Allowance for Loan Losses

9 Months Ended

Sep. 30, 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 past due history and regulatory requirements.

Allowance for loan losses for the three and nine months period ending September 30, 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		0			(130	)		(11	)		(358	)		(1,931	)		(79	)		(58	)		(2,567	)
Recoveries		0			17			9			5			164			684			65			944
Provision		502			134			(409	)		273			(168	)		406			861			1,599
Ending balance September 30, 2012	$	537		$	101		$	2,073		$	474		$	6,342		$	3,576		$	1,405		$	14,508
Beginning balance June 30, 2012	$	554		$	49		$	1,688		$	768		$	6,396		$	4,118		$	612		$	14,185
Charge-offs		0			(128	)		0			(2	)		(704	)		(14	)		(7	)		(855	)
Recoveries		0			16			0			2			54			648			1			721
Provision		(17	)		164			385			(294	)		596			(1,176	)		799			457
Ending balance September 30, 2012	$	537		$	101		$	2,073		$	474		$	6,342		$	3,576		$	1,405		$	14,508
Beginning balance December 31, 2010	$	166		$	246		$	2,860		$	849		$	8,050		$	3,638		$	1,061		$	16,870
Charge-offs		0			(60	)		(85	)		(107	)		(2,000	)		(1,066	)		(48	)		(3,366	)
Recoveries		0			3			156			210			488			118			98			1,073
Provision		(142	)		(66	)		113			(183	)		2,420			1,395			(499	)		3,038
Ending balance September 30, 2011	$	24		$	123		$	3,044		$	769		$	8,958		$	4,085		$	612		$	17,615
Beginning balance June 30, 2011	$	25		$	114		$	2,933		$	628		$	8,974		$	5,102		$	575		$	18,351
Charge-offs		0			(3	)		(52	)		0			(553	)		(487	)		(39	)		(1,134	)
Recoveries		0			1			40			6			105			9			9			170
Provision		(1	)		11			123			135			432			(539	)		67			228
Ending balance September 30, 2011	$	24		$	123		$	3,044		$	769		$	8,958		$	4,085		$	612		$	17,615

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

At September 30, 2012 (in thousands)	Construction		Consumer		Multi- Family		Land, Farm & Ag Loans		Residential		Commercial  & Non- Residential		Commercial and Industrial		Total
Individually evaluated for impairment	$	1	$	39	$	406	$	100	$	595	$	524	$	34	$	1,699
Collectively evaluated for impairment	$	537	$	62	$	1,666	$	374	$	5,747	$	3,052	$	1,371	$	12,809
Portfolio balances:
Collectively evaluated for impairment	$	29,635	$	3,550	$	68,172	$	13,241	$	272,680	$	143,589	$	38,092	$	568,959
Individually evaluated for impairment
With no related allowance		0		0		0		0		589		1,143		66		1,798
With related allowance		16		526		4,565		900		10,825		5,949		492		23,273
Ending balance	$	29,651	$	4,076	$	72,737	$	14,141	$	284,094	$	150,681	$	38,650	$	594,030

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		0		0		51		0		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 of interest income will be recognized while the previous payments of interest (during non-accrual status) will not be recognized until loan is paid off.

The following table details non-accrual loans at September 30, 2012 and December 31, 2011:

	Non-Accrual		Non-Accrual
(in thousands)	September 30, 2012		December 31, 2011
Construction	$	16	$	19
Land, Farmland, Ag Loans		986		367
Residential		19,152		22,277
Commercial and non-residential		2,068		1,879
Consumer		499		113
Commercial and industrial		66		212
Multi Family		0		51
Total	$	22,787	$	24,918

Detailed below is an age analysis of past due loans, segregated by class. Total past due has decreased $7.3 million, or 30.5% since December 31, 2011 to $16.7 million at September 30, 2012. The majority of the decrease relates to a decrease in subprime residential loans of $8.9 million, or 53.0%. This decrease is significant, because subprime refers to the credit quality of particular borrowers, who have weakened credit histories and are characterized with a higher risk of loan default than prime borrowers.

September 30, 2012	Loans 30- 59 Days Past Due		Loans 60 - 89 Past Due		Loans 90+ Days Past Due		Total Past Due		Current		Total Loans		Accruing Loans 90 Days Past Due
(in thousands)
Construction	$	0	$	0	$	0	$	0	$	29,651	$	29,651	$	0
Land, Farmland, Ag Loans		0		0		119		119		14,022		14,141		0
Residential / prime		1,136		685		5,462		7,283		218,153		225,436		0
Residential / subprime		1,576		677		5,593		7,846		50,812		58,658		0
Commercial and non-residential		118		816		326		1,260		149,421		150,681		0
Consumer		34		24		35		93		3,983		4,076		0
Commercial and industrial		0		0		66		66		38,584		38,650		0
Multi Family		0		0		0		0		72,737		72,737		0
Total	$	2,864	$	2,202	$	11,601	$	16,667	$	577,363	$	594,030	$	0

December 31, 2011 (in thousands)	Loans 30- 59 Days Past Due		Loans 60 - 89 Past Due		Loans 90+ Days Past Due		Total Past Due		Current		Total Loans		Accruing Loans 90 Days Past Due
Construction	$	0	$	0	$	0	$	0	$	23,876	$	23,876	$	0
Land, Farmland, Ag Loans		103		0		136		239		17,583		17,822		0
Residential / prime		638		269		4,139		5,046		235,502		240,548		0
Residential / subprime		5,380		1,818		9,499		16,697		60,679		77,376		0
Commercial and non-residential		462		527		638		1,627		162,137		163,764		0
Consumer		54		76		18		148		3,382		3,530		0
Commercial and industrial		45		0		114		159		38,704		38,863		0
Multi Family		0		0		51		51		87,879		87,930		0
Total	$	6,682	$	2,690	$	14,595	$	23,967	$	629,742	$	653,709	$	0

Although we believe that the allowance for loan losses at September 30, 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. Ohio did experience decreased values of residential real estate from 2008 through 2011 but the decline in values has stabilized in 2012. Nonetheless, these factors, compounded by an 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 collateral dependent and payment is expected solely from the collateral, or is less than the present value of estimated future cash flows using the loan’s existing rate and the calculated value is not sufficient it is considered impaired. If it is impaired a specific valuation allowance is allocated, so that the loan is reported net, or at the loan’s fair sale value. All 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 loans:

• 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 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 there is some certainty that 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 property values are below a set threshold they are not subject to an updated appraisal; Camco will use the underlying collateral’s fair market value as 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
(in thousands)	September 30, 2012
With no related allowance recorded:
Construction	$	0	$	0	$	0
Land, Farmland, Ag Loans		0		0		0
Residential		589		673		0
Commercial and non-residential		1,143		1,143		0
Consumer		0		0		0
Commercial and industrial		66		66		0
Multi Family		0		660		0
Total	$	1,798	$	2,542	$	0
With a related specific allowance recorded:
Construction	$	16	$	16	$	1
Land, Farmland, Ag Loans		900		1,256		100
Residential		10,825		11,202		595
Commercial and non-residential		5,949		5,949		524
Consumer		526		568		39
Commercial and industrial		492		492		34
Multi Family		4,565		4,565		406
Total	$	23,273	$	24,048	$	1,699

	Recorded Investment		Unpaid Principal Balance		Related Allowance
(in thousands)	December 31, 2011
With no related allowance recorded:
Construction	$	0	$	0	$	0
Land, Farmland, Ag Loans		0		0		0
Residential		1,945		3,579		0
Commercial and non-residential		695		2,015		0
Consumer		0		0		0
Commercial and industrial		112		151		0
Multi Family		51		971		0
Total	$	2,803	$	6,716	$	0
With a related specific allowance recorded:
Construction	$	19	$	0	$	3
Land, Farmland, Ag Loans		1,203		1,216		208
Residential		8,922		9,033		720
Commercial and non-residential		6,612		6,612		335
Consumer		128		100		41
Commercial and industrial		396		396		27
Multi Family		4,633		4,633		426
Total	$	21,913	$	21,990	$	1,760

	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Investment Income Recognized
(in thousands)	3 Months Ended Sept 30, 2012				3 Months Ended Sept 30, 2011				9 Months Ended Sept 30, 2012				9 Months Ended Sept 30, 2011
With no related allowance recorded:
Construction	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Land, Farmland, Ag Loans		0		0		0		0		0		0		0		0
Residential		619		1		512		0		551		0		402		3
Commercial and non-residential		1,170		36		1,176		0		504		0		919		38
Consumer		0		0		0		0		0		0		0		0
Commercial and industrial		66		0		704		16		102		0		669		29
Multi Family		0		0		310		26		0		0		167		0
Total	$	1,855	$	37	$	2,702	$	42	$	1,157	$	0	$	2 ,157	$	70
With a related specific allowance recorded:
Construction	$	16	$	0	$	0	$	0	$	18	$	0	$	0	$	0
Land, Farmland, Ag Loans		902		25		1,220		45		243		9		1,258		53
Residential		10,954		186		9,754		190		11,756		194		9,446		289
Commercial and non-residential		5,544		163		5,899		123		8,361		253		5,905		219
Consumer		553		12		0		0		280		8		0		0
Commercial and industrial		308		4		314		9		377		12		318		13
Multi Family		4,577		107		5,601		141		4,611		107		5,267		209
Total	$	22,854	$	497	$	22,788	$	508	$	25,646	$	583	$	22,194	$	783

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:

• Un-criticized Assets (Grade 1-3)

Un-criticized 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-homogeneous loans and leases is as follows:

	(In Thousands)
September 30, 2012	Pass		Watch		Special Mention		Substandard		Total(1)
Construction	$	22,324	$	7,311	$	0	$	16	$	29,651
Land, Farmland, Ag Loans		13,090		0		0		1,051		14,141
Commercial and non-residential		109,803		28,016		5,502		7,360		150,681
Commercial and industrial		36,533		1,936		0		181		38,650
Multi Family		46,910		18,416		3,936		3,475		72,737
Total	$	228,660	$	55,679	$	9,438	$	12,083	$	305,860

December 31, 2011	Pass		Watch		Special Mention		Substandard		Total(1)
Construction	$	16,263	$	7,594	$	0	$	19	$	23,876
Land, Farmland, Ag Loans		15,894		173		292		1,463		17,822
Commercial and non-residential		129,446		17,112		4,959		12,247		163,764
Commercial and industrial		33,064		5,154		336		309		38,863
Multi Family		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 18 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 September 30, 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 and nine months ended September 30, 2012.

	Loans Modified as a TDR for the				Loans Modified as a TDR for the
	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
Troubled Debt Restructurings	Number of		Recorded Investment		Number of		Recorded Investment
(dollars in thousands)	Contracts		(as of period end) 1		Contracts		(as of period end) 1
Land, Farmland, Ag Loans		0	$	0		2	$	732
Residential - prime		6		503		54		3,281
Residential - subprime		2		187		10		966
Commercial and non-residential		0		0		4		1,711
C Consumer Other		5		223		10		417
Multi Family		0		0		0		0
Total		13	$	913		80	$	7,107

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 October 1, 2011 through September 30, 2012 that subsequently defaulted (i.e., 60 days or more past due following a modification) during the three and nine months ended September 30, 2012.

	Loans Modified as a TDR				Loans Modified as a TDR
	Within the Previous Twelve Months				Within the Previous Twelve Months
	That Subsequently Defaulted During the				That Subsequently Defaulted During the
	Three Months Ended September 30, 2012				Twelve Months Ended September 30, 2012
			Recorded				Recorded
	Number of		Investment		Number of		Investment
(dollars in thousands)	Contracts		(as of period end) 1		Contracts		(as of period end) 1
Residential - prime		1	$	98		2	$	166
Residential -subprime		3		153		3		153
Consumer		1		20		1		20
Total		5	$	271		6	$	339

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.