Camco Financial Corp. SVP Stanley Christ Laurence bought 125,000 shares on 7-11-2012 at $ 1.75
Camco Financial Corporation (â€śCamcoâ€ť or the â€śCorporationâ€ť) is a bank holding company that was organized under Delaware law in 1970. Camco is engaged in the financial services business in Ohio, Kentucky and West Virginia, through its wholly-owned subsidiary, Advantage Bank, an Ohio bank (â€śAdvantageâ€ť or the â€śBankâ€ť). On March 31, 2011, Camco divested activities related to Camco Title Agency and decertified as a financial holding company. Camco remains a bank holding company and continues to be regulated by the Federal Reserve Board (â€śFRBâ€ť).
Advantage is primarily regulated by the State of Ohio Department of Commerce, Division of Financial Institutions (the â€śDivisionâ€ť), and the Federal Deposit Insurance Corporation (the â€śFDICâ€ť). Advantage is a member of the Federal Home Loan Bank (the â€śFHLBâ€ť) of Cincinnati, and its deposit accounts are insured up to applicable limits by the Deposit Insurance Fund (the â€śDIFâ€ť) administered by the FDIC.
Advantageâ€™s lending activities include the origination of commercial real estate and business loans, consumer loans, and residential conventional fixed-rate and variable-rate mortgage loans for the acquisition, construction or refinancing of single-family homes located in Advantageâ€™s primary market areas. Advantage also originates construction and permanent mortgage loans on condominiums, two- to four-family, multi-family (over four units) and nonresidential properties. Advantage continues to diversify the balance sheet through commercial, commercial real estate, and consumer loans as well as retail and business checking and money market deposit accounts.
The financial statements for Camco and Advantage are prepared on a consolidated basis. The principal source of revenue for Camco on an unconsolidated basis has historically been dividends from the Bank. Payment of dividends to Camco by the Bank is subject to various regulatory restrictions.
References in this report to various aspects of the business, operations and financial condition of Camco may be limited to Advantage, as the context requires. Camcoâ€™s Internet site, http://www.camcofinancial.com , provides Camcoâ€™s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 free of charge as soon as reasonably practicable after Camco has filed the report with the Securities and Exchange Commission.
Residential Loans. A portion of the lending activity of Advantage is the origination of fixed-rate and adjustable-rate conventional loans for the acquisition, refinancing, home equity lines of credit or construction of single-family residences. Home equity loans are made at fixed and variable rates of interest for terms of up to 15 years. Excluding home equity lines of credit, approximately 35.9% of total loans as of December 31, 2011, consisted of loans secured by mortgages on one- to four-family residential properties.
Advantageâ€™s home equity line of credit loan portfolio totaled $82.7 million, or 12.6%, of the total loan portfolio at December 31, 2011. During the past three years, management tightened lending standards on home equity lines of credit in response to significant economic weakness and declining home values. These actions included increasing minimum credit scores and reducing the combined loan-to-value which is the percentage of the mortgage lien to total appraised value (â€śLTVâ€ť) on new loans. At December 31, 2011, residential and home equity line of credits constituted $317.8 million, or 49.7% of Advantageâ€™s total loans.
Federal regulations and Ohio law limit the amount which Advantage may lend in relationship to the appraised value of the underlying real estate at the time of loan origination (the â€śLoan-to-Value Ratioâ€ť or â€śLTVâ€ť). In accordance with such regulations and law, Advantage generally makes loans for its own portfolio on single-family residences up to 95% of the value of the real estate and improvements. Advantage generally requires the borrower on each loan with an LTV in excess of 80% to obtain private mortgage insurance, loan default insurance or a guarantee by a federal agency. On an exception basis only, Advantage permits borrowers to exceed a LTV of 80% without private mortgage insurance, loan default insurance or a guarantee by a federal agency.
The interest rate adjustment periods on adjustable-rate mortgage loans (â€śARMsâ€ť) offered by Advantage are generally three, five and seven years. The interest rates initially charged on ARMs and the new rates at each adjustment date are determined by adding a stated margin to a designated interest rate index. Advantage has generally used one-year and three-year United States Treasury note yields, adjusted to a constant maturity, as the index for one-year and three-year adjustable-rate loans, respectively. Advantage has used the London Interbank Offered Rate (â€śLIBORâ€ť) and FHLB advance rates as additional indices on certain loan programs to diversify its concentrations of indices that may prove beneficial during re-pricing of loans throughout changing economic cycles. The maximum adjustment on residential loans at each adjustment date for ARMs is usually 2%, with a maximum adjustment of 6% over the term of the loan.
From time to time, Advantage originates ARMs which have an initial interest rate that is lower than the sum of the specified index plus the margin. Such loans are subject to increased risk of delinquency or default due to increasing monthly payments as the interest rates on such loans increase to the fully indexed level. Advantage attempts to reduce the risk by underwriting ARMs at rates ranging from note rate on longer term ARMs to the maximum possible rate on shorter term ARMs. None of Advantageâ€™s ARMs have negative amortization or â€śpayment optionâ€ť features.
Residential mortgage loans offered by Advantage are usually for terms of up to 30 years, which could have an adverse effect upon earnings if the loans do not re-price as quickly as the cost of funds. To minimize such effect, Advantage generally sells fixed-rate loans to Freddie Mac and Fannie Mae. Furthermore, experience reveals that, as a result of prepayments in connection with refinancing and sales of the underlying properties, residential loans generally remain outstanding for periods which are substantially shorter than the maturity of such loans.
At December 31, 2011, fixed-rate loans comprised 24.5% of the 1-4 family residential loan portfolios. Approximately 75.5% of the 1-4 family residential loan portfolios had adjustable rates tied to U.S. Treasury note yields or LIBOR.
Construction and Development Loans. Advantage offers residential construction loans both to owner-occupants and to builders for homes being built under contract with owner-occupants. Advantage also makes loans to persons constructing projects for investment purposes. Loans for developed building lots are generally made on an adjustable-rate basis for terms of up to two years with an LTV of 65% or less.
Advantage offers construction loans to owner-occupants at adjustable-rate term loans on which the borrower pays only interest on the disbursed portion during the construction period, which is usually 9 months. At December 31, 2011, Advantage had approximately $24.1 million of construction loans, of which $19.2 million was undisbursed.
Construction loans for investment properties involve greater underwriting and default risks than loans secured by mortgages on existing properties or construction loans for single-family residences. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate precisely the total loan funds required to complete a project and the related LTV ratios. In the event a default on a construction loan occurs and foreclosure follows, Advantage could be adversely affected because it would have to take control of the project and either arrange for completion of construction or dispose of the unfinished project. Advantage mitigates these risks by working with experienced developers which have substantial personal liquidity, and utilizing third party reviews related to the construction process, budgets and draws. At December 31, 2011, Advantage had $21.6 million of multi-family and non-residential construction loans, of which $16.8 million was undisbursed.
Nonresidential Real Estate Loans . Advantage originates loans secured by mortgages on nonresidential real estate, including retail, office and other types of business facilities. Nonresidential real estate loans are made on an adjustable-rate or fixed-rate basis for terms of up to 10 years. Nonresidential real estate loans originated by Advantage generally have an LTV of 75% or less. The largest nonresidential real estate loan outstanding at December 31, 2011 was $8.5 million secured by a skilled nursing facility located in Eastern Ohio. Nonresidential real estate loans comprised $110.7 million, or 16.9% of total loans at December 31, 2011.
Nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. Advantage has endeavored to reduce this risk by carefully evaluating the credit history and past performance of the borrower, the location of the real estate, the quality of the management operating the property, the rent roll, the propertyâ€™s debt service coverage, the quality and characteristics of the income stream generated by the property and appraisals supporting the propertyâ€™s valuation.
Consumer and Other Loans . Advantage makes various types of consumer loans, including loans made to depositors on the security of their savings deposits, automobile loans and unsecured personal loans. Most other consumer loans are generally made at fixed rates of interest for terms of up to 10 years. The risk of default on consumer loans during an economic recession is greater than for residential mortgage loans.
Loan Solicitation and Processing . Loan originations are developed from a number of sources, including: solicitations by Advantageâ€™s lending staff; referrals from real estate brokers and builders; participations with other banks; continuing business with depositors, other business borrowers and real estate developers; and walk-in customers. Advantageâ€™s management stresses the importance of individualized attention to the financial needs of its customers.
The loan origination process for each of Advantageâ€™s regions is centralized in the processing and underwriting of loans. Mortgage loan applications from potential borrowers are taken by loan officers originating loans and then forwarded to the loan department for processing. The Bank typically obtains a credit report, verification of employment and other documentation concerning the borrower and orders an appraisal of the fair market value of the collateral which will secure the loan. The collateral is thereafter physically inspected and appraised by a staff appraiser or by a designated fee appraiser approved by the Board of Directors of Advantage. Upon the completion of the appraisal and the receipt of all necessary information regarding the borrower, the loan is reviewed by an underwriter or officer with appropriate loan approval authority. If the loan is approved, an attorneyâ€™s opinion of title or title insurance is obtained on the real estate which will secure the loan. Borrowers are required to carry satisfactory fire and casualty insurance and, if applicable, flood and private mortgage insurance, and to name Advantage as an insured mortgagee.
The procedure for approval of construction loans is the same as for residential mortgage loans, except that the appraiser evaluates the building plans, construction specifications and construction cost estimates. Advantage also evaluates the feasibility of the proposed construction project, often utilizing independent architects as consultants.
Consumer loans are underwritten on the basis of the borrowerâ€™s credit history and an analysis of the borrowerâ€™s income and expenses, ability to repay the loan and the value of the collateral. Centralized processing and underwriting are utilized to add adequate controls over the credit review process.
Loan Originations, Purchases and Sales . Generally, residential fixed-rate loans made by Advantage are originated with documentation which will permit a possible sale of such loans to secondary mortgage market investors. When a mortgage loan is sold to the investor, Advantage services the loan by collecting monthly payments of principal and interest and forwarding such payments to the investor, net of a servicing fee. Fixed-rate loans not sold and virtually all of the ARMs originated by Advantage are held in Advantageâ€™s loan portfolio. During the year ended December 31, 2011, Advantage sold approximately $67.7 million in loans. Residential loans serviced by Advantage for others totaled $446.1 million at December 31, 2011.
The Corporationâ€™s lending efforts have historically focused on loans secured by existing 1-4 family residential properties. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Corporation with adequate collateral coverage in the event of default. Nevertheless, Advantage, as with any lending institution, is subject to the risk that residential real estate values could continue to deteriorate in its primary lending areas within Ohio, West Virginia, and northern Kentucky, thereby further impairing collateral values.
With the addition of new management, in 2009, our Commercial Banking Division began an extensive review of the loan portfolio and began to assist our Credit Administration Unit with implementing strategies to decrease our non-performing loans. In 2010 and 2011, our Commercial Banking Division was a key revenue driver with higher loan and origination fees and a significant amount of new commercial deposit relationships. The increased commercial loan origination is reflected in the table below.
We believe that some of the key attributes of the commercial business include the opportunity to provide financial services to high net worth individuals, lower leveraged real estate projects and high credit quality operating companies. The Commercial Banking Division continues to be focused on relationship banking, credit quality and earning an acceptable interest rate margin.
Of the total loans originated by Advantage during the year ended December 31, 2011, 53.8% were ARM and 46.2% were fixed-rate loans. Adjustable-rate loans comprised 75.5% of Advantageâ€™s total loans outstanding at December 31, 2011.
From time to time, Advantage sells participation interests in mortgage loans, business loans and commercial loans originated by it and purchases whole loans or participation interests in loans originated by other lenders. Advantage held whole loans and participations in loans originated by other lenders of approximately $7.8 million at December 31, 2011. Loans which Advantage purchases or participates must meet or exceed the normal underwriting standards utilized by the Bank.
Loan Concentrations. As of December 31, 2011, Advantage is 8% above our policy concentration limit related to multi-family residential. In February of 2012, $5.8 million of pay downs occurred which corrected this concentration issue. The early conversion of construction projects to permanent status prior to expected payoffs created the loan concentration in late 2011. We have no significant concentrations of loans to specific industries at December 31, 2011.
Regulatory guidance suggests that financial institutions not exceed 3x risk based capital in a concentration of commercial real estate. At December 31, 2011, Camcoâ€™s ratio for this concentration was 4.14x risk based capital, approximately $63.0 million over the guidance limitation. Advantage has a number of significant pay downs approaching in the first half of 2012, additionally, in the interim, Camco continues to monitor and control our concentration exposure through our concentration management plan that was implemented in 2011. Camco also plans to raise capital which would help to correct and or eliminate the exposure and concentration limits.
Loan Origination and Other Fees. In addition to interest earned on loans, Advantage may receive loan origination fees or â€śpointsâ€ť relating to the loan amount, depending on the type of loan, plus reimbursement of certain other expenses. Loan origination fees and other fees are a more volatile source of income, varying with the volume of lending and economic conditions. All loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment to yield over the life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets . Generally, after a loan payment is 15 days delinquent, a late charge of 5% of the amount of the payment is assessed and a collection officer contacts the borrower to request payment. In certain limited instances, Advantage may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his or her financial affairs. Advantage initiates foreclosure proceedings in accordance with applicable laws, when it appears that a modification or moratorium would not be or has not been effective.
James D. Douglas was appointed to the Camco Board in October 2010. Mr. Douglas is the President of JRC Advisor Services, LLC in Westerville, Ohio, a consulting services company he formed that focuses on transportation/logistics activities as well as management development and other general management issues. He has been President of JRC Advisor Services, LLC since 2004. Prior to establishing JRC Advisor Services, LLC, he was employed in various operating and financial positions for over 35 years in the transportation and logistics industry including over 25 years with Union Pacific Corporation and most recently with Gemini Air Cargo and World Airways, Inc. Mr. Douglas has a Bachelor of Business Administration degree from the University of Iowa and graduated from the Advanced Management Program at Harvard University in 1990. He has actively served on the Business Advisory Committee and the Professional Accounting Council of the University of Iowa. He also served on the Board of Directors of Best Transport, Inc., Worthington, Ohio, from 2005 through 2007 and the Board of Trustees of Mary Baldwin College, Staunton, Virginia, from 1996 through 2000. This experience brings valuable management, financial and general business knowledge to the Board of Directors, as well as the Corporate Governance and Nominating Committee, and Compensation Committee.
James E. Huston was named Chief Executive Officer, President and Chairman of the Board on December 31, 2008. Mr. Huston worked as an independent consultant for financial institutions from July 2006 through December 2008, including for Camco from September 2008 through December 2008. From February 2006 until July 2006, Mr. Huston served as the interim Chief Financial Officer for the Federal Home Loan Bank of Des Moines. Mr. Huston was employed by First Consumers National Bank in Portland, Oregon, from November 2001 until November 2005, serving as the Chief Executive Officer from March 2002 until November 2005. Mr. Huston served as Executive Vice President and Chief Financial Officer of Aames Financial Corporation, Los Angeles, California, from August 2000 to November 2001. He was employed by Bank One Corporation, Columbus, Ohio from 1992 to 2000 where he held several executive positions, including Senior Vice President and Chief Financial Officer, Bank One Consumer Financial Services from May 1997 to August 2000. Mr. Hustonâ€™s role as President and Chief Executive Officer of Camco provides him with intimate knowledge of the organization and its operations through his day-to-day management. In addition, Mr. Huston has served as an independent consultant, CFO, CEO, and EVP at various financial institutions. This extensive experience and banking knowledge allow him to provide valuable perspective to the Board of Directors in the areas of finance, audit, accounting and regulatory and strategic issues relating to all aspects of Camcoâ€™s business.
MANAGEMENT DISCUSSION FROM LATEST 10K
During 2011, the economic environment for financial services companies continued to be challenging. Bankruptcies, foreclosures and prolonged unemployment have continued and the oversupply of housing has depressed property values. Due to the decreased property values the government has expanded the HARP program for borrowers that are current on their mortgages which enables them to refinance up to 125% loan to value. This coupled with interest rates decreasing in the fourth quarter of 2011 has created a higher loan application level but has also decreased the value of our mortgage servicing rights asset.
We continued to execute our long-term strategic plan to diversify the balance sheet, improve delinquency, loan quality and our funding mix by reducing borrowings and increasing transaction-based deposits.
In 2011, total deposits decreased $22.6 million or 3.5% as we continued our goal of decreasing public funds and paying off all brokered deposits while increasing â€ścoreâ€ť deposit growth related to a number of organizational and product development initiatives which included our suite of commercial and small business checking accounts, online business cash management system, and remote deposit capture solutions. We have continued to build our deposits with these new products and believe these products will continue to help us be more competitive for business checking accounts. Competition for deposits continues to put pressure on marginal funding costs, despite continued low rates in 2011 but our goal is to continue our strategy and build core customer accounts that are normally a lower cost of funding.
During 2011, Camco experienced improving trends in asset quality metrics. Nonperforming loans decreased $8.9 million, or 26.3% from $33.8 million at December 31, 2010 to $24.9 million at the end of 2011. Net charge offs totaled $4.6 million during 2011 compared to $17.7 million during 2010. These decreases show that we continue to diligently manage our delinquencies and work with our loan customers in order to reduce losses for them, as well as our Corporation. Additionally, the amount of classified loans has decreased not only due to charge off and sales of various assets, but also due to upgrading the loan quality ratings of various commercial loans related to improved borrower financial performance combined, in some cases, with restructured credit facilities which has resulted in lower provisions for loan losses.
The Corporation engaged an investment banking firm in 2010 and has developed capital plan initiatives that may include 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. 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 Corporationâ€™s common stock.
We believe we are taking significant steps forward in managing our operational efficiency. In 2011, we launched online statements, a more convenient way of banking for many customers, and we are continuing our focus on improving noninterest income and controlling noninterest expense by refining our operations. We continue to analyze new products to deepen relationships with our â€ścoreâ€ť customers and improve the structure of our balance sheet and create efficiency throughout.
Critical Accounting Policies
â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations,â€ť as well as disclosures found elsewhere in this annual report, are based upon Camcoâ€™s consolidated financial statements, which are prepared in accordance with US GAAP. The preparation of these financial statements requires Camco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under US GAAP.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of mortgage servicing rights and the valuation of deferred tax assets. Actual results could differ from those estimates.
Summary . We believe the accounting estimates related to the allowance for loan losses, the capitalization, amortization, and valuation of mortgage servicing rights and deferred income taxes are â€ścritical accounting estimatesâ€ť because: (1) the estimates are highly susceptible to change from period to period because they require us to make assumptions concerning the changes in the types and volumes of the portfolios, rates of future prepayments, and anticipated economic conditions, and (2) the impact of recognizing an impairment or loan loss could have a material effect on Camcoâ€™s assets reported on the balance sheet as well as its net earnings.
Allowance for Loan Losses
The procedures for assessing the adequacy of the allowance for loan losses reflect managementâ€™s evaluation of credit risk after careful consideration of all information available to management. In developing this assessment, management must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic factors, developments affecting companies in specific industries and issues with respect to single borrowers. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or a decrease in the allowance for loan losses.
Each quarter, management analyzes the adequacy of the allowance for loan losses based on a review of the loans in the portfolio along with an analysis of external factors (including current housing price depreciation, homeownersâ€™ loss of equity, etc) and historical delinquency and loss trends. The allowance is developed through specific components; 1) the specific allowance for loans subject to individual analysis, 2) the allowance for classified loans not otherwise subject to individual analysis and 3) the allowance for non-classified loans (primarily homogenous).
Classified loans with indication or acknowledgment of deterioration are subject to individual analysis. Loan classifications are those used by regulators consisting of Special Mention, Substandard, Doubtful and Loss. In evaluating these loans for impairment, the measure of expected loss is based on the present value of the expected future cash flows discounted at the loanâ€™s effective interest rate, a loanâ€™s observable market price or the fair value of the collateral if the loan is collateral dependent. All other classified assets and non-classified assets are combined with the homogenous loan pools and segregated into loan segments. The segmentation is based on grouping loans with similar risk characteristics (one-to-four family, home equity, etc.). Loss rate factors are developed for each loan segment, which are used to estimate losses and determine an allowance. The loss factors for each segment are derived from historical delinquency, classification, and charge-off rates adjusted for economic factors and an estimated loss scenario.
The allowance is reviewed by management to determine whether the amount is considered adequate to absorb probablelosses to the loan portfolio. Managementâ€™s evaluation of the adequacy of the allowance is an estimate based on managementâ€™s current judgment about the credit quality of the loan portfolio. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan pools that are based on historical loss experience, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrowerâ€™s ability to repay, and current economic and industry conditions. Management also considers trends in delinquencies and loan losses for the bank specifically, the region, the nation, and other economic factors. While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur.
Mortgage Servicing Rights
To determine the fair value of its mortgage servicing rights (â€śMSRsâ€ť) each reporting quarter, the Corporation provides information representing loan information in each pooling period accompanied by escrow amounts to a third party valuation firm. The third party then evaluates the possible impairment of MSRs as described below.
MSRs are recognized as separate assets or liabilities when loans are sold with servicing retained. A pooling methodology, in which loans with similar characteristics are â€śpooledâ€ť together, is applied for valuation purposes. Once pooled, each group of loans is evaluated on a discounted earnings basis to determine the present value of future earnings that the Bank expects to realize from the portfolio. Earnings are projected from a variety of sources including loan service fees, net interest earned on escrow balances, miscellaneous income and costs to service the loans. The present value of future earnings is the estimated fair value for the pool, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the MSRâ€™s.
Events that may significantly affect the estimates used are changes in interest rates and the related impact on mortgage loan prepayment speeds and the payment performance of the underlying loans. The interest rate for net interest earned on escrow balances, which is supplied by management, takes into consideration the investment portfolio average yield as well as current short duration investment yields. Management believes this methodology provides a reasonable estimate. Mortgage loan prepayment speeds are calculated by a third party provider utilizing the Economic Outlook as published by the Office of the Chief Economist of Freddie Mac in estimating prepayment speeds and provides a specific scenario with each evaluation. Based on the assumptions discussed, pre-tax projections are prepared for each pool of loans serviced. These earnings are used to calculate the approximate cash flow that could be received from the servicing portfolio. Valuation results are presented quarterly to management. At that time, management reviews the information and MSRâ€™s are marked to lower of amortized cost or fair value for the current quarter.
Deferred Income Taxes
Camco recognizes expense for federal income taxes currently payable as well as for deferred federal taxes for estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets. Realization of a deferred tax asset is dependent upon generating sufficient taxable income in either the carry forward or carry back periods to cover net operating losses generated by the reversal of temporary differences. A valuation allowance is provided by way of a charge to income tax expense if it is determined that it is more likely than not that some or all of the deferred tax asset will not be realized. If different assumptions and conditions were to prevail, the valuation allowance may not be adequate to absorb unrealized deferred taxes and the amount of income taxes payable may need to be adjusted by way of a charge to expense. Furthermore, income tax returns are subject to audit by the IRS. Income tax expense for current and prior periods is subject to adjustment based upon the outcome of such audits. Camco believes it has adequately accrued for all probable income taxes payable. Accrual of income taxes payable and valuation allowances against deferred tax assets are estimates subject to change based upon the outcome of future events.
Other Real Estate
Assets acquired through or instead of foreclosure, primarily other real estate owned, are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. New real estate appraisals are generally obtained at the time of foreclosure and are used to establish fair value. If fair value declines, a valuation allowance is recorded through expense. Estimating the initial and ongoing fair value of these properties involves a number of factors and judgments including holding time, costs to complete, holding costs, discount rate, absorption and other factors.
Discussion of Financial Condition Changes from December 31, 2011 to December 31, 2010
At December 31, 2011, Camcoâ€™s consolidated assets totaled $767.0 million, a decrease of $47.9 million, or 5.8%, from the December 31, 2010 total. The decrease in total assets was comprised primarily of decreases in loans receivable, FHLB stock and securities available for sale which were offset partially by the increase in cash and loans held for sale.
Loans receivable has decreased due to continued paydowns and refinancing from adjustable rate to fixed rate loans. Our strategy of selling fixed rate product continues to shift the loan portfolio toward commercial loans. Current and upcoming loan rates may slow or increase residential lending and the sale of fixed rate loans. Due to the continued low interest rate environment over the past few years we believe that is not likely that the profits on gain on sale of mortgage loans will continue to be as strong in 2012 as the margins continue to decrease and many customers have already refinanced into the lower available rates. Possible growth in deposits, related to our strategic planning would most likely be used to reduce outstanding borrowings, purchase investments or fund commercial loan growth which is not expected until the second half of 2012. Management continues its overall focus on managing credit, reducing risk within the loan portfolio and enhancing liquidity and capital in the current economic environment. Continuous progress is being made on addressing these issues, but we expect the distressed economic environment to continue through 2012 which may slow expectations.
Cash and interest-bearing deposits in other financial institutions totaled $38.4 million at December 31, 2011 an increase of $9.3 million, or 31.8%, from December 31, 2010 levels. Cash has increased as we have begun to restructure the balance sheet by decreasing assets and liabilities when possible to improve our capital position in conjunction with ensuring on-hand liquidity is adequate.
Securities totaled $20.9 million at December 31, 2011, a decrease of $13.8 million, or 39.7%, from December 31, 2010 due to the sale of $27.2 million in securities, principal repayments and maturities of $13.6 million offset partially by purchases of $27.4 million which were primarily investment securities at a weighted rate of 1.25%. Additionally, $20.0 million of FHLB stock was redeemed during the first quarter of 2011. The securities portfolio has a weighted maturity that is relatively short in order to minimize extension risk. We have purchased callable agencies to maximize yield and liquidity. Approximately $16.3 million or 77.9% of the portfolio has a callable option which management expects to be exercised during the year. If the investments are not called, final maturity dates range from February, 2013 to June, 2014.
At December 31, 2011, other than $2.0 million of municipal bonds, all of our debt securities were issued and guaranteed by US Government sponsored enterprises such as Freddie Mac, Fannie Mae, Ginnie Mae and the FHLB. We held no private-label mortgage-backed securities or collateralized debt obligations.
Loans receivable net and loans held for sale totaled $647.3 million at December 31, 2011, a decrease of $22.8 million, or 3.4%, from the total at December 31, 2010. The decrease resulted primarily from principal repayments of $196.7 million, loan sales of $67.7 million and $11.2 million of loans transferred to real estate owned offset partially by loan disbursements totaling $254.9 million. Principal repayments are slightly higher than 2010 on loans and our ability to originate new loans in 2011 was not as strong as 2010. 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 and throughout 2011. Many customers refinanced in 2010 when the rates originally dropped to record lows.
During 2011, the average yield on loans was 5.50% a decrease of 22 basis points as compared to 5.72% for 2010. The decrease in yield is due to lower average loan balances within our commercial and consumer loan portfolios, which are generally higher yielding assets. This was coupled with lower effective rates in the loan portfolio during 2011. Adjustable rate loans re-priced lower in 2011 due to the current low rate environment and new loans are also being originated at these lower market rates.
The allowance for loan losses totaled $14.5 million and $16.9 million at December 31, 2011 and 2010, respectively, representing 58.3% and 49.9% of nonperforming loans at those dates. Nonperforming loans (three monthly payments or more delinquent plus nonaccrual loans) totaled $24.9 million and $33.8 million at December 31, 2011 and 2010, respectively, constituting 3.8% and 4.9% of total net loans, including loans held for sale, at those dates. Net charge-offs totaled $4.6 million for 2011 and were primarily comprised of $2.8 million of residential real estate and $1.7 million of commercial and non-residential. See Note D to the financial statements for additional information.
The decrease in deposits was primarily due to decreases in brokered and retail certificates of deposits offset partially by an increase in â€ścore relationshipsâ€ť such as noninterest-bearing demand and money markets. We continue to focus and implement our strategy of improving the long-term funding mix of the Bankâ€™s deposit portfolio by developing deeper â€ścore relationshipsâ€ť with small businesses, and adding commercial and retail checking accounts. 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 a remote deposit capture solution. In 2011, we continued to build our deposits with these new products and believe these products will continue to help us be more competitive for acquiring new business checking accounts. See â€śLiquidity and Capital Resourcesâ€ť in this MD&A for further discussion on our deposit strategy and additional liquidity risks.
We continued to slightly reduce the rates offered on some of our accounts and feel we are competitive with current markets and are planning on continued strategic growth of â€ścore relationshipsâ€ť. We also believe that if we are able to maintain the majority of current customers that have retail certificates of deposit maturing in 2012, we will continue to slightly decrease our cost of funds which will help costs of funds remain stable and possibly incur some reduction of costs related to such deposits in 2012. To reduce interest rate risk over the long term, we will continue our efforts to lengthen the duration of our deposit structure and our FHLB borrowings, but over the past few years it has not been the customersâ€™ preference to lengthen such deposits in such a low interest rate environment.
In 2011, all of our brokered deposits matured, which coupled with our strategy to continue growing core deposits will help maintain the Bankâ€™s margin in 2012. We acknowledge that brokered deposits are not core, franchise-enhancing deposits, and we intend to continue our strategy of improving the long-term funding mix of the Bankâ€™s deposit portfolio by growing small business, commercial and retail checking accounts. In the future, we do not expect to use brokered deposits for liquidity position but they may be used as contingency funding if needed.
Advances from the FHLB and other borrowings decreased by $24.2 million, or 23.1%, to a total of $80.3 million at December 31, 2011. Approximately $10.0 million of advances are expected to mature in 2012 with a weighted rate of 4.58%. We plan to pay-off the 2012 maturing advances as the Corporation continues to focus on our strategy of growing and replacing a portion of these funding sources with core relationship deposits (checking, savings, money market and CD accounts).
Stockholdersâ€™ equity totaled $45.6 million at December 31, 2011, decrease of $498,000, or 1.1% from December 31, 2010. The increase resulted from net earnings of $214,000 coupled with $331,000 of stock-based compensation expenses related to FAS 123R which was offset by a $1.0 million decrease in accumulated other comprehensive income related to the fair value of our investment securities as an unrealized gain was realized through the sale of securities. See Consolidated Statements of Stockholdersâ€™ Equity on page 50 for additional information.
During 2012, management was notified by the FDIC that for Advantage to be categorized as â€śadequately-capitalizedâ€ť under the regulatory framework the Bank must have Tier 1 leverage to average assets equating to 9.00%. To be categorized as â€śadequately-capitalizedâ€ť Camco and Advantage must maintain this minimum capital ratio per the FDIC. At December 31, 2011 the Bankâ€™s Tier 1 leverage to average assets was 6.29%. A failure to comply with the capital directive could result in additional enforcement actions by the FDIC or the Division.
Comparison of Results of Operations for the Years Ended December 31, 2011 and December 31, 2010
General. Camcoâ€™s net earnings of $214,000, or $0.03 per share for the year ended December 31, 2011, increased from the net loss of $14.6 million, or ($2.02) per share for the same period in 2010. The increase in earnings was primarily attributable to decreased provision for losses on loans, increased gain on sale of investments, increased rent and other offset partially by increased expenses related to other real estate owned, decreased gain on sale of loans and title fees.
Net Interest Income. Net interest income for the year ended December 31, 2011, amounted to $25.9 million, an increase of $524,000, or 2.0%, compared to 2010, generally reflecting the effects of re-pricing of liabilities in the current lower interest rate environment. Net interest margin increased 16 basis points to 3.66% for the twelve months ending December 31, 2011 compared to 3.5% for the comparable period in 2010. The increase in net interest margin during the 2011 period, compared to the same period of 2010, was due primarily to a lower cost of interest-bearing liabilities in the 2011 period offset partially by a lower volume of interest-earning assets and a lower yield on those assets.
We have continued with our strategies and offset decreased interest earned by decreasing the balances of our borrowed funds when applicable. Additionally, we continue to re-price deposits on a year to year comparison, which helped reduce overall deposit funding costs by 43 basis points throughout 2011. Our strategy is to continue to maintain cost of funds by increasing deposits related to our â€ścommercial relationshipsâ€ť instead of borrowing at higher yields.
Interest income on loans totaled $35.0 million for the year ended December 31, 2011, a decrease of $2.6 million, or 7.0%, from the comparable 2010 total. The decrease resulted primarily from a 22 basis point decrease in the average yield, from 5.72% in 2010, to 5.50% in 2011, coupled with a $21.3 million, or 3.2%, decrease in the average balance of loans outstanding year to year. Interest income on securities totaled $578,000 for the year ended December 31, 2011, a $1.3 million, or 69.7% decrease from the 2010 period. The decrease was due primarily to a $23.7 million, or 53.3% decrease in the average balance outstanding, coupled with a 150 basis point decrease in the average yield, to 2.79% in 2011. Interest income on FHLB stock decreased by $616,000 or 47.1%, due primarily to a decrease in the average balance outstanding of $18.5 million or 61.8% in 2011. Interest income on other interest-bearing deposits increased by $6,000 or 100.0%, due to a $15.8 million or 67.7% increase in the average balance outstanding year to year.
Interest expense on deposits totaled $7.5 million for the year ended December 31, 2011, a decrease of $3.1 million, or 29.3%, compared to the year ended December 31, 2010. This was due primarily to a 46 basis point decrease in the average cost of deposits, to 1.28% for 2011, coupled with a $24.1 million, or 4.0%, decrease in the average balance of interest-bearing deposits outstanding year to year. Interest expense on borrowings totaled $2.9 million for the year ended December 31, 2011, a decrease of $966,000, or 25.0%, from 2010. The decrease resulted primarily from a $36.1 million, or 29.1% decrease in the average balance outstanding year to year offset partially by a 19 basis point increase in the average rate to 3.30% in 2011.
Approximately $202.6 million, or 58.7%, of our certificate deposit portfolio will mature during 2012. While this presents an opportunity to continue reducing our cost of funds (as these deposits are re-pricing into a slightly lower interest rate environment) we continue to experience competition for deposits in our market areas. This competition is limiting our ability to further reduce the marginal cost of deposits to a level reflective of the general rate environment.
Continued decreases in interest rates could compress our net interest margin due to continued re-pricing between our loan and deposit portfolios. At the same time, the loan portfolio has not grown enough to offset these tighter spreads. As noted earlier, we plan to continue to diversify the loan portfolio by encouraging growth in commercial and consumer loan balances. This strategy should slow net interest margin compression as these types of loans are normally higher-yielding assets than conventional mortgage loans and investment securities.
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 Bankâ€™s market areas, and other factors related to the collectability of the Bankâ€™s loan portfolio. Key drivers of 2009 and 2010 reported provisions related to declines in commercial real estate values on impaired loans and loan downgrades. The higher allocation in recent years primarily reflected the impact of distressed commercial real estate values and general economic conditions on specific reserves for impaired loans, while the elevated level of charge-offs in those years resulted in higher loss factors related to classified loans and has carried over into 2011. The allowance allocated to the real estate and consumer loan categories is based upon Camcoâ€™s allowance methodology for homogeneous pools of loans. The decreased allowance for loan losses relates to fluctuations and changes in these allocations which are consistent with the improvement in loan quality, loss experience and economic factors in each of the loan categories.
Nonperforming loans (three monthly payments or more delinquent plus nonaccrual loans) totaled $24.9 million at December 31, 2011, a decrease of $8.9 million from $33.8 million at December 31, 2010. Additionally, net charge offs decreased $13.1 million to $4.6 million for the year ended December 31, 2011 compared to $17.7 million for the year ended December 31, 2010.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Camco is a full-service provider of financial products through its subsidiary, Advantage Bank. Products and services include traditional banking products, such as deposit accounts and lending products within Ohio, Kentucky and West Virginia. Services are provided through 22 financial offices, 20 ATMs and telephone and internet-based banking. Brokerage services are offered exclusively through an unaffiliated registered broker-dealer at certain locations.
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. Additionally, Camco filed a Form S-1 on July 17, 2012 for a potential rights offering of up to $10.0 million in Camco common stock.
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 continue to recognize the results of difficult economic conditions. The real estate market continues to create a very challenging environment as bankruptcies, foreclosures and unemployment continue to be higher than normal in Ohio.
It is the Corporationâ€™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 significant undertaking, requiring both time and considerable effort of staff. We believe that we are taking the appropriate 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 managementâ€™s efforts will be successful.
Net interest income, the amount by which interest income exceeds interest expense, is affected by various factors, including changes in market interest rates due to the Federal Reserve Boardâ€™s monetary policy, the level and degree of pricing competition for both loans and deposits in our markets and the amount and composition of earning assets and interest-bearing liabilities. We have found that â€ścoreâ€ť deposit growth continues to be challenging in our markets 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 the continuing low market rates. Earnings related to net interest income continues to be challenged as net interest income and margin are impacted by changes in market interest rates based upon actions taken by the Federal Reserve either directly or through its Open Market Committee. Between 2007 and 2008, the Federal Reserve reduced the Federal Funds rate 500 basis points to a range of 0% to .25% and reduced the Discount Rate 575 basis points to .50%. These actions have caused a downward shift in short-term market interest rates and these rates have continued at historically low levels with expectations that the rates will not increase until 2014.
Discussion of Financial Condition Changes from December 31, 2011 to June 30, 2012
At June 30, 2012, Camcoâ€™s consolidated assets totaled $766.9 million, a decrease of $102,000, from December 31, 2011. The decrease in total assets resulted primarily from decreases in cash and cash equivalents and loans receivable and loans held for sale, offset partially by increases in securities available for sale. Loans receivable decreased in the second quarter of 2012, primarily due to the slowing of portfolio production and continued expected payoffs, which in turn has decreased our concentration limits.
Advantage continues to monitor certain types of commercial loan growth related to regulatory guidance that suggests financial institutions not exceed 3x risk based capital in a concentration of commercial real estate. At June 30, 2012, Advantageâ€™s ratio for this concentration was 3.76x risk based capital, approximately $43.1 million over the guidance limitation. Advantage has a number of pay-downs approaching throughout 2012. Additionally, Advantage continues to monitor and control our concentration exposure through our concentration management plan that was implemented in 2011. Camco also plans to raise capital through a rights offering, as described in the Form S-1 that was filed with the SEC on July 17, 2012. Camco intends to contribute a significant portion of the additional capital raised to the Bank to help correct and/or eliminate the exposure and concentration limits.
Residential loan production increased slightly in the second quarter of 2012. High unemployment rates in Ohio have fallen from 10.0% in 2010 to 7.3% at June 30, 2012. This coupled with a slight decrease in loan rates in 2012 has resulted in some new residential home loan purchases and additional refinancing in the first six months of 2012.
Managementâ€™s continued focus at the Bank has been on managing credit, reducing risk and concentrations within the loan portfolio and maintaining sufficient liquidity and capital in a distressed economic environment. Continuous progress is being made on addressing these issues, but we expect the distressed economic environment to continue through 2012 and into 2013.
Cash and interest-bearing deposits in other financial institutions totaled $28.2 million at June 30, 2012, a decrease of $10.2 million, or 26.6%, from December 31, 2011. Cash was previously held at higher levels as we continued to restructure the balance sheet by decreasing assets and liabilities when possible to improve our capital position in conjunction with ensuring that liquidity continues to be adequate.
As of June 30, 2012, securities totaled $75.3 million, an increase of $54.4 million, or 260.0%, from December 31, 2011, due to the purchase of $64.0 million in securities at a weighted rate of .51%, offset partially by principal repayments and maturities of $9.6 million. Decreases of $39.6 million in the loan portfolio; and $5.6 million in loans held for sale and an increase of $9.3 million in deposits created additional liquidity that was utilized to purchase securities in the first six months of 2012.
Loans receivable, including loans held for sale, totaled $602.1 million at June 30, 2012, a decrease of $45.1 million, or 7.0%, from December 31, 2011. The decrease resulted primarily from principal repayments of $134.8 million, loan sales of $53.7 million, $3.3 million of loans transferred to real estate owned, and an addition of $1.1 million to losses on loans, all of which was offset partially by loan disbursements totaling $148.1 million. Principal repayments and payoffs on loans were higher than 2011, which have decreased the portfolio balances and improved our concentration levels related to commercial production. The reduction in residential real estate loan balances was intensified by the secondary market offering historically low long-term fixed rates during the current year. New purchase customers are currently more likely to choose fixed rate loans during this low rate environment. Due to the fact that Advantage normally sells fixed rate loans and does not hold them, the portfolio balance of residential loans continues to decrease. Management will consider holding some fixed rate loans in the second half of 2012 if the portfolio continues to decrease and liquidity is available.
Loan originations during the six-month period ended June 30, 2012 included $86.3 million of commercial loans, $53.9 million in loans secured by one- to four-family residential real estate and $7.9 million in consumer and other loans. Our intent is to continue to service our communities in one- to four-family residential, consumer and commercial real estate lending and continue with our strategic plan of generating additional lending opportunities and core relationships.
The Corporation continues to originate fixed-rate, single-family loans in its marketplace, with most originated for sale in the secondary market rather than for its portfolio. The origination and sale of fixed-rate loans has historically generated gains on sale and allowed the Corporation to manage its investment in loans serviced, without assuming the interest-rate risk associated with holding long-term fixed-rate assets, which facilitates the maintenance of liquidity levels. Mortgage application volume has remained elevated in the current quarter, due to a low interest rate environment, and consisted predominantly of loan refinancing highly correlated to interest rate movements and levels. New home sales continue to remain weak in the current economic environment, limiting new home financing opportunities.
During the first six months of 2012, the average yield on loans was 5.21% a decrease of 36 basis points as compared to 5.57% for the same period in 2011. The decrease in yield is due to lower average loan balances coupled with lower effective rates in the loan portfolio during 2012. As we continue to have payoffs and adjustable rate loans re-price and originate new loans at the current lower rate environment we expect the yield on loans to continue to decrease slightly throughout 2012.
The allowance for loan losses totaled $14.2 million and $14.5 million at June 30, 2012, and December 31, 2011, respectively, representing 60.0% and 58.3% of nonperforming loans, respectively, at those dates. Nonperforming loans (loans with three payments delinquent plus nonaccrual loans) totaled $23.7 million and $24.9 million at June 30, 2012 and December 31, 2011, respectively, constituting 3.8% of total net loans for June 30, 2012 and December 31, 2011, including loans held for sale. See the Allowance for loan losses footnote above for additional information related to change in allowance and delinquency. Net charge-offs totaled $1.5 million and $1.3 million for the six months ended June 30, 2012 and June 30, 2011 respectively.
The decrease in certificates of deposits was primarily due to decreases in non-core customers (only certificate of deposit account). The decline in retail certificates of deposit continues to be strategically directed as part of managementâ€™s relationship pricing initiative which targets rate sensitive, non-relationship deposits for reduction, coupled with an emphasis on increasing â€ścore relationshipsâ€ť and commercial deposits. The Corporation continues to focus on its collection of core deposits. Core deposit balances, generated from customers throughout the Bankâ€™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. Management will continue to modify its noncore deposit strategies to support the funding needs of the Companyâ€™s loan activities, while maintaining appropriate liquidity levels, as it executes its strategies to diversify its funding mix by expanding â€ścore deposit relationshipsâ€ť and building business deposits. To the extent the Bank is able to grow its core deposits and continues to pay down borrowings and higher cost funds such as certificates of deposits, the cost related to these liabilities should decrease.
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 implemented paperless statements that are less costly to the Bank, more efficient for many customers, and strategically add convenience products to enhance our banking products with current technology.
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 (Prior â€śConsent Orderâ€ť). Deposits solicited by the Bank cannot significantly exceed the prevailing rates in our market areas. The FDIC has implemented by regulation the statutory language â€śsignificantly exceedsâ€ť 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 $69.2 million at June 30, 2012, a decrease of $11.1 million, or 13.8%, from the total at December 31, 2011. The decrease in borrowings was due to decreased balances in repurchase agreements which we believe is timing related to customer needs coupled with the payoff of a maturing $5.0 million advance.
The decrease in advances from borrowers for taxes and insurance of $1.2 million for the period ended June 30, 2012 was attributable to timing differences between the collection and payment of taxes and insurance. The increase of $1.8 million in accrued expenses and other liabilities was primarily the result of timing related to an investment that was purchased but not settled as of June 30, 2012.
Stockholdersâ€™ equity totaled $46.8 million at June 30, 2012, an increase of $1.2 million, or 2.6%, from December 31, 2011. The increase resulted primarily from net earnings of $895,000, coupled with $262,000 of restricted stock awards related to the 2011 officer incentive plan and an increase in other comprehensive income of $49,000 related to the fair value of our investment securities. This was partially offset by $36,000 of net changes related to FAS 123R and stock based compensation.
Comparison of Results of Operations for the Six Months Ended June 30, 2012 and 2011
Camcoâ€™s net income is dependent primarily on its net interest income, which is the difference between interest earned on its loans and investments and interest paid on interest-bearing liabilities. Net interest income is determined by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities (â€śinterest-rate spreadâ€ť)â€™ and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Camcoâ€™s interest-rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, the collectability of loans, and deposit flows. Net interest income also includes amortization of loan origination fees, net of origination costs.
Camcoâ€™s net income is also affected by the generation of non-interest income, which primarily consists of loan servicing income, service fees on deposit accounts and gains on sale of loans held for sale. In addition, net income is affected by the level of operating expenses, loan loss provisions, and costs associated with the acquisition, maintenance and disposal of real estate.
Camco recognized net earnings for the six months ended June 30, 2012, of $895,000, an increase of $1.7 million, or 210.4%, from the net loss of $811,000 reported in the comparable 2011 period. On a per share basis, the net earnings during the first half of 2012 were $0.12, compared to $(0.11) per share in the first half of 2011. The increase in earnings was primarily attributable to increased gain on sale of loans, decreased REO expense and loan expenses coupled with a decrease in provision for losses on loans. This was offset partially by decreased gain on sale of investments.
Net Interest Income
Net interest income totaled $12.1 million for the six months ended June 30, 2012, a decrease of $944,000 or 7.2%, compared to the six month period ended June 30, 2011, generally reflecting the effects of a $13.4 million decrease in the average balance of interest earning assets coupled with the decrease of average yield on earning assets of 57 basis points. This was partially offset by a $38.8 million decrease in interest-bearing liabilities and a decrease of 33 basis points related to the cost of funding. Due to these changes, the net interest margin decreased 20 basis points to 3.42% in 2012 compared to 3.62% in 2011.
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 $15.9 million for the six months ended June 30, 2012, a decrease of $1.8 million, or 10.3%, from the comparable 2011 period. The decrease resulted primarily from a decrease in the average balance outstanding of $25.6 million, or 4.0%, from the comparable 2011 period. The average loan balances continued to be impacted by loan payments and payoffs, which are not being totally replaced by new portfolio loan production, as well as movement of loans to real estate owned and the change related to balances in non-accrual and charged off loans during the period. Commercial production slowed in the fourth quarter of 2011 and first quarter of 2012, but the pipeline began to increase in the second quarter of 2012. The higher loan payoffs that occurred in the current year were at higher rates than new production which is being generated at our current lower interest rate environment. This created a 36 basis point decrease in the average yield on loans.
Interest income on securities totaled $219,000 for the six months ended June 30, 2012, a decrease of $220,000, or 50.1%, from the first half of 2011. The decrease was due primarily to a 289 basis point decrease in the average yield to 0.79% for the 2012 period. In early 2011 we sold investments for a gain on sale and have purchased new investments with additional cash on hand liquidity. These investments are shorter term and at lower interest rates, which affected the average yield on investments.
Dividend income on FHLB stock is paid a quarter in arrears. Due to our redemption of $20.0 million of FHLB stock in January 2011, the yield was inflated for the first quarter of 2011. Therefore in the first quarter of 2011, interest was paid on $29.8 million. The current interest yield on the asset is applicable to actual rates received on this investment. 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 will continue to deploy cash when available by paying down advances and borrowings in order to generate additional income.
Interest expense on deposits totaled $3.0 million for the six months ended June 30, 2012, a decrease of $1.2 million, or 28.0%, compared to the same period in 2011 due primarily to a 34 basis point decrease in the average cost of deposits to 1.03% in the current period, coupled with a $24.7 million, or 4.1%, decrease in average interest bearing deposits outstanding. While the cost of deposits was lower in 2012 compared to 2011, the cost of funds in 2012 is expected to stabilize as rates have been at low levels for the past few years. However, we will continue to re-price certificates of deposit in the current lower interest rate environment in 2012, 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 $1.3 million, for the six months ended June 30, 2012, a decrease of $238,000, or 15.6%, from the same 2011 six months period. The decrease resulted primarily from a $14.2 million or 15.8% decrease in the average borrowings outstanding, offset partially by a 1 basis point increase in the average cost of borrowings to 3.41%. In early June 2012, we restructured $22.0 million of advances with a weighted rate of 2.52%. After the restructure the weighted rate on the replacement advances was 1.53%, which should decrease expense going forward by approximately $18,000 per month.
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 Bankâ€™s market areas, and other factors related to the collectability of the Bankâ€™s loan portfolio.
Camcoâ€™s loan quality has been negatively impacted by conditions within our market areas which have 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, Camcoâ€™s provision for loan losses, net charge-offs and non-performing loans were significantly higher than historical levels in 2009 and 2010. Camco made noted improvement in non-performing loans in 2011 and continues to improve in 2012. See item 7. Allowance Loan Losses and related tables above in the notes to Consolidated Financial Statements.
Camcoâ€™s net loan charge-offs and provision for loan losses in recent years has been impacted by ongoing workout efforts on existing impaired loans. The efforts have included negotiating reduced payoffs and the sale of underlying collateral â€“or short sales coupled with charging down values to net realizable or fair value of the underlying collateral. Management believes these actions continue to be prudent during the current economic environment.
Based upon an analysis of these factors, the continued economic outlook and new production, we recorded a provision for losses on loans of $1.1 million for the six months ended June 30, 2012. We believe our loans are adequately reserved for probable losses inherent in our loan portfolio at June 30, 2012. However, there can be no assurance that the loan loss allowance will be adequate to absorb actual losses. See item 7. Allowance for Loan Losses for additional information above in the notes to Consolidated Financial Statements.
Other income totaled $3.7 million for the six months ended June 30, 2012, a decrease of $399,000, or 9.8%, from the comparable 2011 period. The decrease in other income was primarily attributable to a $1.3 million decrease in gain on sale of investments, offset partially by the increase of $1.0 million in gain on sale of loans.
The decrease in gain on sale of investments can be attributed to the fact that there were no sales in 2012. Gain on sale of loans increased in 2012 primarily due to 2011 including the sale of three portfolio loans at a loss of $433,000, which was offset by the 2011 year to date gain on the sale of mortgage loans of $433,000. When comparing the six months ended June 30, 2012 versus 2011, the gain on sale of mortgage loans increased $648,000.
General, Administrative and Other Expense
General, administrative and other expense totaled $13.7 million for the six months ended June 30, 2012 a decrease of $819,000 or 5.6%, from the comparable period in 2011. The decrease in general, administrative and other expense was primarily due to decreases in real estate owned and other expense and other loan fee expenses. These decreases were partially offset by an increase in professional services.
The decrease in real estate owned and other expense of $419,000 is primarily due to the prepayment of FHLB borrowings in the first quarter of 2011. Additionally, 2011 included losses on sale of real estate owned of $590,000 versus current year gain on sale of $91,000. The decrease of $420,000 in other loan expense was due to lower classified asset expenses in the first half of 2012.
The increase in professional services is related to additional legal expenses related to our exploration of capital raising alternatives.
Federal Income Taxes
Federal income tax benefit totaled $25,000 for the six months ended June 30, 2012 a decrease of $562,000 compared to the six months ended June 30, 2011. This decrease reflects the change for 2012 in the valuation allowance against the Corporationâ€™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.
Furthermore, income tax returns are subject to audit by the IRS. Income tax expense for current and prior periods is subject to adjustment based upon the outcome of such audits. During 2011, the IRS began an examination of the Corporationâ€™s tax returns for the year ended December 31, 2009. Accrual of income taxes payable and valuation allowances against deferred tax assets are estimates subject to change based upon the outcome of future events.
The Corporation recorded a 100% valuation allowance against the net deferred tax asset in 2010. 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 carry forward for tax purposes of approximately $4.3 million at June 30, 2012. This compares to a net operating loss carry forward of approximately $7.2 million at December 31, 2011. As the Corporation returns 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, 2012 and 2011
Camcoâ€™s net earnings for the three months ended June 30, 2012, totaled $482,000, an increase of $1.9 million, from the net loss of $1.5 million reported in the comparable 2011 period. On a per share basis, the net earnings for the three months ended 2012 were $0.06, compared to a loss of $(0.20) per share in the three months of 2011. The increase in earnings was primarily attributable to decreased provision recorded for losses on loans, coupled with increased gain on sale of loans and decreased real estate owned and other expenses which was offset by decreased net interest income.
Net Interest Income
Net interest income totaled $5.9 million for the three months ended June 30, 2012, a decrease of $523,000 or 8.1%, compared to the three months period ended June 30, 2011, generally reflecting the effects of a decrease in the average yield on earning assets of 62 basis points coupled with the decrease of a $3.1 million in average balance of interest earning assets. This was partially offset by a $25.2 million decrease in interest-bearing liabilities and a decrease of 32 basis points related to the cost of funding. Due to these changes the net interest margin decreased 28 basis points to 3.33% in 2012 compared to 3.61% of 2011.
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.