FIN 320

Banking

Financial Analysis Report of Beal Bank

Submitted to: Prof. Ali Mirzaei

Submitted by:

Ankita Rejith

Chirag Khanchandani

Diya Pramod

Joel Ben George

Date of Submission: May 5th , 2024

Abstract
 The report analyzes the financial performance of Beal Bank, which is one of the

largest private financial organizations in the United States. The literature review provides

insights into the macroeconomic and endogenous variables such as inflation, bank size, and

bank capital, and how they affect a bank’s profitability. Furthermore, the report analyzes the

financial statements, profitability, and risk ratios of Beal Bank from 2019 to 2023. The

research looks at the evolution of Beal Bank’s profitability and risk, and its performance

compared to industry standards. The bank’s profitability measured through Net Interest

Margin, Return on Assets, and Return on Equity has been fluctuating resulting in a sharp

decline over the years. In addition, Beal Bank’s Loan-to-Deposit ratio, Non-Performing

Loans ratio, and Equity to Total Assets ratio indicate inadequate risk management by the

Bank. Policy implication

1. Introduction

The Beal Bank family of companies was founded in 1988 by Andrew Beal. They are

based in Plano, Texas, and are one of the largest private financial organizations in the United

States. They have combined assets of more than $27.6 billion as of December 31, 2023. It

consists of two different chartered banks, Beal Bank and Beal Bank USA. Beal Bank USA

shares a common brand with Beal Bank and was founded in 2004. Andrew Beal had shut

down Beal Bank in the years leading up to the financial crisis of 2008 because he believed

that the housing market would bust. After the markets collapsed, Beal Bank was in an ideal

position to profit by purchasing distressed assets cheaply. According to Forbes, Beal Bank's

assets grew to $9.2 billion at the end of 2009, more than three times higher than in the fall of

2007 (Vardi, 2013). In 2020, Beal Bank completed its conversion to a Texas state-chartered

bank from a state savings bank (Cooper, 2020).

Beal Bank provides competitive deposit rates through a range of savings alternatives

such as CDs, money market accounts, statement savings accounts, and IRA CDs. The Federal
Deposit Insurance Corporation (FDIC) insures deposits up to at least $250,000 per depositor

(Beal Bank, 2023). Beal Bank finances commercial real estate, acquires individual loans and

loan portfolios, and provides loan financing and funding. Additionally, they participate in

loan syndications involving loans backed by physical assets in industries such as real estate,

lodging, energy and power, manufacturing, timber, and transportation and distribution (PR

Newswire, 2024).

Through our research, we aim to find out how the profitability and risk of Beal Bank

have changed over the years. Furthermore, we compare Beal Bank’s performance compared

to the industry standard. To address these research questions, we analyzed the financial

statements of Beal Bank to assess its performance from the period 2019 to 2023. In addition,

we conducted a ratio analysis to measure the bank’s profitability and risk.

2. Literature Review

Studies of the determinants of bank performance fall largely into two categories:

Macroeconomic variables which affect the economy as a whole and endogenous variables

which differ and affect each bank separately.

Firstly, The effect of inflation on banking performance is an important and complex

issue because it has been a concern of investors, shareholders, and managers in planning their

policies and programmes. Inflation affects bank performance as it transfers money from

lenders to borrowers. According to Umar et al., (2014), the opportunity cost of holding

currency in the future discourages savings as savers will prefer to invest in non-monetary

capital projects to avoid losses expected from the declining purchasing power of money.

Additionally, inflation worsens the loans policy which affects the performance of banks as a

result of withdrawals by depositors from the banks. This reduces bank resources thereby

decreasing a large proportion of their profitability (Umar et al.,2014). In other words, it

reduces the inflow and outflow of loans and advances because banks may not want to lend

unless the interest rate is higher, thus deterring borrowing.

Furthermore, the impact of bank size on profitability and operational efficiency merits

attention. It is commonly assumed that larger banks benefit from economies of scale, leading

to reduced costs, and economies of scope, owing to enhanced product diversification and

broader access to global clients. Regarding profitability, findings on the influence of bank

size present a paradoxical picture. Ali et al. (2011) asserted a positive correlation between

bank size and profitability, indicating that profitability, as measured by Return on Assets

(ROA), is bolstered by size, operational efficiency, and portfolio diversity while being

mitigated by capital and credit risks. Conversely, Obamuyi (2013) contended that bank size

exerts a negative yet statistically significant impact on profitability (ROA), suggesting that

larger banks may yield lower profits compared to their smaller counterparts. This negative

association might stem from the bureaucratic hurdles that often impede the performance of

excessively large banks.

Lastly, drawing from the bank capital theory proposed by Diamond and Rajan (2000),

it was anticipated that there exists a favorable link between bank capital and profitability.

Specifically, a positive correlation was hypothesized between return on equity (ROE) and the

capital-to-asset ratio, suggesting that banks with higher capital reserves can mitigate the risk

of bankruptcy and lessen their dependence on external funding sources. Liu and Wilson

(2010) suggest that diversified banks are adept at minimizing their lending margins by

leveraging revenues generated from non-interest activities, thereby bolstering their lending

business. The positive association between the capital adequacy (KA) ratio and ROE, as well

as ROA, suggests that managers utilize capital strength as a means to signal anticipated future

profitability.
3. Results and Discussion

3.1 Balance Sheet and Income Statement Overview

For the chosen period of 2019-2023, Beal Bank’s balance sheet values seem to be

similar to other banks in the same category. Over the years, the bank’s total assets have

shown a fluctuating trend. While the decrease in 2021, could have been caused by the early

effects of the pandemic, the increase from USD 2,099.8 million to USD 6,666 million in

2022 shows signs of economic recovery. The company's cash and balances due from

depository institutions have also shown evident fluctuations, with notable increases and

decreases over the years. Noninterest-bearing balances, interest-bearing balances, and cash

items in the process of collection have shown shifts as well. Liabilities and capital have also

fluctuated over the years. The total liabilities mainly consist of deposits, with a significant

portion attributed to time and saving deposits. The bank's deposits has shown a slight increase

from USD 1,310.5M to USD 2005M from 2019 to 2023. However, borrowings showed an

increasing trend of USD of 147.1M in 2019 to USD 2512.8M in 2023, with about 60% of the

debt in 2023 being short-term borrowings. The equity is composed of common stock, surplus,

and a significant increase in the amount of retained earnings from USD 22.6M in 2019 to

USD 559.8M in 2023, playing a huge role in the equity growth. Lastly, According to US

capital standards, Beal Bank is well-capitalized in 2023, their (Total Capital / RWA) ratio is

69.22%, the (Tier 1/ RWA) ratio is 68.8% and the (Tier 1/ TA) ratio is 17.29%. This

suggests that the bank has a significant buffer against potential losses. A high ratio like this

implies that the bank has substantial capital reserves to cover its risks, contributing to

financial stability.

After analyzing the income statement, it can be seen that the majority of the revenues

come from interest income. Although there were fluctuations over the years which may be

caused due to changes in interest rates, the global pandemic, or overall economic growth, the
increased interest income indicated a growth in the banks lending activities and interest-

earning activities. Similar to interest income, interest expenses have shown a significant rise

in the past years. This suggests higher costs of borrowing, increased interest payments on

liabilities, etc. The shifts in the non-interest income and expense can be due to changes in fee-

based income, operational costs, or other non-interest-related activities impacting the

company's financial performance. The variations in the provision for loans indicate the efforts

of the bank to manage credit risks, and loan losses as there was a significant recovery after

the initial years. Nonetheless, net income also appears to fluctuate however, there has been an

increase over time indicating positive financial performance over the years.

3.2 Profitability Ratios

Figure 1: Profitability ratios over a 5-year horizon.

Profitability Ratios 2019 2020 2021 2022 2023 Mean Standard Deviation

Net Interest Margin 27.41% 78.97% 23.02% 5.86% 4.15% 27.88% 30.34%

ROA 0.85% 1.67% 5.88% 4.57% 1.55% 2.90% 2.19%

ROE 2.84% 5.53% 19.51% 38.34% 9.62% 15.17% 14.42%

Sourced from Captial IQ

Beal Bank's NIM declined from 27.41% in 2019 to 4.15% in 2023. This is a result of

a notable increase in interest expenses that overshadowed the increase in interest income.

The bank's ROA is seen to be fluctuating over time, initially demonstrating an increase before

starting to decline again. This trend can significantly impact the bank's long-term financial

stability and create challenges when it comes to sustaining profitability.

The ROE in the first two years shows a significant deviation with values much lower than

14.42% which is the mean. In 2021 and 2022, Beal Bank improved equity capital
management. However, in 2023, ROE declined from 38.35% to 9.62%. This indicates that

Beal Bank had rather poor financial performance in 2023.

3.3 Risk Ratios

Figure 3: Data sourced from Capital IQ

It is seen that the LDR was at 83.2% in the 2018 financial year. It managed an

increase in 2019, followed by a corresponding decrease across 2020-2022 to stabilise at

36.71% in 2023. The decrease means the bank has reduced its risk and would almost

certainly have funds in reserve to help mitigate any crisis. While the bank has low LDR, it

could have adverse implications for the bank as they are not meeting the general industry

standard of 70-90%. They are not lending enough loans which means their profitability is

very low which is not sustainable for the bank in the long run even if they are having lower

risk. This NPL ratio is a measure of a bank's exposure to credit risk and the quality of the

loans it has made to its customers. Beal Bank's NPL was 25.11% in 2018 and managed to

come down to 8.69% in 2019. Afterward, it climbed over the subsequent three years before it

decreased again to 6.64% in FY 2023. A lower NPL ratio, on the other hand, tells that the

bank exposes less risks to its operations. While the capital risks may appear to increase from

year to year until 2021, then there was an abrupt fall to 11.91%, this trend will be on course

to 16.15% in FY 2023. A low equity ratio means that the company primarily used debt to

acquire assets, which is widely viewed as an indication of greater financial risk.

Conclusion
 In conclusion, the financial analysis of Beal Bank spanning from 2019 to 2023 reveals

a series of fluctuations in various key performance indicators. While the bank exhibited

strong balance sheet values, with notable increases in total assets and equity, there are

concerns raised by the fluctuating trends in liabilities, particularly in the form of increasing

borrowings and debt. Despite maintaining a well-capitalized status according to US capital

standards, the bank faced challenges in managing its net interest margin (NIM) and return on

equity (ROE), which witnessed significant declines in 2023, indicating potential issues in

profitability and long-term financial stability. Furthermore, Beal Bank's loan-to-deposit ratio

(LDR) and non-performing loan (NPL) ratios showed mixed signals, with a decrease in LDR

indicating lower lending activity, resulting in lower revenue, and a decrease in NPL ratio

indicating better credit risk management. To improve Beal Bank's performance and address

the identified challenges, the bank may consider diversifying its revenue streams beyond

interest income. This strategic approach is intended to mitigate the impact of fluctuating

interest rates and expenses by exploring options such as increasing fee-based revenue or

investing in non-interest activities. Secondly, the bank should focus on optimizing its capital

structure to strike a balance between debt and equity financing, ensuring sustainable growth

while minimizing financial risks associated with excessive leverage. Lastly, while reducing

the LDR can mitigate risks, Beal Bank should also consider strategic lending strategies to

increase profitability without compromising asset quality. This could involve targeting

specific market segments or industries with higher creditworthiness. By implementing these

policy implications, Beal Bank can enhance its financial performance, strengthen its position

to face adverse economic uncertainties and sustain long-term growth and profitability.

References
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