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 June 30, 1997
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 (I.R.S. Employer Identification
incorporation 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: (972) 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 June 30, 1997, 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. . . . . . . 5
PART II. OTHER INFORMATION
SIGNATURES
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands,except share data)
June 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
Cash $ 949 $ 449
Interest bearing deposits 45,122 65,491
---------- ----------
CASH AND CASH EQUIVALENTS 46,071 65,940
Accrued interest receivable 16,481 16,361
Securities available for sale 117,946 123,939
Net loans receivable 966,547 1,067,393
Less allowance for losses (11,367) (13,189)
---------- ----------
955,180 1,054,204
Federal Home Loan Bank stock 9,901 9,618
Real estate held for investment or sale 114,746 102,680
Premises and equipment, net 6,672 6,803
Other assets 11,600 15,361
---------- ----------
$1,278,597 $1,394,906
---------- ----------
---------- ----------
LIABILITIES
Deposit accounts $1,011,934 $1,043,433
Federal Home Loan Bank advances 30,000 146,000
Senior notes, net 57,140 57,094
Other borrowings 9,627 14,748
Other liabilities 25,315 16,834
---------- ----------
TOTAL LIABILITIES 1,134,016 1,278,109
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 300
Paid-In capital 2,740 2,740
Unrealized gain (loss) on available for sale
securities, net of tax benefit of $382
at December 31, 1996. 1,440 709
Retained earnings 140,101 113,048
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 144,581 116,797
---------- ----------
$1,278,597 $1,394,906
---------- ----------
---------- ----------
See notes to consolidated financial statements
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------------ -------------------
Interest Income:
Loans, including fees $24,515 $28,788 $ 60,173 $ 60,004
Purchased discount accretion 9,944 11,347 26,502 22,494
Investment securities 3,073 3,704 5,803 6,789
------- ------- -------- --------
TOTAL INTEREST INCOME 37,532 43,839 92,478 89,287
Interest expense:
Deposits 14,724 13,308 29,409 27,671
Federal Home Loan Bank
advances and other borrowings 212 1,471 1,094 2,140
Senior notes 1,993 1,974 3,982 3,956
------- ------- -------- --------
TOTAL INTEREST EXPENSE 16,929 16,753 34,485 33,767
------- ------- -------- --------
NET INTEREST INCOME 20,603 27,086 57,993 55,520
Provision for loan losses (261) 2,182 672 3,109
------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,864 24,904 57,321 52,411
Other income
Gain on sale of loans 2 3,015 538 4,400
Gain on real estate transactions 2,404 3,308 3,748 4,342
Other real estate operations, net 985 413 1,568 677
Other operating income 6 (123) 194 13
------- ------- -------- --------
TOTAL NONINTEREST INCOME 3,397 6,613 6,048 9,432
Other expense
Salaries and employee benefits 1,860 2,009 3,866 3,919
Occupancy and equipment 577 569 1,224 1,133
SAIF deposit insurance premium 171 561 337 891
Loss on sales of securities available for sale 0 587 0 587
Other operating expenses 3,017 3,579 4,800 5,407
------- ------- -------- --------
TOTAL NONINTEREST EXPENSES 5,625 7,305 10,227 11,937
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 18,636 24,212 53,142 49,906
Income Taxes 962 8,923 2,165 18,128
------- ------- -------- --------
NET INCOME $17,674 $15,289 $ 50,977 $ 31,778
------- ------- -------- --------
------- ------- -------- --------
Income per common share $ 58.91 $ 50.96 $ 169.92 $ 105.93
Weighted average number of common shares
outstanding 300 300 300 300
See notes to consolidated financial statements
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
Six Months
ended June 30
-----------------------
1997 1996
---------- ---------
OPERATING ACTIVITIES
Net income $ 50,977 $ 31,778
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,176 1,088
Accretion of purchased discount (26,502) (22,494)
Provision for loan losses 672 3,109
Amortization of bond premium
and underwriting costs 317 278
Gains on real estate transactions (3,748) (4,342)
Gain on sales of loans (538) (4,400)
Loss on sales of investment
securities-available for sale - 587
Loss on sale of premises and equipment 7 -
Changes in operating assets and liabilities
Accrued interest receivable (1,570) (8,107)
Prepaid expenses and other assets (307) (1,331)
Accrued interest payable-bonds - -
Other liabilities and accrued expenses 777 4,953
--------- ---------
Net cash provided by
operating activities 21,261 1,119
INVESTING ACTIVITIES
Proceeds from sales of loans 14 12,102
Proceeds from sales of securities available for sale - 151,744
Proceeds from paydowns of securities available
for sale 6,394 8,432
Proceeds from sales of Other Investments - 6,300
Proceeds from loan collections, less loan
originations and advances 128,109 85,181
Proceeds from sales of real estate 13,123 3,756
Proceeds from sales of premises and equipment 5 -
Purchases of loans and bid deposits on loan
purchases (20,059) (34,128)
Purchases of securities available for sale - (318,769)
Purchases of federal Home Loan Bank stock (283) (3,943)
Purchases of real estate held for invest. or
sale and partnership/JV interests (2,144) (3,786)
Capitalized interest on real estate investments - (482)
Purchases of premises and equipment (346) (622)
--------- ---------
Net cash provided by (used in)
investing activities 124,813 (94,215)
FINANCING ACTIVITIES
Net decrease in deposit accounts (31,500) (72,650)
Proceeds from long-term debt 162 1,053
Repayments of long-term debt (5,283) (879)
Repayments of advances from the Federal Home
Loan Bank (116,000) 185,000
Cash dividends paid (13,322) -
--------- ---------
Net cash provided by (used in)
financing activities (165,943) 112,524
--------- ---------
Increase (decrease) in cash and
cash equivalents (19,869) 19,428
Cash and cash equivalents at beginning of period 65,940 35,942
--------- ---------
Cash and cash equivalents at end of period $ 46,071 $ 55,370
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 33,838 $ 31,288
Income taxes 1,592 14,118
Supplemental disclosure of noncash investing and
financing activities
Real estate acquired in foreclosure or in
settlement of loans $ 25,180 $ 15,768
Assumption of majority stockholder's debt
related to initial public offering - -
See Notes to Consolidated Financial Statements
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS of PRESENTATION
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 as of June 30, 1997 and for the three
months ended June 30, 1997, and 1996 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 month period are not necessarily indicative of the results to be
expected for the full year.
NOTE B--NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have an effect on the disclosure of earnings per
share in the financial statements.
NOTE C--INCOME TAXES
On March 13, 1997, Beal Financial filed an application with the Internal Revenue
Service to elect Subchapter-S status for federal income tax purposes effective
January 1, 1997. This election covered all subsidiaries of Beal Financial,
including the Bank except Beal Affordable Housing and BRE-N, Inc.
As a result of the aforementioned application, beginning January 1, 1997, Beal
Financial and all Subchapter-S subsidiaries will no longer pay federal income
taxes, except for possible tax liabilities on net built-in gains as of January
1, 1997, which may be recognized during the ten year period commencing January
1, 1997. The Company has not yet determined the amount of net built-in gains as
of January 1, 1997.
Except as discussed in the preceding paragraph, the future tax liability for the
taxable income of Beal Financial and the subchapter-S subsidiaries will be the
responsibility of its shareholders.
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, AND TO ADVISE READERS THAT VARIOUS FACTORS INCLUDING REGIONAL AND
NATIONAL ECONOMIC CONDITIONS, CHANGES IN LEVELS OF MARKET INTEREST RATES, CREDIT
RISK OF LENDING ACTIVITIES, AND COMPETITIVE AND REGULATORY FACTORS, COULD AFFECT
THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL RESULTS
FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED.
THE COMPANY 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
Beal Financial Corporation ("Beal Financial" and with its subsidiaries,
the "Company"), the parent company of Beal Bank, ssb, (the "Bank") had total
assets of $1.3 billion at June 30, 1997 representing a decrease of $116.3
million or 8.3%, from $1.4 billion at December 31, 1996. The decrease resulted
primarily from a decrease in net loans receivable of $99.0 million, a decrease
in cash and cash equivalents of $19.9 million, a decrease in securities
available for sale of $6.0 million, and a decrease in other assets of $3.8
million, partially offset by an increase in real estate held for investment or
sale of $12.1 million. The decrease in net loans receivable was due primarily to
normal principal repayments of loans, early loan payoffs and foreclosures of
loans. The decrease in securities available for sale was the result of
repayments. The increase in real estate held for investment or sale was
primarily the result of foreclosures of loans of $25.2 million, partially
offset by real estate sales of $13.1 million. The decrease in cash and cash
equivalents was the result of normal operations.
Total liabilities decreased $144.1 million, or 11.3% from $1.3 billion at
December 31, 1996 to $1.2 billion at June 30, 1997, primarily due to a decline
in Federal Home Loan Bank ("FHLB") advances of $116.0 million, a decline in
deposits of $31.5 million and a decline in other borrowings of $5.1 million,
partially offset by an increase in other liabilities of $8.5 million. Advances
from the FHLB were repaid primarily with cash flow provided from normal
operations. The decrease in deposits for the six months ended June 30, 1997 was
primarily due to a planned decrease in retail deposits of $68.6 million,
partially offset by a planned increase in brokered deposits of $37.1 million.
The net decrease in deposits was primarily funded by the decrease in cash and
cash equivalents. The increase in other liabilities was primarily due to an
increase in dividends payable of $10.6 million.
Stockholders' Equity increased $27.8 million from $116.8 million at
December 31, 1996 to $144.6 million at June 30, 1997. The change was primarily
due to net income of $51.0 million, partially offset by a dividends paid to
shareholders of $24.0 million.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
NET INCOME. For the six months ended June 30, 1997, net income of $51.0
million represented an increase of $19.2 million, or 60.4% from the six months
ended June 30, 1996. As discussed in more detail below, the increase was
primarily due to a decrease in income taxes of $16.0 million, an increase in net
interest income after provision for loan losses of $4.9 million and a decrease
in total noninterest expense of $1.7 million, partially offset by a decrease of
$3.4 million in total noninterest income.
INTEREST INCOME. Interest income increased $3.2 million, or 3.6%, from
$89.3 million at June 30, 1996 to $92.5 million at June 30, 1997. Of the total
increase in interest income, $170,000 was due to an increase in interest income
on loans receivable and $4.0 million was due to an increase in the discount
accretion, partially offset by a decrease in interest income on investment
securities of $1.0 million. The average balance of interest-earning assets
increased $56.3 million during this period, as compared to the same period a
year ago, primarily due to an increase in average net loans receivable of $79.1
million and an increase in the average balance of interest earning deposits of
$13.9 million, partially offset by a decrease in average holdings of mortgage-
backed securities of $40.6 million. In addition, net interest spread decreased
from 9.62% for the six months ended June 30, 1996 to 9.57% for the same period
ending June 30, 1997 primarily due to a decrease in yield on interest-earning
assets from 15.79% to 15.58% for the six month periods ending June 30, 1996 and
June 30, 1997, respectively.
INTEREST EXPENSE. Interest expense increased $718,000, or 2.1%, from $33.8
million at June 30, 1996 to $34.5 million at June 30, 1997. The increase
resulted from the average balance of interest-bearing liabilities increasing
$54.0 million from $1.1 billion at June 30, 1996 to $1.2 billion at June 30,
1997 resulting in a $1.6 million increase in interest expense, partially
offset by a $900,000 decrease due to a decrease in the average rate of interest
bearing liabilities from 6.17% at June 30, 1996 to 6.01% at June 30, 1997. The
increase in average interest-bearing liabilities was due to an increase in the
average balance of deposits of $95.9 million, partially offset by the decline
in the average balance of FHLB advances of $28.2 million and the decline in
other borrowings of $12.8 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 decreased $2.4 million, or 78.4%, for the six months
ended June 30, 1997, as compared to the six months ended June 30, 1996 primarily
due to a decrease in the level of new loan purchases and a decrease in net non-
performing loans.
The Company 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 6.50% at June 30, 1997 as compared
to 6.49% at December 31, 1996. Net non-performing loans decreased $28.5
million from $203.3 million at December 31, 1996 to $174.8 million at June 30,
1997.
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 Company'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 Company's
allowance for loan losses. Such agencies may require the Company 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 $3.4 million, or
35.9% to $6.0 million at June 30, 1997 from $9.4 million at June 30, 1996. This
decrease was primarily due to a decrease in the income attributable to the sale
of loans of $3.9 million and a decrease of $594,000 in the gain on real estate
transactions, partially offset by an increase in the income from other real
estate operations, net of $891,000.
NON-INTEREST EXPENSE. Non-interest expense decreased $1.7 million, or
14.3% from $11.9 million for the six months ended June 30, 1996 to $10.2 million
for the six months ended June 30, 1997. The decrease was primarily due to a
decrease of $607,000 in other operating expenses reflecting reduced levels of
loan purchasing activities, a decrease of $587,000 in the loss on sales of
securities available for sale, and a decrease of $554,000 in the SAIF deposit
insurance premium.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
NET INCOME. For the three months ended June 30, 1997, net income of $17.7
million represented an increase of $2.4 million, or 15.6% from the three months
ended June 30, 1996. As discussed in more detail below, the increase was
primarily due to a decrease in income taxes of $8.0 million and a decrease in
total noninterest expense of $1.7 million, partially offset by a decrease in net
interest income after provision for loan losses of $4.0 million and a decrease
of $3.2 million in total noninterest income.
INTEREST INCOME. Interest income decreased $6.3 million, or 14.4%, from
$43.8 million at June 30, 1996 to $37.5 million at June 30, 1997. Of the total
decrease in interest income, $4.3 million was due to a decrease in interest
income on loans receivable and $1.4 million was due to a decrease in the
discount accretion. The average balance of interest-earning assets increased
$50.0 million during this period, as compared to the same period a year ago,
primarily due to an increase in average net loans receivable of $72.7 million
and an increase in the average balance of interest-earning deposits of $31.7
million, partially offset by a decrease in
average holdings of mortgage-backed securities of $57.4 million. In addition,
net interest spread decreased from 9.50% for the three months ended June 30,
1996 to 6.85% for the same period ending June 30, 1997 primarily due to an
decrease in yield on interest-earning assets from 15.63% to 12.81% for the
three month periods ending June 30, 1996 and June 30, 1997, respectively.
The yield on interest-bearing assets for the three months ending June 30,
1996 was favorably impacted by the recognition of additional purchase
discount accretion due to the resolution of certain underlying loans.
INTEREST EXPENSE. Interest expense increased $176,000, or 1.0%, from $16.8
million at June 30, 1996 to $16.9 million at June 30, 1997. The increase
resulted from the average balance of interest-bearing liabilities increasing
$43.2 million to $1.1 billion at June 30, 1997 resulting in a $644,000 increase
in interest expense, partially offset by a $483,000 decrease due to a decrease
in the average rate of interest bearing liabilities from 6.13% at June 30, 1996
to 5.96% at June 30, 1997. The increase in average interest-bearing liabilities
was due to an increase in the average balance of deposits of $128.6 million, ,
partially offset by the decline in the average balance of FHLB advances of
$66.1 million and the decline in other borrowings of $18.1 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 decreased $2.4 million resulting in a net recovery
of $261,000, or 78.4%, for the three months ended June 30, 1997, as compared
to the three months ended June 30, 1996 primarily due to a decrease in the
level of new loan purchases and a decrease in net non-performing loans.
NON-INTEREST INCOME. Total non-interest income decreased $3.2 million, or
48.6% to $3.4 million at June 30, 1997 from $6.6 million at June 30, 1996. This
decrease was primarily due to a decrease in the income attributable to the sale
of loans of $3.0 million.
NON-INTEREST EXPENSE. Non-interest expense decreased $1.7 million, or
23.0% from $7.3 million for the three months ended June 30, 1996 to $5.6 million
for the three months ended June 30, 1997. The decrease was primarily due to a
decrease $587,000 in the loss on sales of securities available for sale, a
decrease of $562,000 in other operating expenses, and a decrease of $390,000 in
the SAIF deposit insurance premium.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Beal Financial filed with the Internal Revenue Service
on March 13, 1997, to elect Subchapter-S status for federal income tax purposes
effective January 1, 1997. This election covered all subsidiaries of Beal
Financial, including the Bank, except for Beal Affordable Housing, Inc. ("BAH").
and BRE-N, Inc.("BRE-N") (the "Subchapter-S subsidiaries"), which elected to
remain Subchapter-C Corporations for federal tax purposes. Concurrent with the
change to Subchapter-S status, Beal Financial and all subsidiaries changed their
tax and fiscal year-ends to December 31 from the previous June 30 year-ends.
Therefore, Beal Financial will file a consolidated Subchapter-C federal tax
return for the six months ended December 31, 1996.
In the future, Beal Financial and the Subchapter-S subsidiaries will not
pay any federal taxes on net income. The only exception will involve possible
Subchapter-C tax liability on net built-in gains as of January 1, 1997, which
may be recognized during the 10 year period ending December 31, 2006.
Recognition of built-in gains/losses are subject to certain limitations. Beal
Financial has not yet determined the amount of net built-in gains as of
January 1, 1997, or the estimated amount of Subchapter-C taxes to be paid in
future periods. BAH and BRE-N will continue to pay federal income taxes as
C-Corporations.
The future tax liability for the taxable earnings of Beal Financial and the
Subchapter-S subsidiaries will be the responsibility of the shareholders of Beal
Financial. The Board of Directors of Beal Financial, on June 24, 1997 declared
a dividend payable to the shareholders of $10.6 million, which included
approximately $7.1 million associated with the amount of tax liability to the
shareholders associated with the earnings for the quarter ended June 30, 1997.
The dividend was paid to the shareholders on July 30, 1997. It is anticipated
that future dividends to shareholders will be declared equal to their tax
liability related to the earnings of Beal Financial.
TEXAS STATE INCOME TAXATION. Beal Financial and each subsidiary currently
file Texas franchise tax returns. Texas imposes a franchise tax on the taxable
income of savings
institutions and other corporations. The franchise tax equals the greater of
$2.50 per $1,000 of taxable capital apportioned to Texas, or $45.00 per $1,000
net taxable earned surplus apportioned to Texas. Taxable earned surplus is
the federal corporate taxable income of each company within the corporate
group determined on a separate company basis with certain modifications. At
June 30, 1997, the Company accrued $2.2 million in franchise tax payable for
the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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 Company 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 six month periods ended June 30, 1997, the Company purchased $9.4 and
$20.2 million of net loans, respectively. Loan originations for the three and
six months ended June 30, 1997 totaled $22.0 and $27.9 million, respectively.
The Company's primary financing activity has historically been the
attraction of deposits. During the three months ended June 30, 1997, the
Company experienced a net decrease in deposits of $87.6 million, primarily due
to a $68.3 million decrease in retail deposits and a $19.9 million decrease in
brokered deposits. The decrease in deposits for the three months ended June 30,
1997 was funded with an increase in FHLB advances of $30 million along with cash
flow from normal operations. During the six months ended June 30, 1997, The
Company experienced a net decrease in deposits of $31.5 million, primarily due
to a $ $68.6 million decrease in retail deposits, partially offset by an
increase of $37.1 million in brokered deposits. The decrease in deposits for
the six months ended June 30, 1997 was primarily funded with cash flow provided
from normal operations. The Company had Senior Notes, net, of $57.1 million
and other borrowings of $12.0 million at June 30, 1997.
The Company has the ability to borrow additional funds from the FHLB of
Dallas by pledging assets as collateral, subject to certain restrictions. At
June 30, 1997, the Company had an undrawn advance arrangement with the FHLB for
$107.4 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
June 30, 1997, the Bank's liquidity ratio was 14.11%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash equivalents is dependent on the Company's operating, financing, and
investing activities during any given period. At June 30, 1997, the Company had
cash and cash equivalents of $46.1 million.
The Company anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At June 30, 1997, the Company had
commitments to
originate loans of $21.8 million and no outstanding commitments to purchase
loans. Certificates of deposits which are scheduled to mature in one year of
less at June 30, 1997 totaled $790.6 million. Due to the Company's high
interest rate spread, management has typically relied upon interest rate
sensitive short-term deposits to fund its loan purchases. The Company
believes the potential interest rate risk is acceptable in view of the
Company's belief that it can maintain an acceptable net interest spread.
At June 30, 1997, the Bank exceeded each of its three capital requirements.
The following is a summary of the Bank's regulatory capital position at June 30,
1997.
At June 30, 1997
---------------------------------------
Required(1) Actual
----------------- ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Leverage capital ............... $113,861 9.00% $167,886 13.27%
Tier 1 capital ................. 40,881 4.00 167,886 16.43
Total risk-based capital ....... 112,423 11.00 179,253 17.54
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(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.
RATIOS OF EARNING TO FIXED CHARGES
The Company's consolidated ratios of earnings to fixed charges for the six
months ended June 30, 1997 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 Six Months Ended
June 30, 1997
------------------------
Excluding interest on deposits . . . . . . . 11.5:1
Including interest on deposits . . . . . . . 1.7:1
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company 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 Company's interests and have a material adverse
effect on the financial position or results of operations of the Company.
In the Kenneth L. Musgrave vs. Beal Banc, S.A. lawsuit described in the
Form 10-K submission for the period ending December 31, 1996, the Court granted
the Bank's motion for Summary Judgment on August 4, 1997 and thereby dismissed
all claims of Kenneth Musgrave. The Court's decision is appealable and it is
unknown at this time if Mr. Musgrave will appeal.
Item 2. CHANGES IN SECURITIES
None.
Items 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
(a) Exhibit 27--Financial Data Schedule
(b) On July 28, 1997, the Company filed a Current Report on Form 8-K to
report a press release issued the same date announcing earnings for the quarter
ended June 30, 1997
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 20, 1997 /s/ DAVID C. MEEK
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David C. Meek, President
Date: May 20, 1997 /s/ DAVID R. FARMER
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David R. Farmer, Senior Vice President
and Treasurer (Chief Financial and
Accounting Officer)