<PAGE>
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
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________________________ TO
______________________________________
COMMISSION FILE NUMBER 0-25516
CAMERON FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 43-1702410
- ----------------------------------------------------- --------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1304 North Walnut, Cameron, Missouri 64429
- ----------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 632-2154
--------------
</TABLE>
Securities Registered Pursuant to Section 12(b) of the Act: None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(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
--- ---.
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 11, 1998, was $33,405,168. (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 11, 1998, there were issued and outstanding 2,215,732 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, 1998.
Part III of Form 10-K - Portions of the Proxy Statement for 1999 Annual
Meeting of Stockholders.
<PAGE>
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 1304 North Walnut, Cameron,
Missouri, and three branch offices located in Liberty, Maryville and Mound City,
Missouri. The Association occupied the new main office during June 1997 and the
new branch office in Liberty in August 1998. At September 30, 1998, the Company
had total assets of $221.5 million, deposits of $136.6 million, and
shareholders' equity of $43.5 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 1304 North Walnut,
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,
2
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Missouri, and Clay and Platte Counties through its branch office in Liberty,
Missouri. Nearly all of the Association's construction lending is originated by
the Liberty branch 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 and the Cameron R-1 school
district. 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, some of which it 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, 1998, the Association's net loan portfolio totaled $184.6 million.
The Association maintains an established loan approval process. Loans
under $150,000 secured by real estate are reviewed and approved by any two
members of the loan committee. Real estate loans between $150,000 and $214,600
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.
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
3
<PAGE>
unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation
of Savings Associations." At September 30, 1998, the maximum amount which the
Association could have lent to any one borrower and the borrower's related
entities was approximately $5.5 million. At September 30, 1998, the Association
had no loans with an aggregate outstanding balance in excess of this amount. The
Association has 21 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 $3.9 million to a
realtor/property manager for rental properties, and was secured by real estate
primarily in Clay and Platte Counties, Missouri and the personal guarantee of
the borrower. At September 30, 1998, these loans were performing in accordance
with their terms. See "Regulation - Federal Regulation of Savings Associations."
4
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family/(1)/ $134,416 65.08% $123,856 61.96% $109,292 62.06%
Multi-family 2,943 1.42 4,226 2.11 2,908 1.65
Commercial 3,243 1.57 3,403 1.70 4,322 2.45
Land 11,059 5.35 8,257 4.13 9,605 5.46
Construction/(2)/ 45,654 22.11 51,447 25.74 41,646 23.65
-------- ------ -------- ------ -------- ------
Total real estate loans 197,315 95.53 191,189 95.64 167,773 95.27
-------- -------- --------
Other Loans:
- ------------
Consumer Loans:
Deposit account 621 0.30 398 0.20 533 0.30
Automobile 3,094 1.50 3,302 1.65 3,359 1.91
Home equity 2,937 1.42 1,904 0.95 2,718 1.54
Home improvement 1,181 0.57 1,014 0.51 873 0.50
Other 1,408 0.68 2,091 1.05 847 0.48
-------- ------ -------- ------ -------- ------
Total consumer loans 9,241 4.47 8,709 4.36 8,330 4.73
-------- ------ -------- ------ -------- ------
Total loans 206,556 100.00% 199,898 100.00% 176,103 100.00%
====== ====== ======
Less:
- -----
Loans in process 19,730 20,679 19,502
Deferred loan fees, net 700 805 804
Allowance for loan losses 1,521 1,624 1,353
-------- -------- --------
Loans receivable, net $184,605 $176,790 $154,444
======== ======== ========
</TABLE>
___________________
/(1)/ Includes $526,000 and $466,000 of loans held for sale at September 30,
1998 and 1997, respectively.
/(2)/ Includes $9.9 million, $6.6 million and $8.3 million of construction-
permanent loans on one-to four-family properties at September 30, 1998,
1997 and 1996, respectively, $0.8 million, $0.3 million and $1.4 million
of construction-permanent loans on multi-family properties at September
30, 1998, 1997 and 1996, respectively, and $70,000 of construction-
permanent loans on commercial property at September 30, 1996.
5
<PAGE>
The following table sets forth the composition of the Association's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family/(1)/ $ 27,039 13.09% $ 22,214 11.11% $ 24,312 13.81%
Multi-family 152 0.07 942 0.47 986 0.56
Commercial 349 0.17 571 0.29 604 0.34
Land 5,284 2.56 5,180 2.59 6,298 3.58
Construction 41,821 20.25 50,106 25.07 35,475 20.14
-------- ------ -------- ------ -------- ------
Total real estate loans 74,645 36.14 79,013 25.07 67,675 38.43
Consumer 5,224 2.53 5,768 2.88 6,033 3.43
-------- ------ -------- ------ -------- ------
Total fixed-rate loans 79,869 38.67 84,781 42.41 73,708 41.86
-------- -------- ------ -------- ------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family 107,377 51.98 101,642 50.85 84,980 48.26
Multi-family 2,791 1.35 3,284 1.64 1,922 1.09
Commercial 2,894 1.40 2,832 1.42 3,718 2.11
Land 5,775 2.80 3,077 1.54 3,307 1.88
Construction 3,833 1.86 1,341 0.67 6,171 3.50
-------- ------ -------- ------ -------- ------
Total real estate loans 122,670 59.39 112,176 56.12 100,098 56.84
Consumer 4,017 1.94 2,941 1.47 2,297 1.30
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans 126,687 61.33 115,117 57.59 102,395 58.14
-------- ------ -------- ------ -------- ------
Total loans 206,556 100.00% 199,898 100.00% 176,103 100.00%
====== ====== ======
Less:
- -----
Loans in process 19,730 20,679 19,502
Deferred loan fees, net 700 805 804
Allowance for loan losses 1,521 1,624 1,353
-------- -------- --------
Loans receivable, net $184,605 $176,790 $154,444
======== ======== ========
</TABLE>
__________________
/(1)/ Includes ARM loans aggregating $2.8 million, $6.9 million and $7.9 million
at September 30, 1998, 1997 and 1996, respectively, which have their next
interest rate adjustment date five years or more from the dates indicated.
6
<PAGE>
The following table sets forth the contractual maturity and weighted
average rates of the Association's loan portfolio at September 30, 1998. 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During
Years Ending
September 30,
- -------------
1999/(1)/ $ 618 8.52% $ 43 9.12% $ 158 8.32% $30,799 9.20%
2000 170 8.67 31 8.34 81 8.21 4,018 9.11
2001 548 8.39 19 9.64 924 9.20 138 9.49
2002 and 2003 2,356 8.26 167 9.27 3,132 9.63 -- --
2004 to 2008 12,609 8.20 1,240 8.66 2,079 9.62 -- --
2009 to 2023 83,429 8.04 4,686 8.73 4,654 8.80 4,545 7.92
2024 and following 34,686 7.69 -- -- 31 8.07 6,154 7.68
-------- ---- ------ ---- ------- ---- ------- ----
Total $134,416 7.97% $6,186 8.73% $11,059 9.21% $45,654 8.86%
======== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Consumer Total
-------------------- ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ------------- ------ ---------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Due During
Years Ending
September 30,
- -------------
1999/(1)/ $1,209 9.37% $ 32,827 9.19%
2000 575 11.16 4,875 9.32
2001 1,890 9.92 3,519 9.47
2002 and 2003 2,106 10.59 7,761 9.47
2004 to 2008 3,386 10.00 19,314 8.70
2009 to 2023 75 9.60 97,389 8.11
2024 and following -- -- 40,871 7.69
------ ----- -------- ----
Total $9,241 10.10% $206,556 8.35%
====== ========
</TABLE>
The total amount of loans due after September 30, 1999 which have fixed
interest rates is $47.0 million, while the total amount of loans due after such
date which have adjustable interest rates is $126.7 million.
7
<PAGE>
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, 1998, $134.4 million, or 65.1%,
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, most 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 which have the interest rates below a pre-determined
level into the secondary markets, servicing released. See "Business -
Originations, Purchases and Sales of Loans." The interest rates on loans sold
are determined pursuant to commitments to purchase from secondary market
sources.
8
<PAGE>
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, 1998, the Association had $107.4 million of one- to four-family
ARM loans, or 52.0% 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
<PAGE>
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. Cameron
Financial has recently completed the construction of a building in Liberty which
has been leased to the Association and operated as a full service branch. The
Liberty loan production office has been closed. Vice President Stephen E.
Hayward is the Liberty Branch Manager. 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 loan department 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
<PAGE>
The table below presents information on the Association's construction and
land loans at September 30, 1998:
<TABLE>
<CAPTION>
Outstanding Percent of
Loan Balance/(1)/ Total
----------------- -----------
(Dollars in Thousands)
<S> <C> <C>
Speculative......................... $30,304 53.44%
Contract............................ 4,652 8.20
Construction/permanent.............. 10,698 18.86
------- ------
Total construction............... 45,654 80.50
------- ------
Conventional land................... 7,805 13.76
Land A&D............................ 3,254 5.74
------- ------
Total land....................... 11,059 19.50
------- ------
Total construction and land... $56,713 100.00%
======= ======
</TABLE>
_______________
/(1)/ Includes loans in process.
At September 30, 1998, the Association's $45.7 million of construction
loans and $11.1 million of land loans represented 22.1% and 5.4%, respectively,
of total loans receivable. At the same time, the Association's $30.3 million of
speculative construction loans and $3.3 million of land A&D loans represented
14.7% and 1.6%, respectively, of total loans receivable. At September 30, 1997,
the Association's speculative construction loans of $40.2 million represented
20.1% of total loans receivable. The reduction of $9.9 million, or 24.6%, in
speculative construction loans during the 1998 fiscal year reduced the risk
profile of the Association's loan portfolio. This reduction of risk in the
overall loan portfolio allowed the Association to credit earnings with a $76,000
reduction in the provision for loan losses during the 1998 fiscal year.
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
11
<PAGE>
Association. At September 30, 1998, the Association had 11 borrowers for which
speculative construction and land A&D loans outstanding totaled more than $1
million. Each 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, 1998, the
Association had speculative construction and land A&D loans secured by
properties in 54 developments of which 8 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 customers by
12
<PAGE>
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, 1998, the Association had one such loan
outstanding totalling $0.8 million.
Land and Development Loans. At September 30, 1998, the Association had
total land loans of $11.1 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, 1998, $2.9 million, or 1.4%, of the
Association's loan portfolio consisted of multi-family loans and $3.2 million,
or 1.5%, 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
operating expenses and debt service payments. The Association generally
requires a debt service coverage ratio of 120% or more.
13
<PAGE>
At September 30, 1998, the Association's largest multi-family or commercial
real estate loan was $600,000, secured by a convenience store complex located in
Clinton 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, 1998, the Association had $9.2 million, or 4.5% 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, 1998 the
Association had $4.1 million or 44.6% of its consumer loan portfolio in home
equity and home improvement loans and $3.1 million in auto loans, or 33.5% of
the consumer loan portfolio. Approximately 4.2% of the consumer loans were
unsecured at September 30, 1998.
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 0.11% at
September 30, 1998.
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
14
<PAGE>
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 1-1/2% 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 1998, the Association originated $110.6
million of loans, compared to $100.6 million and $99.6 million in fiscal 1997
and 1996, respectively. During recent years, the Association's construction
loan originations have been strong, totaling $55.4 million, $63.5 million, and
$57.0 million, or 50.1%, 63.1%, and 57.2%, of total loan originations in fiscal
1998, 1997 and 1996, 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
15
<PAGE>
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 1998, conventional mortgage loans originated and sold into the secondary
market totaled $7.9 million.
While the Association has purchased whole loans or loan participations from
time to time, such purchases have been infrequent. In 1998, the Association
purchased two loans totaling $66,000 from individuals. 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 1998, 1997
and 1996 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,
1998, there were outstanding first mortgage loan commitments totaling $7.2
million. At that date, the Association also had $45.7 million of construction
loans of which approximately $19.7 million had not yet been disbursed.
16
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------
1998 1997 1996
-------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Originations by type:
- ---------------------
Adjustable rate:
Real estate - one- to four-family................. $ 24,148 $ 24,074 $21,063
multi-family.................................... 38 660 1,679
commercial...................................... 1,593 40 1,085
land........................................... 2,421 1,088 2,079
construction................................... 10,683 9,565 9,901
Non-real estate - consumer 2,690 1,612 1,278
-------- -------- -------
Total adjustable-rate...................... 41,573 37,039 37,085
-------- -------- -------
Fixed rate:
Real estate - one- to four-family................. 17,583 4,226 4,262
- commercial........................ 121 48 100
- land.............................. 3,886 1,407 5,348
- construction...................... 44,681 53,980 47,089
Non-real estate - consumer........................ 2,654 3,905 5,735
-------- -------- -------
Total fixed-rate........................... 68,925 63,566 62,534
-------- -------- -------
Total loan originations.................... 110,498 100,605 99,619
-------- -------- -------
Purchases:
- ----------
Real estate - one- to four-family................. 52 -- 882
- land................................ 14 -- --
-------- -------- -------
Total loan purchases....................... 66 -- 882
Mortgage-backed securities........................ -- -- --
-------- -------- -------
Total purchases............................ 66 -- 882
-------- -------- -------
Sales and Repayments:
- ---------------------
Real estate - one- to four-family................. 7,916 2,731 1,531
-------- -------- -------
Total loan sales........................... 7,916 2,731 1,531
Principal repayments.............................. 95,989 74,079 67,496
-------- -------- -------
Total sales and repayments................. 103,905 76,810 69,027
Decrease (Increase) in other items:
Loans in process.................................. 949 (1,177) (6,249)
Deferred fees and discounts....................... 105 (1) (162)
Allowance for loan losses......................... 102 (271) (359)
-------- -------- -------
Net increase............................... $ 7,815 $ 22,346 $24,704
======== ======== =======
</TABLE>
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
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
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
------ ------ --------- ------ ------ --------------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
m (Dollars in Thousands)
Real Estate:
One- to four-family 32 $1,370 1.02% 36 $ 1591 1.18% 68 $2,961 2.20%
Commercial-multifamily -- -- -- 2 41 1.26 2 41 1.26
Land 1 9 .008 -- -- -- 1 9 .008
Construction 3 347 0.76 11 1,494 3.27 14 1,841 4.03
Consumer 2 45 0.49 4 10 0.11 6 55 0.60
-- ------ ---- -- ------ ---- -- ------ ----
Total 38 $1,771 0.86% 53 $3,136 1.52% 91 $4,907 2.38%
== ====== ==== == ====== ==== == ====== ====
</TABLE>
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
<PAGE>
<TABLE>
<CAPTION>
September 30,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
(Dollars in Thousands)
Non-accruing loans:
One- to four-family................................................. $ 721 $ 262 $ 638
Multi-family........................................................ -- -- --
Commercial.......................................................... 34 -- --
Land................................................................ -- -- --
Construction........................................................ 1,044 110 131
Consumer............................................................ -- -- --
------- ------- ------
Total non-accruing loans......................................... 1,799 372 769
------- ------- ------
Accruing loans delinquent 90 days or more:/(2)/
One- to four-family.................................................. 870 708 653
Multi-family......................................................... 7 -- --
Commercial........................................................... -- -- --
Land................................................................. -- -- --
Construction......................................................... 450 -- --
Consumer............................................................. 10 88 56
------- ------- ------
Total accruing loans delinquent more than 90 days.................. 1,337 796 709
------- ------- ------
Total non-performing loans......................................... 3,136 1,168 1,478
------- ------- ------
Foreclosed assets:
One- to four-family.................................................. -- -- 70
Multi-family......................................................... -- -- --
Commercial........................................................... -- -- --
Land................................................................. -- -- --
Construction......................................................... -- -- --
Consumer............................................................. 19 12 --
------- ------- ------
Total............................................................. 19 12 70
------- ------- ------
Total non-performing assets............................................ $ 3,155 $ 1,180 $1,548
======= ======= ======
Total classified assets/(1)/........................................... $11,803 $10,754 $7,729
Total non-performing loans as a percentage
of total loans receivable............................................. 1.52% 0.58% 0.84%
Total non-performing assets as a percentage
of total assets....................................................... 1.42% 0.56% 0.83%
Total classified assets/(1)/ as a percentage of total assets........... 5.32% 5.06% 4.15%
Interest income that would have been recorded on
non-performing loans if current /(3)/................................. $ 62 $ 21 $ 40
Interest income on non-performing loans included in
net income /(4)/...................................................... $ 92 $ 13 $ 40
</TABLE>
_________________________
/(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.
The Association's non-performing assets include four construction loans to
a builder in the aggregate amount of $516,000 that were non-performing as of
September 30, 1998. The Association does not believe it will incur a
significant loss on these loans.
19
<PAGE>
Other Loans of Concern. In addition to the non-performing loans and
foreclosed assets set forth in the preceding table, as of September 30, 1998,
there was also an aggregate of $8.6 million in net book value of loans
classified by the Association with respect to which known 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, 1998, other loans of concern consisted primarily of speculative
construction and one- to four-family residential loans, and there was one other
loan of concern in excess of $250,000. A loan of $542,000 made during fiscal
year 1997 secured by the borrower's primary residence and 10 rental properties
was 30 days past due at September 30, 1998. The loan to value ratio on the loan
was 60%. 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, the Office of Thrift
Supervision ("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, 1998,
on a net basis, the Association had classified $3.5 million as Substandard,
$5,000 as Doubtful, $0 as Loss and $8.3 million as Special Mention.
Classified assets at September 30, 1998 were $11.8 million, compared to
$10.8 million at September 30, 1997 and $7.8 million at September 30, 1996. The
majority of the increase in fiscal 1998 was in the "substandard" category.
During the 1998 fiscal year, delinquencies in both the speculative construction
and the one- to four-family portfolios increased. At September 30, 1998, eleven
speculative construction loans had become 90 days delinquent compared to one at
September 30, 1997. Since September 30, 1998, two of the eleven have been paid
off, three have signed sales contracts and three are current on interest
payments. Some interest payments have been made on the remaining three loans.
The majority of the increase in fiscal 1997 was in the "special mention"
category. In an attempt to insure that internal controls monitor all situations
of possible concern, the
20
<PAGE>
Association's classification policy was changed in fiscal 1997 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. 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, 1998 were $5.8 million compared to $5.9 million at September 30,
1997 and $4.2 million at September 30, 1996.
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, 1998, the Association had a
total allowance for loan losses of $1.5 million representing 48.5% of total non-
performing loans.
21
<PAGE>
The following table sets forth an analysis of the Association's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------
1998 1997 1996
-------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year........................... $1,624 $ 1,353 $ 994
Charge-offs:
One- to four-family.................................. (20) -- --
Multi-family......................................... -- -- --
Commercial........................................... -- -- --
Land................................................. -- -- --
Construction......................................... -- -- --
Consumer............................................. (7) (14) (9)
------ ------- ------
Total charge-offs............................ (27) (14) (9)
------ ------- ------
Recoveries:
One- to four-family.................................. -- -- --
Multi-family......................................... -- -- --
Commercial........................................... -- -- --
Land................................................. -- -- --
Construction......................................... -- -- --
Consumer............................................. -- -- --
------ ------- ------
Total recoveries.................................. -- -- --
Net charge-offs........................................ (27) (14) (9)
Additions charged to operations........................ (76) 285 368
------ ------- ------
Balance at end of year................................. $1,521 $ 1,624 $1,353
====== ======= ======
Ratio of net charge-offs during the year to 0.015% 0.008% 0.006%
average loans outstanding during the year............ ====== ======= ======
Ratio of allowance for loan losses to non- 48.50% 139.04% 91.54%
performing loans at end of year...................... ====== ======= ======
Ratio of allowance for loan losses to total loans 0.74% 0.81% 0.77%
receivable at end of year............................ ====== ======= ======
</TABLE>
22
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans Amount of Loans
Loan in Each Loan in Each of Loan in Each
Amount of Amounts Category Amount of Amounts Category 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $ 357 $134,416 65.08% $ 345 $123,856 61.96% $ 299 $109,292 62.06%
Multi-family 15 2,943 1.42 21 4,226 2.11 22 2,908 1.65
Commercial 31 3,243 1.57 26 3,403 1.70 33 4,322 2.45
Land 261 11,059 5.35 209 8,257 4.13 235 9,605 5.46
Construction 673 45,654 22.11 818 51,447 25.74 577 41,646 23.65
Consumer 184 9,241 4.47 205 8,709 4.36 187 8,330 4.73
------ -------- ------ ------ -------- ------ ------ -------- ------
Total $1,521 $206,556 100.00% $1,624 $199,898 100.00% $1,353 $176,103 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
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, 1998, and 1997, the Association's regulatory
liquidity ratio (liquid assets as a percentage of net withdrawable savings
deposits and current borrowings) was 15.0%, and 8.97%, respectively.
The Association has the authority to invest in various types of liquid
assets, including United States 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.
Investment Securities. At September 30, 1998, the Company's certificates
of deposit in other financial institutions totaled $4.4 million, or 2.0%, of
total assets and investment securities
23
<PAGE>
totaled $16.3 million, or 7.3% of total assets. As of such date, the Company
also had a $2.0 million investment in Federal Home Loan Bank ("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 following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government securities........................... $ 1,994 7.66% $ 3,965 15.17% $ 7,428 29.26%
Federal agency obligations........................... 13,495 51.84 8,999 34.42 9,254 36.44
Municipal bonds...................................... 813 3.12 908 3.47 1,615 6.36
------- ------ ------- ------ ------- ------
Subtotal.......................................... 16,302 62.62 13,872 53.06 18,297 72.06
FHLB stock............................................. 2,013 7.73 1,762 6.74 1,259 4.96
------- ------ ------- ------ ------- ------
Total investment securities $18,315 70.35 $15,634 59.80 $19,556 77.02
and FHLB stock................................... ======= ====== ======= ====== ======= ======
Average remaining life of investment securities,
excluding FHLB stock and equity securities........... 3.0 years 1.9 years 2.5 years
Other interest-earning assets:
Cash equivalents..................................... $ 3,319 12.75 $ 2,909 11.13% $ 3,333 13.13%
Certificates of deposit in other financial 4,400 16.90 7,600 29.07 2,500 9.85
institutions........................................ ------- ------ ------- ------ ------- ------
Total investment portfolio........................ $26,304 100.00% $26,143 100.00% $25,389 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
24
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock and equity securities, are indicated in the following
table.
<TABLE>
<CAPTION>
At September 30, 1998
--------------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government securities................ $1,994 -- $ 0 -- $ 1,994 $ 2,020
Federal agency obligations................ 3,000 8,995 1,500 -- 13,495 13,604
Municipal bonds........................... 101 452 260 -- 813 843
------ ------ ------ ---------- ------- -------
Total investment securities............... $5,095 $9,447 $1,760 -- $16,302 $16,467
====== ====== ====== ========== ======= =======
Weighted average yield.................... 6.02% 6.07% 5.91% --% 6.03%
</TABLE>
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, 1998 was $7,000. 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
<PAGE>
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 $15.0 million from the FHLB of Des Moines and repaid $13.0 million of
maturing advances during fiscal 1998 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, 1998, the Association
had $21.5 million of certificates of deposit with remaining maturities in excess
of five years.
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 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.
26
<PAGE>
The following table sets forth the savings flows at the Association during
the years indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in Thousands)
Opening balance............. $128,771 $123,108 $121,280
Deposits.................... 126,953 116,808 100,960
Withdrawals................. 124,073 115,789 103,883
Interest credited........... 4,971 4,644 4,751
-------- -------- --------
Ending balance.............. $136,622 $128,771 $123,108
======== ======== ========
Net increase................ $ 7,851 $ 5,663 $ 1.828
======== ======== ========
Percent increase............ 6.1% 4.6% 1.5%
======== ======== ========
</TABLE>
27
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
- ----------------------------------
Passbook accounts 3.25.......................... $ 10,777 7.9% $ 12,022 9.3% $ 11,179 9.1%
NOW accounts 0.00 - 3.00........................ 7,583 5.5 4,362 3.4 5,294 4.3
Money market accounts 3.00 - 4.89%.............. 8,971 6.6 5,871 4.6 7,494 6.1
-------- ----- -------- ----- -------- -----
Total non-certificates.......................... 27,331 20.0 22,255 17.3 23,967 19.5
-------- ----- -------- ----- -------- -----
Certificates:
- -------------
2.00 - 3.99%.................................. 5 -- 4 -- 4 --
4.00 - 5.99%.................................. 68,744 50.3 59,510 46.2 63,866 52.0
6.00 - 7.99%.................................. 38,530 28.2 44,962 34.9 33,182 27.0
8.00 - 9.99%.................................. 2,012 1.5 2,040 1.6 2,089 2.0
-------- ----- -------- ----- -------- -----
Total certificates.............................. 109,291 80.0 106,516 83.0 99,141 80.5
-------- ----- -------- ----- -------- -----
Total deposits.................................. $136,622 100.0% $128,771 100.0% $123,108 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
28
<PAGE>
The following table shows rate and maturity information for the
Association's certificates of deposit at September 30, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts 2.00- 4.00- 5.00- 6.00- 7.00- 8.00% Percent
maturing in 3.99% 4.99% 5.99% 6.99% 7.99% or greater Total of Total
quarter ending: ------ ------- ------- ------- ------ ---------- -------- --------
- --------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998......... $ 5 $ 153 $14,571 $ 960 $ 248 $ -- $ 15,937 14.58%
March 31, 1999............ -- -- 17,984 327 30 78 18,419 16.85
June 30, 1999............. -- 10,854 1,122 -- -- 11,976 10.96
September 30, 1999........ -- 9,744 1,129 20 271 11,164 10.22
December 31, 1999......... -- 3,010 744 2 246 4,002 3.66
March 31, 2000............ -- -- 3,232 244 447 393 4,316 3.95
June 30, 2000............. -- -- 1,289 256 798 239 2,582 2.36
September 30, 2000........ -- -- 1,791 543 1 216 2,551 2.33
December 31, 2000......... -- -- 1,027 654 8 152 1,841 1.69
March 31, 2001............ -- -- 1,842 371 19 149 2,381 2.18
June 30, 2001............. -- -- 414 338 159 46 957 0.88
September 30, 2001........ -- -- 280 899 137 -- 1,316 1.20
Thereafter................ -- -- 2,553 25,614 3,460 222 31,849 29.14%
------ ------- ------- ------- ------ ------- -------- ------
Total.................. $ 5 $ 153 $68,591 $33,201 $5,329 $ 2,012 $109,291 100.00%
====== ======= ======= ======= ====== ======= ======== ======
Percent of total....... 0.00% 0.14% 62.76% 30.38% 4.88% 1.84% 100.00%
</TABLE>
The following table indicates the amount of the Association's certificates
of deposit and other deposits by time remaining until maturity at September 30,
1998.
<TABLE>
<CAPTION>
Maturity
-------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- -----
<S> <C> <C> <C> <C> <C>
(Dollars In thousands)
Certificates of deposit less than $100,000... $14,144 $15,704 $20,123 $45,155 $ 95,126
Certificates of deposit of $100,000 or more.. 534 1,686 2,818 6,621 11,659
Public funds /(1)/........................... 1,259 1,029 199 19 2,506
------- ------- ------- ------- --------
Total certificates of deposit................ $15,937 $18,419 $23,140 $51,795 $109,291
======= ======= ======= ======= ========
</TABLE>
_______________
/(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 Moines, the
29
<PAGE>
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 $15.0 million under FHLB advances during 1998 to
fund loan originations and meet short term cash needs. The Association repaid
$13.0 million of maturing advances during 1998. Outstanding balances at
September 30, 1998 were $37.3 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.
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Maximum Balance
- ---------------
FHLB advances $40,250 $35,250
Average Balance
- ---------------
FHLB advances $37,250 $26,173
Years Ended September 30,
---------------------------
1998 1997
------- -------
(Dollars In Thousands)
FHLB advances $37,250 $35,250
======= =======
Weighted average interest rate 5.88% 6.02%
</TABLE>
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.
30
<PAGE>
At September 30, 1998, 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,
1998, the Association's investment in the Service Corporation was $329,000.
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.
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 February 23, 1998. 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, 1998, was
$61,000.
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 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
31
<PAGE>
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, 1998, Cameron Savings' lending limit under this
restriction was $5.5 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 adopted additional guidelines on asset quality and
earnings standards, which are designed to enhance early identification and
resolution of problems and problem assets.
INSURANCE OF DEPOSITS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures
deposits of banks and thrift institutions up to certain specified limits and
regulates such institutions for safety and soundness. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks, and the SAIF for savings associations such as the
Association and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund.
ASSESSMENTS. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time, and may decrease these rates if the target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
that law, the Association and other institutions with SAIF-insured deposits were
charged a one-time special assessment equal to $0.657 per $100 of assessable
deposits at March 31,1995. The Association recognized this special assessment as
a charge to noninterest expense of $800,000 (or $509,000 when adjusted for
taxes) during the year ended September 30, 1996. The assessment was fully
deductible for both federal and state income tax purposes. Assessment rates for
regular ongoing, deposit insurance premiums
32
<PAGE>
currently range from 0.0% of deposits for an institution in the highest category
(i.e., well-capitalized and financially sound, with no more than a few minor
weaknesses) to 0.27% of deposits for an institution in the lowest category
(i.e., undercapitalized and substantial supervisory consent). The Association's
assessment rate for deposit insurance was 0.23% of deposits for 1996, and it was
reduced to 0.0% of deposits beginning on January 1, 1997. The FDIC is authorized
to raise the assessment rates as necessary to maintain the required reserve
ratio of 1.25%, and both the BIF and the SAIF currently satisfy the reserve
ratio requirement. The annual rate of assessments on SAIF-assessable deposits
for the payments on the FICO bonds was 0.0648% for the semi-annual period
beginning on January 1, 1997; 0.0630% for the semi-annual period beginning on
July 1, 1997; and 0.0622% currently. The 1996 law also provides for the merger
of the SAIF and the BIF by 1999, but not until such time as bank and thrift
charters are combined. Until the charters are combined, savings associations
with SAIF deposits may not transfer deposits to the BIF without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
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 $85,000.
CAPITAL REQUIREMENTS.
The OTS capital regulations require savings institutions to meet three
capital standards: a 1.5% tangible capital standard, a 3.0% leverage (core
capital) standard, and an 8.0% risk-based capital standard. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, minority interests
in equity accounts of consolidated subsidiaries less intangibles other than
certain mortgage servicing rights ("MSRs") and purchased credit card
relationships. The OTS regulations require that, in meeting the tangible, core
and risk-based capital standards, institutions generally must deduct investments
in and loans to subsidiaries engaged in activities not permissible for a
national bank. In addition, the OTS prompt corrective action regulation provides
that a savings institution that has a leverage capital ratio of less than 4.0%
(3.0% for institutions receiving the highest CAMELS examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8.0%. In determining the amount of risk-
weighted assets, assets and certain off-balance sheet assets items are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3.0% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred
33
<PAGE>
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half
of the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. The
rule also provides that the Director of the OTS may waive or defer an
association's interest rate risk component on a case-by-case basis. The OTS has
postponed the effective date of the capital component in order to provide it
with an opportunity to review the interest rate risk approaches taken by the
other federal banking agencies.
At September 30, 1998, the Association had tangible capital of $34.8
million, or 16.2% of adjusted total assets, which is approximately $31.6 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date. At that date, Cameron Savings had core capital equal to $34.8 million, or
16.2% of adjusted total assets, which is $26.2 million above the minimum
leverage ratio requirement of 4% as in effect on that date. At that date,
Cameron Savings had total risk-based capital of $36.3 million (including $34.8
million in core capital and $1.5 million in qualifying supplementary capital)
and risk-weighted assets of $146.3 million (including $9.4 million in converted
off-balance sheet assets); or total capital of 24.8% of risk-weighted assets.
This amount was $24.6 million above the 8% requirement in effect on that date.
THRIFT CHARTER
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to national
or state bank charters. Legislation enacted in 1996 required the Treasury
Department to prepare for Congress a comprehensive study on development of a
common charter for federal savings associations and commercial banks; and
provided for the merger of the BIF and the SAIF into a single deposit insurance
fund on January 1, 1999 provided the thrift charter was eliminated. The
Association cannot determine whether, or in what form, such legislation may
eventually be enacted and there can be no assurance that any legislation that is
enacted would not adversely affect the Association and the Company.
34
<PAGE>
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
At September 30, 1998, the Association was categorized as "well
capitalized," meaning that the Association's total risk-based capital ratio
exceeded 10.0%, Tier I risk-based capital ratio exceeded 6.0%, leverage capital
ratio exceeded 5.0%, and the Association was not subject to a regulatory order,
agreement or directive to meet and maintain a specific capital level for any
capital measure.
DIVIDEND LIMITATIONS
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility given to well-capitalized associations. A savings
association which has total capital (immediately prior to and after giving
effect to the capital distribution) that is at least equal to its fully phased-
in capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An
association that has total capital at least equal to its minimum capital
requirements, but less than its capital requirements, would be a Tier 2
institution ("Tier 2 Institution"). An institution having total capital that is
less than its minimum capital requirements would be a Tier 3 institution ("Tier
3 Institution"). However, an institution which otherwise qualifies as a Tier 1
Institution may be designated by the OTS as a Tier 2 or Tier 3 Institution if
the OTS determines that the institution is "in need of more than normal
supervision." The Association is currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its
35
<PAGE>
net income over the most recent four-quarter period. Any additional amount of
capital distributions would require prior regulatory approval.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
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
4%.
Penalties may be imposed upon associations for violations of liquid asset
ratio requirement. At September 30, 1998, Cameron Savings was in compliance with
an overall liquid asset ratio of 15.0%.
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.
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate and
certain other assets). A savings association that fails the qualified thrift
lender test is subject to substantial restrictions on activities and to other
significant penalties.
36
<PAGE>
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10% of total assets, plus an additional 10%
for small business loans. Loans for personal, family and household purposes
(other than credit card, small business and educational loans) are now included
without limit with other assets that, in the aggregate, may account for up to
20% of total assets. The Association exceeded the applicable requirements at
September 30, 1998.
A savings association that fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities will be limited to
those of a national bank; (iii) it will not be eligible for any new FHLB
advances; and (iv) it will be bound by regulations applicable to national banks
regarding the payment of dividends. Three years after failing the QTL test, the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association, and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
COMMUNITY REINVESTMENT ACT
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.
37
<PAGE>
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. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to the other participating
employees.
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.
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."
38
<PAGE>
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 Securities and Exchange
Commission ("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, 1998, 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.
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.
39
<PAGE>
As a member, Cameron Savings is required to purchase and maintain stock in
the FHLB of Des Moines. At September 30, 1998, Cameron Savings had $2.0 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 7.33% and were 6.75% for
fiscal year 1998.
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, 1998, dividends paid by the FHLB of Des
Moines to the Association totaled $130,000, compared to $101,000 received in
fiscal year 1997.
FEDERAL TAXATION
GENERAL. The Company and the Association report their income on a fiscal
year basis using the accrual method of accounting and are subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Association's reserve for bad debts discussed below.
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to the
Association or the Company.
BAD DEBT RESERVE. Historically, savings institutions such as the
Association which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may have been deducted in arriving at their taxable income. The Association's
deductions with respect to "qualifying real property loans," which are generally
loans secured by certain interest in real property, were computed using an
amount based on the Association's actual loss experience, or a percentage equal
to 8% of the Association's taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Association's loss experience, the Association generally
recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). As of September 30, 1998,
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 $98,000 for this recapture. For taxable years
beginning after December 31, 1995, the Association's bad debt deduction will be
determined under the experience
40
<PAGE>
method using a formula based on actual bad debt experience over a period of
years or, if the Association is a "large" association (assets in excess of $500
million) on the basis of net charge-offs during the taxable year. The new rules
allow an institution to suspend bad debt reserve recapture for the 1996 and 1997
tax years if the institution's lending activity for those years is equal to or
greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase or home improvements loans are included and the institution can elect
to have the tax years with the highest and lowest lending activity removed from
the average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The unrecaptured base year reserves will not be subject to recapture as long as
the institution continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
DISTRIBUTIONS. To the extent that the Association makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Association's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Association's taxable income. Nondividend distributions
include distributions in excess of the Association's current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. However, dividend paid out of the
Association's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Association's bad debt reserve. The amount of additional taxable
income created from an Excess Distribution is an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, if the Association makes a "nondividend distribution," then approximately
one and one-half the times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). The Association does not presently intend
to pay dividends that wold result in a recapture of any portion of its tax bad
debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition, only 90%
of AMTI can be offset by net operating loss carryovers. AMTI is increased by an
amount equal to 75% of the amount by which the Association's adjusted current
earnings exceeds its AMTI (determined without regard to this preference and
prior to reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12% of
the excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Association, whether or not an Alternative Minimum
Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude form its income 100%
of dividends received from the Association as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from
41
<PAGE>
unaffiliated corporations with which the Company and the Association will not
file a consolidated tax return, except that if the Company or the Association
owns more than 20% of the stock of a corporation distributing a dividend, then
80% of any dividends received may be deducted.
AUDITS. The Association's federal income tax returns have not been audited
within the past five years.
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 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, 1998, the Association and its subsidiary had a total of 64
full-time employees and 7 part-time employees. None of the Association's
employees is represented by any collective bargaining group. Management
considers its employee relations to be good.
42
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY AND THE ASSOCIATION WHO ARE NOT DIRECTORS
RONALD W. HILL. Mr. Hill, age 49, 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 36, 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. Mr.
Hayward is also Branch Manager of the office in Liberty, Missouri.
EARL FRAZIER. Mr. Frazier, age 63, is currently the manager of the loan
production office in Liberty, Missouri. In that capacity, Mr. Frazier is
responsible for overseeing the lending 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. Mr. Frazier recently
notified the Association that he will retire effective January 31, 1999.
ITEM 2. DESCRIPTION OF PROPERTY
-----------------------
The Association operates from four full-service facilities. The
Association's new home office building on North Walnut Street in Cameron opened
for business on June 23, 1997. Construction and furnishings costs totaled
approximately $4.96 million.
43
<PAGE>
The new branch office in Liberty opened for business on August 17, 1998.
Construction and furnishings costs totaled approximately $2.2 million. The
following table sets forth certain information with respect to the offices of
the Association and its subsidiary at September 30, 1998.
<TABLE>
<CAPTION>
Approximate Net Book Value as
Date Square of September 30,
Location Acquired Title Footage 1998
- -------- -------- -------------- ----------- -----------------
<S> <C> <C> <C> <C>
Main Office 1993 Owned 25,942 $4,647,000
- -----------
1304 North Walnut Street
Cameron, MO
Branch Offices
- --------------
115 East Fourth Street 1994 Leased 1,311 N/A
Maryville, MO (expires 2003)
702 State Street 1992 Leased 900 N/A
Mound City, MO (expires
2000)/(1)/
1580 A Highway 1997 Owned 7,700 $1,993,000
Liberty, MO
Additional Property
- -------------------
309 North Main Street 1977 Owned 4,040 $ 56,000
Cameron, MO (2)
</TABLE>
________________
/(1)/ Subject to option to extend for three years.
(2) This property is currently vacant and this property is for sale.
The Association's accounting and record-keeping activities are maintained on-
line 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.
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,
1998.
44
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
--------------------------------------------------------------------
MATTERS
-------
Page 42 of the attached 1998 Annual Report to Shareholders is herein
incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Pages 3 to 4 of the attached 1998 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 17 of the attached 1998 Annual Report to Shareholders are
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Pages 18 through 41 of the attached 1998 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 25, 1999, 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 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 25, 1999, except for
information contained under the heading "Report of the
45
<PAGE>
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 25, 1999, 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 25, 1999, 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.
46
<PAGE>
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, 1998, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- --------
<S> <C>
Report of Independent Auditors........................................................ 18
Consolidated Balance Sheets at September 30, 1998 and 1997............................ 19
Consolidated Statements of Earnings for the Years ended September 30, 1998, 1997
and 1996............................................................................. 20
Consolidated Statements of Stockholders' Equity for the Years ended
September 30, 1998, 1997 and 1996................................................... 21
Consolidated Statements of Cash Flows for the Years ended September 30, 1998,
1997 and 1996....................................................................... 22-23
Notes to Consolidated Financial Statements............................................ 24-41
</TABLE>
(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.
47
<PAGE>
(a) (3) Exhibits:
-----------------
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- -------------------------------------- ---------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or succession
3.1 Certificate of Incorporation *
3.2 Bylaws ***
4 Instruments defining the rights of *
security holders, including indentures
9 Voting trust agreement None
10.1 Severance Agreements of David G. Just *
and Ronald Hill
10.2 Employee Stock Ownership Plan *
10.3 1995 Stock Option and Incentive Plan **
10.4 Recognition and Retention Plan **
10.5 Deferred Fee Agreement *
10.6 Director Emeritus Agreement *
10.7 Severance Agreement of Stephen D. 10.7
Hayward
11 Statement re: computation of per None
share earnings
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountant
48
<PAGE>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------- -------------------------------------- ---------------
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
___________________
/*/ 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.
*** Filed December 29, 1997, as exhibits to the Registrant's Form 10-K
Annual Report for the fiscal year ended September 30, 1997. Such previously
filed document is 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, 1998.
49
<PAGE>
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 29, 1998 By: /s/ David G. Just
_______________________________ _______________________________
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/ Dennis E. Marshall
--------------------------------- ---------------------------------
David G. Just, President Dennis E. Marshall
Chief Executive Officer and Director Director
Date: December 29, 1998 Date: December 29, 1998
------------------------------- -------------------------------
By: /s/ Kennith R. Baker By: /s/ William J. Heavner
--------------------------------- ---------------------------------
Kennith R. Baker, Secretary and William J. Heavner, Director
Director
Date: December 29, 1998 Date: December 29, 1998
------------------------------- -------------------------------
By: /s/ Harold D. Lee By: /s/ William F. Barker
--------------------------------- ---------------------------------
Harold D. Lee, Director William F. Barker, Director
Date: December 29, 1998 Date: December 29, 1998
-------------------------------- -------------------------------
<PAGE>
By: /s/ Jon N. Crouch By: /s/ Ronald W. Hill
---------------------------------- --------------------------------
Jon N. Crouch, Director Ronald W. Hill, Vice President,
Treasurer, and Chief Financial
Officer (Principal Financial and
Accounting Officer
Date: December 29, 1998 Date: December 29, 1998
--------------------------------- ------------------------------
<PAGE>
EXHIBIT 10.7
CHANGE IN CONTROL SEVERANCE AGREEMENT
-------------------------------------
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT ("Agreement") is made and
entered into as of this 27th day of March, 1998, by and between The Cameron
Savings & Loan Association, F.A., a federally chartered savings institution
(which, together with any successor thereto which executes and delivers the
assumption agreement provided for in Section 8(a) hereof or which otherwise
becomes bound by the terms and provisions of this Agreement by operation of law,
is hereinafter referred to as the "Association"), and Stephen D. Hayward (the
"Employee").
WHEREAS, the Employee is currently serving as Vice President and Director
of Lending of the Association; and
WHEREAS, The Association has converted to capital stock form (the
"Conversion") and become the wholly-owned subsidiary of Cameron Financial
Corporation (the "Holding Company"); and
WHEREAS, the Board of Directors of the Association recognizes that, as is
the case with publicly held corporations generally, the possibility of a change
in control of the Association or the Holding Company may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Association, the Holding Company and their
respective stockholders; and
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Company to enter into this Agreement with the Employee in
order to assure continuity of the management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee to the
Employee's assigned duties without distraction in the face of potentially
disruptive circumstances arising from the possibility of a change in control of
the Association or the Holding Company, although no such change is now
contemplated; and
WHEREAS, the Board of Directors intends that this Agreement shall not
create any right of continued employment on behalf of the Employee, nor shall
the Employee be entitled to any payments hereunder unless a Change in Control
(as defined herein) shall occur followed by the involuntary termination of the
Employee's employment; and
<PAGE>
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 1 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. TERM OF AGREEMENT
-----------------
The term of this Agreement shall be deemed to have commenced as of the date
this Agreement is signed and shall continue for a period of one year thereafter.
Commencing on the first anniversary of the Conversion Date and on each
anniversary thereafter, this Agreement shall be extended for a period of one
year in addition to the then-remaining term of employment under this Agreement,
unless either the Association or the Employee gives contrary written notice to
the other not less than 90 days in advance of the date on which the term of
employment under this Agreement would otherwise be extended, and provided that
-------------
no extension shall occur unless prior to each anniversary of the Conversion
Date, the Board of Directors of the Association has reviewed a formal evaluation
of the Employee's performance during the year preceding such anniversary
prepared by the disinterested members of the Board of Directors of the
Association and explicitly approved such extension of the term of this
Agreement.
2. PAYMENTS TO THE EMPLOYEE UPON CHANGE IN CONTROL
-----------------------------------------------
(a) Upon the occurrence of a Change in Control (as herein defined) of the
Association or the Holding Company followed at any time during the term of this
Agreement by the involuntary termination of the Employee's employment, other
than for cause, as defined in Section 2(d) hereof, the provisions of Section 3
shall apply.
(b) A "change in control" of the Association or the Holding Company shall
mean (1) any acquisition of control (other than by a trustee or other fiduciary
holding securities under an employee benefit plan of the Holding Company or a
subsidiary of the Holding Company), as defined in 12 C.F.R. (S) 574.4, or any
successor regulation, of the Association or Holding Company which would require
the filing of an application for acquisition of control or notice of change in
control in a manner as set forth in 12 C.F.R. (S) 574.3, or any successor
regulation; (2) the ownership, holding or power to vote more than 25% of the
Association's or Holding Company's voting stock; (3) the control of the election
of a majority of the Association's or Holding Company's directors; (4) the
exercise of a controlling influence over the management or
2
<PAGE>
policies of the Association or Holding Company by any person or by persons
acting as a "group" (within the meaning of Section 13(d) of the Securities
Exchange Act of 1934) (except in the case of (1), (2), (3) and (4), hereof,
ownership or control of the Association by the Holding Company itself shall not
constitute a "change in control"); or (5) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board of
Directors of the Association or Holding Company (the Continuing Directors")
cease for any reason to constitute at least two-thirds thereof, provided that
any individual whose election or nomination for election as a member of the
Association or Holding Company Board was approved by a vote of at least two-
thirds of the continuing Directors then in office shall be considered a
continuing Director. Notwithstanding the foregoing, a change in control shall
not be deemed to have occurred with respect to the purchase of shares by
underwriters in connection with a public offering.
(c) The Employee's employment under this Agreement may be terminated at any
time by the Board of Directors of the Association. The terms "involuntary
termination" or "involuntarily terminated" in this Agreement shall refer to the
termination of the employment of the Employee without the Employee's express
written consent. In addition, any of the following actions, shall constitute
involuntary termination of employment unless consented to in writing by the
Employee: (1) change in the principal workplace of the Employee to a location
outside of a 35 mile radius from the Association's headquarters office as of the
date hereof; (2) a material demotion of the Employee or material adverse change
in the salary, perquisites, benefits, contingent benefits or vacation time which
had theretofore been provided to the Employee, other than as part of an overall
program applied uniformly and with equitable effect to all members of the senior
management of the Association or the Holding Company; and (3) a material
permanent increase in the required hours of work or the workload of the
Employee.
(d) The Employee shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon termination for cause. For purposes of this
Agreement, termination for "cause" shall include termination for personal
dishonesty, incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any material law, rule, or regulation (other than a law, rule or
regulation relating to a traffic violation or similar offense) or final cease-
and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless and until there shall have been delivered
3
<PAGE>
to the Employee a copy of a resolution, duly adopted by the affirmative vote of
not less than a majority of the entire membership of the Board of Directors of
the Association at a meeting of the Board called and held for such purpose
(after reasonable notice to the Employee and an opportunity for the Employee,
together with the Employee's counsel, to be heard before the Board), stating
that in the good faith opinion of the Board the Employee was guilty of conduct
constituting "cause" as set forth above and specifying the particulars thereof
in detail.
3. TERMINATION BENEFITS
--------------------
(a) Upon the occurrence of a change in control, followed by the involuntary
termination of the Employee's employment, other than for cause, the Association
shall pay to the Employee in a lump sum in cash within 25 business days after
the date of severance of employment an amount equal to 100 percent of the
Employee's "base amount" of compensation, as defined in Section 280G(b)(3) of
the Internal Revenue Code of 1986, as amended ("Code").
(b) Upon the occurrence of a change in control of the Association or the
Holding Company followed by the involuntary termination of the Employee's
employment, other than for cause, the Association shall cause life and health
insurance coverage substantially similar to the coverage maintained by the
Association for the Employee immediately prior to such termination to be
maintained for a period of twelve (12) months or for the remaining term of this
Agreement, whichever is greater.
4. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCATION
-----------------------------------------------
Anything in this Agreement to the contrary notwithstanding, in the event
that the amount or amounts of any benefit or benefits payable to the Employee
under this Agreement or otherwise ("Benefits") are such that any portion of the
amount of Benefits would be non-deductible by the Holding Company or the
Association for Federal income tax purposes pursuant to Section 280G of the
Code, then the amount of Benefits shall be reduced to the amount, not less than
zero, which maximizes the amount of Benefits payable to the Employee without
causing any portion to be non-deductible by the Holding Company or the
Association pursuant to Section 280G of the Code. The Employee shall determine
the allocation of any such reduction among the Benefits.
5. REQUIRED REGULATORY PROVISIONS
------------------------------
(a) If the Employee is suspended from office and/or temporarily prohibited
from participating in the conduct of the Association's affairs by a notice
served under Section 8(e)(3)
4
<PAGE>
or (g)(1) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C. (S)
1818(e)(3) and (g)(1), the Association's obligations under this Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Association may in
its discretion (I) pay the Employee all or part of the compensation withheld
while its obligations under this Agreement were suspended, and (ii) reinstate in
whole or in part any of the obligations which were suspended.
(b) If the Employee is removed from office and/or permanently prohibited
from participating in the conduct of the Association's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. (S) 1818(e)(4) or
(g)(1), all obligations of the Association under this Agreement shall terminate,
as of the effective date of the order, but vested rights of the parties shall
not be affected.
(c) If the Association becomes in default (as defined in Section 3(x)(1) of
the FDIA), all obligations under this Agreement shall terminate as of the date
of default, but this provision shall not affect any vested rights of the
parties.
(d) All obligations under this Agreement may be terminated, except to the
extent determined that continuation of this Agreement is necessary for the
continued operation of the Association: (i) by the Director or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the Association under the authority contained in Section 13(c)
of the FDIA, or (ii) by the Director of the Office of Thrift Supervision
("Director") or his or her designee at the time the Director or his or her
designee approves a supervisory merger to resolve problems related to operation
of the Association or when the Association is determined by the Director to be
in an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by any such action.
(e) Any payments made to the Employee pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
(S) 1828(k) and any regulations promulgated thereunder.
6. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
5
<PAGE>
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
7. NO MITIGATION
-------------
The amount of any payment or benefit provided for in this Agreement shall
not be reduced by any compensation earned by the Employee as the result of
employment by another employer, by retirement benefits after the date of
termination or otherwise.
8. NO ASSIGNMENTS
--------------
(a) This Agreement is personal to each of the parties hereto, and neither
party may assign or delegate any of its rights or obligations hereunder without
first obtaining the written consent of the other party; provided, however, that
the Association will require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. Failure of the Association to obtain
such an assumption agreement prior to the effectiveness of any such succession
or assignment shall be a breach of this Agreement and shall entitle the Employee
to compensation from the Association in the same amount and on the same terms as
the compensation pursuant to Section 3 hereof. For purposes of implementing the
provisions of this Section 8(a), the date on which any such succession becomes
effective shall be deemed the date of termination or employment.
(b) This agreement and all rights of the Employee hereunder shall inure to
the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance
6
<PAGE>
with the terms of this Agreement to the Employee's devisee, legatee or other
designee or if there is no such designee, to the Employee's estate.
9. NOTICE
------
For the purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified mail, return
receipt requested, postage prepaid, addressed to the Association at its main
office to the attention of the Board of Directors of the Association with a copy
to the Secretary of the Association, or, if to the Employee, at such home or
other address as the Employee has most recently furnished in writing to the
company.
For the purposes of this Agreement, notices and all other communications
provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or sent by certified mail, return
receipt requested, postage prepaid, addressed to the Association at its main
office to the attention of the Board of Directors of the Association with a copy
to the Secretary of the Association, or, if to the Employee, at such home or
other address as the Employee has most recently furnished in writing to the
company.
10. AMENDMENTS
----------
No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
11. PARAGRAPH HEADINGS
------------------
The paragraph headings used in this Agreement are included solely for
convenience and shall not affect, or be used in connection with, the
interpretation of this agreement.
12. SEVERABILITY
------------
The provisions of this Agreement shall be deemed severable and the
invalidity or unenforceability of any provision shall not affect the validity or
enforceability of the other provisions hereof.
13. GOVERNING LAW
-------------
This agreement shall be governed by the laws of the United States to the
extent applicable and otherwise by the laws of the State of Missouri.
14. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration
7
<PAGE>
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction.
15. REIMBURSEMENT
-------------
In the event the Association purports to terminate the Employee for cause,
but it is determined by a court of competent jurisdiction or by an arbitrator
pursuant to Section 14 that cause did not exist for such termination, or if in
any event it is determined by any such court or arbitrator that the Association
has failed to make timely payment of any amounts owed to the Employee under this
Agreement, the Employee shall be entitled to reimbursement for all reasonable
costs, including attorney's fees, incurred in challenging such termination or
collecting such amounts. Such reimbursement shall be in addition to all rights
to which the Employee is otherwise entitled under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION, WHICH MAY BE
ENFORCED BY THE PARTIES.
THE CAMERON SAVINGS & LOAN
Attest: ASSOCIATION, F.A.
/s/ Kennith R. Baker By: /s/ David G. Just
- --------------------------------- ---------------------------
Secretary Its: Chairman
WITNESS: EMPLOYEE:
/s/ Karen Han /s/ Stephen D. Hayward
- --------------------------------- ---------------------------
Karen Han Stephen D. Hayward
8
<PAGE>
EXHIBIT 13
Cameron Financial Corporation
1998
Annual Report
<PAGE>
TABLE OF CONTENTS
Page
----
President's Message 1
General Information 2
Selected Consolidated Financial Information and Other Data of the Company 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 5
Consolidated Financial Statements 18
Stockholder Information 42
Corporate Information 43
<PAGE>
December 29, 1998
To our Stockholders:
The Board of Directors, management, and staff of Cameron Financial Corporation
and its wholly-owned subsidiary, The Cameron Savings & Loan Association, F.A.,
are pleased to present our fourth Annual Report.
The fiscal year ended September 30, 1998 was an exciting year. The Association
completed its first full year in the new home office building in Cameron,
Missouri. In August 1998, the Association opened a new full-service branch
office in Liberty, Missouri. The Loan Production Office in Liberty was then
closed. During September 1998, The Cameron Savings and Loan Service Corporation
opened Specialized Investments Division, a full-service brokerage office. These
developments will position the Association for future growth opportunities.
The 1998 fiscal year was also filled with challenges. Declining interest rates
with narrowing spreads, the related mortgage refinancing activity, and the
increased overhead of the new offices all contributed to a reduction of net
earnings to $2.3 million from $2.5 million reported from the previous year.
Diluted earnings per share were $0.95 for fiscal 1998 compared with $0.98 for
fiscal 1997. During the fiscal year, more than 181,000 shares of Cameron
Financial Corporation common stock were repurchased. Growth continued at a
slower pace than during the previous year. Assets increased $9 million to nearly
$222 million, net loans receivable increased nearly $8 million to over $184
million, and deposits increased nearly $8 million to over $136 million.
The Association is making progress in preparing for Year 2000. Year 2000
sensitive areas have been identified and categorized, testing is scheduled and
has commenced, with mission critical testing to be fully completed by the end of
May 1999. Contingency plans are being developed.
Your Board and management remain committed to building strong stockholder value.
We continue to be a financial institution that emphasizes family financial
relationships, and we are committed to our customers and to the communities we
serve.
Thank you for your investment in Cameron Financial Corporation. We are looking
forward to a long and prosperous relationship.
Sincerely,
David G. Just
President
1
<PAGE>
GENERAL INFORMATION
-------------------
Cameron Financial Corporation (the "Company") is a Delaware Corporation, which
is the holding company for The Cameron Savings & Loan Association, F.A. (the
"Association"). The Company was organized by the Association for the purpose of
acquiring all of the capital stock of the Association in connection with the
conversion of the Association from mutual to stock form, which was completed on
March 31, 1995 (the "Conversion"). The only significant assets of the Company
are the capital stock of the Association, the Company's loan to an employee
stock ownership plan, the branch office building in Liberty, Missouri, and
investment securities in United States government and agency obligations. The
business of the Company initially consists of the business of the Association.
The Association, 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. The Federal Deposit Insurance Corporation (FDIC)
insures its deposits up to the maximum allowable amount. The Association serves
the financial needs of its customers throughout northwestern Missouri through
its main office located at 1304 North Walnut, Cameron, Missouri, and three
branch offices located in Liberty, Maryville, and Mound City.
The Association 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 together with Federal Home Loan Bank (FHLB) advances 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, multifamily, and consumer
loans in its market area.
2
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATE OF THE COMPANY
------------------------------------------------------------
Set forth below are selected consolidated financial and other data of the
Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in the Annual Report.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
- ---------------------------------
Total assets $ 221,521 212,504 186,346 173,077 144,821
Loan receivable, net 184,605 176,790 154,444 129,740 113,981
Investment securities 16,309 13,882 18,310 26,490 16,329
Cash and cash equivalents 3,319 2,909 3,783 3,315 1,072
Certificates of deposit in other financial
institutions 4,400 7,600 2,500 8,611 10,221
Savings deposits 136,622 128,771 123,108 121,280 123,110
FHLB advances 37,250 35,250 12,250 -- --
Total stockholders' equity 43,473 44,667 46,815 48,727 19,267
Year ended September 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------
(In thousands, except share information)
SELECTED OPERATIONS DATA:
- ------------------------
Total interest income $ 17,057 15,989 13,921 12,289 10,662
Total interest expense 9,404 8,179 6,679 6,317 5,710
-------------------------------------------------------
Net interest income 7,653 7,810 7,242 5,972 4,952
Provision for loan losses (76) 285 368 120 252
-------------------------------------------------------
Net interest income after provision
for loan losses 7,729 7,525 6,874 5,852 4,700
-------------------------------------------------------
Loan fees and deposit service charges 235 162 130 131 136
(Loss) gain on sales of investment securities -- -- -- (4) 7
Other income 107 57 92 100 43
-------------------------------------------------------
Net noninterest income 342 219 222 227 186
-------------------------------------------------------
Total noninterest expense 4,390 3,670 3,772 2,503 2,443
-------------------------------------------------------
Earnings before income taxes 3,681 4,074 3,324 3,576 2,443
Income taxes 1,384 1,564 1,214 1,272 894
-------------------------------------------------------
Net earnings $ 2,297 2,510 2,110 2,304 1,549
=======================================================
Net earnings per share:
Basic $ 0.97 0.99 0.77 0.83 --
=======================================================
Diluted $ 0.95 0.98 0.77 0.83 --
=======================================================
</TABLE>
(Footnotes on the following page)
3
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended September 30,
--------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
- ----------------------------------------
Performance ratios:
<S> <C> <C> <C> <C> <C>
Return on assets (ratio of earnings to average
total assets) 1.05% 1.25 1.20 1.45 1.08
Return on equity (ratio of earnings to
average equity) 5.11 5.48 4.43 6.62 8.26
Interest rate spread (1):
Average during period 2.70 2.93 2.78 2.71 2.89
End of period 2.57 2.62 2.71 2.35 2.67
Net interest margin (2) 3.69 4.08 4.23 3.84 3.50
Dividend payout ratio 29.47 28.87 36.36 8.43 --
Ratio of noninterest expense to average total
assets 2.02 1.83 2.14 1.57 1.70
Ratio of noninterest income to average total
assets 0.16 0.11 0.13 0.14 0.13
Ratio of average interest-earning assets to
average interest-bearing liabilities 121.97 126.82 137.06 127.79 115.12
Asset quality ratios:
Nonperforming loans to total loans receivable
at end of period 1.52 0.58 0.84 0.92 0.97
Allowance for loan losses to nonperforming
loans 48.50 139.04 91.54 74.46 71.51
Allowance for loan losses to total loans
receivable 0.74 0.81 0.77 0.69 0.69
Nonperforming assets to total assets at end of
period 1.42 0.56 0.83 0.77 0.85
Classified assets to total assets (3) 5.32 5.06 4.15 2.26 2.93
Ratio of net charge-offs to average loans
receivable 0.015 0.008 0.006 0.002 0.01
Capital ratios: (4)
Equity to total assets at end of period 19.59 21.03 25.12 28.15 13.30
Average equity to average assets 20.61 22.88 27.06 21.96 13.06
Other data:
Number of full-service offices 4 4 3 3 3
Number of loan production offices 0 1 1 1 1
Real estate loan originations (in thousands) $ 105,220 95,088 92,606 64,257 54,474
</TABLE>
(1) Interest rate spread represents the difference between weighted average
yield on interest-earning assets and the weighted average rate on interest-
bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(3) Includes assets designated as Special Mention.
(4) For a discussion of the Association's regulatory capital ratios, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources."
4
<PAGE>
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF
----------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
GENERAL
- -------
Cameron Financial Corporation ("Cameron Financial" and, with its subsidiary, the
"Company") was formed in December 1994 by The Cameron Savings & Loan
Association, F. A. (the "Association") to become the holding company of the
Association. The acquisition of the Association by Cameron Financial was
consummated on March 31, 1995, in connection with the Association's conversion
from the mutual to stock form (the "Conversion"). All references to the Company
prior to March 31, 1995, except where otherwise indicated, are to the
Association and its subsidiary on a consolidated basis.
The Company's results of operation depend primarily on its level of net interest
income, which is the difference between interest earned on interest-earning
assets, consisting primarily of mortgage loans and other investments, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits
and FHLB advances. Net interest income is a function of the Company's "interest
rate spread," which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread is affected by regulatory, economic, and
competitive factors that influence interest rates, loan demand, and deposit
flows. The Company, like other financial institutions, is subject to interest-
rate risk to the degree that its interest-earning assets mature or reprice at
different times, or on a different basis, than its interest-bearing liabilities.
The Company's operating results are also affected by the amount of its
noninterest income, including loan fees and service charges and other income,
which includes commissions from sales of insurance by the Association's service
corporation. In September 1998, the Association's service corporation started a
full service brokerage service. This will allow the Association to compete with
other financial services companies. Noninterest expense consists primarily of
employee compensation, occupancy expense, data processing, federal insurance
premiums, advertising, real estate owned operations, and other operating
expense. The Company's operating results are significantly affected by general
economic and competitive conditions, in particular, changes in market interest
rates, government policies and actions by regulatory authorities.
FINANCIAL CONDITION
- -------------------
Total assets increased $9.0 million, or 4.24%, to $221.5 million at September
30, 1998 from $212.5 million at September 30, 1997. The increase was primarily
due to an increase in savings deposits of $7.9 million and an increase of $2.0
million in FHLB advances. These funds were used to finance a $7.8 million
increase in net loans receivable and an $1.5 million increase in fixed assets.
Net loans receivable increased by $7.8 million, or 4.42%, to $184.6 million at
September 30, 1998 from $176.8 million at September 30, 1997 due primarily to a
$10.6 million increase in one- to four-family permanent mortgage loans and a
$2.8 million increase in land loans, net of loans in process.
Investment securities, certificates of deposit in other financial institutions,
and cash equivalents decreased $360,000, or 1.48%, to $24.0 million at September
30, 1998 from $24.4 million at September 30, 1997.
Savings deposits increased $7.9 million, or 6.10%, to $136.6 million at
September 30, 1998 from $128.8 million at September 30, 1997. Of the $7.9
million increase in deposits, $4.3 million, or 54.5%, of the increase occurred
at the new home office in Cameron, Missouri. The new branch office in Liberty,
Missouri, which opened in August 1998, had deposits of $1.7 million in the first
six weeks of operations. FHLB advances increased $2.0 million, or 5.67%, to
$37.3 million at September 30, 1998 from $35.3 million at September 30, 1997.
Total stockholders' equity decreased $1.2 million, or 2.67%, to $43.5 million at
September 30, 1998 from $44.7 million at September 30, 1997. Earnings for the
year provided a $2.3 million increase, which was offset by the purchase of
181,346 shares of treasury stock for $3.7 million, the declaration of dividends
of $644,000, and the amortization of the Recognition and Retention Plan (RRP)
and unearned employee stock ownership plan (ESOP) shares.
5
<PAGE>
The Association's capital exceeds all of the capital requirements imposed by
FIRREA. OTS regulations provide that an institution that exceeds all capital
requirements before and after a proposed capital distribution and, like the
Association, has not been notified of a need for more than normal supervision
could, after prior notice, but without approval by OTS, make capital
distributions during the calendar year of up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over the capital requirement) at the
beginning of the calendar year. Any additional capital distribution would
require prior regulatory approval.
The Association declared and paid dividends to the Company of $2,128,000 in
fiscal year 1998. The Association has also notified OTS of its plan to declare
an additional $409,260 dividend to Cameron Financial in December 1998. Those
dividends approximate the Association's net income from July 1, 1997 through
September 30, 1998. These funds will be available to the Company to use for
stock repurchases, dividends to the Company's stockholders, and for other
corporate purposes.
RESULTS OF OPERATIONS
- ---------------------
The Company's results of operations depend primarily on the level of net
interest income and noninterest income and its control of operating expense. Net
interest income depends upon the volume of interest-earning assets and interest-
bearing liabilities and the interest rates earned or paid on them.
The Company's noninterest income consists primarily of fees charged on
transaction accounts and fees charged for delinquent payments received on
mortgage and consumer loans. In addition, noninterest income is derived from
activities of the Association's wholly-owned subsidiary, which engages in the
sale of various insurance and other investment products.
The schedule on the following page presents, for the periods indicated, the
total dollar amount of interest income from average interest-earning assets and
the resultant yields, as well as the total dollar amount of interest expense on
average interest-bearing liabilities and resultant rates. The average yields
include loan fees, which are considered adjustments to yield. The amount of
interest income resulting from recognition of loan fees was $516,000, $490,000,
and $397,000 for the years ended September 30, 1998, 1997, and 1996,
respectively. No tax-equivalent adjustments were made. All average balances are
monthly average balances. Management does not believe that the use of monthly
balances instead of daily balances has caused a material difference in the
information presented. Nonaccruing loans have been included as loans carrying a
zero yield.
6
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------------------------------------------
1998 1998
------------------------------------- -------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 180,671 15,523 8.59 % $ 167,051 14,535 8.70 %
Investment and mortgage-backed securities 15,553 951 6.11 15,707 976 6.21
Certificates of deposits 6,430 356 5.54 5,036 285 5.66
Other interest-bearing deposits 2,531 97 3.83 2,382 92 3.86
FHLB stock 1,936 130 6.71 1,454 101 6.95
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 207,121 17,057 8.24 191,630 15,989 8.34
----------- ----------- ----------- -----------
Noninterest-earning assets 11,115 8,659
----------- -----------
Total average assets $ 218,236 200,289
=========== ===========
Interest-bearing liabilities:
Passbook accounts $ 10,437 347 3.32 10,834 346 3.19
NOW and money market accounts 14,234 465 3.27 12,498 348 2.78
Certificates 107,814 6,342 5.88 101,596 5,889 5.80
FHLB advances 37,327 2,250 6.03 26,173 1,596 6.10
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities 169,812 9,404 5.54 151,101 8,179 5.41
----------- ----------- ----------- -----------
Noninterest-bearing liabilities 3,141 3,356
----------- -----------
Total average liabilities $ 172,953 154,457
=========== ===========
Net interest income $ 7,653 7,810
=========== ===========
Net interest rate spread (2) 2.70 % 2.93
=========== ===========
Net interest-earning assets $ 37,309 40,529
=========== ===========
Net interest margin (3) 3.69 % 4.08
=========== ===========
Average interest-earning assets to
average interest-bearing liabilities 121.97 % 126.82 %
=========== ===========
<CAPTION>
Years ended September 30,
------------------------------------
1996
-------------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 141,896 12,181 8.58 %
Investment and mortgage-backed securities 21,970 1,321 6.01
Certificates of deposits 3,525 225 6.38
Other interest-bearing deposits 2,572 103 4.00
FHLB stock 1,254 91 7.26
----------- ----------- -----------
Total interest-earning assets 171,217 13,921 8.13
----------- -----------
Noninterest-earning assets 4,954
-----------
Total average assets 176,171
===========
Interest-bearing liabilities:
Passbook accounts 10,710 348 3.25
NOW and money market accounts 12,915 364 2.82
Certificates 98,102 5,780 5.89
FHLB advances 3,192 187 5.86
----------- ----------- -----------
Total interest-bearing liabilities 124,919 6,679 5.35
----------- -----------
Noninterest-bearing liabilities 3,587
-----------
Total average liabilities 128,506
===========
Net interest income 7,242
===========
Net interest rate spread (2) 2.78
===========
Net interest-earning assets 46,298
===========
Net interest margin (3) 4.23
===========
Average interest-earning assets to
average interest-bearing liabilities 137.06
===========
</TABLE>
(1) Calculated net of deferred loan fees and discounts, loans in process, and
loss reserves.
(2) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
<PAGE>
The following schedule presents the weighted average yields earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on deposits and FHLB advances and the resultant interest rate spreads at
the dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1998 1997 1996
----------- ----------- -----------
Weighted average yield on:
<S> <C> <C> <C>
Loans receivable 8.35% 8.54 8.48
Investment securities 6.04 6.07 6.22
Certificates of deposit in other financial institutions 5.80 6.15 5.85
Other interest-bearing deposits 4.89 4.95 3.69
FHLB stock 6.75 7.00 7.25
Combined weighted average yield on interest-earning assets 8.06 8.22 8.11
----------- ----------- -----------
Weighted average rate paid on:
Passbook accounts 3.26% 3.25 6.25
NOW and money market accounts 3.58 3.16 2.84
Certificates 5.87 5.96 5.89
FHLB advances 5.88 6.02 6.09
Combined weighted average rate paid on interest-bearing
liabilities 5.49 5.60 5.40
----------- ----------- -----------
Spread 2.57% 2.62 2.71
=========== =========== ===========
</TABLE>
RATE/VOLUME ANALYSIS
- --------------------
The schedule on the following page represents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the change due
to changes in outstanding balances and those due to changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior interest rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the changes due to volume and the changes due
to rate.
8
<PAGE>
<TABLE>
<CAPTION>
Years ended September 30,
------------------------------------------
1998 vs. 1997
------------------------------------------
Increase
(decrease) Total
due to increase
volume Rate (decrease)
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 1,174 (186) 988
Investment securities (10) (15) (25)
Certificates of deposit in other financial
institutions 77 (6) 71
Other interest-bearing deposits 6 (1) 5
FHLB stock 32 (3) 29
------------ ------------ ------------
Total interest-earning assets 1,279 (211) 1,068
------------ ------------ ------------
Interest-bearing liabilities:
Passbook accounts (13) 14 1
NOW & money market accounts 52 65 117
Certificates 370 83 453
FHLB advances 671 (17) 654
------------ ------------ ------------
Total interest-bearing liabilities 1,080 145 1,225
------------ ------------ ------------
Net interest income $ 199 (356) (157)
============ ============ ============
<CAPTION>
Years ended September 30,
------------------------------------------
1997 vs. 1996
------------------------------------------
Increase
(decrease) Total
due to increase
volume Rate (decrease)
------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable 2,182 172 2,354
Investment securities (390) 45 (345)
Certificates of deposit in other financial
institutions 82 (22) 60
Other interest-bearing deposits (8) (3) (11)
FHLB stock 15 (5) 10
------------ ------------ -------------
Total interest-earning assets 1,881 187 2,068
------------ ------------ -------------
Interest-bearing liabilities:
Passbook accounts 4 (6) (2)
NOW & money market accounts (11) (5) (16)
Certificates 200 (91) 109
FHLB advances 1,393 16 1,409
------------ ------------ -------------
Total interest-bearing liabilities 1,586 (86) 1,500
------------ ------------ -------------
Net interest income 295 273 568
============ ============ =============
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- -------------------------------------------------------------------------------
General. Net earnings for the year ended September 30, 1998 decreased by
$213,000, or 8.49%, to $2.3 million, or $0.95 per diluted share, from $2.5
million, or $0.98 per diluted share, for the year ended September 30, 1997. The
increase was primarily due to the combined effects of a $157,000 decrease in net
interest income and a $720,000 increase in noninterest expense offset by a
$361,000 decrease in the provision for loan losses, a $123,000 increase in
noninterest income and a $180,000 decrease in income tax expense. For the years
ended September 30, 1998 and 1997, the return on average assets was 1.05% and
1.25%, respectively, while the return on average equity was 5.11% and 5.48%,
respectively.
NET INTEREST INCOME. For the year ended September 30, 1998, net interest income
decreased by $157,000 to $7.7 million from $7.8 million in 1997. This reflects
an increase of $1.1 million in interest income to $17.1 million from $16.0
million and an increase of $1.2 million in interest expense to $9.4 million from
$8.2 million. The increase in interest income was primarily due to an increase
in total interest-earning assets offsetting a decrease in average yields on
interest-earning assets. The increase in interest expense was due to increased
interest-bearing liabilities and the average rates paid on interest-bearing
liabilities.
INTEREST INCOME. Interest income for the year ended September 30, 1998 increased
$1.1 million to $17.1 million from $16.0 million for the year ended September
30, 1997. The $15.5 million increase in average interest-earning assets resulted
in an increase in interest income of $1.3 million. The decrease in average yield
on interest-earning assets decreased interest income by $211,000 in fiscal 1998.
9
<PAGE>
Interest income on loans increased $988,000, or 6.80%, to $15.5 million from
$14.5 million for the year ended September 30, 1997. Interest income on
investment securities, certificates of deposit, and other interest-bearing
deposits increased $80,000, or 5.50%, to $1.53 million from $1.45 million for
the year ended September 30, 1997. Interest income on loans increased due to
increased average balances in loans offsetting decreased average yields.
Increases in average balances of investment securities, certificates of deposit,
and other interest-bearing deposits offset decreased yields on those items.
INTEREST EXPENSE. Interest expense for the year ended September 30, 1998
increased $1.2 million to $9.4 million from $8.2 million for the year ended
September 30, 1997. The increase was due to increased average balances
outstanding on interest-bearing liabilities and slightly higher average rates
paid on those liabilities. Interest expense on FHLB advances increased to $2.3
million for the year ended September 30, 1998 from $1.6 million for the prior
year. The Association borrowed $15.0 million and repaid maturing advances of
$13.0 million in fiscal 1998 that resulted in FHLB advances of $37.3 million at
September 30, 1998 compared to $35.3 million at September 30, 1997.
PROVISION FOR LOAN LOSSES. The Association maintains a program for establishing
general loan loss reserves by classifying various components of the loan
portfolio by potential risk. Management reviews the composition of the loan
portfolio monthly and adjusts the valuation allowance. In addition, the Internal
Auditor reviews the general valuation allowance on a quarterly basis and reports
the findings to the Board of Directors. At September 30, 1998, the Association's
speculative construction loans of $30.3 million represented 14.7% of total loans
receivable. At September 30, 1997, the Association's speculative construction
loans of $40.2 million represented 20.1% of total loans receivable. The
reduction of $9.9 million, or 24.6%, in speculative construction loans during
the current year reduced considerably the risk profile of the Association's loan
portfolio. This reduction in risk in the overall loan portfolio allowed the
Association to credit earnings with a $76,000 negative provision for loan losses
during the current fiscal year. That compared to a charge of $285,000 for the
year ended September 30, 1997. This resulted in an allowance for loan losses of
$1.5 million, or 0.74%, of total loans receivable at September 30, 1998,
compared to 0.81% of total loans receivable at September 30, 1997. The fiscal
1998 net charge-offs totaled $27,000 and the net charge-offs for fiscal 1997
were $14,000.
The Association had $3.5 million in loans classified as substandard, doubtful or
loss at September 30, 1998, compared to $2.1 million at September 30, 1997. The
increase was almost entirely due to an increase in delinquent construction
loans. During fiscal 1998, the loan service officer was transferred to the loan
origination department and a new loan service officer was hired. In August 1998,
the new loan service officer resigned unexpectedly. A replacement was not able
to start until early November 1998. Due to the absence of qualified personnel
during that time period, loan delinquencies increased. One construction loan was
substandard at September 30, 1997, compared to eleven at September 30, 1998.
Since September 30, 1998, two of the eleven have been paid off, three have been
brought current on interest payments and three have signed real estate
contracts. Partial interest payments have been received on the remaining three
loans.
Management will continue to monitor its allowance for loan losses and make
future adjustments to the allowance through provision for loan losses as
economic conditions dictate. Although the Association maintains its allowance
for loan losses at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods.
10
<PAGE>
NONINTEREST INCOME. For the year ended September 30, 1998, noninterest income
was $342,000, compared to $219,000 for the year ended September 30, 1997. Loan
fees and deposit service charges, which consist primarily of late charges on
loans receivable, underwriting fees, service charges on transaction accounts,
and ATM fees, were $235,000 and $162,000 for fiscal 1998 and 1997, respectively.
Underwriting fees were $25,000 in fiscal 1998 with no similar fees in 1997. Late
charges on loans were $83,000 for fiscal 1998 compared to $76,000 for fiscal
1997. The increase is primarily due to the increase in the number of loans
outstanding. Service charges on transaction accounts were $108,000 and $74,000
for fiscal 1998 and 1997, respectively. The increase is due to increased
checking accounts that pay a flat monthly fee and increased number of items
returned on accounts. ATM fees were $9,000 and $2,000 for fiscal 1998 and 1997,
respectively. The Association's first two ATMs were installed in June 1997.
Currently, there are four installed. Gains on the sale of loans originated for
sale were $73,000 and $23,000 for fiscal 1998 and 1997, respectively. The
increase was primarily due to the increased numbers of loans sold in the current
year.
NONINTEREST EXPENSE. Noninterest expense increased $720,000, to $4.4 million,
for the year ended September 30, 1998 from $3.7 million for the prior year.
Compensation, payroll taxes, and fringe benefit expense increased $385,000 in
fiscal 1998 compared to 1997. Cash compensation increased $240,000 in fiscal
1998 to $1.7 million from $1.5 million in 1997. The increase was due to an
increase in the number of employees and raises to existing employees. There were
sixty-seven full-time equivalent employees at September 30, 1998 compared to
fifty-five at September 30, 1997. Payroll taxes and other fringe benefits
increased $86,000 due to the increased number of employees and increased
compensation. ESOP expenses increased to $528,000 for fiscal 1998 compared to
$465,000 for 1997. The increase was due to higher average monthly price for
shares of the Company's common stock in fiscal 1998 compared to fiscal 1997.
Occupancy expense increased $204,000 in fiscal 1998 to $622,000 from $418,000 in
1997. The increase was primarily due to increased depreciation and increased
taxes on the new home office opened in June 1997 and the new branch office
opened in August 1998. Depreciation also increased due to new equipment for the
new home and branch offices. Although occupancy expenses increased significantly
as a result of the two new offices, the deposits attributed to the new offices
also increased substantially. Data processing expenses increased $24,000 to
$192,000 for fiscal 1998 compared to $168,000 for fiscal 1997. The increase was
due to an increased number of accounts processed and increased charges for
additional on-line workstations. Federal insurance premiums decreased $35,000 to
$82,000 for fiscal 1998 compared to $117,000 for fiscal 1997. The decrease is
primarily due to reduced premiums after the special Savings Association
Insurance Fund (SAIF) assessment paid in 1997. Advertising expense increased
$2,000 to $148,000 for fiscal 1998 compared to $146,000 in fiscal 1997. Other
operating expense increased to $787,000 for fiscal 1998 compared to $649,000 in
fiscal 1997. The increase was primarily due to increased expenses for office
supplies, telephones, new checking accounts, and loan expense.
INCOME TAXES. Income taxes decreased to $1.4 million for fiscal 1998 from $1.6
million for fiscal 1997. The decrease was due to a decrease in taxable income
for 1998 compared to 1997. The effective tax rate for 1998 was 37.6%, compared
to 38.4% for 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------------------
General. Net earnings for the year ended September 30, 1997 increased by
$400,000, or 18.96%, to $2.5 million, or $0.97 per share, from $2.1 million, or
$0.77 per share, for the year ended September 30, 1996. The increase was
primarily due to the combined effects of a $600,000 increase in net interest
income, an $83,000 decrease in the provision for loan loss and a $102,000
decrease in noninterest expense offset by a $350,000 increase in income tax and
a $3,000 decrease in noninterest income. For the years ended September 30, 1997
and 1996, the return on average assets was 1.25% and 1.20%, respectively, while
the return on average equity was 5.48% and 4.43%, respectively.
NET INTEREST INCOME. For the year ended September 30, 1997, net interest income
increased by $600,000 to $7.8 million from $7.2 million for 1996. This reflects
an increase of $2.1 million in interest income to $16.0 million from $13.9
million and an increase of $1.5 million in interest expense to $8.2 million from
$6.7 million. The increase in interest income was primarily due to an increase
in total interest-earning assets and an increase in average yields on interest-
earning assets. The increase in interest expense was due to increased interest-
bearing liabilities.
11
<PAGE>
INTEREST INCOME. Interest income for the year ended September 30, 1997 increased
$2.1 million to $16.0 million from $13.9 million for the year ended September
30, 1996. The $20.4 million increase in average interest-earning assets resulted
in an increase in interest income of $1.9 million. The increase in average yield
on interest-earning assets provided $187,000 additional interest income in
fiscal 1997.
Interest income on loans increased $2.4 million, or 19.33%, to $14.5 million
from $12.2 million for the year ended September 30, 1996. Interest income on
investment securities, certificates of deposit, and other interest bearing
deposits decreased $285,000, or 16.4%, to $1.5 million from $1.7 million for the
year ended September 30, 1996. Interest income on loans increased due to
increased average balances and increased yields on those balances. Decreases in
average balances of investment securities, certificates of deposit, and other
interest bearing deposits offset increased yields on those items. This was the
result of the changing mix of assets with higher concentration of assets in
loans.
INTEREST EXPENSE. Interest expense for the year ended September 30, 1997
increased $1.5 million to $8.2 million from $6.7 million for the year ended
September 30, 1996. The increase was due to increased average balances
outstanding on interest-bearing liabilities. Depositors continued their
preference for higher rate certificates rather than lower rate passbook, NOW or
money market deposit accounts. Average balances in certificates of deposit
increased $3.5 million to $101.6 million for the year ended September 30, 1997
from $98.1 million for the prior fiscal year. Average passbook, NOW and money
market deposit account balances decreased $293,000 to $23.3 million for the
fiscal year ended September 30, 1997, from $23.6 million for the prior fiscal
year. Interest expense on FHLB advances increased to $1.6 million for the year
ended September 30, 1997 from $187,000 for the prior year. The Association
borrowed $26.0 million and repaid maturing advances of $3.0 million in fiscal
1997, which resulted in FHLB advances of $35.3 million at September 30, 1997
compared to $12.3 million at September 30, 1996.
PROVISION FOR LOAN LOSSES. The Association maintains a program for establishing
general loan loss reserves by classifying various components of the loan
portfolio by potential risk. Management reviews the composition of the loan
portfolio monthly and adjusts the valuation allowance. In addition, the Internal
Auditor reviews the general valuation allowance on a quarterly basis and reports
the findings to the Board of Directors. During the year ended September 30,
1997, the Association charged $285,000 against earnings as a provision for loan
losses compared to $368,000 for the year ended September 30, 1996. This resulted
in an allowance for loan losses of $1.6 million, or 0.81%, of total loans
receivable at September 30, 1997, compared to $1.4 million, or 0.77%, of total
loans receivable at September 30, 1996. The ratio was increased during fiscal
1997 due to increased consumer loans and construction loans. Consumer loans
increased to $8.7 million from $8.3 million and construction loans increased to
$51.4 million from $41.6 million. The fiscal 1997 net charge-offs against
general valuation allowances totaled $14,000 and the net charge-offs for fiscal
1996 were $9,000. While the Association has not experienced any significant
charge-offs in the past three years, the decision was made to increase the
allowance for loan losses based on a more refined evaluation process which, in
management's view, more fully recognizes the changing composition of the
Association's loan portfolio and the risk associated with different types of
loans.
The Association had $2.1 million in loans classified as substandard, doubtful or
loss at September 30, 1997, compared to $2.3 million at September 30, 1996.
12
<PAGE>
NONINTEREST INCOME. For the year ended September 30, 1997, noninterest income
was $219,000, compared to $222,000 for the year ended September 30, 1996. Loan
fees and deposit service charges, which consist primarily of late charges on
loans receivable and service charges on transaction accounts and ATM charges,
were $162,000 and $130,000 for fiscal 1997 and 1996, respectively. Late charges
on loans were $76,000 for fiscal 1997, compared to $61,000 for fiscal 1996. The
increase is primarily due to the increase in the number of loans outstanding.
Service charges on transaction accounts were $74,000 and $55,000 for fiscal 1997
and 1996, respectively. The increase is due to increase checking accounts that
pay a flat monthly fee and an increase in the fees charged for related items
such as return item charges. ATM fees, which were effective with the
installation of the Association's first two ATMs in the Cameron and Maryville
offices in June 1997, were $2,000. Commissions from insurance sales by the
Association's service corporation were $17,000 and $22,000 for fiscal 1997 and
1996, respectively. Gains on the sale of loans originated for sale were $23,000
and $17,000 for fiscal 1997 and 1996, respectively. A patronage dividend of
$8,000 was received in 1997 from a cooperative service bureau, compared to
$40,000 in 1996.
NONINTEREST EXPENSE. Noninterest expense decreased $102,000, or 2.7%, to $3.7
million for the year ended September 30, 1997 from $3.8 million for the year
ended September 30, 1996. Compensation, payroll taxes, and fringe benefits
expense increased $507,000 in fiscal 1997 compared to 1996. Expenses associated
with the RRP plan were $274,000 for fiscal 1997 compared to $186,000 for fiscal
1996. The plan was approved in January 1996 and was only in effect for a portion
of fiscal 1996. ESOP expenses increased to $465,000 for fiscal 1997 from
$426,000 for 1996. The increase was due to higher average monthly price for
shares of the Company's common stock in 1997 compared to 1996. Cash compensation
increased $312,000 in fiscal 1997 to $1.5 million from $1.2 million in 1996. The
increase was due to an increase in the number of employees and raises to
existing employees. There were fifty-five full-time equivalent employees at
September 30, 1997 compared to forty-five at September 30, 1996. Payroll taxes
and other fringe benefits increased $57,000 due to increased compensation and
payroll taxes due to the first year's vesting of the RRP. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 91, the Association
defers certain direct loan origination and modification costs and amortizes
these costs as adjustment to yield. The Association has deferred $15,000 less in
compensation costs for fiscal 1997 than 1996. Occupancy expense increased
$209,000 in fiscal 1997 to $418,000 from $209,000 in 1996. Of the $418,000 of
occupancy expense for the fiscal year, $170,000 was incurred in the quarter
ended September 30, 1997, the first full quarter the new home office was
occupied. The increase was primarily due to increased depreciation and increased
taxes on the new home office opened in June 1997. Depreciation also increased
due to new equipment for the new home office. Although occupancy expenses are up
significantly as a result of the new office in Cameron, the increase in deposits
attributed to the opening of the new office is also up substantially. Data
processing expenses increased $17,000 to $168,000 for fiscal 1997 compared to
$151,000 for fiscal 1996. The increase was due to the increased number of
accounts processed and increased charges for additional on-line workstations.
Federal insurance premiums decreased $965,000 to $117,000 from $1.1 million for
1996. The decrease was due to the special SAIF assessment of $800,000 in fiscal
1996. Advertising expenses increased $65,000 to $146,000 for fiscal 1997
compared to $81,000 for fiscal 1996. The increase was due primarily to increased
advertising for new deposit products and promotional items for the opening of
the new home office. Other operating expenses increased to $649,000 for fiscal
1997 from $585,000 in fiscal 1996. The increase was primarily due to increased
expenses for legal services, new checking accounts, office supplies, telephones,
and postage.
INCOME TAXES. Income taxes increased to $1.56 million for fiscal 1997 from $1.21
million in fiscal 1996. The increase was due to an increase in taxable income
for 1997 as compared to 1996. The effective tax rate for 1997 was 38.4%,
compared to 36.4% in 1996.
13
<PAGE>
ASSET AND LIABILITY MANAGEMENT INTEREST RATE SENSITIVITY ANALYSIS
- ------------------------------------------------------------------
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets are interest rate sensitive and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets and interest-
bearing liabilities maturing or repricing within a specific time period. A gap
is considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to positively affect
net interest income. During a period of falling interest rates, a negative gap
would tend to positively affect net interest income while a positive gap would
tend to negatively affect net interest income.
The Association's strategy in recent years has been to reduce its exposure to
interest rate risk by better matching the maturities or repricing schedules of
its interest rate sensitive assets and liabilities. This strategy has been
implemented by originating adjustable rate mortgage loans, short-term
construction loans, and other variable rate or short-term loans, as well as by
purchasing short-term investments. The Association seeks to lengthen the
maturities of its deposits by promoting longer-term certificates with
substantial penalties for early withdrawal. Maturities of new FHLB advances are
scheduled to compliment the current gap position. The Association does not
solicit negotiated high-rate jumbo certificates of deposit or brokered deposits.
At September 30, 1998, the Company's total interest-bearing liabilities maturing
or repricing within one year exceeded interest-earning assets maturing or
repricing in the same period by $1.2 million, representing a cumulative negative
one-year gap ratio of 0.5% to total assets. The Association has established an
Asset-Liability Management Committee (ALCO) which is responsible for reviewing
the Association's asset-liability policies. The ALCO meets monthly and reports
to the Board of Directors on interest rate risks and trends, as well as
liquidity and capital ratios and requirements.
MARKET RISK MANAGEMENT
- ----------------------
Market risk is the risk of loss arising from adverse changes in market prices
and rates. The Association's market risk is comprised primarily of interest rate
risk resulting from its core banking activities of lending and deposit taking.
Interest rate risk is the risk that changes in market interest rates might
adversely affect the Association's net interest income or the economic value of
its portfolio of assets, liabilities, and off-balance sheet contracts.
Management continually develops and applies strategies to mitigate this risk.
Management does not believe that the Association's primary market risk exposures
and how those exposures are managed in fiscal year 1998 have changed when
compared to fiscal year 1997. Market risk limits have been established by the
Board of Directors based on the Association's tolerance for risk.
The Association primarily relies on the OTS Net Portfolio Value (NPV) Model to
measure its susceptibility to interest rate changes. NPV is defined as the
present value of expected net cash flows from existing assets minus the present
value of expected net cash flows from existing liabilities plus or minus the
present value of net expected cash flows from existing off-balance sheet
contracts after various assumed instantaneous, parallel shifts in the yield
curve, both upward and downward.
The NPV model uses an option-based pricing approach to value one- to four-family
mortgages, mortgages serviced by or for others and firm commitments to buy,
sell, or originate mortgages. This approach makes use of an interest rate
simulation program to generate random interest rate paths that, in conjunction
with a prepayment model, are used to estimate mortgage cash flows. Prepayment
options and interest rate caps and floors contained in mortgages and mortgage-
related securities introduce significant uncertainty in estimating the timing of
cash flows for these instruments that warrant the use of this sophisticated
methodology.
14
<PAGE>
All other financial instruments are valued using a static discounted cash flow
method. Under this approach, the present value is determined by discounting the
cash flows the instrument is expected to generate by yields currently available
to investors from an instrument of comparable risk and duration.
The following table sets forth the present value estimates for major categories
of financial instruments of the Association at September 30, 1998, as calculated
by the OTS NPV model. The table shows the present value of the instruments under
rate shock scenarios of -300 basis points to +300 basis points in increments of
100 basis points.
<TABLE>
<CAPTION>
Present Value Estimates by Interest Rate Scenarios
At September 30, 1998
-300 bp -200 bp -100 bp 0 bp +100 bp +200 bp +300 bp
------------ ------------ ------------ ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans and securities $ 193,270 190,129 187,414 185,012 182,311 178,854 174,663
Nonmortgage loans 5,170 5,125 5,081 5,038 4,996 4,995 4,915
Cash, deposits, and securities 20,976 20,464 19,972 19,501 19,048 18,613 18,194
Other assets 9,732 9,832 9,954 10,219 10,788 11,515 12,196
------------ ------------ ------------ ----------- ----------- ----------- -----------
Total assets 229,148 225,550 222,421 219,770 217,143 213,977 209,968
------------ ------------ ------------ ----------- ----------- ----------- -----------
Deposits 148,698 145,630 142,729 139,980 137,384 134,923 132,586
Borrowings 44,853 43,016 41,303 39,704 38,210 36,813 35,506
Other liabilities 3,935 3,935 3,935 3,933 3,933 3,932 3,931
------------ ------------ ------------ ----------- ----------- ----------- -----------
Total liabilities 197,486 192,581 187,967 183,617 179,527 175,668 172,023
------------ ------------ ------------ ----------- ----------- ----------- -----------
Off-balance sheet positions 752 554 373 201 (3) (225) (537)
------------ ------------ ------------ ----------- ----------- ----------- -----------
Net portfolio value $ 32,414 33,523 34,827 36,354 37,613 38,084 37,408
============ ============ ============ =========== =========== =========== ===========
$ change from base $ (3,940) (2,831) (1,523) -- 1,259 1,660 1,054
============ ============ ============ =========== =========== =========== ===========
Percent change from base (11)% (8) (4) 0 3 5 3
Percent change - Board limit (25) (20) (10) 0 (10) (20) (30)
</TABLE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit runoffs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Association may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in both
the computation of NPV and in an analysis of the maturing and repricing of
interest-earning assets and interest-bearing liabilities. Although certain
assets and liabilities may have similar maturities or periods within which they
will reprice, they may react differently to changes in market interest rates.
Additionally, adjustable-rate mortgages have features that restrict changes in
interest rates on a short-term basis and over the life of the asset. The
proportion of adjustable-rate loans could be reduced in future periods if market
interest rates would decrease and remain at lower levels for a sustained period,
due to increased refinance activity. Further, in the event of a change in
interest rates, prepayment, and early withdrawal levels would likely deviate
significantly from those assumed in the table. Finally, the ability of many
borrowers to service their adjustable-rate debt may decrease in the event of a
sustained interest rate increase.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Association's primary sources of funds are deposits, repayments on and sale
of loans, FHLB advances, the maturity of investment securities, and interest
income. Although maturity and scheduled amortization of loans are relatively
predictable sources of funds, deposit flows and prepayments on loans are
influenced significantly by general interest rates, economic conditions, and
competition.
15
<PAGE>
The primary investing activity of the Association is the origination of loans to
be held for investment. For the fiscal years ended September 30, 1998 and 1997,
the Association originated loans for portfolio in the amounts of $102.6 million
and $97.9 million, respectively. Purchases of loans during the fiscal years
ended September 30, 1998 and 1997 were $66,000 and none, respectively. The
Association also originates loans for sale. For the fiscal years ended September
30, 1998 and 1997, the Association originated $7.9 million and $3.1 million,
respectively, of mortgage loans for sale. For the fiscal years ended September
30, 1998 and 1997, these activities were funded primarily by principal
repayments of $96.0 million and $74.1 million, respectively, proceeds from the
sale of loans of $8.0 million and $2.7 million, respectively, and FHLB advances
of $15.0 million and $26.0 million, respectively.
The Association is required to maintain minimum levels of liquid assets under
OTS regulations. Savings institutions are required to maintain an average daily
balance of liquid assets (including cash, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds, and specified U. S.
government, state or federal agency obligations) of not less than 4.0% of its
average daily balance of net withdrawable accounts plus short-term borrowings.
It is the Association's policy to maintain its liquidity portfolio in excess of
regulatory requirements. The Association's eligible liquidity ratios were 15.0%
and 8.97%, respectively, at September 30, 1998 and 1997.
The Company's most liquid assets are cash and cash equivalents, which include
short-term investments. The levels of these assets are dependent on the
operating, financing, lending and investment activities during any given period.
At September 30, 1998 and 1997, cash and cash equivalents were $3.3 million and
$2.9 million, respectively. The increase in cash and cash equivalents in 1998
compared to 1997 results primarily from sources of cash receipts and the use of
cash to fund loans and investments. The principal components of cash provided
during the fiscal year ended September 30, 1998 were FHLB advances and loan
repayments. Additional sources of cash included maturing investments, sales of
loans and deposit activity.
Liquidity management for the Company is both an ongoing and long-term function
of the asset/liability management strategy. Excess Association funds generally
are invested in overnight deposits at the FHLB of Des Moines. If the Association
requires funds beyond its ability to generate them internally, additional
sources of funds are available through FHLB of Des Moines advances. The
Association borrowed $15.0 million in FHLB advances and repaid $13.0 million of
maturing FHLB advances in fiscal year 1998. During 1997, the Association
borrowed $26.0 million in FHLB advances and repaid $3.0 million in maturing FHLB
advances. 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 of the investment securities portfolio
and total 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.
At September 30, 1998, the Association had outstanding loan commitments of $7.2
million, unused lines of credit of $3.0 million, and undisbursed loans in
process of approximately $19.7 million. The Association anticipates it will have
sufficient funds available to meet its current loan commitments, including loan
applications received and in process prior to issuance of firm commitments.
Certificates of deposit that are scheduled to mature in one year or less at
September 30, 1998 were $57.5 million. Management believes that a significant
portion of such deposits will remain with the Association.
At September 30, 1998, the Association had tangible capital of $34.8 million, or
16.2% of total adjusted assets, which is approximately $31.6 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date. The
Association had core capital of $34.8 million, or 16.2% of adjusted total
assets, which is $26.2 million above the minimum leverage ratio of 3.0% in
effect on that date. The Association had total risk-based capital of $36.3
million and total risk-weighted assets of $146.3 million, or total capital of
24.8% of risk-weighted assets. This was $24.6 million above the 8.0% requirement
in effect on that date.
16
<PAGE>
THE YEAR 2000 ISSUE
- -------------------
The Association has an ongoing program designed to ensure that its operational
and financial systems will not be adversely affected by Year 2000 software
failures, due to processing errors arising from calculations using the Year 2000
date. Should the Company's mission critical systems fail in the Year 2000, the
Company would have difficulty in processing transactions for loan and deposit
customers, which could cause significant damage to the Company's important
customer relationships.
The Association has completed assessment of its computer hardware Year 2000
compliance and testing of such hardware operating systems is approximately 95%
complete. The Association has three mission critical software areas: the
hardware operating system, the core (loan and deposit) processing system, and
the loan origination system. The hardware operating system currently in use is
acknowledged as Year 2000 compliant. A contract has been signed for a Year 2000
compliant core processing system with installation currently scheduled for May
1999. Proxy testing will be reviewed prior to conversion. A decision between two
Year 2000 compliant loan origination systems will be made in the near future.
Installation is anticipated in March 1999. Review of proxy testing will occur
prior to installation.
The Association is requiring its computer systems and software vendors to
represent that the products are, or will be, Year 2000 compliant. Major
suppliers and vendors have been requested to provide the Association with their
progress in becoming Year 2000 compliant. Responses and progress of vendors is
being monitored.
In fiscal 1998, Year 2000 costs did not exceed $100,000. Additional costs of
Year 2000 compliance are not expected to exceed $100,000 in fiscal 1999. This
estimate of costs to become Year 2000 compliant is exclusive of the estimated
$425,000 necessary to purchase the new core processing system and related
hardware. Since the decision to replace the core processing system and loan
origination system was made several years ago, costs of the new systems and
conversion are not included in Year 2000 compliance costs.
Contingency plans are being developed for noncompliant mission critical items
which continue to be updated and improved. Most of these contingency plans
involve development of manual procedures or use of alternative systems.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
- ----------------------------------------------
The Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in June 1997. SFAS No. 130 will require the
Company to classify items of other comprehensive income by their nature in the
consolidated financial statements and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the consolidated statement of stockholders'
equity. SFAS No. 131 requires that public enterprises report financial and
descriptive information about their reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by management. Both SFAS
No. 130 and SFAS No. 131 are effective for the Company's year ending September
30, 1999. The adoption of the standards is not expected to have a significant
impact on the consolidated financial statements of the Company.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in June 1998. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management believes adoption of SFAS No. 133 will not have
a material effect on the Company's financial position or results of operations,
nor will adoption require additional capital resources.
17
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cameron Financial Corporation:
We have audited the accompanying consolidated balance sheets of Cameron
Financial Corporation and subsidiary (the Company) as of September 30, 1998
and 1997 and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cameron
Financial Corporation and subsidiary as of September 30, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
November 12, 1998
18
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 3,319,000 2,909,000
Certificates of deposit in other financial institutions 4,400,000 7,600,000
Investment securities held-to-maturity (estimated fair value of
$16,467,000 in 1998 and $13,911,000 in 1997) (notes 3 and 6) 16,302,000 13,872,000
Mortgage-backed securities held-to-maturity 7,000 10,000
Loans receivable, net (notes 4 and 8) 184,605,000 176,790,000
Accrued interest receivable:
Loans and mortgage-backed securities 1,346,000 1,268,000
Investment securities 229,000 150,000
Office properties and equipment, net (note 5) 7,861,000 6,406,000
Stock in Federal Home Loan Bank (FHLB) of Des Moines, at cost 2,013,000 1,762,000
Deferred income taxes (note 8) 155,000 536,000
Other assets (note 9) 1,284,000 1,201,000
------------- -------------
$ 221,521,000 212,504,000
============= =============
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities:
Savings deposits (note 6) $ 136,622,000 128,771,000
Borrowings from the FHLB (note 7) 37,250,000 35,250,000
Advance payments by borrowers for property taxes and insurance 1,903,000 1,772,000
Accrued interest payable on savings deposits 180,000 137,000
Accrued expenses and other liabilities 1,901,000 1,506,000
Current income taxes payable 192,000 401,000
------------- -------------
Total liabilities 178,048,000 167,837,000
------------- -------------
Stockholders' equity (notes 1 and 2):
Serial preferred stock, $.01 par; 2,000,000 shares authorized; none
issued or outstanding -- --
Common stock, $.01 par; 10,000,000 shares authorized; 3,026,928 shares
issued 30,000 30,000
Additional paid-in capital 30,058,000 29,804,000
Retained earnings, substantially restricted (note 8) 26,220,000 24,567,000
Unearned employee benefits (note 9) (1,947,000) (2,524,000)
Treasury stock; 646,196 shares in 1998 and 464,850 shares in 1997
of common stock at cost (10,888,000) (7,210,000)
------------- -------------
Total stockholders' equity 43,473,000 44,667,000
Commitments (notes 4 and 11)
------------- -------------
$ 221,521,000 212,504,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended September 30
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans $ 15,523,000 14,535,000 12,181,000
Investment securities 950,000 975,000 1,319,000
Mortgage-backed securities 1,000 1,000 2,000
Certificates of deposit and other 583,000 478,000 419,000
------------ ---------- ----------
Total interest income 17,057,000 15,989,000 13,921,000
------------ ---------- ----------
Interest expense:
Savings deposits (note 6) 7,154,000 6,583,000 6,492,000
Borrowed money 2,250,000 1,596,000 187,000
------------ ---------- ----------
Total interest expense 9,404,000 8,179,000 6,679,000
------------ ---------- ----------
Net interest income 7,653,000 7,810,000 7,242,000
Provision for loan losses (note 4) (76,000) 285,000 368,000
------------ ---------- ----------
Net interest income after provision for loan losses 7,729,000 7,525,000 6,874,000
------------ ---------- ----------
Noninterest income:
Loan and deposit service charges 235,000 162,000 130,000
Other income 107,000 57,000 92,000
------------ ---------- ----------
Total noninterest income 342,000 219,000 222,000
------------ ---------- ----------
Noninterest expense:
Compensation, payroll taxes, and fringe benefits (note 9) 2,557,000 2,172,000 1,665,000
Occupancy expense 622,000 418,000 209,000
Data processing 192,000 168,000 151,000
Federal deposit insurance premiums (note 10) 82,000 117,000 1,082,000
Advertising 148,000 146,000 81,000
Other operating expenses 789,000 649,000 584,000
------------ ---------- ----------
Total noninterest expense 4,390,000 3,670,000 3,772,000
------------ ---------- ----------
Earnings before income taxes 3,681,000 4,074,000 3,324,000
Income taxes (note 8) 1,384,000 1,564,000 1,214,000
------------ ---------- ----------
Net earnings $ 2,297,000 2,510,000 2,110,000
============ ========== ==========
Earnings per share:
Basic $ .97 .99 .77
============ ========== ==========
Diluted $ .95 .98 .77
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended September 30
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
stock capital earnings
----------- --------- ----------
<S> <C> <C> <C>
Balance at September 30, 1995 $ 30,000 29,476,00 21,398,000
Adoption of Recognition and Retention Plan (RRP) (note 10) 1,000 1,398,00 --
Amortization of RRP, net of forfeitures -- -- --
Net earnings -- -- 2,110,000
Dividend declared ($.28 per share) -- -- (752,000)
Allocation of ESOP shares -- 124,00 --
Purchase 271,223 shares of treasury stock -- -- --
Retirement 93,975 shares of treasury stock (1,000) (1,376,00) --
----------- --------- ----------
Balance at September 30, 1996 30,000 29,622,00 22,756,000
Amortization of RRP, net of forfeitures -- -- --
Net earnings -- -- 2,510,000
Dividend declared ($.28 per share) -- -- (699,000)
Allocation of ESOP shares -- 182,00 --
Purchase 287,602 shares of treasury stock -- -- --
----------- --------- ----------
Balance at September 30, 1997 30,000 29,804,00 24,567,000
Amortization of RRP, net of forfeitures -- -- --
Net earnings -- -- 2,297,000
Dividend declared ($.28 per share) -- -- (644,000)
Allocation of ESOP shares -- 259,00 --
Purchase 181,346 shares of treasury stock -- -- --
Exercise of stock options to acquire 5,027 shares of common stock -- (5,000) --
----------- --------- ----------
Balance at September 30, 1998 $ 30,000 30,058,00 26,220,000
=========== ========= ==========
<CAPTION>
Unearned
employee Treasury
benefits stock Total
---------- ------------- -----------
<S> <C> <C> <C>
Balance at September 30, 1995 (2,177,000) -- 48,727,000
Adoption of Recognition and Retention Plan (RRP) (note 10) (1,399,000) -- --
Amortization of RRP, net of forfeitures 193,000 (7,000) 186,000
Net earnings -- -- 2,110,000
Dividend declared ($.28 per share) -- -- (752,000)
Allocation of ESOP shares 301,000 -- 425,000
Purchase 271,223 shares of treasury stock -- (3,881,000) (3,881,000)
Retirement 93,975 shares of treasury stock -- 1,377,000 --
---------- ------------- -----------
Balance at September 30, 1996 (3,082,000) (2,511,000) 46,815,000
Amortization of RRP, net of forfeitures 274,000 -- 274,000
Net earnings -- -- 2,510,000
Dividend declared ($.28 per share) -- -- (699,000)
Allocation of ESOP shares 284,000 -- 466,000
Purchase 287,602 shares of treasury stock -- (4,699,000) (4,699,000)
---------- ------------- -----------
Balance at September 30, 1997 (2,524,000) (7,210,000) 44,667,000
Amortization of RRP, net of forfeitures 309,000 (89,000) 220,000
Net earnings -- -- 2,297,000
Dividend declared ($.28 per share) -- -- (644,000)
Allocation of ESOP shares 268,000 -- 527,000
Purchase 181,346 shares of treasury stock -- (3,667,000) (3,667,000)
Exercise of stock options to acquire 5,027 shares of common stock -- 78,000 73,000
---------- ------------- -----------
Balance at September 30, 1998 (1,947,000) (10,888,000) 43,473,000
========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,297,000 2,510,000 2,110,000
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization 309,000 137,000 50,000
Provision for loan losses (76,000) 285,000 368,000
Provision for losses on real estate owned -- 3,000 --
Amortization of RRP and allocation of ESOP shares 747,000 740,000 611,000
Deferred income taxes 381,000 75,000 (403,000)
Gain on sales of real estate owned (8,000) (4,000) (3,000)
Stock dividend received on FHLB stock -- -- (24,000)
Amortization of deferred loan fees (499,000) (490,000) (397,000)
Proceeds from sales of loans held for sale 7,989,000 2,693,000 1,549,000
Origination of loans held for sale (7,976,000) (3,137,000) (1,450,000)
Gain on sale of loans held for sale (73,000) (23,000) (17,000)
Changes in assets and liabilities:
Accrued interest receivable (157,000) (122,000) (49,000)
Other assets (83,000) 68,000 333,000
Accrued interest payable 43,000 (4,000) (14,000)
Accrued expenses and other liabilities 417,000 (483,000) 1,003,000
Current income taxes payable (209,000) 87,000 24,000
------------ ----------- -----------
Net cash provided by operating activities 3,102,000 2,335,000 3,691,000
------------ ----------- -----------
Cash flows from investing activities:
Net increase in loans receivable (7,107,000) (21,673,000) (23,938,000)
Purchase of loans receivable (66,000) -- (882,000)
Mortgage-backed securities principal repayments 3,000 3,000 4,000
Maturities of investment securities held-to-maturity 11,595,000 6,456,000 12,751,000
Purchase of investment securities held-to-maturity (13,996,000) (2,000,000) (4,541,000)
Purchase of FHLB stock (251,000) (503,000) --
Net decrease in certificates of deposit in other
financial institutions -- -- 991,000
Net proceeds from sales of real estate owned -- -- 2,000
Additions and improvements to real estate owned -- -- (7,000)
Purchase of office properties and equipment, net (1,793,000) (3,700,000) (2,259,000)
------------ ----------- -----------
Net cash used in investing activities $(11,615,000) (21,417,000) (17,879,000)
------------ ----------- -----------
(Continued)
</TABLE>
22
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended September 30
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in NOW, passbook, and money
market demand amounts $ 5,076,000 (1,712,000) 139,000
Net increase in certificate accounts 2,775,000 7,375,000 1,689,000
Net increase in advance payments by borrowers
for taxes and insurance 131,000 43,000 101,000
Proceeds from FHLB advances 15,000,000 26,000,000 12,250,000
Repayment of FHLB advances (13,000,000) (3,000,000) --
Dividends paid (666,000) (699,000) (762,000)
Issuance of common stock under stock option plan 73,000 -- --
Purchase of treasury stock (3,666,000) (4,699,000) (3,881,000)
----------- ----------- -----------
Net cash provided by financing activities 5,723,000 23,308,000 9,536,000
----------- ----------- -----------
Net (decrease) increase in cash (2,790,000) 4,226,000 (4,652,000)
Cash and cash equivalents at beginning of year 10,509,000 6,283,000 10,935,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 7,719,000 10,509,000 6,283,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 1,216,000 1,401,000 1,594,000
=========== =========== ===========
Cash paid during the year for interest $ 9,361,000 8,168,000 6,505,000
=========== =========== ===========
Supplemental schedule of noncash investing and
financing activities:
Conversion of loans to real estate owned $ 244,000 -- 121,000
=========== =========== ===========
Conversion of real estate owned to loans $ 487,000 51,000 59,000
=========== =========== ===========
Dividends declared and payable $ 150,000 168,000 186,000
=========== =========== ===========
Issuance of unearned RRP shares $ -- -- 1,399,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(1) CONVERSION AND ACQUISITION OF THE ASSOCIATION BY THE COMPANY
Cameron Financial Corporation (the "Company") was incorporated in December
1994 for the purpose of becoming the savings and loan holding company of
The Cameron Savings & Loan Association, F.A. (the "Association") in
connection with the Association's conversion from a federally chartered
mutual savings and loan to a federally chartered stock savings and loan.
Pursuant to its Plan of Conversion, on March 31, 1995, the Company issued
and sold 3,026,928 shares of its common stock, in a subscription and
community offering to the Association's depositors and borrowers, the
Company's employee stock ownership plan and the general public. The Company
utilized a portion of the net proceeds to acquire all of the common stock
issued by the Association in connection with its conversion. The
acquisition of the Association by the Company was accounted for in a manner
similar to the pooling-of-interests method. Accordingly, the accounting
basis of the assets, liabilities, and equity accounts of the Association
remained the same as prior to the conversion and acquisition and were not
adjusted to their fair values, and no purchase accounting adjustments were
recorded. All intercompany accounts and transactions are eliminated in
consolidation.
In order to grant priority to eligible account holders in the event of
future liquidation, the Association, at the time of conversion, established
a liquidation account in the amount equal to the Association's capital as
of September 30, 1994 ($19,291,000). In the event of the future liquidation
of the Association, eligible account holders and supplemental eligible
account holders who continue to maintain their deposit accounts shall be
entitled to receive a distribution from the liquidation account. The total
amount of the liquidation account will be decreased as the balance of the
eligible account holders and supplemental eligible account holders is
reduced subsequent to the conversion, based on an annual determination of
such balances. The Association may not declare or pay a cash dividend to
the Company on, or repurchase any of its common stock if the effect thereof
would cause the retained earnings of the Association to be reduced below
the amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not restrict
the use or application of the Association's retained earnings.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, all short-term
investments with a maturity of three months or less at date of
purchase are considered cash equivalents. Cash and cash equivalents
reflected on the balance sheet include interest earning deposits of
$2,483,000 and $2,448,000 at SeptemberE30, 1998 and 1997,
respectively.
(Continued)
24
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(b) INVESTMENT SECURITIES
The Company and the Association classify their investment securities as
held-to-maturity, available-for-sale, or trading. Held-to-maturity
securities are recorded at amortized cost adjusted for amortization of
premiums and accretion of discounts that are recognized in income using
the interest method over the period to maturity. Available-for-sale and
trading securities are recorded at fair value. Adjustments to record
available-for-sale securities at fair value are reflected, net of tax,
in stockholders' equity. At September 30, 1998 and 1997, all of the
Company's and Association's investment and mortgage-backed securities
are classified as held-to-maturity.
Gain or loss on the sale of securities is recognized using the specific
identification method.
(c) PROVISIONS FOR LOSSES ON LOANS AND INTEREST RECEIVABLE
Provision for losses on loans receivable are based upon management's
estimate of the amount required to maintain an adequate allowance for
losses, relative to the risks in the loan portfolio. The estimate is
based on reviews of the portfolio, including assessment of the carrying
value of the loans to the estimated net realizable value of the related
underlying collateral, considering past loss experience, current
economic conditions and such other factors which, in the opinion of
management, deserve current recognition. The Association is subject to
the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities. As an integral part of
those examinations, the various regulatory agencies periodically review
the Association's allowance for loan losses. Such agencies may require
the Association to recognize changes to the allowance based on their
judgments about information available to them at the time of their
examination.
Accrual of interest income on loans is discontinued for those loans
with interest more than ninety days delinquent or sooner if management
believes collectibility of the interest is not probable. Management's
assessment of collectibility is primarily based on a comparison of the
estimated value of underlying collateral to the related loan and
accrued interest receivable balances.
A loan is considered impaired when it is probable a creditor will be
unable to collect all amounts due - both principal and interest -
according to the contractual terms of the loan agreement. When
measuring impairment, the expected future cash flows of an impaired
loan are required to be discounted at the loan's effective interest
rate. Impairment may also be measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement
method used, the Association measures impairment based on the fair
value of the collateral when the creditor determines foreclosure is
probable. Additionally, impairment of a restructured loan is measured
by discounting the total expected future cash flows at the loan's
effective rate of interest as stated in the original loan agreement.
The Association applies the methods described above to multifamily real
estate loans, commercial real estate loans, and restructured loans.
Smaller balance, homogeneous loans, including one- to four-family
residential and construction loans and consumer loans, are collectively
evaluated for impairment.
(Continued)
25
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(d) DEFERRED LOAN FEES AND COSTS
Mortgage loan origination fees and direct mortgage loan origination
costs are deferred and the net fee or cost is recognized in earnings
using the interest method over the contractual life of the loan. Direct
loan origination costs for other loans are expensed, as such costs are
not material in amount.
(e) LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or fair value. Net unrealized losses
are recognized through a valuation allowance by charges to income. At
September 30, 1998 and 1997, loans held for sale totaled $526,000 and
$466,000 respectively.
(f) REAL ESTATE OWNED
Real estate owned includes real estate acquired through, or in lieu of,
loan foreclosure and is carried at the lower of cost or estimated fair
value less estimated cost to sell. Revenue and expenses from operations
and the provision for losses on real estate owned are included in other
operating expense in the accompanying consolidated statements of
earnings.
(g) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are recorded at cost, less accumulated
depreciation. Depreciation is provided on office properties and
equipment using the straight-line method over the estimated useful
lives of the related assets.
(h) STOCK IN FEDERAL HOME LOAN BANK (FHLB)
The Association is a member of the FHLB system. As a member, the
Association is required to purchase and hold stock in the FHLB of Des
Moines in an amount equal to the greater of (a)E1% of unpaid
residential loans at the beginning of each year, (b) 5% of FHLB
advances, or (c)E.3% of total assets. The Association's investment in
such stock is recorded at cost.
(i) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the consolidated
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
(Continued)
26
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(j) EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share, in 1998. Pursuant to SFAS No. 128, the
Company has presented basic and diluted earnings per share. Basic
earnings per share exclude dilution and is computed by dividing net
income by the weighted average number of common shares outstanding.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. All previous periods have
been restated to conform to the requirement of SFAS No. 128.
The shares used in the calculation of basic and diluted earnings per
share are shown below:
For the years ended September 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
Average basic common shares outstanding 2,370,540 2,534,098 2,740,759
Common stock equivalents - stock options 45,021 20,564 --
--------- --------- ---------
Average diluted common shares outstanding 2,415,561 2,554,662 2,740,759
========= ========= =========
(k) USE OF ESTIMATES
Management of the Association has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(l) NEW ACCOUNT PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, Reporting Comprehensive Income, which requires entities
presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive
income consists of net earnings or loss for the current period and
other comprehensive income--expenses, gains, and losses that bypass the
statement of earnings and are reported in a separate component of
equity, i.e., unrealized gains and losses on certain investment
securities. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997.
The FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, in June 1998. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
(Continued)
27
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Management believes that the adoption of these accounting standards will not
significantly affect the Company's consolidated financial statements.
(3) INVESTMENT SECURITIES
A summary, by maturity dates, of investment securities held-to-maturity at
SeptemberE30, 1998 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized FAIR
cost gains losses VALUE
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
United States government and
agency obligations maturing
in less than one year $ 4,994,000 29,000 -- 5,023,000
United States government and
agency obligations maturing
after one year but within five
years 8,995,000 100,000 -- 9,095,000
United States government and
agency obligations maturing
after five years but within ten
years 1,500,000 6,000 -- 1,506,000
Privately issued bonds maturing in
2002 813,000 30,000 -- 843,000
-------------- --------------- -------------- --------------
Total $ 16,302,000 165,000 -- 16,467,000
============== =============== ============== ==============
</TABLE>
A summary, by maturity dates, of investment securities held-to-maturity at
SeptemberE30, 1997 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized FAIR
cost gains losses VALUE
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
United States government and
agency obligations maturing
in less than one year $ 3,483,000 14,000 (7,000) 3,490,000
United States government and
agency obligations maturing
after one year but within five
years 9,481,000 51,000 (19,000) 9,513,000
Privately issued bonds maturing in
2005 908,000 -- -- 908,000
--------------- -------------- -------------- --------------
Total $ 13,872,000 65,000 (26,000) 13,911,000
=============== ============== ============== ==============
</TABLE>
(Continued)
28
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(4) LOANS RECEIVABLE
Loans receivable at September 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Residential real estate loans:
<S> <C> <C> <C>
One- to four-family $ 133,890,000 123,390,000
Multifamily 2,943,000 4,226,000
Held for sale 526,000 466,000
Construction loans, primarily single family 45,654,000 51,447,000
Land 11,059,000 8,257,000
Commercial real estate 3,243,000 3,403,000
Consumer loans 9,241,000 8,709,000
----------------- -----------------
Total loans receivable 206,556,000 199,898,000
Less:
Loans in process 19,730,000 20,679,000
Deferred loans fees, net 700,000 805,000
Allowance for loan losses 1,521,000 1,624,000
----------------- -----------------
$ 184,605,000 176,790,000
================= =================
</TABLE>
The Association grants residential and commercial real estate and other
consumer and commercial loans primarily in its lending territory which
includes Clay, Platte, and Clinton Counties in Missouri and contiguous
counties. Although the Association has a diversified loan portfolio, a
substantial portion of its borrowers' ability to repay their loans is
dependent upon economic conditions in the Association's lending territory.
The Association makes contractual commitments to extend credit which are
subject to the Association's credit monitoring procedures. At SeptemberE30,
1998, the Association was committed to originate loans receivable
aggregating approximately $7,185,000, including fixed-rate loan commitments
of approximately $4,871,000 with interest rates ranging from 6.375% to 9.5%.
At September 30, 1998, commitments to sell loans were $526,000. There were
no commitments to buy loans.
At SeptemberE30, 1998 and 1997, the Association had loans of $597,000 and
$604,000, respectively, to various directors, officers and their families.
During 1998, $168,000 of new loans were made and repayments totaled
$175,000. These loans are made subject to the same interest rates and
underwriting standards used to originate loans to other borrowers of the
Association.
(Continued)
29
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The following is a summary of activity in the allowance for loan losses for
the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1,624,000 1,353,000 994,000
Provision for loan losses (76,000) 285,000 368,000
Charge-offs, net of recoveries (27,000) (14,000) (9,000)
-------------- ------------- ---------------
Balance at end of year $ 1,521,000 1,624,000 1,353,000
============== ============= ===============
</TABLE>
Loans delinquent ninety days or more at September 30, 1998 and 1997 were
approximately $3,136,000 and $1,010,000, respectively, including nonaccrual
loans of approximately $1,799,000 and $372,000, respectively. Interest that
would have been recognized on nonaccrual loans under their original terms
but for which an allowance has been established amounted to $92,000 and
$21,000 at SeptemberE30, 1998 and 1997, respectively. The amount that was
included in income on such loans was $62,000 and $13,000 for the years ended
September 30, 1998 and 1997, respectively. Impaired loans, exclusive of
nonaccrual loans, were insignificant in amount.
(5) OFFICE PROPERTIES AND EQUIPMENT
At SeptemberE30, 1998 and 1997, office properties and equipment consisted
of the following:
1998 1997
--------------- -------------
Land $ 1,270,000 1,278,000
Buildings and improvements 5,655,000 4,736,000
Furniture, fixtures, and equipment 1,479,000 649,000
Construction in progress -- 22,000
--------------- -------------
8,404,000 6,685,000
Less accumulated depreciation 543,000 279,000
--------------- -------------
$ 7,861,000 6,406,000
=============== =============
The Association completed construction on its new home office building in
Cameron, Missouri in June 1997. Total cost of the new building was
$4,619,000. In January 1997, the Company purchased a parcel of land for
$850,000 in Liberty, Missouri for the purpose of building a branch office,
which the Association leases as a branch location, and for the development
and sale of the adjoining lots. The construction costs of the new branch,
which was completed in August 1998, were $1,124,000.
(Continued)
30
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(6) SAVINGS DEPOSITS
Savings deposits at SeptemberE30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------
Rate Amount Percent Amount Percent
------------ ----------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance by interest rate:
NOW and super NOW accounts 0-3.00% $ 7,583,000 5.5% $ 4,362,000 3.4%
Passbook accounts 3.25 10,777,000 7.9 12,022,000 9.3
Money market demand accounts 3.00-4.89 8,971,000 6.6 5,871,000 4.6
-------------- -------- ------------- ------------
27,331,000 20.0 22,255,000 17.3
-------------- -------- ------------- ------------
Certificate accounts 0-3.99 5,000 -- 4,000 --
4.00-4.99 153,000 .1 208,000 .2
5.00-5.99 68,591,000 50.3 59,302,000 46.1
6.00-6.99 33,201,000 24.3 39,118,000 30.3
7.00-7.99 5,329,000 3.9 5,844,000 4.5
8.00-8.99 1,834,000 1.3 1,868,000 1.5
9.00 178,000 .1 172,000 .1
-------------- -------- ------------- ------------
109,291,000 80.0 106,516,000 82.7
-------------- -------- ------------- ------------
$136,622,000 100.0% $128,771,000 100.0%
============== ======== ============= ============
Weighted average interest rate on
savings deposits at September 30 5.35% 5.49%
======== ============
1998 1997
--------------------------- ---------------------------
Amount Percent Amount Percent
-------------- -------- ------------- ------------
Contractual maturity of certificate accounts:
Under 12 months $ 57,496,000 52.6% $ 58,586,000 55.0%
12 to 24 months 13,452,000 12.3 12,741,000 12.0
24 to 36 months 6,495,000 6.0 6,563,000 6.2
36 to 48 months 4,059,000 3.7 3,449,000 3.2
48 to 60 months 6,274,000 5.7 3,660,000 3.4
Over 60 months 21,515,000 19.7 21,517,000 20.2
------------ ----- ------------ -----
$109,291,000 100.0 $106,516,000 100.0
============ ===== ============ =====
</TABLE>
(Continued)
31
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The components of interest expense on savings deposits are as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C>
NOW, super NOW, passbook, and money market $ 810,000 696,000 691,000
Certificate accounts 6,344,000 5,887,000 5,801,000
-------------- -------------- --------------
$ 7,154,000 6,583,000 6,492,000
============== ============== ==============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $13,804,000 and $8,248,000 at SeptemberE30,
1998 and 1997, respectively. The amount by which individual certificates of
deposit exceed $100,000 are not insured by the Federal Deposit Insurance
Corporation (FDIC). The Association has pledged investment securities with
an amortized cost of approximately $5,090,000 and $3,795,000 at
SeptemberE30, 1998 and 1997, respectively, as additional security on certain
certificate accounts.
(7) FHLB ADVANCES
The Association had the following debt outstanding from the Federal Home
Loan Bank of Des Moines at September 30, 1998:
<TABLE>
<S> <C> <C>
$3,000,000 advance, interest at 6.070%, due January 1999 $ 3,000,000
$1,000,000 advance, interest at 6.75%, due July 1999 1,000,000
$2,000,000 advance, interest at 6.4%, due September 1999 2,000,000
$2,000,000 advance, interest at 6.19%, due January 2000 2,000,000
$5,000,000 advance, interest at 5.55%, due June 2000 5,000,000
$1,000,000 advance, interest at 6.46%, due October 2000 1,000,000
$1,250,000 advance, interest at 5.79%, due December 2000 1,250,000
$1,000,000 advance, interest at 6.36%, due January 2001 1,000,000
$1,000,000 advance, interest at 7.01%, due July 2001 1,000,000
$2,000,000 advance, interest at 6.49%, due December 2001 2,000,000
$1,000,000 advance, interest at 6.43%, due January 2002 1,000,000
$1,000,000 advance, interest at 6.61%, due October 2002 1,000,000
$1,000,000 advance, interest at 6.57%, due December 2002 1,000,000
$8,000,000 advance, interest at 5.42%, due January 23, 2008 8,000,000
$2,000,000 advance, interest at 5.13%, due April 30, 2008 2,000,000
$2,000,000 advance, interest at 5.40%, due April 30, 2008 2,000,000
$3,000,000 advance, interest at 5.63%, due April 30, 2008 3,000,000
----------------
$ 37,250,000
================
</TABLE>
The advances from the FHLB are collateralized by first mortgage loans.
(Continued)
32
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Scheduled maturities of FHLB advances are as follows:
Year ending September 30,
1999 $ 6,000,000
2000 9,250,000
2001 4,000,000
2002 3,000,000
2008 15,000,000
----------------
$ 37,250,000
================
(8) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Federal State Total
-------------- ------------ -------------
Year ended September 30, 1998:
<S> <C> <C> <C> <C>
Current $ 890,000 113,000 1,003,000
Deferred 338,000 43,000 381,000
-------------- ------------ -------------
$ 1,228,000 156,000 1,384,000
============== ============ =============
Year ended September 30, 1997:
Current $ 1,355,000 134,000 1,489,000
Deferred 42,000 33,000 75,000
-------------- ------------ -------------
$ 1,397,000 167,000 1,564,000
============== ============ =============
Year ended September 30, 1996:
Current $ 1,440,000 177,000 1,617,000
Deferred (351,000) (52,000) (403,000)
-------------- ------------ -------------
$ 1,089,000 125,000 1,214,000
============== ============ =============
</TABLE>
The reasons for the differences between the effective tax rates and the
expected federal income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
Percentage of earnings
before income taxes
----------------------------------------------
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Expected federal income tax rate 34.0% 34.0 34.0
State taxes, net of federal tax benefit 2.7 2.6 2.3
Other, net 0.9 1.8 0.1
------------- ----------- -----------
Effective income tax rate 37.6% 38.4 36.4
============= =========== ===========
</TABLE>
(Continued)
33
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities at SeptemberE30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C> <C>
Accrued compensation $ 298,000 305,000
Allowance for loan losses 506,000 548,000
Other 53,000 8,000
-------------- --------------
Deferred income tax asset 857,000 861,000
-------------- --------------
Loan origination fees, net of deferred costs (209,000) (40,000)
FHLB dividends (186,000) (186,000)
Accrued and prepaid expenses (20,000) (12,000)
Federal and state taxes related to reversing temporary differences (8,000) (56,000)
Accrued interest on loans originated prior to September 25, 1985 (14,000) (18,000)
Depreciation of fixed assets (265,000) (13,000)
-------------- --------------
Deferred income tax liability (702,000) (325,000)
-------------- --------------
Net deferred income tax asset, included in other
assets $ 155,000 536,000
============== ==============
</TABLE>
There was no valuation allowance for deferred tax assets at September 30,
1998 or 1997. Management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
Prior to 1996, savings institutions that met certain definitional tests and
other conditions prescribed by the Internal Revenue Code were allowed to
deduct, within limitations, a bad debt deduction under either of two
alternative methods: (i) a deduction based on a percentage of taxable income
(most recently 8%), or (ii) a deduction based upon actual loan loss
experience (the Experience Method). On August 20, 1996, the President signed
the Small Business Job Protection Act (the Act) into law. The Act repealed
the bad debt deduction based on a percentage of taxable income effective for
taxable years beginning after December 31, 1995. The Association, therefore,
will be limited to the use of the bad debt deduction computed under the
Experience Method for its year ended September 30, 1998, the first period
affected by the Act. The Association's base year tax bad debt reserve
balance of approximately $4.6 million as of September 30, 1998, will, in
future years, be subject to recapture in whole or in part upon the
occurrence of certain events, such as a distribution to stockholders in
excess of the Association's current and accumulated earnings and profits, a
redemption of shares or upon a partial or complete liquidation of the
Association. The Association does not intend to make distributions to
stockholders that would result in recapture of any portion of its base year
bad debt reserve. Since management intends to use the reserve only for the
purpose for which it was intended, a deferred tax liability of approximately
$1.6 million has not been recorded.
(Continued)
34
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(9) BENEFIT PLANS
PENSION AND RETIREMENT PLANS
The Association has a supplemental retirement plan to provide members of the
Board of Directors with supplemental retirement, disability, and death
benefits. The Plan provides benefits for directors or their beneficiaries
after they have completed service to the Association. The annual benefits
are equal to the number of years of service on the board times $500, paid
monthly for ten years following retirement. Expense under the plan for the
years ended SeptemberE30, 1998, 1997, and 1996 amounted to $40,000, $32,000,
and $29,000, respectively. The Association purchased life insurance policies
to fund its obligations under the plan in October 1994, which are included
in other assets.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
All employees meeting age and service requirements are eligible to
participate in an ESOP. Under the terms of the ESOP, contributions are
allocated to participants using a formula based upon compensation.
Participants vest over five years.
In connection with the conversion described in note 1, the ESOP purchased
242,154 shares of Company common stock. The remaining unamortized cost of
such shares purchased is reflected as unearned employee benefits in the
accompanying consolidated balance sheet. For the years ended September 30,
1998, 1997, and 1996, 27,226, 28,215, and 30,605 shares were allocated to
participants, respectively. The fair value of such shares, $527,000,
$466,000, and $425,000, respectively, were charged to expense. The fair
value of the remaining 131,742 unallocated shares at September 30, 1998,
1997, and 1996 aggregated $2,207,000, $3,060,000, and $2,761,000,
respectively.
STOCK OPTION AND RECOGNITION AND RETENTION PLAN
Under the RRP, common stock aggregating 121,077 shares may be awarded to
certain officers and directors of the Company or the Association. In January
1996, the Company awarded 95,675 shares with a market value of $1,399,000.
These shares have been reflected as unearned employee benefits in the
accompanying consolidated balance sheets. Participants vest over five years.
As the awards vest, they are reflected as compensation expense. The
amortization of the RRP awards during 1998 and 1997 was $309,000 and
$274,000, respectively. The unamortized cost of the RRP awards at September
30, 1998 and 1997 was $623,000 and $932,000, respectively.
Under the stock option plan, options to acquire 302,692 shares of the
Company's common stock may be granted to certain officers and directors of
the Company or the Association. In January 1996, the Company awarded options
to acquire 186,323 shares of stock. The options enable the recipients to
purchase stock at an exercise price equal to the fair market value of the
stock at the date of the grant ($14.56). The options vest over the five
years following the date of grant. No stock options were exercised by
recipients during 1997 and 1996. During 1998, options to acquire 5,027
shares were exercised.
(Continued)
35
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The Company applies APB 25 and related interpretations in accounting for the
stock option plan. Accordingly, no compensation expense has been recognized
in the accompanying consolidated financial statements. SFAS No. 123 requires
pro forma disclosures for companies that do not adopt its fair value method
of accounting for stock-based employee compensation. Accordingly, the
following pro forma information presents net income and earnings per share
as if the fair value method required by SFAS No. 123 had been used to
measure compensation cost for stock options granted.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C> <C>
Net income as reported $ 2,297,000 2,510,000
============= =============
Net income pro forma $ 2,247,000 2,460,000
============= =============
Basic earnings per share as reported $ .97 .99
============= =============
Basic earnings per share pro forma $ .95 .96
============= =============
</TABLE>
The fair value of options granted of $2.20 was estimated using the following
weighted-average information: risk-free interest rate of 5.5%, expected life
of four years, expected volatility of stock price of 6%, and expected
dividends of 1.5% per year.
(10) FEDERAL DEPOSIT INSURANCE PREMIUMS
The deposits of the Association are presently insured by the Savings
Association Insurance Fund (SAIF), which together with the Bank Insurance
Fund (BIF), are the two insurance funds administered by the FDIC. In the
third quarter of 1995, the FDIC lowered the premium schedule for BIF-insured
institutions in anticipation of the BIF achieving its statutory reserve
ratio. The reduced premium created a significant disparity in deposit
insurance expense, causing a competitive advantage for BIF members.
Legislation enacted on September 30, 1996 provided for a one-time special
assessment of .657% of the Association's SAIF insured deposits at March 31,
1995. The purpose of the assessment is to bring the SAIF to its statutory
reserve ratio. Based on the above formula, the Association's SAIF assessment
of $800,000 was recorded in the 1996 consolidated financial statements.
(11) REGULATORY CAPITAL REQUIREMENTS
The Financial Institution Reform, Recovery and Enforcement Act of 1989
(FIRREA) and the capital regulations of the OTS promulgated thereunder
require institutions to have a minimum regulatory tangible capital equal to
1.5% of total assets, a minimum 4% leverage capital ratio and a minimum 8%
risk-based capital ratio. These capital standards set forth in the capital
regulations must generally be no less stringent than the capital standards
applicable to national banks. FIRREA also specifies the required ratio of
housing-related assets in order to qualify as a savings institution.
(Continued)
36
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established additional capital requirements which require regulatory action
against depository institutions in one of the undercapitalized categories
defined in implementing regulations. Institutions such as the Association,
which are defined as well capitalized, must generally have a leverage (core)
capital ratio of at least 5%, a Tier 1 risk-based capital ratio of at least
6%, and a total risk-based capital ratio of at least 10%. FDICIA also
provides for increased supervision by federal regulatory agencies, increased
reporting requirements for insured depository institutions and other changes
in the legal and regulatory environment for such institutions.
The Association met all regulatory capital requirements at September 30,
1998, 1997, and 1996. The Association's actual and required capital amounts
and ratios as of September 30, 1998 were as follows:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
--------------------------- ---------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- --------- ---------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital
(to tangible assets) $ 34,826,000 16.23% $ 3,219,000 $ 1.50% -- -- %
Tier I leverage (core) capital
(to adjusted tangible assets) 34,826,000 16.23 8,584,000 4.00 10,730,000 5.00
Risk-based capital
(to risk-weighted assets) 36,344,000 24.83 11,709,000 8.00 14,636,000 10.00
Tier I leverage risk-based capital
(to risk-weighted assets) 34,826,000 23.79 -- -- 8,782,000 6.00
=============== ========= ================ ========== ============ =========
</TABLE>
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, and
SFAS No. 119, Disclosures About Derivative Financial Instruments and Fair
Value of Financial Instruments, require disclosure of estimated fair values
of financial instruments, both assets and liabilities recognized and not
recognized in the consolidated financial statements. Fair value estimates
have been made as of September 30, 1998 based on then current economic
conditions, risk characteristics of the various financial instruments, and
other subjective factors.
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Cash Equivalents and Certificates of Deposit
The carrying amounts approximate fair value because of the short maturity
of these instruments.
(Continued)
37
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Investment Securities and Mortgage-backed Securities
The fair values of investment securities and mortgage-backed securities
are estimated based on published bid prices or bid quotations received
from securities dealers.
Certificates of Deposit in Other Financial Institutions
The fair values of certificates of deposit are estimated based on the
static discounted cash flow approach using rates currently offered for
deposits of similar remaining maturities.
Loans Receivable
The fair values of loans receivable are estimated using the option-based
approach. Cash flows consist of scheduled principal, interest, and
prepaid principal. Loans with similar characteristics were aggregated for
purposes of these calculations.
Accrued Interest
The carrying amount of accrued interest is assumed to be its carrying
value because of the short-term nature of these items.
Stock in the FHLB
The carrying amount of such stock is estimated to approximate fair value.
Deposits
The fair values of deposits with no stated maturity are deemed to be
equivalent to amounts payable on demand. The fair values of certificates
of deposit are estimated based on the static discounted cash flow
approach using rates currently offered for deposits of similar remaining
maturities.
FHLB Advances
The fair values of FHLB advances are estimated based on discounted values
of contractual cash flows using the rates currently available to the
Association for advances of similar remaining maturities. The carrying
amount of the advances under the line of credit approximates fair value
due to the short maturity.
(Continued)
38
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Fair value estimates of the Association's financial instruments as of
September 30, 1998 are set forth below:
<TABLE>
<CAPTION>
Carrying Estimated
amount fair value
----------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents and certificates of deposit $ 7,719,000 7,719,000
================= =================
Investment securities $ 16,302,000 16,467,000
================= =================
Mortgage-backed securities $ 7,000 7,000
================= =================
Loans receivable, net of loans in process $ 184,605,000 186,725,000
================= =================
Accrued interest receivable $ 1,575,000 1,575,000
================= =================
Stock in the FHLB $ 2,013,000 2,013,000
================= =================
Deposits:
Money market and NOW deposits $ 16,554,000 16,554,000
Passbook accounts 10,777,000 10,777,000
Certificate accounts 109,291,000 112,130,000
----------------- -----------------
Total deposits $ 136,622,000 139,461,000
================= =================
FHLB advances $ 37,250,000 38,123,000
================= =================
Accrued interest payable $ 180,000 180,000
================= =================
</TABLE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Association's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Association's financial instruments, fair value estimates are
based on judgments regarding future loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.
(Continued)
39
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
(13) PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C> <C>
Cash and cash equivalents $ 2,924,000 2,143,000
Investment securities held-to-maturity 2,990,000 5,965,000
Investment in Association 34,826,000 34,186,000
ESOP loan receivable 1,453,000 1,695,000
Office properties and equipment, net 1,993,000 872,000
Accrued interest receivable 27,000 49,000
Other (42,000) 15,000
--------------- ----------------
Total assets $ 44,171,000 44,925,000
=============== ================
Dividends payable $ 150,000 179,000
Other liabilities 548,000 79,000
--------------- ----------------
Total liabilities 698,000 258,000
Stockholders' equity 43,473,000 44,667,000
--------------- ----------------
Total liabilities and stockholders' equity $ 44,171,000 44,925,000
=============== ================
</TABLE>
CONDENSED INCOME STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C> <C>
Dividend income $ 2,128,000 1,652,000
Interest income 565,000 753,000
Expense (293,000) (414,000)
--------------- --------------
Income before equity in undistributed
earnings of the Association 2,400,000 1,991,000
Equity in undistributed earnings of the Association (103,000) 519,000
--------------- --------------
Net income $ 2,297,000 2,510,000
=============== ==============
</TABLE>
(Continued)
40
<PAGE>
CAMERON FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1998 and 1997
Condensed Statements of Cash Flows
Years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
Cash provided by operations:
<S> <C> <C> <C>
Net earnings $ 2,297,000 2,510,000
Depreciation and amortization (29,000) (21,000)
Change in accrued interest receivable 22,000 (49,000)
Change in other assets 57,000 82,000
Change in other liabilities 469,000 38,000
Undistributed earnings of subsidiary, net 103,000 (519,000)
---------------- ----------------
Cash provided by operations 2,919,000 2,041,000
---------------- ----------------
Cash used by investing activities:
Proceeds from ESOP note receivable 242,000 242,000
Purchase of office properties and equipment (1,121,000) (872,000)
Maturities of investment securities held-to-maturity 3,000,000 3,500,000
---------------- ----------------
Cash provided by investing activities 2,121,000 2,870,000
---------------- ----------------
Cash provided by (used in) financing activities:
Purchase of treasury stock (3,666,000) (4,699,000)
Dividends paid (666,000) (699,000)
Issuance of common stock under stock option plan 73,000 --
---------------- ----------------
Cash used in financing activities (4,259,000) (5,398,000)
---------------- ----------------
Net (decrease) increase in cash $ 781,000 (487,000)
================ ================
Cash and cash equivalents at beginning of period $ 2,143,000 2,630,000
================ ================
Cash and cash equivalents at end of period $ 2,924,000 2,143,000
================ ================
</TABLE>
Dividends paid by the Company are primarily provided through Association
dividends paid to the Company. At September 30, 1998, the Company had
declared dividends of $160,000 which had not been paid as of year-end.
During 1998, the Association paid dividends of $2,128,000 to the Company.
41
<PAGE>
STOCKHOLDER INFORMATION
-----------------------
Annual Meeting
- --------------
The Annual Meeting of Stockholders will be held at 4:00 p.m., Cameron, Missouri
time, on January 25, 1999, in the Community Room of The Cameron Savings & Loan
Association, F.A., 1304 North Walnut Street, Cameron, Missouri 64429.
STOCK LISTING
- -------------
Cameron Financial Corporation common stock is traded on the National Association
of Securities Dealers, Inc. National Market under the symbol "CMRN."
PRICE RANGE OF COMMON STOCK
- ---------------------------
The per share price range of the common stock for each quarter during the last
three years was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1996 High Low Dividends
- -------------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
First Quarter $ 14.75 13.50 .07
Second Quarter 15.25 13.75 .07
Third Quarter 14.50 13.50 .07
Fourth Quarter 15.25 13.50 .07
FISCAL YEAR 1997
- --------------------
First Quarter 16.25 14.50 .07
Second Quarter 17.00 15.50 .07
Third Quarter 18.00 15.50 .07
Fourth Quarter 19.50 17.00 .07
FISCAL YEAR 1998
- --------------------
First Quarter 21.25 18.50 .07
Second Quarter 21.00 19.13 .07
Third Quarter 23.00 18.63 .07
Fourth Quarter 17.75 15.25 .07
</TABLE>
A $.07 per share dividend was declared by the Board of Directors on September
17, 1998, payable October 26, 1998 to stockholders of record on October 9, 1998.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc., Automated Quotation System.
At December 11, 1998, there were 2,215,732 shares of Cameron Financial
Corporation common stock issued and outstanding (including unallocated ESOP
shares) and there were 591 registered holders of record.
SHAREHOLDERS AND GENERAL INQUIRIES Transfer Agent
David G. Just, President Registrar and Transfer Co.
Cameron Financial Corporation 10 Commerce Drive
1304 North Walnut Street Cranford, New Jersey 07016
Cameron, Missouri 64429
(816) 632-2154
42
<PAGE>
ANNUAL AND OTHER REPORTS
- ------------------------
A copy of Cameron Financial Corporation's Annual Report on Form 10-K for the
year ended September 30, 1998, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting David G. Just,
President and Chief Executive Officer, Cameron Financial Corporation, 1304 North
Walnut Street, Cameron, Missouri 64429.
CORPORATE INFORMATION
---------------------
<TABLE>
<S> <C>
Company and Association Address
1304 North Walnut Street Telephone: (816) 632-2154
Cameron, Missouri 64429 Fax: (816) 632-2157
DIRECTORS OF THE BOARD
Harold D. Lee William J. Heavner
Chairman of Cameron Financial Owner, Red X Motors
Corporation, and
The Cameron Savings and Loan Jon N. Crouch
Association, F.A. Manager, Cameron Memorial Airport
Retired Owner, Lee Auto & Tractor Owner, Crouch Aviation
NAPA Dealership Retired Frontier and Continental
Airlines Captain
David G. Just
President of Cameron Financial William F. Barker, DDS
Corporation and Owner, Barker Dental Clinic
The Cameron Savings & Loan
Association, F.A. Dennis E. Marshall
Farmer
Kennith R. Baker
Agent, State Farm Insurance
CAMERON FINANCIAL CORPORATION EXECUTIVE OFFICERS
David G. Just Ronald W. Hill
President and Chief Executive Officer Vice President and Treasurer
THE CAMERON SAVINGS & LOAN ASSOCIATION, F.A. EXECUTIVE OFFICERS
David G. Just Ronald W. Hill
President and Chief Executive Officer Vice President and Treasurer
Stephen D. Hayward Earl T. Frazier
Vice-President, Director of Lending, Manager, Liberty Loan Department
Manager, Liberty Branch Office
INDEPENDENT AUDITORS Special Counsel
KPMG Peat Marwick LLP Luse, Lehman, Gorman, Pomerenk & Schick, PC
1000 Walnut, Suite 1600 5335 Wisconsin Avenue, N.W.
Post Office Box 13127 Suite 400
Kansas City, Missouri 64199 Washington, D.C. 20015
</TABLE>
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
PERCENTAGE OF INCORPORATION
PARENT SUBSIDIARY OWNERSHIP OR ORGANIZATION
- ------------------------------- ---------------------------- ------------- ---------------
<S> <C> <C> <C>
Cameron Financial Corporation The Cameron Savings & Loan 100% Federal
Association, F.A.
The Cameron Savings & Loan The Cameron Savings and 100% Missouri
Association, F.A. Loan Service Corporation
</TABLE>
<PAGE>
EXHIBIT 23
ACCOUNTANT'S CONSENT
The Board of Directors
Cameron Financial Corporation
We consent to incorporation by reference in the registration statements (Nos.
333-20563 and 333-20643) on Form S-8 of Cameron Financial Corporation of our
report dated November 12, 1998, relating to the consolidated balance sheets of
Cameron Financial Corporation and subsidiaries as of September 30, 1998 and
1997, and the related consolidated statements of earnings, stockholders' equity,
and cash flows for each of the years in the three-year period ended September
30, 1998, which report appears in the September 30, 1998 annual report on Form
10-K of Cameron Financial Corporation.
KPMG Peat Marwick LLP
Kansas City, Missouri
December 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 837,000
<INT-BEARING-DEPOSITS> 8,313,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 16,302,000
<INVESTMENTS-MARKET> 16,467,000
<LOANS> 186,126,000
<ALLOWANCE> 1,521,000
<TOTAL-ASSETS> 221,521,000
<DEPOSITS> 136,622,000
<SHORT-TERM> 37,250,000
<LIABILITIES-OTHER> 4,176,000
<LONG-TERM> 0
0
0
<COMMON> 30,000
<OTHER-SE> 43,443,000
<TOTAL-LIABILITIES-AND-EQUITY> 221,521,000
<INTEREST-LOAN> 15,523,000
<INTEREST-INVEST> 950,000
<INTEREST-OTHER> 584,000
<INTEREST-TOTAL> 17,057,000
<INTEREST-DEPOSIT> 7,154,000
<INTEREST-EXPENSE> 9,404,000
<INTEREST-INCOME-NET> 7,653,000
<LOAN-LOSSES> (76,000)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,390,000
<INCOME-PRETAX> 3,681,000
<INCOME-PRE-EXTRAORDINARY> 3,681,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,247,000
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.95
<YIELD-ACTUAL> 8.06
<LOANS-NON> 1,799,000
<LOANS-PAST> 1,337,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,667,000
<ALLOWANCE-OPEN> 1,624,000
<CHARGE-OFFS> 27,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,521,000
<ALLOWANCE-DOMESTIC> 1,521,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
