UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-25516
CAMERON FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 43-1702410
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
123 East Third Street, Cameron, Missouri 64429
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 632-2154
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
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
requirements for the past 90 days. YES X . NO ___.
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market as of December 13, 1996, was $42,118,646. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of December 13, 1996, there were issued and outstanding 2,849,280
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended September 30, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
PART I
Item 1. Description of Business
-----------------------
General
Cameron Financial Corporation ("Cameron Financial" and, with its
subsidiary, the "Company") was formed at the direction of The Cameron Savings &
Loan Association, F.A. ("Cameron Savings" or the "Association") in December 1994
for the purpose of owning all of the outstanding stock of Cameron Savings issued
upon the conversion of the Association from the mutual to the stock form (the
"Conversion"). On March 31, 1995, Cameron Financial acquired all of the shares
of the Association in connection with the completion of the Conversion. All
references to the Company, unless otherwise indicated, at or before March 31,
1995 refer to the Association and its subsidiaries on a consolidated basis. The
Company's Common Stock is quoted on the Nasdaq National Market under the symbol
"CMRN."
Cameron Savings, which was originally chartered in 1887 as a Missouri-
chartered mutual savings and loan association, is headquartered in Cameron,
Missouri. The Association amended its mutual charter to become a federal mutual
savings and loan association in 1994. Its deposits are insured up to the maximum
allowable amount by the Federal Deposit Insurance Corporation ("FDIC"). Cameron
Savings serves the financial needs of its customers throughout northwest
Missouri through its main office located at 123 East Third Street, Cameron,
Missouri, two branch offices located in Maryville and Mound City, Missouri and
one loan production office located in Liberty, Missouri. At September 30, 1996,
the Company had total assets of $186.3 million, deposits of $123.1 million, and
shareholders' equity of $46.8 million.
Cameron Savings has been, and intends to continue to be, a community-
oriented financial institution offering financial services to meet the needs of
the market area it serves. The Association attracts deposits from the general
public and uses such funds to originate loans secured by first mortgages on
owner-occupied one- to four-family residences and construction loans in its
market area. To a lesser extent, the Association originates land, commercial
real estate, multi-family and consumer loans in its market area. See "Business -
Originations, Purchases and Sales of Loans." The Association also invests in
investment securities, interest-bearing deposits and other short-term liquid
assets. See "Business - Investment Activities."
The executive office of the Association is located at 123 East Third
Street, Cameron, Missouri. Its telephone number at that address is
(816) 632-2154.
Market Area
The Association's primary market consists of the Northwestern part of
Missouri. The Association primarily serves Clinton, Caldwell, DeKalb and Daviess
Counties, Missouri through its main office located in Cameron, Missouri. The
Association serves Nodaway County through its branch office in Maryville,
Missouri and Holt County through its branch office in Mound City, Missouri. In
addition, the Association serves Clay and Platte Counties through its loan
production office in Liberty, Missouri. Nearly all of the Association's
construction lending is
2
originated by the Association's loan production office and is secured by
properties located in the northern suburbs of Kansas City.
Cameron, Missouri is located approximately 50 miles northeast of Kansas
City, Missouri at the intersection of Interstate 35 and U.S. Highway 36.
According to the 1990 census, Clinton, Caldwell, DeKalb and Daviess Counties had
a combined population of approximately 45,000. The primary industries in Clinton
and surrounding counties are services; governmental; finance, insurance and real
estate; and light manufacturing. Major employers in the Association's market
area include the State of Missouri Department of Corrections, Cameron Insurance
Companies, Cameron Community Hospital, the Cameron R-1 school district and the
Stride-Rite Manufacturing Corporation, a shoe manufacturer. The Association also
serves commuting customers to Kansas City.
Lending Activities
General. Historically, the Association originated primarily fixed-rate
long-term residential mortgage loans. Since the early 1980s, however, the
Association has emphasized, subject to market conditions, the origination for
portfolio of adjustable rate mortgage ("ARM") loans and the origination and sale
of fixed-rate loans with terms to maturity of up to 30 years. Management's
strategy has been to attempt to increase the percentage of assets in its
portfolio with more frequent repricing terms or shorter maturities. As part of
its efforts, the Association has developed a variety of ARM loan products. In
response to customer demand, however, the Association continues to originate
fixed-rate mortgage loans with terms of 30 years, which it typically sells into
the secondary market.
The Association's primary focus in lending activities is on the
origination of loans secured by first mortgages on owner-occupied, one- to four-
family residences and loans for the construction of one- to four-family
residences. In addition, in order to serve the financial needs of the families
and the communities in the Association's primary market area, Cameron Savings
also originates, to a lesser extent, land, commercial real estate, multi-family
and consumer loans. See "- Originations, Purchases and Sales of Loans." At
September 30, 1996, the Association's net loan portfolio totaled $154.4 million.
The Association maintains an established loan approval process. Loans
under $125,000 secured by real estate are reviewed and approved by any two
members of the loan committee. Real estate loans between $125,000 and $150,000
that meet specified criteria may be approved by any two members of the loan
committee. The entire Board of Directors approves all other real estate loans.
Home equity and improvement loans are approved by the loan committee and the
consumer lending department. Other consumer loans may be approved by any one
person in the consumer lending department except for signature loans over $5,000
which require the approval of two persons on the loan committee.
3
The aggregate amount of loans that the Association is permitted to make
under applicable federal regulations to any one borrower, including related
entities, or the aggregate amount that the Association can have invested in any
one real estate project is generally the greater of 15% of unimpaired capital
and surplus or $500,000. See "Regulation - Federal Regulation of Savings
Associations." At September 30, 1996, the maximum amount which the Association
could have lent to any one borrower and the borrower's related entities was
approximately $5.1 million. At September 30, 1996, the Association had no loans
with an aggregate outstanding balance in excess of this amount. The Association
has 19 borrowers or related borrowers with total loans outstanding in excess of
$1.0 million. The largest amount outstanding to any one borrower and the
borrower's related entities was approximately $3.6 million to a developer for
land acquisition and development loans, commercial real estate loans, and
residential construction loans, and was secured by real estate primarily in Clay
and Platte Counties, Missouri and the personal guarantee of the borrower. At
September 30, 1996, these loans were performing in accordance with their terms.
See "Regulation - Federal Regulation of Savings Associations."
4
Loan Portfolio Composition. The following table sets forth the
composition of the Association's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) at the dates indicated. Substantially all of the
loans in process reflected in the table represent undisbursed residential
construction funding.
At September 30,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
Amount Percent Amount Percent Amount Percent
------------ ------------- ------------ ------------- ------------ -------------
(Dollars in Thousands)
Real Estate Loans:
- -----------------
One- to four-family.................. $109,292 62.06% $95,040 65.71% $85,197 67.48%
Multi-family ........................ 2,908 1.65 3,181 2.20 3,865 3.06
Commercial........................... 4,322 2.45 3,759 2.60 3,807 3.01
Land................................. 9,605 5.46 4,106 2.84 3,950 3.13
Construction/(1)/.................... 41,646 23.65 32,956 22.79 25,233 19.98
------- ------ -------- ------ -------- ------
Total real estate loans.......... 167,773 95.27 139,042 96.14 122,052 96.66
------- -------- ------ -------- ------
Other Loans:
- -----------
Consumer Loans:
Deposit account..................... 533 0.30 316 0.22 244 0.19
Student............................. -- -- 123 0.08 151 0.12
Automobile.......................... 3,359 1.91 1,249 0.86 950 0.75
Home equity......................... 2,718 1.54 1,327 0.92 1,328 1.05
Home improvement.................... 873 0.50 1,387 0.96 1,014 0.80
Other............................... 847 0.48 1,185 0.82 539 0.43
------- ------ -------- ------ -------- ------
Total consumer loans............. 8,330 4.73 5,587 3.86 4,226 3.34
------- ------ -------- ------ -------- ------
Total loans...................... 176,103 100.00% $144,629 100.00% 126,278 100.00%
====== ====== ======
Less:
- ----
Loans in process..................... 19,502 13,253 10,833
Deferred loan fees, net.............. 804 642 588
Allowance for loan losses............ 1,353 994 876
------- -------- --------
Loans receivable, net................ 154,444 $129,740 $113,981
======= ======== ========
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/(1)/ Includes $8.3 million and $4.4 million of construction-permanent loans on
one- to four-family residences at September 30, 1996 and September 30,
1995, respectively, and $1.4 million of construction-permanent loans on
multi-family properties and $70,000 of construction-permanent loans on
commercial property at September 30, 1996.
5
The following table sets forth the composition of the Association's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
At September 30,
--------------------------------------------------------------------------------
1996 1995 1994
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Amount Percent Amount Percent Amount Percent
------------- ------------- ------------- ------------ ------------ ------------
(Dollars in Thousands)
Fixed-Rate Loans:
- ----------------
Real estate:
One- to four-family/(1)/.................. $24,312 13.81% $24,146 16.70% $24,357 19.29%
Multi-family.............................. 986 0.56 1,028 0.71 1,085 0.86
Commercial................................ 604 0.34 354 0.24 1,410 1.12
Land...................................... 6,298 3.58 2,457 1.70 2,911 2.30
Construction.............................. 35,475 20.14 30,369 21.00 21,963 17.39
-------- ------ -------- ------ -------- ------
Total real estate loan.................. 67,675 38.43 58,354 40.35 51,726 40.96
Consumer................................... 6,033 3.43 3,901 2.70 2,795 2.22
-------- ------ -------- ------ -------- ------
Total fixed-rate loans.................. 73,708 41.86 62,255 43.05 54,521 43.18
-------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
- ---------------------
Real estate:
One- to four-family....................... 84,980 48.26 70,894 49.01% 60,840 48.18
Multi-family.............................. 1,922 1.09 2,153 1.49 2,780 2.20
Commercial................................ 3,718 2.11 3,405 2.35 2,397 1.90
Land...................................... 3,307 1.88 1,649 1.14 1,039 .82
Construction.............................. 6,171 3.50 2,587 1.79 3,270 2.59
-------- ------ -------- ------ -------- ------
Total real estate loans................. 100,098 56.84 80,688 55.78 70,326 55.69
Consumer.................................... 2,297 1.30 1,686 1.17 1,431 1.13
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans............. 102,395 58.14 82,374 56.95 71,757 56.82
-------- ------ -------- ------ -------- ------
Total loans............................. 176,103 100.00% 144,629 100.00% 126,278 100.00%
======== ====== ====== ======
Less:
- ----
Loans in process........................... 19,502 13,253 10,833
Deferred loan fees, net.................... 804 642 588
Allowance for loan losses.................. 1,353 994 876
-------- -------- --------
Loans receivable, net................... $154,444 $129,740 $113,981
======== ======== ========
- ------------------
(1) Includes ARM loans which have their next interest rate adjustment date
five years or more from the dates indicated. At September 30, 1996,
approximately $7.9 million of ARM loans fell into this category.
6
The following table sets forth the contractual maturity and weighted
average rates of the Association's loan portfolio at September 30, 1996. Loans
which have adjustable or renegotiable interest rates are shown as maturing in
the year during which the contract is due. The schedule does not reflect the
effects of scheduled payments, possible prepayments or enforcement of
due-on-sale clauses.
Real Estate
---------------------------------------------------------------------------------
Multi-family and
One- to Four-Family Commercial Land Construction
--------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
1997/(1)/............. $1,043 8.45% $ 5 8.75% $ 234 9.10% $28,127 9.71%
1998.................. 153 8.18 828 9.74 293 8.95 3,674 9.70
1999.................. 402 7.82 86 9.56 70 8.56 -- --
2000 and 2001......... 1,485 8.50 132 9.56 3,675 9.07 -- --
2002 to 2006.......... 12,387 8.32 2,345 8.76 1,745 8.67 -- --
2007 to 2021.......... 79,794 8.09 3,834 8.05 3,588 8.09 6,425 8.10
2022 and following.... 14,028 7.69 -- -- -- -- 3,420 7.56
-------- ---- ----- --- ------ ---- ------- -----
Total................. $109,292 8.07 $7,230 8.52 $9,605 8.62 $41,646 9.28
======== ====== ====== =======
Consumer Total
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Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---------- -------- ----------
Due During
Years Ending
September 30,
- -------------
1997/(1)/............. $1,289 8.99% $30,698 9.63%
1998.................. 462 10.10 5,410 9.66
1999.................. 777 9.71 1,335 9.07
2000 and 2001......... 2,946 9.07 8,238 8.98
2002 to 2006.......... 2,180 10.15 19,287 8.67
2007 to 2021.......... 46 8.50 93,687 8.09
2022 and following.... -- -- 17,448 7.66
----- ----- -------- -----
Total................. $8,330 9.54 $176,103 8.48
====== ========
- -------------------
/1/ Includes demand loans and overdraft loans.
The total amount of loans due after September 30, 1997 which have
predetermined interest rates is $43.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $102.4
million.
7
All of the Association's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations, if
applicable.
The Association requires evidence of marketable title and lien position
and/or appropriate title insurance or title opinions and surveys of such
properties. The Association also requires fire and extended coverage casualty
insurance in amounts at least equal to the lesser of the principal amount of the
loan or the value of improvements on the property, depending on the type of
loan. As required by federal regulations, the Association also requires flood
insurance to protect the property securing its interest if such property is
located in a designated flood area.
One- to Four-Family Residential Real Estate Lending
A primary focus of the Association's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied,
one- to four-family residences. At September 30, 1996, $109.3 million, or 62.1%,
of the Association's loan portfolio consisted of permanent loans on one- to
four-family residences. Substantially all of the residential loans originated by
Cameron Savings are secured by properties located in the Association's market
area.
Historically, Cameron Savings originated for retention in its portfolio,
fixed-rate loans secured by one- to four-family residential real estate. In the
early 1980s, in order to reduce its exposure to changes in interest rates,
Cameron Savings began to emphasize the origination of ARM loans, subject to
market conditions and consumer preference. The Association originates ARM loans
for its portfolio. However, as a result of continued consumer demand for long-
term fixed-rate loans, particularly during recent periods of relatively low
interest rates, Cameron Savings has continued to originate fixed-rate loans with
terms to maturity of 15 to 30 years. During recent years, the Association's
general policy has been to sell into the secondary market, with servicing
released, fixed-rate loans with terms to maturity of 30 years. Fixed-rate loans
with terms to maturity of less than 30 years may either be retained in portfolio
or sold in the secondary market depending on the interest rate charged and the
Association's asset/liability management objectives.
In the loan approval process, Cameron Savings assesses the borrower's
ability to repay the loan, the adequacy of the proposed security, the employment
stability of the borrower and the creditworthiness of the borrower. Initially,
Cameron Savings' loan underwriters analyze the loan application and the property
involved. As part of the loan application process, qualified independent and, to
a lesser extent, staff appraisers inspect and appraise the security property.
All appraisals are subsequently reviewed by the loan committee as applicable.
The Association's loans are underwritten and documented pursuant to the
guidelines of Freddie Mac. Most of the Association's fixed-rate residential
loans have contractual terms to maturity of ten to 30 years. The Association's
decision to hold or sell these loans is based on its asset/liability management
policies and goals and the market conditions for mortgages at any period in
time. Currently, the Association originates and sells substantially all of its
fixed-rate 30-year loans into the secondary markets, servicing released. See
"Business - Originations,
8
Purchases and Sales of Loans." The interest rates on loans sold are determined
pursuant to commitments to purchase from secondary market sources.
The Association offers ARM loans at rates and on terms determined in
accordance with market and competitive factors. Substantially all of the ARM
loans originated by the Association meet the underwriting standards regarding
creditworthiness of the secondary market for residential loans, but may not have
other terms that are generally acceptable to the secondary market (i.e.,
periodic interest rate cap or type of property). The Association's one- to
four-family residential ARM loans generally are fully amortizing loans with
contractual maturities of up to 30 years.
Cameron Savings presently offers several ARM products which adjust
annually after an initial period ranging from one to seven years subject to a
limitation on the annual increase of 0.5%, 1.0% or 2.0% and an overall life of
loan limitation of 5.0% or 6.0%. These ARM products utilize the weekly average
yield on one-year U.S. Treasury securities adjusted to a constant maturity of
one year plus a margin of 2.75% or 3.0%. Borrowers are generally qualified using
the fully indexed rate. ARM products held in the Association's portfolio do not
permit negative amortization of principal and carry no prepayment restrictions.
At September 30, 1996, the Association had $85.0 million of one- to four-family
ARM loans, or 48.3% of total loans.
It is Cameron Savings' present policy generally to lend up to 97% of the
lesser of the appraised value or purchase price of the property. Cameron Savings
generally requires private mortgage insurance on residential loans with a loan-
to-value ratio at origination exceeding 80% in order to reduce its exposure to
80% or less. The Association occasionally deviates from this policy for first-
time home buyers in which the Association will provide lending opportunities to
individuals who have not been employed long enough to qualify for private
mortgage insurance but who have qualifying incomes and low debt to income
ratios.
Adjustable-rate loans decrease the risk associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrowers may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. Also, adjustable-rate
loans have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. In particular, the ARM loans originated by
the Association which have annual adjustments of 0.5% would take longer to
adjust to market rates than would many competing loans. At the same time, the
market value of the underlying property may be adversely affected by higher
interest rates.
The Association's residential mortgage loans customarily include due-on-
sale clauses giving the Association the right to declare the loan immediately
due and payable in the event that, among other things, the borrower sells or
otherwise disposes of the property subject to the mortgage and the loan is not
repaid. The Association may enforce due-on-sale clauses in its mortgage
contracts for the purpose of increasing its loan portfolio yield.
9
Construction and Land Lending
Historically, the Association has invested a significant proportion of
its loan portfolio in construction and land loans. Prompted by increased
residential development (predominately subdivisions) in the northern suburbs of
Kansas City, on July 1, 1987, the Association opened a loan production office in
Liberty, Missouri, a suburb community located northeast of Kansas City.
Substantially all of the Association's construction and land loans are secured
by residential properties located in the northern suburbs of Kansas City and are
originated, monitored, and serviced by the Liberty office. Earl T. Frazier, who
joined the Association in 1981, manages the Liberty office in close consultation
with the senior management and Board of Directors. Prior to joining the
Association, Mr. Frazier was a real estate agent and, prior thereto, a
residential home builder. See "Executive Officers of the Company and the
Association who are not Directors."
The Association originates five basic types of construction and land
loans:
1. "Speculative" construction loans are made to home builders for the
construction principally of one- to four-family residences and
residential development projects and, to a lesser extent,
commercial buildings and multi-family residences. Speculative
construction loans generally do not have a sale contract or
permanent loan in place for the finished home, and the purchasers
for the finished homes may be identified either during or following
the construction period.
2. "Contract" construction loans are made to builders who have a
signed contract to build a new home.
3. "Construction--permanent" loans are made to individuals who have
contracted with a builder to construct their personal residence.
4. "Conventional" land loans are made to individuals typically to
finance agricultural land, building lots, and unimproved land.
5. "Land acquisition and development" loans ("land A&D loans") are
made to real estate developers and individuals for the acquisition
of land upon which the purchaser can then build and for the
acquisition of unimproved land upon which the purchaser makes
improvements necessary to build upon or to sell as improved lots.
10
The table below presents information on the Association's construction
and land loans at September 30, 1996:
Outstanding Percent of
Loan Balance/(1)/ Total
------------------- ------------
(Dollars in Millions)
Speculative.................................. $26.7 52.15%
Contract..................................... 5.1 9.96
Construction/permanent....................... 9.8 19.14
----- ------
Total construction........................ 41.6 81.25
Conventional land............................ 5.4 10.55
Land A&D..................................... 4.2 8.20
----- ------
Total land................................ 9.6 18.75
----- ------
Total construction and land............ $51.2 100.00%
===== ======
- ---------------
(1) Includes loans in process.
At September 30, 1996, the Association's $41.6 million of construction
loans and $9.6 million of land loans represented 23.7% and 5.5%, respectively,
of total loans receivable. At the same time, the Association's $26.7 million of
speculative construction loans and $4.2 million of land A&D loans represented
15.2% and 2.4%, respectively, of total loans receivable.
Construction and land A&D lending affords the Association the
opportunity to achieve higher interest rates and fees with shorter terms to
maturity than does its single-family permanent mortgage lending. Construction
and land A&D lending, however, is generally considered to involve a higher
degree of risk than single-family permanent mortgage lending due to (i) the
concentration of principal among relatively few borrowers and development
projects, (ii) the increased difficulty at the time the loan is made of
estimating building costs and the selling price of the residence to be built,
(iii) the increased difficulty and costs of monitoring the loan, (iv) the higher
degree of sensitivity to increases in market rates of interest, and (v) the
increased difficulty of working out problem loans. Speculative construction
loans have the added risk associated with identifying an end-purchaser for the
finished home. The Association has sought to address these risks by developing
and adhering to underwriting policies, disbursement procedures, and monitoring
practices.
The Association seeks to make construction loans to those builders with
which it has a long-standing history of satisfactory performance. New builders
typically borrow from the Association in limited amounts and may borrow
additional amounts based on proven experience with the Association. At September
30, 1996, the Association had 7 borrowers for which speculative construction and
land A&D loans outstanding totaled more than $1.0 million. Each
11
of the foregoing builders with speculative construction and land A&D loans
totaling more than $1.0 million have been customers of the Association for more
than three years.
While substantially all of the Association's construction and land A&D
loans are secured by properties located in the northern suburbs of Kansas City,
the Association also seeks to diversify its construction and land A&D lending
risks among several development projects. At September 30, 1996, the Association
had speculative construction and land A&D loans secured by properties in 63
developments of which 6 represented an exposure to a single development of more
than $1.0 million.
One- to Four-Family Construction Loans. Loans for the construction of
one- to four-family residences are generally made for terms of six to 12 months.
The Association's loan policy includes maximum loan-to-value ratios of up to 85%
that vary by amount and type (i.e., speculative versus contract) of construction
loan. The Board of Directors may increase or decrease the maximum loan-to-value
ratio depending on borrower strength, economic conditions and other factors.
Prior to preliminary approval of a construction loan application, Association
personnel inspect the site, review the existing or proposed improvements,
identify the market for the proposed project, analyze the pro forma data and
assumptions on the project, and satisfy themselves with the experience and
expertise of the builder. After preliminary approval has been given, the
application is processed. Processing includes obtaining credit reports,
financial statements and tax returns on the borrowers and guarantors, an
independent appraisal of the project, and any other expert reports necessary to
evaluate the proposed project. The Association requires builders to designate
Cameron Savings as the beneficiary of a life insurance policy equal to the
lesser of $50,000 or 50% of the loan balance, though the Board of Directors may
require additional amounts or make other similar arrangements. Although
individual loan officers can make conditional loan commitments, all construction
loans must be approved by the Loan Committee or Board of Directors.
With few exceptions, the Association requires that construction loan
proceeds be disbursed in increments as construction progresses. To control the
disbursement process, the Association requires that builders and their
subcontractors and vendors submit invoices to the Association for payment. In
disbursing construction loan funds, the Association uses proprietary software,
for which the Association charges a per-loan fee, that tracks actual
disbursements compared to estimated costs by category of expense and provides
certain tax reports for the borrower. The Association uses this information,
along with periodic on-site inspections by Association personnel, to monitor the
progress of the project. In the event of cost overruns, depending on the
circumstances (i.e., whether due to "add-ons" not included in the original plans
or due to unanticipated changes in building costs) the Association may seek to
require the borrower to deposit funds with the Association for additional
disbursements, increase the loan amount on the basis of an increased appraisal
and disburse additional loan proceeds consistent with the original loan-to-value
ratio, or become more active in the monitoring and progress of the project.
The Association regularly monitors the accuracy of assumptions made in
its construction loan business over time. In particular, the Association tracks
the accuracy of its independent appraisers by comparing actual selling prices
with the appraised value estimated in connection with the loan approval.
Additionally, the Association tracks the performance of its builder
12
customers by comparing actual costs with those estimated in the loan
application. The Association believes that this experience mitigates some of the
risks inherent in its construction lending.
Commercial and Multi-family Construction Loans. Occasionally, the
Association originates loans for the construction of commercial buildings and
multi-family residences on terms similar to those on one- to four-family
construction loans. At September 30, 1996, the Association had 8 such loans
outstanding totalling $1.5 million.
Land and Development Loans. At September 30, 1996, the Association had
total land loans of $9.6 million. In making land loans, the Association follows
similar underwriting policies as for construction loans and, to the extent
applicable (i.e., if the loan is to develop land for future building rather than
simply to acquire raw land), similar disbursement procedures. The Association
originates land loans with similar terms and at similar rates as construction
loans, except that the initial term on conventional land loans is typically five
to ten years (not to exceed 20 years) as opposed to the term of up to 12 months
that is typical of construction loans. Land A&D loans are interest-only loans,
payable semi-annually, with provisions for principal reductions as lots are
sold.
Multi-Family and Commercial Real Estate Lending
Cameron Savings also originates loans secured by multi-family and
commercial real estate. At September 30, 1996, $2.9 million, or 1.7%, of the
Association's loan portfolio consisted of multi-family loans and $4.3 million,
or 2.5%, of the Association's loan portfolio consisted of commercial real estate
loans.
Multi-family and commercial real estate loans originated by the
Association may be either fixed- or adjustable-rate loans with terms to maturity
and amortization schedules of up to 20 years. Rates on such ARM loans generally
adjust annually to specified spreads over the one-year U.S. Treasury securities
index adjusted to a constant maturity of one year, subject to annual and
life-of-loan interest rate caps. Multi-family and commercial real estate loans
are written in amounts of up to 80% of the lesser of the appraised value of the
property or the sales price.
The Association's commercial real estate portfolio consists of loans on
a variety of non-residential properties including small shopping centers,
nursing homes, small office buildings and churches. Multi-family loans generally
are secured by seven- to 36-unit apartment buildings. Appraisals on properties
which secure multi-family and commercial real estate loans are performed by an
independent appraiser designated by the Association before the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Association's management. In underwriting such loans, the Association primarily
considers the cash flows generated by the real estate to support the debt
service, the financial resources and income level of the borrower and the
Association's experience with the borrower. In addition, the Association's
underwriting procedures require verification of the borrower's credit history,
an analysis of the borrower's income, financial statements and banking
relationships, a review of the borrower's property management experience and
references, and a review of the property, including cash flow projections and
historical operating results. The Association seeks to ensure that the property
securing the loans will generate sufficient cash flow to adequately cover
13
operating expenses and debt service payments. The Association generally requires
a debt service coverage ratio of 120% or more.
At September 30, 1996, the Association's largest multi-family or
commercial real estate loan of $793,000 was secured by seven 4-unit apartment
buildings located in Clay County, Missouri.
Multi-family and commercial real estate lending affords the Association
an opportunity to receive interest at rates higher than those generally
available from one- to four-family residential lending. Nevertheless, loans
secured by such properties are generally larger, more difficult to evaluate and
monitor and, therefore generally, involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
commercial real estate and multi-family properties are often dependent on the
successful operation or management of the properties, repayment of such loans
may be subject to adverse conditions in the real estate market or the economy.
If the cash flow from the project is reduced, the borrower's ability to repay
the loan might be impaired. The Association has attempted to minimize these
risks by lending primarily to the ultimate user of the property or on existing
income-producing properties.
Consumer Lending
The Association originates a variety of consumer loans, including home
equity loans, automobile loans, education loans, home improvement loans, loans
secured by deposit accounts, and other types of secured and unsecured loans. At
September 30, 1996, the Association had $8.3 million, or 4.7% of its loans
receivable, in outstanding consumer loans. The Association has recently focused
on the expansion of its consumer lending portfolio as a result of the variety of
products that can be offered, the higher yields that can be obtained and the
stronger consumer demand for such products. In addition, management believes
that offering consumer loan products helps to expand the Association's customer
base and creates stronger ties to its existing customer base. Consumer loan
balances typically range from $1,000 to $50,000 and are generally repaid over
periods ranging from one to ten years. Unsecured consumer loans generally do not
exceed $10,000 and typically are repayable in monthly installment payments
within five years. The Association's consumer loans are primarily secured by
second mortgages on residential real estate, automobiles, recreational vehicles
or boats. The Association's focus in consumer lending has been the origination
of home equity and improvement loans and auto loans. At September 30, 1996 the
Association had $3.6 million or 43.1% of its consumer loan portfolio in home
equity and home improvement loans and $3.4 million in auto loans, or 40.3% of
the consumer loan portfolio. Approximately 3.2% of the consumer loans were
unsecured at September 30, 1996.
Consumer loans generally have shorter terms and higher interest rates
than first lien mortgage loans because they generally involve more credit risk
than mortgage loans as a result of the type and nature of the collateral and, in
certain cases, the absence of collateral. Consumer loans generally are dependent
on the borrower's continuing financial stability and thus are more likely to be
affected by adverse personal circumstances. Despite the risks inherent in
consumer lending, the Association's consumer loans delinquent greater than 90
days as a percentage of total consumer loans was .67% at September 30, 1996.
14
The underwriting standards generally employed by the Association for
consumer loans include a determination of the applicant's payment history on
other debts and an assessment of the borrower's ability to meet the payments on
the proposed loan as well as existing obligations. In addition to the
creditworthiness of the applicant, the underwriting process also includes a
comparison of the value of the security in relation to the proposed loan amount.
Upon receipt of a completed consumer loan application from the prospective
borrower, a credit report is obtained, income and other information is verified
and, if necessary, additional financial information is requested.
The Association's underwriting procedures for home equity loans include
a comprehensive review of the loan application, which require a clean credit
rating and verification of stated income and other financial information. The
combined loan-to-value ratio, including prior mortgage liens, also is a
determining factor in the underwriting process. Generally, the combined
loan-to-value ratio, including prior mortgage liens, may not exceed 80% of the
underlying security property.
Loan Fees
In addition to earning interest on loans, the Association also receives
income from loan origination fees and fees related to late payments, loan
modifications, and miscellaneous activities related to loans. Income from these
activities varies from period to period with the volume and type of loans
originated.
The Association generally receives loan origination and/or commitment
fees when originating loans. Fees are generally up to 2% of the principal amount
of residential mortgage loans. In accordance with SFAS No. 91, the Association
defers loan origination and commitment fees and certain direct loan origination
costs, with the net amount amortized as an adjustment of the loan's yield. The
Association amortizes these amounts, using the level-yield method, over the
contractual life of these loans. Net deferred amounts are recorded in income
when the underlying loans are sold or paid in full. See Note 2 of Notes to
Consolidated Financial Statements.
Originations, Purchases and Sales of Loans
The Association originates real estate loans through marketing efforts,
the Association's customer base and walk-in customers. Mortgage loan
originations come from direct solicitation by the Association's loan officers
and branch managers, and from real estate brokers, builders, depositors and
walk-in customers. Loan applications are taken and processed by loan
representatives, while underwriting and document preparation functions are
performed at the Cameron Savings home office and Liberty loan production office.
When all necessary documents are obtained, the loan, depending on its size and
type, may be approved by any three members of the loan committee or the Board of
Directors.
While the Association originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market. In fiscal 1996, the Association originated $99.6
million of loans, compared to $67.9 million and $57.6 million in fiscal 1995 and
1994, respectively. During recent years, the Association's
15
construction loan originations have been strong, totaling $57.0 million, $43.6
million, and $35.0 million, or 57.2%, 64.2%, and 60.8%, of total loan
originations in fiscal 1996, 1995 and 1994, respectively.
Cameron Savings generally sells its 30-year fixed-rate one- to
four-family residential mortgage loans, without recourse, to secondary market
purchasers. Sales of whole loans generally are beneficial to the Association
since these sales may generate income at the time of sale, provide funds for
additional lending and other investments and increase liquidity. When loans are
sold, the Association typically does not retain the responsibility for servicing
the loans. At origination, all of the Association's mortgage loans are
immediately classified as either held for investment or held for sale. During
fiscal 1996, conventional mortgage loans originated and sold into the secondary
market totaled $1.5 million.
While the Association has purchased whole loans or loan participations
from time to time, such purchases have been infrequent. In 1996, the Association
purchased eight loans for a total of $882,000. Any such purchases are made
consistent with the Association's underwriting standards. Most of the
Association's purchased loans are secured by property located in Missouri.
In addition, the Association may purchase mortgage-backed securities to
complement its mortgage lending activities. However, during fiscal 1996, 1995
and 1994 the Association did not purchase any mortgage-backed securities.
Loan commitments are issued as soon as possible upon completion of the
underwriting process, and mortgage loans are closed as soon as all title
clearance and other required procedures have been completed. At September 30,
1996, there were outstanding first mortgage loan commitments totaling $6.7
million. At that date, the Association also had $41.6 million of construction
loans of which approximately $19.5 million had not yet been disbursed.
16
The following table shows the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
Year Ended September 30,
-------------------------------------
1996 1995 1994
----------- ------- --------
(Dollars In Thousands)
Originations by type:
- --------------------
Adjustable rate:
Real estate - one- to four-family.................. $21,063 $15,226 $11,577
- multi-family....................... 1,679 201 285
- commercial......................... 1,085 277 1,100
- land............................... 2,079 743 420
- construction....................... 9,901 4,678 5,611
Non-real estate - consumer......................... 1,278 668 680
------- ------- -------
Total adjustable-rate...................... 37,085 21,793 19,673
------- ------- -------
Fixed rate:
Real estate - one- to four-family.................. 4,262 3,489 3,903
- commercial......................... 100 --- ---
- land............................... 5,348 734 2,143
- construction....................... 47,089 38,909 29,435
Non-real estate - consumer......................... 5,735 3,010 2,477
------- ------- -------
Total fixed-rate............................ 62,534 46,142 37,958
------- ------- -------
Total loan originations..................... 99,619 67,935 57,631
------- ------- -------
Purchases:
- ---------
Real estate - one- to four-family.................. 882 26 ---
- land................................. -- --- 373
------- ------- -------
Total loan purchases........................ 882 26 373
Mortgage-backed securities......................... -- --- ---
------- ------- -------
Total purchases............................. 882 26 373
------- ------- -------
Sales and Repayments:
- --------------------
Real estate - one- to four-family.................. 1,531 1,102 2,556
------- ------- -------
Total loan sales............................ 1,531 1,102 2,556
Principal repayments............................... 67,496 48,508 47,140
------- ------- -------
Total sales and repayments.................. 69,027 49,610 49,696
Increase in other items:
Loans in process................................... (6,249) (2,420) (4,005)
Deferred fees and discounts........................ (162) (54) (106)
Allowance for loan losses.......................... (359) (118) (239)
------- ------- -------
Net increase................................ $24,704 $15,759 $3,958
======= ======= ======
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a first mortgage loan, the Association attempts to cause the
delinquency to be cured by contacting the borrower by mail or telephone when the
loan is 20 days delinquent. A second late notice is sent after the loan is 30
days delinquent in addition to verbal contact with the borrower.
17
In the event the loan payment is past due for 90 days or more, the
Association performs an in-depth review of the loan's status, the condition of
the property and circumstances of the borrower. Based upon the results of the
review, the Association may negotiate and accept a repayment program with the
borrower or, when deemed necessary, initiate foreclosure proceedings. If
foreclosed on, real property is sold at a public sale and the Association may
bid on the property to protect its interest. A decision as to whether and when
to initiate foreclosure proceedings is made by the loan service officer with the
approval of the President and is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness, the extent of
delinquency and the borrower's ability and willingness to cooperate in curing
the delinquencies.
The following table sets forth the Association's loan delinquencies by
type, by amount and by percentage of type at September 30, 1996.
Loans Delinquent For
------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------------- -------------------------------- --------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
---------- --------- ---------- -------- -------- ---------- --------- ---------- ----------
(Dollars in Thousands)
Real Estate:
One- to four-family........ 18 $656 0.60% 30 $1,291 1.18% 48 $1,947 1.78%
Commercial-multifamily..... -- -- -- -- -- -- -- -- --
Land....................... -- -- -- -- -- -- -- -- --
Construction............... 2 197 0.47 1 131 0.31 3 328 0.78
Consumer..................... 6 48 0.58 12 56 0.67 18 104 1.25
-- ---- ---- -- ------ ---- --- ------ -----
Total................... 26 $901 0.51% 43 $1,478 0.84% 69 $2,379 1.35%
== ==== == ====== == ======
Non-Performing Assets. Real estate acquired in settlement of loans is
classified as real estate owned until it is sold. When property is acquired, it
is initially recorded at the lower of estimated fair value, less estimated costs
to sell, or cost. If, subsequent to foreclosure, the fair value of the real
estate acquired through foreclosure is determined to have declined based upon
periodic evaluations by management, valuation allowances are established through
a charge to income. Costs relating to the development or improvement of real
estate owned are capitalized to the extent of fair market value.
The following table sets forth the amounts and categories of the
Association's non-performing assets. Loans are placed on non-accrual status when
the collection of principal and/or interest is not probable; however, in no
event is interest accrued on loans for which interest is more than 90 days
delinquent. Foreclosed assets include assets acquired in settlement of loans.
18
September 30,
-------------------------------------------
1996 1995 1994
---------- ---------- -------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family........................................ $638 $349 $471
Multi-family............................................... --- --- ---
Commercial................................................. --- 5 7
Land....................................................... --- --- ---
Construction............................................... 131 206 ---
Consumer................................................... --- --- ---
------- ------- --------
Total non-accruing loans................................ 769 560 478
------ ------ ------
Accruing loans delinquent 90 days or more:/(2)/
One- to four-family........................................ 653 716 671
Multi-family............................................... --- --- ---
Commercial................................................. --- --- ---
Land....................................................... --- --- ---
Construction............................................... --- --- ---
Consumer................................................... 56 59 76
------- -------- -------
Total accruing loans delinquent more than 90 days........ 709 775 747
------ -------- ------
Total non-performing loans............................... 1,478 1,335 1,225
------ -------- -------
Foreclosed assets:
One- to four-family........................................ 70 --- ---
Multi-family............................................... --- --- ---
Commercial................................................. --- --- ---
Land....................................................... --- --- ---
Construction............................................... --- --- ---
Consumer................................................... --- --- ---
-------- -------- --------
Total................................................... 70 --- ---
------- -------- -------
Total non-performing assets.................................. $1,548 $1,335 $1,225
====== ====== ======
Total classified assets/(1)/................................. $7,729 $3,903 $4,243
Total non-performing loans as a percentage
of total loans receivable.................................. 0.84% 0.92% 0.97%
Total non-performing assets as a percentage
of total assets............................................. 0.83% 0.77% 0.85%
Total classified assets/(1)/ as a percentage of total assets. 4.15% 2.25% 2.93%
Interest income that would have been recorded on
non-performing loans if current/(3)/........................ $ 40 $ 15 $ 46
Interest income on non-performing loans included in
net income/(4)/............................................. $ 40 $ 19 $ 41
- -------------------------
(1) Includes assets designated special mention.
(2) These loans are delinquent 90 days or more as to principal but not as to
interest. This can occur when the Association receives a partial payment
from a borrower which is first applied to interest due.
(3) This represents the additional interest income that would have been
collected had the loans been current.
(4) This represents the interest income actually collected on the loans.
Other Loans of Concern. In addition to the non-performing loans and
foreclosed assets set forth in the preceding table, as of September 30, 1996,
there was also an aggregate of $6.2 million in net book value of loans
classified by the Association with respect to which known
19
information about the possible credit problems of the borrowers or the cash
flows of the secured properties have caused management to have some doubts as to
the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories. At September 30, 1996, other loans of concern consisted
primarily of speculative construction and one- to four-family residential loans,
and there were no other loans of concern in excess of $250,000. Management has
considered the Association's non-performing and "of concern" assets in
establishing its allowance for loan losses.
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the savings institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
probability of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as Loss, the institution must either establish specific
allowances for loan losses in the amount of 100% of the portion of the asset
classified Loss, or charge-off such amount. If an institution does not agree
with an examiner's classification of an asset, it may appeal this determination
to the District Director of the OTS. Assets which do not currently expose the
savings institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess weaknesses deserving management's close
attention, are required to be designated Special Mention.
On the basis of management's review of its assets, at September 30,
1996, on a net basis, the Association had classified $2.3 million as
Substandard, $4,000 as Doubtful, $0 as Loss and $5.4 million as Special Mention.
Classified assets at September 30, 1996 were $7.7 million, an increase
of $3.3 million over September 30, 1995. The majority of the increase was in the
"special mention" category. In an attempt to insure that internal controls
monitor all situations of possible concern, the Association's classification
policy was changed to classify all speculative construction loans not repaid
within the original one year term as special mention. These loans may not be
paid off during the initial one year due to delays in starting construction,
weather delays during construction, the inability of the new buyer to close the
purchase within the original term, or the property remaining unsold near the
original maturity date. Prior to maturity, the original loan is modified to
reflect a new maturity date one year later than the original maturity date. All
of the speculative construction loans were performing in accordance with the
loan documents as modified, including the payment of required interest payments.
Such loans are not classified as nonperforming since they are performing in
accordance with current loan requirements. Speculative construction loans
classified as "special mention" at September 30, 1996 were $4.2
20
million compared to none at September 30, 1995. Two of the loans at September
30, 1996 were delinquent 30 days interest and none were delinquent 60 days or
more.
Allowance for Loan Losses. The allowance for estimated loan losses is
established through a provision for losses based on management's evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers the estimated
net realizable value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate allowance for loan losses.
Real estate properties acquired through foreclosure are recorded at the
lower of estimated fair value, less estimated costs to sell, or cost. If fair
value at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination.
Future additions to the Association's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance level based upon their judgment of the information available to them
at the time of their examination. At September 30, 1996, the Association had a
total allowance for loan losses of $1.4 million representing 91.5% of total
non-performing loans.
21
The following table sets forth an analysis of the Association's
allowance for loan losses.
Year Ended September 30,
----------------------------------------
1996 1995 1994
----------------------------------------
(Dollars in Thousands)
Balance at beginning of year......................... $994 $876 $637
Charge-offs:
One- to four-family................................ --- --- (6)
Multi-family....................................... --- --- ---
Commercial......................................... --- --- ---
Land............................................... --- --- ---
Construction ...................................... --- --- ---
Consumer........................................... (9) (2) (7)
------ ------ ------
Total charge-offs.......................... (9) (2) (13)
Recoveries:
One- to four-family................................ --- --- ---
Multi-family....................................... --- --- ---
Commercial......................................... --- --- ---
Land............................................... --- --- ---
Construction ...................................... --- --- ---
Consumer........................................... --- --- ---
------ ------ ------
Total recoveries................................ --- --- ---
Net charge-offs...................................... (9) (2) (13)
Additions charged to operations...................... 368 120 252
--- ----- --------
Balance at end of year............................... $1,353 $994 $876
====== ==== ====
Ratio of net charge-offs during the year to
average loans outstanding during the year........... 0.006% .002% .012%
===== ==== ====
Ratio of allowance for loan losses to non-
performing loans at end of year...................... 91.54% 74.46% 71.51%
===== ===== =====
Ratio of allowance for loan losses to total loans
receivable at end of year............................ 0.77% 0.69% 0.69%
==== ==== ====
22
The distribution of the Association's allowance for loan losses at the
dates indicated is summarized in the following table. The portion of the
allowance allocated to each loan category does not necessarily represent the
total available for losses within that category since the total allowance is
applicable to the entire loan portfolio.
At September 30,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------ ------------------------------------ ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Amount Loan in Each
Amount of Amounts Category Amount of Amounts Category of Loan Amounts Category
Loan Loss by to Total Loan Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars In Thousands)
One- to four-family....... $299 $109,292 62.06% $255 $95,040 65.71% $229 $ 89,197 67.48%
Multi-family.............. 22 2,908 1.65 16 3,181 2.20 19 3,865 3.06
Commercial ............... 33 4,322 2.45 28 3,759 2.60 36 3,807 3.01
Land ..................... 235 9,605 5.46 79 4,106 2.84 111 3,950 3.13
Construction.............. 577 41,646 23.65 503 32,956 22.79 403 25,233 19.98
Consumer.................. 187 8,330 4.73 113 5,587 3.86 78 4,226 3.34
------ -------- ------ ---- -------- ------ ---- -------- ------
Total................ $1,353 $176,103 100.00% $994 $144,629 100.00% $876 $126,278 100.00%
====== ======== ====== ==== ======== ====== ==== ======== ======
Investment Activities
General. Cameron Savings must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Association
has maintained liquid assets at levels above the minimum requirements imposed by
the OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including potential deposit outflows. Cash flow projections
are regularly reviewed and updated to assure that adequate liquidity is
maintained. At September 30, 1996, and 1995, the Association's regulatory
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 6.43%, and 18.63%, respectively.
The Association has the authority to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal and
state agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Association may also invest its
assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a savings institution
is otherwise authorized to make directly.
Generally, the investment policy of the Association is to invest funds
among various categories of investments and maturities based upon the
Association's asset/liability management policies, investment quality and
marketability, liquidity needs and performance objectives.
23
Investment Securities. At September 30, 1996, the Company's certificates of
deposit in other financial institutions totaled $2.5 million, or 1.3%, of total
assets and investment securities totaled $18.3 million, or 9.82% of total
assets. As of such date, the Company also had a $1.3 million investment in FHLB
stock, satisfying its requirement for membership in the FHLB of Des Moines. It
is the Company's general policy to purchase securities which are U.S. Government
securities or federal or state agency obligations or other issues that are rated
investment grade or have credit enhancements, except for certain municipal bonds
purchased by the Association. The Company's investment portfolio includes $9.3
million of federal agency obligations, of which $242,000 provide for periodic
interest rate increases during their remaining terms.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
At September 30,
------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- ------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------------ ----------- ------------ ----------- ------------ ----------
(Dollars in Thousands)
Investment securities:
U.S. Government securities......................... $ 7,428 29.26% $10,833 27.62% $ 504 1.76%
Federal agency obligations......................... 9,254 36.44 14,873 37.76 13,195 46.21
Municipal bonds.................................... 1,615 6.36 717 1.82 777 2.72
Mutual funds and equity securities/(1)/............ --- --- --- --- 1,832 6.41
------- ------ ------- ------ ------- ------
Subtotal........................................ 18,297 72.06 26,473 67.20% 16,308 57.10
FHLB stock........................................... 1,259 4.96 1,235 3.13 1,235 4.32
------- ------ ------- ------ ------- ------
Total investment securities
and FHLB stock................................. $19,556 77.02 $27,708 70.33% $17,543 61.42%
======= ====== ======= ====== ======= ======
Average remaining life of investment securities,
excluding FHLB stock and equity securities......... 2.5 years 2.1 years 3.2 years
Other interest-earning assets:
Cash equivalents................................... $ 3,333 13.13% $ 3,082 7.82% $ 796 2.79%
Certificates of deposit in other financial
institutions...................................... 2,500 9.85 8,611 21.85 10,221 35.79
------- ------ ------- ------ ------- ------
Total investment portfolio...................... $25,389 100.00% $39,401 100.00% $28,560 100.00%
======= ====== ======= ====== ======= ======
/(1)/ Comprised primarily of a mutual fund investing in government and agency
obligations maturing in less than three years, which was sold in 1995.
24
The composition and maturities of the investment securities portfolio,
excluding FHLB stock and equity securities, are indicated in the following
table.
At September 30, 1996
---------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
------ ----- ----- -------- ---------------- ----------
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- -------------
(Dollars in Thousands)
U.S. Government securities............. $3,488 $3,940 $-- $-- $7,428 $7,483
Federal agency obligations............. 500 8,254 500 -- 9,254 9,129
Municipal bonds........................ 217 902 496 -- 1,615 1,637
------ ------ ------ ---- ------- -------
Total investment securities............ $4,205 $13,906 $996 $-- $18,297 $18,249
====== ======= ==== === ======= =======
Weighted average yield................. 6.44% 6.14% 5.93% -- 6.20%
Mortgage-Backed Securities. From time to time, the Association purchases
mortgage-backed securities to supplement residential loan production. The type
of securities purchased is based upon the Association's asset/liability
management strategy and balance sheet objectives. The balance of all mortgage-
backed securities at September 30, 1996 was $13,000. The Company has not and
does not intend to invest in high-risk mortgage derivative securities. The
Company may determine to increase its investment in mortgage-backed securities
in order to supplement loan origination activity.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities.
Effective February 10, 1992, the OTS adopted the Federal Financial
Institutions Examination Council "Statement of Policy on Securities Activities"
through its Thrift Bulletin 52 (the "Bulletin"). The Bulletin requires
depository institutions to establish prudent policies and strategies for
securities transactions, describes securities trading and sales practices that
are unsuitable when conducted in an investment portfolio and sets forth certain
factors that must be considered when evaluating whether the reporting of an
institution's investments is consistent with its intent and ability to holder
such investments. The Bulletin also establishes a framework for identifying when
certain mortgage derivative products are high-risk mortgage securities that must
be reported in a "trading" or "held for sale" account. Purchases of high-risk
mortgage securities prior to the effective date of the Bulletin generally will
be reviewed in accordance with previously-existing OTS supervisory policies. The
Association believes that it currently holds and reports its securities and
loans in a manner consistent with the Bulletin. The Association also holds no
assets which management believes qualify as high-risk mortgage securities, as
defined in the Bulletin.
25
Sources of Funds
General. Deposit accounts have traditionally been the principal source
of the Association's funds for use in lending and for other general business
purposes. In addition to deposits, the Association derives funds from loan
repayments, cash flows generated from operations and FHLB advances. Scheduled
loan payments are a relatively stable source of funds, while deposit inflows and
outflows and the related cost of such funds have varied. The Association
borrowed $12.25 million from the FHLB of Des Moines during fiscal 1996 to
supplement funding for loan originations.
Deposits. The Association offers a variety of accounts, including money
market accounts, passbook savings accounts, interest and non-interest-bearing
NOW accounts and certificates of deposit accounts. Account terms vary, with
principal differences being the minimum balance required, the time period funds
must remain on deposit, fixed versus variable interest rates and the interest
rate. Maturity terms, service fees and withdrawal penalties are established by
the Association on a periodic basis. Determinations of savings rates are
predicated on funding and liquidity requirements, U.S. Treasury rates,
competition and established Association goals. As part of its asset/liability
management efforts, the Association has emphasized long-term certificates of
deposit with terms of up to ten years. At September 30, 1996, the Association
had $17.7 million of certificates of deposit with remaining maturities in excess
of five years. The Association has successfully marketed a "Wildcard"
certificate of deposit, which is an Individual Retirement Account certificate
that varies as to rate each quarter based on the coupon equivalent of the most
recent 52 week Treasury Bill auction prior to the start of a calendar quarter.
The minimum rate is 5% and the maximum rate is 10%. At September 30, 1996, the
Association had $12.0 million of "Wildcard" certificates outstanding.
The Association's deposits are obtained primarily from the areas in
which its branch offices are located, and the Association relies primarily on
customer service, marketing programs and long-standing relationships with
customers to attract and retain these deposits. Various types of advertising and
promotion to attract and retain deposit accounts also are used. The Association
does not currently solicit or currently accept brokered deposits. The
Association has been competitive in the types of accounts and interest rates it
has offered on its deposit products. The Association intends to continue its
efforts to attract deposits as a primary source of funds for supporting its
lending and investing activities. The Association advertises via radio, direct
mail and in local newspapers.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Association has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demands. The Association has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Association manages the pricing of its deposits in keeping
with its asset/liability management, liquidity and growth objectives. Based on
its experience, the Association believes that its savings and interest and
non-interest-bearing checking accounts are relatively stable sources of
deposits. However, the ability of the Association to attract and maintain
certificates
26
of deposit, and the rates paid on these deposits, has been and will continue to
be significantly affected by market conditions.
In setting rates, Cameron Savings regularly evaluates (i) its internal
cost of funds, (ii) the rates offered by competing institutions, (iii) its
investment and lending opportunities and (iv) its liquidity position. In order
to decrease the volatility of its deposits, Cameron Savings imposes penalties on
early withdrawal on its certificates of deposit.
The following table sets forth the savings flows at the Association
during the years indicated.
Year Ended September 30,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
(Dollars in Thousands)
Opening balance ............................ $121,280 $123,110 $122,378
Deposits.................................... 100,960 134,651 98,372
Withdrawals................................. 103,883 141,254 101,730
Interest credited........................... 4,751 4,773 4,090
-------- --------- ---------
Ending balance.............................. $123,108 $121,280 $123,110
======== ======== ========
Net increase (decrease)..................... $1.828 $( 1,830) $ 732
====== ======== =======
Percent increase (decrease)................. 1.5% (1.5)% .6%
=== ===== ==
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Association at the dates
indicated.
At September 30,
-------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- ------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ------------ ----------- ------------ --------- -----------
(Dollars in Thousands)
Transactions and Savings Deposits:
- ---------------------------------
Passbook accounts 3.25............................ $11,179 9.1% $ 10,415 8.6% $ 15,389 12.5%
NOW accounts 0.00 - 2.75.......................... 5,294 4.3 5,322 4.4 5,051 4.1
Money market accounts 3.00........................ 7,494 6.1 8,091 6.7 11,252 9.1
-------- ------ -------- ----- -------- -----
Total non-certificates............................ 23,967 19.5 23,828 19.7 31,692 25.7
-------- ------ -------- ----- -------- -----
Certificates:
2.00 - 3.99%.................................... 4 --- 52 --- 7,146 5.8
4.00 - 5.99%.................................... 63,866 51.9 52,769 43.5 50,263 40.9
6.00 - 7.99%.................................... 33,182 27.0 42,365 34.9 29,178 23.7
8.00 - 9.99%.................................... 2,089 1.7 2,266 1.9 4,829 3.9
10.00% and over................................... --- --- --- --- 2 ---
-------- ------ -------- ----- -------- -----
Total certificates................................ 99,141 80.5 97,452 80.3 91,418 74.3
-------- ------ -------- ----- -------- -----
Total deposits.................................... $123,108 100.00% $121,280 100.0% $123,110 100.0%
======== ====== ======== ===== ======== =====
27
The following table shows rate and maturity information for the
Association's certificates of deposit at September 30, 1996.
2.00- 4.00- 5.00- 6.00- 7.00- 8.00% Percent
3.99% 4.99% 5.99% 6.99% 7.99% or greater Total of Total
------- -------- -------- -------- -------- ------------- ---------- --------
(Dollars in Thousands)
Certificate accounts
maturing in
quarter ending:
- ------- ------
December 31, 1996.......... $4 $609 $14,254 $981 $11 $57 $15,916 16.05%
March 31, 1997............. -- 315 16,347 188 185 26 17,061 17.21%
June 30, 1997.............. -- 228 6,764 322 11 25 7,350 7.41%
September 30, 1997......... -- 72 7,263 366 1,516 3 9,220 9.30%
December 31, 1997.......... -- 56 3,300 1,471 104 44 4,975 5.02%
March 31, 1998............. -- -- 6,149 1,790 27 -- 7,966 8.04%
June 30, 1998.............. -- -- 1,575 326 14 -- 1,915 1.93%
September 30, 1998......... -- -- 1,642 1,189 444 -- 3,275 3.30%
December 31, 1998.......... -- -- 1,151 177 233 -- 1,561 1.57%
March 31, 1999............. -- -- 1,407 232 28 66 1,733 1.75%
June 30, 1999.............. -- -- 430 1,052 -- -- 1,482 1.49%
September 30, 1999......... -- -- 282 1,052 20 253 1,607 1.62%
Thereafter................. -- -- 2,022 16,647 4,796 1,615 25,080 25.31%
---- ------ ------- ------ ----- ----- -----
Total................... $ 4 $1,280 $62,586 $25,793 $7,389 $2,089 $99,141 100.00%
==== ====== ======= ======= ====== ====== ======= ======
Percent of total........ --% 1.29% 63.13% 26.02% 7.45% 2.11% 100.00%
The following table indicates the amount of the Association's
certificates of deposit and other deposits by time remaining until maturity at
September 30, 1996.
Maturity
-------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------------- ------------ ----------- ----------- ----------
(Dollars In thousands)
Certificates of deposit less than $100,000....... $14,407 $15,666 $15,527 $44,084 $89,684
Certificates of deposit of $100,000 or more...... 556 1,229 841 5,494 8,120
Public funds /1/................................. 953 166 202 16 1,337
------- ------- ------ ------ -----
Total certificates of deposit.................... $15,916 $17,061 $16,570 $49,594 $99,141
======= ======= ======= ======= =======
- ---------------
/1/ Deposits from governmental and other public entities, including deposits
greater than $100,000.
Borrowings. The Association has the ability to use advances from FHLB
of Des Moines to supplement its deposits when the rates are favorable. As a
member of the FHLB of Des
28
Moines, the Association is required to own capital stock and is authorized to
apply for advances. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and includes a range of maturities. The FHLB of Des
Moines may prescribe the acceptable uses to which these advances may be put, as
well as limitations on the size of the advances and repayment provisions.
The Association borrowed $12.5 million under FHLB advances during 1996
to fund loan originations and meet short term cash needs. Outstanding balances
at September 30, 1996 were $12.5 million.
The following tables set forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated, as well as the amount of
such advances and the weighted average interest rate at the dates indicated.
Years Ended September 30,
--------------------------
1996 1995
---- ----
(In Thousands)
Maximum Balance
- ---------------
FHLB advances $12,250 $2,000
Average Balance
- ---------------
FHLB advances $3,192 $19
Years Ended September 30,
--------------------------
1996 1995
---- ----
(In Thousands)
FHLB advances $12,250 --
======= ===
Weighted average interest rate 6.09% --%
During the last several years, loan originations have exceeded savings
inflows, loan repayments and cash provided by operations. Prior to fiscal year
1996, the excess resulted in reductions in the investment securities portfolio
and the Association's total liquidity. See "Regulation-Liquidity". To maintain
liquidity above the required minimum, it is anticipated that FHLB advances will
continue to supplement projected savings inflows and loan repayments to fund
continued loan demand.
Subsidiaries
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets for community purposes. In
addition, federal associations may invest up to 50% of their total capital in
conforming loans to their service corporations in which they own more than 10%
of the capital stock. In addition, federal associations are permitted to invest
an unlimited amount in operating subsidiaries engaged solely in activities which
a federal association may engage in directly.
29
At September 30, 1996, Cameron Savings had one service corporation. The
Service Corporation was established in 1975 for the purpose of offering credit
life, disability and accident insurance to its customers. At September 30, 1996,
the Association's investment in the Service Corporation was $351,000.
REGULATION
General
Cameron Savings is a federally chartered savings and loan association,
the deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, Cameron Savings is subject
to broad federal regulation and oversight extending to all its operations.
Cameron Savings is a member of the FHLB of Des Moines and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). As the savings and loan holding company of the
Association, the Company also is subject to federal regulation and oversight.
The purpose of the regulation of the Company and other holding companies is to
protect subsidiary savings associations. Cameron Savings is a member of the
Savings Association Insurance Fund ("SAIF") and the deposits of Cameron Savings
are insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Cameron Savings.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Congress is considering legislation that would consolidate the
supervision and regulation of all U.S. financial institutions in one
administrative body, expand the powers of financial institutions, and provide
regulatory relief to financial institutions. It cannot be predicted with
certainty whether or when this legislation will be enacted, or the extent to
which the Association or the Company would be affected thereby.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Cameron Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of Cameron Savings and Cameron
Financial Corp. was as of June 13, 1996. When these examinations are conducted
by the OTS and the FDIC, the examiners may require Cameron Savings to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Association's OTS assessment for
the fiscal year ended September 30, 1996, was $49,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including associations and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions
30
or inactions may provide the basis for enforcement action, including misleading
or untimely reports filed with the OTS. Except under certain circumstances,
public disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of Cameron
Savings is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Association is in compliance with the noted
restrictions.
The Association's general permissible lending limit for loans-to-one-
borrower is equal to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At September 30, 1996, Cameron Savings' lending limit under this
restriction was $5.1 million. The Association is in compliance with the
loans-to-one-borrower limit.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Cameron Savings is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
and loan associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .67% to .23% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest
31
premium while institutions that are less than adequately capitalized (i.e., core
or core capital to risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
pay the highest premium. Risk classification of all insured institutions will be
made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March 31,
1995. The assessment was 65.7 basis points per $100 in deposits, payable on
November 27, 1996. For the Association, the assessment amounted to $800,000 (or
$509,000 when adjusted for taxes), based on the Association's deposits on March
31, 1995. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
deposits and 6.44 basis points per $100 in SAIF deposits. Beginning January 1,
2000, the FICO interest payments will be paid pro rata by banks and thrifts
based on deposits (approximately 2.4 basis points per $100 in deposits). The BIF
and SAIF will be merged on January 1, 1999, provided the bank and saving
association charters are merged by that date. In that event, pro rata FICO
sharing will begin on January 1, 1999.
While the legislation has reduced the disparity between premiums paid
on BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Association, and
BIF-insured institutions will continue until at least January 1, 1999. Under the
legislation, the Association anticipates that its ongoing annual SAIF premiums
will be approximately $80,000.
Regulatory Capital Requirements
Federally insured savings associations, such as the Association, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity including retained earnings, and certain
noncumulative perpetual preferred stock and related
32
earnings. In addition, all intangible assets, other than a limited amount of
purchased mortgage servicing rights, must be deducted from tangible capital for
calculating compliance with the requirement. Further, the valuation allowance
applicable to the write-down of investments and mortgage-backed securities in
accordance with SFAS No. 115 is excluded from the regulatory capital
calculation. At September 30, 1996, the Association had no intangible assets or
unrealized loss, net of tax under SFAS No. 115.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At September 30, 1996, the Association had tangible capital of $32.9
million, or 18.9% of adjusted total assets, which is approximately $30.3 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital of at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At September 30, 1996,
Cameron Savings had no intangible assets which were subject to these tests.
At September 30, 1996, Cameron Savings had core capital equal to $32.9
million, or 18.9% of adjusted total assets, which is $27.7 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At September 30, 1996, Cameron
Savings had no capital instruments that qualify as supplementary capital and
$1.3 million of general loss reserves, which was less than 1.25% of
risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Association had
exclusions from capital and assets at September 30, 1996 of $1.1 million.
33
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total risk
weighted capital ratio in excess of 12% is exempt from this requirement unless
the OTS determines otherwise.
On September 30, 1996, Cameron Savings had total capital of $33.1
million (including $32.9 million in core capital and $1.3 million in qualifying
supplementary capital) and risk- weighted assets of $117.3 million (including
$2.3 million in converted off-balance sheet assets); or total capital of 28.3%
of risk-weighted assets. This amount was $23.8 million above the 8% requirement
in effect on that date.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
34
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Cameron Savings may have a substantial adverse effect on the Association's
operations and profitability. Holding Company shareholders do not have
preemptive rights, and therefore, if the Holding Company is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of the Holding Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account (see "--Regulatory Capital
Requirements").
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Association meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and
35
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Association will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted. The Association qualifies for Tier 1 and has declared and paid
dividends of $2,248,000 to Cameron Financial Corporation during fiscal 1996.
Liquidity
All savings associations, including Cameron Savings, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what the Bank
includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
36
ratio requirement. At September 30, 1996, Cameron Savings was in compliance with
both requirements, with an overall liquid asset ratio of 6.43% and a short-term
liquid assets ratio of 3.64%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Cameron Savings is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Cameron Savings, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At September 30, 1996, the Association met the test and has always
met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
37
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of Cameron
Savings, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by Cameron
Savings. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Association may be required to devote additional
funds for investment and lending in its local community. The Association was
examined for CRA compliance in January 1995 and received a rating of
satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of the Association include the Holding
Company and any company which is under common control with the Association. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Association's subsidiaries are not deemed affiliates,
however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over holding companies
and their non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
38
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL and were acquired in a supervisory
acquisition.
If Cameron Savings fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At September 30, 1996, Cameron Savings was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
39
Federal Home Loan Bank System
Cameron Savings is a member of the FHLB of Des Moines, which is one of
12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, Cameron Savings is required to purchase and maintain stock
in the FHLB of Des Moines. At September 30, 1996, Cameron Savings had $1.3
million in FHLB stock, which was in compliance with this requirement. In past
years, Cameron Savings has received substantial dividends on its FHLB stock.
Over the past five fiscal years such dividends have averaged 8.03% and were
7.26% for fiscal year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Cameron Savings' FHLB stock may result in a corresponding
reduction in Cameron Savings' capital.
For the year ended September 30, 1996, dividends paid by the FHLB of
Des Moines to the Association totaled $91,000, which equaled the amount of
dividends received in fiscal year 1995.
40
Federal and State Taxation
Federal Taxation. Savings associations such as the Association that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code (the "Code") are permitted to
establish reserves for bad debts and to make annual additions thereto which may,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
For tax years beginning before December 31, 1995, the amount of the bad debt
reserve deduction for "qualifying real property loans" (generally loans secured
by improved real estate) may be computed under either the experience method or
the percentage of taxable income method (based on an annual election). If a
saving association elected the latter method, it could claim, each year, a
deduction based on a percentage of taxable income, without regard to actual bad
debt experience.
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings and loan association over a period of years.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for years beginning after December 31, 1995, and
"large" associations, i.e., the quarterly average of the association's total
assets or of the consolidated group of which it is a member, exceeds $500
million for the year, may no longer be entitled to use the experience method of
computing additions to their bad debt reserve. A "large" association must use
the direct write-off method for deducting bad debts, under which charge-offs are
deducted and recoveries are taken into taxable income as incurred. If the
Association is not a "large" association, the Association will continue to be
permitted to use the experience method. The Association will be required to
recapture (i.e., take into income) over a six-year period its applicable excess
reserves, i.e, the balance of its reserves for losses on qualifying loans and
nonqualifying loans, as of the close of the last tax year beginning before
January 1, 1996, over the greater of (a) the balance of such reserves as of
December 31, 1987 (pre-1988 reserves) or (b) in the case of a bank which is not
a "large" association, an amount that would have been the balance of such
reserves as of the close of the last tax year beginning before January 1, 1996,
had the bank always computed the additions to its reserves using the experience
method. Postponement of the recapture is possible for a two-year period if an
association meets a minimum level of mortgage lending for 1996 and 1997. As of
September 30, 1996, the Association's bad debt reserve subject to recapture over
a six-year period totaled approximately $288,000. The Association has
established a deferred tax liability of approximately $96,000 for this
recapture.
If an association ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of, shareholders.
41
In addition to the regular income tax, corporations, including savings
associations such as the Association, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Association, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the Association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of September 30, 1996, the Association's excess for tax purposes
totaled approximately $4.6 million.
The Association and its subsidiaries file consolidated federal income
tax returns on a fiscal year basis using the accrual method of accounting. The
Company files consolidated federal income tax returns with the Association and
its subsidiaries. Savings associations, such as the Association, that file
federal income tax returns as part of a consolidated group are required by
applicable Treasury regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses attributable to
activities of the non-savings association members of the consolidated group that
are functionally related to the activities of the savings association member.
The Association and its consolidated subsidiaries have been audited by
the IRS with respect to consolidated federal income tax returns through
September 30, 1981. With respect to years examined by the IRS, either all
deficiencies have been satisfied or sufficient reserves have been established to
satisfy asserted deficiencies. In the opinion of management, any examination of
still open returns (including returns of subsidiaries and predecessors of, or
entities merged into, the Association) would not result in a deficiency which
could have a material adverse effect on the financial statements of the
Association and its consolidated subsidiaries.
Missouri Taxation. The State of Missouri has a corporate income tax;
however, savings and loan institutions are exempt from such tax. Missouri-based
thrift institutions, such as the Association, are subject to a special financial
institutions tax, based on net income without regard to net operating loss
carryforwards, at the rate of 7% of net income as defined in the Missouri
statutes. This tax is a prospective tax for the privilege of the Association
exercising its corporate franchise within the state, based on its net income for
the preceding year. The tax is in lieu of all other state taxes on thrifts,
except taxes on real estate, tangible personal property
42
owned by the taxpayer and held for lease or rental to others, certain payroll
taxes, and sales and use taxes.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Competition
Savings institutions generally face strong competition both in
originating real estate loans and in attracting deposits. Competition in
originating loans comes primarily from other savings institutions, commercial
banks and mortgage bankers who also make loans secured by real estate located in
the Association's market area. The Association competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
The Association faces substantial competition in attracting deposits
from other savings institutions, commercial banks, securities firms, money
market and mutual funds, credit unions and other investment vehicles. The
ability of the Association to attract and retain deposits depends on its ability
to provide an investment opportunity that satisfies the requirements of
investors as to rate of return, liquidity, risk, convenient locations and other
factors. The Association competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours and a
customer-oriented staff.
Employees
At September 30, 1996, the Association and its subsidiary had a total
of 44 full-time employees and 4 part-time employees. None of the Association's
employees is represented by any collective bargaining group. Management
considers its employee relations to be good.
Executive Officers of the Company and the Association who are not Directors
Ronald W. Hill. Mr. Hill, age 47, is the Vice President and Treasurer
of Cameron Savings, responsible for the supervision of the accounting
department, reporting to the regulatory authorities, and managing the
Association's liquidity position. Mr. Hill joined the Association in 1981 as
Controller and was promoted to his current position in 1988.
Stephen Hayward. Mr. Hayward, age 34, is currently the Director of
Lending of the Association. As such, he is responsible for the supervision of
all lending operations of the Association, including loan applications and loan
closings. Mr. Hayward joined the Association in 1991 as Internal Auditor and
Compliance Officer. Prior to joining the Association, Mr. Hayward was a Manager
with the accounting firm of KPMG Peat Marwick LLP in Kansas City, Missouri.
Earl Frazier. Mr. Frazier, age 61, is currently the manager of the
loan production office in Liberty, Missouri. In that capacity, Mr. Frazier is
responsible for overseeing the lending
43
operations, including the origination of construction and land loans.
Mr. Frazier joined the Association in 1981 as a loan officer. Prior to joining
the Association, Mr. Frazier was a real estate agent and, prior thereto, a
residential home builder.
Item 2. Description of Property
The Association operates from three full-service facilities and one
loan production office. The Association's main office and adjoining consumer
loan office are owned entirely by Cameron Savings. The two branch locations as
well as the Association's loan production office are leased. Construction of the
new home office building on North Walnut Street in Cameron commenced in
November, 1995, with completion scheduled for March, 1997. Estimated
construction costs are $4.25 million.
On November 15, 1996, the Company signed a contract to purchase
approximately four acres of land in Liberty, Missouri for use as a future branch
office. It is the Association's intent to convert the current loan production
office to a full service branch office. Application for the change has not yet
been submitted to OTS for approval. The cost of the land is $850,000. Although
no formal estimates have been prepared at this time, construction costs are
estimated at $1.0 million. Completion of the office could occur in late 1997 or
early 1998. The Company intends to use approximately one acre for the branch
facility and the remainder as investment property.
44
The following table sets forth certain information with respect to the
offices of the Association and its subsidiary at September 30, 1996.
Net Book
Value as
Approximate of
Date Square September 30,
Location Acquired Title Footage 1996
- ---------------- ---------- ------- ----------- -------------
Main Office 1959 Owned 14,091 $ 9,000
- -----------
123 East Third Street
Cameron, MO
309 North Main Street 1977 Owned 4,040 61,000
Cameron, MO
Branch Offices 1994 Leased 1,311 N/A
- -------------- (expires
115 East Fourth Street 2003)
Maryville, MO
702 State Street 1992 Leased 900 N/A
Mound City, MO (expires
1998)/(1)/
Loan Production Office 1992 Leased 2,296 N/A
- ---------------------- (expires
101 Clayview Drive 1997)/(2)/
Liberty, MO
Future Main Office 1993 Owned 3.9 Acres 2,678,000
- ------------------
1304 North Walnut Street/(3)/
Cameron, MO
- ----------------
/1/ Subject to option to extend for three years.
/2/ Subject to option to extend for five years.
/3/ Acquired as the future site of the Main Office/Customer Convenience Center.
The Association's accounting and record-keeping activities are
maintained on an on-line basis with an independent service bureau.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Company in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Company's financial statements.
45
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended September 30,
1996.
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
--------------------------------------------------------------------
Page 43 of the attached 1996 Annual Report to Shareholders is herein
incorporated by reference.
Item 6. Selected Financial Data
-----------------------
Pages 3 to 4 of the attached 1996 Annual Report to Shareholders are
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
Pages 5 through 18 of the attached 1996 Annual Report to Shareholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Pages 19 through 42 of the attached 1996 Annual Report to Shareholders
are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on January 27, 1997, except
for information contained under the heading
46
"Report of the Compensation Committee" and "Comparative Stock Performance
Graph", a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 11. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein
by reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on January 27, 1997, except for
information contained under the heading "Report of the Compensation Committee"
and "Comparative Stock Performance Graph", a copy of which will be filed not
later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held on January 27, 1997, except for information contained under the heading
"Report of the Compensation Committee" and "Comparative Stock Performance
Graph", a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held on January
27, 1997, except for information contained under the heading "Report of the
Compensation Committee" and "Comparative Stock Performance Graph", a copy of
which will be filed not later than 120 days after the close of the fiscal year.
47
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) (1) Financial Statements:
-----------------------------
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended September 30, 1996, is incorporated by
reference in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- --------
Report of Independent Auditors.............................................................. 19
Consolidated Balance Sheets at September 30, 1996 and 1995.................................. 20
Consolidated Statements of Earnings for the Years ended September 30, 1996,
1995 and 1994............................................................................... 21
Consolidated Statements of Stockholders' Equity for the Years ended
September 30, 1996, 1995 and 1994......................................................... 22
Consolidated Statements of Cash Flows for the Years ended September 30, 1996,
1995 and 1994............................................................................. 23-24
Notes to Consolidated Financial Statements.................................................. 25-42
(a) (2) Financial Statement Schedules:
--------------------------------------
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
48
(a) (3) Exhibits:
-----------------
Sequential Page
Reference to Number Where
Regulation Prior Filing or Attached Exhibits
S-K Exhibit Exhibit Number Are Located in this
Number Document Attached Hereto Form 10-K Report
- ------------ ---------------------------------------- ----------------- ---------------------
2 Plan of acquisition, reorganization, None Not applicable
arrangement, liquidation or succession
3 Certificate of Incorporation and Bylaws * Not applicable
4 Instruments defining the rights of * Not applicable
security holders, including indentures
9 Voting trust agreement None Not applicable
10.1 Severance Agreements of David G. Just * Not applicable
and Ronald Hill
10.2 Employee Stock Ownership Plan * Not applicable
10.3 1995 Stock Option and Incentive Plan ** Not applicable
10.4 Recognition and Retention Plan ** Not applicable
10.5 Deferred Fee Agreement * Not applicable
10.6 Director Emeritus Agreement * Not applicable
11 Statement re: computation of per None Not applicable
share earnings
12 Statement re: computation or ratios Not required Not applicable
13 Annual Report to Security Holders 13 Page 53
16 Letter re: change in certifying None Not applicable
accountant
18 Letter re: change in accounting None Not applicable
principles
21 Subsidiaries of Registrant 22 Page 98
49
Sequential Page
Reference to Number Where
Regulation Prior Filing or Attached Exhibits
S-K Exhibit Exhibit Number Are Located in this
Number Document Attached Hereto Form 10-K Report
- ------------ ------------------------------------------ ------------------ ----------------------
22 Published report regarding matters None Not applicable
submitted to vote of security holders
23 Consent of experts and counsel None Not applicable
24 Power of Attorney Not Required Not applicable
27 Financial Data Schedule 27 Page 99
28 Information from reports furnished to None Not applicable
State insurance regulatory authorities
99 Additional exhibits None Not applicable
- -------------------
* Filed on December 23, 1994, as exhibits to the Registrant's Form S-1
registration statement (Registration No. 33-87900), pursuant to the Securities
Act of 1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
** Filed December 27, 1995, as exhibits to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1995. All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
------------------------
No current reports on Form 8-K were filed by the Company during
the three months ended September 30, 1996.
50
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAMERON FINANCIAL CORPORATION
Date: December 26, 1996 By: /s/David G. Just
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David G. Just
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/David G. Just By: /s/Herschel Pickett
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David G. Just, President Herschel Pickett
Chief Executive Officer and Director Chairman of the Board
Date: December 26, 1996 Date: December 26, 1996
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By: /s/Kennith R. Baker By: /s/George E. Hill
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Kennith R. Baker, Secretary and George E. Hill, Director
Director
Date: December 26, 1996 Date: December 26, 1996
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By: /s/Harold D. Lee By: /s/William F. Barker
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Harold D. Lee, Director William F. Barker, Director
Date: December 26, 1996 Date: December 26, 1996
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By: /s/Jon N. Crouch By: /s/Ronald W. Hill
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Jon N. Crouch, Director Ronald W. Hill, Vice President,
Treasurer, and Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: December 26, 1996 Date: December 26, 1996
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