<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
----------------------- -----------------
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
SUITE 300, LB 66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75248
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 404-4000
--------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
----
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $0, as all shares of the Registrant were held by affiliates
of the Registrant at September 30, 1996.
As of September 30, 1996, there were issued and outstanding 300,000 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LENDING ACTIVITIES. . . . . . . . . . . . . . . . . . . . . . . . . 3
GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
LOAN PORTFOLIO COMPOSITION . . . . . . . . . . . . . . . . . . 5
CONTRACTUAL PRINCIPAL REPAYMENTS . . . . . . . . . . . . . . . 7
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE SECURED LOANS . . . . . 8
LOAN ACQUISITION, RESOLUTION, ORIGINATION AND SALE ACTIVITIES . . . 11
GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ORIGINATIONS, REPURCHASES AND SALES OF MORTGAGE LOANS. . . . . 12
ACQUISITION OF DISCOUNTED LOANS. . . . . . . . . . . . . . . . 14
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING . . . . . . . 15
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. . . . . . . . 15
CONSTRUCTION, DEVELOPMENT AND LAND LENDING . . . . . . . . . . 17
CONSUMER LENDING . . . . . . . . . . . . . . . . . . . . . . . 19
COMMERCIAL BUSINESS LENDING. . . . . . . . . . . . . . . . . . 19
FOREIGN LENDING ACTIVITY . . . . . . . . . . . . . . . . . . . 19
LOAN DELINQUENCIES AND NON-PERFORMING ASSETS. . . . . . . . . . . . 20
NON-ACCRUING LOANS . . . . . . . . . . . . . . . . . . . . . . 23
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS. . . . . . . . . . 23
FORECLOSED ASSETS. . . . . . . . . . . . . . . . . . . . . . . 24
OTHER LOANS OF CONCERN . . . . . . . . . . . . . . . . . . . . 24
CLASSIFIED ASSETS. . . . . . . . . . . . . . . . . . . . . . . 24
ALLOWANCE FOR LOAN LOSSES. . . . . . . . . . . . . . . . . . . 25
INVESTMENT ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . 28
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SOURCES OF FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . 29
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
BORROWINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SUBSIDIARIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 33
SUBSIDIARIES OF THE BANK . . . . . . . . . . . . . . . . . . . . . 33
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
GENERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . 35
THE CONVERSION. . . . . . . . . . . . . . . . . . . . . . . 36
TEXAS LAW AND SUPERVISION BY THE TEXAS DEPARTMENT.. . . . . 36
FEDERAL REGULATION OF STATE-CHARTERED SAVINGS BANKS.. . . . 37
INSURANCE AND ACCOUNTS OF REGULATION BY THE FDIC. . . . . . 38
REGULATORY CAPITAL REQUIREMENTS AND PROMPT CORRECTIVE
REGULATORY ACTION . . . .. . . . . . . . . . . . . . . . . 39
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. . 42
LIQUIDITY . . . . . . . . . . . . . . . . . . . . . . . . . 42
QUALIFIED THRIFT LENDER TEST. . . . . . . . . . . . . . . . 42
COMMUNITY REINVESTMENT ACT. . . . . . . . . . . . . . . . . 42
TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . 43
HOLDING COMPANY REGULATION. . . . . . . . . . . . . . . . . 43
FEDERAL SECURITIES LAW. . . . . . . . . . . . . . . . . . . 43
FEDERAL RESERVE SYSTEM. . . . . . . . . . . . . . . . . . . 44
FEDERAL HOME LOAN BANK SYSTEM.. . . . . . . . . . . . . . . 44
FEDERAL AND STATE TAXATION . . . . . . . . . . . . . . . . . . . 44
FEDERAL TAXATION. . . . . . . . . . . . . . . . . . . . . . 44
TEXAS STATE INCOME TAXATION.. . . . . . . . . . . . . . . . 46
DELAWARE TAXATION.. . . . . . . . . . . . . . . . . . . . . 46
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 46
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 46
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 47
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 47
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 50
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ASSET/LIABILITY MANAGEMENT . . . . . . . . . . . . . . . . . . . 50
FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . . . . . . 54
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . 54
GENERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . 54
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES. . . 55
RATE/VOLUME ANALYSIS. . . . . . . . . . . . . . . . . . . . 56
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED
JUNE 30, 1996 AND 1995. . . . . . . . . . . . . . . . . . . 57
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED
JUNE 30, 1995 AND 1994 . . . . . . . . . . . . . . . . . . . . . 59
LIQUIDITY AND CAPITAL RESOURCES. . . . . . . . . . . . . . . . . 60
IMPACT OF INFLATION AND CHANGING PRICES. . . . . . . . . . . . . 61
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION. . . . . . 62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . . . . . . 87
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. . . . . . . . . . . . . . . 87
DIRECTORS OF BEAL FINANCIAL. . . . . . . . . . . . . . . . . . . 87
EXECUTIVE OFFICERS OF THE CORPORATION . . . . . . . . . . . . . . 88
BOARD OF DIRECTORS OF THE BANK. . . . . . . . . . . . . . . . . . 88
EXECUTIVE OFFICERS OF THE BANK. . . . . . . . . . . . . . . . . . 90
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
AND THE BANK. . . . . . . . . . . . . . . . . . . . . . . . . 91
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION . . . 92
COMPENSATION OF DIRECTORS.. . . . . . . . . . . . . . . . . . . . 92
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 92
COMPENSATION OF EXECUTIVE OFFICERS. . . . . . . . . . . . . . . . 92
EMPLOYMENT AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . 93
BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 94
ITEM 13. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. . . . . . . . . 95
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM
8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
iii
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PART I
ITEM 1. BUSINESS
GENERAL. Beal Financial Corporation ("Beal Financial" and with its
subsidiaries the "Company"), a Texas corporation, was organized by the
stockholders of Beal Bank, SSB (the "Bank") for the purpose of acquiring all of
the outstanding capital stock of the Bank, which it indirectly owns through its
wholly owned subsidiary, Beal Banc Holding Company, a Delaware corporation.
Beal Financial is owned primarily by D. Andrew Beal, Chairman of the Board of
the Bank. Beal Financial, through Beal Banc Holding Company, acquired ownership
of the Bank in July 1995 and is subject to regulation by the Office of Thrift
Supervision (the "OTS"). The only significant asset of Beal Financial is its
indirect ownership of the capital stock of the Bank. At June 30, 1996, the
business of the Company consisted primarily of the business of the Bank and its
subsidiaries. All references to the Company, unless otherwise indicated, prior
to July 1, 1995 refer to its subsidiaries, including the Bank and its
subsidiaries on a consolidated basis.
The Bank, a privately held Texas-chartered savings bank headquartered in
Dallas, Texas, was originally chartered in 1988 as a Texas-chartered savings and
loan association. Effective December 1, 1994, the Bank converted to a Texas
savings bank charter. This conversion was made primarily to eliminate the
duplicative regulation and supervision of the Bank by the OTS and the FDIC.
Prior to December 1994, the name of the Bank was "Beal Banc, S.A." See
"Regulation."
Beal Financial is subject to regulatory oversight and examination by the
OTS and the Texas Savings and Loan Department (the "Texas Department"). The
Bank is subject to regulation by the Texas Department, as its chartering
authority, and by the FDIC as a result of its membership in the Savings
Association Insurance Fund ("SAIF") administered by the FDIC, which insures the
Bank's deposits up to the maximum extent permitted by law. The Bank also is
subject to certain regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board") and currently is a member of the Federal Home
Loan Bank ("FHLB") of Dallas, one of the 12 regional banks which comprise the
FHLB System.
The Company's primary business currently consists of purchasing pools of
performing and, to a lesser extent, non-performing mortgage loans secured by
single-family (one to four units) residences, multi-family residential real
estate (over four units), commercial real estate and, to a much lesser extent,
undeveloped land and business assets. These loans are generally purchased at
discounts from the principal balances of the loans ("discounted loans")
primarily from the U.S. Department of Housing and Urban Development ("HUD"), the
FDIC and private sector sellers located nationwide. The Company had purchased a
significant amount of discounted loans from the Resolution Trust Company (the
"RTC") prior to December 31, 1995, the date of the RTC's termination. The
Company's current business strategy emphasizes the ongoing identification and
purchase of discounted loans, primarily secured by real estate, which management
believes are undervalued due to market, economic and competitive conditions.
See "- Loan Acquisition, Resolution, Origination and Sale Activities." The
Company is also exploring the possibility of lending to, or investing through
its subsidiaries in, real estate related projects or other business ventures in
various foreign countries. In this regard, the Bank has recently implemented a
lending program approved by the Texas Department to originate up to $15.0
million of commercial real estate loans secured by property located in Mexico.
To date, the Bank has funded one $5.0 million commercial real estate loan. See
"- Foreign Lending Activities" and - "Subsidiaries of the Bank."
The Company funds its discounted loan purchases and loan originations
primarily through the attraction of deposits from the general public, including
brokered deposits, and, to a lesser extent, borrowings from the FHLB of Dallas
and other sources. The Company has branch offices located in Dallas and
Houston, Texas. During fiscal 1996, the Company also opened a branch office in
Winnetka, Illinois, a suburb of Chicago, Illinois. The Company is also
exploring opening additional branch offices in other large metropolitan areas.
See "Sources of Funds - Deposits."
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The Company originates a limited amount of construction and land loans to
select builders and originates a limited amount of commercial real estate loans
mainly in its primary market area. Prior to May 1, 1996 the Company also
originated and purchased home improvement loans nationwide through correspondent
lending relationships. The Company considers its primary market area for
deposits and loan originations to consist of Collin, Dallas, Denton, Ellis,
Kaufman, Rockwall, Fort Bend, Harris, Liberty, Montgomery and
Waller counties, Texas and Cook, DuPage, McHenry and Lake counties, Illinois.
These counties consist of communities comprising the Dallas, Houston and the
Chicago/Lake County metropolitan statistical areas, respectively.
In addition to its loan purchasing and lending activities, the Company is
engaged in direct equity real estate investments, including the development of
residential lots through the Bank's subsidiaries, Beal Mortgage, Inc. ("BMI")
and Beal Properties Inc. ("BPI"). At June 30, 1996, the Company's real estate
held for development totaled $11.6 million, representing three residential
projects located in the suburbs of Dallas and one residential projected located
in Sacramento, California. BMI and BPI also held in the aggregate $10.7 million
of income producing properties (primarily consisting of the buildings located
adjacent to the Bank's corporate headquarters). See "- Subsidiaries of the
Bank."
In addition, the Company is engaged in the ownership of multi-family
projects that qualify for low-income housing tax credits through the Bank's
subsidiary, Beal Affordable Housing ("BAH"). BAH has invested $27.6 million in
three affordable housing apartment buildings at June 30, 1996. See "-
Subsidiaries of the Bank" and "- Regulation - Federal Regulation of
State-Chartered Savings Banks."
At June 30, 1996, the Bank was a "well capitalized institution" as defined
in FDIC regulations and had tier 1 capital to total assets ("leverage capital
ratio"), tier 1 capital to risk-weighted assets ("tier 1 capital ratio") and
total capital to risk-weighted assets ("total risk-based capital ratio") of
10.8%, 15.3% and 16.6%, respectively.
As a result of the nature of the Bank's core business, acquiring assets
(including assets of failed financial institutions) together with the
significant growth the Bank has experienced, the Bank and its subsidiaries have
been subject to closer supervisory monitoring and more frequent field
examinations, including special examinations. See "Regulation - Texas Law and
Supervision by the Texas Department" and "- Insurance of Accounts and Regulation
by the FDIC."
Subsequent to June 30, 1996, the Company received permission to charter
Beal State Savings Bank ("Beal State") as a Texas-chartered state savings bank
and is currently awaiting approval of its application for insurance from the
Federal Deposit Insurance Corporation (the "FDIC") for insurance of deposit
accounts through the Bank Insurance Fund ("BIF"). The Company has not
determined, however, if it will utilize Beal State as a separate subsidiary or
spin it off to Mr. Beal, subject to regulatory approval and reimbursement of
associated expenses. See "- Regulation - Holding Company Regulation."
In addition, subsequent to June 30, 1996, the Company purchased the
inactive Bank subsidiaries Beal Delaware Corp. and its subsidiary Beal Business
Trust ("BBT") from the Bank and invested, through BBT, $2.8 million in a joint
venture to develop 533 acres of land located in Austin, Texas zoned for light
industrial and commercial/retail use. In addition, the Company purchased from
the Bank a 45.1% participation interest in certain loans for a payment of
$18.5 million. The participation agreement provides that the Company's
interest in the loans will be junior to the Bank's interest in that the
principal amount of loans owed to the Bank will be repaid prior to the
principal amount owed to the Company. Lastly, the Company formed a new
subsidiary to invest approximately $750,000 in a limited partnership to
develop property located in McKinney, Texas. See "- Multi-Family and
Commercial Real Estate Lending."
The executive offices of the Company are located at 15770 N. Dallas
Parkway, Suite 300, Dallas, Texas 75248. Its telephone number at that address
is (972) 404-4000.
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements
2
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made with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and to advise readers that various factors, including
regional and national economic conditions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment
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 does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
LENDING ACTIVITIES
GENERAL. Commencing in 1990, the Company began purchasing pools of
performing and, to a lesser extent, non-performing discounted loans. The
discounted loans which have been acquired by the Company to date consist
primarily of single-family and multi-family residential loans, commercial real
estate loans, land, consumer and commercial business loans which have been
acquired from the RTC, the FDIC and the HUD, primarily in auctions of pools of
loans acquired by those agencies from failed financial institutions and to a
much lesser extent, private sector sellers.
At June 30, 1996 the Company's gross loan portfolio totaled $1.2 billion.
The Company's unaccreted purchase discounts and fees at June 30, 1996 totaled
$281.8 million. The Company's gross loan portfolio at June 30, 1996 was
comprised primarily of one- to four-family residential mortgage loans (22.5%),
commercial real estate loans (26.4%) and multi-family residential real estate
loans (28.0%). The balance of the gross loan portfolio included land loans
(8.2%), construction and development loans (7.0%), consumer loans (5.4%) and
commercial business loans (2.5%). At June 30, 1996 the Company's net loan
portfolio totaled $897.4 million. The Company's net loan portfolio at June 30,
1996 was comprised primarily of one- to four-family residential mortgage loans
(25.2%), commercial real estate loans (27.0%) and multi-family residential real
estate loans (25.7%). The balance of the net loan portfolio included land loans
(8.5%), construction and development loans (6.4%), consumer loans (5.9%) and
commercial business loans (1.3%).
At June 30, 1996, approximately 27.0% of the Company's gross real estate
mortgage loans (including one- to four-family junior lien loans classified as
consumer loans) were secured by real estate properties located in Texas. The
Company also has loans secured by real estate properties (including one- to
four-family junior lien loans) located in California and Florida, representing
17.5% and 11.6% of the Company's gross loan portfolio, respectively. At June
30, 1996, there were no other states where loans secured by real estate
properties (including one- to four-family junior lien loans) exceeded 5%. The
balance of the Company's real estate mortgage loans were secured by properties
located in the northeast, the midwest, and throughout the rest of the United
States. See "- Geographic Distribution of Real Estate Secured Loans."
Texas law limits the maximum amount the Bank may lend to one borrower or
group of related borrowers to the greater of $500,000, or 15%, of unimpaired
capital and surplus. At June 30, 1996, the Bank's loan to one borrower limit
was $22.6 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated borrowers was $16.5 million, which was secured
by land located in a suburb of Chicago, Illinois. This loan was current in
accordance with its repayment terms at June 30, 1996. See "Regulation" for a
discussion of the Bank's loans-to-one borrower limit.
The Company has no other loans in excess of $11.0 million, net to any
borrower or group of related borrowers but had two such lending relationships in
excess of $10.0 million, net (aggregating $21.1 million), an additional four
such lending relationships in excess of $7.5 million, net (aggregating $33.2
million), an additional seven such lending relationships in excess of $5.0
million, net (aggregating $42.6 million) and an additional 64 such lending
relationships in excess of $2.0 million, net (aggregating $211.4 million). At
June 30, 1996, eleven of these
3
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lending relationships in excess of $2.0 million, net, aggregating $36.7 million
were non-performing. See "- Loan Delinquencies and Non-Performing Assets."
4
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LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Company's loan portfolio, in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------------ ------------------- ------------------ ------------------ --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family. . . . . $44,159 51.39% $ 62,540 42.53% $ 67,169 21.81% $237,585 35.70% $ 273,780 22.47%
Commercial . . . . . . . . . 13,234 15.40 30,271 20.58 93,496 30.37 109,080 16.39 321,385 26.38
Multi-family . . . . . . . . 10,516 12.24 20,675 14.06 55,633 18.07 124,985 18.78 341,696 28.05
Construction and development 1,600 1.86 3,893 2.65 27,100 8.80 51,284 7.71 85,133 6.99
Land . . . . . . . . . . . . 6,332 7.37 7,089 4.82 9,889 3.21 35,997 5.41 100,047 8.21
------ ----- -------- ----- ------- ------- --------- ------ ---------- -----
Total real estate loans . 75,841 88.26 124,468 84.64 253,287 82.26 558,931 83.99 1,122,041 92.10
OTHER LOANS:
Consumer Loans:
One- to four-family - junior
liens . . . . . . . . . . 2,654 3.09 9,993 6.79 19,549 6.35 44,999 6.77 50,146 4.12
Timeshares . . . . . . . . . 2,471 2.87 1,599 1.09 18,249 5.93 11,668 1.75 7,809 .64
Other. . . . . . . . . . . . 4,045 4.71 3,747 2.55 7,139 2.32 4,791 .72 8,373 .69
------ ----- -------- ----- ------- ------- --------- ------ ---------- -----
Total consumer loans. . . 9,170 10.67 15,339 10.43 44,937 14.60 61,458 9.24 66,328 5.45
Commercial business loans. . 919 1.07 7,253 4.93 9,662 3.14 45,060 6.77 29,886 2.45
------ ------- -------- ----- ------- ------- --------- ------ ---------- -----
Total loans . . . . . . . 85,930 100.00% 147,060 100.00% 307,886 100.00% 665,449 100.00% 1,218,255 100.00%
------- -------- ------- ------- ------
------- -------- ------- ------- ------
LESS:
Loans in process . . . . . . --- 1,558 11,235 21,217 27,172
Deferred fees and discounts. 27,612 43,447 73,190 144,927 281,837
Allowance for loan losses. . 550 1,245 3,547 6,137 11,832
------ ------ ------ ------- -------
Total loans receivable,
net . . . . . . . . . . $57,768 $100,810 $219,914 $493,168 $ 897,414
------- -------- -------- -------- ---------
------- -------- -------- -------- ---------
</TABLE>
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The following table sets forth information concerning the composition of
the Company's loan portfolio after deduction for loans in process, deferred fees
and discounts, allowance for loan losses and loans held for sale at June 30,
1996.
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------------------------------------------------
Deferred
Fees and
Discounts
as a
Gross Deferred Allowance Percentage
Loan Loans in Fees and for Loan of Gross
Amount Process Discounts Losses Net Loans
----------- --------- ----------- --------- -------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
One- to four-family - first liens . . $ 273,780 $ --- $ 44,309 $ 3,153 $226,318 16.18%
Commercial . . . . . . . . . . . . . 321,385 --- 75,880 2,788 242,717 23.61
Multi-family. . . . . . . . . . . . . 341,696 --- 110,463 239 230,994 32.33
Construction and development. . . . . 85,133 27,172 896 19 57,046 1.05
Land. . . . . . . . . . . . . . . . . 100,047 --- 23,354 752 75,941 23.34
---------- -------- -------- -------- --------
Total real estate loans . . . . . . 1,122,041 27,172 254,902 6,951 833,016 22.72
OTHER LOANS:
Consumer Loans:
One- to four-family -
junior liens. . . . . . . . . . . . 50,146 --- 5,606 1,873 42,667 11.18
Timeshares. . . . . . . . . . . . . . 7,809 --- 1,609 374 5,826 20.60
Other . . . . . . . . . . . . . . . . 8,373 --- 2,575 1,138 4,660 30.75
---------- -------- -------- -------- --------
Total consumer loans. . . . . . . . 66,328 --- 9,790 3,385 53,153 14.76
Commercial business loans . . . . . . . 29,886 -- 17,145 1,496 11,245 57.37
---------- -------- -------- -------- --------
Total other loans . . . . . . . . . 96,214 --- 26,935 4,881 64,398 27.99
---------- -------- -------- -------- --------
Total loans . . . . . . . . . . . . . $1,218,255 $27,172 $281,837 $11,832 $897,414 23.13
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
Less:
Loans in process. . . . . . . . . . . 27,172 (27,172) --- --- ---
Deferred fees and discounts . . . . . 281,837 --- (281,837) --- ---
Allowance for losses. . . . . . . . . 11,832 --- --- (11,832) ---
---------- -------- -------- -------- --------
Total loans receivable, net . . . . $ 897,414 $ --- $ --- $ --- $897,414
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
</TABLE>
6
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS. The following schedule illustrates the
contractual maturity of the Company's loan portfolio at June 30, 1996. Loans
which have adjustable or renegotiable interest rates are shown as maturing in
the period during which the contract is due. The schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-------------------------------------------------------
One- to Construction
Four- and Commercial
Family Multi-family Commercial Development Land Consumer Business Total
Amount Amount Amount Amount Amount Amount Amount Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Due During
Periods Ending
June 30,
- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997(1). . . . . . . . . . $ 9,215 $ 19,972 $ 27,357 $ 28,692 $ 8,888 $ 4,446 $ 2,289 $100,859
1998 to 2001 . . . . . . . 30,954 44,531 92,107 24,196 43,516 8,998 5,556 255,113
2002 and following . . . . 189,301 147,251 103,607 4,177 15,997 38,986 3,927 497,992
-------- --------- --------- -------- -------- ------- -------- --------
229,471 211,754 223,071 57,065 68,401 52,430 11,772 853,963
Nonaccrual loans . . . . . --- 19,480 22,434 --- 8,292 4,107 969 55,282
Less:. . . . . . . . . . .
Allowance for loan losses 3,153 239 2,788 19 752 3,385 1,496 11,832
-------- --------- --------- -------- -------- ------- -------- --------
Total loans receivable, net $226,318 $230,994 $242,717 $57,046 $75,941 $53,153 $11,245 $897,414
-------- --------- --------- -------- -------- ------- -------- --------
-------- --------- --------- -------- -------- ------- -------- --------
</TABLE>
- -----------------------
(1) Includes demand loans and loans having no stated maturity and overdraft
loans.
7
<PAGE>
The total amount of gross loans due after June 30, 1997, which have
predetermined interest rates is $486.0 million, while the total amount of gross
loans due after such date which have floating or adjustable interest rates is
$272.4 million.
Scheduled contractual principal repayments do not reflect the actual
maturities of loans because of prepayments and, in the case of conventional
mortgage loans, due-on-sale clauses. The average life of mortgage loans,
particularly fixed-rate loans, tends to increase when current mortgage loan
rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgages are substantially higher
than current mortgage loan rates. Further, as a result of the use of the level
yield method or "interest method" of accretion of the purchase discount pursuant
to generally accepted accounting principles, to the extent loan repayments
exceed scheduled loan amortizations, the accretion of the remaining purchase
discount, if any, would be accelerated.
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE SECURED LOANS. The Company's loans
are secured by properties located throughout the United States. Some of these
loans are located in states which are reported to be experiencing adverse
economic conditions, including a general softening in real estate markets and
the local economies, which may result in increased loan delinquencies and loan
losses. The Company attempts to address this geographic risk by only purchasing
loans that meet the Company's underwriting and investment standards. Management
believes that purchasing loans secured by properties located across the country
results in a diversified loan portfolio and overall lower risk. As of June 30,
1996, the Company's gross real estate collateralized loans (excluding junior
liens secured by one- to four-family real estate totaling $50.2 million) were
geographically distributed as follows:
<TABLE>
<CAPTION>
Total Real Estate Secured Outstanding Percent Non-performing
Loans By Geographic Balance at of Total Balance at Percent of
Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- -------------------------------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Texas. . . . . . . . . . . . . . . . $ 296,021 26.38% $ 28,933 14.86%
California . . . . . . . . . . . . . 201,103 17.92 48,794 25.06
Florida. . . . . . . . . . . . . . . 133,895 11.93 45,540 23.39
Colorado . . . . . . . . . . . . . . 48,136 4.29 90 .05
Illinois . . . . . . . . . . . . . . 38,518 3.43 874 .45
All others . . . . . . . . . . . . . 404,368 36.05 70,485 36.19
---------- ------- -------- ------
Total real estate loan portfolio . $1,122,041 100.00% $194,716 100.00%
---------- ------- -------- ------
---------- ------- -------- ------
</TABLE>
At June 30, 1996, there were no other loan concentrations in any other
state which exceeded three percent of the total real estate loan portfolio.
8
<PAGE>
The following tables set forth the geographic distribution of the Company's
real estate loans by loan type at June 30, 1996.
<TABLE>
<CAPTION>
One- to Four-Family Outstanding Percent Non-performing
Loans By Geographic Balance at of Total Balance at Percent of
Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- --------------------------------------- ------------- ----------- ------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
California . . . . . . . . . . . . . $ 54,825 20.03% $ 6,787 32.08%
Texas . . . . . . . . . . . . . . . 53,847 19.67 1,669 7.89
Florida . . . . . . . . . . . . . . 30,450 11.12 2,730 12.90
Massachusetts. . . . . . . . . . . . 18,590 6.79 2,101 9.93
Alabama. . . . . . . . . . . . . . . 12,538 4.58 226 1.07
Maryland . . . . . . . . . . . . . . 8,727 3.19 1,036 4.90
Virginia . . . . . . . . . . . . . . 8,614 3.15 478 2.26
All others . . . . . . . . . . . . . 86,189 31.47 6,132 28.97
-------- ------ ------- ------
Total One- to Four- Family Loans . $273,780 100.00% $21,159 100.00%
-------- ------ ------- ------
-------- ------ ------- ------
Outstanding Percent Non-performing
Commercial Real Estate Balance at of Total Balance at Percent of
Loans By Geographic Location June 30, 1996 Outstanding June 30, 1996 Nonperforming
- -------------------------------------- -------------- ------------ -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Texas. . . . . . . . . . . . . . . . $ 73,747 22.95% $ 821 1.55%
California . . . . . . . . . . . . . 72,332 22.51 18,866 35.72
Florida. . . . . . . . . . . . . . . 49,428 15.38 10,162 19.24
Colorado . . . . . . . . . . . . . . 16,911 5.26 --- ---
Virginia . . . . . . . . . . . . . . 14,001 4.36 1,439 2.72
All others . . . . . . . . . . . . . 94,966 29.54 21,527 40.77
-------- ------ ------- ------
Total Commercial Real Estate Loans $321,385 100.00% $52,815 100.00%
-------- ------ ------- ------
-------- ------ ------- ------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Outstanding Percent Non-performing
Multi-familyLoans By Balance at of Total Balance at Percent of
Geographic Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- -------------------------------------- ------------- ----------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Texas. . . . . . . . . . . . . . . . $ 73,476 21.50% $ 24,417 22.78%
Florida. . . . . . . . . . . . . . . 48,225 14.11 31,291 29.19
California . . . . . . . . . . . . . 41,359 12.10 18,803 17.54
Louisiana. . . . . . . . . . . . . . 27,090 7.93 9,200 8.58
Missouri . . . . . . . . . . . . . . 24,296 7.11 9,033 8.43
Colorado . . . . . . . . . . . . . . 19,214 5.62 --- ---
Kansas . . . . . . . . . . . . . . . 19,003 5.56 --- ---
Georgia. . . . . . . . . . . . . . . 17,602 5.15 2,987 2.79
Arkansas . . . . . . . . . . . . . . 12,949 3.79 3,412 3.18
All others . . . . . . . . . . . . . 58,482 17.13 8,038 7.51
-------- ------ --------- ------
Total Multi-Family Loans . . . . . $341,696 100.00% $ 107,181 100.00%
-------- ------ --------- ------
-------- ------ --------- ------
Outstanding Percent Non-performing
Construction and Development Balance at of Total Balance at Percent of
Loans by Geographic Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- ------------------------------------ ------------- ----------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Texas. . . . . . . . . . . . . . . . $81,061 95.22% $156 100.00%
Colorado . . . . . . . . . . . . . . 4,072 4.78 --- ---
------- ------ ------ ------
Total Construction Loans . . . . . $85,133 100.00% $156 100.00%
------- ------ ------ ------
------- ------ ------ ------
Land Loans Outstanding Percent Non performing
By Geographic Balance at of Total Balance at Percent of
Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- ------------------------------------ ------------- ----------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
California . . . . . . . . . . . . . $ 32,587 32.57% $ 2,658 19.83%
Illinois . . . . . . . . . . . . . . 17,010 17.00 --- ---
Texas. . . . . . . . . . . . . . . . 13,889 13.88 1,590 11.86
South Carolina . . . . . . . . . . . 9,966 9.96 --- ---
Florida. . . . . . . . . . . . . . . 5,792 5.79 452 3.37
New Jersey . . . . . . . . . . . . . 4,760 4.76 4,354 32.48
Colorado . . . . . . . . . . . . . . 3,247 3.25 --- ---
New Mexico . . . . . . . . . . . . . 3,060 3.06 473 3.53
All others . . . . . . . . . . . . . 9,736 9.73 3,878 28.93
-------- ------ -------- ------
Total Land Loans . . . . . . . . . $100,047 100.00% $ 13,405 100.00%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
10
<PAGE>
The following table sets forth the geographic distribution of the Company's
junior lien loans secured by one- to four-family real estate at June 30, 1996.
<TABLE>
<CAPTION>
One- to Four-Family
Junior Lien Loans Outstanding Percent Non-performing
By Geographic Balance at of Total Balance at Percent of
Location June 30, 1996 Outstanding June 30, 1996 Non-performing
- ------------------------------------ ------------- ----------- -------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Texas . . . . . . . . . . . . . . . . $20,026 39.93% $ 2,144 21.11%
New York. . . . . . . . . . . . . . . 5,034 10.04 1,232 12.13
California. . . . . . . . . . . . . . 3,408 6.80 558 5.49
New Jersey. . . . . . . . . . . . . . 3,143 6.27 1,915 18.86
Florida . . . . . . . . . . . . . . . 2,532 5.05 1,000 9.85
Georgia . . . . . . . . . . . . . . . 2,010 4.01 83 .82
Oklahoma. . . . . . . . . . . . . . . 1,615 3.22 126 1.24
All others. . . . . . . . . . . . . . 12,378 24.68 3,099 30.50
------- ------ ------- ------
Total One-to-Four Family
Junior Lien Loans . . . . . . . . $50,146 100.00% $10,157 100.00%
------- ------ ------- ------
------- ------ ------- ------
</TABLE>
LOAN ACQUISITION, RESOLUTION, ORIGINATION AND SALE ACTIVITIES
GENERAL. The Company has limited the development of its direct lending
operations. In order to avoid the cost of developing lending programs where
demand is deemed to be insufficient or competition would reduce the return to
the Company below acceptable levels, the Company historically has invested and
intends to continue to invest a significant percentage of its assets in
discounted loans. The Company believes that under appropriate market
conditions the acquisition of discounted loans offers a better return than the
origination of mortgage loans. Historically, discounted loans purchased by the
Company generally have collateral coverage which is substantially in excess of
the purchase price of the loan. In addition, the Company believes that
discounted loans can be purchased on terms which result in the investment having
a total return which is substantially in excess of an equivalent investment in
originated mortgage loans.
It should be noted, however, that the acquisition of discounted loans has
become more competitive in the marketplace, in part because of the presence of
additional competitors for discounted loans offered by the HUD, the FDIC and
private sector sellers and because the HUD and the FDIC generally sought to
increase the number of purchasers of assets sold by them. The Company continues
to review and bid to acquire a substantial amount of performing discounted loans
and, to a lesser extent, non-performing discounted loans. There can be no
assurance, however, that the Company will be able to continue to acquire
discounted loans in the future at either the same volumes or the same level of
discounts as experienced in the past. Moreover, the significant earnings
achieved by the Company on the discounted loan portfolio in recent periods may
be attributable in part to early resolution of the least difficult
non-performing loans in acquired pools. As a result, there can be no assurance
that the level of earnings on discounted loans experienced by the Company to
date are necessarily indicative of the results to be experienced in future
periods or that there will not be substantial periodic variations in the results
from such activities.
Prior to entering the discounted loan business, management of the Company,
particularly, Chairman D. Andrew Beal, had loan acquisition and resolution and
real estate management experience. His experience assisted the Company in
developing the procedures and systems which are necessary to evaluate and
acquire discounted loans and to resolve such loans in a timely and profitable
manner.
11
<PAGE>
All reviews of discounted loans are initially performed through Loan
Acceptance Corporation ("LAC"), a wholly owned subsidiary of the Bank, of which
D. Andrew Beal is President. LAC places bids on pools of discounted loans in
anticipation of assigning its interest in the loan pool to the Bank following
acceptance of its bid. All purchases by the Bank are made within the parameters
set by the Board of Directors of the Bank for loan purchases and originations,
as discussed below.
The Bank's Junior Loan Committee, comprised of President Meek, Executive
Vice President Farmer and Senior Vice President-Lending Saurenmann (with any
Vice President substituting for a missing member) may approve loan originations
and purchases or a modification or extension of any existing loan when the net
book value is $250,000 or less.
The Bank's Senior Loan Committee, comprised of Chairman Beal, President
Meek and Executive Vice President Farmer (with any Senior Vice President
substituting for a missing member), requires the unanimous approval for all loan
purchases and originations or a modification or extension of an existing loan
from $250,000 to $1.0 million in net book value.
The Bank's Executive Loan Committee, comprised of Chairman Beal, President
Meek and Directors Blanton, Fults, Goldstein and Weinstein (with any other
Director substituting for a missing member) may approve by majority vote all
loan purchases and originations or a modification or extension of an existing
loan in excess of $1.0 million in net book value. Notwithstanding the above,
full Bank Board approval is required for all purchases of non-performing assets
which would result in the Bank's ratio of classified assets to total capital
exceeding or projected to exceed 70% at any month-end.
Loan sales and sales of foreclosed assets are approved at various levels of
authority requiring the approval of the President, the Chairman and the
President, the Bank's Executive Loan Committee, or the Board of Directors, based
upon the amount of proceeds to be received as a percentage of net book value, or
appraisal value in the case of foreclosed assets.
In addition to making substantial investments in discounted loans, the
Company originates construction and land loans, and originates a limited amount
of commercial real estate and other loans. Prior to May, 1996, the Company also
originated and purchased home improvement loans nationwide through correspondent
lending relationships.
ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS. During fiscal 1996,
1995 and 1994, the Company purchased $541.2 million, $346.2 million and
$124.7 million of loans, net of discount, respectively.
The Company services $856.9 million of its gross loan portfolio directly,
including virtually all of its multi-family and commercial real estate loans,
construction and land loans. The Company relies on approximately 184 other
entities to service the remaining $361.3 million of its gross loans. Of this
amount, at June 30, 1996, seven entities individually service loans in excess of
$10.0 million, aggregating $216.5 million, or 59.9% of the Company's loans
serviced by others. No other entity services individually in excess of $5.4
million of the Company's gross loan portfolio. The Company attempts to
consolidate the loan servicing when feasible, taking into consideration the
relative costs and performance of the servicing entity.
12
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------
1994 1995 1996
--------------- ------------ ---------------
(Dollars In Thousands)
<S> <C> <C> <C>
Originations by type:
--------------------
Adjustable rate:
---------------
Real estate - one- to four-family . . . . . . . . . . . . $ 83 $ 240 $ ---
- multi-family. . . . . . . . . . . . . . . . 5,550 529 2,452
- commercial. . . . . . . . . . . . . . . . . 1,300 9,687 3,942
- construction. . . . . . . . . . . . . . . . 47,666 53,840 97,887
- land. . . . . . . . . . . . . . . . . . . . 3,380 5,625 17,534
Commercial Business . . . . . . . . . . . . . . . . . . . 1,190 3,400 780
-------- -------- --------
Total adjustable-rate . . . . . . . . . . . . . . . 59,169 73,321 122,595
Fixed rate:
----------
Real estate - one- to four-family . . . . . . . . . . . . --- --- ---
- multi-family. . . . . . . . . . . . . . . . --- --- 1,236
- commercial. . . . . . . . . . . . . . . . . --- --- 10,198
- land. . . . . . . . . . . . . . . . . . . . --- --- 1,312
Consumer - one- to four-family junior liens . . . . . . . 8,087 --- 42
- other. . . . . . . . . . . . . . . . . . . . . --- --- 3,032
Commercial Business . . . . . . . . . . . . . . . . . . --- 3,093 17
-------- -------- --------
Total fixed-rate. . . . . . . . . . . . . . . . . . 8,087 3,093 15,837
-------- -------- --------
Total loans originated. . . . . . . . . . . . . . . 67,256 76,414 138,432
Purchases:
---------
Real estate - one- to four-family . . . . . . . . . . . . 18,917 253,107 82,291
- multi-family. . . . . . . . . . . . . . . . 36,268 68,512 314,616
- commercial. . . . . . . . . . . . . . . . . 79,930 52,474 226,495
- land. . . . . . . . . . . . . . . . . . . . --- 25,563 62,074
Consumer - one- to four-family - junior liens. . . . . . 6,702 21,251 34,947
- timeshares. . . . . . . . . . . . . . . . . . 16,928 --- ---
- other . . . . . . . . . . . . . . . . . . . . 3,761 1,123 5,105
Commercial business . . . . . . . . . . . . . . . . . . . 5,669 33,426 7,223
-------- -------- --------
Total loans purchased, gross. . . . . . . . . . . . . 168,175 455,456 732,751
Purchase discounts. . . . . . . . . . . . . . . . . . . . 43,456 109,284 208,078
-------- -------- --------
Total loans purchased, net. . . . . . . . . . . . . . 124,719 346,172 524,673
-------- -------- --------
Percentage of purchase discounts to
to total gross loans purchased. . . . . . . . . . . . . 25.8% 24.0% 28.4%
-------- -------- --------
-------- -------- --------
Sales and Repayments:
--------------------
Real estate - one- to four-family . . . . . . . . . . . . --- 52,257 1,886
- multi-family. . . . . . . . . . . . . . . . --- 7,283 5,644
- commercial. . . . . . . . . . . . . . . . . 1,647 2,616 3,102
Consumer - one- to four-family - junior liens. . . . . . --- 5,007 ---
Commercial business . . . . . . . . . . . . . . . . . . . --- --- ---
-------- -------- --------
Total loans sold. . . . . . . . . . . . . . . . . . . 1,647 67,163 10,632
Principal repayments. . . . . . . . . . . . . . . . . . . 57,600 70,131 258,197
-------- -------- --------
Total sales and repayments. . . . . . . . . . . . . . 59,247 137,294 268,829
Other reductions: . . . . . . . . . . . . . . . . . . . .
Transfers to real estate owned. . . . . . . . . . . . . 4,274 7,725 22,118
Unearned discounts. . . . . . . . . . . . . . . . . . (13,713) (19,327) (38,926)
Decrease in other items, net. . . . . . . . . . . . . 23,063 24,506 277
-------- -------- --------
Net Increase. . . . . . . . . . . . . . . . . . . . . . . $119,104 $272,388 $410,807
-------- -------- --------
-------- -------- --------
</TABLE>
13
<PAGE>
ACQUISITION OF DISCOUNTED LOANS. Many of the discounted loans purchased by
the Company are performing loans. In order to determine the amount that it will
bid to acquire performing discounted loans, the Bank considers, among other
factors, the yield expected to be earned, the geographic location of the loans,
servicing restrictions, if any, the type and value of the collateral securing
the loan and the length of time during which the loan has performed in
accordance with its repayment terms. In order to determine the amount that it
will bid to acquire non-performing discounted loans, in addition to the factors
stated above, the Company estimates the amounts it will realize through its
collection efforts or foreclosure and sale of the security property, net of
expenses, and the length of time and costs required to complete the collection
or foreclosure process.
Prior to acquiring a pool of loans, LAC utilizes primarily third-party
subcontractors to conduct an acquisition review of each loan pool. This review
includes an evaluation of the seller's representations and warranties and of the
adequacy of the applicable loan documentation (E.G., the existence of a note,
including confirmation of the interest rate and outstanding loan balance,
mortgage, title policy, borrower financial statements, tax returns,
environmental reports, etc.). The current value of the security property is
estimated utilizing various methods, considering, among other factors, the type
of property, the loan balance, the recourse nature of the debt, the age and
performance of the loan, and the resources of the borrower. For example, a
performing, well seasoned pool of single family loans may receive a relatively
limited collateral value review consisting of a drive by appraisal of select
properties by a local broker, or in some cases, obtaining multiple broker
opinions of value on all loans in the pool. As the value and complexity of the
property increases, LAC's efforts to value the property also increase. For
larger, more complex loans, LAC personnel may visit the collateral property,
conduct an internal rental analysis of competing properties, or order asset
searches on the borrowers and/or guarantors to identify other sources of
repayment. New title searches and tax reports may also be obtained. LAC may
also retain environmental consultants to review potential environmental issues.
The amount of resources devoted to valuing collateral property is determined on
a case by case basis for each pool acquired.
An estimated value is prepared for each loan or pool of loans. The factors
considered by LAC include the current status of the loan and the borrower
(including payment history, bankruptcy and litigation considerations) taxes due,
and, if non-performing, estimated foreclosure costs and length of time to
conduct a foreclosure sale in the applicable state, estimated current market
value of the property based on a limited marketing period, costs of taxes and
insurance and maintenance of the property during the marketing period and fees
and other costs incurred in connection with the sale of the property. The
resulting price to be bid by LAC is generally at a discount from both the
principal balance of the loan and the estimated value of the underlying
collateral. All bids are prepared by or subject to the approval of LAC's
President, D. Andrew Beal.
If LAC is the successful bidder, a bid deposit, if required, will be
forwarded to the selling entity. Prior to a loan being acquired, the Company's
lending personnel, supplemented if necessary or appropriate by subcontractors,
(generally different than the ones who conducted the initial evaluation review)
perform a more in-depth review of the loan documents to determine and categorize
the extent of loan documentation deficiencies and review LAC's analysis of
value. The Company reviews loans by conducting a comprehensive inspection of
all documentation relating to the loans and by obtaining current credit reports,
when appropriate. Depending on the circumstances, the Company's due diligence
team may use local counsel and engineering and environmental experts, to assist
in the evaluation and verification of this information and the gathering of
other information not previously made available by the seller. For example,
there may be maintenance and occupancy problems associated with the collateral
which this additional review may reveal. Based upon the review performed by the
Company's lending personnel, a recommendation is made to the appropriate Company
loan committee which determines whether the Company should purchase the loans
covered by the bid. In the event that the Company's applicable loan committee
declines to purchase the loans, the right to purchase may be sold to a third
party or LAC may forfeit its deposit or be subject to additional penalties as
set forth in the contract, including the remedy of specific performance.
Upon purchase, each loan file is then reviewed by the loan servicing
department to ensure the adequacy and completeness of the documentation securing
the Company's interest in the underlying collateral and to correct loan
documentation, and as appropriate, other file deficiencies. Large loans are
assigned to a loan officer. Loan resolution alternatives for non-performing
loans consist primarily of the following: (i) the borrower brings the loan
current in accordance with original or modified terms, (ii) the borrower repays
the loan, (iii) the Company sells the
14
<PAGE>
loan to a third party to resolve, (iv) the borrower agrees to deed the property
to the Company in lieu of foreclosure, in which case it is classified as a
foreclosed asset and held for sale by the Company, and (v) the Company
forecloses on the loan and the property is either acquired at the foreclosure
sale by a third party or by the Company, in which case it is classified as a
foreclosed asset owned and held for sale by the Company. The loan officer
evaluates all available information and pursues the best expected means of
resolving the loan on the Company's behalf. In this regard, because the Company
generally acquires the loan at a substantial discount from the outstanding
principal balance of the loan and the value of the underlying collateral, the
Company has the ability to modify the loan terms or otherwise make concessions
to a borrower in the loan resolution process and still meet or exceed the
targeted return to the Company.
In the event of the bankruptcy of the borrower, the loan officer works
closely with the Company's outside counsel. The loan officer determines the
appropriate course of action, such as filing a proof of claim, moving to have
the stay lifted or establishing procedures for monitoring the bankruptcy plan.
The loan officer may also order property inspections and ensures that a current
broker's opinion or appraisal is in the loan file. Property inspections
continue until the loan is brought current or refinanced or the property is
sold. A current broker's opinion of value is confirmed or an appraisal is also
obtained prior to any foreclosure sale for bidding purposes.
If a security property becomes a foreclosed asset, the Company obtains a
new appraisal unless a current acceptable appraisal is available. The Company
then determines whether any repairs should be made to the property and the
initial price to list the property under circumstances which are intended to
result generally in a quick sale of the property. The Company then markets the
property and supervises the management of the property until it is sold. The
Company also generally retains a management firm to manage its commercial and
multi-family foreclosed assets. For information about the Company's foreclosed
assets, see "- Loan Delinquencies and Non-Performing Assets."
The Company generally anticipates a three to eighteen month period to
resolve large non-performing commercial and multi-family real estate loans,
which is longer than it generally takes to resolve the Company's discounted non-
performing single-family residential loans due to the complexity and wide
variety of issues that may occur with respect to a delinquent commercial or
multi-family real estate loan. Unlike single-family residential loans, however,
commercial and multi-family real estate loans frequently provide some income to
the Company, which may be the case even in a bankruptcy situation if a receiver
has been appointed for the property.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. At June 30, 1996, the
Company's one- to four-family residential mortgage loans totaled $273.8 million,
or 22.5% of the Company's gross loan portfolio. At that date, the Company's net
one- to four-family residential mortgage loan portfolio totaled $226.3 million,
or 25.2% of the Company's net loan portfolio. The Company generally does not
originate one- to four-family residential loans other than loans made to
facilitate the sale of foreclosed assets, however, the Company has purchased
such loans from correspondent financial institutions and brokers. Consistent
with its asset/liability objectives, the Company may sell a portion of the
purchased one- to four-family residential mortgage loans to the FNMA and other
secondary market purchasers after the loan files have been reviewed and
deficiencies corrected by Bank personnel to ensure loan documentation complies
with the purchaser's standards.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company originates a
limited amount of loans for the purchase, construction, refurbishing and
development of commercial and multi-family real estate. Substantially all of
the multi-family and commercial real estate loans originated by the Company are
secured by properties located in the Company's primary market area. At June 30,
1996, $321.4 million, or 26.4% of the Company's gross loan portfolio, consisted
of 799 loans secured by commercial real estate and $341.7 million, or 28.0% of
the Company's gross loan portfolio, consisted of 550 loans secured by multi-
family residential properties. At that date, $242.7 million, or 27.0% of the
Company's net loan portfolio, consisted of loans secured by commercial real
estate and $231.0 million, or 25.7% of the Company's net loan portfolio,
consisted of loans secured by multi-family residential properties.
15
<PAGE>
Included in the multi-family residential portfolio are 66 loans aggregating
$189.3 million in gross principal amount at June 30, 1996 ($111.7 million net of
purchase discount). These loans were purchased from HUD in October, 1995. All
of these HUD Loans are secured by first mortgage liens. In addition, the
Company has second mortgage liens on two of these properties.
The properties which secure the HUD Loans are predominately located in five
states, Texas, Florida, Louisiana, California and Missouri, which had $42.3
million, $28.7 million, $24.7 million, $18.0 million and $16.7 million gross
principal amount of loans, respectively. The balance of the loans are located in
the Southeastern and Southwestern states.
The HUD Loans were acquired by HUD pursuant to various insurance programs
of the FHA. Under programs of the FHA, a lending institution may assign a
defaulted FHA-insured loan to HUD because of an economic hardship on the part of
the borrower which precludes the borrower from making the scheduled principal
and interest payment on the loan. Once a loan is assigned to HUD, the FHA
insurance is paid and the loan is no longer insured. As a result, none of the
HUD Loans are insured by the FHA.
HUD assistance to borrowers is provided in the form of Provisional Workout
Agreements ("PWA") which are forbearance agreements under which the borrower
either makes a monthly payment less than or equal to the original monthly
payment or makes a monthly payment more than the original monthly payment to
make up for arrearages. These agreements vary in duration. Under the terms of
the contract governing the sale of the HUD Loans, the Company is obligated to
comply with the terms of any PWA until the term of the agreement expires or is
cancelled pursuant to its terms or there is a default under the PWA.
Subsequent to June 30, 1996, the Company purchased an additional 24 loans
aggregating $111.8 million in gross principal amount at June 30, 1996. All of
these HUD Loans are secured by first mortgage liens except for one second
mortgage lien on a property the Company also has the first mortgage lien.
The properties which secure these HUD Loans are predominately located in
three states, Florida, Massachusetts and Ohio, which had $61.4 million, $24.0
million and $14.6 million gross principal amount of loans, respectively. Two of
these loans, located in Massachusetts and Florida had balances of $16.0 million
and $12.5 million, respectively. The balance are located in Maryland, Indiana
and Kentucky.
Included in this purchase are 16 properties aggregating $70.8 million in
gross principal amount at June 30, 1996 which are the subject of bankruptcy
proceedings. Each of these properties are limited partnerships sharing a common
general partner. The Company is negotiating with the general partner in an
attempt to reach an acceptable reorganization plan.
The terms of commercial and multi-family real estate loans originated by
the Company are individually negotiated on a case by case basis, however, these
loans generally have terms ranging up to seven years with adjustable rates of
interest. Rates on these loans generally float with changes in the prime rate.
Such loans generally do not contain caps on the maximum amount of interest which
may be charged over the term of the loan but may contain a floor below which the
interest rate on the loan may not fall. In addition to the payment of principal
and interest on these loans, the Company may receive an additional fee or a
share in the profits from the project upon the completion of the construction or
refurbishment of the underlying property. The Company's commercial and multi-
family real estate loans provide for recourse against the security property and,
in most circumstances, require the borrower to be personally liable for all or a
portion of the loan.
Multi-family and commercial real estate loans are generally underwritten in
amounts of up to 85% of the lesser of cost or the appraised value of the
underlying property. Appraisals on properties securing multi-family and
commercial real estate loans originated by the Company are generally performed
by an independent fee appraiser designated by the Company before the loan is
made. All appraisals on multi-family and commercial real estate loans are
reviewed by the Company's management. In addition, the Company's underwriting
procedures require verification of the borrower's credit history, financial
statements, references and income projections for the property.
16
<PAGE>
While the Company continues to monitor both purchased and originated multi-
family and commercial real estate loans through its semi-annual asset review
process, updated appraisals are not normally obtained after loan purchase or
origination unless the Company's asset review process raises questions regarding
the value of the collateral. In order to monitor the adequacy of cash flows on
income-producing properties, the borrower is notified semi-annually, requesting
financial statements and other information from the borrower and guarantor,
including but not limited to information pertaining to rental rates and income,
maintenance costs and an update of real estate property tax payments.
Multi-family and commercial real estate loans generally present a higher
level of risk than do loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on commercial properties and the increased difficulty of evaluating
and monitoring these types of loans. Furthermore, the repayment of loans
secured by multi-family and commercial real estate is typically dependent upon
the successful operation of the related real estate project. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. Commercial
real estate loans also involve many of the same risks discussed below regarding
construction loans. The Company has attempted to minimize these risks through
its underwriting and investment standards and by lending primarily on existing
income-producing properties. At June 30, 1996, $160.0 million, or 24.1% of the
multi-family and commercial real estate gross loan portfolio, was delinquent 90
days or more, substantially all of which was purchased non-performing. At that
date, net non-performing multi-family and commercial real estate loans totaled
$85.9 million.
CONSTRUCTION, DEVELOPMENT AND LAND LENDING. The Company initiated a
construction lending program in January 1993. The Company originates
construction and development loans to builders and developers, based on
demonstrated experience and financial condition, primarily for the construction
of one- to four-family residences that have been pre-sold, for speculative
and/or model homes or for the development of single family lots. These loans
increase the yield on, and the proportion of interest rate sensitive loans in,
the Company's portfolio. The Company generally does not make construction loans
on single-family residences to individuals who will ultimately be the owner-
occupier of the house or construction loans to builders and developers for the
construction of commercial real estate projects, including multi-family
residences. The Company's construction loans for owner-occupied residential
property do not convert to permanent loans upon completion of the construction
phase. At June 30, 1996, the Company's construction loan portfolio totaled
$85.1 million, or 7.0% of its gross loan portfolio. At that date, the Company's
construction loan portfolio, totaled $57.0 million, or 6.4% of its net loan
portfolio. Substantially all of these loans are secured by property located
within the Dallas/Ft. Worth Metroplex or Austin, El Paso, Temple, Belton and
Killeen, Texas.
The application for this program generally requires the builder to provide
information to the Company, including the builder's financial condition,
experience and other background information. Following the Company's
independent review and acceptance of a builder into the program, the Company's
appropriate loan committee establishes a guidance limit which represents the
maximum amount of credit the Company will consider lending to the builder. At
June 30, 1996, the Company had residential construction lines of credit
outstanding to approximately 30 builders. The Company will extend a builder a
loan for up to a maximum of $125,000 to $400,000 per house with the approval of
both the Construction Lending Manager and either the Company's Senior Vice
President-Lending or the President consistent with the terms of the borrower's
guidance limit. The Company obtains personal guarantees for substantially all
of its construction loans.
At June 30, 1996, the Company had 470 construction loans to builders of
one- to four-family residences totaling $40.5 million (of which approximately
62.0% represented pre-sold homes) of which $24.5 million was funded. At
June 30, 1996, the largest guidance limit approval to one builder or group of
related builders totaled $6.0 million, of which $3.5 million was funded.
Construction loans for the construction of one- to four-family residences
generally require the payment of interest only for a term of six to 12 months.
Construction loans provide for the payment of loan origination fees from loan
proceeds and carry adjustable rates of interest. Construction loan proceeds are
disbursed in increments
17
<PAGE>
as construction progresses. Disbursements are scheduled by contract, with the
Company reviewing the progress of the underlying construction project prior to
each disbursement.
The loan application process includes a submission to the Company of
accurate plans, specifications and costs of the project to be constructed. The
Company also reviews the borrower's existing financial condition and total debt
outstanding. Loans are based on the appraised value of the underlying
collateral, as completed. These items are also used as a basis to determine
the appraised value of the subject property. Construction loans on pre-sold
homes are based on the lesser of 80% of the current appraised value or 100% of
the cost (land plus buildings) of construction (typically, 75% of the current
appraisal value and 95% of the cost, respectively for construction loans on
speculative or model homes). Draws on construction loans are made only after an
inspection of the property is made by an experienced outside inspector or by
Bank personnel with significant experience in the inspection of homes under
construction. With respect to development loans originated by the Company, the
builder or developer is required to submit detailed bids obtained from
subcontractors which reflect the estimated costs of the project. The Company
may require commitments for the purchase of the lots to be developed prior to
the Company advancing funds. The Company's development loan agreements
generally provide that principal repayments are required as individual lots are
sold to third parties so that the remaining loan balance is in proportion to the
value of the remaining security.
The Company has recently determined to limit its construction loans to the
construction of one- to four-family residences located in one of the Company's
residential developments. As a result, the Company anticipates a decrease in
the origination of construction loans.
In addition to construction loans, the Company originates and has purchased
land loans secured by residential lots and land held for the development of
single-family lots and, to a much lesser extent, loans secured by land utilized
for agricultural or ranching purposes. As of June 30, 1996, land loans totaled
$100.0 million, or 8.2% of the Company's gross loan portfolio. At that date,
net land loans totaled $75.9 million, or 8.5% of the Company's net loan
portfolio. These loans are generally underwritten in amounts up to 65% of
appraised value and typically have terms that are individually negotiated on a
case-by-case basis. The majority of land loans have adjustable rates of
interest and some may have a profit participation interest.
Construction, development and land lending is generally considered to
involve a higher level of credit risk than permanent one- to four-family
residential lending, due to the concentration of principal in a limited number
of loans and borrowers and/or the effects of general economic conditions on
development projects, real estate developers, managers or homebuilders. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. Construction and land loans also involve many of the same
risks discussed regarding commercial and multi-family loans and tend to be more
sensitive to general economic conditions than many other types of loans. The
Company's risk of loss on a construction or land loan is dependent largely upon
the accuracy of the initial estimate of the property's value upon completion of
the project and the estimated cost (including interest) of the project. Because
of the uncertainties inherent in estimating construction costs and the market
for the project upon completion, it is relatively difficult to evaluate
accurately the total loan funds requested to complete a project, the related
loan-to-value ratios and the likelihood of ultimate success of the project. If
the estimate of construction or development cost proves to be inaccurate, the
Company may be required to advance funds beyond the amount originally committed
in order to permit completion of the project. If the estimate of value proves
to be inaccurate, the Company may be confronted, at or prior to the maturity of
the loan, with a project having a value which is insufficient to assure full
repayment. When loan payments become due, borrowers may experience cash flow
from the property which is not adequate to service total debt. In such cases,
the Company may be required to modify the terms of the loan. The Company
attempts to mitigate these risks by dealing primarily with experienced builders.
In addition, the Company monitors the progress and condition of homes under
construction prior to each draw and verifies the builder's credit no less
frequently than semi-annually through an independent credit reporting service.
See "- Loan Delinquencies and Non-Performing Assets."
At June 30, 1996, there were two construction loans and 49 land loans with
aggregate gross principal balances of $13.6 million delinquent 90 days or more.
At that date, net non-performing land loans totaled $8.3 million.
18
<PAGE>
CONSUMER LENDING. The Company originates loans secured by savings deposits
and has purchased other consumer loans, including loans secured by timeshare
agreements. At June 30, 1996, the gross consumer loan portfolio totaled $66.3
million, or 5.4% of the gross loan portfolio, and was predominately fixed-rate
loans. At that date, net consumer loans totaled $53.2 million, or 5.9% of the
Company's net loan portfolio.
Prior to May, 1996, the Company indirectly originated and purchased one- to
four-family junior lien loans from correspondent financial institutions, brokers
and home improvement contractors. Although the loan documentation utilized was
the seller's, the Company approved the loan prior to purchase utilizing the
Company's underwriting standards and, in the case of home improvement
contractors, funded the loan upon assignment. The underwriting standards
employed included a determination of the applicant's payment history on other
debts and an assessment of the ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant was a
consideration, because these loans were generally made to credit-impaired
borrowers, the primary consideration in the underwriting process was a
comparison of the value of the security in relation to the proposed loan amount.
One- to four-family junior lien loans were generally made at fixed rates
for terms of up to 15 years. Generally, such loans did not exceed 90% of the
property's appraisal value less the amount owed, if any, on any other mortgages
or liens. One- to four-family junior lien loans are secured by a lien on the
underlying real estate. The Company required a title search on all one- to
four-family junior lien loans.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured. In some cases,
the collateral for a defaulted consumer loan may not provide an adequate source
of repayment of the outstanding loan balance. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which may be recovered on
such loans. At June 30, 1996, there were 873 consumer loans with aggregate gross
principal balances of $12.4 million ($9.4 million, net of purchase discount)
delinquent in excess of 90 days.
COMMERCIAL BUSINESS LENDING. At June 30, 1996, the Company had $29.9
million in commercial business loans outstanding, or 2.5% of the Company's gross
loan portfolio, all of which were purchased discounted loans. At that date, the
Company had $11.2 million of net commercial business loans outstanding, or 1.3%
of the Company's net loan portfolio. The Company's loans include loans to
finance accounts receivable, inventory and equipment. Management does not
currently contemplate any significant increase in the ratio of this portfolio to
the Company's total loan portfolio.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
FOREIGN LENDING ACTIVITY. The Company is exploring foreign lending to, or
through its subsidiaries making direct equity investments in, real estate
related projects or other business ventures located in, among other areas,
Mexico, South America and Europe. In this regard, in July 1995, the Texas
Department directed that neither the Bank nor its subsidiaries shall lend,
invest or engage in any new activities or expand any current activities outside
the continental United States without its prior written approval.
Foreign lending and investment generally involves greater risks than do
lending and investment in the United States. Foreign economies differ favorably
or unfavorably from the United States' economy in such respects as the level of
inflation and debt, which may result in fluctuations in the value of the
country's currency and real property. Further, there may be less government
regulation in various countries, and difficulty in enforcing legal
19
<PAGE>
rights outside the United States. Additionally, in some foreign countries,
there is the possibility of expropriation or confiscatory taxation, limitations
on the removal of property or other assets, political or social instability or
diplomatic developments which could affect the operations and assets of U.S.
companies doing business in that country. Many of these risks are more
pronounced for activities in developing or emerging countries, such as the
countries in which the Company is exploring lending or investment opportunities.
The Company's management is not experienced in the area of foreign lending or
investment.
Except as described below, the Company (including its subsidiaries) has not
made any foreign loans or investments, and, although it continues to explore
possible opportunities, it currently has not identified any such loans or
investments that it intends to make.
During fiscal 1996 the Bank received authority from the Texas Department to
originate up to $15.0 million in loans to Mexican nationals secured by real
estate located in Mexico with an appraised value at least equal to twice the
loan amount, and that no more than $5.0 million will be loaned to a single
borrower. All transactions must be dollar denominated to avoid the currency
exchange risk. As of June 30, 1996, one loan with a book balance of $4.9
million had been funded under this program. See "- Subsidiaries - Foreign
Lending Corporation."
At June 30, 1996, the Company had less than $2.0 million in principal
balance of loans that were originated in the United States but secured by the
right to use time-share properties located primarily in Spain, Mexico, Bermuda,
the Bahamas or the Caribbean region.
LOAN DELINQUENCIES AND NON-PERFORMING ASSETS
When a borrower fails to make a required payment on a loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. A
past due notice is sent when the loan is 10 days past due. A delinquency notice
is sent 15 days after the due date and a late charge is assessed in accordance
with the loan terms. If the delinquency is not cured by the 30th day, a default
warning is sent to the borrower. Other written and verbal contacts may be made
with the borrower between five and 90 days after the due date. If the
delinquency continues for a period of 90 days, the Company usually institutes
appropriate action to foreclose on the property. If foreclosed, the property is
sold and may be purchased by the Company. Delinquent consumer loans are handled
in a generally similar manner. The Company's procedures for repossession and
sale of consumer collateral are subject to various requirements under the
consumer protection laws of the applicable state.
20
<PAGE>
The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of type at June 30, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
-------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------------- ------------------------------- ----------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
-------- -------- ---------- -------- ---------- -------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family -
first liens. . . . . . . . 118 $2,321 .85% 559 $ 21,159 7.73% 677 $ 23,480 8.58%
Commercial . . . . . . . . . 4 386 .12 92 52,816 16.43 96 53,202 16.55
Multi-family . . . . . . . . 7 2,998 .88 53 107,180 31.37 60 110,178 32.24
Construction or
development. . . . . . . . --- --- --- 2 156 .18 2 156 .18
Land . . . . . . . . . . . . 4 421 .42 49 13,404 13.40 53 13,825 13.82
--- ----- ---- ------- ---- -------
Total real estate. . . . . 133 6,126 .55 755 194,715 17.35 888 200,841 17.90
Other Loans:
Consumer Loans:
One-to four-family
junior lien. . . . . . . . 60 1,179 2.35 343 10,225 20.39 403 11,404 22.74
Timeshares . . . . . . . . . 23 47 .60 486 1,630 20.87 509 1,677 21.48
Other. . . . . . . . . . . . 15 109 1.30 44 573 6.84 59 682 8.15
--- ------ ---- ------- ---- -------
Total consumer loans. . . . 98 1,335 2.01 873 12,428 18.74 971 13,763 20.75
Commercial business. . . . . . 2 268 .90 51 7,778 26.03 53 8,046 26.92
--- ------ ---- ------- ---- -------
Total other loans . . . . . 100 1,603 1.67 924 20,206 21.00 1,024 21,809 22.67
--- ------ ---- ------- ------ -------
Total loans . . . . . . . . 233 7,729 .63 1,679 214,921 17.64 1,912 222,650 18.28
Less:
Unearned discounts . . . . . . 1,493 92,341 93,834
------ -------- --------
Total Loans, net . . . . . $6,236 .69 $122,580 13.66 $128,816 14.35
--- ------ -------- --------
--- ------ -------- --------
</TABLE>
At June 30, 1996, the Company's non-performing loans included 206 loans
aggregating $52.8 million for which foreclosure proceedings had been commenced.
At that date, 296 loans involved borrowers involved in bankruptcy proceedings
representing approximately $31.5 million of delinquent loans in the Company's
loan portfolio.
21
<PAGE>
The following table sets forth the amounts and categories of non-performing
assets in the Company's loan portfolio. Loans are placed on non-accrual status
when the collection of principal and/or interest become doubtful. Such loans
remain on non-accrual status until the earlier of legal foreclosure, or
relinquishment of control of the collateral by the borrower, or the collection
of principal or interest is no longer doubtful. For all years presented, the
Company has had no troubled debt restructurings (which involve forgiving a
portion of interest or principal on any loans below net book value or making
loans at a rate materially less than that of market rates). Foreclosed assets
include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
---------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Real estate:
One- to four-family. . . . . . . . . . . . $ 1,945 $ 1,732 $ 3,185 $11,093 $ ---
Commercial . . . . . . . . . . . . . . . . 687 248 14,492 16,816 35,004
Construction . . . . . . . . . . . . . . . --- --- --- 93 156
Multi-family . . . . . . . . . . . . . . . --- 580 4,883 9,507 51,934
Land . . . . . . . . . . . . . . . . . . . --- 2,433 3,282 8,056 7,961
Consumer:
One- to four-family - junior liens . . . . 14 193 1,185 2,850 10,157
Timeshares . . . . . . . . . . . . . . . . 308 554 1,019 1,673 1,630
Other consumer . . . . . . . . . . . . . . 98 525 476 545 641
Commercial business. . . . . . . . . . . . . --- 78 2,320 7,357 7,777
Purchase discounts . . . . . . . . . . . . (1,230) (1,864) (14,063) (22,011) (59,978)
------- ------- ------- ------- --------
Total (net). . . . . . . . . . . . . . 1,822 4,479 16,779 35,979 55,282
Accruing loans delinquent more than
90 days:
Real estate:
One- to four-family. . . . . . . . . . . . --- --- 583 --- 21,159
Multi-family . . . . . . . . . . . . . . . --- --- 106 --- 55,247
Commercial . . . . . . . . . . . . . . . . --- 200 77 --- 17,811
Land . . . . . . . . . . . . . . . . . . . --- --- --- --- 5,444
Consumer:
One to four-family - junior liens. . . . . 202 --- 80 --- ---
Purchase discounts . . . . . . . . . . . . (77) (62) (347) --- (32,363)
------- - ------ ------- ------- --------
Total (net). . . . . . . . . . . . . . 125 138 499 --- 67,298
Foreclosed assets:
Real estate:
One- to four-family. . . . . . . . . . . . 82 651 481 1,525 1,799
Commercial . . . . . . . . . . . . . . . . 269 302 1,456 3,026 9,148
Multi-family . . . . . . . . . . . . . . . --- --- --- 3,633 15,010
Construction . . . . . . . . . . . . . . . --- 1,987 --- --- 300
Land . . . . . . . . . . . . . . . . . . . 13 --- 365 570 1,456
Consumer:
Timeshares . . . . . . . . . . . . . . . . --- --- --- 36 32
------- ------- ------- ------- --------
Total (net). . . . . . . . . . . . . . 364 2,940 2,302 8,790 27,745
------- ------- ------- ------- --------
Total non-performing assets. . . . . . . . . $ 2,311 $ 7,557 $19,580 $44,769 $150,325
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Total as a percentage of total assets. . . . 3.58% 6.36% 7.95% 7.07% 11.84%
---- ---- ---- ---- -----
---- ---- ---- ---- -----
</TABLE>
22
<PAGE>
For the year ended June 30, 1996 gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $8.3 million. The amount that was included in
interest income on such loans was $2.8 million for the year ended June 30, 1996.
NON-ACCRUING LOANS. As of June 30, 1996, the Company had approximately
$55.3 million in net non-accruing loans, which constituted 6.2% of the Company's
net loan portfolio. Certain of the Company's loans are classified as non-
accruing due to problems related to the financial condition of the borrower.
The following is a brief summary of each non-accruing loan with a net
principal balance of over $2.5 million at June 30, 1996.
Retirement Facility, Northern Florida. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $6.4 million is secured
by a first lien on an independent living/retirement community of approximately
510 units. The borrower entered into bankruptcy proceedings in June, 1996 and
the Company is seeking to have a receiver appointed.
Apartment Complex, Los Angeles, California. The Company purchased this
loan in fiscal 1996. The net book balance at June 30, 1996 of $2.8 million is
secured by a first lien on an apartment complex of approximately 200 units. The
Company anticipates foreclosing on this loan in January, 1997.
Adult Congregate Living Facility, Miami, Florida. This non-performing loan
with a net book balance of $2.5 million at June 30, 1996 is secured by a first
lien on a 180 bed facility. Subsequent to June 30, 1996 the Company agreed to a
payment in excess of book value to be made in November, 1996 and may pursue a
deficiency judgment against the guarantors.
Apartment Complex, Los Angeles, California. The Company purchased this
loan in fiscal 1996. The net book balance at June 30, 1996 of $2.8 million is
secured by a first lien on an apartment complex of approximately 110 units. In
September, 1996 a plan of reorganization was approved by the Company and the
bankruptcy court modifying the loan.
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS. As of June 30, 1996, the
Company had $67.3 million of accruing loans delinquent more than 90 days. The
Company continues to accrue interest on these loans because the value of the
underlying collateral is deemed to be in excess of principal and accrued
interest. The following is a brief summary of such loans with a June 30, 1996
net principal balance in excess of $2.5 million.
Apartment Complex, Carson City, Nevada. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $4.8 million is secured
by a first lien on an apartment complex of approximately 200 units. The Company
anticipates foreclosing on this loan in September, 1996.
Apartment Complex, Northern California. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $3.4 million is secured
by a first lien on an apartment complex of approximately 120 units. The loan is
currently in default, and the Company anticipates foreclosing on this loan in
September, 1996.
23
<PAGE>
Apartment Complex, South Texas. The Company purchased this loan in fiscal
1996. The net book balance at June 30, 1996 of $3.2 million is secured by a
first lien on an apartment complex of approximately 220 units. In September,
1996 the borrower filed for Chapter 11 bankruptcy protection.
Shopping Center, Shawnee, Kansas. In December 1995 the Company purchased a
69.29% participation interest in a $7.0 million loan secured by a first deed of
trust on a 180,000 square foot shopping center. The Company's net book value at
June 30, 1996 was $3.0 million. There is $1.0 million in delinquent taxes owed
on the property. Despite the borrower filing Chapter 11 Bankruptcy, the Company
is attempting to foreclose on the property and anticipates doing so in December,
1996.
Apartment Complex, Los Angeles, California. The Company purchased this
loan in fiscal 1996. The net book balance at June 30, 1996 of $2.8 million is
secured by a first lien on an apartment complex of approximately 110 units. In
September, 1996 a plan of reorganization was approved by the Company and the
bankruptcy court.
FORECLOSED ASSETS. As of June 30, 1996, the Company had approximately
$27.7 million in carrying value of foreclosed assets. Included in foreclosed
assets were 36 one- to four-family mortgage loans aggregating $1.8 million, 29
commercial and multi-family real estate loans totaling $24.2 million (of which
$2.3 million of assets are held by the Company's subsidiary, BRE), and eight
construction, development and land loans aggregating $1.8 million. See "-
Subsidiaries of the Company."
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the previous table, as of June 30, 1996 the Company had approximately $52.0
million of net loans, which includes $49.8 million of commercial and multi-
family real estate loans and $2.2 million of other loans with respect to which
known information about the possible credit problems of the borrowers or the
cash flows of the security properties have caused management to have concern as
to the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories. The following is a summary of such loans with a June 30, 1996
net principal balance in excess of $2.5 million.
Retirement Center, Southern Arizona. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $3.4 million is secured
by a first lien on a retirement center with approximately 200 units. The
borrower was performing at June 30, 1996 in accordance with a PWA, which was
cancelled subsequently by the Company in accordance with its terms. The Company
anticipates foreclosing on this loan in October, 1996.
Apartment Complex, Southern Louisiana. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $2.8 million is secured
by a first lien on an apartment complex of approximately 200 units. The
borrower was performing at June 30, 1996 in accordance with a PWA, which was
cancelled subsequently by the Company in accordance with its terms. The Company
anticipates foreclosing on this loan in November, 1996.
Apartment Complex, Northern Louisiana. The Company purchased this loan in
fiscal 1996. The net book balance at June 30, 1996 of $2.8 million is secured
by a first lien on an apartment complex of approximately 100 units. The
borrower was performing at June 30, 1996 in accordance with a PWA, which was
cancelled subsequently by the Company in accordance with its terms. The Company
anticipates foreclosing on this loan in December, 1996.
CLASSIFIED ASSETS. The FDIC requires the classification of a savings
bank's problem assets. Management of the Company classifies all problem assets
as "substandard," "doubtful" or "loss." An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values,
24
<PAGE>
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
When the Company classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Company classifies problem assets as
"loss," it will charge off such amount. The Company reviews its asset portfolio
and classifies certain assets semi-annually. In addition, the Company's
determination as to the classification of its assets and the amount of its
valuation allowances is reviewed by the Texas Department and the FDIC during
their examinations of the Company, which may result in the establishment of
additional general or specific loss allowances.
The Company reviews the problem loans and other assets to determine whether
any loans or other assets require classification on a monthly basis. Net
classified assets of the Company as of the dates indicated were as follows:
<TABLE>
<CAPTION>
June 30, 1996
----------------------
(Dollars In Thousands)
<S> <C>
Substandard. . . . . . . . . . . . . . . $87,713
Doubtful . . . . . . . . . . . . . . . . 1,080
Loss . . . . . . . . . . . . . . . . . . ---
------
Total Classified Assets . . . . . . $88,793
-------
-------
</TABLE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through provisions for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity. Such evaluation includes a review of the loan portfolio including
those loans of which full collectibility may not be reasonably assured, current
economic conditions, historical loan loss experience, loan volume and growth,
the composition of the loan portfolio and other factors that warrant recognition
in providing for an adequate allowance for loan losses. The Company also
developed certain asset review policies and procedures which established minimum
general loan loss reserves for all types of loans. In determining the general
reserves under these policies historical charge-offs and recoveries, changes in
the mix and levels of the various types of loans, fair values, the current loan
portfolio and current economic conditions are considered. These policies also
require additional reserves for all delinquent and classified loans. See "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company establishes a specific allowance against a given loan when
management perceives a problem in that loan that may result in a loss. The
Company continues to monitor and modify its allowances for general and specific
loan losses as economic conditions dictate. Although the Company maintains its
allowance for loan losses at a level which it considers to be adequate to
provide for potential losses, there can be no assurances that such losses will
not exceed the estimated amounts. In addition, various regulatory agencies
periodically review the allowance for loan losses and may require that additions
be made based upon their judgment of information available to them at the time
of their examination.
Real estate properties acquired through, or in lieu of loan foreclosure are
initially recorded at fair value less estimated cost to sell at date of
foreclosure. Valuations are periodically performed by management and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
25
<PAGE>
The following table sets forth an analysis of the Company's allowance for loan
losses at the dates indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . . . . . . . . . $189 $550 $1,245 $3,547 $ 6,137
Charge-offs:
One- to four-family. . . . . . . . . . . . . . . . . 46 30 174 440 845
Commercial . . . . . . . . . . . . . . . . . . . . . -- -- 36 534 28
Multi-family . . . . . . . . . . . . . . . . . . . . -- -- -- -- 80
Construction and development . . . . . . . . . . . . -- -- -- -- 35
Land . . . . . . . . . . . . . . . . . . . . . . . . -- -- 203 39 362
Consumer . . . . . . . . . . . . . . . . . . . . . . -- 59 173 449 858
Commercial business. . . . . . . . . . . . . . . . . -- -- -- -- 1,177
------ ------ ------ ------ ------
46 89 586 1,462 3,385
Recoveries:
One- to four-family. . . . . . . . . . . . . . . . . -- -- -- 2 1
Consumer . . . . . . . . . . . . . . . . . . . . . . -- -- -- 5 18
Commercial business. . . . . . . . . . . . . . . . . -- -- -- -- 17
------ ------ ------ ------ ------
Net charge-offs. . . . . . . . . . . . . . . . . . . . 46 89 586 1,455 3,349
Additions charged to operations. . . . . . . . . . . . 407 784 2,888 4,045 9,044
------ ------ ------ ------ ------
Balance at end of period . . . . . . . . . . . . . . . $550 $1,245 $ 3,547 $6,137 $11,832
---- ------ ------- ------ -------
---- ------ ------- ------ -------
Ratio of net charge-offs during the
period to average loans outstanding during
the period. . . . . . . . . . . . . . . . . . . . . . .12% .11% .40% .40% .44%
Ratio of net charge-offs during the period to
average non-performing assets . . . . . . . . . . . . 2.86% 1.80% 4.32% 4.52% 2.95%
</TABLE>
26
<PAGE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------------
1992 1993 1994
-----------------------------------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each Loan
Amount of Amounts Category Amount of Amounts Category Amount of Amounts
Loan Loss by to Total Loan Loss by to Total Loan Loss by
Allowance Category Loans Allowance Category Loans Allowance Category
--------- ---------- --------- ----------- -------- -------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family. . . . . . . . . $ 94 $ 44,159 51.38% $ 114 $ 62,540 42.52% $ 90 $ 67,169
Multi-family . . . . . . . . . . . . 26 10,516 12.24 110 20,675 14.06 139 55,633
Commercial real estate . . . . . . . 5 13,234 15.40 216 30,271 20.58 303 93,496
Construction and development . . . . -- 1,600 1.86 17 3,893 2.65 50 27,100
Land . . . . . . . . . . . . . . . . -- 6,332 7.37 101 7,089 4.82 81 9,889
One- to four-family junior liens . . 1 2,654 3.09 92 9,993 6.80 29 19,549
Timeshares . . . . . . . . . . . . . 2 74 .09 -- 1,599 1.09 -- 18,249
Other consumer . . . . . . . . . . . -- 6,442 7.50 200 3,747 2.55 151 7,139
Commercial business. . . . . . . . . 112 919 1.07 200 7,253 4.93 151 9,662
Unallocated. . . . . . . . . . . . . 310 -- -- 195 -- -- 2,553 --
----- ------- ------ ------ -------- ------ ------ -------
Total . . . . . . . . . . . . . $ 550 85,930 100.00% $1,245 147,060 100.00% $3,547 307,886
----- ------ ------ ------ ------
----- ------ ------ ------ ------
Less:
- ----
Loans in process . . . . . . . . . -- 1,558 11,235
Loans held for sale, net . . . . . -- -- --
Deferred fees and
discounts. . . . . . . . . . . . 27,612 43,447 73,190
Allowance for loan losses. . . . . 550 1,245 3,547
------- ------- --------
Total loans
receivable, net . . . . . . . $57,768 $100,810 $219,914
------- ------- --------
------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1995 1996
------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each Loan in Each Loan in Each
Category Amount of Amounts Category Amount of Amounts Category
to Total Loan Loss by to Total Loan Loss by to Total
Loans Allowance Category Loans Allowance Category Loans
--------- ----------- -------- -------- --------- -------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family. . . . . . . . . 21.81% $1,881 $237,585 35.70% $ 3,153 $ 273,780 22.47%
Multi-family . . . . . . . . . . . . 18.07 604 109,080 16.39 239 341,696 28.05
Commercial real estate . . . . . . . 30.37 1,276 124,985 18.78 2,788 321,385 26.38
Construction and development . . . . 8.80 88 51,284 7.71 19 85,133 6.99
Land . . . . . . . . . . . . . . . . 3.21 474 35,997 5.41 752 100,047 8.21
One- to four-family junior liens . . 6.35 577 44,999 6.76 1,873 50,146 4.12
Timeshares . . . . . . . . . . . . . 5.93 595 11,668 1.75 374 7,809 .64
Other consumer . . . . . . . . . . . 2.32 266 4,791 .72 1,138 8,373 .69
Commercial business. . . . . . . . . 3.14 376 45,060 6.77 1,496 29,886 2.45
Unallocated. . . . . . . . . . . . . -- -- -- -- -- -- --
----- ------- ------ ------ -------- ------ -----
Total . . . . . . . . . . . . . 100.00% $6,137 665,449 100.00% $11,832 1,218,255 100.00%
------ ------ ------ ------- ------
------ ------ ------ ------- ------
Less:
- ----
Loans in process . . . . . . . . . 21,217 27,172
Loans held for sale, net . . . . . 866 --
Deferred fees and
discounts. . . . . . . . . . . . 144,927 281,837
Allowance for loan losses. . . . . 6,137 11,832
-------- ----------
Total loans
receivable, net . . . . . . . $492,302 $ 897,414
-------- ----------
-------- ----------
</TABLE>
27
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Company, which is established by the
Investment Committee and approved by the Company's and Bank's Board of
Directors, is designed primarily to provide a portfolio of high quality,
diversified instruments while seeking to optimize net interest income within
acceptable limits of interest rate risk, credit risk and liquidity.
Generally, the investment policy of the Company is to invest funds in
interest-bearing deposits in banks, FHLB overnight deposits, FHLB of Dallas
stock and GNMA securities based upon the Company's liquidity needs and
performance objectives. It is the Company's general policy to purchase
investment securities which are U.S. Government securities and federal agency
obligations and other issues rated investment grade.
The Bank must maintain minimum levels of investments that qualify as liquid
assets under the Texas Department regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. The Bank maintains its
liquidity at a level believed adequate to meet requirements of normal daily
activities, repayment of maturing debt and potential deposit outflows. Cash
flow projections are regularly reviewed and updated to assure that adequate
liquidity is maintained. At June 30, 1996, the Bank's liquidity ratio was
15.4%. See "Regulation - Liquidity."
Texas-chartered savings banks have the authority to invest in various types
of liquid assets, including United States Treasury obligations, securities of
various federal agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, Texas-chartered savings banks
may also invest their assets in commercial paper, investment grade corporate
debt securities and mutual funds whose assets conform to the investments that a
Texas-chartered savings bank is otherwise authorized to make directly.
The following table sets forth the composition of the Company's investment
in FHLB Stock, interest-bearing deposits with banks and mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1994 1995 1996
--------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------ ------ ------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLB stock . . . . . . . . . . . . . . . $1,573 100.00% $ 7,475 100.00% $ 9,340 100.00%
------ ------ ------- ------ ------- ------
------ ------ ------- ------ ------- ------
Interest-bearing deposits with banks. . . $4,930 100.00% $31,044 100.00% $54,838 100.00%
------ ------ ------- ------ ------- ------
------ ------ ------- ------ ------- ------
Mortgage-backed securities:
GNMA . . . . . . . . . . . . . . . . . $2,000 100.00% $40,184 98.70% $199,429 102.43%
Gross unrealized (loss) . . . . . . . . . --- --- --- --- (1,328) (.68)
Unamortized premium (discount). . . . . . 1 --- 530 1.30 (3,402) (1.75)
------ ------ ------- ------ ------- ------
Total mortgage-backed securities. . . $2,001 100.00% $40,714 100.00% $194,699 100.00%
------ ------ ------- ------ ------- ------
------ ------ ------- ------ ------- ------
</TABLE>
The Company's investment securities portfolio at June 30, 1996, contained
neither tax-exempt securities nor securities of any issuer with an aggregate
book value in excess of 10% of the Company's stockholders' equity, excluding
those issued by the United States Government, or its agencies.
28
<PAGE>
SOURCES OF FUNDS
GENERAL. Beal Financial's primary source of funds are dividends which may
be paid by the Bank. In addition, Beal Financial has the ability to access the
capital markets, if necessary.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal, borrowings, and funds provided from operations
and, from time to time, sales of assets. Management of the Bank closely
monitors rates and terms of competing sources of funds on a regular basis and
generally utilizes the sources which are the most cost effective.
Borrowings, predominantly from the FHLB of Dallas, may be used on a short-
term basis to compensate for reductions in deposits or deposit inflows at less
than projected levels, and may be used on a longer-term basis to support
expanded purchasing activities.
DEPOSITS. The Bank's deposits consist of statement savings accounts,
commercial demand deposit accounts, money market and certificate accounts.
Certificates of deposit are the primary source of deposits because they
generally are more responsive to market interest rates than other types of
deposits, and thus more attractive to depositors. The Bank relies primarily on
competitive pricing policies, advertising, and customer service to attract and
retain these deposits. In this regard, the Bank generally prices its deposits
at or above the highest rates offered by its competitors.
In addition to retail deposits, from time to time the Bank obtains
wholesale deposits through deposit brokers which solicit funds from their
customers for deposit with the Bank. Brokered deposits amounted to $150.8
million or 16.9% of deposits at June 30, 1996. Brokered deposits generally are
more responsive to changes in interest rates than retail deposits and, thus, are
more likely to be withdrawn from the Bank upon maturity as changes in interest
rates and other factors are perceived by investors to make other investments
more attractive. Although, the Bank currently does not have any plans to
increase its brokered deposits, the amount may vary depending on the Bank's need
for liquidity and loan purchase activity.
The Bank believes that it competes effectively for deposits; however, the
Bank's ability to attract and retain deposits and the Bank's cost of funds have
been, and will continue to be, significantly affected by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The rates paid on deposit accounts offered by the Bank have allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, the Bank believes that its statement savings and money market
accounts are relatively stable sources of deposits. However, the ability of the
Bank to attract and maintain certificate accounts, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions.
29
<PAGE>
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank at the dates indicated.
<TABLE>
<CAPTION>
At Year Ended June 30,
--------------------------------------------------------------
1994 1995 1996
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Money Market Accounts . . . . . . . . $ 7,462 4.01% $ 57,616 12.58% $159,689 17.92%
Commercial Demand . . . . . . . . . . 1,428 .77 1,522 .33 2,813 .31
Savings Deposits . . . . . . . . . . 106 .06 827 .18 893 .10
-------- ------ -------- ------ -------- ------
Total Non-Certificates. . . . . . . . 8,996 4.84 59,965 13.09 163,395 18.33
-------- ------ -------- ------ -------- ------
Certificates:
2.01 - 4.00% . . . . . . . . . . . . 51,350 27.60 152 .03 --- ---
4.01 - 6.00% . . . . . . . . . . . . 119,082 64.00 95,473 20.84 658,279 73.86
6.01 - 8.00% . . . . . . . . . . . . 5,956 3.20 301,981 65.91 69,630 7.81
8.01 - 10.00% . . . . . . . . . . . . 664 .36 594 .13 --- ---
-------- ------ -------- ------ -------- ------
Total Certificates . . . . . . . . . 177,052 95.16 398,200 86.91 727,909 81.67
-------- ------ -------- ------ -------- ------
Total Deposits(1) . . . . . . . . . . $186,048 100.00% $458,165 100.00% $891,304 100.00%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
- --------------------
(1) At June 30, 1996, the average rates paid on non-certificate deposit
accounts and certificate accounts were 4.99% and 5.64%, respectively.
The following table sets forth the savings flows at the Bank during the
periods indicated. New deposits, net refers to the amount of deposits during
a period less the amount of withdrawals during the period.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1994 1995 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance . . . . . $ 92,826 $186,048 $458,165
New deposits, net . . . . 91,390 267,454 407,482
Interest credited . . . . 1,832 4,663 25,657
-------- -------- --------
Ending balance . . . . . $186,048 $458,165 $891,304
-------- -------- --------
-------- -------- --------
Net increase . . . . . . $ 93,222 $272,117 $433,139
-------- -------- --------
-------- -------- --------
Percent increase . . . . 100.43% 146.26% 94.54%
------ ------ -----
------ ------ -----
</TABLE>
30
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1996.
<TABLE>
<CAPTION>
4.00- 6.00- 8.00- Percent
5.99% 7.99% 9.99% Total of Total
-------- ------- ---- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing
in quarter ending:
September 30, 1996 . . . . $ 92,733 $ 702 $ 99 $ 93,534 12.85%
December 31, 1996 . . . . . 283,639 2,607 --- 286,246 39.33
March 31, 1997 . . . . . . 104,511 11,070 --- 115,581 15.88
June 30, 1997 . . . . . . . 47,271 11,804 --- 59,075 8.12
September 30, 1997 . . . . 24,172 20,668 --- 44,840 6.16
December 31, 1997 . . . . . 72,048 243 --- 72,291 9.93
March 31, 1998 . . . . . . 8,332 6,444 --- 14,776 2.03
June 30, 1998 . . . . . . . 968 3,553 --- 4,521 .62
September 30, 1998 . . . . 1,745 1,089 --- 2,834 .39
December 31, 1998 . . . . . 4,688 263 --- 4,951 .68
March 31, 1999 . . . . . . 4,049 3,116 --- 7,165 .98
June 30, 1999 . . . . . . . 639 394 --- 1,033 .14
Thereafter . . . . . . . . 8,392 12,670 --- 21,062 2.89
-------- ------- ---- -------- ------
Total . . . . . . . . . $653,187 $74,623 $ 99 $727,909 100.00%
-------- ------- ---- -------- ------
-------- ------- ---- -------- ------
Percent of Total . . . . 89.74% 10.25% .01% 100.00%
----- ----- --- ------
----- ----- --- ------
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30,
1996.
<TABLE>
<CAPTION>
Maturity
------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 . . . $76,101 $167,289 $146,349 $100,267 $490,006
Certificates of deposit of $100,000
or more . . . . . . . . . . . . . . . . . . . 17,431 118,958 28,308 73,206 237,903
------- -------- -------- -------- --------
Total certificates of deposit . . . . . . . . . $93,532 $286,247 $174,657 $173,473 $727,909
------- -------- -------- -------- --------
------- -------- -------- -------- --------
</TABLE>
BORROWINGS. Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize borrowings when they are a less costly source
of funds. In addition, the Bank has relied upon selective borrowings for
liquidity needs. The Bank obtains FHLB advances upon the security of certain
of its residential first mortgage loans, and other assets, including FHLB stock,
provided certain standards related to the creditworthiness of the Bank have been
met. At June 30, 1996, advances were secured by stock in the FHLB totaling $9.3
million, qualifying first mortgage loans of approximately $152.0 million and
mortgage-backed securities of $85.0 million. FHLB advances are available for
investment, purchasing and lending activities and other general business
purposes. FHLB advances are made pursuant to several different credit programs,
each of which has its own interest rate, which may be fixed or adjustable, and
range of maturities. At June 30, 1996, the Bank's
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<PAGE>
other borrowings consisted primarily of loans to the Bank's subsidiaries from
unaffiliated third party lenders secured by certain real estate held for
development or sale.
On August 9, 1995, Beal Financial issued $57.5 million of 12.75% Senior
Notes due on August 15, 2000 (the "Senior Notes"). Of this amount, $46.3
million was contributed to the Bank in the form of paid in capital. The
remaining net proceeds of the Senior Notes were retained by Beal Financial for
the maintenance of a reserve equal to the annual interest expense on the Senior
Notes and general operating expenses. Interest on the Senior Notes is payable
semi-annually on February 15 and August 15, 1996 of each year. On or after
August 15, 1996, the Senior Notes will be redeemable, in whole or in part at the
option of Beal Financial. See Note H to the Notes to Consolidated Financial
Statements of the Company.
For additional information relating to borrowings, see Note G to the Notes
to Consolidated Financial Statements of the Company.
At June 30, 1996, FHLB advances totaled $185.0 million, representing 14.6%
of total assets. FHLB advances were used to fund purchases of discounted loans.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
1994 1995 1996
------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances . . . . . . . . . . . . . $44,600 $182,173 $185,000
Senior notes, net . . . . . . . . . . . --- --- 57,051
Other borrowings . . . . . . . . . . . 3,220 5,059 61,326
Average Balance:
FHLB advances . . . . . . . . . . . . . $23,662 $123,184 $ 45,052
Senior notes, net . . . . . . . . . . . --- --- 50,093
Other borrowings . . . . . . . . . . . 2,511 2,803 25,894
</TABLE>
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------
1994 1995 1996
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances . . . . . . . . . . . . . . . . $25,000 $111,000 $185,000
Senior notes, net . . . . . . . . . . . . . . --- --- 57,051
Other borrowings . . . . . . . . . . . . . . 2,932 4,898 21,468
------- -------- --------
Total borrowings . . . . . . . . . . . . . $27,932 $115,898 $263,519
------- -------- --------
------- -------- --------
Weighted average interest rate of FHLB
advances . . . . . . . . . . . . . . . . . 4.48% 6.67% 5.55%
Weighted average interest rate of Senior
notes, net . . . . . . . . . . . . . . . . ---% ---% 13.00%
Weighted average interest rate of other
borrowings . . . . . . . . . . . . . . . . 8.38% 9.54% 8.44%
</TABLE>
32
<PAGE>
SUBSIDIARIES OF THE COMPANY
In addition to the Bank, Beal Financial's organized subsidiaries include
Beal Banc Holding Company, a Delaware corporation, which was organized for tax
purposes by the Company in 1993 to hold all of the outstanding stock of the Bank
in connection with its reorganization into the holding company form. This
corporation is not expected to engage in any activities other than holding the
stock of the Bank. The sole director and president of this corporation is
D. Andrew Beal.
SUBSIDIARIES OF THE BANK
As a Texas-chartered savings bank, the Bank is permitted by federal
regulations to have subsidiaries engage only in those subsidiary activities
which are permissible for a subsidiary of a national bank. The FDIC may approve
other activities for a subsidiary provided that the Bank meets its applicable
minimum capital standards and the FDIC determines that the conduct of the
activity of the subsidiary will not pose a significant risk to the SAIF. Under
state law, a Texas-chartered savings bank is permitted to invest an unlimited
amount in operating subsidiaries which are engaged solely in activities
permissible for the Bank to engage in directly. The amount which a Texas-
chartered savings bank may invest in other service corporation subsidiaries may
not exceed 10% of the savings bank's total assets without the prior approval of
the Texas Department. At June 30, 1996, the net book value of the Bank's
investment in its subsidiaries was approximately $43.1 million (including $14.7
million invested in other service corporation subsidiaries).
Under FDIC regulations, if a savings bank's subsidiary is engaged in
activities not permissible for a national bank subsidiary, it may only engage in
such activities with the approval of the FDIC. In the absence of such approval,
the subsidiary must be divested. The Company has received regulatory approval
for both its real estate investment and development activities to date. See "-
Regulation - Federal Regulation of State-Chartered Savings Banks."
The activities of the Bank's operating subsidiaries are briefly described
below.
BEAL MORTGAGE, INC. ("BMI") AND BEAL PROPERTIES, INC. ("BPI"). BMI is a
Texas corporation organized in June 1988 to engage in certain real estate
development activities including the acquisition and development of land and
direct investments in real estate development projects. At June 30, 1996, the
Bank's investment in BMI and BPI totaled $11.6 million and $3.2 million,
respectively.
BMI and BPI are engaged in holding real estate held for investment and in
real estate development projects. The purchase and development of property may
be financed by the Bank or an unrelated third party. Once developed, the lots
are sold to builders primarily for the construction of single-family dwellings.
The Company intends to expand its direct investment activities in the future,
subject to market conditions and regulatory approval. The Board of Directors of
the Bank has determined to limit the Bank's investment in real estate
development and investment activities to an amount which would enable the Bank
to maintain capital, as calculated in accordance with generally accepted
accounting principles, at 6% of total assets, after deduction of its investment
in real estate. In addition, the Bank's individual investment in BMI and BPI is
limited by the FDIC to 10% of Tier I capital provided that Tier I capital is at
least 6% after deduction of the Bank's investment in its real estate
subsidiaries. See " Regulation - Federal Regulation of State-Chartered Savings
Bank" and "- Regulatory Capital Requirements and Prompt Corrective Regulatory
Action."
BMI's largest direct single-family real estate development project consists
of approximately 200 acres of undeveloped land in Coppell, Texas purchased in
May 1995 for approximately $4.8 million. The purchase price was funded by a
loan from the Bank. The sale contract included an option for one of the sellers
to repurchase approximately 50 acres of the land for $2.2 million. This option
has now been exercised and the purchase contract expires December 31, 1996. The
Bank has issued a loan commitment to the purchaser to provide funds for the
purchase and development of 119 single family lots for a total loan amount of
$5.8 million. In addition, BMI has granted the same individual an option to
purchase an additional 50 acres for a purchase price of $1.5 million which
expires on September 30, 1996.
33
<PAGE>
BMI's second largest single investment in single-family real estate
development consists of 68 acres located in Mesquite, Texas currently platted
for 301 single-family lots. The land was purchased in July 1995 for $1.1
million with the proceeds of a loan from the Bank. BMI's current investment in
this development totals approximately $2.6 million. BMI has obtained third
party financing for the development of Phase I which will contain 124 lots. Two
builders currently have commitments to purchase all of the lots in Phase I.
BMI has an investment of $1.3 million in a single-family development
located in Corinth, Texas. This investment represents Phase III of the
development which originally contained 32 acres. BPI also has a $1.8 million
investment in Phases IV, VII and VIII of the same development, containing a
total of 88 acres. Phase III originally was developed for 122 lots, 77 of which
have been sold, with the remaining 55 lots under contract to three builders.
The Bank recently approved a development loan of up to $825,000 to BPI to begin
development in Phase IV on 22 acres to contain 72 lots.
BMI also holds $10.7 million in the aggregate of other real estate for
investment, the largest component of which is Beal Bank Center II, an office
building purchased in March 1995 and located adjacent to the Corporation's
headquarters. At June 30, 1996, Beal Bank Center II had a book value of $8.6
million (subject to a $6.2 million first mortgage lien from an unaffiliated
lender) and was 100% occupied. Two remaining properties held by BMI for
investment had book values of $1.1 million and $1.0 million, respectively, at
June 30, 1996. BPI had an additional investment in land with a book value of
approximately $874,000.
LOAN ACCEPTANCE CORP. ("LAC"). LAC was formed in July 1994 to bid on
third-party loan pools, the majority of which are sold by the FDIC or the RTC.
This activity was formerly conducted through BMI. At June 30, 1996, the Bank's
investment in LAC totaled $260,000. See "- Lending Activities - Loan
Acquisition, Resolution, Origination and Sale Activities."
BRE, INC. ("BRE"). BRE, a Texas corporation, was organized in September
1993 to hold loans and other assets which management of the Bank believes bear
more than the normal risk of exposure to litigation. The most common problems
with these assets include environmental contingencies and litigious histories of
certain borrowers. At June 30, 1996, BRE held three commercial real estate
loans and three commercial real estate properties. Two of these properties and
two of the loans had a net book value in excess of $500,000. The two properties
consist of a marina and a multi-family property, while the two loans in excess
of $500,000 net, are secured by multi-family properties. BRE has performed
full environmental reviews on all of its properties with minimal environmental
problems found. The properties are operational and BRE plans to actively market
the properties for sale. At June 30, 1996, the Bank's investment in BRE totaled
$5.8 million.
BEAL AFFORDABLE HOUSING, INC. ("BAH"). BAH was organized in November 1994
to develop affordable housing apartment buildings to take advantage of certain
tax benefits under Section 42 of the Internal Revenue Code. BAH owns a 98%
limited partnership interest in the three limited partnerships described below.
BMI owns a 1% interest in and serves as the managing general partner for each
limited partnership and a Texas-based, non-profit organization owns the
remaining 1% interest in each limited partnership. The limited partners will
receive 100% of any profits or cash distributions on their respective projects
and will incur 100% of any cash related operating deficiencies and losses. Each
of the projects is managed by a non-affiliated fee management company which
specialize in the management of affordable housing properties. At June 30,
1996, the Bank's investment in BAH totaled $17.3 million.
It is anticipated that BAH will receive tax credits of approximately $2.4
million per year for the next nine years. The limited partnerships are
required to maintain minimum occupancy levels of qualified low-income tenants
continuously throughout the 15-year compliance period beginning in the year the
first low-income housing credit is claimed. Failure to comply with this
occupancy requirement will result in recapture of all or part of the credits
previously claimed. Each of the limited partnerships are in compliance with the
required occupancy levels at June 30, 1996.
FOREIGN LENDING CORPORATION ("FLC"). FLC was being established by the
Bank for the purpose of originating, servicing or holding loans made to foreign
borrowers with assets or collateral outside the United States,
34
<PAGE>
and/or domestic borrowers with collateral in foreign countries. FLC will
also hold and manage to disposition any assets acquired in satisfaction of
debt as a result of this lending activity. Pursuant to the Texas
Department's approval letter, the amount of foreign loans originated by this
subsidiary may not exceed $15.0 million. At June 30, 1996, the Bank's
investment in FLC totaled $4.9 million. See "- Foreign Lending."
Lending and purchasing loans on properties outside the United States is
subject to risks, including exposure to currency fluctuations, the imposition of
government controls, the need to comply with a wide variety of foreign laws,
political and economic instability, changes in tariffs and taxes, the greater
difficulty of administering business overseas and general economic conditions.
In addition, the laws of certain foreign countries may not protect the Company's
property interests to the same extent as do the laws of the United States.
The Bank also has subsidiaries named Beal Delaware Corp., Beal Business
Trust, Bre-N and Property Acceptance Corp. which were inactive at June 30, 1996.
COMPETITION
The Company faces strong competition, both in purchasing discounted loans
and originating real estate and other loans and in attracting deposits.
Competition in purchasing discounted loans and originating real estate loans
comes primarily from other savings institutions, commercial banks, mortgage
bankers, real estate brokers and other private investors. Commercial banks and
finance companies provide vigorous competition in consumer lending. The Company
competes for real estate and other loan originations principally on the basis of
the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers. Some of the Company's
competitors, however, have higher lending limits than does the Company.
The Company attracts substantially all of its deposits through newspaper
advertisements and its branch offices, within the States of Texas and Illinois.
Competition for those deposits is principally from other savings institutions
and commercial banks and other financial intermediaries. The Company competes
for these deposits by offering deposit accounts at very competitive rates.
EMPLOYEES
At June 30, 1996, the Company, including its subsidiaries, had a total of
113 employees. The Company's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
REGULATION
GENERAL. The Bank is a Texas-chartered savings bank and is subject to
broad regulation and oversight by the Texas Department extending to all its
operations. The Bank is also a member of the FHLB of Dallas and is subject to
certain limited regulation by the Federal Reserve Board. The Bank is a member
of the SAIF, which together with the BIF are the two deposit insurance funds
administered by the FDIC. Accordingly, the deposits of the Bank are insured by
the FDIC up to applicable limits and such insurance is backed by the full faith
and credit of the United States Government. As a result, the FDIC has certain
regulatory and examination authority over the Bank. As the savings and loan
holding company of the Bank, the Company is also subject to regulation and
oversight by OTS and the Texas Department. The purpose of the regulation of the
Company and other holding companies is to protect the subsidiary savings bank.
Certain of these regulatory requirements and restrictions are discussed
below. See "- Federal Regulation of State Chartered Savings Banks" and "-
Insurance of Accounts and Regulation by the FDIC."
Insured depository institutions, such as the Bank, and their
institution-affiliated parties, which include the Company, may be subject to
potential enforcement actions by the FDIC and the Texas Department for unsafe or
unsound practices in conducting their businesses or for violations of any law,
rule, regulation or any condition imposed in writing by such agencies or any
written agreement with such agencies. See "- Texas Law and
35
<PAGE>
Supervision by the Texas Department." The OTS may also bring enforcement
actions due to its supervision of the Company.
THE CONVERSION. Effective December 1, 1994, the Bank converted from a
Texas-chartered savings and loan association to a Texas-chartered savings bank.
As a result, the FDIC replaced the OTS as the Bank's primary federal regulator.
In connection with the Bank's reorganization to the holding company form,
effective July 1, 1995, OTS approved the Company's application to become a
savings and loan holding company. See "- Qualified Thrift Lender Test and
"- Holding Company Regulation."
TEXAS LAW AND SUPERVISION BY THE TEXAS DEPARTMENT. As a state-chartered
savings bank, the Bank is governed by the provisions of the Texas Savings Bank
Act (the "Texas Act") and rules and regulations of the Texas Department. The
Texas Act and regulations of the Texas Department are administered by the
Commissioner. Certain of these rules and regulations are discussed below.
The Bank is required to file reports with the Texas Department concerning
its financial condition and activities in addition to obtaining regulatory
approval prior to engaging in certain transactions. The Texas Department
conducts periodic examinations of the Bank in order to assess its compliance
with regulatory requirements. As a result of such examinations, the Texas
Department may require various corrective actions. See "Risk Factors - Capital
and Other Regulatory Matters."
The Texas Act and the regulations promulgated pursuant thereto impose
restrictions on the amount and types of loans that may be made by a state
savings bank, which in some cases, are slightly broader than those applicable to
federally chartered savings associations; however, the Texas statute also
permits a state savings bank to engage in any activity permissible for national
banks. Under the Texas Act, however, the Bank must devote a majority of its
assets to residential real estate lending.
The Commissioner has general supervisory authority over savings banks and
their holding companies. Upon his finding that a savings bank is engaging in or
is about to engage in unsafe or unsound practices, or is engaging in or is about
to engage in a violation of its articles of incorporation or bylaws, or is
engaging in or is about to engage in a violation of any law, rule or supervisory
order applicable to the savings bank or a violation of any condition that the
Commissioner or the Finance Commission of the State of Texas has imposed upon
the savings bank by written order, directive or agreement, or has filed
materially false or misleading information in a filing required under the Act,
or has failed to maintain proper books and records, he may order the savings
bank or its holding company to discontinue the violation or practice. Upon
failure of any savings bank, its holding company or any participating person to
comply with his order, the Commissioner may bring an enforcement action which
can include issuing a cease and desist order, the imposition of civil money
penalties, or placing the institution under the control of a conservator.
Furthermore, if it appears doubtful to the Commissioner that a savings bank
subject to such a conservatorship order can be successfully rehabilitated, the
Commissioner may close and liquidate the savings bank.
The Bank's general permissible lending limit for loans-to-one borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case, this limit is increased to 25% of unimpaired capital and surplus).
At June 30, 1996, the Bank's lending limit under this restriction was $22.6
million. The Bank is in compliance with the loans-to-one borrower limitation.
A change of control (as defined below) of a savings bank (which includes
the Company for this purpose) requires the prior approval of the Commissioner.
For the purposes of Texas law, control is be deemed to exist if any person owns
or controls 25% or more of the voting securities of a savings bank. There is a
rebuttable presumption of control if any person owns or controls 10% or more of
the voting securities of the savings bank.
The Commissioner also has the authority to regulate and examine the holding
companies of Texas-chartered savings banks. Each holding company is required by
Texas law to register with the Commissioner within 90 days after becoming a
holding company. Such holding companies, like the Company, must file periodic
reports
36
<PAGE>
concerning their operations with the Commissioner. The Commissioner also has
enforcement powers over such holding companies similar to those applicable to
savings banks.
In addition to the laws of Texas specifically governing savings banks and
their holding companies, the Bank and the Company are also subject to Texas
corporate law, to the extent such law does not conflict with the laws
specifically governing savings banks and their holding companies.
In addition, pursuant to its agreement with the Commissioner, the Bank has
agreed to maintain capital at a level higher than that which would otherwise be
applicable to a state-chartered savings bank. See "- Regulatory Capital
Requirements" for additional information regarding the Bank's capital
requirements.
FEDERAL REGULATION OF STATE-CHARTERED SAVINGS BANKS. The Bank's deposits
are insured by the FDIC. As an insurer of deposits, the FDIC has extensive
authority over the Bank. The FDIC issues regulations, conducts examinations,
requires the filing of reports and generally supervises the operations of
institutions for which it provides deposit insurance.
The Bank is subject to the rules and regulations of the FDIC to the same
extent as all other state banks that are not members of the Federal Reserve
System. The approval of the FDIC is required prior to any merger or
consolidation, certain changes in control and the establishment or relocation of
any branch office of the Bank. This supervision and regulation is intended
primarily for the protection of the deposit insurance fund.
With respect to a change in control, federal law provides that no person
(which includes a corporation, partnership, association or other entity)
directly or indirectly or acting in concert with one or more persons, may
acquire "control" of a savings institution, such as the Bank (which includes the
Corporation for this purpose) at any time without giving 60 days' prior notice
to the FDIC and having received no FDIC objection to such acquisition of
control, unless the transaction involves an acquisition of control by a company,
in which case, the transaction would be subject to the approval of the OTS,
rather than the FDIC.
Control, as defined under federal law, means the power, directly or
indirectly, to direct the management or policies of the institution or to vote
25% or more of any class of voting securities of the institution. In general,
acquisition of 10% or more of any class of voting stock, constitutes a
rebuttable determination of control if (i) the institution has any class of
securities registered under the Securities and Exchange Act of 1934 or (ii) the
person is the largest shareholder of such class of securities immediately
following the acquisition. In determining whether to disapprove a notice of
change in control, the FDIC must consider, among other things, the competitive
effect of the transaction, the financial condition of the acquiror and the
competence, integrity and experience of the acquiror and any proposed management
personnel. The determination of control may be rebutted by submission to the
FDIC of a statement setting forth facts and circumstances which would support a
finding that no control relationship will exist and containing certain
undertakings.
The Bank is also subject to certain capital adequacy guidelines issued by
the FDIC. See "- Regulatory Capital Requirements."
Federal law also prohibits insured state-chartered banks, including savings
banks such as the Bank, from making equity investments of a type, or in an
amount, that are not permissible for national banks. In general, equity
investments include equity securities, partnership interests and equity
interests in real estate. Under these regulations, non-permissible investments
must be divested by no later than December 19, 1996. Federal law also prohibits
such banks from engaging as principal in any activity not permissible for a
national bank without FDIC approval. Subsidiaries of such insured banks may
also not engage as principal in any activity that is not permissible for a
subsidiary of a national bank without FDIC approval. Through its service
corporations, BMI and BPI, the Bank engages in real estate development and
investment activities ("Real Estate Activities"), which activities are not
permissible for a national bank. The FDIC has authorized (the "FDIC Order") the
Bank and BPI to continue to engage in these Real Estate Activities provided that
it complies with certain requirements. These measures include requiring that
any subsidiary through which the Real Estate Activities are conducted (each a
"Real Estate Subsidiary") is operated to ensure its separate corporate
existence, submission of an annual investment plan to the
37
<PAGE>
FDIC, measures to address concentration of risk, and calculating the Bank's
compliance with regulatory capital standards exclusive of any investment in a
Real Estate Subsidiary. See "- Insurance of Accounts and Regulation by the
FDIC and Regulatory Capital Requirements and Prompt Corrective Action." See
"-Subsidiaries of the Bank."
The FDIC and the other federal banking regulators have issued safety and
soundness guidelines on matters such as loan underwriting and documentation,
internal controls and audit systems, interest rate risk exposure, asset growth,
asset quality, earnings and compensation and other employee benefits. The FDIC
has adopted final regulations providing that any institution it supervises which
fails to comply with these guidelines must submit a compliance plan. A failure
to submit a plan or to comply with an approved plan will subject the institution
to further enforcement action.
In addition, the OTS also has extensive enforcement authority over the
Company. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal orders and
to initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. See "-
Holding Company Regulation."
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the SAIF, which is administered by the FDIC. The Bank is subject to the rules
and regulations of the FDIC to the same extent as all other state banks that are
not members of the Federal Reserve System. This supervision and regulation is
intended primarily for the protection of the deposit insurance fund. In
addition, the FDIC may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings banks and may terminate the deposit insurance if it determines
that the institution has violated any law or regulation or has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition. Such enforcement actions may include the assessment of civil money
penalties against the institution and its management, the imposition of a cease
and desist order or supervisory agreement restricting any and all of the
activities of the institution or requiring corrective action to be taken, the
prohibition of dividends or other distributions of capital and the prohibition
of a person from serving the institution in such capacity as a director, officer
or employee. Any such enforcement action could be substantial and adversely
affect the Bank, and thereby adversely affect the Company's ability to meet its
obligations with respect to the Senior Notes. See "-Federal Regulation of
State-Chartered Savings Banks."
The FDIC's deposit insurance premiums are assessed through a risk based
system, under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (I.E., a leverage ratio of at least 5%, a ratio of Tier 1 or
leverage capital to risk-weighted assets ("Tier 1 capital") of at least 6% and a
risk-based capital ratio of at least 10%) and considered healthy pay the lowest
premium while institutions that are less than adequately capitalized (I.E.,
leverage or Tier 1 capital ratios of less than 4% or a risk-based capital ratio
of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions is made by the
FDIC for each semi-annual assessment period.
Under the FDIC Order, the Bank's capital category will be determined
exclusive of its investment in any Real Estate Subsidiary for purposes of
deposit insurance premium assessments except in determining whether the Bank has
become critically undercapitalized.
The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the Bank Insurance Fund
(the "BIF") of the FDIC in order to maintain the reserve ratio of the BIF
38
<PAGE>
at 1.25% of BIF insured deposits. As a result of the BIF reaching its
statutory reserve ratio, the FDIC revised the premium schedule for BIF
insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. The BIF premium
schedule was further revised, effective January 1996, to provide a range of
0% to .27% with an annual minimum assessment of $2,000, essentially
eliminating deposit insurance premiums for many BIF-insured institutions. As
a result of these adjustments, BIF insured institutions now generally pay
lower premiums than SAIF insured institutions.
The SAIF is not expected to attain the designated reserve ratio until the
year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that certain SAIF premiums be used to make the interest payments on
bonds issued by the Financing Corporation ("FICO") in order to finance the costs
of resolving thrift failures in the 1980s. As a result, SAIF-insured members
will generally be subject to higher deposit insurance premiums than banks until,
all things being equal, the SAIF attains the required reserve ratio.
The effect of this disparity on the Bank and other SAIF members is
uncertain at this time. It may have the effect of permitting BIF-insured banks
to offer loan and deposit products on more attractive terms than SAIF members
due to the cost savings achieved through lower deposit premiums, thereby placing
SAIF members at a competitive disadvantage. A number of proposals are being
considered to recapitalize the SAIF in order to eliminate this disparity. One
plan currently being considered by the United States Congress provides for a
one-time assessment, estimated to be approximately .70%, to be imposed on all
deposits subject to SAIF assessments, as of March 31, 1995, including those held
by commercial banks, and for BIF deposit insurance premiums to be used to pay
the FICO bond interest together with SAIF premiums. For example, if the special
assessment was calculated on the basis of March 31, 1995 deposits, the special
assessment would be approximately $2.2 million on a pre-tax basis. The BIF and
SAIF would be merged into one fund as soon as practicable, but no later than
January 1, 1998. There can be no assurance that any particular proposal will be
implemented, that SAIF-member institutions will not experience a competitive
disadvantage in deposit insurance premium levels, or that premiums for either
BIF or SAIF members will not be adjusted in the future by the FDIC or by
legislative action.
The FDIC has promulgated regulations implementing limitations on brokered
deposits pursuant to the requirements of federal law. Under the regulations,
well capitalized institutions are not subject to any brokered deposit
limitations, while adequately capitalized institutions are able to accept, renew
or roll over brokered deposits only (i) with a waiver from the FDIC and (ii)
subject to the limitation as to all such deposits that they do not pay an
effective yield which exceeds by more than (a) 75 basis points the effective
yield paid on deposits of comparable size and maturity in such institution's
normal market area for deposits accepted in its normal market area or (b) 120%
for retail deposits and 130% for wholesale deposits, respectively, the current
yield on comparable maturity U.S. Treasury obligations for deposits accepted
outside the institution's normal market area. Undercapitalized institutions are
not permitted to accept brokered deposits, and may not solicit any deposits by
offering any effective yield that exceeds by more than 75 basis points the
prevailing effective yields on insured deposits of comparable maturity in the
institution's normal market area or in the market area in which such deposits
are being solicited. At June 30, 1996, the Bank qualified as a well capitalized
institution and, as a result, was not subject to restrictions on brokered
deposits. See "- Sources of Funds-Deposits."
REGULATORY CAPITAL REQUIREMENTS AND PROMPT CORRECTIVE REGULATORY ACTION.
All state-chartered institutions such as the Bank, which report to the FDIC as
their primary federal regulator, must maintain regulatory capital in accordance
with FDIC regulations.
The FDIC has adopted a minimum leverage ratio of Tier 1 capital to average
total assets of 3% for banks that have a uniform composite ("CAMEL") supervisory
rating of 1. Higher leverage ratios are required to be considered well
capitalized under the prompt corrective action provisions of federal law. The
FDIC is also authorized to impose higher capital requirements on institutions on
a case-by-case basis.
The FDIC has also issued guidelines to implement the risk-based capital
requirements. The guidelines require a minimum ratio of qualifying total
capital to risk-weighted assets of 8%. The guidelines are intended to establish
a systematic analytical framework that makes regulatory capital requirements
more sensitive to differences in risk profiles among banking organizations, take
off-balance sheet items into account in assessing capital adequacy
39
<PAGE>
and minimize disincentives to holding liquid, low-risk assets. Under these
guidelines, assets and credit equivalent amounts of off-balance sheet items,
such as letters of credit and outstanding loan commitments, are assigned to
one of several risk categories, which range from 0% for risk-free assets,
such as cash and certain U.S. government securities, to 100% for relatively
high-risk assets, such as loans and investments in fixed assets, premises and
other real estate owned. The aggregate dollar amount of each category is then
multiplied by the risk-weight associated with that category. The resulting
weighted values from each of the risk categories are then added together to
determine the total risk-weighted assets. The FDIC may also require an
institution to maintain additional capital to account for the concentration
of credit risk, the risk of non-traditional activities and for interest rate
risk.
Pursuant to the FDIC Order, the Bank must maintain a Tier 1 capital ratio
of 6% after excluding the amount of its investment in BMI or any other
subsidiary (such as BPI) through which it conducts Real Estate Activities. In
addition, the aggregate investment in any one such subsidiary is limited to 10%
of Tier 1 capital, and with respect to all such subsidiaries is limited to 20%
of Tier 1 capital.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (leverage capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus
and retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for possible loan and lease
losses in an amount up to 1.25% of risk-weighted assets and (ii) certain
permanent and non-permanent capital instruments such as cumulative preferred
stock and subordinated debt. The inclusion of the foregoing elements of Tier 2
capital are subject to certain requirements and limitations.
The Texas Department has agreed to permit the Bank's continued asset
growth, so long as the Bank maintains its current business activities and
maintains minimum leverage and total risk-based capital ratios equal to or
exceeding 9% and 11%, respectively, subject to temporary declines with prior
approval from the Texas Department.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at June 30, 1996:
<TABLE>
<CAPTION>
At June 30, 1996
--------------------------------------
Required(1) Actual
------------------ ------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Leverage capital . . . . . . . $115,168 9.00% $138,664 10.84%
Tier 1 risk-based capital . . . 36,205 4.00 138,664 15.32
Total risk-based capital . . . 99,563 11.00 149,984 16.57
</TABLE>
(1) Required leverage and total risk-based capital requirements represent
higher capital requirements imposed by the Bank's primary regulator as a
condition to the Bank's continued asset growth.
When assessing the Bank's capital adequacy the federal banking agencies,
including the FDIC with respect to the Bank, must take into consideration the
risk of loss from changes in the value of the institution's assets and
liabilities due to changes in interest rates. The agencies have adopted a
policy statement that provides guidance to institutions on the management of
interest rate risk. Although the FDIC may require the Bank to maintain
additional
40
<PAGE>
capital to address such risk, the Bank believes that in light of its interest
rate risk profile it should not be required to maintain additional capital.
The FDIC is authorized and, under certain circumstances required, to take
certain actions against any state-chartered bank that fails to meet its capital
requirements. The FDIC is generally required to restrict the activities of an
"undercapitalized institution" (generally defined to be one with less than
either a 4% leverage capital ratio, a 4% Tier 1 capital ratio or an 8% risk-
based capital ratio). Any such institution must submit a capital restoration
plan and until such plan is approved by the FDIC may not increase its assets,
acquire another institution, establish a branch or engage in any new activities,
and generally may not make capital distributions. The FDIC is authorized to
impose the additional restrictions, discussed below, that are applicable to
significantly undercapitalized institutions.
Any institution that fails to comply with its capital plan or is
"significantly undercapitalized" (I.E., Tier 1 or core capital ratios of less
than 3% or a risk-based capital ratio of less than 6%) must be made subject to
one or more of additional specified actions and operating restrictions mandated
by federal law. These actions and restrictions include requiring the issuance
of additional voting securities; limitations on asset growth; mandated asset
reduction; changes in senior management; divestiture, merger or acquisition of
the institution; restrictions on executive compensation; and any other action
the FDIC deems appropriate. An institution that becomes "critically
undercapitalized" (I.E., a tangible capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to significantly undercapitalized associations. In addition, the FDIC must
appoint a receiver or conservator for an institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized.
Under the FDIC Order, the Bank's capital category will be determined
exclusive of its investment in any Real Estate Subsidiary for purposes of these
prompt corrective regulations except in determining whether the Bank has become
critically undercapitalized.
In the event that the Bank fails to remain well capitalized at the and of
any quarter as a result of these conditions, it is required to notify the FDIC
within 15 days and to file an acceptable plan for restoring capital to the well-
capitalized level.
Any undercapitalized institution is also subject to other possible
enforcement actions by the FDIC. Such actions could include a capital
directive, a cease-and-desist order, civil money penalties, the establishment of
restrictions on all aspects of the association's operations or the appointment
of a receiver or conservator or a forced merger into another institution.
If the FDIC determines that an institution is in an unsafe or unsound
condition or is engaged in an unsafe or unsound practice it is authorized to
reclassify a well capitalized institution as an adequately capitalized
association and if the institution is adequately capitalized, to impose the
restrictions applicable to an undercapitalized institution. If the institution
is undercapitalized, the FDIC is authorized to impose the restrictions
applicable to a significantly undercapitalized institution. The purpose of
these provisions is to resolve the problems of insured depository institutions
at the least possible long-term cost to the appropriate deposit insurance fund.
Any undercapitalized depository institution must submit an acceptable
capital restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. In addition, each company controlling an
undercapitalized depository institution must provide a guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the FDIC may impose any of the
additional restrictions or sanctions that it may impose on significantly
undercapitalized institutions if it determines that such action will further the
purpose of the provisions.
41
<PAGE>
The imposition by the FDIC of any of these measures on the Bank may have a
substantial adverse effect on the Corporation's operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Under Texas law,
a savings bank may declare and pay dividends out of current and retained income
so long as the savings bank meets its capital requirements. The Bank is
required to provide notice to the OTS at least 30 days' prior to the declaration
of a dividend by the Bank to the Corporation.
The FDIC has the authority to prohibit the Bank from engaging in an unsafe
or unsound practice in conducting its business and under such authority could
impose dividend restrictions. Further, the FDIC has established guidelines with
respect to the maintenance of appropriate levels of capital by savings banks
under its jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions described herein could limit the amount of
dividends which the Bank may pay to the Company. In addition, federal law
prohibits an insured depository from paying dividends on its stock or interest
on its debentures (if such interest is required to be paid only out of net
profits) or distribute any of its capital assets while it is in default in the
payment of any assessment due to the FDIC.
LIQUIDITY. All Texas savings banks, including the Bank, are
required to maintain liquidity in an amount not less than 10% of an amount
equal to its average daily deposits for the most recently completed calendar
quarter in cash or readily marketable securities. At June 30, 1996, the
Bank's liquidity ratio was 15.4%.
QUALIFIED THRIFT LENDER TEST. All state-chartered savings banks with
holding companies governed by the OTS, including the Bank, are required to meet
a qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of
its portfolio assets (which consists of total assets less intangibles,
properties used to conduct the Bank's business and liquid assets not exceeding
20% of total assets) in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. Such assets primarily consist
of residential housing related loans and investments. At June 30, 1996, the
Bank met the test and has always met the test since its effective date except
for the month ending December 31, 1995. In the event that the Bank should fail
to qualify as a QTL, it would not be able to requalify for a period of five
years. Upon such a failure, the Company would lose its status as a savings and
loan holding company and would be required to register as a bank holding company
and become subject to the activity restrictions applicable to such companies.
See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
all FDIC insured institutions have a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with the examination of the Bank, to assess the institution's record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by such institution. An unsatisfactory rating may be used as the basis
for the denial of an application by the FDIC. The Bank received a
"satisfactory" rating on its last CRA examination.
The federal banking agencies, including the FDIC, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the
past few years, certain financial institutions have been required to devote
additional funds for investment and lending in its local community. At June 30,
1996, no additional requirements have been imposed on the Bank. There can be no
assurances that additional requirements will not be imposed on financial
institutions, including the Bank, in the future.
In addition, the Texas Act and regulations impose a requirement that a
savings bank maintain investments equal to at least fifteen percent of its
local area deposits in first and second lien residential mortgage loans or
foreclosed residential mortgage loans originated from within the Bank's local
service area; home improvement loans; interim residential construction loans;
mortgage backed securities secured by loans from within the bank's local
42
<PAGE>
service area; and loans for community reinvestment purposes. The Bank's
local service area is currently delineated to include the Dallas, Ft. Worth
and Houston metropolitan statistical areas. At June 30, 1996, the Bank was
in compliance with the requirements of the Texas Act.
TRANSACTIONS WITH AFFILIATES. The Bank is subject to certain restrictions
imposed by federal and state law on any extensions of credit to, or the issuance
of a guarantee or letter of credit on behalf of, the Company or other
affiliates, the purchase of or investments in stock or other securities thereof,
the taking of such securities as collateral for loans and the purchase of assets
of the Company or other affiliates. Such restrictions prevent the Company and
such other affiliates from borrowing from the Bank unless the loans are secured
in accordance with federal law. Further, such transactions by the Bank with the
Company or with any other affiliate is limited to 10% of the Bank's capital and
surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal law). In addition, any transaction with an
affiliate of the Bank must be on terms and under circumstances that are
substantially the same as a comparable transaction with a non-affiliate.
Additional restrictions on transactions with affiliates may be imposed on the
Bank under the prompt corrective action provisions.
HOLDING COMPANY REGULATION. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the
Company is registered with and files reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings bank subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings bank. The Company is also subject to
regulation by the Texas Department. See "- Texas Law and Supervision by the
Texas Department."
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings institution)
would become subject to such restrictions unless such other institutions each
qualify as a QTL and were acquired in a supervisory acquisition.
During fiscal 1996, the Company received regulatory approval to organize a
Texas chartered savings bank insured by the BIF. If the Company commences
operating the savings bank it will become a multiple savings and loan holding
company and its activities will be limited to those approved for such companies.
The activities of a multiple savings and loan holding company are limited to
those permissible for bank holding companies and activities similar to those
authorized for a subsidiary of the Bank. The Company does not intend to operate
this subsidiary unless the approvals obtained for its real estate investment and
development activities are not materially affected.
If the Bank fails the QTL test, the Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other savings association. Such acquisitions are generally prohibited by
federal law if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings institution.
FEDERAL SECURITIES LAW. The Senior Notes are registered with the SEC under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a
result, the Company is subject to certain information, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
The Senior Notes held by persons who are affiliates (generally officers,
directors and principal shareholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale
43
<PAGE>
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of securities in any
three-month period.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1996, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the Texas Department. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs, that administers the home financing credit
function of savings associations. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (I.E., advances) in accordance with policies and
procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas. At June 30, 1996, the Bank had $9.3 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. For the fiscal year ended
June 30, 1996, dividends paid by the FHLB of Dallas to the Bank totaled
$305,000, which constitutes an $80,000 decrease over the amount of dividends
received in fiscal 1995.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), had
been permitted, in years ending prior to January 1, 1997, to establish
reserves for bad debts and to make annual additions thereto which may, within
specified formula limits, be taken as a deduction in computing taxable income
for federal income tax purposes. The amount of the bad debt reserve
deduction for "non-qualifying loans" is computed under the experience method.
The amount of the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) may be computed
under either the experience method or the percentage of taxable income method
(based on an annual election). Under the experience method, the bad debt
reserve deduction is an amount determined under a formula based generally
upon the bad debts actually sustained by the savings association over a
period of years.
The percentage of specially computed taxable income that is used to compute
a savings association's bad debt reserve deduction under the percentage of
taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 32.2% assuming the
maximum percentage bad debt deduction).
44
<PAGE>
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four-year period.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising withdrawable accounts at year-end exceeds
the sum of surplus, undivided profits and reserves at the beginning of the
year. At June 30, 1996, the 6% and 12% limitations did not restrict the
percentage bad debt deduction available to the Bank.
In August 1996, legislation was enacted that repeals the reserve method of
accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of
which will be delayed until the first taxable year beginning after December 31,
1997, provided the institution meets certain residential lending requirements.
The management of the Company does not believe that the legislation will have a
material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a holding company's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of June 30, 1996, the Bank's Excess for tax purposes totaled
approximately $13.6 million.
The Company and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable U.S. Department of the Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through June 30, 1991.
With respect to years examined by the IRS, all deficiencies have been satisfied.
In the opinion of management, any examination (including returns of subsidiaries
and predecessors of, or entities merged into, the Company or Bank) would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Company, the Bank and their consolidated
subsidiaries.
45
<PAGE>
TEXAS STATE INCOME TAXATION. The Company, the Bank and their subsidiaries
currently file Texas franchise tax returns. Texas imposes a franchise tax on
the taxable income of savings institutions and other corporations. The Company
and the Bank each pay an annual franchise tax equal to the greater of $2.50 per
$1,000 of taxable capital apportioned to Texas, or $45.00 per $1000 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.
DELAWARE TAXATION. As a Delaware holding company, the Beal Banc Holding
Company is exempt from the Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of Delaware. The Beal
Banc Holding Company is also subject to an annual franchise tax imposed by the
State of Delaware.
ITEM 2. PROPERTIES
The Company conducts its business at its headquarters and branch offices.
The following table sets forth information relating to each of the Company's
properties as of June 30, 1996.
<TABLE>
<CAPTION>
Owned Total
Year or Approximate
Location Acquired Leased Square Footage Book Value
- ------------------------ -------- ------ -------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Corporate Headquarters:
Beal Bank Center I 1992 Owned 167,138 $4,943
15770 North Dallas
Parkway
Dallas, Texas
Branch Office:
5100 Westheimer 1995 Leased 5,064 --
Houston, Texas
Branch Office:
874 Green Bay Road 1996 Leased 2,500 --
Winnetka, Illinois 60093
</TABLE>
The Company acquired Beal Bank Center I in 1992 and currently occupies
42,405 square feet in the building. At June 30, 1996, the building was 91%
occupied. At June 30, 1996, the Company's total investment in the property was
$6.1 million with a net book value of $4.9 million.
The total net book value of the Bank's premises and equipment (including
land, building and leasehold improvements and furniture, fixtures and equipment)
at June 30, 1996 was $6.9 million.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business. Management of the Company, based on discussions
with litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial position or results of operations of the
Company. There can be no assurance that any of the outstanding legal
proceedings to which the Company is a party will not be decided
46
<PAGE>
adversely to the Company's interests and have a material adverse effect on
the financial position or results of operations of the Company.
Set forth below is a summary description of the only lawsuit involving the
Company claiming damages in excess of $500,000.
KENNETH L. MUSGRAVE VS. BEAL BANC, S.A.; Cause No. 43,536-A in the
42nd District Court of Taylor County, Texas. In April 1994, the Bank
acquired a promissory note with the face amount of $1.5 million (the
"Note") executed by the plaintiff ("Plaintiff") from the FDIC.
Thereafter, the Plaintiff negotiated with representatives of the Bank
to settle the outstanding balance owed on the Note. Those
negotiations stalled and the Bank foreclosed on the two pieces of
property securing the Note in September 1994. Plaintiff filed suit
against the Bank wherein he has asserted claims against the Bank and
certain of the Bank's officers and directors for (a) intentional
infliction of emotional distress; (b) breach of "duty to deal honestly
and in good faith," (c) wrongful acceleration of the Note and wrongful
foreclosure; and (d) fraud. All of the Plaintiff's claims arise out
of the negotiations he conducted with representatives of the Bank to
settle his debt on the Note. The Plaintiff claims that the Bank
deliberately made various misrepresentations about its ownership of
the Note, its willingness to settle his indebtedness on the Note and
its conditional acceptance of his settlement offers in order to lull
the Plaintiff into a position where the Bank would be able to
foreclose on the properties securing repayment of the Note. The
Plaintiff seeks $20.0 million in actual damages and $40.0 million in
punitive damages. His alleged actual damages are based upon his
contention that the value of the foreclosed properties exceeded the
amount of his indebtedness to the Bank at the time of the foreclosures
and the fact that he will lose approximately $2.0 million per year for
the next ten years because he will not be able to bid on note packages
offered for sale by the FDIC as a result of the Bank's foreclosure on
his properties. Based on the information available to the Bank's
litigation counsel at this time, they believe that the claims in this
case are legally and factually without merit and can be successfully
defended; however, because discovery is not complete and resolution of
the case may involve determination of disputed facts, such counsel is
unable to give an opinion as to the likely outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended June 30, 1996.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no public market in the Company's common stock. The common stock
is held of record by two stockholders. See "Security Ownership of Certain
Beneficial Owners and Management - Common Stock."
47
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present, for the fiscal years indicated, certain
summary historical data for the Company. In the opinion of management, all
adjustments (which consist of normal recurring accruals) necessary for a fair
presentation of the results of operations for such periods have been included.
This data should be read in conjunction with the separate consolidated financial
statements and related notes included herein.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . $64,556 $118,849 $246,308 $632,866 $1,269,279
Loans receivable, net . . . . . . . . . . . . . . . . . . 57,768 100,810 219,914 493,168 897,414
Mortgage-backed securities . . . . . . . . . . . . . . . --- --- 1,999 40,714 194,699
Deposits . . . . . . . . . . . . . . . . . . . . . . . . 53,161 92,826 186,048 458,165 891,304
Total borrowings . . . . . . . . . . . . . . . . . . . . 830 8,203 27,932 115,898 263,519
Stockholders' equity . . . . . . . . . . . . . . . . . . 7,755 16,211 27,023 52,400 93,172
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income . . . . . . . . . . . . . . . . . . $ 9,242 $ 21,706 $ 34,580 $ 63,795 $ 140,948
Total interest expense . . . . . . . . . . . . . . . . . 2,353 3,639 6,559 20,981 56,818
------ ------- ------- ------- --------
Net interest income . . . . . . . . . . . . . . . . . . . 6,889 18,067 28,021 42,814 84,130
Provision for loan losses . . . . . . . . . . . . . . . . 407 784 2,888 4,045 9,044
------ ------- ------- ------- --------
Net interest income after provision for loan losses . . . 6,482 17,283 25,133 38,769 75,086
Gain on sales of interest-earning assets . . . . . . . . 2,303 994 451 9,408 8,413
Gain on sales of real estate . . . . . . . . . . . . . . 118 --- 912 4,412 7,068
Other non-interest income . . . . . . . . . . . . . . . . 124 406 173 109 1,202
------ ------- ------- ------- --------
Total non-interest income . . . . . . . . . . . . . . . . 2,545 1,400 1,536 13,929 16,683
Total non-interest expense . . . . . . . . . . . . . . . 2,437 5,113 9,085 12,145 22,456
------ ------- ------- ------- --------
Income before income taxes . . . . . . . . . . . . . . . 6,590 13,570 17,584 40,553 69,313
Income taxes . . . . . . . . . . . . . . . . . . . . . . 2,458 5,115 6,772 15,176 25,153
------ ------- ------- ------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . $4,132 $ 8,455 $ 10,812 $ 25,377 $ 44,160
------ ------- ------- ------- --------
------ ------- ------- ------- --------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
1992 1993 1994 1995 1996
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to average total assets) . . . . . 8.68% 9.15% 6.06% 5.76% 4.46%
Return on equity (ratio of net income to average equity) . . . . . . . . . 76.31 71.77 51.23 64.76 64.51
Interest rate spread information, average during period . . . . . . . . . 14.58 20.61 16.92 10.50 9.43
Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 15.16 21.03 17.15 10.65 9.32
Ratio of operating expense to average total assets . . . . . . . . . . . . 5.12 5.53 5.09 2.74 2.27
Ratio of average interest-earning assets to average
interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . 111.19 109.90 105.62 102.89 98.30
Quality Ratios:
Net non-performing assets to total assets, at end of period . . . . . . . 3.58 6.36 7.95 7.07 11.84
Allowance for loan losses to net non-performing loans . . . . . . . . . . 30.19 27.80 21.14 17.06 9.65
Allowance for loan losses to loans receivable, net . . . . . . . . . . . . .97 1.24 1.62 1.24 1.32
Net charge-offs to average loans, net . . . . . . . . . . . . . . . . . . .12 .11 .40 .41 .39
Equity Ratios:
Equity to total assets, at end of period . . . . . . . . . . . . . . . . . 12.01 13.64 10.97 8.28 7.34
Average equity to average assets . . . . . . . . . . . . . . . . . . . . . 11.37 12.74 11.83 8.84 6.91
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits . . . . . . . . . . . . . . . . . . . . . . 95.4:1 64.1:1 23.9:1 6.6:1 7.4:1
Including interest on deposits . . . . . . . . . . . . . . . . . . . . . . 2.8:1 4.5:1 3.5:1 2.3:1 1.4:1
Other Data:
Number of full-service offices . . . . . . . . . . . . . . . . . . . . . 1 1 1 2 3
</TABLE>
- ---------------------------------
(1) Net interest income divided by average interest-earning assets.
49
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's results of operations are dependent primarily on net interest
income, which is determined by the difference between the yield earned on
interest-earning assets and rates paid on interest-costing liabilities
("interest rate spread"). The yield on interest-earning assets is enhanced by
the accretion of unearned discounts, which are recognized on the level yield
method as dictated by generally accepted accounting principles. Results of
operations are also affected by the Company's provision for loan losses, the
level of operating expenses, and the net gain (loss) from loans or other assets
which have been sold. Due to the substantial discounts generally associated
with the majority of the Company's purchased loans, the gains recognized upon
the sales of such loans or the underlying collateral have been significant in
prior years.
The Company's results of operations are also significantly affected by
prevailing economic conditions, competition, regulatory factors, and the
monetary and fiscal policies of governmental agencies. The Company's primary
business of purchasing discounted loans and assets is influenced by the general
level of product available from U.S. government agencies and private sellers and
the competition for such loans from other purchasers. Deposit flows and cost of
funds are influenced by prevailing market rates of interest primarily on
competing investments, account maturities, and the levels of personal income and
savings in the Company's market areas. Future changes in applicable law,
regulations or government policies may also have a material impact on the
Company.
ASSET/LIABILITY MANAGEMENT
The interest rate sensitivity of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities will mature or reprice
within the same period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
repricing within that same period. A gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income while a positive gap could result in an
increase in net interest income. Conversely during a period of falling interest
rates, a negative gap would result in an increase in net interest income and a
positive gap would adversely affect net interest income.
Management monitors the Bank's interest rate risk as one component of its
business risk. The Bank has an Investment Committee consisting of the Chairman
of the Board, the Executive Vice President and two outside Directors. The
Bank's President, Controller and Senior Vice President/Compliance also attend
all Investment Committee meetings. This committee meets at least quarterly to
review the Bank's interest rate risk position and profitability and to make
recommendations for adjustments to the Bank's Board of Directors. This
committee also reviews the Bank's portfolio, formulates investment strategies
and oversees the timing and implementation of transactions to assure attainment
of the Board's objectives in the most effective manner. In addition, the
Committee reviews on a quarterly basis the Bank's asset/liability position,
including the sensitivity of the market value of portfolio equity based on
various interest rate scenarios.
In managing its asset/liability mix, the Bank has, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, placed more emphasis on increasing net interest margin than
on better matching the interest rate sensitivity of its assets and liabilities
in an effort to enhance net interest income. Management believes that due to
the high yield the Bank earns on its assets resulting from accretion of
purchased discount, the increased net interest income resulting from a mismatch
in the maturity of its asset and liability portfolios can, during periods of
declining or stable interest rates, provide high enough returns to justify the
increased exposure to sudden and unexpected increases in interest rates. In
addition, the majority of the Bank's loan originations, renewals, or
modifications are made at adjustable interest rates to improve the interest
50
<PAGE>
rate sensitivity of the Bank's loan portfolio. The Bank believes that it has
the ability to restructure its liabilities very quickly by extending the
maturities of FHLB advances and pricing deposits to attract funds with longer
terms to maturity. It should be noted that an extension of maturities may
result in a higher cost of funds.
As indicated in the table below, at June 30, 1996, the Bank's interest-
bearing liabilities repricing in one year or less exceeded interest-earning
assets maturing during the same period by $127.5 million, resulting in a one-
year negative gap equal to 11.5% of its interest-earning assets at that date.
Despite the Bank's negative gap position, management believes that the Bank's
interest rate risk is acceptable given its high yield on earning assets. This
high yield is a direct result of (i) purchasing performing loans at a discount,
(ii) prepayments of loans in full that have been purchased at a discount and
(iii) successfully resolving non-performing loans so that they are performing
and thus begin to amortize the discount as the loans are paid down.
The following table sets forth the interest rate sensitivity of the Bank's
net assets and liabilities at June 30, 1996 on the basis of the following
assumptions. It is assumed that adjustable-rate assets and liabilities would
reprice at their earliest repricing date and fixed-rate assets and liabilities
would reprice on their contractual maturity date. In addition, fixed-rate loans
with original terms of five years or less and a balloon payment are treated as
adjustable-rate loans and assumed to reprice in the period the balloon payment
is due. It is further assumed that adjustable rate loans prepay at a rate of
10% per year and fixed rate loans are assumed to prepay at the rate of 5% per
year. Money market deposit accounts ("MMDA's") and savings deposits are assumed
to reprice in accordance with FIDICIA Section 305 guidelines, as follows:
Fifteen percent of MMDA's are assumed to reprice in 0-3 months, 45% in 3-12
months and 40% in 1-3 years; savings deposits are assumed to reprice at 5% in 0-
3 months, 15% in 3-12 months, 40% in 1-3 years and 40% in 3-5 years. All
prepayments and liability repricing assumptions are based on industry averages
used for the purpose of assessing interest rate sensitivity, which the Company
believes does not differ materially from its historical experience. Balances in
all instruments are kept stable with the assumption that runoff is reinvested in
the same instrument. Nonaccrual loans are not reflected below.
51
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
----------------------------------------------------------------------------------------
Over 1 Over 2 Over 3 Over 5
1 Year Year to Years to Years to Years to Over 10
or Less Two Years Three Years 5 Years 10 Years Years Total
----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate one- to four-family,
commercial real estate and
construction loans . . . . . . . . . $ 19,428 $ 14,232 $ 19,367 $ 56,537 $ 133,194 $217,378 $ 460,136
Adjustable rate one- to four-
family, commercial real estate
and construction loans . . . . . . . 244,727 31,013 19,380 38,756 1,043 --- 334,919
Commercial business loans . . . . . . 3,374 386 2,474 950 2,279 2,342 11,805
Consumer loans . . . . . . . . . . . 13,126 1,747 2,121 4,589 10,407 15,114 47,104
Interest-earning deposits . . . . . . 54,838 --- --- --- --- --- 54,838
FHLB Stock . . . . . . . . . . . . . 9,340 --- --- --- --- --- 9,340
Securities available for sale and
other investments . . . . . . . . . 194,699 --- --- --- --- --- 194,699
--------- -------- ---------- -------- -------- -------- ---------
Total interest-earning assets . . 539,532 47,378 43,342 100,832 146,923 234,834 1,112,841
--------- -------- ---------- -------- -------- -------- ---------
Money market accounts . . . . . . . . 95,813 31,938 31,938 --- --- --- 159,689
Commercial demand . . . . . . . . . . 2,813 --- --- --- --- --- 2,813
Savings deposits . . . . . . . . . . 179 179 179 178 178 --- 893
Certificate accounts . . . . . . . . 554,540 136,428 15,983 20,958 --- --- 727,909
Subordinated debt, net . . . . . . . --- --- --- 57,051 --- --- 57,051
FHLB advances . . . . . . . . . . . . --- --- --- --- --- --- ---
Other borrowings . . . . . . . . . . 13,740 --- --- 939 6,237 552 21,468
--------- -------- ---------- -------- -------- -------- ---------
Total interest-bearing liabilities . 667,085 168,545 48,100 79,126 6,415 552 969,823
--------- -------- ---------- -------- -------- -------- ---------
Interest-earning assets less
interest-bearing liabilities . . . . $(127,553) $(121,167) $ (4,758) $ 21,706 $140,508 $234,282 $ 143,018
--------- -------- ---------- -------- -------- -------- ---------
--------- -------- ---------- -------- -------- -------- ---------
Cumulative interest-rate
sensitivity gap . . . . . . . . . . $(127,553) $(248,720) $(253,478) $(231,772) $(91,264) $143,018 $ 143,018
--------- -------- ---------- -------- -------- -------- ---------
--------- -------- ---------- -------- -------- -------- ---------
Cumulative interest-rate gap
as a percentage of total assets
at June 30, 1996 . . . . . . . . . . (10.05)% (19.60)% (19.97)% (18.26)% (7.19)% 11.27% 11.27%
--------- -------- ---------- -------- -------- -------- ---------
--------- -------- ---------- -------- -------- -------- ---------
Cumulative interest-rate gap as
a percentage of interest-earning
assets at June 30, 1996 . . . . . . (11.46)% (22.35)% (22.78)% (20.83)% (8.20)% 12.85% 12.85%
--------- -------- ---------- -------- -------- -------- ---------
--------- -------- ---------- -------- -------- -------- ---------
Cumulative interest-rate gap as a
percentage of interest-bearing
liabilities at June 30, 1996 . . . . (13.15)% (25.65)% (26.14)% (23.90)% (9.41)% 14.75% 14.75%
--------- -------- ---------- -------- -------- -------- ---------
--------- -------- ---------- -------- -------- -------- ---------
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rate. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a short-
term basis and over the life of the asset. In the event of a change in interest
rates, prepayment and early withdrawal levels would significantly change the
results set forth in the foregoing table. The ability of many borrowers to
service their debt may decrease in the event of an interest rate increase.
52
<PAGE>
The table below sets forth, as of June 30, 1996, the estimated changes in
(i) the Bank's market value of portfolio equity ("MVPE") (I.E., the present
value of expected cash flows from assets, liabilities and off-balance sheet
contracts) and (ii) the Bank's net interest income on June 30, 1996, presented
on an annualized basis which would result from the designated instantaneous
changes in the U.S. Treasury yield curve. Yields used in the table to compute
Net Interest Income and MVPE reflect actual effective yields for the quarter
ended June 30, 1996, annualized.
<TABLE>
<CAPTION>
Percentage Change in:
----------------------------------------------
Net Interest Income MVPE Change Change Dollar Percent
Change in ---------------------- ------------------------ Net in Net in Net Change Change
Interest Rates Board Projected Board Projected Interest Interest Interest in in
(Basis Points) Limit %(1) Change % Limit %(1) Change % Income Income Income % MVPE MVPE MVPE
- -------------- ----------- ----------- ---------- ------------ ----------- --------- ---------- ------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
+400 -75.0% -13.5% -75% -56.0% $50,950 $-7,924 -13.5% $ 60,996 $-77,657 -56.0%
+300 -50.0 -9.9 -50 -43.1 53,059 -5,815 -9.9 78,837 -59,816 -43.1
+200 -35.0 -6.2 -35 -28.1 55,195 -3,679 -6.2 99,709 -38,944 -28.1
+100 -25.0 -2.7 -25 -13.5 57,270 -1,604 -2.7 119,958 -18,694 -13.5
0 --- 0 0 0 58,874 0 0 138,653 0 0
-100 -25.0 2.5 -25 10.7 60,330 1,456 2.5 153,422 14,769 10.7
-200 -35.0 5.4 -35 18.8 62,028 3,154 5.4 164,727 26,074 18.8
-300 -50.0 7.6 -50 21.8 63,356 4,482 7.6 168,865 30,212 21.8
-400 -75.0 9.3 -75 22.6 64,376 5,502 9.3 170,027 31,374 22.6
</TABLE>
- --------------------------
(1) Reflects the limits established by the Board of Directors.
As indicated in the table above, management has structured its assets and
liabilities to increase net interest margin rather than minimize its exposure to
interest rate risk. As a result, the changes in the Bank's MVPE reflected above
exceed industry averages. In the event of a 400 basis point change in interest
rates, the Bank would experience a 22.6% increase in MVPE and a $5.5 million
increase in net interest income in a declining rate environment and a 56.0%
decrease in MVPE and a $7.9 million decrease in net interest income in a rising
rate environment. The Bank's asset and liability structure results in a
decrease in MVPE in a rising interest rate environment and an increase in MVPE
in a declining interest rate scenario. During periods of rising rates, the
value of monetary assets and monetary liabilities decline. Conversely, during
periods of falling rates, the value of monetary assets and liabilities increase.
However, the amount of change in value of specific assets and liabilities due to
changes in rates is not the same in a rising rate environment as in a falling
rate environment (I.E., the amount of value increase under a specific rate
decline may not equal the amount of value decrease under an identical upward
rate movement). The decrease in MVPE in a rising interest rate environment is
the result of management's use of relatively short-term liabilities to fund its
purchases of loans with substantially longer terms to maturities. While this
results in a decrease in MVPE during a rising rate environment and an increase
in MVPE in a falling rate environment, management believes that the level of the
Bank's net interest spread enables the Bank to incur this additional interest
rate risk.
Management of the Bank believes that the assumptions used by it to evaluate
the vulnerability of the Bank's operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effect of changes in interest rates on the Bank's net interest income and MVPE
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based. In addition, in
evaluating the Bank's exposure to interest rate risk, certain other shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Further, in the event of a change in interest rates, prepayments and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate
53
<PAGE>
increase. As a result, the actual effect of changing interest rates may
differ substantially from that presented in the foregoing table.
FINANCIAL CONDITION
Total assets increased $636.4 million or 100.6%, from $632.9 million at
June 30, 1995 to $1.3 billion at June 30, 1996. The increase resulted primarily
from an increase in net loans receivable of $405.1 million and an increase in
securities available for sale of $154.0 million. The increase in net loans
receivable was due primarily to the Company 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,
purchased primarily for liquidity and to maintain compliance with the Qualified
Thrift Lender requirements. In addition, real estate held for investment or
sale increased $36.4 million or 88.4%, from $41.2 million at June 30, 1995 to
$77.6 million at June 30, 1996. The increase was primarily due to the increased
investment in residential developments.
Total liabilities increased $595.6 million, or 102.6% from $580.5 million
at June 30, 1995 to $1.2 billion at June 30, 1996, primarily due to FHLB
advances and the issuance of $57.5 million of Senior Notes and increases in
deposits. Savings deposits increased $433.1 million, or 94.5%, from $458.2
million at June 30, 1995 to $891.3 million at June 30, 1996. Of the $433.1
million net increase in savings deposits, $141.3 million were generated by the
sale of certificates of deposits through various brokers, $179.7 million was due
to deposits generated at the Company's branch located in Houston, Texas, which
opened in April 1995 and $9.5 million was due to deposits generated at the
Company's branch located in Winnetka, Illinois, which opened in March, 1996.
Advances from the FHLB increased by $74.0 million to fund loan purchases.
Stockholders' equity increased $40.8 million, or 77.8%, from $52.4 million
at June 30, 1995 to $93.2 million at June 30, 1996. This increase was due to
earnings.
RESULTS OF OPERATIONS
GENERAL. The level of net income experienced by the Company in the past
three fiscal years resulted primarily from (i) the significant increase in the
average balance of interest-earning assets and (ii) non-recurring gains on the
sales of loans and foreclosed assets. Gains on the sales of loans and real
estate generally are dependent on various factors which are not necessarily
within the control of the Company, including market and economic conditions. As
a result, there can be no assurance that the gains on sales of loans and real
estate reported by the Company in prior periods will be reported in future
periods or that there will not be substantial periodic variation in the results
from such activities.
54
<PAGE>
AVERAGE BALANCE, INTEREST AND AVERAGE YIELDS AND RATES. The following
tables present for the periods indicated the total dollar amount of interest
income from average interest-earning assets and the resultant yields, as well as
the interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. No tax equivalent adjustments were made. All average
balances are monthly average balances. Non-accruing loans have been included in
the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- -------------------------------- --------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- --------- ------- ----------- -------- ------ ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1) . . . . $147,609 $33,889 22.96% $359,317 $61,185 17.03% $760,906 $131,544 17.29%
Mortgage-backed securities . 3,828 254 6.64 18,694 1,328 7.10 99,495 6,916 6.95
Interest-earning deposits . 10,425 370 3.55 15,993 896 5.60 36,890 2,183 5.92
FHLB stock . . . . . . . . . 1,522 67 4.40 6,381 386 6.05 4,984 305 6.12
-------- ------- ----- -------- ------- ----- ------- -------- -----
Total interest-earning
assets(1) . . . . . . . . $163,384 34,580 21.16 $400,385 63,795 15.93 $902,275 140,948 15.62
-------- ------- -------- ------- -------- --------
-------- -------- --------
Interest-Bearing Liabilities:
Savings deposits . . . . . . 9,636 247 2.56 29,276 1,435 4.90 127,126 6,099 4.80
Certificate accounts . . . . 118,885 5,354 4.50 233,875 12,282 5.25 669,269 39,816 5.95
Senior notes, net . . . . . --- --- --- --- --- --- 50,093 6,904 13.78
Borrowings . . . . . . . . . 26,173 958 3.66 125,987 7,264 5.77 71,360 3,999 5.60
-------- ------- -------- ------- ------- --------
Total interest-bearing
liabilities . . . . . . . $154,694 6,559 4.24 $389,138 20,981 5.39 $917,848 56,818 6.19
-------- ------- -------- ------- -------- --------
-------- -------- --------
Net interest income . . . . $28,021 $42,814 $ 84,130
------- ------- --------
------- ------- --------
Net interest rate spread . . 16.92% 10.54% 9.43%
Net earning assets . . . . . $ 8,690 $ 11,247 $(15,573)
--------- -------- ---------
--------- -------- ---------
Net yield on average
interest-
earning assets . . . . . . 17.15% 10.69% 9.32%
Average interest-earning
assets to average
interest-bearing
liabilities . . . . . . . . 105.62% 102.89% 98.30%
</TABLE>
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
55
<PAGE>
RATE/VOLUME ANALYSIS. The following schedule presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (I.E., changes in volume multiplied by old rate) and (ii)
changes in rate (I.E., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------------
1994 vs. 1995 1995 vs. 1996
----------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
--------- ------------ ----------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable . . . . . . . . . . . . . . . . $24,485 $(2,803) $21,682 $50,403 $ 357 $50,760
Loans receivable - discount . . . . . . . . . . 11,564 (5,950) 5,614 19,009 590 19,599
------- -------- ------- ------- ------ --------
Loans receivable - total . . . . . . . . . . . . 36,049 (8,753) 27,296 69,412 947 70,359
Mortgage-backed securities . . . . . . . . . . . 1,056 18 1,074 5,616 (28) 5,588
Interest-earning deposits . . . . . . . . . . . 425 101 526 1,234 53 1,287
Other . . . . . . . . . . . . . . . . . . . . . 293 26 319 (86) 5 (81)
------- -------- ------- ------- ------ --------
Total interest-earning assets . . . . . . . . $37,823 $(8,608) 29,215 $76,176 $ 977 77,153
------- -------- ------- ------- ------ --------
------- -------- ------- -------
Interest-Bearing Liabilities:
Savings deposits . . . . . . . . . . . . . . . . $ 963 $ 225 $ 1,188 $ 4,694 $ (30) $ 4,664
Certificate accounts . . . . . . . . . . . . . . 6,036 892 6,928 25,700 1,834 27,534
Senior notes, net . . . . . . . . . . . . . . . --- --- --- 6,904 --- 6,904
Borrowings . . . . . . . . . . . . . . . . . . 5,754 552 6,306 (3,067) (198) (3,265)
------- -------- ------- ------- ------ --------
Total interest-bearing liabilities . . . . . . $12,753 $ 1,669 14,422 $34,231 $ 1,606 35,837
------- -------- ------- ------- ------ --------
------- -------- ------- ------
Change in net interest income . . . . . . . . . . $14,793 $41,316
------- ---------
------- ---------
</TABLE>
56
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND
1995
NET INCOME. The Company had net income of $44.2 million for the fiscal
year ended June 30, 1996, as compared to $25.4 million for the fiscal year ended
June 30, 1995. As discussed in more detail below, the increase in net income of
$18.8 million, or 74.0%, was due primarily to an increase in net interest income
of $41.3 million and an increase in non-interest income of $2.8 million, which
more than offset the increases in the provision for loan losses of $5.0 million,
non-interest expense of $10.3 million and income taxes of $10.0 million.
NET INTEREST INCOME. Net interest income increased $41.3 million, or
96.5%, from $42.8 million in fiscal 1995 to $84.1 million in fiscal 1996, due to
an increase in average interest-earning assets during fiscal 1996. The average
balance of interest-earning assets increased $501.9 million during this period
primarily due to an increase in discounted loans purchased from the HUD and FDIC
and, to a lesser extent, increased loan originations and purchases of mortgage-
backed securities. In addition, net interest rate spread decreased from 10.54%
for fiscal 1995 to 9.43% for fiscal 1996 primarily due to the purchase of lower
yielding mortgage-backed securities and interest expense on the Senior Notes.
INTEREST INCOME. Interest income increased by $77.1 million, or 120.9%,
from $63.8 million at June 30, 1995 to $140.9 million at June 30, 1996. Of the
total increase in interest income, $50.4 million was due to the increase in
average interest-earning assets and $19.6 million was due to the increase in the
purchase discount accretion. The increase in average interest- earning assets
was primarily due to the increase in discounted loans purchased from the HUD and
the FDIC and, to a lesser extent, increased mortgage-backed securities. The
increase in the average balance of interest-earning assets more than offset the
31 basis point decrease in the average yield on interest-earning assets from
15.93% during fiscal 1995 to 15.62% during fiscal 1996. This decrease in yield
was due in part to increases in lower yielding mortgage-backed securities and in
interest-earning deposits.
INTEREST EXPENSE. Interest expense increased by $35.8 million, or 170.8%,
from $21.0 million for fiscal 1995 to $56.8 million for fiscal 1996 due
primarily to an increase in the average balance of interest-bearing liabilities
and, to a lesser extent, the issuance of the Senior Notes. An increase in
certificate accounts accounted for $25.7 million of the increase and the
issuance of the Senior Notes accounted for $6.9 million of the increase. The
average balance of savings deposits and certificate accounts increased $97.9
million and $435.4 million, respectively, between the two periods due to the
opening of two new branch offices, increased rates paid on savings and
certificate accounts and increased deposit solicitation efforts as a result of
management's decision to utilize such deposits to fund the purchase of
discounted loans. The average rate paid on certificate accounts increased from
5.25% during fiscal 1995 to 5.95% for fiscal 1996. The increase in rates paid
on deposits was due to increases in market rates of interest and management's
decision to pay higher rates to obtain deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as an amount sufficient to maintain the allowance for loan losses
after net charge-offs at a level considered adequate to absorb future losses
inherent in the loan portfolio in accordance with generally accepted accounting
principles. The increase of $5.0 million, or 123.6%, in the provision for loan
losses from June 30, 1995 to June 30, 1996 was the result of an increase in the
average outstanding balance of net loans receivable of $401.6 million, or
111.8%. In addition, at June 30, 1996, net non-accruing loans totaled $55.3
million, as compared to $36.0 million at June 30, 1995.
The Company establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio. This analysis
includes an evaluation of the Company'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 and specific allocations based on asset reviews. The
allowance for loan losses as a percentage of net non-performing loans was 17.1%
at June 30, 1995 as compared to 9.7% at June 30, 1996. The primary reason for
the decline in this ratio was due to the purchase of multi-family
non-performing loans for $132.6 million. Management believes that the
underlying collateral value is sufficient to cover the Company's basis in
these loans.
57
<PAGE>
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in adjustment
and net income 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 increased $2.8 million, or
19.8% to $16.7 million for fiscal 1996 from $13.9 million for fiscal 1995. This
increase was primarily due to an increase in gain on real estate transactions
of $2.6 million and an increase of $1.1 million in other real estate
operations, net, partially offset by a $1.0 million decrease in gains on
certain assets. Other real estate operations income, net, increased
primarily due to an increase of $822,000 in real estate investment income.
During fiscal 1996, the Company 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 $2.6 million
in gain on real estate transactions was primarily due to an increase in
foreclosures.
During fiscal 1996, the Company discontinued the home improvement
operations of Beal Acceptance Corporation, a wholly owned subsidiary of the
Bank. The Company does not anticipate a material effect on operations as a
result of this action.
NON-INTEREST EXPENSE. Non-interest expense increased $10.3 million, or
84.9%, from $12.2 million for fiscal 1995 to $22.5 million for fiscal 1996
primarily due to an increase in salaries and employee benefits of $3.3 million
and an increase in other operating expenses of $4.4 million. The increases in
operating expenses, primarily due to the Company's purchasing activities and
resultant increase in asset size were principally legal expenses, loan
acquisition and origination expenses, loan servicing expenses, audit expenses
and marketing expenses. The increase of $3.3 million in salaries and employee
benefits was due to the addition of an average of 48 full-time equivalent
employees as a result of the Company's increased asset size and an increase in
annual bonuses of $614,000. Total full-time equivalent employees at June 30,
1996 were 113 compared to 93 at June 30, 1995. In addition, occupancy expense
increased $1.1 million. Lastly, deposit insurance premiums increased $861,000
due the Company's deposit growth.
The deposits of some financial institutions, such the Bank are presently
insured by the Savings Association Insurance Fund ("SAIF"), which, along with
the BIF, is one of the two insurance funds administered by the FDIC. A
recapitalization plan for the SAIF under consideration by Congress provides for
a special assessment of approximately .70% 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 $2.2
million, before taxes. This special assessment would significantly increase
non-interest expense and adversely effect the Company's results of operations.
The Company 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.
INCOME TAXES. Income taxes increased $10.0 million from $15.2 million for
fiscal 1995 to $25.2 million for fiscal 1996 due to an increase in taxable
income for the 1996 period. The effective tax rate for federal income taxes was
34.8% for the 1995 period as compared to 33.1% for the 1996 period. The rate
decrease was due primarily to the utilization of tax credits generated by BAH.
As a result of the increase in the Company's taxable income, the Company is
currently subject to the highest federal corporate tax rate of 35%.
58
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED JUNE 30, 1995 AND
1994
NET INCOME. The Company had net income of $25.4 million for the fiscal
year ended June 30, 1995, as compared to $10.8 million for the fiscal year ended
June 30, 1994. As discussed below, the increase in net income of $14.6 million,
or 135.2%, was due primarily to an increase in net interest income of $14.8
million, and an increase in non-interest income of $12.4 million, which more
than offset increases in provisions for loan losses of $1.2 million, an increase
in non-interest expense of $3.0 million and an increase in income taxes of $8.4
million.
NET INTEREST INCOME. Net interest income increased $14.8 million, or
52.1%, from $28.0 million in fiscal 1994 to $42.8 million in fiscal 1995 due
to an increase in net interest-earning assets in fiscal 1995 as compared to
fiscal 1994. This increase was primarily due to an increase in discounted
loans purchased and increased loan originations. The average balance of
interest-earning assets increased from $163.4 million to $400.4 million due
primarily to purchase of discounted loans. In addition, net interest rate
spread decreased from 16.9% for fiscal 1994 to 10.5% for fiscal 1995
primarily due to the purchase of lower yielding one- to four-family loans.
INTEREST INCOME. Interest income increased by $29.2 million, or 83.4%,
from $34.6 million in fiscal 1994 to $63.8 million in fiscal 1995 due to an
increase in interest-earning assets. Of the total increase in interest income,
$22.8 million was due to the increase in the average balance of loans receivable
and $5.6 million was due to the increase in purchase discount accretion. During
fiscal 1995, the Company purchased $340.2 million in net discounted loans.
INTEREST EXPENSE. Interest expense increased by $14.4 million, or 221.5%,
from $6.5 million in fiscal 1994 to $20.9 million in fiscal 1995 due to an
increase in the average balance of interest-bearing liabilities and an increase
in the cost of funds primarily due to increases in market rates of interest and,
to a lesser extent, management's decision to pay higher rates to obtain
deposits. The average balance of certificate accounts increased $115.0 million,
or 96.7%, from $118.9 million in fiscal 1994 to $233.9 million in fiscal 1995 as
a result of the opening of the Houston, Texas branch office and increased
advertising. The average outstanding balance of FHLB advances and other
borrowings increased $98.1 million, or 351.6%, from $27.9 million in fiscal 1994
to $126.0 million in fiscal 1995. The Company utilized FHLB advances and
deposits to fund discounted loan purchases.
PROVISION FOR LOAN LOSSES. The increase of $1.2 million, or 41.4%, in the
provision for loan losses from fiscal 1994 to fiscal 1995 was the result of an
increase in net loans receivable of $273.3 million, or 124.3%, which includes an
increase in non-performing assets of $25.2 million, or 128.6%, from $19.6
million at June 30, 1994 to $44.8 million at June 30, 1995 primarily due to the
purchase of non-performing discounted loans.
NON-INTEREST INCOME. Total non-interest income increased by $12.4 million,
or 806.8%, from $1.5 million in fiscal 1994 to $13.9 million in fiscal 1995.
This increase was primarily due to the non-recurring gain on the sales of
interest-earning assets of $9.0 million, gain on sale of mortgage-backed
securities of $788,000 and gain on the sales of real estate of $3.5 million.
These increased gains were primarily due to sales of loans to the Federal
National Mortgage Association ("FNMA") to generate additional capital to fund
the Company's asset growth.
NON-INTEREST EXPENSE. Non-interest expense increased by $3.0 million, or
33.0%, from $9.1 million in fiscal 1994 to $12.1 million in 1995 primarily due
to an increase in salaries from $3.4 million in fiscal 1994 to $4.9 million in
fiscal 1995. The majority of this increase was due to the addition of 41 full-
time equivalent employees during fiscal 1995. Total full-time equivalent
employees at June 30, 1994 was 52 as compared to 93 at June 30, 1995 due to the
Bank's asset growth. In addition, expenses related to discounted loan purchases
from the FDIC and RTC increased $200,000 or 16.7%, from $1.2 million in fiscal
1994 to $1.4 million in fiscal 1995. This increase was a direct result of the
increase in discounted loans purchases from the RTC and FDIC during fiscal 1995
and the level of due diligence required to determine the amount to bid. The
increases in non-interest expenses such as occupancy, SAIF-deposit insurance
premiums and third-party loan servicing fees were related to the Bank's asset
growth and related increases in staff. In addition, the increases in
advertising and promotion expenses were related to increased deposit
solicitation.
59
<PAGE>
INCOME TAXES. Income taxes increased from $6.8 million to $15.2 million
primarily due to an increase in taxable income in fiscal 1995 as compared to
fiscal 1994. The effective tax rate for federal income taxes was 35.0% for
fiscal 1995 as compared to 34.0% in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Beal Financial's primary sources of funds are dividends from the Bank and
interest earned on its investments. The Bank's primary sources of funds for
operations are deposits obtained from its market area, principal and interest
payments on loans, 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.
The primary investing activity of the Company is the purchase of discounted
loans from the HUD and FDIC through the sealed bid process or auctions and other
private sector sellers. During the years ended June 30, 1996, 1995, and 1994,
the Company purchased $541.2 million, $346.2 million and $124.7 million,
respectively, of net loans. Loan originations for the years ended June 30,
1996, 1995, and 1994 were $121.9 million, $76.4 million and $59.2 million,
respectively.
The Company's primary financing activity is the attraction of deposits.
During the fiscal years ended June 30, 1996, 1995 and 1994, the Company
experienced a net increase in deposits of $433.2 million, $272.1 million and
$93.2 million, respectively. The Company also utilizes FHLB advances to fund
the Bank's discounted loan purchases. During the fiscal years ended June 30,
1996, 1995 and 1994 the Company's net financing activity (proceeds less
repayments) with the FHLB totaled $74.0 million, $86.0 million and $17.5
million, respectively. The Company had other borrowings of $78.5 million at
June 30, 1996, including $57.5 million of Senior Notes.
The Company has the ability to borrow additional funds from the FHLB of
Dallas by pledging additional assets as collateral, subject to certain
restrictions. At June 30, 1996, the Company had an undrawn advance arrangement
with the FHLB for $109.0 million.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Texas Department. A Texas savings bank is required to maintain liquidity
in an amount not less than 10% of an amount equal to its average daily deposits
for the most recently completed calendar quarter in cash or readily marketable
securities. At June 30, 1996, the Bank's liquidity ratio was 15.4%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash and cash equivalents is dependent on the Company's operating, financing,
and investing activities during any given period. At June 30, 1996, 1995, and
1994, cash and cash equivalents totaled $55.4 million, $31.5 million and $5.0
million, respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At June 30, 1996, the Company had commitments to
purchase loans of $245,000 and to originate loans of $8.3 million. Certificates
of deposits which are scheduled to mature in one year or less at June 30, 1996
totaled $554.4 million reflecting consumer preference for short-term investments
in the current interest rate environment. 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. The Company further believes that
based on the levels of retention of such deposits in the recent past, that a
significant portion of such deposits will remain with the Company.
60
<PAGE>
At June 30, 1996, the Bank exceeded each of its three capital requirements.
The following is a summary of the Bank's regulatory capital position at June 30,
1996.
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------
Required(1) Actual
------------------- -------------------------
Amount Percent Amount Percent
------- ---------- --------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Leverage capital $115,168 9.00% $138,664 10.84%
Tier 1 risk-based capital 36,205 4.00 138,664 15.32
Total risk-based capital 99,563 11.00 149,984 16.57
</TABLE>
- --------------------
(1) Required leverage and total risk-based capital requirements represent
higher capital requirements imposed by the Bank's primary regulator as a
condition to the Bank's continued asset growth. See "Regulation -
Regulatory Capital Requirements and Prompt Corrective Regulatory Action."
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 Bank's operations. Nearly all the
assets and liabilities of the Company are financial, unlike most industrial
companies. As a result, the Company's performance is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. Since the Company 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 Company'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.
61
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
BEAL FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants 63
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1995 and 1996 64
Consolidated Statements of Income for the years ended June 30, 1994,
1995 and 1996 65
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1994, 1995 and 1996 66
Consolidated Statements of Cash Flows for the years ended June 30,
1994, 1995 and 1996 67
Notes to Consolidated Financial Statements 69
62
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Beal Financial Corporation
We have audited the accompanying consolidated balance sheets of Beal Financial
Corporation and Subsidiaries as of June 30, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Beal
Financial Corporation and Subsidiaries as of June 30, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Dallas, Texas
August 30, 1996
63
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30,
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
ASSETS
Cash $ 532 $ 463
Interest bearing deposits with Federal Home Loan Bank 54,838 31,044
---------- --------
CASH AND CASH EQUIVALENTS 55,370 31,507
Accrued interest receivable 16,146 6,306
Securities available for sale (Note E) 194,699 40,714
Loans receivable, net (Note C) 897,414 492,302
Federal Home Loan Bank stock 9,340 7,475
Real estate held for investment or sale (Note D) 77,632 41,212
Premises and equipment, net 6,918 7,324
Loans held for sale - 866
Other assets 11,760 5,160
---------- --------
$1,269,279 $632,866
---------- --------
---------- --------
LIABILITIES
Deposit accounts (Note F) $ 891,304 $458,165
Federal Home Loan Bank advances (Note G) 185,000 111,000
Senior notes, net (Note H) 57,051 -
Other borrowings 21,468 4,898
Other liabilities 21,284 6,403
---------- --------
TOTAL LIABILITIES 1,176,107 580,466
COMMITMENTS AND CONTINGENCIES (Note L) - -
STOCKHOLDERS' EQUITY (Note I)
Common stock, $1 par value per share; authorized 375
shares; issued and outstanding, 300 shares 300 300
Additional paid-in capital 2,740 2,740
Unrealized loss on available for sale securities,
net of tax benefit of $466 (862) -
Retained earnings 90,994 49,360
---------- --------
TOTAL STOCKHOLDERS' EQUITY 93,172 52,400
---------- --------
$1,269,279 $632,866
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
64
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 92,618 $ 41,858 $ 20,176
Purchase discount accretion 38,926 19,327 13,713
Investment securities 9,404 2,610 691
--------- --------- ---------
TOTAL INTEREST INCOME 140,948 63,795 34,580
Interest expense:
Deposits 45,915 13,717 5,601
Federal Home Loan Bank advances and other borrowings 3,999 7,264 958
Senior notes 6,904 - -
--------- --------- ---------
TOTAL INTEREST EXPENSE 56,818 20,981 6,559
--------- --------- ---------
NET INTEREST INCOME 84,130 42,814 28,021
Provision for loan losses (Note C) 9,044 4,045 2,888
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 75,086 38,769 25,133
Non-interest income:
Gain on sales of loans 8,413 8,620 451
Gain on sales of securities available for sale - 788 -
Gains on real estate transactions 7,068 4,412 912
Other real estate operations, net 1,108 - -
Other operating income 94 109 173
--------- --------- ---------
TOTAL NON-INTEREST INCOME 16,683 13,929 1,536
Non-interest expense:
Salaries and employee benefits 8,232 4,944 3,394
Occupancy and equipment 2,049 922 491
SAIF deposit insurance premium 1,332 471 212
Other real estate operations, net - - 1,214
Loss on sales of securities available for sale 587 - 131
Other operating expense (Note K) 10,256 5,808 3,643
--------- --------- ---------
TOTAL NON-INTEREST EXPENSES 22,456 12,145 9,085
--------- --------- ---------
INCOME BEFORE INCOME TAXES 69,313 40,553 17,584
Income taxes (Note J) 25,153 15,176 6,772
--------- --------- ---------
NET INCOME $ 44,160 $ 25,377 $ 10,812
--------- --------- ---------
--------- --------- ---------
Income per common share $ 147.20 $ 84.59 $ 36.04
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares outstanding 300 300 300
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
65
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Years ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized loss
Common Stock Additional on securities
--------------------- paid-in available Retained
Shares Amount capital for sale earnings Total
------ ------ ---------- --------------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 300 $300 $2,740 $ - $13,171 $16,211
Net income - - - - 10,812 10,812
--- ---- ------ ----- ------- -------
Balance at June 30, 1994 300 300 2,740 - 23,983 27,023
Net income - - - - 25,377 25,377
--- ---- ------ ----- ------- -------
Balance at June 30, 1995 300 300 2,740 - 49,360 52,400
Net income - - - - 44,160 44,160
Net unrealized loss on
securities available for sale,
net of tax benefit of $466 - - - (862) - (862)
Dividends Paid - - - - (2,526) (2,526)
--- ---- ------ ----- ------- -------
Balance at June 30, 1996 300 $300 $2,740 $(862) $90,994 $93,172
--- ---- ------ ----- ------- -------
--- ---- ------ ----- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
66
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 44,160 $ 25,377 $ 10,812
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities
Depreciation and amortization 1,791 585 360
Accretion of purchase discount (38,926) (19,327) (13,713)
Provision for loan losses 9,044 4,045 2,888
Amortization of bond premium and
underwriting costs 477 - -
Gains on real estate transactions (7,068) (4,412) (912)
Gain on sales of loans (8,413) (8,620) -
(Gain) loss on sales of securities
available for sale 587 (788) -
Losses on sales of securities - - 131
Changes in operating assets and liabilities
Accrued interest receivable (11,102) (3,822) (1,169)
Prepaid expenses and other assets (4,515) (3,300) (938)
Other liabilities and accrued expenses 14,842 1,098 3,541
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 877 (9,164) 1,000
INVESTING ACTIVITIES
Proceeds from sales of loans 19,045 64,469 -
Proceeds from sales of securities
available for sale 151,744 43,372 -
Proceeds from paydowns of securities
available for sale 10,954 116 -
Proceeds from sales of real estate 11,067 11,087 6,517
Proceeds from sales of investment securities - - 23,760
Purchases of investment securities - - (25,890)
Purchase of loans and bid deposits on
loan purchases (541,173) (374,403) (124,714)
Purchases of securities available for sale (318,769) (81,426) -
Purchase of Federal Home Loan Bank stock (1,865) (5,902) (746)
Capitalized interest on real estate investments (482) - -
Purchase of real estate held for investment
or sale (18,037) (28,776) (4,471)
Loan originations and advances,
less loan collections 136,265 49,499 12,161
Purchases of premises and equipment (1,406) (2,488) (2,296)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (552,657) (324,452) (115,679)
</TABLE>
67
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Year ended June 30,
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in deposit accounts $ 433,168 $ 272,117 $ 93,222
Proceeds from long-term debt 17,776 2,501 2,229
Repayments of long-term debt (3,767) (535) -
Advances from the Federal Home Loan Bank 74,000 86,000 17,500
Proceeds from issuance of senior notes, net 54,492 - -
Cash dividend paid (26) - -
---------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 575,643 360,083 112,951
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 23,863 26,467 (1,728)
Cash and cash equivalents at beginning of period 31,507 5,040 6,768
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,370 $ 31,507 $ 5,040
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest $ 50,707 $ 20,968 $ 6,558
Income taxes 19,668 14,680 4,920
Supplemental disclosures of noncash investing
and financing activities
Real estate acquired in foreclosure or in
settlement of loans $ 22,520 $ 11,684 $ 4,274
Assumption of majority stockholders'
indebtedness in lieu of cash dividend $ 2,500 $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
68
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES
NATURE OF OPERATIONS: Beal Financial Corporation (the Company),
through its subsidiary, Beal Bank SSB (the Bank), collectively
(the Corporation), operates three branches in Dallas and Houston,
Texas and Winnetka, Illinois. The Bank's primary business consists
of purchasing pools of loans generally at a discount from the principal
balances of the loans. These loans are generally purchased from the
Resolution Trust Corporation (RTC), the Federal Deposit Insurance
Corporation (FDIC), and the U.S. Department of Housing and Urban
Development (HUD).
A summary of the significant accounting policies of the Corporation applied
in the preparation of the accompanying consolidated financial statements
follows. The accounting principles followed by the Corporation and the
methods of applying them are in conformity with both generally accepted
accounting principles and prevailing practices of the savings and loan
industry.
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the accounts of the Corporation, the Bank and its subsidiaries and
partnerships in which its subsidiaries are the 1% general and 98% limited
partner. All significant intercompany transactions and balances are
eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: In preparing
financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and revenues and expenses during the reporting period. Actual results
could differ form those estimates.
LOANS: Loans are stated at unpaid principal balances less the allowance
for loan losses, loans in process and net deferred loan origination fees
and discounts.
The Corporation has adopted Statements of Financial Accounting Standards
Nos. 114 and 118, concerning accounting by creditors for impairment of a
loan (SFAS 114 and 118), effective July 1, 1995. The statements
require impairment on non-performing loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, its observable market price, or fair value of
collateral if the loan is collateral dependent. A loan is identified as
impaired when it is probable that interest and principal will not be
collected according to the contractual terms of the loan agreement. The
adoption of the statement did not have a significant impact on financial
position or results of operations of the Corporation.
Discounts on mortgage loans purchased by the Corporation are amortized to
income using the interest method over a remaining period which is the
longer of the contractual maturity or the remaining amortization term of
the note. Upon early payoff, any remaining discount is taken into income
and reflected in the financial statements as interest income. Discounts on
consumer loans are recognized over the lives of the loans using methods
that approximate the interest method.
Loans held for sale are carried at the lower of cost or estimated fair
value.
69
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
Loans collateralized by real estate are classified as loans until the
earlier of legal foreclosure or relinquishment of control of the collateral
by the borrower.
INVESTMENT SECURITIES: Effective July 1, 1994, the Corporation adopted
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). In
accordance with SFAS 115, the Corporation classifies investments as either
held to maturity, when the Corporation has positive intent and ability to
hold securities to maturity, or available for sale. Securities classified
as held to maturity are reported at amortized cost. Securities classified
as available for sale are reported at fair value, with unrealized gains and
losses, net of income taxes, excluded from earnings and reported as a
separate component of stockholders' equity. The adoption of SFAS 115 has
had no effect on the Corporation's consolidated financial statements.
Realized gains and losses on securities classified as available for sale
and held to maturity are reported in earnings in the year of sale.
LOAN-ORIGINATION FEES, COMMITMENT FEES, AND RELATED COSTS: Loan fees and
certain direct loan origination costs are deferred, and the net fee or cost
is recognized as an adjustment to interest income using the interest method
over the estimated life of the loans, based on the Corporation's historical
prepayment experience. Commitment fees and costs relating to commitments,
for which the likelihood of exercise is remote, are recognized over the
commitment period on a straight-line basis. If the commitment is exercised
during the commitment period, the remaining unamortized commitment fee at
the time of exercise is recognized over the life of the loan as an
adjustment of yield.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at
a level believed adequate by management to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current economic conditions, volume, growth, composition of the
loan portfolio, and other relevant factors. The allowance is increased by
provisions for loan losses charged to operations.
Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Corporation's
allowance for loan losses. Such agencies may require the Corporation to
make additions to the allowance based on their judgment of information
available to them at the time of their examination.
REAL ESTATE HELD FOR INVESTMENT AND SALE: Real estate properties held for
investment are carried at the lower of cost, including cost of improvements
and amenities incurred subsequent to acquisition, or net realizable value
(fair value). Costs relating to development and improvement of property
are capitalized, whereas costs relating to the holding of property are
expensed. Real estate properties acquired through or in lieu of loan
foreclosure are initially recorded at fair value less cost to sell at the
date of foreclosure.
70
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its fair value.
INCOME PER COMMON SHARE: Income per common share is based on the weighted
average number of common shares outstanding during each year.
STATEMENTS OF CASH FLOWS: For purposes of reporting cash flow, cash and
cash equivalents include cash on hand, amounts due from banks and
interest-bearing deposits in other banks.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less
accumulated depreciation based on the estimated useful lives of the assets,
as follows:
Buildings and improvements 10-45 years
Furniture and equipment 3-10 years
Depreciation is computed using the straight-line method.
INCOME TAXES: The Corporation and its subsidiaries file a Federal income
tax return on a consolidated basis. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: In the ordinary course of
business, the Corporation has entered into off-balance sheet financial
instruments consisting of commitments to extend credit and letters of
credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
FAIR VALUES OF FINANCIAL INSTRUMENTS: At June 30, 1996, the Corporation
adopted Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments," (SFAS No. 107).
The disclosures are based on the requirements set forth in SFAS 107 and
do not purport to represent the aggregate net fair value of the
Corporation. Further, the fair value estimates are based on various
assumptions, methodologies and subjective considerations which vary
widely among different financial institutions and which are subject to
change. The following methods and assumptions were used by the Corporation
in estimating financial instruments' fair values:
71
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - CONTINUED
CASH AND CASH EQUIVALENTS: The balance sheet carrying amounts
approximate the estimated fair values of such assets.
INVESTMENT SECURITIES: Fair values for investment securities are based
on quoted market prices, if available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
LOANS: For variable rate loans that reprice frequently and entail no
significant change in credit risk, fair values are based on the carrying
values. The fair values of other loans are estimated based on discounted
cash flow analysis using interest rates currently offered for loans with
similar terms to borrowers of similar credit quality.
DEPOSIT LIABILITIES: The fair values estimated for demand deposits
(interest and non-interest bearing accounts) are, by definition, equal to
the amount payable on demand at the reporting date (i.e., their carrying
amounts). The carrying amounts of variable rate, fixed-term money market
accounts and certificates of deposit approximate their fair values. Fair
values of fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated expected maturities.
FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: Fair values for
Federal Home Loan Bank advances and other borrowings are based upon
current market rates for instruments with similar maturities.
SENIOR NOTES: Fair values for senior notes is based upon the closing
market price at June 30, 1996.
NOTE B - FORMATION OF HOLDING COMPANY
On April 5, 1995, the Company filed an application with the Office of
Thrift Supervision for approval to acquire, indirectly, 100% of the
outstanding common stock of the Bank in exchange for 100% of the
Company's common stock. The application was approved on June 29, 1995
and the acquisition was effective on July 1, 1995. The accompanying
financial statements as of and for each of the two years in the period
ended June 30, 1995 reflect the financial position and results of
operations of the Bank and its subsidiaries. In connection with the
acquisition of the Bank's common stock, the Company assumed certain
related indebtedness of $2,500 from the majority shareholder. This amount
has been reflected in stockholders' equity as a dividend.
72
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE C - LOANS RECEIVABLE
A substantial portion of the Corporation's loan portfolio consists of first
mortgage loans in Texas, California, Florida and Colorado. A borrower's
ability to pay in full is dependent, in some respects, upon the general
economic condition of the area the underlying collateral is in. Loans
receivable, net, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Real estate loans
One-to-four family first liens $ 273,780 $ 237,585
Multifamily 341,696 109,080
Commercial 321,385 124,985
Construction and development 85,133 51,284
Land 100,047 35,997
---------- ----------
Total real estate loans 1,122,041 558,931
Other loans
Consumer loans
One-to-four family junior lien 50,146 44,999
Timeshares 7,809 11,668
Other 8,373 4,791
---------- ----------
Total consumer loans 66,328 61,458
Commercial business loans 29,886 45,060
---------- ----------
Total other loans 96,214 106,518
---------- ----------
Total loans 1,218,255 665,449
Less:
Loans held for sale - (866)
Loans in process (27,172) (21,217)
Deferred fees and discounts (281,837) (144,927)
Allowance for loan losses (11,832) (6,137)
---------- ----------
Total loans receivable, net $ 897,414 $ 492,302
---------- ----------
---------- ----------
</TABLE>
The amount of loans being serviced by the Corporation for others was
approximately $50,299 and $40,388 at June 30, 1996 and 1995, respectively.
73
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE C - LOANS RECEIVABLE - CONTINUED
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------
1996 1995 1994
---- ---- ----
------- -------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 6,137 $ 3,547 $ 1,245
Provision for loan losses 9,044 4,045 2,888
Charge-offs (3,385) (1,462) (586)
Recoveries 36 7 -
------- -------- -------
Balance at end of year $11,832 $ 6,137 $ 3,547
------- -------- -------
------- -------- -------
</TABLE>
In the normal course of business, the Corporation acquires pools of loans
at a discount from their current principal balance. The unearned discount
is then accreted over the life of the loans using the interest method. In
the Corporation's due diligence procedures and bidding, the Corporation
takes into consideration potential loans to be modified in determining the
price they are willing to pay for a particular pool. In connection with
these loan purchases, the Corporation subsequently modifies the terms of
certain loans included in the pools. The Corporation does not consider
these to be troubled debt restructurings. The effective interest rate on
the Corporation's modified loans is equal to or greater than the rate the
Corporation would be willing to accept for a new loan with comparable risk.
The Corporation has previously measured the allowance for credit losses using
methods similar to those prescribed in SFAS 114 as amended by SFAS
118. No additional allowance for loan losses was required as a result of
adopting these statements on July 1, 1995. At June 30, 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 June 30, 1996, the Corporation's recorded investment in impaired loans
and the related valuation allowance calculated under SFAS 114 and 118
are as follows:
<TABLE>
<CAPTION>
Recorded Valuation
investment allowance
---------- ---------
<S> <C> <C>
Impaired loans - valuation allowance required $24,233 $2,789
Impaired loans - no valuation allowance 71,035 -
------- ------
Total impaired loans $95,268 $2,789
------- ------
------- ------
</TABLE>
74
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE C - LOANS RECEIVABLE - CONTINUED
The valuation allowance for impaired loans is included in the allowance for
loan losses.
The average recorded investment in impaired loans for the year ended June
30, 1996 was $94,007. Interest income on impaired loans of $8,206 was
recognized in 1996. Interest income foregone under the original terms of
impaired loans was approximately $5,400 in 1996.
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $57,990 at June 30, 1995. Interest income foregone under the
original terms of such loans was approximately $971 and $3,578 for the years
ended June 30, 1994 and 1995, respectively.
NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE
Real estate held for investment or sale is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Real estate held for development and rental $50,649 $32,536
Real estate held for sale 27,745 8,790
------- -------
78,394 41,326
Less accumulated depreciation (762) (114)
------- -------
Total real estate held for investment or sale $77,632 $41,212
------- -------
------- -------
</TABLE>
Income from real estate development and rental activities which has not been
significant is included in other income in the statements of income. Real
estate held for sale was acquired by foreclosure or by deed in lieu of
foreclosure.
NOTE E - SECURITIES AVAILABLE FOR SALE
The carrying amounts and approximate market values of securities available
for sale are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Mortgage-backed securities:
June 30, 1996 $196,027 $142 $(1,470) $194,699
June 30, 1995 $ 40,714 $ - $ - $ 40,714
</TABLE>
75
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE F - DEPOSITS
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
1996 1995
----------------------- ----------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 2,813 .3% $ 1,522 .3%
Statement savings deposits (4.75% at June 30, 1996) 893 .1 827 .2
Money market demand deposit accounts
(3.0% to 5.87% at June 30, 1996) 159,689 17.9 57,616 12.6
-------- ----- -------- -----
163,395 18.3 59,965 13.1
Certificates of deposit
3.51% to 4.00% - - 152 .1
4.00% to 4.50% 359 - 2,751 .6
4.51% to 5.00% 37,966 4.3 8,840 1.9
5.01% to 5.50% 285,176 32.0 41,839 9.1
5.51% to 6.00% 334,778 37.6 42,043 9.2
6.01% to 6.50% 38,467 4.3 218,693 47.7
6.51% to 7.00% 16,822 1.9 68,971 15.1
7.01% to 7.50% 14,242 1.6 13,525 2.9
7.51% to 8.00% 99 - 792 .2
8.01% to 8.50% - - 594 .1
-------- ----- -------- -----
Total certificates of deposit 727,909 81.7 398,200 86.9
-------- ----- -------- -----
Total deposits $891,304 100.0% $458,165 100.0%
-------- ------ -------- ------
-------- ------ -------- ------
</TABLE>
The aggregate amount of deposits with a minimum denomination of $100 or more
was approximately $281,582 and $56,645 at June 30, 1996 and 1995,
respectively.
At June 30, 1996, the scheduled maturities of certificates of deposit were as
follows:
<TABLE>
<CAPTION>
June 30,
--------
<S> <C>
1997 $554,436
1998 136,428
1999 15,983
2000 8,372
2001 12,690
--------
$727,909
--------
--------
</TABLE>
76
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE F - DEPOSITS - CONTINUED
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Savings deposits $ 6,675 $ 1,435 $ 247
Certificates of deposit 39,240 12,282 5,354
-------- -------- -------
$ 45,915 $ 13,717 $ 5,601
-------- -------- -------
-------- -------- -------
</TABLE>
NOTE G - FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB, mortgage-backed securities
of $85,000 and qualifying first mortgage loans with a collateral value of
approximately $152,000 at June 30, 1996. The FHLB advances of $185,000 at
June 30, 1996 mature in July 1996.
NOTE H - SENIOR NOTES
On August 9, 1995, the Company issued $57,500 of 12.75% Senior Notes due
on August 15, 2000 at a discount of $500 which is being accreted over the
life of the notes. Interest is payable semi-annually on February 15 and
August 15 of each year. Commencing August 15, 1996, the Senior Notes are
redeemable, in whole or in part, at the option of the Company.
NOTE I - REGULATORY MATTERS
The Company is not subject to capital adequacy requirements by its
primary regulator, the Office of Thrift Supervision.
The Bank is subject to various regulatory capital requirements administered
by the Texas Savings and Loan Department (the Department) and federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
77
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE I - REGULATORY MATTERS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total risk based and tier I capital to risk-weighted assets,
and of leverage capital to total assets. Management believes, as of June 30,
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
The Department set a capital standard of 11% for total risk based capital
and 9% for leverage capital. Texas savings banks, including the Bank, are
required to maintain a daily balance of liquid assets at least equal to 10%
of the average daily balance of deposits for the preceding quarter. At June
30, 1996 and 1995, the Bank's liquidity ratios were 15.41% and 11.44%,
respectively. Effective May 1995, the Department reduced the Bank's minimum
total risk based capital ratio and leverage capital ratio to 10% and 7%,
respectively, until September 1995 provided the Bank's ratio of classified
assets to total risk based capital did not exceed 75%.
The most recent notification from the Department and Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
To be categorized as well capitalized by the federal banking agencies, the
Bank must maintain minimum total risk-based, tier I risk-based, and leverage
ratios as set forth in the table below.
<TABLE>
<CAPTION>
For capital
Actual adequacy purposes
--------------------- -----------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1996
Total risk based capital $149,984 16.57% $72,409 Greater than or equal to 8%
Tier I risk based capital 138,664 15.32% 36,205 Greater than or equal to 4%
Leverage capital 138,664 10.84% 51,186 Greater than or equal to 4%
AS OF JUNE 30, 1995
Total risk based capital 58,189 12.56% 37,057 Greater than or equal to 8%
Tier I risk based capital 52,400 11.31% 18,528 Greater than or equal to 4%
Leverage capital 52,400 8.26% 25,367 Greater than or equal to 4%
To be well capitalized under
prompt corrective action provisions
------------------------------------
Amount Ratio
------- -----
<S> <C> <C>
AS OF JUNE 30, 1996
Total risk based capital $90,512 Greater than or equal to 10%
Tier I risk based capital 54,307 Greater than or equal to 6%
Leverage capital 63,982 Greater than or equal to 5%
AS OF JUNE 30, 1995
Total risk based capital 46,321 Greater than or equal to 10%
Tier I risk based capital 27,793 Greater than or equal to 6%
Leverage capital 31,709 Greater than or equal to 5%
</TABLE>
78
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE J - INCOME TAXES
The following items give rise to deferred tax assets and liabilities in the
consolidated balance sheets at June 30:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C> <C>
Deferred tax assets
Accrued interest receivable $ 2,092 $ 776
Loan acquisition cost 321 224
Deferred loan fees 28 189
Accrued expenses 42 50
Real estate held for investment or sale 167 141
Premises and equipment 167 36
Unrealized loss on investment securities 466 -
Other 777 -
------- --------
Gross deferred tax asset 4,060 1,416
Deferred tax liabilities
Loan discounts 272 383
Allowance for loan losses 714 645
FHLB stock dividends 175 148
Gains on real estate transactions 1,303 -
Accrued interest 2,168 -
Other - 28
------- --------
Gross deferred tax liability 4,632 1,204
------- --------
Net deferred tax asset (liability $ (572) $ 212
------- --------
------- --------
Taxes on income consisted of the following for the years ended June 30:
1996 1995 1994
------- ------- --------
Federal
Current $21,095 $13,646 $ 6,354
Deferred 1,249 (57) (373)
------- ------- --------
22,344 13,589 5,981
State 2,809 1,587 791
------- ------- --------
$25,153 $15,176 $ 6,772
------- ------- --------
------- ------- --------
</TABLE>
79
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE J - INCOME TAXES - CONTINUED
Income taxes for financial reporting purposes differed from the amount
computed by applying the statutory federal income tax rate to the income
before income taxes for the years ended June 30 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at statutory Federal income tax rate $24,260 $14,193 $ 5,979
Increase (decrease) in taxes resulting from:
State tax, net of federal tax benefit 2,195 1,047 505
Tax credits (1,469) - -
Other 167 (64) 288
------- ------- -------
Total $25,153 $15,176 $ 6,772
------- ------- -------
------- ------- -------
</TABLE>
In August 1996, the Small Business Job Protection Act of 1996 was signed into
law (the Law). Included in the Law is a provision eliminating Section 593 of
the Internal Revenue Code which allowed thrift institutions to utilize a
preferential loss reserve methodology for determining the allowable bad debt
deduction for tax purposes. In addition, the Law requires thrifts to
recapture certain bad debt reserves accumulated after 1987. The Bank will no
longer be permitted to utilize the reserve method of accounting for bad debts
for tax purposes and will be required to recapture all of the Bank's
accumulated tax bad debt reserves. The recapture of the tax bad debt
reserves will be taken into income ratably over a six year period. However,
special provisions of the Law allow thrifts to defer the recapture period for
up to two years. At June 30, 1996, the Bank's tax bad debt reserves are
approximately $13.6 million. It is expected the Bank will be able to meet
the requirements for deferral of the recapture period for the allowed two
years and, therefore, approximately $2.3 million will be taken into
taxable income annually beginning July 1, 1998.
NOTE K - OTHER OPERATING EXPENSE
Other operating expense consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Advertising and promotion $ 714 $ 584 $ 230
Office supplies and expense 394 267 94
Legal and professional 3,599 1,351 700
Expenses related to loan purchases 2,409 1,375 1,191
Loan servicing fees 2,278 1,611 467
Other 862 620 961
-------- ------- -------
$ 10,256 $ 5,808 $ 3,643
-------- ------- -------
-------- ------- -------
</TABLE>
80
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE L - COMMITMENTS AND CONTINGENCIES
The Corporation's financial statements do not reflect various commitments to
extend credit or commitments to purchase loans which arise in the normal
course of business and which involve elements of credit risk, interest rate
risk or liquidity risk. At June 30, 1996, there were no significant
commitments to purchase loans and unfunded loan commitments to extend
credit were $8,310.
Commitments to purchase loans are agreements to purchase certain loans at a
specified percentage of the outstanding principal balance as long as all
conditions established in the contract are met. Commitments do not have a
fixed expiration date. Since the conditions in the contract may not be met
for all loans covered by the commitments, the total commitments do not
necessarily represent future cash requirements. Collateral on the loans
consists primarily of single family residences.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee by the customer. Since many of the
commitments are expected to expire without being funded, the total commitment
amounts do not necessarily represent future cash requirements. The
Corporation evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation upon extension of credit is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and liens on real estate.
In September 1994, a borrower filed suit against the Corporation, its
directors and certain officers arising out of a foreclosure by the
Corporation. The suit alleges intentional infliction of emotional distress,
breach of duty to deal honestly and in good faith, and fraud. The plaintiff
seeks $20 and $40 million in compensatory and punitive damages, respectively.
The Corporation has answered the suit, denying all material allegations
therein and intends to vigorously defend such allegations. In the opinion of
management, the suit will not have a material effect on
the Corporation's consolidated financial position or results of operations.
The Corporation is also a defendant in various matters in litigation which
have arisen in the normal course of business. In the opinion of management,
such litigation will not have a material effect on the Corporation's
consolidated financial position or results of operations.
In order to recapitalize the Savings Association Insurance Fund (SAIF),
Congress is currently considering legislation which would allow the Federal
Deposit Insurance Corporation to assess a special assessment of approximately
77 to 80 basis points to be imposed on all deposits subject to SAIF
assessments as of March 31, 1995. Under the proposed plan, the assessment
would result in an additional expense to the Corporation of approximately
$2.3 million during the year ending June 30, 1997.
81
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 1996
-------------------------
Carrying Fair
amount value
---------- -----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 55,370 $ 55,370
Securities available for sale 194,699 194,699
Loans receivable 897,414 934,999
Financial liabilities:
Deposit liabilities 891,304 892,756
Federal Home Loan Bank advances 185,000 185,000
Other borrowings 21,468 21,468
Senior notes 57,051 59,225
</TABLE>
NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Beal Financial Corporation
Balance Sheet
June 30, 1996
<TABLE>
<S> <C>
Assets
Cash $ 8,420
Investment in subsidiary 143,438
Other assets 2,900
----------
$ 154,758
----------
----------
Liabilities and shareholders' equity
Senior notes $ 57,051
Other borrowings 1,900
Other liabilities 2,635
Shareholder's equity:
Common stock 300
Additional paid-in capital 2,740
Retained earnings 90,994
Unrealized loss on available for sale securities (862)
----------
Total shareholders' equity 93,172
----------
$ 154,758
----------
----------
</TABLE>
82
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONTINUED
Statement of Income
Year ended June 30, 1996
<TABLE>
<S> <C>
Income
Equity in undistributed earnings of subsidiary $45,648
Dividends from subsidiary 3,181
------
Total income 48,829
Interest expense
Federal Home Loan Bank advances and other borrowings 162
Senior notes 6,903
------
Total interest expense 7,065
Non-interest expense
Salary and employee benefits 2
Other operating expenses 116
------
Total non-interest expense 118
------
Income before taxes 41,646
Income tax expense 2,514
------
Net income $44,160
------
------
</TABLE>
83
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE N - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - CONTINUED
Statement of Cash Flows
Year ended June 30, 1996
<TABLE>
<S> <C>
Operating activities
Net income $ 44,160
Adjustments to reconcile net income to net cash used in
operating activities
Equity in undistributed earnings of subsidiary, less dividends (45,648)
Changes in operating assets and liabilities
Increase in other assets (2,900)
Increase in other liabilities 2,635
--------
Net cash used in operating activities (1,753)
Investing activities
Capital contribution to subsidiary (46,252)
Financing activities
Dividends paid to minority shareholders (26)
Repayments of other borrowings (600)
Proceeds from issuance of senior notes 57,051
--------
Net cash provided by financing activities 56,425
--------
Net increase in cash and cash equivalents 8,420
Cash and cash equivalents, beginning of year -
--------
Cash and cash equivalents, end of year $ 8,420
--------
--------
</TABLE>
84
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands)
NOTE O - SUMMARIZED OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly information is unaudited. However, in the opinion
of management, the information fairly presents the results of operations for
such periods.
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
1st 2nd 3rd 4th
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $21,807 $29,854 $45,448 $43,839
Interest expense 9,629 13,422 17,014 16,753
-------- ------- ------- -------
Net interest income 12,178 16,432 28,434 27,086
Provision for losses (1,366) (4,569) (927) (2,182)
Other income 3,018 4,233 2,819 6,613
Other expenses (5,089) (5,430) (4,632) (7,305)
-------- ------- ------- -------
Income before income tax 8,741 10,666 25,694 24,212
Income tax expense 3,100 3,925 9,205 8,923
-------- ------- ------- -------
Net income $ 5,641 $ 6,741 $16,489 $15,289
-------- ------- ------- -------
-------- ------- ------- -------
Income per common share $18.80 $22.47 $54.96 $50.97
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
85
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands except per share data)
NOTE O - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - CONTINUED
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
1st 2nd 3rd 4th
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $12,308 $14,671 $16,655 $20,161
Interest expense 3,085 4,360 6,015 7,521
-------- ------- ------- -------
Net interest income 9,223 10,311 10,640 12,640
Provision for losses (749) (1,526) (1,797) 27
Other income 2,442 5,001 2,884 3,602
Other expenses (1,854) (3,470) (3,163) (3,658)
-------- ------- ------- -------
Net earnings before income tax 9,062 10,316 8,564 12,611
Income tax expense (benefit) 3,304 3,703 3,380 4,789
-------- ------- ------- -------
Net income $ 5,758 $6,613 $5,184 $7,822
-------- ------- ------- -------
-------- ------- ------- -------
Income per common share $19.19 $22.04 $17.28 $26.07
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
86
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS OF BEAL FINANCIAL
The Board of Directors of Beal Financial currently consists of four members
including D. Andrew Beal, Timothy M. Fults, Bernard L. Weinstein and
David C. Meek. Each member of Beal Financial's Board of Directors is also a
director of the Bank. See "Board of Directors of the Bank." Directors Beal
and Fults have served as such since Beal Financial's incorporation in September
1993, Director Weinstein has served since June 1995, and Director Meek was
appointed in February 1996. The directors of Beal Financial are elected at each
annual meeting of stockholders for terms of one year.
87
<PAGE>
EXECUTIVE OFFICERS OF THE CORPORATION
The executive officers of Beal Financial, who are currently directors or
executive officers of Beal Bank, are identified below. The executive officers
of Beal Financial are elected annually by Beal Financial's Board of Directors.
The executive officers of Beal Financial do not receive any remuneration in
their capacity as Beal Financial executive officers.
Name Position with Corporation
---------------- -----------------------------------
D. Andrew Beal Chairman of the Board
David C. Meek President
David R. Farmer Senior Vice President and Treasurer
Timothy M. Fults Secretary
Margaret M. Curl Vice President/Assistant Secretary
BOARD OF DIRECTORS OF THE BANK
The Board of Directors of Beal Bank is presently composed of nine members.
The following table sets forth certain information with respect to the current
directors of the Bank. Under the Bank's Bylaws, directors are elected annually
by stockholders for terms of one year. Except as described herein, there are no
arrangements or understandings between the persons named and any other person
pursuant to which such director was selected.
<TABLE>
<CAPTION>
Term of
Director Office
Name Age(1) Position(s) Held Since Expires
- ----------------------- ------ ---------------------------------------------- -------- -------
<S> <C> <C> <C> <C>
D. Andrew Beal 43 Chairman of the Board 1985 1996
David C. Meek 52 President, Chief Executive Officer and Director 1996 1996
David R. Farmer 47 Executive Vice President, Chief Operating 1993 1996
Officer and Director
Timothy M. Fults 42 Director and Secretary 1985 1996
Bernard L. Weinstein 54 Director 1991 1996
Susan D. Arnold 54 Director 1992 1996
Lawrence C. Blanton 59 Director 1992 1996
R. Michael Eastland 50 Director 1992 1996
David L. Goldstein, CPA 37 Director 1993 1996
</TABLE>
- ----------
(1) At June 30, 1996.
The business experience of each director is set forth below. All directors
have held their present positions for at least the past five years, except as
otherwise indicated.
D. ANDREW BEAL. Mr. Beal is Chairman of the Board of the Company, a
position he has held since June 1995. Mr. Beal has been Chairman of the Board
of the Bank since its formation in 1985. He is the owner of approximately 99%
of the Company's outstanding common stock. Mr. Beal currently owns and operates
900 apartment units located in Texas, Michigan, Ohio and Missouri and has been
involved in buying and operating apartment complexes since the mid 1970s.
Mr. Beal is a member of various real estate groups located in the Dallas area
and a member and supporter of various civic organizations.
88
<PAGE>
DAVID C. MEEK. Mr. Meek is President and Chief Executive Officer of the
Company and the Bank. Mr. Meek joined the Bank as President in January 1996.
Immediately prior to joining the Bank, Mr. Meek was a self-employed investor and
consultant. From February 1991 until January 1995, Mr. Meek was President/Chief
Executive Officer/Chief Operating Officer of Coventry Properties, Inc., and
Partnership Services, Inc., real estate management corporations located in
Dallas, Texas.
DAVID R. FARMER. Mr. Farmer is a Senior Vice President and Treasurer of
the Company and Executive Vice President-Chief Operating Officer of the Bank.
Mr. Farmer joined the Bank as Chief Financial Officer and was elected as a
Director of the Bank in February 1993. Mr. Farmer also currently holds various
other management positions with the Bank's subsidiaries. Prior to joining the
Bank in February 1993, Mr. Farmer was a self-employed consultant from June 1990
to February 1993 and Senior Vice President and Chief Operating Officer of Murray
Federal Savings and Loan Association in Dallas, Texas from June 1987 until
June 1990.
TIMOTHY M. FULTS. Mr. Fults is the Secretary of the Company and the Bank,
positions he has held since September 1993 and June 1995, respectively.
Mr. Fults is a self-employed trial attorney engaged in the practice of law in
the Dallas, Texas area.
BERNARD L. WEINSTEIN. Dr. Weinstein has been a Professor of Applied
Economics at the University of North Texas in Denton, Texas since June 1989.
Dr. Weinstein has also taught at Rensselaer Polytechnic Institute, the State
University of New York, the University of Texas at Dallas and Southern Methodist
University. Dr. Weinstein has authored or co-authored numerous books and
articles on the subject of economic development, public policy and taxation.
Dr. Weinstein currently serves as a director and consultant to various non-
public companies, non-profit organizations and government agencies.
SUSAN D. ARNOLD. Mrs. Arnold is the President of Coldwell Bankers/Paula
Stringer Realtors located in Dallas, Texas, a position she has held since 1996.
Mrs. Arnold was previously the President of Murray Realtors from 1980 to 1996,
which was acquired by Coldwell Bankers/Paula Stringer Realtors in 1996. Mrs.
Arnold is a former director of both the Greater Dallas Board of Realtors and the
Texas Association of Realtors and the former President of the Greater Dallas
Association of Realtors. Mrs. Arnold currently holds various positions with
numerous community service organizations.
LAWRENCE C. BLANTON. Mr. Blanton is a self-employed investor and
consultant. He previously was the Chairman and Chief Executive Officer of
Providers Funding Corporation of Dallas, Texas from 1989 to 1996, a medical
receivables financing company. Mr. Blanton has over 25 years of commercial
lending experience.
R. MICHAEL EASTLAND. Mr. Eastland has been the Executive Director and
Chief Executive Officer of the North Central Texas Council of Governments
located in Arlington, Texas since December 1992. Prior thereto, Mr. Eastland
was the City Manager for the City of Carrollton, Texas from June 1984 to
December 1992. Mr. Eastland has over 25 years of service in municipal positions
in various Texas localities. He has also served as President and a member of
the board of the Texas City Management Association Board. Mr. Eastland is also
a former President of the North Texas City Management Association.
DAVID L. GOLDSTEIN, CPA. Mr. Goldstein has been an information systems
consultant with Workflow Designs, Inc. an information systems consulting firm
located in Dallas, Texas, since April 1996. From August 1994 through April
1996 Mr. Goldstein was a self employed information systems consultant. Prior
to such time, he was Vice President of Advanced Thought Systems, an
information systems consulting firm located in Dallas, Texas, from November
1993 to August 1994 and a consultant with Compucom, a systems integration
company located in Dallas, Texas, from March 1993 to November 1993. He was a
consultant with Coopers & Lybrand, a national accounting and consulting firm,
from July 1990 to March 1993 and Corporate Controller of Singer Management
Company, a family amusement company located in Carrollton, Texas, from
February 1983 to July 1990.
89
<PAGE>
EXECUTIVE OFFICERS OF THE BANK
The executive officers of the Bank are elected annually by the Board of
Directors of the Bank. Except as described herein, there are no arrangements or
understandings between the person named and any other person pursuant to which
such officer was selected.
The following information as to business experience during the past five
years is supplied with respect to each executive officer of the Bank who does
not serve on the Bank's Board of Directors.
MARGARET M. (MOLLY) CURL. Ms. Curl, age 41, has been the Senior Vice
President of the Bank since February 1994. She is also the Bank's compliance
and CRA officer, positions she has held since March 1994. Ms. Curl also holds
various positions with the Bank's subsidiaries. Prior to joining the Bank in
1994, Ms. Curl was employed by Grant Thornton LLP a national accounting firm
located in Dallas, Texas, as a Senior Associate from August 1993 to February
1994 and a Senior Consulting Manager from October 1986 to August 1993. Ms. Curl
was employed by the Office of the Comptroller of the Currency, the primary
regulator of national banks, as Manager of the Licensing Division from 1983 to
1984, as a National Bank Examiner from 1980 to 1984 and as an Assistant National
Bank Examiner from 1975 to 1980. Ms. Curl is also a certified public
accountant.
WILLIAM T. SAURENMANN. Mr. Saurenmann, age 47, is the Senior Vice
President-Lending of the Bank. Prior to such time, he was a Vice President of
the Bank from August 1991 to November 1994 and an independent consultant to the
Bank from May 1991 through August 1991. Mr. Saurenmann is also a Vice President
of the Bank's subsidiaries, BMI, BRE, Inc., Loan Acceptance Corporation, and
Beal Affordable Housing, Inc. Mr. Saurenmann is also Vice President, Secretary
and Treasurer of Beal Business Trust, a subsidiary of BMI. Prior to joining the
Bank in 1991, he was Senior Vice President - Lending of San Jacinto Savings and
Loan Association, Houston, Texas, from October 1990 to May 1991 and Vice
President of Murray Federal Savings and Loan Association, Dallas, Texas, from
April 1982 to October 1990.
STEPHEN K. O'NEAL. Mr. O'Neal, age 41, has been a Vice President of Loan
Administration since joining the Bank in July 1996. From 1987 to 1995, Mr.
O'Neal was employed in various positions with Metropolitan Federal Bank,
f.s.b., an $8 billion financial institution headquartered in Minneapolis,
Minnesota, including Vice President and Manager of Commercial Loan Servicing
and Asset Management. Prior to that Mr. O'Neal was employed with Grant
Thornton LLP a national public accounting firm located in Dallas, Texas from
1986 to 1987 as a Manager in the consulting department. Mr. O'Neal is also a
certified public accountant.
CLARK E. ENRIGHT. Mr. Enright, age 44, joined the Bank in February 1995 as
the Vice President - Special Assets Department. Prior to such time, Mr. Enright
served as President and Chief Executive Officer of Kelly, Enright and
Associates, Inc., a corporation involved in all levels of property
administration as well as receivable management, investment and mortgage
banking, venture capital and litigation support. He was Senior Vice
President/Manager - Special Assets Division of San Jacinto Savings Association
in Houston, Texas from 1988 to 1991.
JAMES W. LEWIS, JR. Mr. Lewis, age 53, has been a Vice President of
Accounting/Operations and Treasurer of the Bank since February 1993. He is also
the Assistant Secretary and Treasurer of BMI and Secretary and Treasury of Beal
Delaware Corp., BAH, Inc., BRE, Inc., BAC and LAC. He has held these positions
since July 1994. Prior to being appointed to his current positions, Mr. Lewis
was an Executive Vice President of the Bank from December 1988 until February
1993. Mr. Lewis is also a certified public accountant.
RICHARD L. KILLMON. Mr. Killmon, age 61, joined the Bank as Vice
President-Retail Operations in April 1995. Prior to such time, Mr. Killmon
served as a self-employed management consultant with Richard L. Killmon &
Associates located in Tyler, Texas since 1991. He was Vice President of First
Pinnacle, Inc., a financial institution holding company located in Dallas,
Texas, from 1989 to 1991. Mr. Killmon has had extensive operational experience
with various consulting firms and several large commercial banks located
primarily in Texas.
90
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE BANK
MEETINGS AND COMMITTEES OF THE COMPANY. Meetings of the Company's Board of
Directors are generally held on an as needed basis. For the fiscal year ended
June 30, 1996, the Board of Directors met four times. During fiscal 1996, no
incumbent director of the Company attended fewer than 75% of the aggregate of
the total number of Board meetings and the total number of meetings held by the
committees of the Board of Directors on which they served.
The Board of Directors of the Company has a standing Audit Committee.
The Company's Audit Committee recommends independent auditors to the full
Board, reviews the results of the auditors' services, reviews with management
and the internal auditor the systems of internal control and internal audit
reports and assures that the books and records of the Company and the Bank are
kept in accordance with applicable accounting principles and standards. The
members of the Audit Committee are Directors Fults and Weinstein. During the
fiscal year ended June 30, 1996, this committee met two times.
MEETINGS AND COMMITTEES OF THE BANK. The Bank's Board of Directors meets
at least once every month and held 12 meetings during the fiscal year ended
June 30, 1996. During fiscal 1996, no incumbent director of the Bank attended
fewer than 75% of the total number of Board meetings and the total number of
meetings held by the committees of the Board of Directors on which he or she
served.
The Bank has standing Executive, Executive Loan, Audit, Investment and
Compensation Committees. Set forth below is a description of the Bank's primary
committees.
The Executive Committee is comprised of Directors Beal, Meek, Farmer and
Weinstein. The Committee meets when necessary in lieu of the full board of
directors. Certain matters that would come under the purview of the full board
are addressed by the Executive Committee in lieu of a full board meeting. This
committee met once during fiscal 1996.
The Executive Loan Committee was formed in December 1994 and is comprised
of Directors Beal, Meek, Fults, Blanton, Weinstein and Goldstein with directors
Arnold, Farmer and Eastland as alternates. The Committee meets when necessary
and approves all loans or purchases in excess of $1.0 million. This Committee
met 39 times during fiscal 1996.
The Audit Committee maintains a liaison with the Bank's independent
auditors and the Bank's internal auditor throughout the year and reviews the
adequacy of the Bank's internal controls. The Committee is composed of
Directors Eastland, Fults and Goldstein. This Committee met four times during
fiscal 1996.
The Investment Committee meets monthly to review the Bank's current or
planned activities to ensure adequate liquidity, to maintain a high quality of
diversified investments, and to provide collateral for pledging requirements.
The Committee also acts as the Bank's asset/liability management committee and
reviews the Bank's interest rate risk position and profitability on a quarterly
basis and makes recommendations for adjustments in the Bank's asset liability
management strategy to the full board. The Committee is comprised of Directors
Beal, Farmer, Weinstein and Goldstein. This Committee met 11 times in
fiscal 1996.
The Compensation Committee is comprised of Directors Eastland, Arnold and
Weinstein. The Committee meets on an as needed basis to establish the
compensation of the Chief Executive Officer, approve the compensation of senior
officers and the compensation and benefits paid to employees of the Bank. This
Committee did not meet during fiscal 1996.
91
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996, the Compensation Committee was comprised of non-
employee Directors Eastland, Arnold and Weinstein.
COMPENSATION OF DIRECTORS
CASH COMPENSATION. Mr. Beal receives a salary of $120,000 in his capacity
as Chairman of the Board of the Company and the Bank and does not receive
compensation as an officer in various Bank subsidiaries. Non-employee directors
of the Company were paid fees of $500 per meeting for attendance at regular
meetings of the Company's Board of Directors and $200 per committee meeting
attended. Non-employee directors of the Bank were paid fees of $1,500 per
meeting for attendance at regular meetings of the Bank's Board of Directors.
Directors are also paid $200 for each committee meeting attended. In addition,
all non-employee directors of the Bank were paid a $10,000 bonus in fiscal 1996.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid or accrued by the
Company for services rendered by the Company's Chief Executive Officer and each
other officer who made in excess of $100,000 (the "Named Officers"). No other
executive officer of the Company received aggregate compensation (salary and
bonus) in excess of $100,000 in fiscal 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE(1)
- ---------------------------------------------------------------------------
ANNUAL COMPENSATION
--------------------- ALL OTHER
FISCAL SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David C. Meek, President and 1996 $174,949 $144,912 $ 168
Chief Executive Officer(2) 1995 -- -- --
1994 -- -- --
- ---------------------------------------------------------------------------
David R. Farmer, Executive 1996 135,000 108,767 3,615
Vice President and 1995 136,413 75,000 3,243
Chief Operating Officer 1994 95,750 25,000 3,050
- ---------------------------------------------------------------------------
William T. Saurenmann, Senior 1996 96,762 107,000 2,927
Vice President-Lending 1995 104,835 55,000 2,899
1994 74,375 69,731 2,831
- ---------------------------------------------------------------------------
Molly Curl, Senior Vice 1996 90,000 107,727 2,940
President/Compliance(3) 1995 90,000 35,500 3,084
1994 32,077 -- 78
- ---------------------------------------------------------------------------
James W. Lewis, Jr. 1996 72,964 52,000 2,418
Vice President 1995 67,633 30,000 1,414
1994 55,418 20,000 1,084
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
- ----------
(1) Includes the Company's contribution to the 401(k) Plan and life insurance
premiums paid.
(2) Mr. Meek served as a Bank consultant starting in September 1995 until his
appointment as President and Chief Executive Officer in January 1996.
(3) Ms. Curl joined the Bank in February 1994.
92
<PAGE>
EMPLOYMENT AGREEMENTS
The Bank has entered into employment agreements with President David C.
Meek and Senior Vice President Curl. The employment agreements are intended to
assist the Bank in maintaining a stable and competent management team as the
Board believes that the continued success of the Bank depends to a significant
degree on the skills and competence of its officers.
The employment agreement with Mr. Meek provides for an initial term
commencing on January 24, 1996 and ending on December 31, 1998 at a base salary
equal to $200,000 per year, subject to annual increases of 5%. The agreement
provides for quarterly bonuses of 2% of the amount by which the Bank's
consolidated quarterly net after tax income as shown in the Bank's financial
reports filed with the FDIC) exceeds a 20% annualized return on the Bank's
consolidated equity (as defined in the agreement) at the end of the preceding
quarter, without giving effect to unrealized gains or losses on securities
available-for-sale. No bonus would be paid if there is a consolidated net loss
until subsequent earnings exceed the loss and the 20% return on equity is
achieved. The agreement also provides participation in an equitable manner in
employee benefits applicable to executive personnel and for the reimbursement of
business expenses.
The agreement is terminable by Mr. Meek upon 30 days' notice to the Bank.
The agreement provides for the payment to Mr. Meek of an amount equal to
$150,000 in the event of termination of the employee by the Bank without cause
during the term of the agreement provided however, this payment is reduced to
the lesser of $150,000 or the remaining prorated salary benefits, including
bonus, if termination occurs in the third year of the agreement.
The employment agreement with Ms. Curl provides for an initial term of
three years starting in February, 1994 and a base salary equal to $90,000,
subject to annual review and adjustment by the Board of Directors. Ms. Curl's
base salary for fiscal 1997 is $90,000. The agreement provides for renewal upon
the expiration of the initial term upon the written consent of both parties.
The agreement also provides participation in an equitable manner in employee
benefits applicable to executive personnel and for the reimbursement of an
established amount of business expenses.
The agreement is terminable by Ms. Curl upon 90 days' notice to the Bank.
The agreement provides for the payment to Ms. Curl of an amount equal to nine
months base salary in the event of termination of the employee by the Bank
without cause during the term of the agreement. Based on her current salary, if
Ms. Curl had been terminated as of June 30, 1996 under circumstances entitling
her to benefits pay as described above, she would have been entitled to a lump
sum payment of approximately $67,500.
BENEFITS
GENERAL. The Bank currently maintains an employee benefit program
providing, among other benefits, major medical insurance, dental benefits,
disability insurance and life insurance. Beal Bank also maintained a 401(k)
plan for the benefit of its employees.
401(k) PLAN. The Bank maintains the Beal Bank 401(k) Plan, designed to be
qualified under Section 401(k) of the Code (the "401(k) Plan"). The 401(k) Plan
covers all full-time salaried employees of the Bank. Any employee of the Bank
or its subsidiaries over the age of 21 is eligible to participate in the 401(k)
Plan following the completion of three months of service to the Bank or any of
its subsidiaries. Under the 401(k) Plan, a participant may elect to defer up to
a maximum of $9,500 of his salary for calendar 1996 to the 401(k) Plan. The
Bank makes discretionary matching and profit-sharing contributions to the 401(k)
Plan, up to a maximum of 25% of the participant's compensation for the plan
year. "Compensation" for purposes of the 401(k) Plan generally includes a
participant's base compensation, including amounts contributed to the 401(k)
Plan by the employer. A Participant is always 100% vested in his or her salary
deferral contributions and the earnings thereon. A Participant becomes vested
in Bank
93
<PAGE>
contributions to the 401(k) Plan at the rate of 25% per year commencing with
the completion of two years of service.
Participants can allocate their salary deferral contributions and the
Bank's contributions to the 401(k) Plan, if any, among one or more of the six
investment options available under the 401(k) Plan. These investment options
include two fixed interest funds, a bond fund, a bond and stock fund and two
growth stock funds.
The 401(k) Plan provides for in-service hardship distributions of a
participant's salary deferral contributions. Distributions from the 401(k) Plan
are made upon termination of service in the form of a lump sum. The Bank's
contributions to the 401(k) Plan on behalf of the Named Officers are included in
the Summary Compensation Table.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Bank has a policy of granting loans to eligible directors, officers,
employees and members of their immediate families for the financing of their
personal residence and for consumer purposes. Loans to such individuals for
commercial purposes are limited to the lesser of $100,000, or 15% of the Bank's
net worth. All such loans to directors, officers, employees and their immediate
families are made in the ordinary course of business and on the same terms,
including collateral and interest rates, as those prevailing at the time for
comparable transactions with unaffiliated parties and do not involve more than
normal risk of collectibility. All transactions with related parties are also
approved by at least a majority of the disinterested members of the Board of
Directors.
All loans by the Bank to its directors and executive officers are subject
to federal regulations restricting loan and other transactions with affiliated
persons of the Bank. Federal regulations currently require that all loans to
directors and executive officers be made on terms and conditions comparable to
those for similar transactions with non-affiliates. At June 30, 1996, there
were no loans outstanding to any director, executive officer, member of their
immediate families or business interest of such individuals, except for one loan
to a member of Mr. Beal's family. This loan was made on terms and conditions
comparable to those for similar transactions with non-affiliates.
From time to time Mr. Beal has made loans to the Bank and its subsidiaries
He has also provided his personal guarantee on loans made to the Bank or its
subsidiaries by unaffiliated lenders. All of these transactions were on the
same terms as those prevailing at the time for comparable transactions with
unaffiliated parties except that the loans made by Mr. Beal to the Bank's
subsidiaries were interest-free. The amount of interest if a market rate were
to have been used, would not be material to the financial condition or results
of operations of the Bank.
Mr. Beal currently rents office space from the Bank, for which he pays $500
per month. The Board of Directors believes that the rental rate charged is
equivalent to the rental rate which would be charged to an unaffiliated party
for the space.
In July 1995, BMI assigned its interest in 48 acres of timber land located
in Estonia to D. Andrew Beal for a price equal to $25,178. In June 1996, in
connection with the closure of its Estonia office, Mr. Beal purchased for
$30,000, an amount equal to the highest independent offer received, furniture
with a book value of $98,536.
In connection with the Company's indirect acquisition of the Bank's
outstanding capital stock, the Company assumed the obligation to repay a $2.5
million debt obligation of D. Andrew Beal. The proceeds from this borrowing
were used for the initial capitalization of the Bank. This obligation is
secured in full
94
<PAGE>
by a certificate of deposit owned by D. Andrew Beal. The debt had a balance
of $1.9 million at June 30, 1996.
ITEM 13. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of June 30, 1996 regarding
the share ownership of those persons or entities known by management to
beneficially own the Company's Common Stock. Except as set forth below, no
other director or executive officer owns any shares of the Company's Common
Stock.
<TABLE>
<CAPTION>
Shares Beneficially Percent
Name and Address of Beneficial Owner Owned of Class
- -------------------------------------------- ------------------- --------
<S> <C> <C>
D. Andrew Beal, Chairman of the Board of 297,000 99.0%
the Company and the Bank
Suite 902, 15770 N. Dallas Parkway
Dallas, TX 75248
Timothy M. Fults, Director and Secretary of 3,000 1.0%
the Corporation and Director and Secretary
of the Bank
5956 Sherry Lane #800
Dallas, TX 75225
</TABLE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) FINANCIAL STATEMENTS:
The following information appearing in Part I, Item 8 of this Form 10-K is
incorporated herein by reference.
Independent Auditor's Report
Consolidated Statements of Financial Condition at June 30, 1995 and 1996
Consolidated Statements of Income for the Years Ended June 30, 1994, 1995
and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for Years Ended Years June 30, 1994,
1995 and 1996
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted as the information is
not required.
95
<PAGE>
(a)(3) EXHIBITS:
<TABLE>
<CAPTION>
REFERENCE
TO PRIOR
FILING
REGULATION OR EXHIBIT
S-B NUMBER
EXHIBIT ATTACHED
NUMBER DOCUMENT HERETO
- ---------- ----------------------------------------------------- ------------
<C> <S> <C>
2 Plan of Acquisition, Reorganization, Arrangement, None
Liquidation or Succession
3(i) Certificate of Incorporation *
3(ii) Bylaws *
4.1 Form of Indenture dated as of August 11, 1995, with *
respect to the Registrant's 12-3/4% Senior Notes, due
August 15, 2000.
4.2 Specimen Senior Note (found at Sections 2.02 and 2.03 *
of the Form of Indenture filed as Exhibit 4.1)
9 Voting Trust Agreement None
10 Material contracts:
(a) Employment Agreement with Margaret Curl *
(b) Employment Agreement with David C. Meek **
11 Statement re: computation of per share earnings Not required
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders Not required
16 Letter re: change in certifying accountants Not required
18 Letter re: change in accounting principles None
19 Previously unfiled documents None
21 Subsidiaries of Registrant ***
22 Published report regarding matters submitted to vote of None
security holders
23 Consents of Experts and Counsel None
24 Power of Attorney Not required
27 Financial Data Schedule ***
28 Information from reports furnished to state insurance Not required
regulatory authorities
99 Additional Exhibits Not applicable
</TABLE>
- ----------
* Filed as exhibits to the Company's Registration Statement on Form S-1 under
the Securities Act of 1993, filed with the Securities and Exchange
Commission on June 7, 1995 (Registration No. 33-93212). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
** Filed as an exhibit to the Company's Form 10-Q under the Securities Act of
1934, filed with Securities and Exchange Commission on May 15, 1996. Such
previously filed document is hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
*** Exhibit filed herewith.
96
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
Date: September 30, 1996 By: /s/ David C. Meek
------------------------ -------------------------------
David C. Meek, President and Chief
Executive Officer
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ D. Andrew Beal /s/ David R. Farmer
- ----------------------------------- -----------------------------------
D. Andrew Beal, Chairman David R. Farmer, Senior Vice President
and Treasurer (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
Date: September 30, 1996 Date: September 30, 1996
- ----------------------------------- -----------------------------------
/s/ Timothy M. Fults /s/ Dr. Bernard L. Weinstein
- ----------------------------------- -----------------------------------
Timothy M. Fults, Director Dr. Bernard L. Weinstein, Director
Date: September 30, 1996 Date: September 30, 1996
- ----------------------------------- -----------------------------------
/s/ David C. Meek
- -----------------------------------
David C. Meek, Director
Date: September 30, 1996
- -----------------------------------
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other
Jurisdiction
Percentage of of Incorporation
Parent Subsidiary Ownership of Subsidiary
- -------------------------- ------------------------- ------------- -----------------
<S> <C> <C> <C>
Beal Financial Corporation Beal Banc Holding Company 100% Delaware
Beal Financial Corporation Beal Delaware Corp. 100% Delaware
Beal Financial Corporaiton 380 Investors, Inc. 100% Texas
Beal Banc Company Beal Bank, SSB 100% Texas
Beal Bank, SSB Beal Mortgage, Inc. 100% Texas
Beal Bank, SSB Loan Acceptance Corp. 100% Texas
Beal Bank, SSB Property Acceptance Corp. 100% Texas
Beal Bank, SSB BRE, Inc. 100% Texas
Beal Bank, SSB Bre-N, Inc. 100% Texas
Beal Bank, SSB Beal Properties, Inc. 100% Texas
Beal Bank, SSB Foreign Lending Corp. 100% Texas
Beal Bank, SSB Beal Affordable Housing, Inc. 100% Texas
Beal Delaware Corp. Beal Business Trust 100% Delaware
Beal Affordable Housing, Inc. Hebron Trail, Ltd. (1) 99% Texas
Beal Affordable Housing, Inc. Lewisville Manor, Ltd. (1) 99% Texas
Beal Affordable Housing, Inc. Valley River Trail, Ltd. (1) 99% Texas
</TABLE>
- --------------------
(1) Beal Affordable Housing, Inc. is a 98% limited partner and Beal
Mortgage, Inc. is a 1% general partner in these entities.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 532
<INT-BEARING-DEPOSITS> 54838
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 194699
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 909246
<ALLOWANCE> 11832
<TOTAL-ASSETS> 1269279
<DEPOSITS> 891304
<SHORT-TERM> 192101
<LIABILITIES-OTHER> 21284
<LONG-TERM> 71418
0
0
<COMMON> 300
<OTHER-SE> 92872
<TOTAL-LIABILITIES-AND-EQUITY> 93172
<INTEREST-LOAN> 131544
<INTEREST-INVEST> 9404
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 140948
<INTEREST-DEPOSIT> 45915
<INTEREST-EXPENSE> 56818
<INTEREST-INCOME-NET> 84130
<LOAN-LOSSES> 9044
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22456
<INCOME-PRETAX> 69313
<INCOME-PRE-EXTRAORDINARY> 69313
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44160
<EPS-PRIMARY> 147.20
<EPS-DILUTED> 147.20
<YIELD-ACTUAL> 9.324
<LOANS-NON> 55282
<LOANS-PAST> 67298
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6137
<CHARGE-OFFS> 3385
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 11832
<ALLOWANCE-DOMESTIC> 11832
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
