-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IWwUmsCyqwhjpBnHTecaPu4vx69v6ArIfYzwu2tFATrZRe870eV0S9J6GjhigCaL 7WYmzvgbqZ6Z/MqmNSxJ4A== 0000950152-03-009744.txt : 20031114 0000950152-03-009744.hdr.sgml : 20031114 20031114105307 ACCESSION NUMBER: 0000950152-03-009744 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAMCO FINANCIAL CORP CENTRAL INDEX KEY: 0000016614 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 510110823 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25196 FILM NUMBER: 031001100 BUSINESS ADDRESS: STREET 1: 6901 GLENN HIGHWAY CITY: CAMBRIDGE STATE: OH ZIP: 43725 BUSINESS PHONE: 7404325641 10-Q 1 l03878ae10vq.txt CAMCO FINANCIAL CORPORATION 10-Q/QTR END 9-30-03 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 ------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File Number 0-25196 CAMCO FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 51-0110823 ---------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 6901 Glenn Highway, Cambridge, Ohio 43725-9757 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: (740) 435-2020 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of November 12, 2003, the latest practicable date, 7,380,387 shares of the registrant's common stock, $1.00 par value, were issued and outstanding. Page 1 of 23 Camco Financial Corporation INDEX
Page ---- PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition 3 Consolidated Statements of Earnings 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Quantitative and Qualitative Disclosures about Market Risk 21 Controls and Procedures 21 PART II - OTHER INFORMATION 22 SIGNATURES 23
2 CAMCO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
SEPTEMBER 30, DECEMBER 31, ASSETS 2003 2002 Cash and due from banks $ 27,662 $ 20,215 Interest-bearing deposits in other financial institutions 17,428 36,807 ------------- ------------- Cash and cash equivalents 45,090 57,022 Investment securities available for sale - at market 32,295 38,789 Investment securities held to maturity - at cost, approximate market value of $2,213 and $5,501 as of September 30, 2003 and December 31, 2002, respectively 2,131 5,368 Mortgage-backed securities available for sale - at market 88,571 97,332 Mortgage-backed securities held to maturity - at cost, approximate market value of $9,169 and $20,634 as of September 30, 2003 and December 31, 2002, respectively 9,072 20,000 Loans held for sale - at lower of cost or market 7,934 55,493 Loans receivable - net 792,864 741,465 Office premises and equipment - net 13,741 14,492 Real estate acquired through foreclosure 1,251 1,589 Federal Home Loan Bank stock - at cost 24,250 23,539 Accrued interest receivable 4,436 4,922 Prepaid expenses and other assets 1,870 2,130 Cash surrender value of life insurance 17,547 17,372 Goodwill - net of accumulated amortization 2,953 2,953 Prepaid federal income taxes 701 774 ------------- ------------- Total assets $ 1,044,706 $ 1,083,240 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 661,520 $ 694,072 Advances from the Federal Home Loan Bank 277,794 276,276 Advances by borrowers for taxes and insurance 2,580 3,509 Accounts payable and accrued liabilities 4,475 4,298 Dividends payable 1,070 1,046 Deferred federal income taxes 3,517 5,438 ------------- ------------- Total liabilities 950,956 984,639 Stockholders' equity Preferred stock - $1 par value; authorized 100,000 shares; no shares outstanding -- -- Common stock - $1 par value; authorized 14,900,000 shares; 8,420,260 and 8,311,145 shares issued at September 30, 2003 and December 31, 2002, respectively 8,420 8,311 Additional paid-in capital 55,034 54,063 Retained earnings - substantially restricted 45,597 42,497 Accumulated other comprehensive income - unrealized gains on securities designated as available for sale, net of related tax effects 98 2,098 Less 1,042,523 and 622,260 shares of treasury stock at September 30, 2003 and December 31, 2002, respectively - at cost (15,399) (8,368) ------------- ------------- Total stockholders' equity 93,750 98,601 ------------- ------------- Total liabilities and stockholders' equity $ 1,044,706 $ 1,083,240 ============= =============
3 CAMCO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 Interest income Loans $ 36,497 $ 44,047 $ 11,795 $ 13,868 Mortgage-backed securities 2,775 3,295 736 1,489 Investment securities 1,016 929 305 438 Interest-bearing deposits and other 1,665 2,118 506 666 ----------- ----------- ----------- ----------- Total interest income 41,953 50,389 13,342 16,461 Interest expense Deposits 12,460 18,008 3,827 5,544 Borrowings 11,495 11,511 3,828 3,984 ----------- ----------- ----------- ----------- Total interest expense 23,955 29,519 7,655 9,528 ----------- ----------- ----------- ----------- Net interest income 17,998 20,870 5,687 6,933 Provision for losses on loans 930 752 255 338 ----------- ----------- ----------- ----------- Net interest income after provision for losses on loans 17,068 20,118 5,432 6,595 Other income Late charges, rent and other 2,942 2,368 944 901 Loan servicing fees 1,225 1,157 412 401 Service charges and other fees on deposits 878 718 309 276 Gain on sale of loans 3,257 1,667 547 847 Valuation of mortgage servicing rights - net 188 1,000 (402) 260 Gain on sale of investment and mortgage-backed securities 716 27 531 -- Gain (loss) on sale of real estate acquired through foreclosure 20 104 82 (1) ----------- ----------- ----------- ----------- Total other income 9,226 7,041 2,423 2,684 General, administrative and other expense Employee compensation and benefits 8,178 7,767 2,461 2,712 Occupancy and equipment 2,792 2,555 936 857 Data processing 993 937 318 378 Advertising 554 605 190 123 Franchise taxes 959 612 362 326 Other operating 3,714 3,907 1,284 1,163 Restructuring charges (credits) -- (112) -- -- ----------- ----------- ----------- ----------- Total general, administrative and other expense 17,190 16,271 5,551 5,559 ----------- ----------- ----------- ----------- Earnings before federal income taxes 9,104 10,888 2,304 3,720 Federal income taxes Current 3,726 2,001 850 (764) Deferred (890) 1,512 (132) 1,954 ----------- ----------- ----------- ----------- Total federal income taxes 2,836 3,513 718 1,190 ----------- ----------- ----------- ----------- NET EARNINGS $ 6,268 $ 7,375 $ 1,586 $ 2,530 =========== =========== =========== =========== EARNINGS PER SHARE Basic $ 0.83 $ 0.93 $ 0.21 $ 0.32 =========== =========== =========== =========== Diluted $ 0.82 $ 0.92 $ 0.21 $ 0.32 =========== =========== =========== ===========
4 CAMCO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 Net earnings $ 6,268 $ 7,375 $ 1,586 $ 2,530 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) during the period, net of related taxes (benefits) of $(787), $817, $(556) and $435 for the nine and three months ended September 30, 2003 and 2002, respectively (1,527) 1,586 (1,080) 845 Reclassification adjustment for realized gains included in net earnings, net of taxes of $243, $9 and $181 for the respective periods (473) (18) (350) -- ------------ ------------ ------------ ------------ Comprehensive income $ 4,268 $ 8,943 $ 156 $ 3,375 ============ ============ ============ ============ Accumulated comprehensive income $ 98 $ 1,675 $ 98 $ 1,675 ============ ============ ============ ============
5 CAMCO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, (In thousands)
2003 2002 Cash flows from operating activities: Net earnings for the period $ 6,268 $ 7,375 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of deferred loan origination fees (352) (504) Amortization of premiums and discounts on investment and mortgage-backed securities - net 1,977 317 Amortization of purchase accounting adjustments - net 66 189 Depreciation and amortization 1,354 989 Provision for losses on loans 930 752 Gain on sale of real estate acquired through foreclosure (20) (104) Federal Home Loan Bank stock dividends (711) (794) Gain on sale of investment and mortgage-backed securities (716) (27) Gain on sale of loans (3,257) (1,667) Loans originated for sale in the secondary market (205,600) (142,001) Proceeds from sale of loans in the secondary market 256,416 140,129 Gain on sale of premises and equipment (2) -- Increase (decrease) in cash due to changes in: Accrued interest receivable 486 298 Prepaid expenses and other assets 260 2,528 Accrued interest and other liabilities 177 (6,350) Federal income taxes: Current 73 137 Deferred (890) 1,512 ------------ ------------ Net cash provided by operating activities 56,459 2,779 Cash flows provided by (used in) investing activities: Proceeds from maturities of investment securities 17,191 21,567 Proceeds from sale of investment securities designated as available for sale 2,043 44 Proceeds from sale of mortgage-backed securities designated as available for sale 54,135 -- Purchase of investment securities designated as held to maturity -- (1,048) Purchase of investment securities designated as available for sale (10,341) (55,864) Purchase of mortgage-backed securities designated as available for sale (112,989) (108,411) Purchase of mortgage-backed securities designated as held to maturity (270) -- Purchase of loans (9,954) (2,125) Loan disbursements (295,714) (197,883) Principal repayments on loans 250,816 271,943 Principal repayments on mortgage-backed securities 75,351 16,525 Purchase of office premises and equipment (610) (876) Proceeds from sales of real estate acquired through foreclosure 3,206 1,795 Additions to real estate acquired through foreclosure -- (21) Purchase of cash surrender value of life insurance -- (825) Proceeds from sale of office premises and equipment 9 -- Proceeds from redemption of life insurance 422 -- Net increase in cash surrender value of life insurance (597) (604) ------------ ------------ Net cash used in investing activities (27,302) (55,783) ------------ ------------ Net cash provided by (used in) operating and investing activities (subtotal carried forward) 29,157 (53,004) ------------ ------------
6 CAMCO FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the nine months ended September 30, (In thousands)
2003 2002 Net cash provided by (used in) operating and investing activities (subtotal brought forward) $ 29,157 $ (53,004) Cash flows provided by (used in) financing activities: Net decrease in deposits (32,552) (26,857) Proceeds from Federal Home Loan Bank advances 44,500 68,500 Repayment of Federal Home Loan Bank advances (43,013) (45,293) Dividends paid on common stock (3,144) (2,993) Purchase of treasury stock (7,031) (4,478) Proceeds from exercise of stock options 1,080 1,593 Advances by borrowers for taxes and insurance (929) (1,249) ------------ ------------ Net cash used in financing activities (41,089) (10,777) ------------ ------------ Net decrease in cash and cash equivalents (11,932) (63,781) Cash and cash equivalents at beginning of period 57,022 104,964 ------------ ------------ Cash and cash equivalents at end of period $ 45,090 $ 41,183 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest on deposits and borrowings $ 22,704 $ 28,200 ============ ============ Income taxes $ 3,493 $ 1,903 ============ ============ Supplemental disclosure of noncash investing activities: Transfers from mortgage loans to real estate acquired through foreclosure $ 2,848 $ 1,168 ============ ============ Unrealized gains (losses) on securities designated as available for sale $ (2,000) $ 1,568 ============ ============ Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 3,132 $ 1,634 ============ ============ Issuance of loans upon sale of real estate acquired through foreclosure $ 1,838 $ 594 ============ ============ Dividends declared but unpaid $ 1,070 $ 1,051 ============ ============ Supplemental disclosure of noncash financing activities: Treasury shares received from settlement of Columbia Financial's Employee Stock Ownership Plan $ -- $ 639 ============ ============
7 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine- and three-month periods ended September 30, 2003 and 2002 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Camco Financial Corporation ("Camco" or the "Corporation") included in Camco's Annual Report on Form 10-K for the year ended December 31, 2002. However, all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the nine and three month periods ended September 30, 2003, are not necessarily indicative of the results which may be expected for the entire year. 2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Camco and two wholly-owned subsidiaries: Advantage Bank ("Advantage" or the "Bank") and Camco Title Insurance Agency, Inc., as well as a second tier subsidiary, Camco Mortgage Corporation. 3. Critical Accounting Policies The "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as disclosures found elsewhere in this quarterly report, are based upon Camco Financial'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 assets and goodwill impairment. Actual results could differ from those estimates. ALLOWANCE FOR LOAN LOSSES The procedures for assessing the adequacy of the allowance for loan losses reflect our evaluation of credit risk after careful consideration of all information available to us. In developing this assessment, we 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. 8 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 3. Critical Accounting Policies (continued) ALLOWANCE FOR LOAN LOSSES (continued) The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable losses. 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 borrower's ability to repay, and current economic and industry conditions. Also considered as part of that judgement is a review of the Bank's trends in delinquencies and loan losses, as well as trends in delinquencies and losses for the region and nationally, and economic factors. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses inherent in the loan portfolio. Management's evaluation of the adequacy of the allowance is an estimate based on management's current judgement about the credit quality of the loan portfolio. While the Corporation strives to reflect all known risk factors in its evaluations, judgment errors may occur. MORTGAGE SERVICING ASSETS To determine the fair value of its mortgage servicing rights ("MSRs") each reporting quarter, the Corporation transmits information to a third party provider, representing individual loan information in each pooling period accompanied by escrow amounts. The third party then evaluates the possible impairment of MSRs as described below. Servicing assets are recognized as separate assets when loans are sold with servicing retained. A pooling methodology to the servicing valuation, in which loans with similar characteristics are "pooled" together, is applied for valuation purposes. Once pooled, each grouping of loans is evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from the portfolio. Earnings are projected from a variety of sources including loan service fees, interest earned on float, net interest earned on escrow balances, miscellaneous income and costs to service the loans. The present value of future earnings is the estimated market value for the pool, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing. 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 float, 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 the third party provider utilizing the Economic Outlook as published by the Office of 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 earning figures approximate the 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 the mortgage servicing asset is marked to lower of amortized cost or market for the current quarter. 9 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 3. Critical Accounting Policies (continued) GOODWILL We have developed procedures to test goodwill for impairment on an annual basis using June financials. This testing procedure is outsourced to a third party that evaluates possible impairment based on the following: The test involves assigning tangible assets and liabilities, identified intangible assets and goodwill to reporting units and comparing the fair value of each reporting unit to its carrying value including goodwill. The value is determined assuming a freely negotiated transaction between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Accordingly, to derive the fair value of the reporting unit, the following common approaches to valuing business combination transactions involving financial institutions are utilized by a third party selected by Camco: (1) the comparable transactions approach - specifically based on earnings, book, assets and deposit premium multiples received in recent sales of comparable thrift franchises; and (2) the discounted cash flow ("DCF") approach. The application of the valuation techniques take into account the reporting unit's operating history, the current market environment and future prospects. As of the most recent quarter, the only reporting unit carrying goodwill is the Bank. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and no second step is required. If not, a second test is required to measure the amount of goodwill impairment. The second test of the overall goodwill impairment compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill. The impairment loss shall equal the excess of carrying value over fair value. After each testing period, the third party compiles a summary of the test that is then provided to the audit committee for review. SUMMARY Management believes the accounting estimates related to the allowance for loan losses, the capitalization, amortization, and valuations of mortgage servicing assets and the goodwill impairment test are "critical accounting estimates" because: (1) the estimates are highly susceptible to change from period to period because they require management 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 Camco's assets reported on the balance sheet as well as its net earnings. Management has discussed the development and selection of these critical accounting estimates with the audit committee of the board of directors and the audit committee has reviewed Camco's disclosures relating to them in the quarterly Management's Discussion and Analysis. 10 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 4. Earnings Per Share Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under the Corporation's stock option plan. The computations are as follows:
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 Weighted-average common shares outstanding (basic) 7,537,944 7,947,311 7,417,459 7,897,051 Dilutive effect of assumed exercise of stock options 130,045 107,509 82,721 111,444 ------------ ------------ ------------ ------------ Weighted-average common shares outstanding (diluted) 7,667,989 8,054,820 7,500,180 8,008,495 ============ ============ ============ ============
Options to purchase 7,088 and 65,441 shares of common stock with respective weighted-average exercise prices of $16.59 and $14.83 were outstanding at September 30, 2003 and 2002, respectively, but were excluded from the computation of common share equivalents for the nine and three month periods then ended, because the exercise prices were greater than the average market price of the common shares. 5. Stock Option Plans Camco presently has options outstanding under four stock option plans. Under the 1995 Plan and the 2002 Plan, 161,488 and 400,000 shares, respectively, were reserved for issuance. Additionally, in connection with the 1996 acquisition of First Savings, 265,876 shares were reserved for issuance under the First Ashland stock option plan. In connection with the 2000 acquisition of Westwood Homestead, 311,794 shares were reserved for issuance under the Westwood stock option plan. The Corporation accounts for its stock option plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair-value based method for valuing stock-based compensation that entities may use, that measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair-value based method of accounting defined in SFAS No. 123 had been applied. The Corporation utilizes APB Opinion No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the Corporation's stock option plans been determined based on the fair value at the grant dates for awards under the plans consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share for the nine- and three-month periods ended September 30, 2003 and 2002, would have been reported as the pro forma amounts indicated below: 11 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 5. Stock Option Plans (continued)
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2003 2002 2003 2002 Net earnings (In thousands) As reported $ 6,268 $ 7,375 $ 1,586 $ 2,530 Stock-based compensation, net of tax (15) (3) (5) (1) ----------- ----------- ----------- ----------- Pro-forma $ 6,253 $ 7,372 $ 1,581 $ 2,529 =========== =========== =========== =========== Earnings per share Basic As reported $ .83 $ .93 $ .21 $ .32 Stock-based compensation, net of tax -- -- -- -- ----------- ----------- ----------- ----------- Pro-forma $ .83 $ .93 $ .21 $ .32 =========== =========== =========== =========== Diluted As reported $ .82 $ .92 $ .21 $ 3.2 Stock-based compensation, net of tax -- -- -- -- ----------- ----------- ----------- ----------- Pro-forma $ .82 $ .92 $ .21 $ .32 =========== =========== =========== ===========
The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following assumptions used for grants during 2003, 2002 and 2001: dividend yield of 3.50%, 3.84% and 4.07%, respectively; expected volatility of 16.88%, 16.34%, and 17.06%, respectively; a risk-free interest rate of 3.95%, 2.00% and 3.00%, respectively, and an expected life of ten years for all grants. A summary of the status of the Corporation's stock option plans as of September 30, 2003 and December 31, 2002 and 2001, and changes during the periods ending on those dates is presented below:
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 2003 2002 2001 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of period 323,291 $ 9.79 503,005 $ 10.16 688,655 $ 10.53 Granted 56,948 16.13 3,700 14.55 8,500 11.93 Exercised (109,114) 7.96 (174,106) 10.84 (115,656) 10.91 Forfeited (4,318) 13.75 (9,308) 11.91 (78,494) 12.50 ------------ ------------ ------------ ------------ ------------ ------------ Outstanding at end of period 266,807 $ 11.83 323,291 $ 9.79 503,005 $ 10.16 ============ ============ ============ ============ ============ ============ Options exercisable at period-end 219,516 $ 9.91 323,291 $ 9.79 503,005 $ 10.16 ============ ============ ============ ============ ============ ============ Weighted-average fair value of options granted during the period $ 2.60 $ 1.36 $ 1.37 ============ ============ ============
12 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 5. Stock Option Plans (continued) The following information applies to options outstanding at September 30, 2003: Number outstanding 141,302 Range of exercise prices $7.40 - $9.79 Number outstanding 125,505 Range of exercise prices $11.36 - 16.59 Weighted-average exercise price $11.83 Weighted-average remaining contractual life 6.0 years
6. Effects of Recent Accounting Pronouncements In September 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides financial accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Management adopted SFAS No. 146 effective January 1, 2003, without material effect on the Corporation's financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Corporation adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002, without material effect on the Corporation's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees Camco issues or modifies subsequent to December 31, 2002. Camco had no letters of credit outstanding at September 30, 2003. 13 CAMCO FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 6. Effects of Recent Accounting Pronouncements (continued) In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Corporation has no variable interest entities. Management adopted FIN 46 effective July 1, 2003, without material effect on Camco's financial condition or results of operations. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which clarifies certain implementation issues raised by constituents and amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to include the conclusions reached by the FASB on certain FASB Staff Implementation Issues that, while inconsistent with Statement 133's conclusions, were considered by the Board to be preferable; amends SFAS No. 133's discussion of financial guarantee contracts and the application of the shortcut method to an interest-rate swap agreement that includes an embedded option and amends other pronouncements. The guidance in Statement 149 is effective for new contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date. Management adopted SFAS No. 149 effective July 1, 2003, as required, without material effect on the Corporation's financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," which changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 requires an issuer to classify certain financial instruments as liabilities, including mandatorily redeemable preferred and common stocks. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, with one exception, is effective at the beginning of the first interim period beginning after June 15, 2003 (July 1, 2003 as to the Corporation). The effect of adopting SFAS No. 150 must be recognized as a cumulative effect of an accounting change as of the beginning of the period of adoption. Restatement of prior periods is not permitted. Management adopted SFAS No. 150 effective July 1, 2003, as required, without material effect on the Corporation's financial condition or results of operations. 7. Forward Looking Statements Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to Camco or its management are intended to identify such forward looking statements. Camco's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. 14 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the nine- and three-month periods ended September 30, 2003 and 2002 Discussion of Financial Condition Changes from December 31, 2002 to September 30, 2003 At September 30, 2003, Camco's consolidated assets totaled $1.045 billion, a decrease of $38.5 million, or 3.6%, from the December 31, 2002 total. The decrease in total assets was comprised primarily of decreases in loans held for sale and investment and mortgage-backed securities, which were partially offset by an increase in loans receivable. Cash and interest-bearing deposits in other financial institutions totaled $45.1 million at September 30, 2003, a decrease of $11.9 million, or 20.9%, from December 31, 2002 levels. Investment securities totaled $34.4 million at September 30, 2003, a decrease of $9.7 million, or 22.0%, from the total at December 31, 2002. Investment securities purchases, which were comprised primarily of $10.3 million of intermediate-term callable U.S. Government agency obligations with an average yield of 2.95%, were offset by $17.2 million of maturities and sales of $2.0 million. Mortgage-backed securities totaled $97.6 million at September 30, 2003, a decrease of $19.7 million, or 16.8%, from December 31, 2002. Mortgage-backed securities purchases totaled $113.3 million, while principal repayments totaled $75.4 million and sales totaled $54.1 million during the nine-month period ended September 30, 2003. Purchases of mortgage-backed securities during the period were comprised primarily of short duration mortgage-backed securities and collateralized mortgage obligations yielding 3.41%, which were classified as available for sale. Loans receivable, including loans held for sale, totaled $800.8 million at September 30, 2003, an increase of $3.8 million, or .5%, from December 31, 2002. The increase resulted primarily from loan disbursements and purchases totaling $511.3 million, which were partially offset by principal repayments of $250.8 million and loan sales of $253.2 million. The volume of loans originated and purchased during the first nine months of 2003 was greater than that of the comparable 2002 period by $169.3 million, or 49.5%, while the volume of loan sales increased by $114.7 million year to year. As interest rates in the economy have begun to rise, consumer preference is moving towards adjustable-rate mortgage loans to fund home purchases. Camco has typically held adjustable-rate mortgage loans in its portfolio as part of its strategy to maintain its asset-sensitive interest-rate risk position. Loan originations during the nine-month period ended September 30, 2003, were comprised primarily of $392.8 million of loans secured by one- to four-family residential real estate, $72.0 million in consumer and other loans and $46.5 million in loans secured by commercial real estate. Management will continue to expand its consumer and commercial real estate lending in future periods as a means of increasing the yield on its loan portfolio. The allowance for loan losses totaled $5.3 million and $5.5 million at September 30, 2003 and December 31, 2002, respectively, representing 43.4% and 40.3% of nonperforming loans, respectively, at those dates. Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled $12.3 million and $13.6 million at September 30, 2003 and December 31, 2002, respectively, constituting 1.53% and 1.71% of total net loans, including loans held for sale, at those dates. At September 30, 2003, nonperforming loans were comprised of $10.5 million in one- to four-family residential real estate loans, $1.3 million in commercial real estate loans and $467,000 of consumer loans. Management believes all nonperforming loans are adequately collateralized and no loss is expected over and above allocated reserves on such loans. Loans delinquent greater than 30 days but less than 90 days totaled $8.6 million at September 30, 2003, compared to $10.5 million at December 31, 2002, a decrease of $1.9 million, or 18.1%. Although management believes that its allowance for loan losses is adequate based upon the available facts and circumstances at September 30, 2003, there can be no assurance that increased provisions will not be necessary in future periods, which could adversely affect Camco's results of operations. 15 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 Discussion of Financial Condition Changes from December 31, 2002 to September 30, 2003 (continued) Deposits totaled $661.5 million at September 30, 2003, a decrease of $32.6 million, or 4.7%, from the total at December 31, 2002. The decrease in deposits was due to withdrawal of maturing public funds totaling approximately $12.5 million, coupled with management's decision to not aggressively compete to renew matured higher rate certificates of deposit. Stockholders' equity totaled $93.8 million at September 30, 2003, a decrease of $4.9 million, or 4.9%, from December 31, 2002. The decrease resulted primarily from dividends of $3.2 million, purchases of treasury shares totaling $7.0 million and a $2.0 million decrease in the unrealized gains on available for sale securities, which were partially offset by net earnings of $6.3 million and proceeds from the exercise of stock options of $1.1 million. The increase in treasury shares represented purchases under the 5% stock repurchase plan that was announced in October 2002. Advantage is required to maintain minimum regulatory capital pursuant to federal regulations. At September 30, 2003, the Bank's regulatory capital exceeded all regulatory capital requirements. Comparison of Results of Operations for the Nine Months Ended September 30, 2003 and 2002 General Camco's net earnings for the nine months ended September 30, 2003 totaled $6.3 million, a decrease of $1.1 million, or 15.0%, from the $7.4 million of net earnings reported in the comparable 2002 period. The decrease in earnings was primarily attributable to a decrease of $2.9 million in net interest income, an increase in the provision for losses on loans of $178,000 and an increase in general, administrative and other expense of $919,000, which were partially offset by an increase in other income of $2.2 million and a decrease in federal income tax expense of $677,000. Net Interest Income Total interest income amounted to $42.0 million for the nine months ended September 30, 2003, a decrease of $8.4 million, or 16.7%, compared to the nine-month period ended September 30, 2002, generally reflecting the effects of a decrease in yield on total interest-earning assets of 101 basis points, from 6.51% in the 2002 period to 5.50% in the 2003 period, coupled with a $14.1 million, or 1.4%, decrease in the average balance of interest-earning assets outstanding year to year. Interest income on loans totaled $36.5 million for the nine months ended September 30, 2003, a decrease of $7.6 million, or 17.1%, from the comparable 2002 period. The decrease resulted primarily from a $44.4 million, or 5.4%, decrease in the average balance outstanding and an 89 basis point decrease in the average yield, to 6.29% in the 2003 period. Interest income on mortgage-backed securities totaled $2.8 million for the nine months ended September 30, 2003, a $520,000, or 15.8%, decrease year to year. The decrease was due primarily to a 165 basis point decrease in the average yield, to 3.06% in the 2003 period, which was partially offset by a $27.8 million, or 29.8%, increase in the average balance outstanding. Interest income on investment securities increased by $87,000, or 9.4%, due primarily to an $8.4 million increase in the average balance outstanding, which was partially offset by a decline in the average yield, to 3.36% in the 2003 period. Interest income on other interest-earning assets decreased by $453,000, or 21.4%, due primarily to a decrease in the average yield, to 2.69% in the 2003 period, coupled with a decrease of $6.0 million, or 6.8%, in the average balance outstanding year to year. 16 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 Comparison of Results of Operations for the Nine Months Ended September 30, 2003 and 2002 (continued) Net Interest Income (continued) Interest expense on deposits totaled $12.5 million for the nine months ended September 30, 2003, a decrease of $5.5 million, or 30.8%, compared to the 2002 period, due primarily to a 97 basis point decrease in the average cost of deposits, to 2.53% in the 2003 period, and a $31.0 million, or 4.5%, decrease in the average balance of deposits outstanding year to year. Interest expense on borrowings totaled $11.5 million for the nine months ended September 30, 2003, a decrease of $16,000, or .1%, from the 2002 nine-month period. The decrease resulted primarily from a 31 basis point decrease in the average cost of borrowings to 5.56% in the 2003 period, which was partially offset by a $14.2 million, or 5.4%, increase in the average balance outstanding year to year. Decreases in the level of average yields on interest-earning assets and average costs of interest-bearing liabilities were due primarily to the overall decrease in interest rates in the economy. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $2.9 million, or 13.8%, to a total of $18.0 million for the nine months ended September 30, 2003. The interest rate spread decreased to approximately 2.07% at September 30, 2003, from 2.36% at September 30, 2002, while the net interest margin decreased to approximately 2.36% for the nine months ended September 30, 2003, compared to 2.70% for the 2002 period. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Bank's market areas, and other factors related to the collectibility of the Bank's loan portfolio. Based upon an analysis of these factors, management recorded a provision for losses on loans totaling $930,000 for the nine months ended September 30, 2003, an increase of $178,000, or 23.7%, over the comparable period in 2002. The current period provision was predicated primarily on an increase in the loan portfolio, including the increased percentage of loans secured by commercial real estate within the loan portfolio and an increase in the level of loans charged-off year to year. Management believes all classified loans are adequately collateralized, however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known classified assets or that the allowance will be adequate to cover losses on classified assets in the future. Other Income Other income totaled $9.2 million for the nine months ended September 30, 2003, an increase of $2.2 million, or 31.0%, over the comparable 2002 period. The increase in other income was primarily attributable to a $1.6 million increase in the gain on sale of loans, a $574,000, or 24.2%, increase in late charges, rent and other and a $689,000 increase in gain on sale of investment and mortgage-backed securities, which were partially offset by an $812,000, or 81.2%, decrease in income from mortgage servicing rights. Management anticipates less gain on sale of investment and mortgage-backed securities in the forseeable future due to rising rate environment and projected liquidity needs. The increase in the gain on sale of loans was due to the $114.7 million, or 82.8%, increase in sales volume, as Advantage continued to sell fixed-rate loans originated in the low interest rate environment that prevailed through much of the nine month period ended September 30, 2003. As interest rates increase management expects the volume of loans sold into the secondary market to decrease. If this occurs the gain on sale of loans would decrease. The increase in late charges, rent and other was due primarily to an increase in title premiums and other fees on loans and proceeds of $175,000 from a life insurance policy due to the death of an officer of the Bank. The decrease in mortgage servicing rights was comprised of increases in amortization totaling $1.5 million and impairment charges of $782,000, partially offset by an increase in new servicing rights recognized of $1.5 million year to year. 17 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 Comparison of Results of Operations for the Nine Months Ended September 30, 2003 and 2002 (continued) General, Administrative and Other Expense General, administrative and other expense totaled $17.2 million for the nine months ended September 30, 2003, an increase of $919,000, or 5.6%, over the comparable period in 2002. The increase in general, administrative and other expense was due primarily to a $411,000, or 5.3%, increase in employee compensation and benefits, an increase of $347,000 in franchise taxes and an increase of $237,000, or 9.3%, in occupancy and equipment and the absence of $112,000 related to the reversal of the restructuring charge recognized in 2001, which were partially offset by a $193,000, or 4.9%, decrease in other operating costs and a $51,000, or 8.4%, decrease in advertising. The increase in employee compensation and benefits was due primarily to an increase in incentive compensation and 401(k) plan costs, as well as normal merit increases, which were partially offset by an increase in deferred loan origination costs related to the increase in loan volume year to year. The increase in franchise tax expense reflects the effects of refund claims recorded in 2002. The increase in occupancy and equipment was due primarily to an increase in office repairs and maintenance expenses, as well as costs associated with the new Dover office location. The decrease in other operating costs was due primarily to a decrease in long distance telephone costs following a change in service providers, a decrease in FHLB charges due to use of bonds as pledged collateral versus letters of credit and decreases in legal, accounting and other professional services. The decrease in advertising was due primarily to cost savings realized from implementation of a plan to centralize the purchase of advertising contracts. Federal Income Taxes The provision for federal income taxes totaled $2.8 million for the nine months ended September 30, 2003, a decrease of $677,000, or 19.3%, compared to the nine months ended September 30, 2002. This decrease was primarily attributable to a $1.8 million, or 16.4%, decrease in pre-tax earnings and the non-taxable redemption of a life insurance policy. The Corporation's effective tax rates amounted to 31.2% and 32.3% for the nine-month periods ended September 30, 2003 and 2002, respectively. Comparison of Results of Operations for the Three Months Ended September 30, 2003 and 2002 General Camco's net earnings for the three months ended September 30, 2003 totaled $1.6 million, a decrease of $944,000, or 37.3%, from the $2.5 million of net earnings reported in the comparable 2002 period. The decrease in earnings was primarily attributable to a decrease of $1.2 million in net interest income and a decrease in other income of $261,000, which were partially offset by a decrease in the provision for losses on loans of $83,000, a decrease in general, administrative and other expense of $8,000 and a decrease in federal income tax expense of $472,000. Net Interest Income Total interest income amounted to $13.3 million for the three months ended September 30, 2003, a decrease of $3.1 million, or 18.9%, compared to the three-month period ended September 30, 2002, generally reflecting the effects of a decrease in yield on total interest-earning assets of 100 basis points, from 6.31% in the 2002 period to 5.31% and a $37.9 million, or 3.6%, decrease in the average balance of interest-earning assets outstanding year to year. 18 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 Comparison of Results of Operations for the Three Months Ended September 30, 2003 and 2002 (continued) Net Interest Income (continued) Interest income on loans totaled $11.8 million for the three months ended September 30, 2003, a decrease of $2.1 million, or 14.9%, from the comparable 2002 period. The decrease resulted primarily from a $10.2 million, or 1.3%, decrease in the average balance outstanding and a 97 basis point decrease in the average yield, to 6.02% in the 2003 period. Interest income on mortgage-backed securities totaled $736,000 for the three months ended September 30, 2003, a $753,000, or 50.6%, decrease from the 2002 quarter. The decrease was due primarily to a 221 basis point decrease in the average yield, to 2.40% for the 2003 period, coupled with a $6.5 million, or 5.0%, decrease in the average balance outstanding in the 2003 period. Interest income on investment securities decreased by $133,000, or 30.4%, due primarily to an $11.8 million decrease in the average balance outstanding, coupled with a 31 basis point decrease in the average yield, to 3.21% in the 2003 period. Interest income on other interest-earning assets decreased by $160,000, or 24.0%, due primarily to a decrease in the average yield, to 3.33% in the 2003 period as compared to 3.80% for the three months ended September 30, 2002, coupled with a decrease in the average balance outstanding of $9.3 million, or 13.3%. Interest expense on deposits totaled $3.8 million for the three months ended September 30, 2003, a decrease of $1.7 million, or 31.0%, compared to the same quarter in 2002, due primarily to an 89 basis point decrease in the average cost of deposits, to 2.37% in the current quarter, and a $35.7 million, or 5.29%, decrease in average deposits outstanding. Interest expense on borrowings totaled $3.8 million for the three months ended September 30, 2003, a decrease of $156,000, or 3.9%, from the same 2002 three-month period. The decrease resulted primarily from a 25 basis point decrease in the average cost of borrowings to 5.53%, partially offset by a $1.3 million, or .5%, increase in the average balance outstanding year to year. Decreases in the level of average yields on interest-earning assets and average costs of interest-bearing liabilities were due primarily to the overall decrease in interest rates in the economy. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $1.2 million, or 18.0%, to a total of $5.7 million for the three months ended September 30, 2003. The interest rate spread decreased to approximately 1.99% at September 30, 2003, from 2.33% at September 30, 2002, while the net interest margin decreased to approximately 2.26% for the three months ended September 30, 2003, compared to 2.66% for the 2002 period. Provision for Losses on Loans A provision for losses on loans is charged to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by the Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Bank's market areas, and other factors related to the collectibility of the Bank's loan portfolio. Based upon an analysis of these factors, management recorded a provision for losses on loans totaling $255,000 for the three months ended September 30, 2003, a decrease of $83,000, or 24.6%, from the comparable period in 2002. The decrease in the current period provision compared to the 2002 period was predicated primarily on a decrease in the level of classified loans year to year. Management believes all classified loans are adequately collateralized, however, there can be no assurance that the loan loss allowance will be adequate to absorb losses on known classified assets or that the allowance will be adequate to cover losses on classified assets in the future. 19 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 Comparison of Results of Operations for the Three Months Ended September 30, 2003 and 2002 (continued) Other Income Other income totaled $2.4 million for the three months ended September 30, 2003, a decrease of $261,000, or 9.7%, from the comparable 2002 period. The decrease in other income was primarily attributable to a $662,000 decrease in the valuation of mortgage servicing rights and a $300,000 decrease in gain on sale of loans, partially offset by a $531,000 gain on sale of investment and mortgage-backed securities and an increase of $43,000, or 4.8%, in late charges, rent and other. The decrease in mortgage servicing rights was attributable to an increase in amortization of mortgage servicing rights due to the high level of prepayments on the portfolio of loans serviced. The decrease in gain on sale of loans was due primarily to the $3.7 million, or 7.1%, decrease in sales volume. After several quarters of contraction in our owned loan portfolio due to heavy refinancing activity, we are beginning to see growth, due to a shift from selling long-term, fixed-rate home loans into the secondary market to origination of rate-sensitive loans for our portfolio. The increase in late charges, rent and other was due primarily to an increase in title premiums and other fees on loans and an increase in ATM fees. General, Administrative and Other Expense General, administrative and other expense totaled $5.6 million for the three months ended September 30, 2003, a decrease of $8,000, or .1%, from the comparable period in 2002. The decrease in general, administrative and other expense was due primarily to a $251,000, or 9.3%, decrease in employee compensation and benefits and a decrease of $60,000, or 15.9%, in data processing expense, which were partially offset by an increase of $79,000 or 9.2%, in occupancy and equipment and a $121,000, or 10.4%, increase in other operating costs. The decrease in employee compensation and benefits was due primarily to an increase in deferred loan origination costs related to the increase in loan volume. The decrease in data processing expense was primarily due to the 2002 expenses related to the consolidation of Columbia Federal Savings Bank's data processing into Advantage's system. The increase in occupancy and equipment was due primarily to an increase in office repairs and maintenance expenses, as well as costs associated with the new Dover office location and the amortization of new software products. The increase in other operating costs was due primarily to an increase in customer checks and ATM cards, as well as stationery and other office supplies resulting from the centralization of operations following the charter consolidation, including changing all previous individual bank division names to Advantage Bank. Federal Income Taxes The provision for federal income taxes totaled $718,000 for the three months ended September 30, 2003, a decrease of $472,000, or 39.7%, compared to the three months ended September 30, 2002. This decrease was primarily attributable to a $1.4 million, or 38.1%, decrease in pre-tax earnings. The Corporation's effective tax rates amounted to 31.2% and 32.0% for the three-month periods ended September 30, 2003 and 2002, respectively. 20 CAMCO FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine- and three-month periods ended September 30, 2003 and 2002 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk There has been no material change in the Corporation's market risk since the Corporation's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002. ITEM 4: Controls and Procedures Management refines the Corporation's internal controls on an ongoing basis with a view towards continuous improvement. In this regard, during the third quarter of 2003, management became aware of certain deficiencies and weaknesses in the Corporation's internal controls relating to: o The designation and recordation of loans held for sale; and o The recordation of deferred loan origination fees and costs. To address the deficiencies and weaknesses identified, management is taking the following corrective actions with respect to internal controls: o More clearly documenting the Corporation's internally established exposure limitations for loans held for sale and enhancing the monitoring process to ensure compliance with those limits. o Requiring the generation of a monthly summary of loan originations and related deferred fees and costs to insure completeness of future financial information in the Corporation's financial statements. The Corporation's independent auditors have advised the Audit Committee that these internal control deficiencies constitute material weaknesses and significant deficiencies as defined in the auditing literature. The Corporation's independent auditors concurred with the corrective actions taken by management as described above. The Corporation's Chief Executive Officer and Chief Financial Officer evaluated the disclosure controls and procedures (as defined under Rule 13a-14(c) and 15d-14 (c) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report. Based upon that evaluation and the corrective actions discussed above, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. 21 Camco Financial Corporation PART II ITEM 1. Legal Proceedings Not applicable ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable ITEM 5. Other Information Not applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: 3 Bylaws, as amended 31.1 Written Statement of Chief Executive Officer furnished Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 31.2 Written Statement of Chief Financial Officer furnished Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 32.1 Written Statement of Chief Executive Officer furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 32.2 Written Statement of Chief Financial Officer furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 Reports on Form 8-K: On July 24, 2003, a Form 8-K was filed to report that Richard C. Baylor, the President and CEO, will make a presentation at the Keefe, Bruyette & Woods Fourth Annual Community Investor Conference in New York. On July 25, 2003, a Form 8-K was filed to report that Camco has been added to the Russell 2000(R) Index. On July 28, 2003, a Form 8-K was filed to report that Camco had been included in the "Plain Dealer 100" Listing compiled by the Plain Dealer, a newspaper published in Cleveland, Ohio. On July 30, 2003, a Form 8-K was filed to report earnings for the second quarter of 2003. On September 23, 2003, a Form 8-K was filed to report the declaration of a cash dividend. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 12, 2003 By: /s/ Richard C. Baylor ------------------------- ---------------------------- Richard C. Baylor Chief Executive Officer Date: November 12, 2003 By: /s/ Mark A. Severson ------------------------- ---------------------------- Mark A. Severson Chief Financial Officer 23 EX-3 3 l03878aexv3.txt EXHIBIT 3 EXHIBIT 3 1987 AMENDED AND RESTATED BY-LAWS OF CAMCO FINANCIAL CORPORATION ARTICLE ONE OFFICES Section 1.01. Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware or such other place in the State of Delaware as the Directors may designate from time to time by resolution. Section 1.02. Business Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE TWO MEETINGS OF STOCKHOLDERS Section 2.01. Place of Meetings. All meetings of the stockholders for the election of directors shall be held in the City of Cambridge, State of Ohio at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2.02. Annual Meeting. Annual meetings of stockholders, commencing with the year 1988 shall be held on the fourth Tuesday in May in each year, if not a legal holiday, and if a legal holiday, then on the next business day following, at three o'clock p.m. (local time at the place of meeting), or at such other date or time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, for the election of directors and to transact such other business as may properly be brought before the meeting. Section 2.03. Notice of Annual Meeting. Written notice of the annual meeting of stockholders stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty (60) days before the date of the meeting. Section 2.04. List of Stockholders. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.05. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may be called only as provided in the certificate of incorporation. Section 2.06. Notice of Special Meetings. Written notice of a special meeting stating the place, date and hour of the meeting, and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 2.07. Business Transacted at Special Meetings. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 2.08. Quorum. The holders of not less than a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time to another time or place, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present or represented; provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present in person or represented by proxy, the corporation may transact any business which might have been transacted at the original meeting. Section 2.09. Vote Required. At all meetings for the election of directors at which a quorum is present, the candidates receiving the greatest number of votes shall be elected. Any other matter submitted to the stockholders at a meeting at which a quorum is present shall be decided by the vote of the holders of a majority of the stock having voting power, represented in person or by proxy, unless the matter is one upon which a different vote is required by express provision of the statutes, the certificate of incorporation or the by-laws, in which case such express provision shall govern and control the decision of such matter. Section 2.10. Voting Rights. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. Section 2.11. Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent and dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Section 2.12. Action Without Meeting. Any action required or permitted to be taken by the stockholders of the corporation must be taken pursuant to a vote of such stockholders at an annual or special meeting of such stockholders that is duly held pursuant to notice. No action required or permitted to be taken by the stockholders of the corporation at any annual or special meeting of such stockholders may be taken pursuant to one or more consents in writing signed by the holders of all or any other portion of the outstanding stock entitled to vote on such action. ARTICLE THREE DIRECTORS Section 3.01. Number of Directors. The authorized number of directors may be fixed or changed from time to time and at any time by a resolution adopted by a majority of the whole authorized number of directors, but no reduction in the number of directors shall of itself have the effect of shortening the term of any incumbent director. Until changed in accordance with law, the total authorized number of directors shall be nine (9). The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.03 of the by-laws. Section 3.02. Classification and Term of Directors. The directors shall be divided into three classes. If the authorized number of directors is increased or decreased at any time, the directors may, by a resolution adopted by the whole authorized number of directors, determine the number of directors to be added or subtracted, as the case may be, from any class or classes of directors, and the effect of such increase or decrease on each class need not be uniform; provided, however, that the authorized number of directors of any class shall not exceed by more than four (4) the authorized number of directors of any other class. The election of each class of directors shall be a separate election. The term of office of the three directors who shall be elected at the annual meeting of stockholders for 1977 shall expire at the annual meeting of stockholders for 1980; the term of office of Larry A. Caldwell, David A. Kesterson and John H. Heiby, who were elected as directors at the annual meeting of stockholders for 1976, shall expire at the annual meeting of stockholders for 1979; and the term of office of Carl L. Ariker, J.D. Knapp, M.D. and Robert S. Moorehead, who were elected as directors at the annual meeting of stockholders for 1975, shall expire at the annual meeting of stockholders for 1978; and at each annual meeting of stockholders commencing with the year 1978, directors shall be elected to succeed the directors of the class whose terms shall expire in that year, each to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year; provided, however, that each director elected at any time shall hold office until his successor is duly elected and shall qualify, or until his earlier death, resignation or removal. Section 3.03. Vacancies. Vacancies, and newly-created directorships resulting from any increase in the authorized number of directors, may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and any director so chosen shall hold office until the next annual election and until his successor is duly elected and shall qualify, or until his earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly-created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery of the State of Delaware may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3.04. Authority of Board of Directors. The business of the corporation shall be managed by its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by the by-laws directed or required to be exercised or done by the stockholders. Section 3.05. Place of Meetings. All meetings of the board of directors, both regular and special, may be held at the principal office of the corporation in Cambridge, Ohio or at any other place within or without the State of Delaware. Section 3.06. Regular Meetings. A regular meeting of the board of directors shall be held immediately following the adjournment of each annual meeting of stockholders at which directors are elected, and notice of such meeting need not be given. Additional regular meetings of the board of directors may be held at such other times and places as may from time to time be determined by resolution by the board of directors, and notice of any such additional regular meeting need not be given. Section 3.07. Special Meetings. Special meetings of the board of directors may be called only by the president upon his causing one (1) days' notice thereof to be given to each director, either personally or by mail or by telegram. Special meetings of the board of directors shall be called by the president or secretary in like manner and upon the giving of like notice on the written request of two directors. Section 3.08. Quorum. At all meetings of the board a majority of the number of directors in office, but in no case less than one-third (1/3) of the total number of directors authorized by, or in the manner provided in, the certificate of incorporation or the by-laws, shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation or by the by-laws. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time to another time or place, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present. Section 3.09. Action Without Meeting. Unless otherwise restricted by the certificate of incorporation or the by-laws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 3.10. Committees of Directors. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee shall, unless otherwise specifically provided in the resolution of the board of directors, have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation [except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation], adopting an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation: and, unless otherwise specifically provided in the resolution of the board of directors, the by-laws, or the certificate of incorporation, such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Section 3.11. Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 3.12. Compensation of Directors. Unless otherwise restricted by the certificate of incorporation, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 3.13. Qualifications of Directors. 1. No person shall serve or be appointed, nominated or elected as a Director of the corporation after having attained the age of seventy (70) years. 2. No person shall serve or be appointed, nominated or elected as a Director of the corporation who is not the holder of record of at least one hundred (100) shares of its issued and outstanding common stock. 3. Any nominee for election as a Director of the corporation may be proposed only by the Board of Directors or by any stockholder entitled to vote for the election of such person as a Director. No person, other than a nominee proposed by the Board of Directors, may be nominated for election, or elected, as a Director of the corporation unless such person shall have been proposed as a Director in a written notice from a stockholder entitled to vote for the election of such person as a Director, delivered or mailed by first-class United States mail, postage prepaid, to the Secretary of the corporation at its principal office. In the case of a nominee proposed for election as a Director at an annual meeting of stockholders, such written notice of a proposed nominee must be received by the Secretary of the corporation on or before the later of (A) March 31 immediately preceding such annual meeting or (B) the sixtieth (60th) day prior to the first anniversary of the most recent annual meeting of stockholders of the corporation held for the election of Directors; provided, however, that if the annual anniversary, then the written notice required by this paragraph (3) must be received by the Secretary within a reasonable time prior to the date of such annual meeting. In the case of a nominee proposed for election as a Director at a special meeting of stockholders at which Directors are to be elected, such written notice of a proposed nominee must be received by the Secretary of the corporation no later than the close of business on the seventh day following the day on which notice of the special meeting was mailed to stockholders. Each such written notice of a proposed nominee shall set forth (i) the name, age, business and residence addresses of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee and (iii) the number of each class of shares of the stock of the corporation owned beneficially and/or of record by each such nominee and the length of time such shares have been so owned. 4. If a stockholder shall attempt to nominate one or more persons for election as a Director at any meeting of stockholders at which one or more Directors are to be elected without having identified each such person in a written notice given as contemplated by, and/or without having provided therein the information specified in, paragraph (3) of this Section 3.13, each such attempted nomination shall be invalid and shall be disregarded unless the person acting as chairman of the meeting determines, in his sole discretion, that acceptance of such nomination is unlikely to affect the results of such election and should accordingly be accepted as a courtesy. 5. Nothing contained in this Section 3.13 shall be construed to prohibit the Board of Directors to fix powers or voting or other rights of the preferred stock, or of any series of the preferred stock, of the corporation that are inconsistent with the provisions of this Section 3.13, and if the terms and provisions fixing the powers or voting or other rights of any such stock shall be inconsistent with the provisions of this Section 3.13, the terms and provisions of such powers or voting or other rights shall govern and control. ARTICLE FOUR NOTICES Section 4.01. Form of Notice. Whenever, under the provisions of the statutes or of the certificate of incorporation or of the by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 4.02. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes, of the certificate of incorporation or of the by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE FIVE OFFICERS Section 5.01. Officers. The officers of the corporation shall be chosen by the board of directors and shall be a president, who must be a director; a vice-president; a secretary; a treasurer and such additional officers and assistant officers as the directors may from time to time elect. The board of directors may elect a chairman of the board, who must be a director. Any number of offices may be held by the same person, unless the certificate of incorporation or the by-laws otherwise provide. Section 5.02. Term. Any officer of the corporation shall hold office at the pleasure of the board of directors and until his successor is elected and qualified, or until his earlier death, resignation or removal. Section 5.03. Additional Officers and Agents. The board of directors may appoint such other officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 5.04. Compensation. The compensation of all officers and agents of the corporation shall be fixed by the board of directors. Section 5.05. Removal of Officers. Any officer elected or appointed by the board of directors may be removed at any time by the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. Section 5.06. Duties of the Chairman of the Board. The chairman of the board, if any, shall preside at all meetings of the directors at which he is present. Section 5.07. Duties of the President. The president shall be the chief executive officer of the corporation, shall preside at all meetings of the stockholders and, in the absence of the chairman of the board, or if there is no chairman of the board, at all meetings of the board of directors, shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the board of directors are carried into effect. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. Section 5.08. Duties of the Vice-President. In the absence of the president or in the event of his inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated by the board of directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 5.09. Duties of the Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and shall record all the proceedings of the meetings of the stockholders and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or the president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation, if any, and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 5.10. Duties of the Assistant Secretary. The assistant secretary, if any, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 5.11. Duties of the Treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 5.12. Duties of the Assistant Treasurer. The assistant treasurer, if any, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE SIX STOCK AND STOCKHOLDERS Section 6.01. Certificates. Every holder of stock in the corporation shall be entitled to have a certificate, signed by or in the name of the corporation by the chairman of the board or the president or a vice-president, and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, representing the number of shares owned by him in the corporation, which certificate may, at the option of the corporation, bear such recitals as are required or permitted by law. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 6.02. Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not (i) be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action, or (ii) precede the date upon which the resolution fixing such record date is adopted by the board of directors. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Section 6.03. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for such calls and assessments as are permitted by statute a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by statute. Section 6.04. Transfers. Where a certificate evidencing stock of the corporation is presented to the corporation or its proper agents with a request to register transfer, the transfer shall be registered as requested if: 1. an appropriate person signs on each certificate so presented or signs on a separate document an assignment or transfer of shares evidenced by each such certificate, or signs a power to assign or transfer such shares, or when the signature of an appropriate person is written without more on the back of each such certificate; and 2. reasonable assurance is given that the endorsement of each appropriate person is genuine and effective; the corporation or its agents may refuse to register a transfer of shares unless the signature of each appropriate person is guaranteed by a commercial bank or trust company having an office or a correspondent in the City of New York or by a firm having membership in the New York Stock Exchange; and 3. all applicable laws relating to the collection of transfer or other taxes have been complied with; and 4. the corporation or its agents are not otherwise required or permitted to refuse to register such transfer. Section 6.05. Lost, Wrongfully Taken or Destroyed Certificates. Except as otherwise provided by law, where the owner of a certificate evidencing stock of the corporation claims that such certificate has been lost, destroyed or wrongfully taken, the board of directors must cause the corporation to issue a new certificate in place of the original certificate if the owner: 1. so requests before the corporation has notice that such original certificate has been acquired by a bona fide purchaser; and 2. files with the corporation, unless waived by the board of directors, an indemnity bond, with surety or sureties satisfactory to the corporation, in such sum as the directors may, in their discretion, deem reasonably sufficient as indemnity against any loss or liability that the corporation may incur by reason of the issuance of each such new certificate: and 3. satisfies any other reasonable requirements which may be imposed by the board of directors, in their discretion. ARTICLE SEVEN INDEMNIFICATION AND INSURANCE Section 7.01. Mandatory Indemnification. The corporation shall indemnify any officer or director of the corporation, and any officer (other than an assistant officer) or director (i) of a subsidiary of the corporation or (ii) of a subsidiary of any such subsidiary, who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action threatened or instituted by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee or agent of the corporation or of a subsidiary of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. A person claiming indemnification under this Section 7.01 shall be presumed, in respect of any act or omission giving rise to such claim for indemnification, to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal matter, to have had no reasonable cause to believe his conduct was unlawful, and the termination of any action, suit or proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, rebut such presumption. Section 7.02. Court-Approved Indemnification. Anything contained in the by-laws or elsewhere to the contrary notwithstanding: (A) the corporation shall not indemnify any officer or director of the corporation who was a party to any completed action or suit instituted by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, in respect of any claim, issue or matter asserted in such action or suit as to which he shall have been adjudged to be liable for gross negligence or misconduct (other than negligence) in the performance of his duty to the corporation unless and only to the extent that the Court of Common Pleas of Franklin County, Ohio or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances of the case, he is fairly and reasonably entitled to such indemnity as such Court of Common Pleas of Franklin County, Ohio or such other court shall deem proper; and (B) the corporation shall promptly make any such unpaid indemnification as is determined by a court to be proper as contemplated by this Section 7.02. Section 7.03. Indemnification for Expenses. Anything contained in the by-laws or elsewhere to the contrary notwithstanding, to the extent that an officer or director of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01, or in defense of any claim, issue or matter therein, he shall be promptly indemnified by the corporation against expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) actually and reasonably incurred by him in connection therewith. Section 7.04. Determination Required. Any indemnification required under Section 7.01 and not precluded under Section 7.02 shall be made by the corporation only upon a determination that such indemnification of the officer or director is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 7.01. Such determination may be made only (A) by a majority vote of a quorum consisting of directors of the corporation who were not and are not parties to any such action, suit or proceeding, or (B) if such a quorum is not obtainable or if a majority of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (C) by the stockholders, or (D) by the Court of Common Pleas of Franklin County, Ohio or (if the corporation is a party thereto) the court in which such action, suit or proceeding was brought, if any; any such determination may be made by a court under division (D) of this Section 7.04 at any time [including, without limitation, any time before, during or after the time when any such determination may be requested of, be under consideration by or have been denied or disregarded by the disinterested directors under division (A) or by independent legal counsel under division (B) or by the stockholders under division (C) of this Section 7.04]; and no failure for any reason to make any such determination, and no decision for any reason to deny any such determination, by the disinterested directors under division (A) or by independent legal counsel under division (B) or by stockholders under division (C) of this Section 7.04 shall be evidence in rebuttal of the presumption recited in Section 7.01. Section 7.05. Advances for Expenses. Expenses (including, without limitation, attorneys' fees, filing fees, court reporters' fees and transcript costs) incurred in defending any action, suit or proceeding referred to in Section 7.01 shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding to or on behalf of the officer or director promptly as such expenses are incurred by him, but only if such officer or director shall first agree, in writing, to repay all amounts so paid in respect of any claim, issue or other matter asserted in such action, suit or proceeding in defense of which he shall not have been successful on the merits or otherwise: (A) if it shall ultimately be determined as provided in Section 7.04 that he is not entitled to be indemnified by the corporation as provided under Section 7.01; or (B) if, in respect of any claim, issue or other matter asserted by or in the right of the corporation in such action or suit, he shall have been adjudged to be liable for gross negligence or misconduct (other than negligence) in the performance of his duty to the corporation, unless and only to the extent that the Court of Common Pleas of Franklin County, Ohio or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability, and in view of all the circumstances, he is fairly and reasonably entitled to all or part of such indemnification. Section 7.06. Article Seven Not Exclusive. The indemnification provided by this Article Seven shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under the certificate of incorporation or any by-law, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be an officer or director of the corporation and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 7.07. Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, trustee, officer, employee, or agent of another corporation (domestic or foreign, nonprofit or for profit), partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the obligation or the power to indemnify him against such liability under the provisions of this Article Seven. Section 7.08. Certain Definitions. For purposes of this Article Seven, and as examples and not by way of limitation: (A) a person claiming indemnification under this Article Seven shall be deemed to have been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01, or in defense of any claim, issue or other matter therein, if such action, suit or proceeding shall be terminated as to such person, with or without prejudice, without the entry of a judgment or order against him, without a conviction of him, without the imposition of a fine upon him and without his payment or agreement to pay any amount in settlement thereof (whether or not any such termination is based upon a judicial or other determination of the lack of merit of the claims made against him or otherwise results in a vindication of him); and (B) references to an "other enterprise" shall include employee benefit plans; references to a "fine" shall include any excise taxes assessed on a person with respect to an employee benefit plan; references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and references to "a subsidiary of the corporation" shall include another corporation if securities representing at least a majority of the voting power of such other corporation are owned by the corporation; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" within the meaning of that term as used in this Article Seven. Section 7.09. Venue. Any action, suit or proceeding to determine a claim for indemnification under this Article Seven may be maintained by the person claiming such indemnification, or by the corporation, in the Court of Common Pleas of Franklin County, Ohio. The corporation and (by claiming such indemnification) each such person consent to the exercise of jurisdiction over its or his person by the Court of Common Pleas of Franklin County, Ohio in any such action, suit or proceeding. ARTICLE EIGHT MISCELLANEOUS Section 8.01. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, deem proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 8.02. Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. Section 8.03. Fiscal Year. The fiscal year of the corporation may be fixed by resolution of the board of directors. Section 8.04. Seal. The corporate seal, if any, may have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE NINE AMENDMENTS Section 9.01. Amendments. The by-laws of the corporation may be adopted, altered, amended or repealed only as provided in the certificate of incorporation. RESOLUTION ADOPTED BY THE BOARD OF DIRECTORS OF CAMCO FINANCIAL CORPORATION RESOLVED, that Article III, Section 3.13, paragraph 3 of the Amended and Restated By-Laws of Camco Financial Corporation be deleted in its entirety and replaced with the following new Article III, Section 3.13, paragraph 3: 3. Any nominee for election as a Director of the corporation may be proposed only by the Board of Directors or by any stockholder entitled to vote for the election of such person as a Director. No person, other than a nominee proposed by the Board of Directors, may be nominated for election, or elected, as a Director of the corporation unless such person shall have been proposed as a Director in a written notice from a stockholder entitled to vote for the election of such person as a Director, delivered or mailed by first-class United States mail, postage prepaid, to the Secretary of the corporation at its principal office. In the case of a nominee proposed for election as a Director at an annual meeting of stockholders, such written notice of a proposed nominee must be received by the Secretary of the corporation on or before the sixtieth (60th) day prior to the first anniversary of the most recent annual meeting of stockholders of the corporation held for the election of Directors. In the case of a nominee proposed for election as a Director at a special meeting of stockholders at which Directors are to be elected, such written notice of a proposed nominee must be received by the Secretary of the corporation no later than the close of business on the seventh day following the day on which notice of the special meeting was mailed to stockholders. Each such written notice of a proposed nominee shall set forth (i) the name, age, business and residence addresses of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee and (iii) the number of each class of shares of the stock of the corporation owned beneficially and/or of record by each such nominee and the length of time such shares have been so owned. Approved by the Board of Directors of Camco Financial Corporation on this 22nd day of July, 2003. /s/ D. Edward Rugg --------------------------- Secretary EX-31.1 4 l03878aexv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 SECTION 302 CERTIFICATION I, Richard C. Baylor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Camco Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ Richard C. Baylor ------------------------------------- Richard C. Baylor, Chief Executive Officer EX-31.2 5 l03878aexv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 SECTION 302 CERTIFICATION I, Mark A. Severson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Camco Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/Mark A. Severson -------------------------------------------- Mark A. Severson, Chief Executive Officer EX-32.1 6 l03878aexv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Camco Financial Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard C. Baylor, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Richard C. Baylor - --------------------------------------------- Richard C. Baylor, Chief Executive Officer November 12, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 7 l03878aexv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Camco Financial Corporation (the "Company") on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark A. Severson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/Mark A. Severson - -------------------------------------------- Mark A. Severson, Chief Financial Officer November 12, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----