Allowance for Loan Losses

3 Months Ended

Mar. 31, 2012

Allowance for Loan Losses [Abstract]

Allowance for Loan Losses

7. Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision which is charged to expense and represents management’s best estimate of probable losses that could be incurred within the existing portfolio of loans. The allowance is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Corporation’s allowance for possible loan loss methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The amount of the provision reflects not only the necessary allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Corporation’s control, including, among other things, changes in market interest rates and other factors in the local economies that we serve, such as unemployment rates and real estate market values.

The Corporation’s allowance for possible loan losses consists of three elements: (i) specific valuation allowances on probable losses on specific loans; (ii) historical valuation allowances based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the Corporation.

Loans identified as losses by management are charged-off. Furthermore, consumer loan accounts are charged-off automatically based on regulatory requirements.

Allowance for loan losses as of March 31, 2012 and 2011 are summarized as follows:

(in thousands)	Construction			Consumer			Multi- Family			Land, Farm & Ag Loans			Residential			Commercial  & Non- Residential			Commercial and Industrial			Total
Allowance for credit losses:
Beginning balance December 31, 2011	$	35		$	80		$	2,484		$	554		$	8,277		$	2,565		$	537		$	14,532
Charge-offs		—			—			(11	)		—			(634	)		—			(46	)		(691	)
Recoveries		—			—			8			1			50			10			39			108
Provision		393			(32	)		(933	)		488			(727	)		1,781			35			1,005
Ending balance March 31, 2012	$	428		$	48		$	1,548		$	1,043		$	6,966		$	4,356		$	565		$	14,954
Beginning balance December 31, 2010	$	166		$	246		$	2,860		$	849		$	8,050		$	3,638		$	1,061		$	16,870
Charge-offs		—			(2	)		—			—			(710	)		(266	)		(9	)		(987	)
Recoveries		—			1			6			195			135			88			89			514
Provision		(2	)		33			(511	)		(262	)		487			1,968			(700	)		1,013
Ending balance March 31, 2011	$	164		$	278		$	2,355		$	782		$	7,962		$	5,428		$	441		$	17,410

Allocation of the allowance for loan loss by segment to loans individually and collectively evaluated for impairment as follows:

At March 31, 2012 (in thousands)	Construction		Consumer		Multi- Family		Land, Farm & Ag Loans		Residential		Commercial & Non- Residential		Commercial and Industrial		Total
Individually evaluated for impairment	$	4	$	12	$	412	$	373	$	424	$	395	$	27	$	1,647
Collectively evaluated for impairment	$	424	$	36	$	1,136	$	670	$	6,542	$	3,961	$	538	$	13,307
Portfolio balances:
Collectively evaluated for impairment	$	23,155	$	3,410	$	77,000	$	12,686	$	297,467	$	157,537	$	37,208	$	608,463
Individually evaluated for impairment
With no related allowance		—		—		—		—		788		887		107		1,782
With related allowance		18		123		4,611		1,197		9,012		6,538		380		21,879
Ending balance	$	23,173	$	3,533	$	81,611	$	13,883	$	306,267	$	163,962	$	37,695	$	630,124

At December 31, 2011 (in thousands)	Construction		Consumer		Multi- Family		Land, Farm & Ag Loans		Residential		Commercial  & Non- Residential		Commercial and Industrial		Total
Individually evaluated for impairment	$	3	$	41	$	426	$	208	$	720	$	335	$	27	$	1,760
Collectively evaluated for impairment	$	32	$	39	$	2,058	$	346	$	7,557	$	2,230	$	510	$	12,772
Portfolio balances:
Collectively evaluated for impairment	$	23,857	$	3,402	$	83,246	$	16,619	$	307,057	$	156,457	$	38,355	$	628,993
Individually evaluated for impairment
With no related allowance		—		—		51		—		1,945		695		112		2,803
With related allowance		19		128		4,633		1,203		8,922		6,612		396		21,913
Ending balance	$	23,876	$	3,530	$	87,930	$	17,822	$	317,924	$	163,764	$	38,863	$	653,709

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 (minimum of six months), or future payments are reasonably assured. Future payments interest income will be recognized while the previous payments of interest (during non-accrual status) will not be recognized until payoff or refinance.

The following table details non-accrual loans at March 31, 2012 and December 31, 2011:

(in thousands)	Non-Accrual March 31, 2012		Non-Accrual December 31, 2011
Construction	$	18	$	19
Land, Farmland, Ag Loans		1,384		367
Residential		20,793		22,277
Commercial		1,830		1,879
Consumer		169		113
Commercial and industrial		160		212
Multi Family		—		51
Total	$	24,354	$	24,918

An age analysis of past due loans, segregated by class of loans were as follows:

March 31, 2012	Loans 30- 59 Days Past Due		Loans 60 - 89 or More Days Past Due		Loans 90+ Days Past Due		Total Past Due		Current		Total Loans		Accruing Loans 90 Days Past Due
(in thousands)
Construction	$	—	$	—	$	—	$	—	$	23,173	$	23,173	$	—
Land, Farmland, Ag Loans		1,056		69		136		1,261		12,622		13,883		—
Residential / prime		1,478		1,146		7,530		10,154		234,021		244,175		—
Residential / subprime		2,241		1,319		6,016		9,576		52,516		62,092		—
Commercial		130		—		1,225		1,355		162,607		163,962		467
Consumer		6		6		83		95		3,438		3,533		—
Commercial and industrial		—		52		107		159		37,536		37,695		—
Multi Family		—		—		—		—		81,611		81,611		—
Total	$	4,911	$	2,592	$	15,097	$	22,600	$	607,524	$	630,124	$	467

December 31, 2011	Loans 30- 59 Days Past Due		Loans 60 - 89 or More Days Past Due		Loans 90+ Days Past Due		Total Past Due		Current		Total Loans		Accruing Loans 90 Days Past Due
(in thousands)
Construction	$	—	$	—	$	—	$	—	$	23,876	$	23,876	$	—
Land, Farmland, Ag Loans		103		—		136		239		17,583		17,822		—
Residential / prime		638		269		4,139		5,046		235,502		240,548		—
Residential / subprime		5,380		1,818		9,499		16,697		60,679		77,376		—
Commercial		462		527		638		1,627		162,137		163,764		—
Consumer		54		76		18		148		3,382		3,530
Commercial and industrial		45		—		114		159		38,704		38,863		—
Multi Family		—		—		51		51		87,879		87,930		—
Total	$	6,682	$	2,690	$	14,595	$	23,967	$	629,742	$	653,709	$	—

Although we believe that the allowance for loan losses at March 31, 2012 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 experienced some decreases 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 or is considered a modification See the Modifications section below. 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.

• 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:

• Camco’s personnel property inspections combined with original appraisal review

• County Auditor values

• Broker price opinions

• Various on-line fair market value estimation programs (i.e. Freddie Mac, Fannie Mae, etc).

Impaired loans are set forth in the following table:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Investment Income Recognized
(in thousands)	March 31, 2012						3 Months Ended March 31, 2012				3 Months Ended March 31, 2011
With no related allowance recorded:
Construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Land, Farmland, Ag Loans		—		—		—		—		—		509		19
Residential		788		1,117		—		831		—		3,518		46
Commercial		887		2,011		—		888		—		123		—
Consumer		—		—		—		—		—		—		—
Commercial and industrial		107		114		—		107		—		36		—
Multi Family		—		661		—		—		—		821		—
Total	$	1,782	$	3,903	$	—	$	1,826	$	—	$	5,007	$	65
With a related specific allowance recorded:
Construction	$	18	$	18	$	4	$	18	$	—	$	—	$	—
Land, Farmland, Ag Loans		1,197		1,197		373		1,200		4		328		—
Residential		9,012		9,158		424		9,049		83		2,907		3
Commercial		6,537		6,537		395		6,575		95		9,286		28
Consumer		123		138		12		125		2		—		—
Commercial and industrial		381		382		27		389		5		66		—
Multi Family		4,611		4,611		412		4,622		53		1,108		—
Total	$	21,879	$	22,041	$	1,647	$	21,978	$	242	$	13,695	$	31

December 31, 2011 (in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Construction	$	—	$	—	$	—	$	—	$	—
Land, Farmland, Ag Loans		—		—		—		—		—
Residential		1,945		3,579		—		2,273		7
Commercial		695		2,015		—		703		27
Consumer		—		—		—		—		—
Commercial and industrial		112		151		—		113		2
Multi Family		51		971		—		52		—
Total	$	2,803	$	6,716	$	—	$	3,141	$	36
With a related specific allowance recorded:
Construction	$	19	$	—	$	3	$	—	$	1
Land, Farmland, Ag Loans		1,203		1,216		208		1,276		74
Residential		8,922		9,033		720		8,233		456
Commercial		6,612		6,612		335		4,404		358
Consumer		128		100		41		25		—
Commercial and industrial		396		396		27		304		26
Multi Family		4,633		4,633		426		4,674		259
Total	$	21,913	$	21,990	$	1,760	$	18,916	$	1,174

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:

• Uncriticized Assets (Grade 1-3)

Uncriticized assets exhibit no material problems, credit deficiencies or payment problems. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral. Such credits are graded as follows: Excellent (1), Good (2) or Satisfactory (3).

• Watch (Grade 4)

Watch rated credits are of acceptable credit quality, but exhibit one or more characteristics which merit closer monitoring or enhanced structure. Such characteristics include higher leverage, lower debt service coverage, industry issues or a construction loan without preleasing commitments (generally multifamily projects).

• Special Mention Assets (Grade 5)

Special Mention Assets have potential weaknesses or pose financial risk that deserves management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date. Special Mention Assets are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification.

• Substandard Assets (Grade 6)

An asset classified Substandard is protected inadequately by the current net worth and paying capacity of the obligor, or by the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The possibility that liquidation would not be timely requires a substandard classification even if there is little likelihood of total loss.

Assets classified as Substandard may exhibit one or more of the following weaknesses:

• The primary source of repayment is gone or severely impaired and the Bank may have to rely upon a secondary source.

• Loss does not seem likely but sufficient problems have arisen to cause the Bank to go to abnormal lengths to protect its position in order to maintain a high probability of repayment.

• Obligors are unable to generate enough cash flow for debt reduction.

• Collateral has deteriorated.

• The collateral is not subject to adequate inspection and verification of value (if the collateral is expected to be the source of repayment).

• Flaws in documentation leave the Bank in a subordinated or unsecured position if the collateral is needed for the repayment of the loan.

• For assets secured by real estate, the appraisal does not conform to FDIC appraisal standards or the assumptions underlying the appraisal are demonstrably incorrect.

• Doubtful Assets (Grade 7)

An asset classified Doubtful has all the weaknesses inherent in one classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

• Loss Assets (Grade 8)

An asset, or portion thereof, classified loss is considered uncollectible and of such little value that its continuance on the books is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing off an essentially worthless asset (or portion thereof), even though partial recovery may occur in the future.

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:

	(Dollars in Thousands)
March 31, 2012	Pass		Watch		Special Mention		Substandard		Total(1)
Construction	$	12,600	$	10,555	$	—	$	18	$	23,173
Land, Farmland, Ag Loans		11,975		169		286		1,453		13,883
Commercial		121,481		23,015		7,322		12,144		163,962
Commercial and industrial		32,262		4,865		317		251		37,695
Multi Family*		51,114		24,478		4,114		1,905		81,611
Total	$	229,432	$	63,082	$	12,039	$	15,771	$	320,034
December 31, 2011	Pass		Watch		Special Mention		Substandard		Total(1)
Construction	$	16,263	$	7,594	$	—	$	19	$	23,876
Land, Farmland, Ag Loans		15,894		173		292		1,463		17,822
Commercial		129,446		17,112		4,959		12,247		163,764
Commercial and industrial		33,064		5,154		336		309		38,863
Multi Family(2)		57,353		24,470		4,138		1,969		87,930
Total	$	252,020	$	54,503	$	9,725	$	16,007	$	332,255

Homogeneous loans are monitored at 60+ days delinquent. See the above schedule on page 16 related to change in allowance for loans which includes all class of loans including the loans related to residential and consumer.

(1) There were no doubtful loans as of March 31, 2012 or December 31, 2011.

Modifications.

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral and/or guarantors may be requested.

Commercial mortgage and construction loans modified in a TDR often involve a temporary or permanent interest rate reduction, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, and/or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs. This is accomplished by temporary interest only payment periods, temporarily lowering the interest rate, extending the maturity date or a combination of these strategies. The accrual status of modified residential mortgages is dependent on the delinquency status before, during and after the modification process. Home equity modifications are uniquely designed to meet the specific needs of each borrower. Modified terms for home equity loans include renewal of an interest only payment stream, extending the maturity date, converting to a principal and interest payment, amortizing the balance due, or a combination of these strategies. Automobile loans are typically not modified.

Loans modified in a TDR may be in accrual status, non-accrual status, partial charge-offs, not delinquent, delinquent or any combination of these criteria. As a result, loans modified in a TDR for the Corporation may have the financial effect of increasing the specific allowance associated with individual loans. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based either on the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

The following presents by class, information related to loans modified in a TDR during the three months ended March 31, 2012.

	Loans Modified as a TDR for the Three Months Ended March 31, 2012
Troubled Debt Restructurings 1 (dollars in thousands)	Number of Contracts		Recorded Investment (as of period end)
Residential—prime		5	$	247
Residential—subprime		1		22
Commercial		1		300
Consumer Other		1		8
Total		8	$	577

1 The period end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

The following presents by class, loans modified in a TDR from April 1, 2011 through March 31, 2012 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three months ended March 31, 2012.

	Loans Modified as a TDR Within the Previous Twelve  Months That Subsequently Defaulted During the Twelve Months Ended March 31, 2012
(dollars in thousands)	Number of Contracts		Recorded Investment (as of period end) 1
Residential—subprime		1	$	102
Commercial and Industrial		1		52
Total		2	$	154

1 The period end balances are inclusive of all partial pay downs and charge-offs since the modification date. Loans modified in a TDR that were fully paid down, charged-off, or foreclosed upon by period end are not reported.