totaled $726,000 for the three months ended June 30, 2011 a decrease
of $266,000, or 26.8%, from the same 2010 three-month period. The decrease resulted primarily from
a $46.5 million, or 36.8%, decrease in the average borrowings outstanding offset partially by a 50
basis point increase in the average cost of borrowings to 3.64%.
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.
Camco’s loan quality has been negatively impacted by the conditions within our market areas which
has caused declines in real estate values and deterioration in the financial condition of some of
our borrowers. These conditions have led Camco to downgrade the loan quality ratings on various
loans through our loan review process throughout the past two years. In addition, some of our
loans became under-collateralized due to reductions in the estimated net realizable fair value of
the underlying collateral. As a result, Camco’s provision for loan losses, net charge-offs and
nonperforming loans have been significantly higher than historical levels since 2008.
Camco’s net loan charge-offs and provision for loan losses in recent quarters 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 are
prudent during the current economic environment.
Based upon an analysis of these factors, the continued economic outlook and new loan quality
production, we increased the provision for losses on loans to strengthen our allowance in previous
quarters. Due to the previous strengthening of the allowance and the decrease in our non-accrual
and classified assets we determined that a much lesser provision was needed for this quarter. An
additional $197,000 was added to the provision for the three months ended June 30, 2011, compared
to $5.2 million for the same period in 2010. We believe our loans are adequately reserved for
probable losses inherent in our loan portfolio at June 30, 2011. However, there can be no assurance
that the loan loss allowance will be adequate to absorb actual losses.
Other Income
Other income totaled $1.0 million for the three months ended June 30, 2011 a decrease of $574,000,
or 35.8%, from the comparable 2010 period. The decrease in other income was primarily attributable
to a $353,000, or 135.3% decrease in gain on sale of loans related to losses on three portfolio
loans of $283,000, which was offset partially by our current year to date gain on the sale of or
mortgage banking activity of $191,000, offset partially by normal residential fixed rate secondary
market activity. This was coupled with the liquidation of Camco Title on March 31, 2011 and
earnings related to the subsidiary in the previous period.
General, Administrative and Other Expense
General, administrative and other expense totaled $7.1 million for the three months ended June 30,
2011, an increase of $166,000 or 2.4%, from the comparable period in 2010. The increase in
general, administrative and other expense was due to increases in real estate owned and loan
expenses partially offset by decreases in employee compensation and professional services.
The increase in real estate owned expense of $416,000 and loan expenses of $265,000 is reflective
of the large real estate owned portfolio and expenses related to ownership such as real estate
taxes, and upkeep of properties. These expenses were coupled with the continued falling of real
estate values that have negatively impacted our portfolio values and caused a write down to fair
market value. The increase in loan expenses are reflective of additional expenses related to
classified assets and the legal aspects related to collection efforts or litigation.
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The decrease in employee compensation is due to a decrease in the total number of employees. The
Corporation has made it a priority to identify cost savings opportunities throughout its operations
and is committed to maintaining cost control measures, believing that the effort will play a major
role in improving its performance. The Corporation also believes that its technology allows it to
be efficient in its back-office operations. In addition, as the level of nonperforming assets is
reduced, the operating costs associated with carrying those assets, such as maintenance, legal
proceedings, insurance and taxes will decrease.
Federal Income Taxes
Federal income tax benefit totaled $11,000 for the three months ended June 30, 2011 a decrease of
$102,000, compared to the three months ended June 30, 2010. This decrease reflects the change in
our 100% valuation allowance that was taken in September 2010 on the Corporation’s deferred tax
asset. At June 30, 2011, the Corporation has a federal net operating loss carry-forward of
approximately $1 million available to offset future taxable income.
The Corporation recorded a 100% valuation allowance against the net deferred tax asset in 2010
considering, based on the available evidence, it is more-likely-than-not that some portion or the
entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in which those temporary
differences become deductible. In making such judgments, significant weight is given to evidence
that can be objectively verified. A cumulative tax loss position is considered significant
negative evidence in assessing the realization of a net deferred tax asset, which is difficult to
overcome. Reversal of the valuation allowance can be realized in the future based on estimates of
projected taxable income.
The Corporation has a net operating loss carryforward for tax purposes of approximately $1 million
at June 30, 2011. This compares to a net operating loss carryforward of approximately $13.0 million
at December 31, 2010. The net operating loss carryforward was substantially reduced during the six
months ended June 30, 2011 as the Corporation generated approximately $12.0 million of taxable
income during that period, primarily due to the redemption of the FHLB stock which resulted in
taxable income of approximately $10.0 million. As the Corporation executes plans to return to
profitability future earnings may benefit from the current operating loss carry-forwards.
Additional Capital
The Corporation’s Tier 1 capital at June 30, 2011 did not meet the requirements set forth in the
Consent Order or the Memorandum of Understanding (the “MOU”) that Camco entered into with the
Federal Reserve Board of Governors (“FRB”) on March 4, 2009 as those agreements are discussed under
“Liquidity and Capital Resources” below. As a result, the Corporation will need to increase
capital levels to meet the standards set forth by the FDIC, Ohio Division and FRB. The Corporation
has engaged an investment banking firm and has developed a capital plan that includes, but is not
limited to, the potential for balance sheet reduction, the sale of branches, issuing common stock,
preferred stock, debt or some combination of those issuances, or other financing alternatives that
will be treated as capital. Although the Corporation anticipates raising additional capital, the
Board of Directors has not yet determined the type, timing, amount, or terms of possible securities
to be issued in the offering, and there are no assurances that an offering will be completed or
that the Corporation will succeed in this endeavor. On July 11, 2011, the Board decided to file a
Form S-1 for a public rights offering. This is only one of several alternatives currently being
evaluated by the Board and there is no assurance that this be the final capital raising measure
pursued. However, the Board believed it was prudent to make the filing so that it could move
quickly once its evaluation of available alternatives is complete. In addition, a transaction,
which would likely involve equity financing would result in substantial dilution to current
stockholders and could adversely affect the price of the Corporation’s common stock.
Liquidity and Capital Resources
Liquidity is the Corporation’s ability to generate adequate cash flows to meet the demands of its
customers and provide adequate flexibility for the Corporation to take advantage of market
opportunities. Cash is used to fund loans, purchase investments, fund the maturity of liabilities,
and at times to fund deposit outflows and operating activities. The Corporation’s principal sources
of funds are deposits; amortization, prepayments and sales of loans; maturities, sales and
principal receipts from securities; borrowings; and operations. Managing liquidity entails
balancing the need for cash or the ability to borrow against the objectives of maximizing
profitability and minimizing interest rate risk. The most liquid types of assets typically carry
the lowest yields.
Camco is a single bank holding company with its primary source of liquidity derived from dividends
received from the Bank which are dependent on the Bank’s cash flow and earnings. Ohio statutes
also impose certain limitations on a bank’s payment of dividends and other capital distributions.
Currently, a Consent Order prohibits the Bank from paying a dividend to Camco without prior
approval of the FDIC and Ohio Division. Camco has $5.0 million in trust preferred securities
outstanding with a maturity date of 2037 and a provision that provides for a deferment of interest
payment for up to 20 consecutive quarters without default, if required. Based on notification
received from the FRB on April 30, 2009, Camco was required to exercise
this provision to defer interest payments and has deferred a total of nine quarters as of June 30,
2011. Further, as a result of entering into the MOU, Camco is prohibited from paying dividends to
our stockholders without first obtaining the approval of the FRB. Our ability to pay dividends to
stockholders is dependent on our net earnings. Increases in loan losses or higher regulatory
capital reserve requirements may also jeopardize our ability to pay dividends.
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The objective of the Bank’s liquidity management is to maintain ample cash flows to meet
obligations for depositor withdrawals, fund the borrowing needs of loan customers, and to fund
ongoing operations. Core relationship deposits are the primary source of the Bank’s liquidity. As
such, the Bank focuses on deposit relationships with local business and consumer clients with a
strategy to increase the number of services/products per client. The Corporation views such
deposits as the foundation of its long-term liquidity because it believes such core deposits are
more stable and less sensitive to changing interest rates and other economic factors compared to
large time deposits or wholesale purchased funds.
Liquidity is monitored and assessed daily in order to meet deposit, loan and operational needs of
the Bank. A liquidity contingency funding plan at both the Camco and Bank levels identifies
liquidity thresholds and red flags that may evidence liquidity concerns or future crises. The
contingency plan details specific actions to be taken by management and the Board of Directors
should such an incident arise and identifies sources of both asset and liability based liquidity.
In conjunction with the Corporation’s asset/liability and interest rate risk management activities,
we actively monitor liquidity risk and analyze various scenarios that could impact or impair
Camco’s ability to access emergency funding during a liquidity crisis.
Liquid assets consist of cash and interest-bearing deposits in other financial institutions,
investments and mortgage-backed securities. Approximately $9.4 million, or 65.4%, of our investment
portfolio is expected to mature or prepay during the next 12 months. While these maturities could
provide a source of liquidity in the short term, the collateral requirements of public deposits
and repurchase agreements limit our ability to use these funds freely. State and local political
subdivision deposits equaled $2.0 million at June 30, 2011, and $4.2 million at December 31, 2010.
Liquidity sources also include deposits, borrowings and principal and interest repayments on loans.
While scheduled loan repayments and maturing investments are relatively predictable, deposit flows
and early loan and security prepayments are influenced more by interest rates, general economic
conditions, and competition and are difficult to predict. Approximately $206.4 million of the
Corporation’s certificate of deposit portfolio is scheduled to mature during the next 12 months.
Depositors continue a preference toward short-term certificates or other issuances less than 18
months. The shorter term preference places additional liquidity pressure on the Corporation,
however, management has seen a weakening in competition for deposits in the current economic
environment. A material loss of these short-term deposits could force us to seek funding through
contingency sources, which may negatively impact earnings.
Management may augment liquidity and core deposit funding utilizing diversified and reliable
sources of wholesale funds. Borrowings with up to 90 days maturity may be used to compensate for
reduction in other sources of funds or to support lending activities. The Bank’s loan portfolio
and FHLB stock provide collateral to support its borrowing needs. Management believes that its
focus on core relationship deposits coupled with access to borrowing through reliable
counterparties provides reasonable and prudent assurance that ample liquidity is available.
However, depositor or counterparty behavior could change in response to competition, economic or
market situations or other unforeseen circumstances, which could have liquidity implications that
may require different strategic or operational actions. One wholesale funding source historically
used by the Bank is brokered deposits. At June 30, 2011, such deposits have declined to $6.4
million, exclusive of CDARS deposits and will be repaid by the end August 2011.
FHLB advances are another funding source. While significant strategic and tactical focus is
currently being placed on deposit growth, borrowings and additional borrowing capacity at the FHLB
are still vital sources of liquidity and growth funding. However, our total borrowing capacity at
the FHLB is dependent on the level of eligible collateral assets held by the Bank and the Bank’s
credit rating with the FHLB. Available capacity at the FHLB has been increased by pay downs of
advances during 2011. The inability of the Bank to access contingency funding from the FHLB may
significantly limit our growth and negatively affect earnings, however, the Bank has improved
on-balance-sheet liquidity in response to FHLB’s higher collateral maintenance requirements.
We plan to continue to monitor our funding sources through wholesale deposits and FHLB borrowings,
but recognize that our current credit risk profile may restrict these sources. Our Funds
Management Group monitors the market deposit rates to allow for competitive pricing in order to
raise funds through deposits. Funds in excess of loan demand and available borrowing repayments
will be held in short-term investments or federal funds sold. We are taking these actions to
proactively prepare for the possibility of continued balance sheet management opportunities,
possible credit markets deteriorations and non-performing loan status changes, which may change our
borrowing capacity at the FHLB further.
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The following table sets forth information regarding the Bank’s obligations and commitments to make
future payments under contract as of June 30, 2011.
We anticipate that we will have sufficient funds available to meet our current loan commitments.
Based upon historical deposit flow data, the Bank’s competitive pricing in its market and
management’s experience, we believe that a significant portion of our maturing certificates of
deposit in the next 12 months will remain with the Bank, but
recognize the risk but recognize the risk related to a large portion
of the certificates of deposit maturing within three years.
Liquidity management is both a daily and long-term management process. In the event that we should
require funds beyond our ability to generate them internally, additional funds are available
through the use of FHLB advances, internet deposits, and through the sales of loans or securities.
As a
result of the Camco Agreement with the FRB, Camco has elected to defer further interest
payments on the subordinated debt securities relating to the trust preferred securities of Camco
Financial Corporation Trust 1. The Company has the right under the indenture for the subordinated
debt securities to defer interest payments for up to 20 consecutive calendar quarters. The
deferral provisions for the securities were intended to provide the Corporation with a measure of
financial flexibility during times of financial stress due to market conditions, such as the
current state of the financial and real estate markets.
As a result of the Corporation’s election to exercise its contractual right to defer interest
payments on its subordinated debt securities, it is likely that the Corporation will not have
access to the trust preferred securities market until the Corporation becomes current on those
obligations. This may also adversely affect the Corporation’s ability in the market to obtain debt
financing. Therefore, the Corporation is likely to have greater difficulty in obtaining financing
and, thus, will have fewer sources to enhance its capital and liquidity position. In addition, the
Corporation will be unable to pay dividends on its common stock until such time as the Corporation
is current on interest payments on its subordinated debt securities. Currently there is no market
for trust preferred securities.
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Camco and Advantage are required to maintain minimum regulatory capital pursuant to federal
regulations. The following tables present certain information regarding compliance by Camco and
Advantage with applicable regulatory capital requirements at June 30, 2011:
Federal law prohibits a financial institution from making a capital distribution to anyone or
paying management fees to any person having control of the institution if, after such distribution
or payment, the institution would be undercapitalized. Additionally, the payment of dividends by
Advantage to Camco and by Camco to stockholders is subject to restriction by regulatory agencies.
These restrictions normally limit dividends from the Bank to the sum of the Bank’s current and
prior two years’ earnings, as defined by the agencies.
On March 4, 2009, Camco entered into a Memorandum of Understanding (the “MOU”) with the FRB. The
MOU prohibits Camco from engaging in certain activities while the MOU is in effect, including,
without the prior written approval of the FRB, (1) the declaration or payment of dividends to
stockholders or (2) the repurchase of Camco’s stock.
On April 30, 2009, Camco was notified by the FRB that it had conducted a “surveillance review” as
of December 31, 2008. Based on that review, the FRB notified Camco that it must (i) eliminate
stockholder dividends and (ii) defer interest payments on its 30-year junior subordinated
deferrable interest notes that were issued to its wholly-owned subsidiary, Camco Statutory Trust
I, in its trust preferred financing that was completed in July 2007. These prohibitions were
memorialized in a written agreement with the FRB on August 5, 2009 (the “Camco Agreement”). Camco
and Camco Statutory Trust I, are permitted to defer interest and dividend payments, respectively,
for up to five consecutive years without resulting in a default. As of June 30, 2011, Camco had
deferred payments for nine quarters. Camco may not resume these dividend or interest payments
until it receives approval from the FRB.
The Camco Agreement also requires Camco to obtain FRB approval prior to: (i) receiving dividends
or any other form of payment representing a reduction in capital from Advantage; (ii) making any
distributions of interest, principal or other sums on subordinated debentures or trust preferred
securities; (iii) incurring, increasing or guaranteeing any debt; or (iv) repurchasing any Camco
stock.
Advantage entered into the Consent Agreement with the FDIC and the State of Ohio, Division of
Financial Institutions (“Ohio Division”) that provided for the issuance of an order by the FDIC
and the Ohio Division, which order was executed by the FDIC and Ohio Division on July 31, 2009
(the “Bank Agreement”). The Consent Agreement requires Advantage to, among other things, (i)
increase its Tier 1 leverage capital ratio to 8%; and (ii) seek regulatory approval prior to
declaring or paying any cash dividend. As a result of the Consent Agreement, Advantage is
disqualified as a public depository under Ohio law and will incur higher premiums for FDIC
insurance of its accounts. Advantage is not in compliance with the capital requirement of the
Consent Order and must raise additional capital.
As a result of the recent downturn in the financial markets, the availability of many sources of
capital (principally to financial service companies) has become significantly restricted or has
become increasingly costly as compared to the prevailing market
rates prior to the downturn. Management cannot predict when or if the capital markets will return
to more favorable conditions.
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There can be no assurances that the Corporation will be successful in its efforts to raise
additional capital during 2011. An equity financing transaction would result in substantial
dilution to the Corporation’s current stockholders and could adversely
affect the market price of
the Corporation’s common stock. We are unable to predict if these efforts will be successful,
either on a short-term or long-term basis. Should these efforts be unsuccessful, due to the
regulatory restrictions which exist that prohibit dividends between the Bank and Camco, which may
cause Camco to be unable to meet its financial obligations in the normal course of business.
Further, a material failure to comply with the provisions of the MOU, Camco Agreement or Consent
Order could result in additional enforcement actions by the FDIC, the Ohio Division or the FRB.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Item 4: Controls and Procedures
Camco’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of
Camco’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended) as of June 30, 2011. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that Camco’s disclosure controls
and procedures were effective as of June 30, 2011. During the quarter ended June 30, 2011, there
were no changes in Camco’s internal controls over financial reporting that have materially affected
or are reasonably likely to materially affect Camco’s internal controls over financial reporting.
PART II
ITEM 1. Legal Proceedings
In the ordinary course of their respective businesses or operations, Camco or its subsidiaries may
be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective
properties may be subject to various pending and threatened legal proceedings and various actual
and potential claims. In view of the inherent difficulty of predicting the outcome of such matters,
Camco cannot state what the eventual outcome of any such matters will be; however, based on current
knowledge and after consultation with legal counsel, management believes that these proceedings
will not have a material adverse effect on the consolidated financial position, results of
operations or liquidity of Camco.
ITEM 1A. Risk Factors
There are no material changes from the risk factors previously disclosed in the Corporation’s Form
10-K for the year ended December 31, 2010. The risk factors described in the Annual Report on Form
10-K are not the only risks facing the Corporation. Additional risks and uncertainties not
currently known to the Corporation or that management currently deems to be immaterial also may
materially adversely affect the Corporation’s business, financial condition and / or operating
results. Moreover, the Corporation undertakes no obligation and disclaims any intention to publish
revised information or updates to forward looking statements contained in such risk factors or in
any other statement made ay any time by the Corporation or any of its directors, officers,
employees or other representatives, unless and until any such revisions or updates are expressly
required to be disclosed by securities laws or regulations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. (Removed and Reserved)
ITEM 5. Other Information
Not applicable
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ITEM 6. Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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