CAMCO FINANCIAL CORPORATION 10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006


o		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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

Indicated by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes o No þ

As of May 3, 2006, the latest practicable date, 7,531,713 shares of the registrant’s common stock, $1.00 par value, were issued and outstanding.

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)


	March 31,			December 31,
	2006			2005
ASSETS

Cash and due from banks	$	19,277		$	21,786
Interest-bearing deposits in other financial institutions		10,584			11,299

Cash and cash equivalents		29,861			33,085

Investment securities available for sale — at market		47,784			47,907
Investment securities held to maturity — at cost, approximate market value of $941 and $947 as of March 31, 2006 and December 31, 2005, respectively		918			919
Mortgage-backed securities available for sale — at market		57,623			61,607
Mortgage-backed securities held to maturity — at cost, approximate market value of $3,070 and $3,251 as of March 31, 2006 and December 31, 2005, respectively		3,135			3,257
Loans held for sale — at lower of cost or market		3,325			1,947
Loans receivable — net		840,105			846,763
Office premises and equipment — net		11,813			11,569
Real estate acquired through foreclosure		1,636			2,581
Federal Home Loan Bank stock — at cost		27,496			27,112
Accrued interest receivable		5,219			5,297
Prepaid expenses and other assets		1,851			1,228
Cash surrender value of life insurance		20,981			20,793
Goodwill — net of accumulated amortization		6,683			6,683
Prepaid federal income taxes		—			500


Total assets	$	1,058,430		$	1,071,248


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	676,376		$	660,242
Advances from the Federal Home Loan Bank and other borrowings		280,280			307,223
Advances by borrowers for taxes and insurance		2,092			3,249
Accounts payable and accrued liabilities		4,965			5,331
Dividends payable		1,131			1,102
Accrued federal income taxes		276			—
Deferred federal income taxes		3,079			3,338

Total liabilities	$	968,199			980,485

Commitments		—			—

Stockholders’ equity
Preferred stock — $1 par value; authorized 100,000 shares; no shares outstanding		—			—
Common stock — $1 par value; authorized 14,900,000 shares; 8,829,839 issued at March 31, 2006 and December 31, 2005.		8,830			8,830
Additional paid-in capital		59,602			59,567
Retained earnings — substantially restricted		43,119			42,569
Accumulated other comprehensive income (loss) — unrealized gains on securities designated as available for sale, net of related tax effects		(2,183	)		(1,663	)
Less 1,293,125 and 1,251,125 shares of treasury stock at March 31, 2006 and December 31, 2005, respectively — at cost		(19,137	)		(18,540	)

Total stockholders’ equity		90,231			90,763


Total liabilities and stockholders’ equity	$	1,058,430		$	1,071,248

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF EARNINGS

For the three months ended March 31,
(In thousands, except per share data)


	2006			2005
Interest income
Loans	$	13,249		$	11,962
Mortgage-backed securities		633			751
Investment securities		480			185
Interest-bearing deposits and other		790			607

Total interest income		15,152			13,505

Interest expense
Deposits		4,424			3,503
Borrowings		2,949			2,634

Total interest expense		7,373			6,137


Net interest income		7,779			7,368

Provision for losses on loans		360			240


Net interest income after provision for losses on loans		7,419			7,128

Other income
Late charges, rent and other		462			745
Loan servicing fees		360			378
Service charges and other fees on deposits		352			334
Gain on sale of loans		99			170
Increase (decrease) in mortgage servicing rights — net		(22	)		51
Gain on sale of real estate acquired through foreclosure		55			9
Gain on sale of mortgage-backed securities and fixed assets		—			19

Total other income		1,306			1,706

General, administrative and other expense
Employee compensation and benefits		3,736			3,446
Deferred loan origination costs – SFAS No. 91		(487	)		(482	)
Occupancy and equipment		780			797
Data processing		393			331
Advertising		303			229
Franchise taxes		246			79
Other operating		1,291			1,165

Total general, administrative and other expense		6,262			5,565


Earnings before federal income taxes		2,463			3,269

Federal income taxes		784			1,051


NET EARNINGS	$	1,679		$	2,218


EARNINGS PER SHARE
Basic	$	.22		$	.29


Diluted	$	.22		$	.29


Dividends declared per share	$	.150		$	.145

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31,
(In thousands)


	2006			2005
Cash flows from operating activities:
Net earnings for the period	$	1,679		$	2,218
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Amortization of deferred loan origination fees		56			19
Amortization of premiums and discounts on investment and mortgage-backed securities — net		76			135
Amortization of mortgage servicing rights — net		191			151
Depreciation and amortization		294			320
Amortization of loan purchase accounting adjustments, net		(22	)		(22	)
Provision for losses on loans		360			240
Stock Option expense		35			—
Loss (gain) on sale of real estate acquired through foreclosure		(55	)		(9	)
Gain on sale of mortgage-backed securities		—			(13	)
Federal Home Loan Bank stock dividends		(384	)		(286	)
Gain on sale of loans		(99	)		(170	)
Loans originated for sale in the secondary market		(13,140	)		(16,150	)
Proceeds from sale of loans in the secondary market		11,861			14,541
Net increase in cash surrender value of life insurance		(188	)		(185	)

Tax benefits related to exercise of stock options		—			32
Increase (decrease) in cash due to changes in:
Accrued interest receivable		78			87
Prepaid expenses and other assets		(623	)		214
Accrued interest and other liabilities		(366	)		(989	)
Federal income taxes
Current		776			3,708
Deferred		8			(8	)

Net cash provided by (used in) operating activities		537			3,833

Cash flows provided by (used in) investing activities:
Purchases of investment securities designated as available for sale		—			(8,978	)
Proceeds from sale of investments designated as available for sale		—			27
Proceeds from maturities of investment securities		—			5,000
Principal repayments on mortgage-backed securities		3,367			4,911
Purchases of mortgage-backed securities designated as available for sale		—			(3,349	)
Loan principal repayments		74,282			67,526
Additions to real estate acquired through foreclosure		(20	)		(6	)
Loan disbursements		(67,061	)		(71,156	)
Purchases of loans		(637	)		(854	)
Additions to office premises and equipment		(538	)		(121	)
Proceeds from sale of real estate acquired through foreclosure		509			993

Net cash used in investing activities		9,902			(6,007	)

Net cash (used in) provided by operating and investing activities balance carried forward		10,439			(2,174	)

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the three months ended March 31,
(In thousands)


	2006			2005
Net cash (used in) provided by operating and investing activities (balance brought forward)	$	10,439		$	(2,174	)

Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits		16,134			7,075
Proceeds from Federal Home Loan Bank advances		7,000			—
Repayment of Federal Home Loan Bank advances		(33,943	)		(6,008	)
Dividends paid on common stock		(1,100	)		(1,112	)
Proceeds from exercise of stock options		—			126
Purchase of treasury shares		(597	)
Decrease in advances by borrowers for taxes and insurance		(1,157	)		(1,006	)

Net cash provided by (used in) financing active		(13,663	)		(925	)


Increase (decrease) in cash and cash equivalents		(3,224	)		(3,099	)

Cash and cash equivalents at beginning of period		33,085			42,894


Cash and cash equivalents at end of period	$	29,861		$	39,795


Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest on deposits and borrowings	$	7,304		$	6,190


Cash paid for taxes		—			—


Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available for sale, net of related tax effects	$	(765	)	$	(992	)


Recognition of mortgage servicing rights in accordance with SFAS No. 140	$	169		$	202


Transfers from mortgage loans to real estate acquired through foreclosure	$	205		$	1,200


Dividends declared but unpaid	$	1,131		$	1,114

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three-month periods ended March 31, 2006 and 2005

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, 2005. 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 three month period ended March 31, 2006, 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 its two wholly-owned subsidiaries: Advantage Bank (“Advantage” or the “Bank”) and Camco Title Agency, Inc.

3.		Critical Accounting Policies

		“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’s consolidated financial statements, which are prepared in accordance with US GAAP. The preparation of these financial statements requires Camco to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under US GAAP.

		Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of mortgage servicing rights and 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.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

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 Rights*

		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 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.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

3.		Critical Accounting Policies (continued)

		At that time, management reviews the information and mortgage servicing rights are marked to lower of amortized cost or market for the current quarter.

		*Goodwill*

		We have developed procedures to test goodwill for impairment on an annual basis using June 30 financial information. 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 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 Enterprise Risk and Audit Committee and management for review.

		*Summary*

		Management believes the accounting estimates related to the allowance for loan losses, the capitalization, amortization, and valuation of mortgage servicing rights 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 Enterprise Risk and Audit Committee of the Board of Directors and the Enterprise Risk and Audit Committee has reviewed Camco’s disclosures relating to such matters in the quarterly Management’s Discussion and Analysis.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

4.		Earnings Per Share

		Basic earnings per common share are 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 plans. The computations are as follows:


	For the three months ended
	March 31,
	2006		2005
Weighted-average common shares outstanding (basic)		7,563,452		7,677,795
Dilutive effect of assumed exercise of stock options		3,718		33,638

Weighted-average common shares outstanding (diluted)		7,567,170		7,711,433

		Anti-dilutive options to purchase 232,364 and 167,879 shares of common stock with respective weighted-average exercise prices of $15.87 and $16.46 were outstanding at March 31, 2006 and 2005, respectively, but were excluded from the computation of common share equivalents for those respective periods because the exercise prices were greater than the average market price of the common shares.

5.		Stock Option Plans

		Under the 1995 Plan, 161,488 shares were reserved for issuance. Under the 2002 Plan, 400,000 shares were reserved for issuance. Additionally, in connection with the acquisition of First Ashland Financial Corporation, the stock options of Ashland were converted into options to purchase 174,421 shares of the Corporation’s stock at an exercise price of $7.38 per share, all of which were exercisable through 2005. In connection with the 2000 acquisition of Westwood Homestead Financial Corporation, the stock options of Westwood Homestead were converted into options to purchase 311,794 shares of the Corporation’s stock at a weighted-average exercise price of $11.89 per share, which expire in 2008.

		Effective January 1, 2006, the Corporation adopted SFAS No. 123R, “Accounting for Stock-Based Compensation,” which contains a fair-value based method for valuing stock-based compensation that measures compensation cost at the grant date based on the fair value of the award.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

5.		Stock Option Plans (continued)

		Prior to January 1, 2006, the Corporation utilized APB Opinion No. 25 and related Interpretations in accounting for its stock option plans in 2005. Accordingly, no compensation cost has been recognized for the plans in 2005. 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. 123R, the Corporation’s net earnings and earnings per share for the three-month periods ended March 31, 2006 and 2005 would have been reported as the pro forma amounts indicated below:


	2006			2005
	(In thousands, except per share data)
Net earnings
As reported	$	1,679		$	2,218
Add: Stock-based compensation, expense included in reported income, net of tax		30			—

Deduct: Total stock-based compensation expense determined under fair value based method for awards, net of tax		(30	)		(21	)

	$	1,679		$	2,197


Earnings per share
Basic
As reported	$	.22		$	.29
Stock-based compensation, net of tax		—			—


Pro-forma	$	.22		$	.29


Diluted
As reported	$	.22		$	.29
Stock-based compensation, net of tax		—			(.01	)

Pro-forma	$	.22		$	.28

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 2006 and 2005: dividend yield of 4.0% and 3.80%, respectively; expected volatility of 15.16% and 18.76% respectively; a risk-free interest rate of 4.57% and 4.22% respectively, and an expected life of ten years for all grants.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

5.		Stock Option Plans (continued)

		A summary of the status of the Corporation’s stock option plans as of March 31, 2006 and December 31, 2005, and changes during the periods ending on those dates is presented below:


				Three months ended					Year ended
				March 31,					December 31,
				2006					2005
				Weighted-					Weighted-
				average					average
				exercise					exercise
	Shares			price		Shares			price
Outstanding at beginning of period		224,636		$	15.71		218,324		$	12.91
Granted		84,513			14.12		87,240			16.51
Exercised		—			—		(70,162	)		8.43
Forfeited		(442	)		16.43		(10,766	)		12.85


Outstanding at end of period		308,707		$	15.28		224,636		$	15.71


Options exercisable at period-end		227,016		$	15.34		138,305		$	15.22

Weighted-average fair value of options granted during the period				$	2.09				$	2.89

The following information applies to options outstanding at March 31, 2006:


Number outstanding		5,255
Range of exercise prices		8.92-9.75

Number outstanding		96,123
Range of exercise prices		11.36-14.16

Number outstanding		207,329
Range of exercise prices		14.55-17.17

Weighted-average exercise price	$	15.28
Weighted-average remaining contractual life	7.3 years

6.		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.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

For the three-month periods ended March 31, 2006 and 2005

Discussion of Financial Condition Changes from December 31, 2005 to March 31, 2006

At March 31, 2006, Camco’s consolidated assets totaled $1.1 billion, a decrease of $12.8 million, or 1.2%, from the December 31, 2005 total. The decrease in total assets was comprised primarily of decreases in loans receivable net, mortgage-backed securities available for sale and cash and cash equivalents.

Cash and interest-bearing deposits in other financial institutions totaled $29.9 million at March 31, 2006, a decrease of $3.2 million, or 9.7%, from December 31, 2005. Investment securities totaled $48.7 million at March 31, 2006, a decrease of $124,000, or .3%, from the total at December 31, 2005 due to amortization and market value.

Mortgage-backed securities totaled $60.8 million at March 31, 2006, a decrease of $4.1 million, or 6.3%, from December 31, 2005, due to principal repayments of $3.4 million coupled with a decrease in market value of $700,000 for the three-month period ended March 31, 2006.

Loans receivable, including loans held for sale, totaled $843.4 million at March 31, 2006, a decrease of $5.3 million, or .6%, from December 31, 2005. The decrease resulted primarily from loan disbursements and purchases totaling $80.8 million, which were partially offset by principal repayments of $74.3 million and loan sales of $11.8 million. The volume of loans originated and purchased during the first three months of 2006 decreased compared to the 2005 period by $7.3 million, or 8.3%, while the volume of loan sales decreased by $2.6 million or 18.2% year to year. The number of loans originated for sale in the secondary market continues to decline as long term rates have risen. The rise in interest rates resulted in an increase in the production of adjustable rate loans for the portfolio. Instead of selling adjustable rate loans, Camco has typically held them in its portfolio as an integral part of its strategy to build interest rate sensitive assets for interest rate risk purposes. Loan originations during the three-month period ended March 31, 2006, were comprised primarily of $33.2 million of loans secured by one- to four-family residential real estate, $23.4 million in loans secured by commercial real estate and $24.2 million in consumer and other loans. 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 $7.3 million and $7.0 million at March 31, 2006 and December 31, 2005, respectively, representing .87% and .82% of loans, respectively, at those dates. Nonperforming loans (90 days or more delinquent plus nonaccrual loans) totaled $14.8 million and $13.9 million at March 31, 2006 and December 31, 2005, respectively, constituting 1.75% and 1.64% of total net loans, including loans held for sale, at those dates. At March 31, 2006, nonperforming loans were comprised of $7.9 million in one- to four-family residential real estate loans, $3.9 million in commercial and multi-family real estate loans and $3.0 million of consumer and non-residential loans. Management believes all nonperforming loans are adequately reserved 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 $11.2 million at March 31, 2006, compared to $4.0 million at December 31, 2005, an increase of $7.2 million, or 177.7%. The increase was primarily due to three non-residential commercial real estate loans totaling $4.0 million. Although management believes that its allowance for loan losses is adequate based upon the available facts and circumstances at March 31, 2006, there can be no assurance that increased provisions will not be necessary in future periods, which could adversely affect Camco’s results of operations.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

Discussion of Financial Condition Changes from December 31, 2005 to March 31, 2006 (continued)

Deposits totaled $676.4 million at March 31, 2006 an increase of $16.1 million, or 2.4%, from the total at December 31, 2005. The increase in deposits was primarily due to an increase of $28.8 million in certificates of deposit and $7.2 million in money market accounts resulting from the increased advertisement of short-term certificates and individual retirement accounts in the first quarter of 2006. Management decided to increase advertising for these deposits in an effort to increase core deposits with short to intermediate term maturities due to rising interest rates and the flat yield curve. The increase in short-term deposits and money market accounts were partially offset by the decrease of $13.6 million in interest bearing checking and $3.5 million in savings accounts, and $2.9 million in non-interest bearing checking which was primarily due to the movement to higher yielding money market accounts and deposits. FHLB advances and other borrowings totaled $280.3 million at March 31, 2006 a decrease of $26.9 million, or 8.8%, from the total at December 31, 2005 The decrease in advances was primarily due to the pay down of repurchase based advances of $14.0 million, a $12.0 million fixed rate advance maturing in March 2006 and continued amortization.

Stockholders’ equity totaled $90.2 million at March 31, 2006 a decrease of $532,000, or .6 %, from December 31, 2005. The decrease resulted primarily from dividends of $1.1 million, an increase in unrealized losses on available for sale securities of $520,000 and the treasury buyback of stock of $597,000, which was partially offset by net earnings of $1.7 million.

Camco and the Bank are required to maintain minimum regulatory capital pursuant to federal regulations. During the first quarter of 2006 management was notified by its primary regulators that Advantage was categorized as “well-capitalized” under the regulatory framework. At March 31, 2006 the regulatory capital of Camco and the Bank exceeded all regulatory capital requirements.

The following tables present certain information regarding compliance by Advantage with applicable regulatory capital requirements at March 31, 2006:

Camco: As of March 31, 2006

To be “well-

capitalized” under

For capital

prompt corrective

Actual

adequacy purposes

action provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

Total capital
(to risk-weighted assets)

92,357

12.43

³$59,425

³8.0

N/A

Tier I capital
(to risk-weighted assets)

85,036

11.45

³$29,713

³4.0

N/A

Tier I leverage

85,036

8.04

³$42,291

³4.0

N/A

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

Comparison of Financial changes from December 31, 2005 to March 31, 2006 (continued)

Advantage: At March 31, 2006

To be “well-

capitalized” under

For capital

prompt corrective

Actual

adequacy purposes

action provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

Total capital
(to risk-weighted assets)

83,431

11.25

³$59,314

³8.0

³$74,142

³10.0

Tier I capital
(to risk-weighted assets)

76,110

10.27

³$29,675

³4.0

³$44,485

³ 6.0

Tier I leverage

76,110

7.27

³$41,881

³4.0

³$52,351

³ 5.0

Comparison of Results of Operations for the Three Months Ended March 31, 2006 and 2005

General

Camco’s net earnings for the three months ended March 31, 2006 totaled $1.7 million, a decrease of $539,000, or 24.3%, from the $2.2 million of net earnings reported in the comparable 2005 period. The decrease in earnings was primarily attributable to a $400,000, or 23.5%, decrease in other income and an increase of $697,000, or 12.5%, in general, administrative and other expenses, which were partially offset by an increase in net interest income of $411,000, or 5.6%.

Net Interest Income

Total net interest income amounted to $7.8 million for the three months ended March 31, 2006, an increase of $411,000 million, or 5.6%, compared to the three-month period ended March 31, 2005, generally reflecting the effects of an increase in yield on total interest-earning assets of 60 basis points, from 5.36% in the 2005 period to 5.96% in 2006 and a $10.3 million, or 1.0%, increase in the average balance of interest-earning assets outstanding year to year.

AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA

The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resulting yields, and the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. Balances are based on the average of month-end balances which, in the opinion of management, do not differ materially from daily balances.


	For the three months ended March 31,
			2006							2005
	Average		Interest		Average			Average		Interest		Average
	outstanding		earned/		yield/			outstanding		earned/		yield/
	balance		paid		rate			balance		paid		rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable ⁽¹⁾		845,557		13,249		6.27	%		840,575		11,962		5.69	%
Mortgage-backed securities ⁽²⁾		62,981		633		4.02	%		82,381		751		3.65	%
Investment securities ⁽²⁾		48,795		480		3.93	%		24,369		185		3.04	%
Interest-bearing deposits and other		60,304		790		5.24	%		60,050		607		4.04	%

Total interest-earning assets		1,017,637		15,152		5.96	%		1,007,375		13,505		5.36	%


Interest-bearing liabilities:
Deposits		630,346		4,424		2.81	%		642,359		3,503		2.18	%
FHLB advances and other		300,930		2,949		3.92	%		293,551		2,634		3.59	%

Total interest-bearing liabilities		931,276		7,373		3.17	%		935,910		6,137		2.62	%


Net interest income/Interest rate spread			$	7,779		2.79	%			$	7,368		2.74	%


Net interest margin ⁽³⁾						3.06	%						2.93	%

⁽¹⁾		Includes nonaccrual loans and loans held for sale.

⁽²⁾		Includes securities designated as available for sale.

⁽³⁾		Net interest income as a percent of average interest-earning assets.

Interest income on loans totaled $13.2 million for the three months ended March 31, 2006, an increase of $1.3 million, or 10.8%, from the comparable 2005 period. The increase resulted primarily from an increase of average balance outstanding of $5.0 million, or .6%, in the 2006 quarter coupled with a 58 basis point increase in the average yield to 6.27% from 5.69% in 2005. Interest income on mortgage-backed securities totaled $633,000 for the three months ended March 31, 2006, an $118,000 or 15.7% decrease from the 2005 quarter. The decrease was due primarily to a $19.4 million, or 23.6%, decrease in the average balance outstanding in the 2006, offset partially by a 37 basis point increase in the average yield, to 4.02% for the 2006 period. Interest income on investment securities increased by $295,000 or 159.5%, due primarily to a 89 basis point increase in the average yield, to 3.93% in the 2006 period and a $24.4 million or 100.2% increase in the average balance outstanding in the 2006 period. Interest income on other interest-earning assets increased by $183,000 or 30.2%, due primarily to a 120 basis point increase in the average yield, to 5.24% in 2006 coupled by a 254,000 or .4%, in the average balance outstanding in the 2006 period.

Interest expense on deposits totaled $4.4 million for the three months ended March 31, 2006 an increase of $921,000, or 26.3%, compared to the same quarter in 2005 due primarily to a 63 basis point increase in the average cost of deposits to 2.81% in the current quarter, offset partially by a $12.0 million, or 1.9%, decrease in average deposits outstanding. Interest expense on borrowings totaled $2.9 million for the three months ended March 31, 2006 an increase of $315,000, or 12.0%, from the same 2005 three-month period. The increase resulted primarily from a 33 basis point increase in the average cost of borrowings to 3.92%, and a $7.4 million, or 2.5%, increase in the average borrowings outstanding. Increases in the level of average yields on interest-earning assets and average costs of interest-bearing liabilities (deposits) were due primarily to the overall increase in interest rates in the economy.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

Comparison of Results of Operations for the Three Months Ended March 31, 2006 and 2005 (continued)

As a result of the foregoing changes in interest income and interest expense, net interest income increased by $411,000 or 5.6%, to a total of $7.8 million for the three months ended March 31, 2006 The interest rate spread increased to approximately 2.79% at March 31, 2006 from 2.74% at March 31, 2005 while the net interest margin increased to approximately 3.06% for the three months ended March 31, 2006 compared to 2.93% for the 2005 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 increased the provision for losses on loans to $360,000 for the three months ended March 31, 2006. This was due to the continued emphasis on consumer and commercial real estate loans, an increase of $120,000 or 50.0%, from the comparable period in 2005. Management believes all classified loans are adequately reserved, 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 $1.3 million for the three months ended March 31, 2006 a decrease of $400,000, or 23.5%, from the comparable 2005 period. The decrease in other income was primarily attributable to a $283,000 decrease in late charges, rent and other, a $73,000 decrease in the valuation of mortgage servicing rights and a decrease of $71,000 in the gain on sale of loans. The decrease in late charges, rent and other was due to a management decision to discontinue the accrual of late charges on commercial loans and move to a method that will recognize late charges as income when collected. This decision to reverse accrued late charges resulted in a decrease in other income of $166,000 for the period. The decrease in mortgage servicing rights was attributable to the increase of loan prepayments in the servicing portfolio for the three months ended March 31, 2006. The decrease in gain on sale of loans was due primarily to a decrease in the volume of loans sold of $2.6 million, or 18.2%, from the volume of loans sold in the 2005 period.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

Comparison of Results of Operations for the Three Months Ended March 31, 2006 and 2005 (continued)

General, Administrative and Other Expense

General, administrative and other expense totaled $6.3 million for the three months ended March 31, 2006 an increase of $697,000 or 12.5%, from the comparable period in 2005. The increase in general, administrative and other expense was due primarily to an increase of $290,000, or 8.4%, in employee compensation and benefits and a $167,000 or 211.4%, increase in franchise taxes. The increase in employee compensation and benefits is due to several key hires within mid-management level of the Corporation as well as revenue generating commercial lenders in the markets we serve, recruiting expense, merit increases and increases in health insurance. The increase in franchise tax was due to incurring a normal level of expense after realizing a one-time tax savings which occurred in 2005 from acquiring London Financial Corporation in August of 2004 when the bank changed charters to a state chartered commercial bank.

Federal Income Taxes

The provision for federal income taxes totaled $784,000 for the three months ended March 31, 2006, a decrease of $267,000 or 25.4%, compared to the three months ended March 31, 2005. This decrease was primarily attributable to an $806,000 or 24.7%, decrease in pre-tax earnings. The Corporation’s effective tax rates amounted to 31.8% for the three-months ended March 31, 2006 and 32.2% for the three months ended March 31, 2005.

Liquidity and Capital Resources

Camco, like other financial institutions, is required under applicable federal regulations to maintain sufficient funds to meet deposit withdrawals, loan commitments and expenses. Liquid assets consist of cash and interest-bearing deposits in other financial institutions, investments and mortgage-backed securities. Management monitors and assesses liquidity needs daily in order to meet deposit withdrawals, loan commitments and expenses.

In the first quarter of 2006, Camco Financial purchased 42,000 of its shares for a total cost of $597,000. The Corporation has continued the treasury buyback of shares as a means to better utilize capital.

The primary sources of funds include deposits, borrowings and principal and interest repayments on loans. The deposit base includes local and state deposits. State of Ohio deposits equated to $34.0 million at March 31, 2006 and $29.2 million at December 31, 2005. Other funding sources include Federal Home Loan Bank advances of which approximately $91.0 million additional borrowing capacity was available as of March 31, 2006.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

For the three-month periods ended March 31, 2006 and 2005

Comparison of Results of Operations for the Three Months Ended March 31, 2006 and 2005 (continued)

The following table sets forth information regarding the Bank’s obligations and commitments to make future payments under contract as of March 31, 2006.


	Payments due by period
	Less						More
	than		1-3		3-5		than
	1 year		years		years		5 years		Total
	(In thousands)
Contractual obligations:
Operating lease obligations	$	152	$	348	$	263	$	296	$	1,059
Advances from the Federal Home Loan Bank		75,747		93,097		42,569		57,982		269,395
Certificates of deposit		274,417		121,115		26,063		1,147		422,742

Amount of commitments expiring per period
Commitments to originate loans:
Overdraft lines of credit		698		—		—		—		698
Home equity lines of credit		77,250		—		—		—		77,250
Commercial lines of credit		15,337		—		—		—		15,337
One- to four-family and multi-family loans		13,357		—		—		—		13,357
Commercial		25,597		—		—		—		25,597
Non-residential real estate and land loans		249		—		—		—		249

Total contractual obligations	$	482,804	$	214,560	$	68,895	$	59,425	$	825,684

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk

Management considers interest rate risk the Bank’s most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Bank’s net interest income is largely dependent upon the effective management of interest rate risk.

To identify and manage its interest rate risk, the Bank employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management projections for activity levels in each of the product lines offered by the Bank. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Assumptions are inherently uncertain and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Bank’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Bank’s Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. The Bank’s current interest rate risk position is determined by measuring the anticipated change in net interest income over a 12 month horizon assuming a 200 basis point (bp) instantaneous and parallel shift (linear) increase or decrease in all interest rates.

The following table shows the Bank’s estimated earnings sensitivity profile as of March 31, 2006:


Change in	Percentage Change in
Interest Rates	Net Interest Income
(basis points)	12 Months			Policy Limit
+200		-5.86	%		-20.00	%
-200		-4.23	%		-20.00	%

Given a 200bp linear increase in the yield curve used in the simulation model, it is estimated net interest income for the Bank would decrease by 5.86% over one year. A 200bp linear decrease in interest rates would decrease net interest income by 4.23% over one year. These estimated changes in net interest income are within the policy guidelines established by the Board of Directors. The Bank’s ALCO also monitors the economic value of equity (EVE) ratio, measured on a static basis at the current period end.

The following table shows the EVE ratios as of March 31, 2006:


Change in
Interest Rates
(basis points)	EVE Ratio			Policy Limit
+100		7.13	%		6.00	%
0		7.93	%		6.50	%
-100		8.33	%		6.00	%

ITEM 4: Controls and Procedures

(a) Camco’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the disclosure controls and procedures (as defined under Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended) as of March 31, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Camco’s disclosure controls and procedures are effective.

(b) There were no changes in Camco’s internal control over financial reporting during the quarter ended March 31, 2006, which materially affected or are reasonably likely to materially affect the internal controls over financial reporting.

Camco Financial Corporation

PART II

ITEM 1. Legal Proceedings

Not applicable.

ITEM 1A. Risk Factors

None.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

All of the following shares were purchased as part of a publicly announced program:

Maximum Number

of shares that may

Number of shares

Average price paid

be purchased under

Period of Repurchase

purchased

per share

the program

January 1-January 31

N/A

229,337

Feb. 1 – Feb. 28

20,500

14.24

208,837

March 1- March 31

21,500

14.19

187,337

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


		Exhibit 31(i)		Section 302 certification by Chief Executive Officer

		Exhibit 31(ii)		Section 302 Certification by Chief Financial Officer

		Exhibit 32(i)		Section 1350 certification by Chief Executive Officer

		Exhibit 32(ii)		Section 1350 certification by Chief Financial Officer


		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	14

	Quantitative and Qualitative Disclosures about Market Risk	20

	Controls and Procedures	21

PART II -	OTHER INFORMATION	22

SIGNATURES		23
EX-31.1
EX-31.2
EX-32.1
EX-32.2



Date: May 4, 2006	By:	/s/ Richard C. Baylor
		Richard C. Baylor
		Chief Executive Officer



Date: May 4, 2006	By:	/s/ Mark A. Severson
		Mark A. Severson
		Chief Financial Officer

	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 Camco, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b.		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c.		Evaluated the effectiveness of Camco’s disclosure controls and procedures and presented in this report our conclusion about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this annual report based on such evaluations; and

	d.		Disclosed in this report any change in Camco’s internal control over financial reporting that occurred during Camco’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, Camco’s internal control over financial reporting.

	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 Camco’s internal control over financial reporting.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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 Camco as of, and for, the periods presented in this quarterly report;

4.		Camco’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) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d 15(f))for Camco and have:



Date: May 4, 2006	By:	/s/ Richard C. Baylor
	Richard C. Baylor, Chief Executive Officer



Date: May 4, 2006	By:	/s/ Mark A. Severson
	Mark A. Severson, Chief Executive Officer


By: /s/ Richard C. Baylor Richard C. Baylor, Chief Executive Officer


By: /s/ Mark A. Severson Mark A. Severson, Chief Financial Officer