<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
0R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or organization) Number)
SUITE 300, LB66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75248
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
As of June 30, 1998, there were 300,000 shares of the Registrant's
common stock issued and outstanding.
<PAGE>
BEAL FINANCIAL CORPORATION
INDEX
<TABLE>
PAGE
NUMBER
------
<S> <C>
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
</TABLE>
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands,except share data)
<TABLE>
June 30, December 31,
1998 1997
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Cash $ 792 $ 630
Interest bearing deposits 84,154 150,219
---------- ----------
CASH AND CASH EQUIVALENTS 84,946 150,849
Accrued interest receivable 12,247 13,071
Securities available for sale 101,142 111,376
Net loans receivable 780,318 899,745
Less allowance for losses (10,414) (11,912)
---------- ----------
769,904 887,833
Federal Home Loan Bank stock 6,268 10,203
Real estate held for investment or sale 147,455 176,682
Premises and equipment, net 5,774 6,351
Other assets 16,645 9,389
---------- ----------
$1,144,381 $1,365,754
---------- ----------
---------- ----------
LIABILITIES
Deposit accounts $ 844,174 $1,001,476
Federal Home Loan Bank advances 48,000 110,000
Senior notes, net 57,241 57,188
Other borrowings 7,186 7,599
Other liabilities 22,569 28,673
---------- ----------
TOTAL LIABILITIES 979,170 1,204,936
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 3,899 3,722
Retained earnings 158,272 154,056
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 165,211 160,818
---------- ----------
$1,144,381 $1,365,754
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(In thousands)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------------- ----------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 24,668 $24,515 $49,078 $60,173
Purchased discount accretion 12,602 9,944 24,509 26,502
Investment securities 2,597 3,073 5,108 5,803
------------------------- ----------------------
TOTAL INTEREST INCOME 39,867 37,532 78,695 92,478
Interest expense:
Deposits 11,767 14,724 24,855 29,409
Federal Home Loan Bank
advances and other borrowings 521 212 933 1,094
Senior notes 2,016 1,993 4,027 3,982
------------------------- ----------------------
TOTAL INTEREST EXPENSE 14,304 16,929 29,815 34,485
------------------------- ----------------------
NET INTEREST INCOME 25,563 20,603 48,880 57,993
Provision for loan losses (309) (261) 1,064 672
------------------------- ----------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 25,872 20,864 47,816 57,321
Other income
Gain on sale of loans 5 2 10 538
Gain on real estate transactions 9,138 2,404 12,152 3,748
Other real estate operations, net 2,745 985 4,230 1,568
Other operating income 224 6 361 194
------------------------- ----------------------
TOTAL NONINTEREST INCOME 12,112 3,397 16,753 6,048
Other expense
Salaries and employee benefits 1,880 1,860 3,575 3,866
Occupancy and equipment 531 577 1,178 1,224
SAIF deposit insurance premium 159 171 317 337
Other operating expenses 2,608 3,017 4,818 4,800
------------------------- ----------------------
TOTAL NONINTEREST EXPENSES 5,178 5,625 9,888 10,227
------------------------- ----------------------
INCOME BEFORE INCOME TAXES 32,806 18,636 54,681 53,142
Income Taxes 1,837 962 2,865 2,165
------------------------- ----------------------
NET INCOME $ 30,969 $17,674 $51,816 $50,977
------------------------- ----------------------
------------------------- ----------------------
Income per common share $ 103.23 $ 58.91 $172.72 $169.92
Weighted average number of common shares
outstanding 300 300 300 300
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Six Months
ended June 30
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 51,816 $ 50,977
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,129 1,176
Accretion of purchased discount (24,509) (26,502)
Provision for loan losses 1,064 672
Amortization of bond premium and underwriting costs 362 317
Gains on real estate transactions (12,152) (3,748)
Gain on sales of loans (10) (538)
Loss on sale of premises and equipment 167 7
Changes in operating assets and liabilities
Accrued interest receivable 408 (1,570)
Prepaid expenses and other assets (1,356) (307)
Other liabilities and accrued expenses (4,765) 777
----------- -----------
Net cash provided by
operating activities 12,154 21,261
INVESTING ACTIVITIES
Proceeds from sales of loans 10 14
Proceeds from paydowns of securities available for sale 10,517 6,394
Proceeds from loan collections, less loan originations
and advances 147,894 128,109
Proceeds from sale of FHLB stock 4,181 -
Proceeds from sales of real estate and partnership/JV interests 31,343 13,123
Proceeds from sales of premises and equipment 70 5
Purchases of loans and bid deposits on loan purchases (1,284) (20,059)
Purchases of Federal Home Loan Bank stock (246) (283)
Purchases of real estate held for invest. or sale and
partnership/JV interests (1,584) (2,144)
Purchases of premises and equipment (143) (346)
----------- -----------
Net cash provided by
investing activities 190,758 124,813
FINANCING ACTIVITIES
Net decrease in deposit accounts (157,302) (31,500)
Proceeds from long-term debt - 162
Repayments of long-term debt (413) (5,283)
Repayments of advances from the Federal Home Loan Bank (62,000) (116,000)
Cash dividends paid (49,100) (13,322)
----------- -----------
Net cash used in
financing activities (268,815) (165,943)
----------- -----------
Net decrease in cash and
cash equivalents (65,903) (19,869)
Cash and cash equivalents at beginning of period 150,849 65,940
----------- -----------
Cash and cash equivalents at end of period $ 84,946 $ 46,071
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 30,517 $ 33,838
Income taxes 7,288 1,592
Supplemental disclosure of noncash investing and financing
activities
Real estate acquired in foreclosure or in settlement of loans $ 6,318 $ 25,180
</TABLE>
3
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with instructions to Form 10-Q and Rule 10-1 of
Regulation S-X. The financial statements as of June 30, 1998 and for the six
months ended June 30, 1998, and 1997 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
six month period are not necessarily indicative of the results to be expected
for the full year.
These unaudited financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
in Form 10-K for the year ended December 31, 1997.
NOTE B--INCOME TAXES
On March 13, 1997, the Company filed an application with the Internal Revenue
Service to elect S Corporation status for federal income tax purposes effective
January 1, 1997. This election covered all subsidiaries of the Company, except
Beal Affordable Housing, Inc. and BRE-N, Inc.
As a result of the aforementioned application, beginning January 1, 1997, the
Company and all of its subsidiaries electing S Corporation status no longer pay
federal income taxes, except for federal taxes related to the recognition of
built-in gains which existed at January 1, 1997. For the six months ended June
30, 1998, the Company recorded federal tax expense of $1,600,600, related to the
recognition of built-in gains. Except as discussed above, the liability for
federal income taxes of the Company is the responsibility of its shareholders.
NOTE C--NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which requires reporting of comprehensive
income in the financial statements. The components of comprehensive income are
as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income $30,969 $17,674 $51,816 $50,977
Other comprehensive income net
unrealized gains on investment
securities - available for sale 209 2,693 177 731
------- ------- ------- -------
Comprehensive income $31,178 $20,367 $51,993 $51,708
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
4
<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 it's subsidiaries,
the "Company"), the parent company of Beal Bank, ssb, (the "Bank") had total
assets of $1.1 billion at June 30, 1998 representing a decrease of $221.4
million or 16.21%, from $1.4 billion at December 31, 1997. The decrease resulted
primarily from a decrease in cash and cash equivalents of $65.9 million, a
decrease in net loans receivable of $119.4 million, and a decrease in real
estate held for investment or sale of $29.2 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 in the ordinary
course of business. The decrease in real estate held for investment or sale was
primarily the result of $32.5 million in sales of other real estate, and a
decrease in real estate and/or interests in real estate joint ventures of $2.1
million, partially offset by foreclosures of loans of $6.1 million. The decrease
in cash and cash equivalents was the result of normal operations. (See also -
Liquidity and Capital Resources)
Total liabilities decreased $225.8 million, or 18.7% from $1.2 billion
at December 31, 1997 to $979.2 million at June 30, 1998, primarily due to a
decline in deposits of $157.3 million and a decline in Federal Home Loan
Bank, Dallas ("FHLB") advances of $62.0 million. The decrease in deposits for
the six months ended June 30, 1998 was primarily due to decreases in brokered
deposits and retail deposits of $125.6 million and $30.0 million,
respectively. The decrease in deposits and the repayment of the advances from
the FHLB, was primarily funded with cash flow provided from normal
operations. The decrease in other liabilities was primarily due to payments
of accrued interest on the 12.75%
5
<PAGE>
senior notes due August 15, 2000, (the "Senior Notes"), and payment of
accrued Texas franchise tax.
Stockholders' equity increased $4.4 million from $160.8 million at December
31, 1997 to $165.2 million at June 30, 1998. The change was due to net income of
$51.8 million partially offset by dividends declared to shareholders of $47.6
million and an increase of $177,000 related to unrealized gains on investment
securities.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME. For the six months ended June 30, 1998, net income of $51.8
million represented an increase of $839,000, or 1.65% from the six months ended
June 30, 1997. As discussed in more detail below, the increase was primarily due
to an increase in noninterest income of $10.7 million which offset a decrease in
net interest income after provision for loan losses of $9.5 million.
INTEREST INCOME. Interest income decreased $13.8 million, or 14.9%, from
$92.5 million at June 30, 1997 to $78.7 million at June 30, 1998. Of the total
decrease in interest income, $11.1 million was due to a decrease in interest
income on loans, including fees, $2.0 million was due to a decrease in the
discount accretion and $695,000 was due to a decrease in interest income on
investment securities. The average balance of interest-earning assets decreased
$178.9 million during this period, as compared to the same period a year ago,
primarily due to a decrease in average net loans receivable of $159.7 million, a
decrease in average holdings of mortgage-backed securities of $12.9 million, a
decrease in the average balance of interest earning deposits of $4.8 million,
and a decrease in the average balance of FHLB stock of $1.5 million. Net
interest spread, however, increased slightly from 9.57% for the six months ended
June 30, 1997 to 9.61% for the same period ending June 30, 1998 primarily due to
an increase in yield on average interest-earning assets from 15.58% to 15.61%
for the six month periods ending June 30, 1997 and June 30, 1998, respectively
due primarily to an increase in the amount of discount accretion taken in
relation to the amount of loans outstanding.
INTEREST EXPENSE. Interest expense decreased $4.7 million, or 13.5%, from
$34.5 million at June 30, 1997 to $29.8 million at June 30, 1998. The decrease
resulted primarily from the average balance of interest-bearing liabilities
decreasing $155.2 million to $993.2 million at June 30, 1998. The average rate
paid on interest bearing liabilities decreased slightly from 6.01% at June 30,
1997 to 6.0% at June 30, 1998. The decrease in average interest-bearing
liabilities was due primarily to a decrease in the average balance of deposits
of $151.0 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 $392,000 for the six months ended June 30,
1998, as compared to the six months ended June 30, 1997. The
6
<PAGE>
allowance for losses as a percentage of net loans receivable increased from
1.2% at June 30, 1997 to 1.3% at June 30, 1998.
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
8.4% at June 30, 1998 as compared to 6.5% at June 30, 1997. Net non-performing
loans decreased $51.3 million from $174.8 million at June 30, 1997 to $123.5
million at June 30, 1998.
Although management believes that it uses the best information available to
determine the allowance for loan losses, 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 for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted with absolute certainty in advance. In addition, bank 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 $10.7 million, or
177.0% to $16.7 million at June 30, 1998 from $6.0 million at June 30, 1997.
This increase was due primarily to an increase in the income attributable to the
gain on real estate transactions of $8.4 million, and an increase in the income
from other real estate operations, net of $2.7 million.
NON-INTEREST EXPENSE. Non-interest expense decreased $339,000, or 3.3% from
$10.2 million for the six months ended June 30, 1997 to $9.9 million for the six
months ended June 30, 1998. The decrease was primarily due to a decrease of
$291,000 in salaries and employees benefits.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME. For the three months ended June 30, 1998, net income of $31.0
million represented an increase of $13.3 million, or 75.2% from the three months
ended June 30, 1997. As discussed in more detail below, the increase was
primarily due to an increase in net interest income after provision for loan
losses of $5.0 million, and an increase in noninterest income of $8.7 million.
7
<PAGE>
INTEREST INCOME. Interest income increased $2.4 million, or 6.22%, from
$37.5 million at June 30, 1997 to $39.9 million at June 30, 1998. Of the total
increase in interest income, $2.7 million was due to an increase in purchased
discount accretion and $153,000 was due to an increase in interest income on
loans, including fees, partially offset by a decrease in interest income on
investment securities of $476,000. The average balance of interest-earning
assets decreased $203.5 million during this period, as compared to the same
period a year ago, primarily due to a decrease in average net loans receivable
of $155.3 million, a decrease in average holdings of mortgage-backed securities
of $14.0 million, a decrease in the average balance of interest earning deposits
of $20.1 million, and a decrease in the average balance of FHLB stock of $3.5
million. Net interest spread increased from 6.85% for the three months ended
June 30, 1997 to 10.45% for the same period ending June 30, 1998 primarily due
to an increase in yield on average interest-earning assets from 12.81% to 16.46%
for the three month periods ending June 30, 1997 and June 30, 1998, respectively
due primarily to an increase in the amount of purchased discount accretion
taken.
INTEREST EXPENSE. Interest expense decreased $2.6 million, or 15.5%, from
$16.9 million at June 30, 1997 to $14.3 million at June 30, 1998. The decrease
resulted from the average balance of interest-bearing liabilities decreasing
$183.9 million to $952.3 million at June 30, 1998. The average rate paid on
interest bearing liabilities increased slightly from 5.96% at June 30, 1997 to
6.01% at June 30, 1998. The decrease in average interest-bearing liabilities was
due to a decrease in the average balance of deposits of $206.8 million, and a
decrease in average other borrowings of $3.6 million, partially offset by an
increase in the average balance of FHLB advances of $26.3 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as an amount sufficient to maintain the allowance for loan losses at
a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses decreased $48,000, or 18.4%, for the three months
ended June 30, 1998, as compared to the three months ended June 30, 1997.
NON-INTEREST INCOME. Total non-interest income increased $8.7 million, or
256.6% to $12.1 million at June 30, 1998 from $3.4 million at June 30, 1997.
This increase was due primarily to an increase in the income attributable to the
gain on real estate transactions of $6.7 million, an increase in the income from
other real estate operations of $1.8 million, and an increase in other operating
income of $218,000.
NON-INTEREST EXPENSE. Non-interest expense decreased $447,000, or 7.9% from
$5.6 million for the three months ended June 30, 1997 to $5.2 million for the
three months ended June 30, 1998. The decrease was due primarily to a decrease
of $409,000 in other operating expenses, and a decrease of $46,000 in occupancy
and equipment, partially offset by an increase in salaries and employee benefits
of $20,000.
8
<PAGE>
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"). BAH and BRE-N
elected to remain Subchapter-C Corporations for federal tax purposes and will
continue to pay federal income taxes. Concurrent with the change to
Subchapter-S status, Beal Financial and all subsidiaries changed their tax
and fiscal year-ends to December 31 from their previous June 30 year-ends.
Beal Financial and the Subchapter-S subsidiaries generally will not pay any
federal taxes on net income. The only exception will involve possible
Subchapter-C tax liabilities 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 also subject to certain limitations.
Approximately $1.6 million of the tax expense for the six months ended June 30,
1998, related to tax on recognized built-in gains. It is not anticipated that
the tax expense, related to recognized built-in gains would be material in
any given quarter.
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 May 26,1998, declared a
dividend payable to the shareholders of $36.7 million. The dividend was paid to
the shareholders on April 7, 1998. A subsequent dividend of $11.1 million was
declared and paid to the shareholders on July 8, 1998. It is anticipated that
future dividends to shareholders will be declared in an amount equal to 50%
of the Company's net income.
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 of 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. Approximately $1.3 million of the tax expense for the six months
ended June 30, 1998, related to franchise tax, primarily Texas franchise tax.
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.
9
<PAGE>
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 from other private sector sellers. During the
three and six month periods ended June 30, 1998, the Company purchased none
and $1.2 million of net loans, respectively as compared to purchases of $9.4
million and $20.2 million for the same periods ended last year. Loan
origination's for the three and six months ended June 30, 1998 totaled $7.8
million and $17.5 million, respectively as compared to origination's of $22.0
million and $27.9 million for the same periods ended last year.
The Company's primary financing activity has historically been the
attraction of deposits. During the six months ended June 30, 1998, The Company
experienced a planned net decrease in deposits of $157.3 million, primarily
due to decreases in retail deposits and brokered deposits of $30.0 million
and $125.6 million, respectively. The decrease in deposits for the six months
ended June 30, 1998 was primarily funded with cash flow provided from normal
operations. The Company had Senior Notes, net, of $57.2 million and other
borrowings of $7.2 million at June 30, 1998.
The Company has the ability to borrow additional funds from the FHLB by
pledging assets as collateral, subject to certain restrictions. At June 30,
1998, the Company had an undrawn advance arrangement with the FHLB for $81.6
million.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Texas Savings and Loan Department ("Texas Department"). Unless approved
in advance by the Texas Department, a Texas savings bank is required to maintain
a minimum of 10% of the previous quarters average deposits in liquid assets. At
June 30, 1998, the Bank's liquidity ratio was 16.9%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash equivalents is dependent on the Company's operating, financing, and
investing activities during any given period. At June 30, 1998, the Company had
cash and cash equivalents of $84.9 million.
The Company anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At June 30, 1998, the Company had
commitments to originate loans of $8.8 million and $203,700 of outstanding
commitments to purchase loans. Certificates of deposits which are scheduled to
mature in one year or less at June 30, 1998 totaled $637.7 million. Due to the
Company's high interest rate spread, management has typically relied upon
interest rate sensitive short-term deposits to fund its loan purchases. The
Company believes the potential interest rate risk is acceptable in view of the
Company's belief that it can maintain an acceptable net interest spread.
At June 30, 1998, the Bank exceeded each of its three capital requirements.
It is expected that the Bank's Board of Directors, at its next scheduled
meeting, will declare a dividend, equal to at least the second quarter
earnings of the Bank, which were $33.1 million. After payment of the dividend
the Bank will still be considered well capitalized for regulatory purposes.
The following is a summary of the Bank's regulatory capital position at June
30, 1998.
10
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------
Required Actual
---------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Leverage capital .............. $56,240 5.00% $180,087 16.01%
Tier 1 capital ................ 54,121 6.00 180,087 19.96
Total risk-based capital ...... 90,202 10.00 190,501 21.12
</TABLE>
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 Tier I 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 June 30, 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 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
three months ended June 30, 1998 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
11
<PAGE>
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 borrowings, the Senior Notes and other borrowed funds.
<TABLE>
UPDATE For the Three Months Ended
June 30, 1998
--------------------------
<S> <C>
Excluding interest on deposits . . . . . 12.0:1
Including interest on deposits . . . . . 2.0:1
</TABLE>
12
<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.
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
13
<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: August 13, 1998 /s/ D. Andrew Beal
----------------------------------
D. Andrew Beal, Chairman
Date: August 13, 1998 /s/ James W. Lewis, Jr.
----------------------------------
James W. Lewis, Jr.
Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 792
<INT-BEARING-DEPOSITS> 84,154
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 101,142
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 780,318
<ALLOWANCE> 10,414
<TOTAL-ASSETS> 1,144,381
<DEPOSITS> 844,174
<SHORT-TERM> 48,000
<LIABILITIES-OTHER> 22,569
<LONG-TERM> 64,427
0
0
<COMMON> 300
<OTHER-SE> 164,911
<TOTAL-LIABILITIES-AND-EQUITY> 1,144,381
<INTEREST-LOAN> 73,587
<INTEREST-INVEST> 5,108
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 78,695
<INTEREST-DEPOSIT> 24,855
<INTEREST-EXPENSE> 29,815
<INTEREST-INCOME-NET> 48,880
<LOAN-LOSSES> 1,064
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,888
<INCOME-PRETAX> 54,681
<INCOME-PRE-EXTRAORDINARY> 54,681
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,816
<EPS-PRIMARY> 172.72
<EPS-DILUTED> 172.72
<YIELD-ACTUAL> 9.70
<LOANS-NON> 113,496
<LOANS-PAST> 10,049
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,912
<CHARGE-OFFS> 2,745
<RECOVERIES> 183
<ALLOWANCE-CLOSE> 10,419
<ALLOWANCE-DOMESTIC> 10,274
<ALLOWANCE-FOREIGN> 140
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
