<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
0R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
SUITE 300, LB66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75248
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 1997, there were 300,000 shares of the
Registrant's common stock issued and outstanding.
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BEAL FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements . . . . . . . . . . . . . . . 1
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 5
PART II. OTHER INFORMATION
SIGNATURES
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BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands,except share data)
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
Cash $ 791 $ 449
Interest bearing deposits 32,040 65,491
------------ ------------
CASH AND CASH EQUIVALENTS 32,831 65,940
Accrued interest receivable 14,708 16,361
Securities available for sale 115,292 123,939
Net loans receivable 915,559 1,067,393
Less allowance for losses (11,845) (13,189)
------------ ------------
903,714 1,054,204
Federal Home Loan Bank stock 10,051 9,618
Real estate held for investment or sale 156,074 102,680
Premises and equipment, net 6,532 6,803
Other assets 11,977 15,361
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$ 1,251,179 $ 1,394,906
------------ ------------
------------ ------------
LIABILITIES
Deposit accounts $ 972,051 $ 1,043,433
Federal Home Loan Bank advances 40,000 146,000
Senior notes, net 57,163 57,094
Other borrowings 9,448 14,748
Other liabilities 11,184 16,834
------------ ------------
TOTAL LIABILITIES 1,089,846 1,278,109
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 300
Paid-In capital 2,740 2,740
Unrealized gain on available for sale
securities, net of tax benefit of $382
at December 31, 1996. 3,081 709
Retained earnings 155,212 113,048
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TOTAL STOCKHOLDERS' EQUITY 161,333 116,797
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$ 1,251,179 $ 1,394,906
------------ ------------
------------ ------------
See notes to consolidated financial statements
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $23,411 $23,631 $ 83,584 $ 83,635
Purchased discount accretion 8,327 19,861 34,829 42,355
Investment securities 2,524 3,251 8,327 10,040
---------------------- -----------------------
TOTAL INTEREST INCOME 34,262 46,743 126,740 136,030
Interest expense:
Deposits 13,788 13,894 43,197 41,565
Federal Home Loan Bank
advances and other borrowings 541 845 1,635 2,985
Senior notes 1,999 1,979 5,981 5,935
---------------------- -----------------------
TOTAL INTEREST EXPENSE 16,328 16,718 50,813 50,485
---------------------- -----------------------
NET INTEREST INCOME 17,934 30,025 75,927 85,545
Provision for loan losses 1,764 334 2,436 3,443
---------------------- -----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,170 29,691 73,491 82,102
Other income
Gain on sale of loans 6 1,413 544 5,813
Gain on sales of securities available for sale - 2,026 - 2,026
Gain on sale of real estate transactions 5,648 583 9,396 4,925
Other real estate operations, net 553 - 2,121 677
Other operating income 223 - 417 13
---------------------- -----------------------
TOTAL NONINTEREST INCOME 6,430 4,022 12,478 13,454
Other expense
Salaries and employee benefits 2,701 2,845 6,567 6,764
Occupancy and equipment 566 528 1,790 1,661
SAIF deposit insurance premium 176 2,612 513 3,503
Loss on sales of securities available for sale - 437 - 1,024
Other operating expenses 3,047 2,866 7,847 8,273
---------------------- -----------------------
TOTAL NONINTEREST EXPENSES 6,490 9,288 16,717 21,225
---------------------- -----------------------
INCOME BEFORE INCOME TAXES 16,110 24,425 69,252 74,331
Income Taxes 999 8,749 3,164 26,877
---------------------- -----------------------
NET INCOME $15,111 $15,676 $ 66,088 $ 47,454
---------------------- -----------------------
---------------------- -----------------------
Income per common share $50.37 $52.25 $220.29 $158.18
Weighted average number of common shares
outstanding 300 300 300 300
</TABLE>
See notes to consolidated financial statements.
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
Nine Months
ended September 30
-----------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 66,088 $ 47,454
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,809 1,595
Accretion of purchased discount (34,829) (42,355)
Provision for loan losses 2,436 3,443
Amortization of bond premium and underwriting costs 482 424
Gains on real estate transactions (9,396) (6,368)
Gain on sales of loans (544) (5,813)
Loss on sales of investment securities-available for sale - 1,024
Loss on sale of premises and equipment 7 71
Changes in operating assets and liabilities
Accrued interest receivable (1,829) (7,402)
Prepaid expenses and other assets (86) (1,496)
Accrued interest payable-bonds (1,833) (1,833)
Other liabilities and accrued expenses (1,031) 15,666
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Net cash provided by
operating activities 21,274 4,410
INVESTING ACTIVITIES
Proceeds from sales of loans 20 18,628
Proceeds from sales of securities available for sale - 219,878
Proceeds from paydowns of securities available for sale 10,718 10,750
Proceeds from sales of Other Investments - 6,300
Proceeds from loan collections, less loan originations and advances 164,325 144,027
Proceeds from sales of real estate 29,798 8,470
Proceeds from sales of premises and equipment 5 43
Purchases of loans and bid deposits on loan purchases (37,100) (185,973)
Purchases of securities available for sale - (318,769)
Purchases of Federal Home Loan Bank stock (433) (4,081)
Purchases of real estate held for invest. or sale and partnership/JV interests (14,711) (7,597)
Capitalized interest on real estate investments - (482)
Purchases of premises and equipment (396) (857)
--------- ---------
Net cash provided by (used in)
investing activities 152,226 (109,663)
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (71,383) 49,630
Increase in long-term debt 162 1,746
Decrease in long-term debt (5,462) (1,402)
Increase (decrease) in advances from the Federal Home Loan Bank (106,000) 99,000
Cash dividends paid (23,926) -
--------- ---------
Net cash provided by (used in)
financing activities (206,609) 148,974
--------- ---------
Increase (decrease) in cash and
cash equivalents (33,109) 43,721
Cash and cash equivalents at beginning of period 65,940 35,942
--------- ---------
Cash and cash equivalents at end of period $ 32,831 $ 79,663
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 52,763 $ 48,135
Income taxes 4,889 18,118
Supplemental disclosure of noncash investing and financing activities
Real estate acquired in foreclosure or in settlement of loans $ 69,833 $ 30,026
</TABLE>
See notes to consolidated financial statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial statements and with instructions to Form 10-Q and Rule 10-1
of Regulation S-X. The financial statements as of September 30, 1997 and for
the nine months ended September 30, 1997, and 1996 are unaudited and, in the
opinion of management, include all adjustments necessary (which consist of
only normal recurring adjustments) for a fair presentation of the financial
position and results of operations for the interim periods. The results of
operations for the nine month period are not necessarily indicative of the
results to be expected for the full year.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in Beal Financial
Corporation's, ("Beal Financial" and with it's Subsidiaries, the "Company"),
the parent company of Beal Bank, ssb, (the Bank), annual report in Form 10-K
for the year ended December 31, 1996.
NOTE B--NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The
new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this
new standard is not expected to have an effect on the disclosure of earnings
per share in the financial statements.
NOTE C--INCOME TAXES
On March 13, 1997, Beal Financial filed an application with the Internal
Revenue Service to elect Subchapter-S status for federal income tax purposes
effective January 1, 1997. This election covered all subsidiaries of Beal
Financial, including the Bank, except BRE 1, Inc., Beal Affordable Housing,
Inc. and BRE-N, Inc.
As a result of the aforementioned application, beginning January 1, 1997,
Beal Financial and all Subchapter-S subsidiaries are no longer required to
pay federal income taxes, except for possible tax liabilities on net built-in
gains as of January 1, 1997, which may be recognized during the ten year
period commencing January 1, 1997. The Company has not yet determined the
amount of net built-in gains as of January 1, 1997.
Except as discussed in the preceding paragraph, the future tax liability for
the taxable income of Beal Financial and the Subchapter-S subsidiaries will
be the responsibility of its' shareholders.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES", "ANTICIPATES", "EXPECTS",
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE
DATE HEREOF, AND TO ADVISE READERS THAT VARIOUS FACTORS INCLUDING REGIONAL AND
NATIONAL ECONOMIC CONDITIONS, CHANGES IN LEVELS OF MARKET INTEREST RATES,
CREDIT RISK OF LENDING ACTIVITIES, AND COMPETITIVE AND REGULATORY FACTORS,
COULD AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S
ACTUAL RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED
OR PROJECTED. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE
RESULTS OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY BE MADE TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF UNANTICIPATED EVENTS.
FINANCIAL CONDITION
Beal Financial Corporation ("Beal Financial" and with its subsidiaries,
the "Company"), the parent company of Beal Bank, ssb, (the "Bank") had total
assets of $1.3 billion at September 30, 1997 representing a decrease of $143.7
million or 10.3%, from $1.4 billion at December 31, 1996. The decrease
resulted primarily from a decrease in net loans receivable of $151.8 million, a
decrease in cash and cash equivalents of $33.1 million, a decrease in
securities available for sale of $8.6 million, and a decrease in other assets
of $3.4 million, partially offset by an increase in real estate held for
investment or sale of $53.4 million. The decrease in net loans receivable was
due primarily to normal principal repayments of loans, early loan payoffs and
foreclosures of loans. The Company believes that the combination of a decline
in the supply of bulk discounted loans available for purchase and competitors
successful bids for bulk asset purchases at net yields which are not acceptable
to the Company has resulted, and will continue to result in a decline in total
assets, including a decline in net loans receivable. The decrease in securities
available for sale was the result of repayments. The increase in real estate
held for investment or sale was primarily the result of foreclosures of loans
of $69.8 million and purchases of real estate and/or interests in real estate
joint ventures of $14.7 million, partially offset by real estate sales of $29.8
million. The decrease in cash and cash equivalents was the result of normal
operations. (See also - Liquidity and Capital Resources)
Total liabilities decreased $188.3 million, or 14.7% from $1.3 billion
at December 31, 1996 to $1.1 billion at September 30, 1997, primarily due to a
decline in Federal Home Loan Bank ("FHLB") advances of $106.0 million, a
decline in deposits of $71.4 million, a decline in other borrowings of $5.3
million, and a decrease in other liabilities of $5.6 million. Advances from the
FHLB were repaid primarily with cash flow provided from normal operations. The
decrease in deposits for the nine months ended September 30, 1997 was primarily
due to an decrease in retail deposits of $53.3 million, and a decrease in
brokered deposits of $18.1 million. The net decrease in deposits was
primarily funded by the decrease in cash and cash equivalents. The decrease
in other liabilities was primarily due to payments of accrued interest on the
12.75%
<PAGE>
senior notes due August 15, 2000, (the "Senior Notes"), and payment of
accrued Texas franchise tax.
Stockholders' equity increased $44.5 million from $116.8 million at
December 31, 1996 to $161.3 million at September 30, 1997. The change was
primarily due to net income of $66.1 million and an increase in the unrealized
gain on securities held for sale of $2.4 million, partially offset by
dividends paid to shareholders of $24.0 million.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME. For the nine months ended September 30, 1997, net
income of $66.1 million represented an increase of $18.6 million, or 39.3%
from the nine months ended September 30, 1996. As discussed in more detail
below, the increase was primarily due to a decrease in income taxes of $23.7
million and a decrease in total non-interest expense of $4.5 million,
partially offset by a decrease in net interest income after provision for
loan losses of $8.6 million, and a decrease of $1.0 million in total
non-interest income.
INTEREST INCOME. Interest income decreased $9.3 million, or 6.8%,
from $136.0 million at September 30, 1996 to $126.7 million at September 30,
1997. Of the total decrease in interest income, $7.5 million was due to a
decrease in the discount accretion and $1.7 million was due to a decrease in
interest income on investment securities. The average balance of
interest-earning assets increased $16.4 million during this period, as
compared to the same period a year ago, primarily due to an increase in
average net loans receivable of $45.5 million, an increase in the average
balance of FHLB Stock of $2.7 million, and an increase in the average balance
of interest earning deposits of $3.4 million, partially offset by a decrease
in average holdings of mortgage-backed securities of $35.2 million. In
addition, net interest spread decreased from 9.91% for the nine months ended
September 30, 1996 to 8.66% for the same period ending September 30, 1997
primarily due to an decrease in yield on interest-earning assets from 16.00%
to 14.69% for the nine month periods ending September 30, 1996 and September
30, 1997, respectively due primarily to a decline in the amount of discount
accretion taken.
INTEREST EXPENSE. Interest expense increased $328,000, or .6%, from
$50.5 million at September 30, 1996 to $50.8 million at September 30, 1997.
The increase resulted from the average balance of interest-bearing liabilities
increasing $16.0 million to $1.1 billion at September 30, 1997, resulting in
a $708,000 increase in interest expense, partially offset by a $380,000
decrease due to a decrease in the average rate of interest bearing
liabilities from 6.08% at September 30, 1996 to 6.03% at September 30, 1997.
The increase in average interest-bearing liabilities was due to an increase
in the average balance of deposits of $54.4 million, partially offset by the
decline in the average balance of FHLB advances of $20.7 million and the
decline in other borrowings of $17.8 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is
determined by management as an amount sufficient to maintain the allowance
for loan losses at a level considered adequate to absorb future losses
inherent in the loan portfolio in accordance with
<PAGE>
generally accepted accounting principles. The provision for loan losses
decreased $1.0 million, or 29.2%, for the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996 primarily due
to a decrease in the level of new loan purchases and a decrease in net
non-performing loans.
The Company establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio as well as a specific
analysis of certain impaired loans. This analysis includes an evaluation of
the 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.
The allowance for loan losses as a percentage of net non-performing loans was
8.55% at September 30, 1997 as compared to 6.49% at December 31, 1996. Net
non-performing loans decreased $64.7 million from $203.3 million at December
31, 1996 to $138.6 million at September 30, 1997.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the
final determination. Future additions to the Company's allowance will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted with absolute certainty in advance. In addition, regulatory
agencies, as an integral part of the examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the
Company to recognize additions to the allowance level based upon their
judgment of the information available to them at the time of their
examination.
NON-INTEREST INCOME. Total non-interest income decreased $1.0
million, or 7.25% to $12.5 million at September 30, 1997 from $13.5 million
at September 30, 1996. This decrease was due to a decrease in the income
attributable to the sale of loans of $5.3 million and a decrease of $2.0
million in gains on sales of securities, partially offset by an increase in
the gain on real estate transactions of $4.5 million, an increase in the
income from other real estate operations of $1.4 million, and a increase in
other operating income of $404,000.
NON-INTEREST EXPENSE. Non-interest expense decreased $4.5 million, or
21.2% from $21.2 million for the nine months ended September 30, 1996 to
$16.7 million for the nine months ended September 30, 1997. The decrease was
primarily due to a decrease of $3.0 million in the SAIF deposit insurance
premium, a decrease of $1.0 million in the loss on sales of securities
available for sale, and a decrease of $426,000 in other operating expenses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME. For the three months ended September 30, 1997, net income
of $15.1 million represented a decrease of $565,000, or 3.6% from the three
months ended September 30, 1996. As discussed in more detail below, the
decrease was primarily due to a decrease in net interest income after provision
for loan losses of $13.5 million, partially offset by a increase of
<PAGE>
$2.4 million in total non-interest income, a decrease in total non-interest
expense of $2.8 million, and a decrease in income taxes of $7.8 million.
INTEREST INCOME. Interest income decreased $12.5 million, or 26.7%,
from $46.7 million at September 30, 1996 to $34.3 million at September 30,
1997. Of the total decrease in interest income, $11.5 million was due to an
decrease in the discount accretion, $727,000 was due to a decrease in interest
from investment securities, and $220,000 was due to a decrease in interest
income on loans receivable. The average balance of interest-earning assets
decreased $26.6 million during this period, as compared to the same period a
year ago, primarily due to a decrease in average holdings of mortgage-backed
securities of $24.8 million and a decrease in the average balance of interest-
earning deposits of $21.8 million, partially offset by an increase in average
net loans receivable of $19.4 million and an increase in FHLB Stock of
$600,000. In addition, net interest spread decreased from 10.77% for the three
months ended September 30, 1996 to 6.58% for the same period ending September
30, 1997 primarily due to a decrease in yield on interest-earning assets from
16.88% to 12.68% for the three month periods ending September 30, 1996 and
September 30, 1997, respectively due primarily to a decline in the amount of
discount accretion taken.
INTEREST EXPENSE. Interest expense decreased $390,000, or 2.3%, from
$16.7 million at September 30, 1996 to $16.3 million at September 30, 1997.
The decrease resulted from the average balance of interest-bearing liabilities
decreasing $22.1 million to $1.1 billion at September 30, 1997 resulting in a
$326,000 decrease in interest expense, and a $64,000 decrease due to a
decrease in the average rate of interest bearing liabilities from 6.12% at
September 30, 1996 to 6.10% at September 30, 1997. The decrease in average
interest-bearing liabilities was due to a decrease in the average balance of
deposits of $4.4 million, a decline in the average balance of FHLB advances of
$5.9 million and the decline in other borrowings of $11.8 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is
determined by management as an amount sufficient to maintain the allowance
for loan losses at a level considered adequate to absorb future losses
inherent in the loan portfolio in accordance with generally accepted
accounting principles. The provision for loan losses increased $1.4 million,
or 428.1%, for the three months ended September 30, 1997, as compared to the
three months ended September 30, 1996. Prior to March 31, 1997, the Bank had
historically performed detailed asset reviews and asset classifications
semi-annually at June 30 and December 31. Commencing March 31, 1997, the Bank
is now performing semi-annual reviews at March 31 and September 30.
Historically, significant fluctuations in the provision for loan losses have
occurred at the semi-annual review dates. This change in the timing of the
semi-annual reviews accounts for the increase of $1.4 million in the
provision for loan losses for the three months ended September 30, 1997 as
compared to the same period ended September 30, 1996.
NON-INTEREST INCOME. Total non-interest income increased $2.4
million, or 59.9% to $6.4 million for the three months ended September 30,
1997 from $4.0 million for the three months ended September 30, 1996. This
increase was primarily due to an increase in the gains on sales of real estate
of $5.1 million and increases in real estate operating income of $553,000,
<PAGE>
partially offset by a decrease in the income attributable to the gains on
sales of loans of $1.4 million, and a decrease in gains on sales of securities
of $2.0 million.
NON-INTEREST EXPENSE. Non-interest expense decreased $2.8 million,
or 30.1% from $9.3 million for the three months ended September 30, 1996 to
$6.5 million for the three months ended September 30, 1997. The decrease was
primarily due to a decrease of $2.4 million in the SAIF deposit insurance
premium and a decrease of $437,000 in the loss on sales of securities
available for sale.
FEDERAL AND STATE TAXATION
Federal Taxation. Beal Financial filed with the Internal Revenue
Service on March 13, 1997, to elect Subchapter-S status for federal income
tax purposes effective January 1, 1997. This election covered all
subsidiaries of Beal Financial, including the Bank, except for Beal
Affordable Housing, Inc. ("BAH") and BRE-N, Inc.("BRE-N"), (the "Subchapter-S
subsidiaries"), which elected to remain Subchapter-C Corporations for
federal tax purposes. Concurrent with the change to Subchapter-S status, Beal
Financial and all subsidiaries changed their tax and fiscal year-ends to
December 31 from the previous September 30 year-ends. Therefore, Beal
Financial filed a consolidated Subchapter-C federal tax return for the six
months ended December 31, 1996.
In the future, Beal Financial and the Subchapter-S subsidiaries will
not pay any federal taxes on net income. The only exception will involve
possible Subchapter-C tax liability on net built-in gains as of January 1,
1997, which may be recognized during the 10 year period ending December 31,
2006. Recognition of built-in gains/losses are subject to certain
limitations. Beal Financial has not yet determined the amount of net
built-in gains as of January 1, 1997, or the estimated amount of
Subchapter-C taxes to be paid in future periods. BAH and BRE-N will
continue to pay federal income taxes as C-Corporations.
The future tax liability for the taxable earnings of Beal Financial
and the Subchapter-S subsidiaries will be the responsibility of the
shareholders of Beal Financial. The Board of Directors of Beal Financial, on
October 28, 1997, declared a dividend payable to the shareholders of $9.1
million, which included approximately $6.0 million associated with the amount
of tax liability to the shareholders associated with the earnings for the
quarter ended September 30, 1997. The dividend was paid to the shareholders
on October 30, 1997. It is anticipated that future dividends to
shareholders will be declared equal to at least their tax liability related
to the earnings of Beal Financial.
TEXAS STATE INCOME TAXATION. Beal Financial and each subsidiary
currently file Texas franchise tax returns. Texas imposes a franchise tax on
the taxable income of savings institutions and other corporations. The
franchise tax equals the greater of $2.50 per $1,000 of taxable capital
apportioned to Texas, or $45.00 per $1,000 net taxable earned surplus
apportioned to Texas. Taxable earned surplus is the federal corporate taxable
income of each company within the corporate group determined on a separate
company basis with certain modifications. During
<PAGE>
September, 1997, the Company made a $3.2 million payment of franchise tax
liability for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for operations are deposits
obtained from its market area, principal and interest payments on loans,
brokered deposits, and advances from the FHLB of Dallas and to a lesser
extent, from the sale of assets. While maturities and scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
Historically, the primary investing activity of the Company has been
the purchase of discounted loans from various U.S. government agencies
through the sealed bid process or auctions and other private sector sellers.
During the three and nine month periods ended September 30, 1997, the Company
purchased $15.0 and $35.2 million of net loans, respectively as compared to
purchases of $151.6 million and $187.0 million for the same periods ended
last year. Loan originations for the three and nine months ended September 30,
1997 totaled $29.1 and $57.0 million, respectively as compared to originations
of $41.4 million and $104.5 million for the same periods ended last year.
The Company's primary financing activity has historically been the
attraction of deposits. During the three months ended September 30, 1997,
the Company experienced a net decrease in deposits of $13.1 million,
primarily due to a $42.1 million increase in retail deposits and a $55.2 million
decrease in brokered deposits. During the nine months ended September 30,
1997, The Company experienced a net decrease in deposits of $33.4 million,
primarily due to a $15.3 million decrease in retail deposits and a decrease
of $18.1 million in brokered deposits. The decrease in deposits for the nine
months ended September 30, 1997 was primarily funded with cash flow provided
from normal operations. The Company had Senior Notes, net, of $57.1 million
and other borrowings of $9.4 million at September 30, 1997.
On October 30, 1997, the Bank executed a Branch Purchase and Assumption
Agreement ( the "Agreement") with Guaranty Bank, SSB, ("Guaranty"), a state
savings bank located in Milwaukee, Wisconsin, to sell the Bank's Winnetka,
Illinois branch. It is anticipated that the transaction will close on, or
before, January 9, 1998 after all of the necessary regulatory approvals are
received by both institutions. The Agreement calls for Guaranty to assume the
branch deposits at closing date, to accept an assignment of the office lease,
and to purchase immaterial amounts of furniture and fixtures. The Winnetka
branch had total deposits of $35.7 million as of September 30, 1997. It is
anticipated that the deposits at the closing date will be significantly lower
and that the sale will be funded from normal operations.
The Company has the ability to borrow additional funds from the FHLB
of Dallas by pledging assets as collateral, subject to certain restrictions.
At September 30, 1997, the Company had an undrawn advance arrangement with
the FHLB for $88.0 million.
<PAGE>
The Bank is required to maintain minimum levels of liquid assets as
defined by the Texas Savings and Loan Department ("Texas Department").
Unless approved in advance by the Texas Department, a Texas savings bank is
required to maintain a minimum of 10% of the previous quarters average
deposits in liquid assets. At September 30, 1997, the Bank's liquidity ratio
was 12.30%.
The Company's most liquid asset is cash and cash equivalents. The
level of cash equivalents is dependent on the Company's operating, financing,
and investing activities during any given period. At September 30, 1997, the
Company had cash and cash equivalents of $32.8 million.
The Company anticipates that it will have sufficient funds available
to meet its current foreseeable commitments. At September 30, 1997, the
Company had commitments to originate loans of $4.4 million and $20.7 million
of outstanding commitments to purchase loans. Certificates of deposits which
are scheduled to mature in one year or less at September 30, 1997 totaled
$755.8 million. Due to the Company's high interest rate spread, management
has typically relied upon interest rate sensitive short-term deposits to fund
its loan purchases. The Company believes the potential interest rate risk is
acceptable in view of the Company's belief that it can maintain an acceptable
net interest spread.
At September 30, 1997, the Bank exceeded each of its three capital
requirements. The following is a summary of the Bank's regulatory capital
position at September 30, 1997.
At September 30, 1997
-----------------------------------------
Required(1) Actual
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Leverage capital ................... $110,930 9.00% $185,159 15.02%
Tier 1 capital ..................... 40,502 4.00 185,159 18.29
Total risk-based capital ........... 111,381 11.00 197,004 19.46
(1) Required leverage and total risk-based capital requirements represent
higher capital requirements imposed by the Texas Department as a condition to
the Bank's continued asset growth.
On October 13, 1997, the Department notified the Bank's Board of Directors
that the Department was rescinding the requirement that the Bank maintain
minimum capital requirements of 9% for Leverage capital and 11% for
risked-based capital, based on a business plan submitted to the Department by
the Bank and the Department's evaluation of the Bank's latest examination as
of March 31, 1997. The business plan generally anticipates a decline in total
assets, absent the Company being the successful bidder for additional bulk
asset purchases; a continued improvement in the Company's level of classified
assets; the discontinuation of the Company's foreign lending program; and the
Bank maintaining a Tier I capital ratio of at least 10%. The Department must
be provided with 30 days prior written notice of any actions planned or
anticipated that might reasonably be expected to result in a material
deviation from the business plan. For purposes of such advance notification,
material deviation would include, but not
<PAGE>
necessarily be limited to, material deviations in capital levels, total asset
growth or bulk asset purchases in any quarter, or any resumption of foreign
lending.
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 Company's operations.
Nearly all the assets and liabilities of the corporation 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.
RATIOS OF EARNING TO FIXED CHARGES
The Company's consolidated ratios of earnings to fixed charges for the
nine months ended September 30, 1997 are set forth below. Earnings used in
computing the ratios shown consist of earnings from continuing operations
before taxes and interest expense. Fixed charges, excluding interest on
deposits, represent interest expense on borrowings. Fixed charges, including
interest on deposits, represent all of the foregoing items plus interest on
deposits. Interest expense (other than on deposits) includes interest on
FHLB of Dallas borrowings, the Senior Notes and other borrowed funds.
For the Nine Months Ended
September 30, 1997
-------------------------
Excluding interest on deposits . . . . . . . 10.1:1
Including interest on deposits . . . . . . . 1.5:1
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings. The
Bank is involved in various legal proceedings occurring in the ordinary
course of business. Management of the Bank, based on discussions with
litigation counsel, believes that such proceedings will not have a material
adverse effect on the financial condition or operations of the Bank. There
can be no assurance that any of the outstanding legal proceedings to which
the Bank is a party will not be decided adversely to the Company's interests
and have a material adverse effect on the financial position or results of
operations of the Company.
In the Kenneth L. Musgrave vs. Beal Banc, S.A. lawsuit described in the Form
10-K submission for the period ending December 31, 1996, the Court granted
the Bank's motion for Summary Judgment on August 4, 1997 and thereby
dismissed all claims of Kenneth Musgrave. The Court's decision is appealable
and it is unknown at this time if Mr. Musgrave will appeal.
Item 2. CHANGES IN SECURITIES
None.
Items 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27--Financial Data Schedule
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEAL FINANCIAL CORPORATION
Registrant
Date: November 19, 1997 /s/ David C. Meek
------------------------------------
David C. Meek, President
Date: November 19, 1997 /s/ David R. Farmer
------------------------------------
David R. Farmer, Senior Vice President and
Treasurer (Chief Financial and Accounting
Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 791
<INT-BEARING-DEPOSITS> 32,040
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,292
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 915,559
<ALLOWANCE> 11,845
<TOTAL-ASSETS> 1,251,179
<DEPOSITS> 972,051
<SHORT-TERM> 40,000
<LIABILITIES-OTHER> 11,184
<LONG-TERM> 66,611
0
0
<COMMON> 300
<OTHER-SE> 161,033
<TOTAL-LIABILITIES-AND-EQUITY> 1,251,179
<INTEREST-LOAN> 118,413
<INTEREST-INVEST> 8,327
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 126,740
<INTEREST-DEPOSIT> 43,197
<INTEREST-EXPENSE> 50,813
<INTEREST-INCOME-NET> 75,927
<LOAN-LOSSES> 2,436
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,717
<INCOME-PRETAX> 69,252
<INCOME-PRE-EXTRAORDINARY> 69,252
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,088
<EPS-PRIMARY> 220.29
<EPS-DILUTED> 220.29
<YIELD-ACTUAL> 8.80
<LOANS-NON> 111,922
<LOANS-PAST> 26,663
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,189
<CHARGE-OFFS> 4,040
<RECOVERIES> 260
<ALLOWANCE-CLOSE> 11,845
<ALLOWANCE-DOMESTIC> 11,656
<ALLOWANCE-FOREIGN> 189
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
