SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
0R
[ ] 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 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
SUITE 300, LB66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75248
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (214) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 1996, there were 300,000 shares of the Registrant's
common stock issued and outstanding.
BEAL FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements . . . . . . . . . . . . . . . . 1
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 2
PART II. OTHER INFORMATION
SIGNATURES
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
1996 JUNE 30,
(UNAUDITED) 1995
----------- ----------
ASSETS
Cash $ 253 $ 463
Interest bearing deposits 28,886 31,044
---------- ----------
Cash and cash equivalents 29,139 31,507
Accrued interest receivable 13,608 6,306
Securities available for sale 194,169 40,714
Net loans receivable 929,818 498,439
Less allowance for losses (10,101) (6,137)
---------- ----------
919,717 492,302
Loans held for sale - 866
Federal Home Loan Bank stock 6,152 7,475
Real estate held for investment or sale 66,989 41,212
Premises and equipment 6,811 7,324
Prepaid expenses and other assets 12,970 5,160
---------- ----------
$1,249,555 $ 632,866
---------- ----------
---------- ----------
LIABILITIES
Deposit accounts $1,003,999 $ 458,165
Federal Home Loan Bank advances 70,000 111,000
Senior notes, net 57,031 -
Other borrowings 21,521 4,898
Other liabilities 18,593 6,403
---------- ----------
Total Liabilities 1,171,144 580,466
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 2,400
Paid-In capital 2,740 640
Unrealized loss on available for
securities, net of tax benefit (335) -
Retained earnings 75,706 49,360
---------- ----------
Total Stockholders' Equity 78,411 52,400
---------- ----------
$1,249,555 $ 632,866
---------- ----------
---------- ----------
See notes to consolidated financial statements
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
Interest Income:
Loans, including fees $31,216 $11,738 $63,830 $29,458
Purchased discount accretion 11,147 3,829 27,579 12,407
Investment securities 3,085 1,088 5,700 1,769
Total interest income 45,448 16,655 97,109 43,634
Interest expense:
Deposits 14,363 3,598 32,608 8,396
Federal Home Loan Bank
advances and other borrowing 669 2,417 2,528 5,064
Senior notes, net 1,982 - 4,929 -
------- ------- ------- -------
Total interest expense 17,014 6,015 40,065 13,460
Net interest income before
provision for loan losses 28,434 10,640 57,044 30,174
Provision for loan losses 927 1,797 6,862 4,072
Net interest income after
provision for loan losses 27,507 8,843 50,182 26,102
Non interest income
Gain on sale of loans 1,385 2,725 5,398 6,570
Gain on sale of real estate 254 324 2,980 3,753
Gain on foreclosed assets 780 - 780 -
Other real estate operations, net 264 (245) 694 (238)
Other operating income 136 80 217 242
------- ------- ------- -------
Total non interest Income 2,819 2,884 10,069 10,327
Non interest expense
Salaries and employee benefits 1,910 1,216 6,223 3,584
Occupancy and equipment 564 209 1,480 566
SAIF deposit insurance premium 330 134 771 337
Loss on sales of mortgage backed - - - 10
Other operating expenses 1,828 1,604 6,677 3,990
------- ------- ------- -------
Total non interest expenses 4,632 3,163 15,151 8,487
------- ------- ------- -------
Income before income taxes 25,694 8,564 45,100 27,942
Income Taxes 9,205 3,380 16,229 10,387
------- ------- ------- -------
Net Income $16,489 $ 5,184 $28,871 $17,555
------- ------- ------- -------
------- ------- ------- -------
See notes to consolidated financial statements
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(in thousands)
NINE MONTHS
ENDED MARCH 31,
-----------------------
1996 1995
---------- ----------
Operating activities
Net income $ 28,871 $ 17,553
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,187 383
Accretion of purchased discount (27,579) (12,407)
Capitalized interest on real estate investments (482) -
Amortization of bond premium and underwriting costs 336 -
Provision for loan losses 6,862 4,072
Gain on sales of real estate (3,760) (3,820)
Gain on sales of loans (5,398) (5,793)
Gain on sales of investment securities-available 0 (788)
Changes in operating assets and liabilities
Accrued interest receivable (7,593) (2,554)
Prepaid expenses and other assets (4,502) (5,563)
Accrued interest payable-bonds 916 -
Other liabilities and accrued expenses 11,922 (2,114)
---------- ----------
Net cash provided by (used in)
operating activities 780 (11,031)
Investing activities
Proceeds from sales and principal collections of
investment securities-available for sale 6,910 41,373
Proceeds from sale of Federal Home Loan Bank stock 4,500 1,750
Proceeds from sales of loans 9,992 49,218
Proceeds from sales of real estate 8,229 7,638
Purchase of investment securities-available for sale (154,630) (40,585)
Purchase of Federal Home Loan Bank stock (3,177) (8,615)
Purchase of other investments (6,300) 0
Purchases of loans and bid deposits on loan purchases (516,024) (280,162)
Purchases of real estate held for investment or sale (17,118) (18,949)
Loan originations and advances, less loan collections 92,088 40,948
Purchases of property and equipment (1,070) (1,303)
---------- ----------
Net cash used in
investing activities (576,600) (208,687)
Financing activities
Net increase in deposit accounts 545,863 122,835
Net increase (decrease) in long-term debt 14,123 (330)
Net change in advances from the Federal Home Loan (41,000) 103,000
Proceeds from bond issue, net 54,491 0
Cash dividends paid (25) 0
---------- ----------
Net cash provided by
financing activities 573,452 225,505
---------- ----------
Increase (decrease) in cash and
cash equivalents (2,368) 5,787
Cash and cash equivalents at beginning of period 31,507 5,040
---------- ----------
Cash and cash equivalents at end of period $ 29,139 $ 10,827
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 35,254 $ 13,319
Income taxes 11,659 11,640
Supplemental disclosure of noncash investing and financing activities
Real estate acquired in foreclosure or in settlement of loans $ 13,147 $ 4,125
Assumption of majority stockholder's debt related to initial public offering 2,500 0
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with instructions to Form 10-Q and Rule 10-1
of Regulation S-X. The financial statements for the three months ended March
31, 1996 and 1995, and the nine months ended March 31, 1996 and 1995 are
unaudited and, in the opinion of management, include all adjustments
necessary (which consist of only normal recurring adjustments) for a fair
presentation of the financial position and results of operations for the
interim periods. The results of operations for the three and nine month
periods are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the consolidated financial
statements as of and for the year ended June 30, 1995 and footnotes thereto
included in the Beal Financial Corporation's ("BFC" or "Corporation")
registration statement filed with the Securities and Exchange Commission on
October 6, 1995.
NOTE B--INITIAL PUBLIC SENIOR NOTE OFFERING
On April 5, 1995, the Corporation filed an application with the Office of
Thrift Supervision for approval to acquire, indirectly, 100% of the
outstanding common stock of Beal Bank, SSB ("Bank") issued to the Bank's
current shareholders. The application was approved on June 29, 1995. In
connection with the acquisition of the Bank's common stock, the Corporation
assumed related indebtedness of $2.5 million from the majority stockholder.
This amount has been reflected in stockholder's equity as a charge to
retained earnings.
In July, 1995, the Corporation filed a registration statement with the
Securities and Exchange Commission relating to its initial public senior note
offering, pursuant to which, in August 1995, Senior Notes ("Senior Notes"
or "Notes") with an interest rate of 12.75%, payable semi-annually, due
August 15, 2000, were issued in the amount of $57.5 million. At the option
of the Corporation, the Notes may be redeemed, at any time on or after
August 15, 1996, in whole or in part, at redemption prices starting at 115%
of principal on August 15, 1996 thereafter declining until maturity of the
Notes. The Senior Notes were issued at a discount of $.5 million. The
discount is being accreted over the life of the Notes.
NOTE C--IMPAIRED LOANS
The Bank adopted SFAS 114 "Accounting by Creditors for Impairment of a Loan,"
and SFAS No. 118 Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure, as of July 1, 1995. SFAS No. 114 requires that
certain impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate. As a
practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loans is less than
the recorded investment in the loan, the impairment is recorded through a
valuation allowance. On collateral dependent loans, the Bank has adopted a
policy which requires measurement of an impaired loan based on the fair value
of the collateral. Other loan impairments will be measured on the present
value of expected future cash flows or the loan's observable market price.
-CONTINUED-
NOTE C--IMPAIRED LOANS CONTINUED
The Bank had previously measured the allowance for credit losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
July 1, 1995. At March 31, 1996, all significant impaired loans have been
determined to be collateral dependent and have been measured utilizing the
fair value of the collateral.
As of March 31, 1996, the Bank's recorded investment in impaired loans and
the related valuation allowance calculated under SFAS No. 114 are as follows:
RECORDED VALUATION
INVESTMENT ALLOWANCE
---------- ---------
Impaired loans-valuation allowance required $25,124 $1,913
No valuation allowance required 80,973 -
---------- ---------
Total impaired loans 106,097 $1,913
---------- ---------
---------- ---------
This valuation allowance is included in the allowance for loan losses on the
balance
The average recorded investment in impaired loans for the nine month period
ended March 31, 1996 was $93,587. The Bank had $151,899 in non performing
assets at March 31, 1996, of which $106,097 represented recorded investments
in impaired loans.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES", "ANTICIPATES",
"EXPECTS", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY
AS OF THE DATE HEREOF. THE CORPORATION UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY BE
MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
FINANCIAL CONDITION
Total assets increased $616.7 million or 97.4%, from $632.9 million at June
30, 1995 to $1.2 billion at March 31, 1996. The increase resulted primarily
from an increase in net loans receivable of $431.4 million and an increase in
securities available for sale of $153.5 million. The increase in net loans
receivable was due primarily to the Corporation being the successful bidder on
loan pools sold by various U.S. governmental agencies. The increase in
securities available for sale resulted from the purchase of mortgage backed
securities. In addition, real estate held for investment or sale increased
$25.8 million or 62.6%, from $41.2 million at June 30, 1995 to $67.0 million at
March 31, 1996. The increase was primarily due to the increased investment to
complete construction on three multi-family apartment projects which were
allocated low-income housing tax credits by the State of Texas.
Prepaid expenses and other assets increased $7.8 million. This increase
was primarily due to an increase of $2.8 million in underwriting and other
capitalized expenses related to the Senior Notes; a receivable of $2.0 million
due from the Department of Housing and Urban Development ("HUD") relating to a
recent loan purchase transaction with HUD and a receivable of $1.7 million from
the FDIC and others relating to loan purchases outstanding at March 31, 1996.
Cash and cash equivalents also decreased $2.4 million from $31.5 million at June
30, 1995 to $ 29.1 million at March 31, 1996.
Total liabilities increased $590.7 million, or 101.8% from $580.5 million
at June 30, 1995 to $1.2 billion at March 31, 1996, primarily due to the
issuance of the Senior Notes and increases in deposits, partially offset by a
decline in Federal Home Loan Bank ("FHLB") advances. Savings deposits increased
$545.8 million, or 119.1%, from $458.2 million at June 30, 1995 to $1.0 billion
at March 31, 1996. Of the $545.8 million net increase in savings deposits,
$215.7 million were generated by the sale of certificates of deposits through
various brokers and $190.8 million was due to deposits generated at the Bank's
branch located in Houston, Texas, which opened in April 1995. Advances from the
FHLB decreased by $41.0 million due to the increase in deposits and the proceeds
of the Corporation's Senior Notes offering.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
NET INCOME. For the nine months ended March 31, 1996, net income increased
$11.3 million, or 64.5% from the nine months ended March 31, 1995. As discussed
in more detail below, the $26.9 million increase in net interest income was
offset by a decrease in non-interest income of $258,000, an increase in the
provision for loan losses of $2.8 million, an increase in non-interest expense
of $6.7 million and an increase in income taxes of $5.8 million.
INTEREST INCOME. Interest income increased $53.5 million, or 122.6%, from
$43.6 million at March 31, 1995 to $97.1 million at March 31, 1996. Of the
total increase in interest income, $34.4 million was due to an increase in
interest income on loans receivable, $15.2 million was due to an increase in the
discount accretion and $3.9 million was due to an increase in interest on
investment securities. The increases in both the interest income on loans
receivable and discount accretion were primarily due to the increase in
discounted loans purchased and to a lesser extent, increased loan originations.
INTEREST EXPENSE. Interest expense increased $26.6 million, or 197.7%,
from $13.5 million at March 31, 1995 to $40.1 million at March 31, 1996. Of the
total increase in interest expense, $21.7 million was due to an increase in the
average balance of interest-bearing liabilities, and $4.9 million was due to
interest expense on the Senior Notes. The increase in average interest-bearing
liabilities was due to an increase in the average balance of deposits of $504
million which was partially offset by the decline in the average balance of FHLB
advances of $81.7 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as an amount sufficient to maintain the allowance for loan losses at
a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses increased $2.8 million, or 68.5% for the nine months
ended March 31, 1996 as compared to the same period last year. The majority of
this increase was the result of an increase in the outstanding balance of loans
receivable, however, $1.1 million was the result of an increase in a specific
reserve for an impaired loan.
The Corporation establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio as well as a specific
analysis of certain impaired loans. This analysis includes an evaluation of the
corporation's loan portfolio, past loan loss experience, current economic
conditions, loan volume and growth, composition of the loan portfolio and other
relevant factors. Management's analysis results in the establishment of
allowance amounts by loan type based on allocations by asset classification.
The allowance for loan losses as a percentage of net non-performing loans was
7.51 % at March 31, 1996 as compared to 17.1 % at June 30, 1995. The primary
reason for the decline in this ratio was due to the purchase of $132.6
million, (net) of multi-family non-performing loans. Management believes
that the underlying collateral value is sufficient to cover the Bank's basis
in these loans.
Although management believes that it uses the best information available
to determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Corporation's allowance will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted with absolute certainty in advance. In addition, regulatory
agencies, as an integral part of the examination process, periodically review
the Corporation's allowance for loan losses. Such agencies may require the
Corporation to recognize additions to the allowance level based upon their
judgment of the information available to them at the time of their
examination.
NON-INTEREST INCOME. Total non-interest income decreased $258,000, or
2.5% to $10.1 million at March 31, 1996 from $10.3 million at March 31, 1995.
This decrease was primarily due to a decrease in the income attributable to
the sale of loans of $1.2 million and a decrease in the gain on the sale of
real estate of $773,000, offset by an increase in gain on foreclosed assets
of $780,000 and an increase of $932,000 in other real estate operations, net.
Other real estate operations income, net, increased primarily due to an
increase of $683,000 in real estate investment income. During the nine month
period ending March 31, 1996, the Corporation increased its earnings on real
estate investments primarily due to the operations of two office buildings
and three low income multi-family housing developments. The increase of
$780,000 in gain on foreclosed assets was primarily due to an increase in
foreclosures which are recorded at their fair value at the date of
repossession.
During the three month period ended March 31, 1996, the Corporation
discontinued the home improvement loan origination operations of Beal
Acceptance Corporation, a wholly owned subsidiary of the Bank. The
Corporation does not anticipate a material effect on operations as a result
of this action.
NON-INTEREST EXPENSE. Non-interest expense increased $6.7 million, or
78.5%, from $8.5 million at March 31, 1995 to $15.2 million for the same
period in fiscal 1996 primarily due to an increase in salaries and employee
benefits of $2.6 million and an increase in other operating expenses of $2.7
million. The increases in other operating expenses, primarily due to the
Corporation's purchasing activities and resultant increase in asset size were
principally legal expenses, $1.1 million; loan acquisition and origination
expenses, $649,000; loan servicing expenses, $524,000; audit expenses,
$152,000; and marketing expenses, $110,000. The increase of $2.6 million in
salaries and employee benefits was due to the addition of 60 full-time
equivalent employees, reflecting the Corporation's increased asset size, and
an increase in annual bonuses of $438,300. Total full-time equivalent
employees at March 31, 1996 were 125
compared to 65 at March 31, 1995. In addition, occupancy expense increased
$914,000. Lastly, deposit insurance premiums increased $434,000 due to the
Corporation's deposit growth.
The deposits of some financial institutions, such as the Bank are
presently insured by the Savings Association Insurance Fund ("SAIF"), which,
along with the Bank Insurance Fund ("BIF"), is one of the two insurance funds
administered by the Federal Deposit Insurance Corporation ("FDIC"). A
recapitalization plan for the SAIF under consideration by Congress provides
for a special assessment of 0.80% to 0.90% of deposits as of March 31, 1995
which would be imposed on insured deposits of all SAIF insured institutions.
The effect of this assessment as proposed would amount to approximately $2.5
million to $2.8 million, before taxes. This special assessment would
significantly increase non-interest expense and adversely effect the
Corporation's results of operation. The Corporation has not recorded any
effect to date due to the uncertainty of pending legislation. Further,
depending upon the Bank's capital level and supervisory rating, and assuming
the insurance premium levels for BIF and SAIF members are again equalized,
future deposit insurance premiums are expected to decrease significantly from
the current level of .23% to as low as $2,000 per year, which would reduce
non-interest expense for future periods.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NET INCOME. For the three months ended March 31, 1996, net income
increased $11.3 million, or 218.1%, from $5.2 million at March 31, 1995 to
$16.5 million at March 31, 1996. As discussed in more detail below, the
$17.8 million increase in net interest income and the $870,000 decrease in
the provision for loan losses were partially offset by an increase of $1.5
million in non-interest expense, a decrease in non-interest income of
$65,000, and an increase of $5.8 million in income taxes.
INTEREST INCOME. Interest income increased $28.8 million or 172.9%,
from $16.7 million at March 31, 1995, to $45.5 million at March 31, 1996.
Of the total increase in interest income, $19.5 million was due to an
increase in interest income on loans receivable, $7.3 million was due to the
increase in the discount accretion and $2.0 million was due to an increase in
interest on investment securities.
INTEREST EXPENSE. Interest expense increased $11.0 million, or 182.9%,
from $6.0 million at March 31, 1995 to $17.0 million at March 31, 1996. Of
the total increase in interest
expense, $9.0 million was due to an increase in the average balance of
interest-bearing liabilities and $2.0 million was due to interest expense on
the Senior Notes.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$870,000 or 48.4%, from $1.8 million at March 31, 1995 to $927,000 at March
31, 1996. This decrease was primarily the result of a relative decrease in
the volume of new loan acquisitions and originations between the two
quarters.
NON-INTEREST INCOME. Total non-interest income decreased $65,000 or
2.3%, to $2.8 million at March 31, 1996 from $2.9 million at March 31, 1995.
This decrease was due primarily to a decrease in the gain on sale of loans of
$1.3 million, offset by an increase of $780,000 in the gain on foreclosed
assets and an increase of $509,000 in other real estate operations, net.
NON-INTEREST EXPENSE. Non-interest expense increased $1.5 million or
46.4%, from $3.2 million at March 31, 1995 to $4.6 million at March 31, 1996,
primarily due to an increase of $694,000 in salaries and employee benefits
and an increase of $224,000 in other operating expenses. The primary
increases in other operating expenses were $261,000 increase in legal
expenses, $170,000 increase in loan servicing expenses, offset by a $128,000
decrease in loan acquisition expense and a $99,000 decrease in marketing
expense. Other increases in non-interest expense, such as an increase in
occupancy and equipment of $355,000 and a SAIF insurance increase of $196,000
during the period were related to the Corporation's asset and deposit growth.
REGULATORY APPROVAL
On January 18, 1996, the Board of Directors of Beal Bank was notified by
the FDIC that the Board of Directors of the FDIC had approved the application
of the Bank to indirectly continue real estate investment activities through
Beal Mortgage, Inc. ("BMI"). The approval was subject to certain conditions
including that real estate investments may not represent more than 10% of
Tier 1 capital in any one real estate subsidiary or exceed 20 percent of Tier
1 capital to all real estate subsidiaries and the Bank may not reduce Tier 1
capital below 6 percent after deducting the real estate investment. As of
March 31, 1996, the Bank was in compliance with all conditions of the
approval. Total real estate investment through BMI and Beal Properties, Inc.,
real estate subsidiaries, represented 11.7% of Tier 1 capital and Tier 1
capital, after deducting total real estate investment, was 8.82 % of total
assets.
NON-ACCRUING LOANS: MARCH 31 JUNE 30
1996 1995
----- ------
Real Estate
One-to-four family 0 11,093
Commercial 28,678 16,816
Construction 0 93
Multifamily 8,142 9,507
Land 5,864 8,056
Consumer:
One-to-four family-junior liens 9,780 2,850
Timeshares 1,683 1,673
Other consumer 836 545
Commercial business 6,600 7,357
Purchase discounts (24,213) (22,011)
------- -------
Total (net) 37,370 35,979
------- -------
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS
Real estate
One-to-four family 23,456 -
Commercial 33,101 -
Multifamily 125,651 -
Land 13,150 -
Purchase discounts (98,265) -
------- -------
Total (net) 97,093 -
------- -------
FORECLOSED ASSETS
Real estate
One-to-four family 3,438 1,525
Commercial 4,393 3,026
Multi-family 8,588 3,633
Construction 300 0
Land 682 570
Consumer:
Timeshares 35 36
------- -------
Total (net) 17,436 8,790
------- -------
Total non-performing assets 151,899 44,769
------- -------
------- -------
Total as a percentage of total assets 13.55% 7.07%
------- -------
------- -------
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds for operations are deposits
obtained from its market area, principal and interest payments on loans,
brokered deposits, and advances from the FHLB of Dallas and to a lesser
extent, from the sale of assets. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
Historically, the primary investing activity of the Corporation has been
the purchase of discounted loans from various U.S. government agencies
through the sealed bid process or auctions and other private sector sellers.
During the three and nine month periods ended March 31, 1996, the Corporation
purchased $8.9 and $516.0 million of net loans, respectively. Loan
originations for the three and nine months ended March 31, 1996, totaled
$27.4 million and $86.2 million, respectively. In addition, the Corporation
purchased $154.6 million of investment securities during the three month
period ending March 31, 1996.
The Corporation's primary financing activity is the attraction of
deposits. During the three and nine months ended March 31, 1996, the
Corporation experienced a net increase in deposits of $40.0 million and
$545.9 million respectively, of which $215.7 million were generated by
deposit brokers during the nine months ended March 31, 1996. In addition,
the Corporation increased advances from the FHLB by $70 million for the
quarter ended March 31, 1996. The increase in deposits for the nine months
ended March 31, 1996 were used to fund the increase in loans and to decrease
FHLB borrowings by $41.0 million. The increases in deposits and FHLB advances
for the three months ended March 31, 1996, were used to fund the increase in
loans and investment securities-available for sale. The Corporation had
Senior Notes, net of $57.0 million and other borrowings of $21.5 million at
March 31, 1996.
The Corporation has the ability to borrow additional funds from the FHLB
of Dallas by pledging assets as collateral, subject to certain restrictions.
At March 31, 1996, the Corporation had an undrawn advance arrangement with
the FHLB for $130 million.
The Bank is required to maintain minimum levels of liquid assets as
defined by the Texas Savings and Loan Department ("Texas Department").
Unless approved in advance by the Texas Department, a Texas savings bank is
required to maintain a minimum of 10% of the previous quarters average
deposits in liquid assets. At March 31, 1996, the Bank's liquidity ratio was
21.9%.
The Corporation's most liquid asset is cash and cash equivalents. The
level of cash equivalents is dependent on the Corporation's operating,
financing, and investing activities during any given period. At March 31,
1996, the Corporation had cash and cash equivalents of $29.1 million.
The Corporation anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At March 31, 1996 the Corporation had
commitments to originate loans of $5.3 million. Certificates of deposits which
are scheduled to mature in one year or less
at March 31, 1996 totaled $675.1 million. Due to the Corporation's high
interest rate spread, management has typically relied upon interest rate
sensitive short-term deposits to fund its loan purchases. The Corporation
believes the potential interest rate risk is acceptable in view of the
Corporation's belief that it can maintain an acceptable net interest spread.
At March 31, 1996, the Bank exceeded each of its three capital
requirements. The following is a summary of the Bank's regulatory capital
position at March 31, 1996.
AT MARCH 31, 1996
-----------------------------------
REQUIRED(1) ACTUAL
---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Leverage capital ...........................$112,273 9.00% $124,532 9.98%
Tier 1 capital ............................. 37,381 4.00 124,532 13.33
Total risk-based capital.................... 102,797 11.00 134,632 14.41
_______________
(1) Required leverage and total risk-based capital requirements represent
higher capital requirements imposed by the Texas Department as a condition to
the Bank's continued asset growth.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Corporation's operations.
Nearly all the assets and liabilities of the corporation are financial,
unlike most industrial companies. As a result, the Corporation's performance
is directly impacted by changes in interest rates, which are indirectly
influenced by inflationary expectations. Since the Corporation has
historically placed more emphasis on increasing net interest margin rather
than on matching the maturities of interest rate sensitive assets and
liabilities, changes in interest rates may have a greater impact on the
Corporation's financial condition and results of operations. Changes in
investment rates do not necessarily move to the same extent as changes in the
price of goods and services.
RATIOS OF EARNING TO FIXED CHARGES
The Corporation's consolidated ratios of earnings to fixed charges for
the nine months ended March 31, 1996 are set forth below. Earnings used in
computing the ratios shown consist of earnings from continuing operations
before taxes and interest expense. Fixed charges, excluding interest on
deposits, represent interest expense on borrowings. Fixed charges, including
interest on deposits, represent all of the foregoing items plus interest on
deposits.
Interest expense (other than on deposits) includes interest on FHLB of Dallas
borrowings, the Senior Notes and other borrowed funds.
FOR THE NINE MONTHS ENDED
MARCH 31, 1996
Excluding interest on deposits . . . . . . . 11.4:1
Including interest on deposits . . . . . . . 2.1:1
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Corporation is not currently involved in any legal proceedings. The
Bank is involved in various legal proceedings occurring in the ordinary
course of business. Management of the Bank, based on discussions with
litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Bank. There
can be no assurance that any of the outstanding legal proceedings to which
the Bank is a party will not be decided adversely to the Corporation's
interests and have a material adverse effect on the financial position or
results of operations of the Corporation.
There have been no material developments to the Kenneth L. Musgrave vs.
Beal Banc, S.A. lawsuit described in the Form 10-Q submission for the period
ending September 30, 1995.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed during the quarter
ended March 31, 1996:
On January 25, 1996 to announce the appointment of David C. Meek as
President and Chief Executive Officer of Beal Bank.
On February 14, 1996, to report earnings for the quarter ended December 31,
1995.
On February 29, 1996, to announce to election of David C. Meek to the Board
of Directors of Beal Financial Corporation as a Director, replacing
David R. Farmer.
The following Exhibit is attached to this Form 10Q
Exhibit 10.3 - Form of Employment Contract with David C. Meek
SIGNATURES
Pursuant to the requirement 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.
BEAL FINANCIAL CORPORATION
Registrant
Date: May 14, 1996 /s/ David C. Meek
------------------------------------------
David C. Meek, President
Date: May 14, 1996 /s/ David R. Farmer
------------------------------------------
David R. Farmer, Senior Vice President and
Treasurer (Chief Financial and Accounting Officer)
EXHIBIT INDEX
Exhibit 10.3 - Form of Employment Contract with David C. Meek
Exhibit 27 - Financial Data Schedule