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 June 30, 2010

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

For the transition period from                      to                     

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)

814 Wheeling Avenue, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o

Indicate 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 August 12, 2010, the latest practicable date, 7,155,595 shares of the registrant’s common stock, $1.00 par value, were outstanding.

 

 

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 (Loss)			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			31
Controls and Procedures			32
PART II — OTHER INFORMATION			33
SIGNATURES			36
Exhibit 31(i)
Exhibit 31(ii)
Exhibit 32(i)
Exhibit 32(ii)

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

		June 30,				December 31,
		2010				2009
		(unaudited)
ASSETS
Cash and due from banks		$	18,033			$	20,490
Interest-bearing deposits in other financial institutions			15,534				17,663
Cash and cash equivalents			33,567				38,153
Securities available for sale, at fair value			38,396				55,950
Securities held to maturity, at cost, approximate fair value of $2,828 and $2,200 as of June 30, 2010 and December 31, 2009, respectively			2,742				2,113
Loans held for sale — at lower of cost or fair value			1,669				475
Loans receivable — net			680,238				659,022
Office premises and equipment — net			10,450				10,870
Real estate acquired through foreclosure			10,599				9,660
Federal Home Loan Bank stock — at cost			29,888				29,888
Accrued interest receivable			3,659				3,979
Mortgage servicing rights — at lower of cost or fair value			4,339				4,433
Prepaid expenses and other assets			5,420				5,712
Cash surrender value of life insurance			19,029				18,838
Prepaid and refundable federal income taxes			4,384				3,562
Total assets		$	844,380			$	842,655
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits		$	652,872			$	659,902
Other Borrowings			11,879				11,941
Advances from the Federal Home Loan Bank and other borrowings			108,111				97,291
Advances by borrowers for taxes and insurance			145				1,909
Accounts payable and accrued liabilities			10,149				11,098
Total liabilities			783,156				782,141
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; 8,884,509 shares issued at June 30, 2010 and December 31, 2009			8,885				8,885
Additional paid-in capital			60,262				60,124
Retained earnings			15,043				14,695
Accumulated other comprehensive income net of related tax effects			1,242				1,049
Unearned compensation; 50,000 shares			(94	)			(125	)
Treasury stock — 1,678,913 shares at June 30, 2010 and December 31, 2009, at cost			(24,114	)			(24,114	)
Total stockholders’ equity			61,224				60,514
Total liabilities and stockholders’ equity		$	844,380			$	842,655

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

		Six months ended								Three months ended
		June 30,								June 30,
(unaudited)		2010				2009				2010				2009
Interest income
Loans		$	18,561			$	20,613			$	9,281			$	10,046
Investment securities			1,073				1,819				495				844
Other interest-earning accounts and dividends			673				689				333				344
Total interest and dividend income			20,307				23,121				10,109				11,234
Interest expense
Deposits			5,689				8,420				2,744				3,948
Borrowings			1,989				2,971				992				1,402
Total interest expense			7,678				11,391				3,736				5,350
Net interest income			12,629				11,730				6,373				5,884
Provision for losses on loans			1,799				1,438				894				790
Net interest income after provision for losses on loans			10,830				10,292				5,479				5,094
Other income
Rent and other			737				982				328				521
Loan servicing fees			637				632				320				316
Service charges and other fees on deposits			1,116				1,071				598				570
Gain on sale of loans			490				773				261				404
Mortgage servicing rights — Net			(94	)			269				(124	)			209
Income on cash surrender value life insurance			435				494				220				238
Gain on sale of mortgage-backed securities and fixed assets			(1	)			4				(1	)			4
Total other income			3,320				4,225				1,602				2,262
General, administrative and other expense
Employee compensation and benefits			6,654				6,540				3,269				3,064
Occupancy and equipment			1,485				1,543				743				761
Federal deposit insurance premium			1,036				1,061				558				779
Data processing			566				614				286				307
Advertising			170				297				89				125
Franchise taxes			534				582				269				314
Postage, supplies and office expenses			567				687				274				327
Travel, training and insurance			176				138				98				73
Professional services			1,171				858				596				414
Real estate owned and other expenses			831				829				409				555
Loan and deposit expenses			727				748				384				174
Total general, administrative and other expenses			13,917				13,897				6,975				6,893
Earnings before federal income tax expense (benefit)			233				620				106				463
Total federal income tax expense (benefit)			(115	)			383				(113	)			461
NET EARNINGS		$	348			$	237			$	219			$	2
EARNINGS PER SHARE
Basic		$	.05			$	.03			$	.03			$	.00
Diluted		$	.05			$	.03			$	.03			$	.00
Dividends declared per share			.00				.02				.00				.01

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

		Six months ended								Three months ended
		June 30,								June 30,
(unaudited)		2010				2009				2010				2009
Net earnings		$	348			$	237			$	219			$	2
Other comprehensive income, net of tax:
Unrealized holding gains (losses) during the period, net of tax effects $99 and$(8), $64 and $(122) for the respective periods			193				(16	)			125				(237	)
Comprehensive income (loss)		$	541			$	221			$	344			$	(235	)

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30,
(In thousands)

(unaudited)		2010				2009
Cash flows from operating activities:
Net earnings for the period		$	348			$	237
Adjustments to reconcile net earnings to net cash provided by operating activities:
Amortization of deferred loan origination fees			67				242
Amortization of premiums and discounts on investment and mortgage-backed securities — net			8				(30	)
Amortization of mortgage servicing rights — net			546				459
Depreciation and amortization			628				546
Provision for losses on loans			1,799				1,438
Stock option expense			138				228
Provision for losses on REO			192				321
Loss on sale of real estate acquired through foreclosure			30				15
Restricted stock / unearned compensation			31				31
(Gain) loss on sale of investments and fixed assets			1				(4	)
Gain on sale of loans			(490	)			(773	)
Loans originated for sale in the secondary market			(29,293	)			(71,732	)
Proceeds from sale of loans in the secondary market			28,589				69,320
Net increase in cash surrender value of life insurance			(351	)			(411	)
Increase (decrease) in cash due to changes in:
Accrued interest receivable			320				412
Prepaid expenses and other assets			(629	)			(229	)
Accrued interest and other liabilities			(949	)			(943	)
Net cash provided by (used in) operating activities			985				(873	)
Cash flows provided by (used in) investing activities:
Principal repayments, maturities on securities held to maturity			195				11,224
Principal repayments, maturities on securities available for sale			17,842				33,396
Purchase of investment securities designated as available for sale			—				(24,019	)
Purchase of investment securities designated as held to maturity			(828	)			—
Loan principal repayments			73,863				111,338
Loan disbursements and purchased loans			(100,079	)			(55,964	)
Proceeds from sale of office premises and equipment			10				4
Proceeds from surrender of bank owned life insurance			160				4,460
Additions to office premises and equipment			(219	)			(106	)
Proceeds from sale of real estate acquired through foreclosure			1,521				2,514
Net cash provided by (used in) investing activities			(7,535	)			82,847
Net cash provided by (used in) operating and investing activities (balance carried forward)			(6,550	)			81,974

Camco Financial Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the six months ended June 30,
(In thousands)

(unaudited)		2010				2009
Net cash provided by (used in) operating and investing activities (balance brought forward)		$	(6,550	)		$	81,974
Cash flows used in financing activities:
Net increase (decrease) in deposits			(7,030	)			(12,353	)
Proceeds from Federal Home Loan Bank advances and other borrowings			87,606				22,000
Repayment of Federal Home Loan Bank advances and other borrowings			(76,848	)			(59,397	)
Dividends paid on common stock			—				(144	)
Decrease in advances by borrowers for taxes and insurance			(1,764	)			(2,239	)
Net cash provided by (used in) financing activities			1,964				(52,133	)
Increase (decrease) in cash and cash equivalents			(4,586	)			29,841
Cash and cash equivalents at beginning of period			38,153				52,285
Cash and cash equivalents at end of period		$	33,567			$	82,126
Supplemental disclosure of cash flow information:
Cash paid during the period for interest on deposits and borrowings		$	7,690			$	11,509
Cash received for income taxes		$	—			$	806
Supplemental disclosure of noncash investing activities:
Recognition of mortgage-servicing rights		$	358			$	728
Transfer of loans to real estate acquired through foreclosure		$	2,682			$	3,289

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

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, 2009. 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 six month period ended June 30, 2010, 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

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

The allowance is regularly reviewed by management to determine whether the amount is considered adequate to absorb probable, incurred losses inherent in the loan portfolio at the balance sheet dates presented. Our evaluation of the adequacy of the allowance for loan losses is an estimate based on management’s current judgment about the credit quality of the loan portfolio. This evaluation includes specific loss estimates on certain individually reviewed loans, statistical loss estimates for loan pools that are based on historical loss experience, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions. Also considered as part of that judgment 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. While we strive to reflect all known risk factors in our evaluations, actual results may differ significantly from our estimates.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

Mortgage Servicing Rights

To determine the fair value of our mortgage servicing rights (“MSRs”) each reporting quarter, we provide information to a third party valuation firm who assists us with determining the possible impairment of MSRs, as described below.

MSRs 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 the Bank 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 fair 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 we estimate, takes into consideration the investment portfolio average yield as well as current short duration investment yields. We believe 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 earnings figures approximate the cash flow that could be received from the servicing portfolio. Valuation results are presented quarterly to management. At that time, we review the information and MSRs are marked to the lower of amortized cost or fair value for the current quarter.

Deferred Income Taxes

Camco recognizes expense for federal income taxes currently payable as well as for deferred federal taxes for estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the consolidated balance sheets, as well as loss carry forwards and tax credit carry forwards. Realization of a deferred tax asset is dependent upon generating sufficient taxable income in either the carry forward or carry back periods to cover net operating losses generated by the reversal of temporary differences. A valuation allowance is provided by way of a charge to income tax expense if it is determined that it is more likely than not that some or all of the deferred tax asset will not be realized. If different assumptions and conditions were to prevail, the valuation allowance may not be adequate to absorb unrealized deferred taxes and the amount of income taxes payable may need to be adjusted by way of a charge or credit to expense. Furthermore, income tax returns are subject to audit by the IRS. Income tax expense for current and prior periods is subject to adjustment based upon the outcome of such audits. Camco believes it has adequately accrued for all probable income taxes payable. Accrual of income taxes payable and valuation allowances against deferred tax assets are estimates subject to change based upon the outcome of future events.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

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 six months ended								For the three months ended
		June 30,								June 30,
“In thousands, except per share data”		2010				2009				2010				2009
BASIC:
Net Earnings		$	348			$	237			$	219			$	2
Weighted average common shares outstanding			7,206				7,199				7,206				7,206
Basic earnings per share		$	.05			$	.03			$	.03			$	.00
DILUTED:
Net Earnings		$	348			$	237			$	219			$	2
Weighted average common shares outstanding			7,206				7,199				7,206				7,206
Dilutive effect of stock options			49				1				63				6
Total common shares and dilutive potential common shares			7,255				7,200				7,269				7,212
Earnings per share — Diluted		$	.05			$	.03			$	.03			$	.00

Anti-dilutive options to purchase 139,363 and 318,638 shares of common stock with respective weighted-average exercise prices of $13.86 and $11.58 were outstanding at June 30, 2010 and 2009, respectively, but were excluded from the computation of common share equivalents for the six months ended because the exercise prices were greater than average market price of the common shares.

Anti-dilutive options to purchase 139,363 and 243,638 shares of common stock with respective weighted-average exercise prices of $13.86 and $14.37 were outstanding at June 30, 2010 and 2009, respectively, but were excluded from the computation of common share equivalents for the three months ended because the exercise prices were greater than average market price of the common shares

5.

Stock Option Plans

The Corporation follows 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.

The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model. The following table details the fair value and assumptions used to value stock options as of the grant date that were granted during the six months ended June 30, 2010 and 2009:

		2010				2009
Fair value, calculated		$	1.65			$	1.43
Exercise Price		$	2.51			$	2.46
Risk-free interest rate			3.61	%			2.66	%
Expected stock price volatility			51.62	%			61.00	%
Expected dividend yield			—				1.63	%
Expected Life		10 years				10 years

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

A summary of the status of the Corporation’s stock option plans as of June 30, 2010 and December 31, 2009, and changes during the periods ending on those dates is presented below:

		Six months ended								Year ended
		June 30,								December 31,
		2010								2009
						Weighted-								Weighted-
						average								average
						exercise								exercise
		Shares				price				Shares				price
Outstanding at beginning of period			260,833			$	10.59				260,703			$	14.11
Granted			260,729				2.51				80,000				2.46
Exercised			—				—				—				—
Forfeited or Expired			(41,470	)			15.27				(79,870	)			13.96
Outstanding at end of period			480,092			$	5.80				260,833			$	10.59
Options exercisable at end of period			259,029			$	8.24				235,451			$	10.54
Weighted-average fair value of options granted during the period						$	1.65							$	1.43

The following information applies to options outstanding at June 30, 2010:

		Options Outstanding												Options Exercisable
						Weighted-Average				Weighted-								Weighted-
						Remaining				Average								Average
Range of Exercise		Number				Contractual				Exercise				Number				Exercise
Prices		Outstanding				Life (Years)				Price				Exercisable				Price
$1.89 - $2.51			340,729				9.4				2.50				132,117				2.48
$8.92 - $9.75			24,014				6.8				9.00				15,394				9.05
$11.36 - $14.16			59,474				5.3				13.37				55,643				13.45
$14.55 - $17.17			55,875				3.9				16.45				55,875				16.45
			480,092				8.1				5.80				259,029				8.24

6.

Fair Value of Financial Instruments

Because it is a financial services corporation, the Corporation’s carrying value of certain financial assets and liabilities is impacted by the application of fair value measurements, either directly or indirectly. In certain cases, an asset or liability is measured and reported at fair value on a recurring basis, such as available-for-sale investment securities. In other cases, management must rely on estimates or judgments to determine if an asset or liability not measured at fair value warrants an impairment write-down or whether a valuation reserve should be established. Given the inherent volatility, the use of fair value measurements may have a significant impact on the carrying value of assets or liabilities, or result in material changes to the financial statements, from period to period.

The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

6.

Fair Value of Financial Instruments (continued)

Cash and Cash Equivalents: The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is deemed to approximate fair value.

Investment Securities: Fair values for investment securities are based on quoted market prices and dealer quotes.

Loans Held for Sale: Fair value for loans held for sale is the contracted sales price of loans committed for delivery, which is determined on the date of sale commitment.

Loans Receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential real estate, multi-family residential real estate, installment and other. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality.

Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value.

Accrued Interest Receivable and Payable: The carrying value for accrued interest approximates fair value.

Deposits: The fair values of deposits with no stated maturity, such as money market demand deposits, savings and NOW accounts have been analyzed by management and assigned estimated maturities and cash flows which are then discounted to derive a value. The fair value of fixed-rate certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Advances from the Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices.

Repurchase Agreements: The fair value of repurchase agreements is based on the discounted value of contractual cash flows using rates currently offered for similar maturities.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows using rates currently offered for similar maturities.

Advances by Borrowers for Taxes and Insurance: The carrying amount of advances by borrowers for taxes and insurance is deemed to approximate fair value.

Commitments to Extend Credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At June 30, 2010 and December 31, 2009, the fair value of loan commitments was not material.

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

6.

Fair Value of Financial Instruments (continued)

Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation’s financial instruments are as follows:

		June 30, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
		value				value				value				value
		(In thousands)
Financial assets
Cash and cash equivalents		$	33,567			$	33,567			$	38,153			$	38,153
Investment securities available for sale			38,396				38,396				55,950				55,950
Investment securities held to maturity			2,742				2,828				2,113				2,200
Loans held for sale			1,669				1,698				475				485
Loans receivable			680,238				662,238				659,022				646,990
Federal Home Loan Bank stock			29,888				29,888				29,888				29,888
Accrued interest receivable			3,659				3,659				3,979				3,979
Financial liabilities
Deposits			652,872				638,722				659,902				647,149
Advances from the Federal Home Loan Bank			108,111				113,458				97,291				101,924
Repurchase agreements			6,879				6,879				6,941				6,941
Subordinated debentures			5,000				4,799				5,000				4,768
Advances by borrowers for taxes and insurance			145				145				1,909				1,909
Accrued interest payable			1,646				1,646				1,669				1,669

Listed below are three levels of inputs that Camco uses to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Level 1 inputs for assets or liabilities that are not actively traded. Also consists of an observable market price for a similar asset or liability. This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices.

Level 3: Consists of unobservable inputs that are used to measure fair value when observable market inputs are not available. This could include the use of internally developed models, financial forecasting, etc.

Fair value is defined as the price that would be received to sell an asset or transfer a liability between market participants at the balance sheet date. When possible, the Corporation looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Corporation looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and Camco must use other valuation methods to develop a fair value. The fair value of impaired loans is based on the fair value of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values.

The following table presents financial assets and liabilities measured on a recurring basis:

						Fair Value Measurements at Reporting Date Using
(in thousands)		June 30, 2010				Level 1				Level 2				Level 3
Securities available for sale
U.S. government sponsored enterprises		$	4,083			$	—			$	4,083			$	—
Corporate equity securities			96				—				96				—
Mortgage-backed securities			34,217				—				34,217				—

Camco Financial Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six- and three-month periods ended June 30, 2010 and 2009

The following table presents financial assets and liabilities measured on a non-recurring basis:

		Fair Value Measurements at Reporting Date Using
																		Change in fair value
		Balance @																for the period
(in thousands)		June 30, 2010				Level 1				Level 2				Level 3				ended
Impaired loans		$	30,236											$	30,236			$	1,820
Real estate acquired through foreclosure			10,599												10,599				122
		Balance @
		December 31, 2009
Impaired loans		$	25,982											$	25,982			$	13,081
Real estate acquired through foreclosure			9,660												9,660				945

Impaired loans, which are measured for impairment using the fair value of the collateral at June 30, 2010, had a carrying amount of $30.2 million, with a valuation allowance of $1.1 million, resulting in an additional provision for loan losses of $1.0 million during the first half of 2010.

Loans held for sale are originated on forward commitment contracts and are reported at the lower of cost or fair value. All loans held for sale at June 30, 2010, are secured by liens on 1-4 family residential properties.

Mortgage servicing rights 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 the bank 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 fair value for the pool, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing.

Fair value for real estate acquired through foreclosure is determined by obtaining recent appraisals on the properties. The fair value under such appraisals is determined by using one of the following valuation techniques: income, cost or comparable sales. The fair value is then reduced by management’s estimate for the direct costs expected to be incurred in order to sell the property. Holding costs or maintenance expenses are recorded as period costs when incurred and are not included in the fair value estimate.

7.

Recent Accounting Pronouncements

In July 2010, FASB issued a statement which expands disclosures about credit quality of financing receivables and allowance for credit losses. The standard will require the Corporation to expand disclosures about the credit quality of loans and the related reserves against them. The extra disclosures will include details on past due loans, credit quality indicators, and modifications of loans. The Corporation will adopt the standard beginning with our December 31, 2010 financial statements.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which statements can be identified by the use of forward-looking terminology, such as may, might, could, would, believe, expect, intend, plan, seek, anticipate, estimate, project or continue or the negative thereof or comparable terminology. All statements other than statements of historical fact included in this document regarding our outlook, financial position and results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements. The Corporation undertakes no responsibility to update or revise any forward-looking statements to reflect events or circumstances after the date on which the statement is made. These forward-looking statements also relate to, among other things:

•

anticipated changes in industry conditions created by state and federal legislation and regulations;

•

anticipated changes in general interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;

•

retention of our existing customer base and our ability to attract new customers;

•

the development of new products and services and their success in the marketplace;

•

the adequacy of the allowance for loan losses; and

•

statements regarding our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.

These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to have been correct, and undue reliance should not be placed on such statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements included herein include, but are not limited to:

•

competition in the industry and markets in which we operate;

•

levels of nonperforming assets;

•

changes in general interest rates;

•

loan demand;

•

rapid changes in technology affecting the financial services industry;

•

real estate values;

•

changes in government regulation; and

•

general economic and business conditions.

Overview

Management’s Discussion and Analysis is intended to give stockholders a more comprehensive review of the issues facing management than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and related footnotes and the selected financial data in the annual report. As used herein and except as the context may otherwise require, references to “Camco,” “the Corporation”, “we,” “us,” or “our” means, collectively, Camco Financial Corporation and its wholly owned subsidiaries, Advantage Bank and Camco Title Agency.

For the six months ended June 30, 2010, Camco reported net earnings of $348,000 compared to $237,000 of net earnings reported for the first half of 2009. Earnings per share for the six months ended June 30, 2010 and 2009, were $0.05 and $0.03, respectively.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Overview (continued)

The following key items summarize the Corporation’s financial results during the 6 months ended June 2010:

•

Loans receivable increased $21.2 million as a result of strong commercial lending efforts

•

Total delinquencies have decreased $2.1 million

•

Net Interest Margin increased to 3.32% from 2.91% at December 31, 2009

•

Total deposits decreased $7.0 million, primarily due to the decrease in wholesale certificates of deposit

Discussion of Financial Condition Changes from December 31, 2009 to June 30, 2010

At June 30, 2010, Camco’s consolidated assets totaled $844.4 million, an increase of $1.7 million, or .2%, from December 31, 2009. The increase in total assets resulted primarily from increases in loans receivable which was offset partially by decreases in securities available for sale.

Cash and interest-bearing deposits in other financial institutions totaled $33.6 million at June 30, 2010, a decrease of $4.6 million, or 12.0%, from December 31, 2009. As noted in our annual report for fiscal year 2009, we have improved our liquidity position by reducing borrowings and will continue to utilize excess cash to reduce borrowings and originate new loans in the third quarter of 2010. However, additionally we have seen a decrease of $7.0 million, or 1.1%, in deposits which are primarily related to higher yielding wholesale certificates of deposits and public funds. We continue to price certificates of deposit specials and continue our efforts to retain our “core” customers. We have implemented a number of organizational and product development initiatives to increase commercial and small business checking accounts.

Securities totaled $41.1 million at June 30, 2010, a decrease of $16.9 million, or 29.1% from December 31, 2009. The decrease was attributable to principal repayments totaling $18.0 million offset partially by the purchases of $828,000 of securities for the six-month period ended June 30, 2010. Purchases were comprised of municipal bonds with an average yield of 4.26%. All of the securities purchased were classified as held to maturity.

Loans receivable, including loans held for sale, totaled $681.9 million at June 30, 2010, an increase of $22.4 million, or 3.4%, from December 31, 2009. The increase resulted primarily from loan disbursements totaling $129.4 million offset partially by principal repayments of $73.9 million and loan sales of $28.1 million. The volume of loans originated and purchased during the first six months of 2010 increased compared to the 2009 period by $1.7 million, or 1.3%, while the volume of loan sales decreased by $40.4 million, or 59.0%, period to period. The increase in outstanding loans during the six months ending June 30, 2010 occurred primarily in our commercial portfolios. While we have seen a slight increase in prepayments on residential mortgage loans, our ability to produce new residential mortgage loans has not been as strong as 2009. The reduction in residential real estate loan balances was intensified by the secondary market offering historically low long-term fixed rates during most of 2009, which resulted in significantly higher refinancing activity during that time period.

Loan originations during the six-month period ended June 30, 2010, included $77.1 million of commercial loans, $10.2 million in loans secured by one to four family residential real estate and $42.1 million in consumer and other loans. Our intent is to continue to service our communities in 1-4 family residential, consumer and commercial real estate lending in future periods.

During the first six months of 2010, we continued to execute our strategic plan to diversify the balance sheet by strategically working to increase our commercial and commercial real estate loan portfolios and improve our funding mix by reducing borrowings and increasing transaction-based deposits related to these commercial relationships.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Discussion of Financial Condition Changes from December 31, 2009 to June 30, 2010 (continued)

We have continued the strategy of transforming our balance sheet toward commercial and consumer loans and in 2009 we increased our monitoring process and expanded our leadership in the commercial lending and underwriting teams in order to expand our product offerings and improve the execution of our relationship lending within our markets.

The following table details 30 — 89 days delinquent loans at:

		June 30,				December 31,
		2010				2009
		30 - 89 days				30 - 89 days
		delinquent				delinquent
Residential		$	3,893			$	4,818
Multifamily			1,539				79
Non Residential			273				2,693
Construction / development			5				534
Commercial			261				92
HELOC and second mortgage			1,962				2,020
Consumer and other			147				77
Total		$	8,080			$	10,313

Delinquency from the 30-89 days decreased due to transition to non accrual status (3 or more payments overdue) in the first half of 2010 and is depicted in the schedule on page 18.

The allowance for loan losses totaled $11.4 million and $16.1 million at June 30, 2010 and December 31, 2009, representing 26.6% and 44.2% of nonperforming loans, respectively, at those dates. Nonperforming loans (loans with three payments or more delinquent plus nonaccrual loans) totaled $42.6 million and $36.4 million at June 30, 2010 and December 31, 2009, respectively, constituting 6.15% and 5.40% of total loans receivable net, including loans held for sale, at those dates. Net charge-offs totaled $6.5 million for the first half of 2010.

The decrease in the allowance from December 31, 2009 to June 30, 2010 was significantly related to charge offs recognized in 2010 that were specific to certain impaired loans as of December 31, 2009, including one large loan. As previously disclosed, subsequent to year end, the Company became aware of a fraudulent commercial loan in our Cincinnati market totaling $2.8 million. Based on accounting standards, the Company evaluated the event which impacted our 2009 earnings. In the second quarter of 2010 the fraudulent loan was charged off using the specific allowance that was provided for at the end of 2009.

Management analyzes the allowance, historical loss activity, and qualitative factors impacting the loan portfolio and allowance on an on-going basis. As part of the analysis, the loan portfolio is segmented by risk characteristics so that the inherent risk in each segment is addressed in the calculation of the allowance for loan losses. Based on changes made in our processes and procedures, we believe commercial loans originated during 2010, totaling $65.0 million, do not contain the same inherent risk as our seasoned commercial portfolio and therefore the allowance for loan losses required for this segment of the portfolio is less than that provided for the rest of the commercial portfolio. This is due to the review and analysis of our historical loss experience and the fact that we have strengthened and revised our underwriting process. We have incorporated additional comprehensive analysis, along with tax return validation and guarantor liquidity verification as appropriate. The Bank has employed a cash flow and/or net worth covenant along with monthly borrowing base requirements as applicable in order to monitor performance on a timely basis. As an added strength, many of our guarantors often have sizeable personal liquidity and the Bank has employed personal liquidity minimums in credit agreements as appropriate.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Discussion of Financial Condition Changes from December 31, 2009 to June 30, 2010 (continued)

Although we believe that the allowance for loan losses at June 30, 2010, is adequate to cover probable, incurred losses inherent in the loan portfolio at that date based upon the available facts and circumstances, there can be no assurance that additions to the allowance for loan losses will not be necessary in future periods, which could adversely affect operations. Unemployment rates in our markets, and Ohio in general, continues to be higher than the national average, and bankruptcy and foreclosure filings in Ohio are very high compared to the rest of the nation. Additionally, Ohio is experiencing declining values of residential real estate. However, Ohio in general has not experienced significant increases in home values over the past five years like many regions in the U.S., which should comparatively mitigate losses on loans. Nonetheless, these factors, compounded by a very uncertain national economic outlook, may increase the level of future losses beyond our current expectations.

The following table sets forth information with respect to Advantage’s nonaccrual and delinquent loans for the periods indicated.

		June 30,				March 31,				December 31,				December 31,				December 31,
		2010				2010				2009				2008				2007
		(Dollars in thousands)
Loans accounted for on nonaccrual basis:
Real estate:
Residential(1)		$	25,282				21,287			$	19,190			$	20,616			$	8,411
Multi-family			2,133				2,430				2,341				3,139				871
Nonresidential			7,994				7,747				3,857				18,057				6,908
Construction			4,175				4,587				4,382				8,603				5,568
Commercial			542				3,297				515				1,393				455
Home equity lines of credit			2,384				2,624				2,415				1,549				925
Consumer and other			133				145				148				127				857
Total nonaccrual loans			42,643				42,117				32,848				53,484				23,995
Accruing loans delinquent three months or more
Real estate:
Residential			—				—				—				44				1,520
Multi-family			—				155				—				—				—
Nonresidential			—				192				2,853				—				—
Construction			—				745				638				—				—
Commercial			—				110				110				—				—
Total loans 90 days past due and accruing			—				1,202				3,601				44				1,520
Total nonperforming loans			42,643				43,319				36,449				53,528				25,515
Other real estate owned			10,599				10,373				9,660				5,841				5,034
Total nonperforming assets		$	53,242				53,692			$	46,109			$	59,369			$	30,549
Allowance for loan losses		$	11,358				15,821			$	16,099			$	15,747			$	6,623
Nonperforming loans as a percent of total net loans (2)			6.15	%			6.18	%			5.40	%			6.91	%			3.13	%
Nonperforming assets to total assets			6.31	%			6.16	%			5.19	%			5.93	%			2.99	%
Allowances for loan losses as a percent of nonperforming loans			26.6	%			36.5	%			44.2	%			29.4	%			26.0	%
Memo section:
Troubled debt restructurings
Loans and leases restructured and in compliance with modified terms		$	3,721				17,894			$	16,645				11,440				—
Loans and leases restructured and not in compliance with modified terms (included in non-accrual)		$	16,792				9,978			$	4,783				12,882				—

Nonaccrual status denotes loans greater than three payments past due, loans for which, in the opinion of management, the collection of additional interest is unlikely, or loans that meet nonaccrual criteria as established by regulatory authorities.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Discussion of Financial Condition Changes from December 31, 2009 to June 30, 2010 (continued)

Payments received on a nonaccrual loan are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the collectability of the loan.

The following table presents changes in Camco’s allowance for loan losses:

		June 30,				December 31,
		2010				2009
		(Dollars in thousands)
Balance at beginning of year		$	16,099			$	15,747
Charge-offs:
1-4 family residential real estate (1)			2,740				8,267
Multifamily & nonresidential real estate			706				9,664
Other Construction and Land			400				2,484
Consumer			9				20
Commercial			3,059				2,052
Agriculture Loans			—				41
Overdraft Protection			4				18
Total charge-offs			6,918				22,546
Recoveries:
1-4 family residential real estate (1)			170				445
Multifamily & nonresidential real estate			97				621
Other Construction and Land			3				—
Consumer			—				—
Commercial			102				22
Agriculture Loans			2				—
Overdraft Protection			4				18
Total recoveries			378				1,106
Net (charge-offs) recoveries			6,540				21,440
Provision for losses on loans			1,799				21,792
Balance at end of period		$	11,358			$	16,099

At June 30, 2010, the Corporation’s real estate owned (REO) consisted of 144 repossessed properties with a net book value of $10.6 million. Initial loss is recorded as a charge to the allowance for loan losses. The Corporation works with borrowers to avoid foreclosure if possible. If it becomes inevitable that a borrower will not be able to retain ownership of its property, the Corporation often seeks a deed in lieu of foreclosure in order to facilitate the recovery process.

Thereafter, if there is a further deterioration in value, a specific valuation allowance is established and charged to operations. The Corporation reflects costs to carry REO as period costs in operations when incurred. When property is acquired through foreclosure or deed in lieu of foreclosure, it is initially recorded at the fair value of the related assets at the date of foreclosure, less estimated costs to sell the property. As a result, real estate owned grew $939,000 during the six months of 2010. The strategy of pursuing deeds in lieu of foreclosure more aggressively should result in a reduction in the holding period for nonperforming assets and ultimately reduce economic losses.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Discussion of Financial Condition Changes from December 31, 2009 to June 30, 2010 (continued)

Deposits totaled $652.9 million at June 30, 2010 a decrease of $7.0 million, or 1.1%, from the total at December 31, 2009. The following table details our deposit portfolio balances and the average rate paid on our deposit portfolio at June 30, 2010 and December 31, 2009:

		June 30, 2010								December 31, 2009								Change
		Balance				Rate				Balance				Rate				Balance				Rate
Noninterest-bearing demand		$	42,095				0.00	%		$	38,911				0.00	%			3,184				0.00	%
Interest-bearing demand			61,983				0.32				70,564				0.43				(8,581	)			(0.11	)
Money market			94,934				0.68				96,172				0.68				(1,238	)			0.00
Savings			39,117				0.25				36,638				0.25				2,479				0.00
Certificates of deposit — retail			393,944				2.28				385,622				2.70				8,322				(0.42	)
Certificates of deposit — brokered			20,799				3.34				31,995				3.19				(11,196	)			0.15
Total deposits		$	652,872				1.62	%		$	659,902				1.89	%			(7,030	)			(0.27	)%

In early 2009, brokered deposits were used to reduce borrowings and improve the Bank’s liquidity position. However, we acknowledge that brokered deposits are not core, franchise-enhancing deposits, and we plan to continue with our current strategy of improving the long-term funding mix of the Bank’s deposit portfolio by aggregating small business, commercial and retail checking and depository accounts. We have implemented a number of organizational and product development initiatives designed to increase commercial and small business checking accounts.

Today’s interest rate environment coupled with our pricing strategy has resulted in a reduction in our higher cost certificates of deposit. Money market accounts have also decreased primarily due to our aggressive rate reduction in the first six months of 2010 as customers continue to look for better rates. This strategy has helped maintain our margin, and we believe that if we are able to maintain most of the certificates of deposit maturing in the remainder of 2010 the continuing decrease of rates will help to reduce our cost of funds further during the year based on our current expectation for interest rates.

Advances from the Federal Home Loan Bank (“FHLB”) and other borrowings totaled $120.0 million at June 30, 2010, a decrease of $10.8 million, or 9.8%, from the total at December 31, 2009. The decrease in borrowings was primarily due to utilizing cash from decreases in our investment portfolios. See “Liquidity and Capital Resources” for further discussion on our borrowings position.

Stockholders’ equity totaled $61.2 million at June 30, 2010, an increase of $710,000, or 1.2%, from December 31, 2009. The majority of the increase resulted from net earnings of $348,000, and lower interest rates which improved the fair value of our investment securities resulting in an increase in unrealized gains on available for sale securities, net of tax, of $193,000. This was coupled with entries relating to stock options of approximately $169,000.

Comparison of Results of Operations for the Six Months Ended June 30, 2010 and 2009

Camco’s net earnings for the six months ended June 30, 2010, totaled $348,000, an increase of $111,000, from the net earnings of $237,000 reported in the comparable 2009 period. On a per share basis, the net earnings during the first half of 2010 were $.05, compared to $.03 per share in the first half of 2009. The increase in earnings was primarily attributable to increased net interest income and a tax benefit offset partially by increased provision and decreased other income.

Net Interest Income

Net interest income totaled to $12.6 million for the six months ended June 30, 2010, an increase of $899,000, or 7.7%, compared to the six-month period ended June 30, 2009, generally reflecting the effects of a $113.3 million decrease in the average balance of interest bearing liabilities coupled with the average cost of funding decreasing by 60 basis points year to year. Net interest margin increased to 3.32% in the first half of 2010 compared to 2.71% at June 30, 2009.

Camco Financial Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION

Comparison of Results of Operations for the Six Months Ended June 30, 2010 and 2009 (continued)

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.

		2010												2009
		Average				Interest				Average				Average				Interest				Average
Six Months Ended June 30,		outstanding				earned				yield/				outstanding				earned				yield/
(Dollars in thousands)		balance				/ paid				rate				balance				/ paid				rate
Interest-earning assets:
Loans receivable (1)		$	653,612				18,561				5.68	%		$	688,140			$	20,613				5.99	%
Securities			50,149				1,073				4.28	%			89,560				1,819				4.06	%
FHLB stock			29,888				671				4.49	%			29,888				670				4.48	%
Other Interest-bearing accounts			26,932				2				0.01	%			58,579				19				0.06	%
Total interest-earning assets			760,581				20,307				5.34	%			866,167				23,121				5.34	%
Noninterest-earning assets (2)			91,398												107,011
Total average assets		$	851,979											$	973,178
Interest-bearing liabilities:
Deposits			611,745				5,689				1.86	%			683,191				8,420				2.46	%
FHLB advances and other			124,813				1,989				3.19	%			166,656				2,971				3.57	%
Total interest-bearing liabilities			736,558				7,678				2.08	%			849,847				11,391				2.68	%
Noninterest-bearing deposits			41,399												37,975
Noninterest-bearing liabilities			13,182												13,301
															51,276
Total average liabilities			791,139												901,123
Total average shareholders’ equity			60,840												72,055
Total liabilities and shareholders’ equity		$	851,979											$	973,178
Net interest income/Interest rate spread						$	12,629				3.26	%						$	11,730				2.66	%
Net interest margin (3)											3.32	%											2.71	%
Average interest-earning assets to average interest-bearing liabilities											103.3	%											101.9	%