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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 September 30, 1996
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 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: (972) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 12, 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 September 30, 1996, there were 300,000 shares of the Registrant's
common stock issued and outstanding.
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BEAL FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
------
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
1
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BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
September 30
1996 June 30
(Unaudited) 1996
------------ ----------
<S> <C> <C>
ASSETS
Cash $ 522 $ 532
Interest bearing deposits 79,141 54,838
---------- ----------
CASH AND CASH EQUIVALENTS 79,663 55,370
Accrued interest receivable 14,463 16,146
Securities available for sale 124,598 194,699
Net loans receivable 1,003,396 908,246
LESS ALLOWANCE FOR LOSSES (11,903) (11,832)
---------- ----------
991,493 897,414
Federal Home Loan Bank stock 9,478 9,340
Real estate held for investment or sale 89,341 77,632
Premises and equipment, net 6,819 6,918
Other assets 16,983 11,760
---------- ----------
$1,332,838 $1,269,279
---------- ----------
---------- ----------
LIABILITIES
Deposit accounts $1,013,584 $891,304
Federal Home Loan Bank advances 99,000 185,000
Senior notes, net 57,072 57,051
Other borrowings 21,638 21,468
Other liabilities 32,226 21,284
---------- ----------
TOTAL LIABILITIES 1,223,520 1,176,107
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 loss on available for sale
securities, net of tax benefit of $211 and $466 at
September 30, 1996, and June 30, 1996, respectively (392) (862)
Retained earnings 106,670 90,994
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 109,318 93,172
---------- ----------
$1,332,838 $1,269,279
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
2
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands, except share data)
Three Months Ended
September 30,
1996 1995
------- -------
Interest Income:
Loans, including fees $23,631 $13,869
Purchase discount accretion 19,861 6,529
Investment securities 3,251 1,409
------- -------
TOTAL INTEREST INCOME 46,743 21,807
Interest expense:
Deposits 13,894 7,873
Federal Home Loan Bank
advances and other borrowings 845 774
Senior notes 1,979 982
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TOTAL INTEREST EXPENSE 16,718 9,629
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NET INTEREST INCOME 30,025 12,178
Provision for loan losses 334 1,366
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 29,691 10,812
Other income
Gain on sales of loans 1,413 335
Gain on real estate transactions 2,026 2,435
Other real estate operations, net 583 241
Other operating income - 7
------- -------
TOTAL NONINTEREST INCOME 4,022 3,018
Other expense
Salaries and employee benefits 2,845 2,518
Occupancy and equipment 528 413
SAIF deposit insurance premium 2,612 178
Loss on sales of securities available for sale 437 -
Other operating expenses 2,866 1,980
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TOTAL NONINTEREST EXPENSES 9,288 5,089
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INCOME BEFORE INCOME TAXES 24,425 8,741
Income taxes 8,749 3,100
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NET INCOME $15,676 $ 5,641
------- -------
------- -------
Income per common share $ 52.25 $ 18.80
------- -------
------- -------
Weighted average number of common shares outstanding 300 300
------- -------
------- -------
See notes to consolidated financial statements
3
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months
ended September 30
------------------
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 15,676 $ 5,641
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 507 308
Accretion of purchased discount (19,861) (6,529)
Provision for loan losses 334 1,366
Amortization of bond premium and underwriting
costs 146 66
Gains on real estate transactions (2,026) (2,536)
Gain on sales of loans (1,413) (335)
Loss on sales of investment securities-available
for sale 437 --
Loss on sale of premises and equipment 71 --
Changes in operating assets and liabilities
Accrued interest receivable 705 (583)
Prepaid expenses and other assets (165) (364)
Accrued interest payable-bonds (1,833) 916
Other liabilities and accrued expenses 10,713 4,089
--------- --------
Net cash provided by operating activities 3,291 2,039
INVESTING ACTIVITIES
Proceeds from sales of loans 6,526 1,219
Proceeds from sales of securities available for
sale 68,134 --
Proceeds from paydowns of securities available for
sale 2,318 927
Proceeds from loan collections, less loan
originations and advances 58,846 19,559
Proceeds from sales of real estate 4,714 5,902
Proceeds from sales of premises and equipment 43 --
Purchases of loans and bid deposits on loan
purchases (151,845) (99,809)
(Purchases) sales of Federal Home Loan Bank stock (138) 4,438
Purchases of real estate held for invest, or sale
and partnership/JV interests (3,811) (8,749)
Purchases of premises and equipment (235) (399)
--------- --------
Net cash used in investing activities (15,448) (76,912)
FINANCING ACTIVITIES
Net increase in deposit accounts 122,280 93,769
Proceeds from long-term debt 693 8,638
Repayments of long-term debt (523) (137)
Repayments of advances from the Federal Home
Loan Bank (86,000) (77,000)
Proceeds from issuance of senior notes, net -- 54,491
Cash dividends paid -- (25)
--------- --------
Net cash provided by financing activities 36,450 79,736
--------- --------
Increase in cash and cash equivalents 24,293 4,863
Cash and cash equivalents at beginning of period 55,370 31,507
--------- --------
Cash and cash equivalents at end of period $ 79,663 36,370
--------- --------
--------- --------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 16,847 8,480
Income taxes 4,000 750
Supplemental disclosure of noncash investing and
financing activities
Real estate acquired in foreclosure or in
settlement of loans $ 14,258 5,146
Assumption of majority stockholder's debt
related to initial public offering -- 2,500
See Notes to Consolidated Financial Statements
4
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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 September 30, 1996 and for
the three months ended September 30, 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 month period are not necessarily indicative of the
results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Beal Financial
Corporation's annual report in Form 10-K for the year ended June 30, 1996.
5
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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
Beal Financial Corporation (the "Corporation"), the parent company of
Beal Bank, ssb, (the "Bank"), had total assets of $1.3 billion at September
30, 1996 representing an increase of $63.6 million or 5%, from $1.2 billion
at June 30, 1996. The increase resulted primarily from an increase in net
loans receivable of $94.1 million, an increase in cash and cash equivalents
of $24.3 million and an increase in real estate held for investment or sale
of $11.7 million; partially offset by a decrease in securities available for
sale of $70.1 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 and to a lesser extent, to loan
origination activity. The increase in cash and cash equivalents was the
result of normal operations, including proceeds received from the sale of
certain mortgage-backed securities from the securities available for sale
portfolio. The increase in real estate held for investment or sale was
primarily the result of additional real estate direct investments by the
Bank's subsidiaries.
Total liabilities increased $47.4 million, or 4.0% from June 30, 1996 to
$1.2 billion at September 30, 1996, primarily due to an increase in deposits
of $122.3 million, or 13.7%, and an increase of $10.9 million in other
liabilities, partially offset by a decline in Federal Home Loan Bank ("FHLB")
advances of $86.0 million. Advances for the FHLB of Dallas were repaid with
the increase in deposits and the proceeds from the sale of mortgaged backed
securities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET INCOME. For the three months ended September 30, 1996, net income
of $15.7 million represented an increase of $10.0 million, or 177.9% from the
three months ended September 30, 1995. As discussed in more detail below,
the increase in net income was primarily due to a $18.9 million increase in
net interest income after provision for loan losses, partially offset by an
increase in non-interest expense of $4.2 million and an increase in income
taxes of $5.6 million.
NET INTEREST INCOME. Net interest income increased $17.8 million, or
146.6%, from $12.2 million at September 30, 1995, to $30.0 million at
September 30, 1996 due to an increase in average interest-earning assets.
The average balance of interest-earning assets increased $515.0 million
during this period primarily due to an increase in discounted loans purchased
and, to a lesser extent, increased loan originations and purchases of
mortgage-backed securities. In addition, net interest rate spread increased
from 8.29% for the
6
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three months ended September 30, 1995, to 10.71% for the three months ended
September 30, 1996 primarily due to an increase in the yield on interest
earning assets from 14.67% to 16.79% for the three month period ending
September 30, 1995 and 1996, respectively.
INTEREST INCOME. Interest income increased $24.9 million, or 114.3%
from $21.8 million at September 30, 1995 to $46.7 million at September 30,
1996. Of the total increase in interest income, $13.3 million was due to an
increase in the discount accretion and $11.6 million was due to an increase
in average interest-earning assets and, to a lesser extent, to an increase in
the yield on interest earning assets. The yield on interest earning assets
increased by 2.12% for the three months ended September 30, 1996 compared to
the same prior year period. This increased yield was primarily due to an
increase in the yield on loans, net, from 15.96% for the three months ended
September 30, 1995 to 18.82% for the three months ended September 30, 1996.
INTEREST EXPENSE. Interest expense increased $7.1 million, or 73.6%,
from $9.6 million at September 30, 1995 to $16.7 million at September 30,
1996 primarily due to an increase in the average balance of interest-bearing
liabilities of $492.8 million. The increase in average interest-bearing
liabilities was primarily due to an increase in the average balance of
deposits of $462.6 million and the issuance of 12.75% senior notes in August,
1995, partially offset by the decline in the average balance of FHLB advances
of $7.6 million. The increase in the average balance of interest-bearing
liabilities more than offset the 31 basis point decrease in the average cost
of interest-bearing liabilities from 6.39% for the three month period ending
September 30, 1995 to 6.08% for the three month period ending September 30,
1996.
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 $1.0 million, or 75.6% for the three
months ended September 30, 1996 as compared to the same period last year.
The majority of this decrease was the result of a decrease in the volume of
loans receivable growth for the three months ended September 30, 1996, as
compared to the same period last year.
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 6.5% at September 30, 1996 as compared to 9.7% at
June 30, 1996. The primary reason for the decline in this ratio was due to
the purchase of $41.0 million, net, of multi-family non-performing loans.
Management believes that the underlying collateral value is sufficient to
cover the Corporation's investment in these loans.
7
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Although management believes it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net income 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 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 increased $1.0 million, or
33.3% to $4.0 million at September 30, 1996 from $3.0 million at September
30, 1995. This increase was primarily due to a increase in the income
attributable to the sale of loans of $1.1 million and an increase of $342,000
in other real estate operations, net, partially offset by a decrease in the
gain on real estate transactions of $409,000. The increase in gain on sale of
loans was primarily attributable to a $916,000 gain on the sale of two
multi-family loans in the process of foreclosure.
NON-INTEREST EXPENSE. Non-interest expense increased $4.2 million, or
82.5%, from $5.1 million at September 30, 1995 to $9.3 million for the same
period in fiscal 1996 primarily due to an increase in SAIF deposit insurance
premium of $2.4 million, an increase in other operating expenses of $886,000,
and a loss of $437,000 on sale of securities available for sale.
On September 30, 1996, federal legislation was enacted that requires the
Savings Association Insurance fund ("SAIF") to be recapitalized with a
one-time assessment on virtually all SAIF-insured institutions, such as the
Bank, equal to 65.7 basis points on SAIF-insured deposits maintained by those
institutions as of March 31, 1995. This SAIF assessment which is to be paid
to the Federal Deposit Insurance Corporation ("FDIC") by November 27, 1996,
is approximately $2 million and has been accrued by the Corporation at
September 30, 1996. The Bank after recording the SAIF assessment charge to
earnings, still remains a well capitalized institution for regulatory capital
purposes.
As a result of the SAIF recapitalization, the FDIC has proposed to amend
its regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC
has proposed that the SAIF insurance premium for all SAIF-insured
institutions that are required to pay the Financing Corporation ("FICO")
obligation, such as the Bank, be reduced to a range of 18 to 27 basis points
from 23 to 31 basis points per $100 of domestic deposits. The Bank currently
qualifies for the minimum SAIF insurance premium of 23 basis points. The FDIC
has also proposed to further reduce the SAIF insurance premium to a range of
0 to 27 basis points per $100 of domestic deposits, effective January 1,
1997. Management cannot predict whether or in what form the FDIC's final
regulation may be promulgated.
The increases in other operating expenses, consisting principally of legal
expenses, loan servicing expenses, marketing expenses, and loan acquisition
and origination expenses, were primarily due to the Corporation's purchasing
activities and resultant increase in asset size.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds for operations are deposits
obtained from areas surrounding its branch offices, principal and interest
payments on loans, brokered deposits, 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, auctions and other private sector sellers.
During the three month period ended September 30, 1996, the Corporation
purchased $151.8 million of loans, net. Loan originations for the three
months ended September 30, 1996, totaled $41.3 million.
The Corporation's primary financing activity is the attraction of
deposits. During the three months ended September 30, 1996, the Corporation
experienced a net increase in deposits of $122.3 million, which was generated
by the Bank's three retail deposit locations. In addition, liquidity was
provided by proceeds received from the $70.0 million sale of securities from
the securities available for sale portfolio during the quarter ended
September 30, 1996. The increased liquidity provided by the deposit increase
and the decrease of securities available for sale for the three months ended
September 30, 1996 was used to fund the increase in loans and to decrease
FHLB borrowings by $86.0 million. The Corporation had Senior Notes of $57.1
million, net, FHLB advances of $99.0 million, and other borrowings of $21.6
million at September 30, 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 September 30, 1996, the Corporation had an undrawn advance arrangement
with the FHLB of Dallas for $53.7 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, (the "Liquidity Ratio"). At September 30, 1996, the Bank's
Liquidity Ratio was 18.3%.
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 September 30,
1996, the Corporation had cash and cash equivalents of $79.7 million.
The Corporation anticipates it will have sufficient funds available to
meet its current foreseeable commitments. At September 30, 1996 the
Corporation had commitments to originate loans of $34.9 million and
outstanding unfunded letters of credit of $11.6 million. Certificates of
deposits which are scheduled to mature in one year of less at September 30,
1996
9
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totaled $725.7 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 and origination activities. 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. The Corporation further believes that based on the levels of
retention for such deposits in the recent past, that a significant portion of
such deposits will remain with the Corporation.
At September 30, 1996, the Bank exceeded each of its three regulatory
capital requirements. The following is a summary of the Bank's regulatory
capital position at September 30, 1996.
At September 30, 1996
---------------------------------------
Required(1) Actual
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Leverage capital................... $117,548 9.00% $129,735 9.93%
Tier 1 capital..................... 39,727 4.00 129,735 13.06
Total risk-based capital........... 109,251 11.00 141,638 14.26
- --------------------
(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 EARNINGS TO FIXED CHARGES
The Corporation's consolidated ratios of earnings to fixed charges for
the three months ended September 30, 1996 are set forth below. Earnings used
in computing the ratios shown
10
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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 Three Months Ended
September 30, 1996
Excluding interest on deposits........... 9.6:1
Including interest on deposits........... 1.6:1
AMENDMENT TO EMPLOYMENT AGREEMENT
Effective October 8, 1996, the employment agreement of David C. Meek,
President and Chief Executive Officer of the Bank, (the "Agreement"),
attached as Exhibit 10.3a, was amended. As a first stage to renegotiating
the Agreement's bonus compensation, the amendment, attached as Exhibit 10.3b,
basically changed the expiration date of the Agreement from December 31, 1998
to December 31, 1996 in return for a payment of $150,000, in accordance with
the terms of the Agreement. The parties are currently negotiating a new
employment agreement.
11
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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-K submission for the
period ending June 30, 1996.
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
None.
The following Exhibit is attached to this Form 10Q
Exhibit 10.3a - Form of Employment Contract with David C. Meek
Exhibit 10.3b - First Amendment to Employment Contract with
David C. Meek
12
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EXHIBIT INDEX
Exhibit 10.3a - Form of Employment Contract with David C. Meek
Exhibit 10.3b - First Amendment to Employment Contract with
David C. Meek
13
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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: November 14, 1996 /s/ DAVID C. MEEK
---------------------------------
David C. Meek, President
Date: November 14, 1996 /s/ DAVID R. FARMER
---------------------------------
David R. Farmer, Senior Vice
President and Treasurer (Chief
Financial and Accounting Officer)
14
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EXHIBIT 10.3a
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Employment Agreement") is made and entered
into, subject to the provisions of Paragraph 36, as of this 24th day of January,
1996, by and between BEAL BANK, SSB, a Texas corporation (hereafter the "Bank")
and DAVID C. MEEK, a resident of Texas (hereafter the "Executive").
WHEREAS, the Executive has considerable experience, expertise, and training
in management related to lending and services offered by the Bank; and
WHEREAS, the Bank desires and intends to employ the Executive as President
and Chief Executive Officer of the Bank pursuant to the terms and conditions set
forth in this Employment Agreement, and the Executive desires to accept such
employment pursuant to the terms and conditions set forth in this Employment
Agreement; and
WHEREAS, both the Bank and the Executive have read and understood the terms
and provisions set forth in this Employment Agreement, and have been afforded a
reasonable opportunity to review this Employment Agreement with their respective
legal counsel.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth in this Employment Agreement, the Executive and the Bank agree as follows:
DURATION
1. This Employment Agreement shall continue in full force and effect for
three (3) years, commencing on January 24, 1996 ("Hire Date"), and will expire
and terminate by its own terms on December 31, 1998, unless either party elects
to terminate this Employment Agreement prior to December 31, 1998, in accordance
with the TERMINATION provisions set forth below at Paragraphs 15-21.
2. Both the Bank and the Executive acknowledge and agree that, subsequent
to the expiration date, the parties may agree to continue the employment
relationship under such terms as they may mutually agree upon. However, both
parties acknowledge and agree that, in the event they fail to agree upon terms
for the continuation of the Executive's employment subsequent to the expiration
date, the employment of the Executive shall automatically terminate on the
expiration date without any additional liability or obligation on the part of
either party except as otherwise specified in Paragraph 21.
COMPENSATION
3. During the first year of this Employment Agreement, the Bank shall
compensate the Executive on a salary basis at the bi-weekly rate of $7,692.30
($200,000 annually), payable in accordance with the Bank's ordinary payroll
policies and procedures. During the
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second year of this Employment Agreement, the Executive will receive a five
percent (5%) increase in salary, effective as of January 1, 1997. During the
third and final year of the term of this Employment Agreement, the Executive
will receive another five percent (5%) increase over his salary for the
preceding year, such increase to be effective as of January 1, 1998.
Both the Bank and the Executive acknowledge that such compensation and the
other covenants and agreements of the Bank contained herein are fair and
adequate compensation for the Executive's services, and for the mutual promises
described below.
4. The Bank and the Executive acknowledge and agree that the Bank shall
reimburse the Executive for all reasonable expenses, including, but not limited
to travel expenses, lodging expenses, meals and entertainment expenses, that the
Executive may incur in the performance of his duties and obligations under this
Employment Agreement. PROVIDED, HOWEVER, that the Executive shall be required
to submit receipts of other acceptable documentation to verify such expenses
prior to any reimbursements.
5. The Bank and the Executive acknowledge and agree that at the end of
each complete calendar quarter (first quarter to be pro-rated), of the
Executive's service pursuant to the terms of this Executive Agreement, the
Executive shall receive bonus compensation, payable 30 days after conclusion of
such quarter ("Bonus"). The Bonus shall be equal to two percent (2%) of the
amount by which the Bank's consolidated quarterly net after tax income, as
reflected on the Bank's Consolidated Report of Condition and Report of Income
("Call Report") filed with the Bank's regulatory authorities ("Quarter's
Income"), exceeds a twenty percent (20%) annualized return on the Bank's
consolidated equity at the end of the preceding quarter ("20% ROE"). The term
"Equity", for purposes of the Bonus calculation shall consist of the Bank's
common stock (and includes any amounts eligible for capital purposes), surplus
and undivided profits accounts, plus any dividends or distributions paid during
such quarter, without giving effect to adjustments required under F.A.S.B. 115,
as reflected on such Call Report. PROVIDED, HOWEVER, that if a consolidated net
loss, or if less that 20% ROE, has been reported on the Call Report by the Bank
in any prior quarter of the Executive's employment, no Bonus shall be payable
until and unless any loss is made up and a Quarter's Income, plus the Quarter's
Income from any prior quarter in which no Bonus was earned exceeds 20% ROE.
6. The Executive acknowledges and agrees that, at the discretion of the
Bank, certain employee benefits may be provided to the Executive incident to the
Executive's employment with the Bank. The Executive acknowledges and agrees
that any employee benefits provided to the Executive by the Bank incident to the
Executive's employment are governed by the applicable plan documents, summary
plan descriptions or employment policies, and may be modified, suspended or
revoked at any time, in accordance with the terms and provisions of the
applicable documents. In addition to the salary specified above, the Bank shall
also provide, as partial consideration for this employment agreement, the
<PAGE>
standard benefits given to all senior level Bank employees plus four (4) weeks
of vacation per year, which vacation shall accrue at the rate of one week
vacation per three months of employment, or portion thereof upon Termination,
and the Executive may carry forward up to two weeks of unused vacation per year.
7. The Executive acknowledges and agrees that he shall be employed as
President and Chief Executive Officer of the Bank. The Executive covenants and
agrees that he will devote his best efforts and substantially all his working
time to this position with the Bank and its subsidiaries.
8. The Executive acknowledges and agrees that the duties and
responsibilities of the Executive required by his position as President and
Chief Executive Officer of the Bank are wholly within the discretion of the
Board of Directors of the Bank, and may be modified, or new duties and
responsibilities imposed by the Board of Directors of the Bank, at any time,
without the approval or consent of the Executive. However, these duties and
responsibilities may not constitute immoral or unlawful acts or require that the
Executive violate any regulation or directive of a governmental body. In
addition, all duties and responsibilities must be consistent with the
Executive's role as President and Chief Executive Officer.
9. The Executive acknowledges and agrees that, during the term of this
Agreement, he has a fiduciary duty of loyalty to the Bank, and that he will not
engage in any activity during the term of this Agreement, which will or could,
in any significant way, harm the business, business interests, or reputation of
the Bank.
10. The Executive acknowledges and agrees that he will not directly or
indirectly engage in competition with the Bank at any time during the existence
of the employment relationship between the Bank and the Executive, and the
Executive will not on his own behalf, or as another's agent, employee, partner,
shareholder or otherwise, engage in any of the same or similar duties and/or
responsibilities required by the Executive's position with the Bank, other than
as an employee of the Bank pursuant to this Employment Agreement.
NON-DISCLOSURE
11. The Executive acknowledges and agrees that certain information
concerning the Bank's services, techniques, pricing, business projections,
business plans and strategies, marketing plans, techniques, assets, customer
contracts, customer needs, and prospective customers is highly sensitive and
confidential, and has been obtained only through the significant effort and
expense to the Bank; and that, as a result, the Executive must agree to treat
this information as highly confidential trade secret information at all times
during the existence of the employment relationship between the Bank and the
Executive, and after the termination of the employment relationship. The Bank
acknowledges and agrees that the Executive brings to the Bank over twenty years
of experience in services, pricing techniques, business projections, business
plans and strategies, marketing plans, techniques, assets, and customer contacts
previously obtained by the Executive.
<PAGE>
12. The Executive acknowledges and agrees that, subsequent to the
execution of this Employment Agreement, the Executive will have access to
certain confidential and highly sensitive information relating to the Bank
incident to his employment by the Bank, including, but not limited to,
information pertaining to: (i) the identity of the Bank's customers and customer
prospects; (ii) the special needs of the Bank's customers; (iii) confidential
market studies, information, and analyses; (iv) current and prospective
services; (v) business projections; (vi) business plans and strategies; (vii)
financial statements and information; and (viii) special services of the Bank.
The Executive acknowledges and agrees that this information, if disclosed, could
place the Bank at a competitive disadvantage. Consequently, the Executive
acknowledges and agrees not to disclose such information to any person who is
not then a current employee of the Bank at any time prior to, or subsequent to,
the termination of his employment without the express, written consent of the
Bank. Notwithstanding anything in this Agreement to the contrary or seemingly
inconsistent herewith, the parties agree that all information referred to in
Paragraphs 11 and 12 shall not be deemed trade secrets or confidential
information of the Bank if such information is already available to the
competitors of the Bank.
NON-INTERFERENCE
13. The Executive covenants and agrees that, for a period of thirty-six
(36) months subsequent to the termination of his employment, whether such
termination occurs at the insistence of the Bank or the Executive, the Executive
shall not recruit, hire, or attempt to recruit or hire, directly or by assisting
others, any other employees of the Bank, nor shall the Executive contact or
communicate with any other employees of the Bank for the purpose of inducing
other employees to terminate their employment with the Bank. For purposes of
this covenant, "other employees" shall refer to employees who are still actively
employed by, or doing business with, the Bank at the time of the attempted
recruiting or hiring.
REMEDIES
14. In the event that the Executive violates any of the provisions set
forth in this Employment Agreement relating to NON-DISCLOSURE or NON-
INTERFERENCE, the Executive acknowledges and agrees that the Bank may suffer
immediate and irreparable harm. Consequently, the Executive and the Bank
acknowledge and agree that the Bank shall be entitled to immediate injunctive
relief, either by temporary or permanent injunction, to prevent or cure such a
violation.
TERMINATION
15. The Executive acknowledges and agrees that the Board of Directors of
the Bank reserves the right to terminate his EMPLOYMENT, without cause, for any
reason, by providing the Executive written notice of the termination, delivered
in person, or by certified U.S. mail to the Executive's last known address
reflected in the Bank's personnel records. Such notice shall be effective upon
personal delivery or three days after mailing by certified
<PAGE>
mail. However, if the Executive's employment is terminated at the Bank's
insistence without "good cause" as defined below in Paragraph 17, the Bank
covenants and agrees to provide the Executive with the SEVERANCE set forth
below at Paragraph 22.
16. The Executive acknowledges and agrees that the Bank may terminate this
Employment Agreement at any time, without notice, for any "good cause" defined
as the following:
a. In the event the Executive violates any material provision of
this Employment Agreement or is grossly negligent, and fails to
cure such violation or the effects of such gross negligence
within thirty (30) days after written notice to the Executive by
the Board specifying in reasonable detail the alleged violation
or gross negligence;
b. In the event the Executive is convicted of a felony, or a
misdemeanor involving moral turpitude; or
c. In the event the Executive engages in gross misconduct in the
course and scope of his employment with the Bank, including
indecency, immorality, material insubordination, dishonesty,
unlawful harassment, use of illegal drugs, or fighting.
The Executive acknowledges and agrees that in the event of the
Executive's termination for cause, he shall be entitled to salary and earned
benefits in accordance with Paragraphs 3 and 6 through the date of termination.
17. The Bank acknowledges and agrees that the Executive reserves the right
to terminate this Employment Agreement at any time, for any reason, with or
without cause, by providing thirty (30) days written notice, by personal
delivery or certified United States mail, to the Bank at its principal business
address of the Executive's intention to terminate this Employment Agreement.
Such notice shall be effective upon personal delivery or three (3) days after
mailing by certified mail.
18. The Executive acknowledges and agrees that in the event of the
Executive's death, this Employment Agreement will terminate immediately, without
notice, on the date of the Executive's death. The Bank acknowledges and agrees
that, in the event of the Executive's
death, the Bank will pay to the Executive's estate all salary, additional bonus
compensation, unused or accrued vacation pay, and other earned benefits in
accordance with Paragraphs 3, 5 and 7 through the date of termination.
19. The Executive acknowledges and agrees that his employment may be
terminated with thirty (30) days prior written notice in the event the Executive
becomes physically or mentally disabled and cannot perform the essential
functions of his position for sixty (60) consecutive days, with or without
reasonable accommodations. The Bank agrees to pay the Executive all salary,
additional bonuses compensation, unused or accrued vacation pay and all
<PAGE>
other earned benefits in accordance with Paragraphs 3, 5 and 6 through the
date of termination.
20. The Executive acknowledges and agrees that in the event of termination
of his employment, for whatever reason, whether at the insistence of the
Executive or at the insistence of the Bank, the Executive will return to the
Bank within seventy-two (72) hours of the time when notice of termination is
communicated by either party, any and all equipment, literature, documents,
data, information, order forms, memoranda, correspondence, customer and
prospective customer lists, customer's orders, records, cards or notes acquired,
compiled or coming into the Executive's knowledge, possession or control in
connection with his activities as an employee of the Bank, as well as all
machines, parts, equipment, or other materials received from the Bank or from
any of its customers, agents, or suppliers, in connection with such activities.
21. All accrued amounts that are due and payable pursuant to the terms of
this Employment Agreement shall continue to be due and owing until they are paid
in full and such obligation shall survive any termination of this Executive
Agreement.
SEVERANCE
22. The Executive and the Bank acknowledge and agree that, if the Bank
elects to terminate Executive's employment at any time prior to December 31,
1998, for any reason other than "good cause" as defined in Paragraph 16, the
Executive shall also be entitled to receive severance pay in addition to the
amounts of salary, earned bonus compensation, accrued vacation, and earned
benefits through the date of termination in accordance with Paragraph 3, 5 and
6. Such severance pay shall be as follows:
a. During the first two years of the agreement $150,000 less
statutory payroll deductions payable within thirty (30) days
following the date that the notice of termination becomes
effective.
b. During the third year of employment the lesser of $150,000 or the
remaining prorated salary benefits (including bonus) and prorated
accrued vacation for the third year, less statutory payroll
deductions, payable within thirty (30) days following the date
that the notice of termination becomes effective or thirty (30)
days after any bonus is calculated with respect to bonus
payments.
SEVERABILITY
23. The Executive and the Bank acknowledges and agree that each covenant
and/or provision of this Employment Agreement shall be enforceable independently
of every other covenant and/or provision. Furthermore, the Executive and the
Bank acknowledge and agree
<PAGE>
that, in the event any covenant and/or provision of this Employment Agreement is
determined to be unenforceable for any reason, the remaining covenants and/or
provisions will remain effective, binding, and enforceable.
WAIVER
24. The parties acknowledge and agree that the failure of either to
enforce any provision of this Employment Agreement shall not constitute a waiver
of that particular provision, or of any other provisions of this Employment
Agreement.
25. The Executive acknowledges and agrees that this Employment Agreement
may be assigned by the Bank to any successor-in-interest and shall inure to the
benefit of, and be fully enforceable by, any successor and/or assignee; and this
Employment Agreement will be fully binding upon, and may be enforced by the
Executive against, any successor and/or assignee of the Bank.
26. The Executive acknowledges and agrees that his obligations, duties and
responsibilities under this Employment Agreement are personal and shall not be
assignable, and that this Employment Agreement shall be enforceable by only the
Executive or his estate. In the event of the Executive's death, this Employment
Agreement shall be enforceable by the Executive's estate, executors, and/or
legal representatives.
CHOICE OF LAW
27. Both parties acknowledge and agree that the law of Texas will govern
the validity, interpretation, and effect of this Employment Agreement, and any
other dispute relating to, or arising out of, the employment relationship
between the Bank and the Executive.
ARBITRATION
28. The Executive and the Bank acknowledge and agree that any claim or
controversy arising out of or relating to this Employment Agreement, or the
breach of this Employment Agreement, or any other dispute arising out of or
relating to the employment of the Executive by the Bank, shall be settled by
final and binding arbitration in the city of Dallas, Texas in accordance with
the Employment Arbitration Rules of the American Arbitration Association in
effect on the date the claim or controversy arises. The Executive and the Bank
further acknowledge and agree that either party must request arbitration of any
claims controversy within sixty (60) days of the date the claim or controversy
arises by giving written notice of the party's request for arbitration by
certified U.S. mail or personal delivery addressed to the Bank's principal
business address or to the Executive's last known address reflected in the
Bank's personnel records. Notice shall be effective upon delivery or mailing.
Failure to give notice of any claim or controversy within sixty (60) days shall
constitute a waiver of the claim or controversy.
<PAGE>
29. All claims or controversies subject to arbitration shall be submitted
to arbitration within three (3) months from the date the written notice of a
request for arbitration is effective. All claims or controversies shall be
resolved by a panel of three (3) arbitrators who are licensed to practice law in
the State of Texas and who are experienced in the arbitration of labor and
employment disputes. These arbitrators shall be selected in accordance with the
Rules of the American Arbitration Association in effect at the time the claim or
controversy arises. Either party may request the arbitration proceeding be
stenographically recorded by a Certified Shorthand Reporter. The arbitrators
shall issue a written decision with respect to all claims or controversies
within thirty (30) days from the date the claims or controversies are submitted
to arbitration. The Executive and the Bank acknowledge and agree that each
party will bear fifty percent (50%) of the actual cost of the arbitration
proceeding (exclusive of each party's own legal fees).
30. The Bank and the Executive acknowledge and agree that the arbitration
provisions in Paragraphs 28 and 29 may be specifically enforced by either party,
and submission to arbitration proceedings compelled, by any court or competent
jurisdiction. The Bank and the Executive further acknowledge and agree that the
decision of arbitrators may be specifically enforced by either party in any
court of competent jurisdiction.
31. Notwithstanding the arbitration provisions set forth at Paragraphs 28-
30, the Executive and the Bank acknowledge and agree that nothing in this
Employment Agreement shall be construed to require the arbitration of any claim
or controversy arising under the NON-DISCLOSURE, and NON-INTERFERENCE provisions
set forth at Paragraphs 11-14 of this Agreement. These provisions shall be
enforceable by any court of competent jurisdiction and shall not be subject to
ARBITRATION pursuant to Paragraphs 28-30. The Executive and the Bank further
acknowledge and agree that nothing in this Employment Agreement shall be
construed to require arbitration of any claim for worker's compensation or
unemployment compensation.
MODIFICATION
32. Both parties acknowledge and agree that this Employment Agreement
constitutes the complete and entire agreement between the parties; that the
parties have executed this Employment Agreement based upon the express terms and
provisions set forth herein; that the parties have not relied on any
representatives, oral or written, which are not set forth in this Employment
Agreement; that no previous agreement, either oral or written, shall have any
effect on the terms or provisions of this Employment Agreement; and that all
previous agreements, either oral or written, are expressly superseded and
revoked by this Employment Agreement.
33. Both parties acknowledge and agree that the covenants and/or
provisions of this Employment Agreement may not be modified by any subsequent
agreement unless the modifying agreement: (i) is in writing; (ii) contains an
express provision referencing this Employment Agreement; (iii) is signed by the
Executive; and (iv) is approved by the Board of Directors of the Bank.
<PAGE>
INDEMNIFICATION
34. During the term of this Employment Agreement, the Bank shall indemnify
and agree to hold the Executive harmless from and against any and all
liabilities, losses, costs, damages, obligations, and expenses (including
attorney's fees) resulting from the fact that the Executive was an officer,
director, or employee of the Bank in accordance with and to the fullest extent
permissible under the law, including, without limitation, the Texas Savings Bank
Act and Article 2.02-1 of the Texas Business Corporation Act, and may purchase
such indemnification insurance as the Board of Directors may from time to time
determine.
LEGAL CONSULTATION
35. The Executive and the Bank acknowledge and agree that both parties
have been accorded a reasonable opportunity to review this Employment Agreement
with legal counsel prior to executing the agreement.
EFFECTIVE DATE
36. Subject to the approval and ratification by the Bank's Board of
Directors, this Agreement shall be effective January 24, 1996 (the "Effective
Date").
NOTICES
37. Any and all notices of documents or other notices required to be
delivered under the terms of this Employment Agreement shall be addressed to
each party as follows:
BANK:
15770 N. Dallas Parkway
Suite 300, LB #66
Dallas, Texas 75248-6617
Fax: (214) 866-8420
EXECUTIVE:
15725 Havenrock Circle
Dallas, Texas 75248
Fax: (214) 788-2337
<PAGE>
EXECUTED ON THIS 24TH DAY OF JANUARY, 1996, AT DALLAS, TEXAS, but to be
effective as of January 24, 1996, but only after approval of the Board of
Directors of the Bank.
BEAL BANK, SSB
By: /s/ D. Andrew Beal
----------------------------------
D. Andrew Beal
Chairman of the Board
EXECUTIVE:
By: /s/ David C. Meek
----------------------------------
David C. Meek
<PAGE>
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
OF JANUARY 24, 1996 BETWEEN DAVID C. MEEK
("EXECUTIVE") AND BEAL BANK, S.S.B. ("BANK")
The Executive and the Bank have entered into an Employment Agreement
(the "Agreement") dated January 24, 1996, and have agreed to amend such
Agreement as follows:
1. Paragraph 1 - Change December 31, 1998 to December 31, 1996.
2. Paragraph 3 - Delete second and third sentences.
3. Paragraph 5 - Add the following sentence at the end of the paragraph:
Notwithstanding the foregoing, the Executive shall not be entitled
to be paid a Bonus for the quarter October 1, 1996 to December 31, 1996
if on or before October 16, 1996 the Bank pays the Executive the
severance payment which is hereby agreed to be owing to the Executive
in consideration of the mutual agreement of the Bank and Executive
to shorten the term of this Agreement from December 31, 1998 to
December 31, 1996.
4. Paragraph 15 - To be added at the end of the Paragraph:
Notwithstanding the foregoing, if the Executive is paid the
$150,000.00 severance payment described in Paragraph 22 below on or
prior to October 16, 1996, the Bank shall not be obligated to make
an additional severance payment in accordance with Paragraph 22 of
the Agreement if the Agreement is terminated without cause after
October 16, 1996.
5. Paragraph 22 - Replace all of paragraph 22 with the following:
In consideration of Executive agreeing to the terms of this First
Amendment, the Bank shall pay the Executive on or before October
16, 1996 the sum of $150,000.00 less statutory payroll deductions,
in full consideration of the Company's severance obligations
hereunder.
6. The Bank and the Executive agree that no "good cause" for termination
of the Agreement and the Executive's employment by the Bank currently exists.
The parties have agreed, however, to amend the Agreement as provided in this
First Amendment. Each party agrees this First Amendment has been fully and
freely entered into without threat or duress and is the voluntary and knowing
act of each such party.
<PAGE>
Executed the 8th day of October, 1996.
EXECUTIVE:
/s/ DAVID C. MEEK
----------------------
David C. Meek
BANK:
BEAL BANK, S.S.B.
By: /s/ D. ANDREW BEAL
-------------------
D. Andrew Beal,
Chairman of the Board
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