<PAGE>

                                   UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION 
                               Washington, DC 20549
 
                                     FORM 10-K
 
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [FEE REQUIRED]
                                          OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
    For the transition period from July 1, 1996 to December, 31, 1996
 
                         Commission File Number 33-93312
 
                            BEAL FINANCIAL CORPORATION 
-------------------------------------------------------------------------------
               (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 December 31, 1996.
 
    As of December 31, 1996, there were issued and outstanding 300,000 shares of
the Registrant's Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    None.
 
                                      
<PAGE>

                               TABLE OF CONTENTS
 

ITEM 1.  BUSINESS........................................................   1
General..................................................................   1
Forward-Looking Statements...............................................   2
Lending Activities.......................................................   3
     General.............................................................   3
     Loan Portfolio Composition..........................................   4
     Contractual Principal Repayments....................................   6
     Geographic Distribution of Real Estate Secured Loans................   7
Loan Acquisition, Resolution, Origination and Sale Activities............  10
     General.............................................................  10
     Originations, Purchases and Sales of Mortgage Loans.................  11
     Acquisition of Discounted Loans.....................................  13
     One- to Four-Family Residential Mortgage Lending....................  14
     Multi-Family and Commercial Real Estate Lending.....................  14
     Construction, Development and Land Lending..........................  16
     Consumer Lending....................................................  17
     Commercial Business Lending.........................................  18
     Foreign Lending Activity............................................  18
Loan Delinquencies and Non-Performing Assets.............................  19
     Non-Accruing Loans..................................................  21
     Accruing Loans Delinquent More than 90 Days.........................  21
     Foreclosed Assets...................................................  22
     Other Loans of Concern..............................................  22
     Classified Assets...................................................  22
     Allowance for Loan Losses...........................................  23
Investment Activities....................................................  26
     General.............................................................  26
Sources of Funds.........................................................  27
     General.............................................................  27
     Deposits............................................................  27
     Borrowings..........................................................  29
Subsidiaries of the Company..............................................  30
Subsidiaries of the Bank.................................................  31
     Beal Mortgage, Inc. ("BMI") and Beal Properties, Inc. ("BPI").......  31
     Loan Acceptance Corp. ("LAC").......................................  32
     BRE, Inc. ("BRE")...................................................  32
     Beal Affordable Housing, Inc. ("BAH")...............................  32
     Foreign Lending Corporation ("FLC").................................  32
Competition..............................................................  33
Employees................................................................  33
Regulation...............................................................  33
     General.............................................................  33
     The Conversion......................................................  33
     Texas Law and Supervision by the Texas Department...................  33
     Federal Regulation of State-Chartered Savings Banks.................  34
     Insurance of Accounts and Regulation by the FDIC....................  36
     Regulatory Capital Requirements and Prompt Corrective Regulatory
       Action............................................................  37
     Limitations on Dividends and Other Capital Distributions............  39
     Liquidity...........................................................  39
     Qualified Thrift Lender Test........................................  40
     Community Reinvestment Act..........................................  40
     Transactions with Affiliates........................................  40
     Holding Company Regulation..........................................  40
     Federal Securities Law..............................................  41

                                       i

<PAGE>

     Federal Reserve System..............................................  41
     Federal Home Loan Bank System.......................................  41
Federal and State Taxation...............................................  42
     Federal Taxation....................................................  42
     Texas State Income Taxation.........................................  43
     Delaware Taxation...................................................  43

ITEM 2. PROPERTIES.......................................................  43

ITEM 3. LEGAL PROCEEDINGS................................................  44
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............  44

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND 
         RELATED STOCKHOLDER MATTERS.....................................  44

ITEM 6. SELECTED FINANCIAL DATA..........................................  45

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.............................  46
     General.............................................................  46
     Asset/Liability Management..........................................  47
     Financial Condition.................................................  50
     Results of Operations...............................................  50
     Comparison of Operating Results for the Six Months Ended
       December 31, 1996 and 1995........................................  53
     Comparison of Operating Results for the Fiscal Years Ended
       June 30, 1996 and 1995............................................  54
     Comparison of Operating Results for the Fiscal Years Ended
       June 30, 1995 and 1994............................................  56
     Liquidity and Capital Resources.....................................  57
     Impact of Inflation and Changing Prices.............................  58
     Ratios of Earnings to Fixed Charges.................................  58
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION...............  59

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.............................  86

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................  86
     Directors of Beal Financial.........................................  86
     Executive Officers of the Corporation...............................  86
     Board of Directors of the Bank......................................  87
     Executive Officers of the Bank......................................  88
     Meetings and Committees of the Board of Directors of the Company
       and the Bank......................................................  89
     Compensation Committee Interlocks and Insider Participation.........  90
     Compensation of Directors...........................................  90

ITEM 11. EXECUTIVE COMPENSATION..........................................  91
     Compensation of Executive Officers..................................  91
     Employment Agreements...............................................  91
     Benefits............................................................  92

ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................  92

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................  93
     Certain Transactions................................................  93

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
           FORM 8-K......................................................  94

                                       ii

<PAGE>

                                      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 most significant asset of Beal 
Financial is its indirect ownership of the capital stock of the Bank. At 
December 31, 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 Company 
changed its fiscal year end from June 30 to December 31 in connection with 
its tax election to be treated as a Subchapter S corporation. See "Federal 
and State Taxation--Federal Taxation."
 
    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 Federal
Deposit Insurance Corporation (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
has from time to time examined 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 implemented
a lending program approved by the Texas Department to originate up to $25.0
million of commercial real estate loans secured by assets located in Mexico. To
date, the Bank has funded one commercial real estate loan with a balance of $4.5
million, net, at December 31, 1996. 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 Winnetka, Illinois
and Dallas and Houston, Texas. See "Sources of Funds--Deposits."


                                       1

<PAGE>


    The Company originates a limited amount of commercial real estate loans
mainly in its primary market area. 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") and through various single purpose 
subsidiaries. At December 31, 1996, the Company's real estate held for 
development totaled $19.2 million. BMI and BPI also held in the aggregate 
$11.0 million of income producing properties (primarily consisting of the 
buildings located adjacent to the Bank's corporate headquarters). See 
"-Subsidiaries of the Bank."
 
    During the six months ending December 31, 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, $2.6 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. See "Lending Activities--General."
 
    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 a total of $26.9
million in three affordable housing apartment buildings at December 31, 1996.
See "--Subsidiaries of the Bank" and "--Regulation -Federal Regulation of
State-Chartered Savings Banks."
 
    At December 31, 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
10.1%, 12.8% and 14.0%, 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."
 
    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.
 
FORWARD-LOOKING STATEMENTS
 
    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 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," "believe" 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, changes in levels of market interest rates,
credit risks 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 does not undertake, and specifically disclaims any obligations,
to revise any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
 
                                       2
<PAGE>
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 December 31, 1996 the Company's gross loan portfolio totaled $1.4
billion. The Company's unaccreted purchase discounts and fees at December 31,
1996 totaled $344.3 million. The Company's gross loan portfolio at December 31,
1996 was comprised primarily of one- to four-family residential mortgage loans
(19.4%), commercial real estate loans (27.2%) and multi-family residential real
estate loans (32.7%). The balance of the gross loan portfolio included land
loans (6.7%), construction and development loans (5.2%), consumer loans (6.4%)
and commercial business loans (2.4%). At December 31, 1996 the Company's net
loan portfolio totaled $1.1 billion. The Company's net loan portfolio at
December 31, 1996 was comprised primarily of one- to four-family residential
mortgage loans (21.7%), commercial real estate loans (26.6%) and multi-family
residential real estate loans (30.6%). The balance of the net loan portfolio
included land loans (7.0%), construction and development loans (5.3%), consumer
loans (7.4%) and commercial business loans (1.4%).
 
    At December 31, 1996, approximately 20.4% 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
19.5% and 13.3% of the Company's gross loan portfolio, respectively. At December
31, 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 December 31, 1996, the Bank's loan to one borrower limit
was $21.3 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated borrowers was $22.5 million, net (which amount
was in compliance with the Bank's loan to one borrower limitation at the time of
origination) which was secured by 16 multi-family properties acquired from HUD
in September 1996. At that time, because the relationship totaled $41.0 million,
net, the Bank sold a $18.5 million loan participation to Beal Financial. These
loans were non-performing at the time of purchase. Subsequent to December 31,
1996 seven loans were repaid in full reducing the Bank's and Beal Financial's
balances to approximately $13.0 million and $10.7 million, net. The Bank is
currently in the process of foreclosing on the remaining properties. The next
largest relationship totaled $19.6 million, net, and consisted of nine letters
of credit aggregating $17.6 million, net, secured by a pledge of mortgage-backed
securities with a market value of $18.3 million at December 31, 1996 and the
balance of $2.0 million, secured by first liens on three small office buildings
located in Houston, Texas. The Bank's third largest relationship consists of
first and second mortgages on a multi-family property located in Massachusetts
acquired from HUD, totaling $15.0 million, net at December 31, 1996. This loan
is performing in accordance with its forbearance agreement. See "Regulation" for
a discussion of the Bank's loans-to-one borrower limit.
 
    The Company has no other loans in excess of $15.0 million, net to any
borrower or group of related borrowers but had five such lending relationships
in excess of $10.0 million, net (aggregating $64.4 million), an additional 10
such lending relationships in excess of $7.5 million, net (aggregating $83.4
million), an additional 10 such lending relationships in excess of $5.0 million,
net (aggregating $58.1 million) and an additional 67 such lending relationships
in excess of $2.0 million, net (aggregating $193.5 million). At December 31,
1996, 13 of these lending relationships in excess of $2.0 million, net,
aggregating $63.4 million were non-performing. See "--Loan Delinquencies and
Non-Performing Assets."


                                        3 
<PAGE>

    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,                                          December 31,
                                --------------------------------------------------------------------------------------------------
                                      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  
Loans held for sale...........      --                  --                  --                    866                  --
                                -------            --------            --------              --------             --------  
Total loans receivable, net...  $57,768            $100,810            $219,914              $492,302             $897,414  
                                -------            --------            --------              --------             --------  
                                -------            --------            --------              --------             --------  
 
<CAPTION>
                                    December 31,
                                       1996
                                ------------------
<S>                             <C>        <C>
                                 AMOUNT    PERCENT
                                ---------  -------
Real Estate Loans:
One- to four-family...........  $ 276,591   19.37%
Commercial....................    388,460   27.20
Multi-family..................    466,697   32.68
Construction and
  development.................     74,437    5.21
Land..........................       8.21    6.70
                                ---------  -------
Total real estate loans.......  1,301,869   91.16
Other Loans:
Consumer Loans:
One- to four-family-- junior
  liens.......................     77,528    5.43
Timeshares....................      6,446     .45
Other.........................      7,095     .50
                                ---------  -------
Total consumer loans..........     91,069    6.38
Commercial business loans.....     35,131    2.46
                                ---------
Total loans...................   1,428,069  100.00%
                                           -------
                                           -------
Less
Loans in process..............     16,364
Deferred fees and discounts...    344,312
Allowance for loan losses.....     13,189
                                  -------
Total loans receivable, net... $1,054,204
                               ----------
                               ----------
</TABLE>

                                       4
<PAGE>

    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 December 31,
1996.
 
<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31, 1996
                                      -------------------------------------------------------------------------------------
<S>                                   <C>           <C>        <C>         <C>                    <C>           <C>
                                                                                                                 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)
REAL ESTATE LOANS:                                                              
One- to four-family -first liens....  $    276,591  $  --      $   45,368        $   3,183        $    228,040       16.40%
Commercial..........................       388,460     --         104,676            2,706             281,078       26.95
Multi-family........................       466,697     --         139,896            1,157             325,644       29.98
Construction and development........        74,437     16,364       1,018                7              57,048        1.37
Land................................        95,684     --          20,908              596              74,180       21.85
                                      ------------  ---------  ----------          -------        ------------       -----
Total real estate loans.............     1,301,869     16,364     311,866            7,649             965,990       23.96
OTHER LOANS:
Consumer Loans:
One- to four-family -junior liens...        77,528     --           8,592            1,680              67,256       11.08
Timeshares..........................         6,446     --           1,297              372               4,777       20.12
Other...............................         7,095     --           2,293            1,135               3,667       32.32
                                      ------------  ---------  ----------          -------        ------------       -----
Total consumer loans................        91,069     --          12,182            3,187              75,700       13.38
Commercial business loans...........        35,131     --          20,264            2,353              12,514       57.68
                                      ------------  ---------  ----------          -------        ------------       -----
Total other loans...................       126,200     --          32,446            5,540              88,214       25.71
Total loans.........................     1,428,069     16,364     344,312           13,189           1,054,204       24.11
                                      ------------  ---------  ----------          -------        ------------       -----
Less:
Loans in process....................        16,364    (16,364)     --               --                 --
Deferred fees and discounts.........       344,312     --        (344,312)          --                 --
Allowance for losses................        13,189     --          --              (13,189)            --
                                      ------------  ---------  ----------          -------        ------------       -----
Total loans receivable, net.........  $  1,054,204  $  --      $   --            $  --            $  1,054,204
                                      ------------  ---------  ----------          -------        ------------       -----
                                      ------------  ---------  ----------          -------        ------------       -----
</TABLE>
                                       5
<PAGE>

    CONTRACTUAL PRINCIPAL REPAYMENTS.  The following schedule illustrates the 
contractual maturity of the Company's loan portfolio at December 31, 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
                     ----------------------------------------------------------------
DUE DURING                                                     CONSTRUCTION
PERIODS ENDING       ONE- TO FOUR-                                 AND                               COMMERCIAL
DECEMBER 31,            FAMILY      MULTI-FAMILY  COMMERCIAL   DEVELOPMENT     LAND      CONSUMER     BUSINESS       TOTAL
-------------------  -------------  ------------  -----------  ------------  ---------  -----------  -----------  ------------
                                                              (DOLLARS IN THOUSANDS)
<S>                  <C>            <C>           <C>          <C>           <C>        <C>          <C>          <C>
1997...............   $    15,595    $   7,839     $  33,982    $   14,190   $   9,516   $   4,234    $   2,617   $     87,973
1998 to 2001.......        30,433       58,722       123,522        38,157      48,076      10,152        5,437        314,499
2002 and                                         
  following........       185,195      162,303        99,049         4,708      14,264      51,255        4,910        521,684
                     -------------  -----------   -----------  ------------  ---------  -----------  -----------  ------------
    Total..........       231,223      228,864       256,553        57,055      71,856      65,641       12,964        924,156
Nonaccrual loans...       --            97,937        27,231        --           2,920      13,246        1,903        143,237
                                                 
Less:                                            
  Allowance for                                  
    loan losses....         3,183        1,157         2,706             7         596       3,187        2,353         13,189
                     -------------  -----------   -----------  ------------  ---------  -----------  -----------  ------------
  Total loans                                    
    receivable,                                  
    net............   $   228,040    $ 325,644     $ 281,078    $   57,048   $  74,180   $  75,700    $  12,514   $  1,054,204
                     -------------  -----------   -----------  ------------  ---------  -----------  -----------  ------------
                     -------------  -----------   -----------  ------------  ---------  -----------  -----------  ------------
</TABLE>
                                       6
<PAGE>

    The total amount of gross loans due after December 31, 1997, which have
predetermined interest rates is $542.5 million, while the total amount of gross
loans due after such date which have floating or adjustable interest rates is
$293.7 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 December 31, 1996, the Company's 
gross real estate collateralized loans (excluding junior liens secured by 
one- to four-family real estate totaling $77.5 million) were geographically 
distributed as follows:
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
TOTAL REAL ESTATE SECURED                              BALANCE AT      PERCENT       BALANCE AT
LOANS BY GEOGRAPHIC                                   DECEMBER 31,    OF TOTAL      DECEMBER 31,      PERCENT OF
LOCATION                                                  1996       OUTSTANDING        1996        NON-PERFORMING
----------------------------------------------------  ------------  -------------  --------------  -----------------
<S>                                                   <C>           <C>            <C>             <C>
Texas...............................................   $  265,334          20.4%     $   27,884              8.5%
California..........................................      250,353          19.2          55,821             17.0
Florida.............................................      178,192          13.7         109,697             33.5
Illinois............................................       57,278           4.4             876               .3
Massachusetts.......................................       55,344           4.3           6,447              2.0
Colorado............................................       49,770           3.8           7,659              2.3
Louisiana...........................................       39,137           3.0          25,501              7.8
All others..........................................      406,461          31.2          94,029             28.7
                                                      ------------        -----    --------------          -----
Total real estate loan portfolio....................   $1,301,869         100.0%     $  327,914            100.0%
                                                      ------------        -----    --------------          -----
                                                      ------------        -----    --------------          -----
</TABLE>
 
    At December 31, 1996, there were no other loan concentrations in any other
state which exceeded three percent of the total real estate loan portfolio.
 
                                       7
<PAGE>

    The following tables set forth the geographic distribution of the Company's
real estate loans by loan type at December 31, 1996.
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
                                                       BALANCE AT      PERCENT       BALANCE AT
                ONE- TO FOUR-FAMILY                   DECEMBER 31,    OF TOTAL      DECEMBER 31,      PERCENT OF
            LOANS BY GEOGRAPHIC LOCATION                  1996       OUTSTANDING        1996        NON-PERFORMING
----------------------------------------------------  ------------  -------------  --------------  -----------------
<S>                                                   <C>           <C>            <C>             <C>
California..........................................   $   56,668          20.5%     $    4,249             14.0%
Texas...............................................       44,702          16.2           3,390             11.2
Florida.............................................       24,763           9.0           2,255              7.4
Massachusetts.......................................       16,280           5.9           1,950              6.4
Colorado............................................       12,542           4.5           7,659             25.2
Virginia............................................        9,998           3.6             284               .9
Alabama.............................................        9,733           3.5             235               .8
Maryland............................................        9,150           3.3             708              2.3
New Jersey..........................................        8,374           3.0           2,599              8.6
All others..........................................       84,381          30.5           7,053             23.2
                                                      ------------        -----         -------            -----
Total One- to Four-Family Loans.....................   $  276,591         100.0%     $   30,382            100.0%
                                                      ------------        -----         -------            -----
                                                      ------------        -----         -------            -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
                                                       BALANCE AT      PERCENT       BALANCE AT
               COMMERCIAL REAL ESTATE                 DECEMBER 31,    OF TOTAL      DECEMBER 31,      PERCENT OF
            LOANS BY GEOGRAPHIC LOCATION                  1996       OUTSTANDING        1996        NON-PERFORMING
----------------------------------------------------  ------------  -------------  --------------  -----------------
<S>                                                   <C>           <C>            <C>             <C>
California..........................................   $  111,929          28.8%     $   33,236             39.7%
Texas...............................................       69,351          17.9           4,121              4.9
Florida.............................................       46,869          12.1          10,536             12.6
Illinois............................................       19,070           4.9             472               .6
Colorado............................................       14,439           3.7          --               --
Arizona.............................................       13,354           3.4             309               .4
Louisiana...........................................       12,417           3.2          11,124             13.3
All others..........................................      101,031          26.0          23,923             28.6
                                                      ------------        -----         -------            -----
Total Commercial Real Estate Loans..................   $  388,460         100.0%     $   83,721            100.0%
                                                      ------------        -----         -------            -----
                                                      ------------        -----         -------            -----
</TABLE>
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
                                                       BALANCE AT      PERCENT       BALANCE AT
               MULTI-FAMILY LOANS BY                  DECEMBER 31,    OF TOTAL      DECEMBER 31,      PERCENT OF
                GEOGRAPHIC LOCATION                       1996       OUTSTANDING        1996        NON-PERFORMING
----------------------------------------------------  ------------  -------------  --------------  -----------------
<S>                                                   <C>           <C>            <C>             <C>
Florida.............................................   $   98,478          21.1%     $   94,054             46.0%
Texas...............................................       55,996          12.0          19,566              9.6
California..........................................       51,382          11.0          17,684              8.7
Massachusetts.......................................       32,362           6.9           1,428               .7
Michigan............................................       25,062           5.4           8,827              4.3
Louisiana...........................................       23,263           5.0          14,216              7.0
Illinois............................................       17,997           3.9             209               .1
Colorado............................................       17,426           3.7          --               --
Ohio................................................       16,547           3.5           9,631              4.7
Missouri............................................       15,257           3.3           1,199               .6
Georgia.............................................       15,141           3.2           2,912              1.4
All others..........................................       97,786          21.0          34,638             16.9
                                                      ------------        -----    --------------          -----
Total Multi-Family Loans............................   $  466,697         100.0%     $  204,364            100.0%
                                                      ------------        -----    --------------          -----
                                                      ------------        -----    --------------          -----
</TABLE>
 
                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                    NON-PERFORMING
                                                       BALANCE AT      PERCENT         BALANCE AT
            CONSTRUCTION AND DEVELOPMENT              DECEMBER 31,    OF TOTAL        DECEMBER 31,          PERCENT OF
            LOANS BY GEOGRAPHIC LOCATION                  1996       OUTSTANDING          1996            NON-PERFORMING
----------------------------------------------------  ------------  -------------  -------------------  -------------------
<S>                                                   <C>           <C>            <C>                  <C>
Texas...............................................   $   72,207          97.0%        $  --
                                                                                                                   ---%
Colorado............................................        2,230           3.0            --                      --
                                                       -----------        -----         -----                      ---
Total Construction and Development Loans............   $   74,437         100.0%        $  --                      ---%
                                                       -----------        -----         -----                      ---
                                                       -----------        -----         -----                      ---
</TABLE>
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
                                                       BALANCE AT      PERCENT       BALANCE AT
                     LAND LOANS                       DECEMBER 31,    OF TOTAL      DECEMBER 31,       PERCENT OF
               BY GEOGRAPHIC LOCATION                     1996       OUTSTANDING        1996         NON-PERFORMING
----------------------------------------------------  ------------  -------------  ---------------  -----------------
<S>                                                   <C>           <C>            <C>              <C>
California..........................................   $   30,375          31.7%      $     651               6.9%
Texas...............................................       23,079          24.1             808               8.6
Illinois............................................       14,581          15.2          --                --
Florida.............................................        8,082           8.4           2,853              30.2
Colorado............................................        3,133           3.3          --                --
New Mexico..........................................        2,959           3.1             358               3.8
All others..........................................       13,475          14.1           4,777              50.6
                                                      ------------        -----          ------             -----
Total Land Loans....................................   $   95,684         100.0%      $   9,447             100.0%
                                                      ------------        -----          ------             -----
                                                      ------------        -----          ------             -----
</TABLE>
 
    The following table sets forth the geographic distribution of the Company's
junior lien loans secured by one- to four-family real estate at December 31,
1996.
 
<TABLE>
<CAPTION>
                                                      OUTSTANDING                  NON-PERFORMING
                                                       BALANCE AT      PERCENT       BALANCE AT
             ONE- TO FOUR-FAMILY JUNIOR               DECEMBER 31,    OF TOTAL      DECEMBER 31,      PERCENT OF
         LIEN LOANS BY GEOGRAPHIC LOCATION                1996       OUTSTANDING        1996        NON-PERFORMING
----------------------------------------------------  ------------  -------------  --------------  -----------------
<S>                                                   <C>           <C>            <C>             <C>
California..........................................   $   18,372          23.7%     $    5,058             36.5%
Texas...............................................       16,543          21.3           1,570             11.3
New York............................................        5,789           7.5             823              5.9
Louisiana...........................................        5,783           7.5             385              2.8
Connecticut.........................................        5,028           6.5           1,242              9.0
Florida.............................................        5,020           6.5             232              1.7
New Jersey..........................................        3,041           3.9           1,059              7.6
Arizona.............................................        3,009           3.9             131               .9
All others..........................................       14,943          19.3           3,363             24.3
                                                      ------------        -----         -------            -----
Total One- to Four-Family Junior Lien Loans.........   $   77,528         100.0%     $   13,863            100.0%
                                                      ------------        -----         -------            -----
                                                      ------------        -----         -------            -----
</TABLE>
 
                                       9

<PAGE>

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.
 
    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, Senior Vice President-Lending Saurenmann, Senior Vice
President--Commercial Loans Enright and Vice President--Loan Servicing O'Neal
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. (Any three
members shall constitute a quorum.)
 
    The Bank's Senior Loan Committee, comprised of Chairman Beal, President
Meek, Executive Vice President Farmer, Senior Vice President--Lending Saurenmann
and Senior Vice President--Commercial Loans Enright, may approve 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. (Any three members shall
constitute a quorum.)
 
    The Bank's Executive Loan Committee, comprised of Chairman Beal, President
Meek and Directors Blanton, Fults, Goldstein and Weinstein (with Directors
Farmer, Arnold and Eastland substituting for a missing member) may approve, with
at least three affirmative votes, 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. (A quorum is defined as four members, two of which must be
non-officer Directors.)
 
                                       10

<PAGE>

    Loan sales, sales of foreclosed assets and other significant loan related
transactions are approved in accordance with written policies requiring approval
by a designated officer, two officers or by an appropriate Committee based on
the type of transaction and the net book value of the asset.
 
    In addition to making substantial investments in discounted loans, the
Company originates a limited amount of commercial real estate and other loans.
During calendar year 1996, the Company discontinued both its origination and
purchase of home improvement loans through its correspondent lending
relationships and began winding down its construction lending activities.
 
    Originations, Purchases and Sales of Mortgage Loans. During fiscal years
ending June 30, 1996, 1995 and 1994, the Company purchased $524.7 million,
$346.2 million and $124.7 million of loans, net of discount, respectively.
During the six months ending December 31, 1996, the Company purchased $273.9
million of loans, net of discount.
 
    The Company services $1.1 billion 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 150 other
entities to service the remaining $364.0 million of its gross loans. Of this
amount, at December 31, 1996, five entities individually service loans in excess
of $10.0 million, aggregating $235.9 million, or 64.8% of the Company's loans
serviced by others. No other entity services individually in excess of $9.6
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.
 
                                       11

<PAGE>

    The following table shows the loan origination, purchase, sale and repayment
activities of the Company for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                      SIX MONTHS
                                                                         ENDED
                                         YEAR ENDED JUNE 30,          DECEMBER 31,
                                 ----------------------------------   ------------
                                    1994         1995        1996         1996
                                 -----------  ----------  ----------  ------------
<S>                              <C>          <C>         <C>         <C>
                                             (DOLLARS IN THOUSANDS)
Originations by type:
Adjustable rate:
Real estate--one- to four-      
  family.......................  $    83         $    240    $   --       $  2,013
  -multi-family................    5,550              529       2,452        4,835
  -commercial..................    1,300            9,687       3,942          495
  -construction................   47,666           53,840      97,887       46,998
  -land........................    3,380            5,625      17,534        7,700
Commercial Business............    1,190            3,400         780           --
                                 -------         --------    --------     --------
Total adjustable-rate..........   59,169           73,321     122,595       62,041
Fixed rate:
Real estate--one- to four-     
  family.......................       --               --          --           --
  -multi-family................       --               --       1,236           --
  -commercial..................       --               --      10,198        5,621
  -land........................       --               --       1,312           --
Consumer--one- to four-family    
  junior liens.................    8,087               --          42           --
  -other.......................       --               --       3,032        1,237
Commercial Business............       --            3,093          17          500
                                 -------         --------    --------     --------
Total fixed-rate...............    8,087            3,093      15,837        7,358
                                 -------         --------    --------     --------
Total loans originated.........   67,256           76,414     138,432        69,399
Purchases:
Real estate--one- to four-       
  family.......................   18,917          253,107      82,291       28,165
  -multi-family................   36,268           68,512     314,616      192,291
  -commercial..................   79,930           52,474     226,495       97,176
  -land........................       --           25,563      62,074        8,992
Consumer -one- to four-family--
  junior liens..................   6,702           21,251      34,947      34,524
  -timeshares...................  16,928              --          --           --
  -other........................   3,761            1,123       5,105          --
Commercial business.............   5,669           33,426       7,223       8,459
                                 -------         --------    --------     --------
  Total loans purchased, gross.. 168,175          455,456     732,751      369,607
Purchase discounts.............   43,456          109,284     208,078       95,722
                                 -------         --------    --------     --------
Total loans purchased, net.....  124,719          346,172     524,673      273,885
                                 -------         --------    --------     --------
Percentage of purchase           
  discounts to to total gross
  loans purchased..............     25.8%            24.0%       28.4%        25.9%
                                 -------         --------    --------     --------
                                 -------         --------    --------     --------
Sales and Repayments:
Real estate--one- to four-   
  family.......................       --           52,257       1,886           --
  -multi-fami..................       --            7,283       5,644        6,450
  -commercial..................    1,647            2,616       3,102           --
Consumer -one- to four-family--
  junior liens.................      --             5,007          --            3
Commercial business............      --                --          --           --
                                 -------         --------    --------     --------
Total loans sold...............    1,647           67,163      10,632        6,453
Principal repayments...........   57,600           70,131     258,197      181,425
                                 -------         --------    --------     --------
Total sales and repayments.....   59,247          137,294     268,829      187,878
Other reductions:
Transfers to real estate         
  owned........................    4,274            7,725      22,118       26,510
Unearned discounts.............  (13,713)         (19,327)    (38,926)     (30,451)
Decrease in other items, net...   23,063           24,506         277        1,200
                                 -------         --------    --------     --------
Net Increase...................  $119,104        $272,388    $410,807     $158,147
                                 -------         --------    --------     --------
                                 -------         --------    --------     --------
</TABLE>
 
                                       12

<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 loan to a 

                                       13

<PAGE>

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 December 31, 1996, the
Company's one- to four-family residential mortgage loans totaled $276.6 million,
or 19.4% of the Company's gross loan portfolio. At that date, the Company's net
one- to four-family residential mortgage loan portfolio totaled $228.0 million,
or 21.6% 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 December
31, 1996, $388.5 million, or 27.2% of the Company's gross loan portfolio,
consisted of 826 loans secured by commercial real estate and $466.7 million, or
32.7% of the Company's gross loan portfolio, consisted of 495 loans secured by
multi-family residential properties. At that date, $281.1 million, or 26.7% of
the Company's net loan portfolio, consisted of loans secured by commercial real
estate and $325.6 million, or 30.9% of the Company's net loan portfolio,
consisted of loans secured by multi-family residential properties.
 
                                       14

<PAGE>

    Included in the multi-family residential portfolio are 89 loans aggregating
$307.4 million in gross principal amount at December 31, 1996 ($199.5 million
net of purchase discount). These loans were purchased from HUD primarily in
three purchases occurring in October 1995, September 1996 and December 1996. All
of these HUD Loans are secured by first mortgage liens. In addition, the Company
has second mortgage liens on two of these properties.
 
    More than half of the properties which secure the HUD Loans are located in
four states, Florida, Massachusetts, Michigan and Louisiana, which had $93.4
million, $24.0 million, $23.8 million, $22.3 million gross principal amount of
loans, respectively. The balance of the loans are located in 21 states
throughout the country.
 
    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
canceled pursuant to its terms or there is a default under the PWA.
 
    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.
 
    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), 

                                       15
<PAGE>

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 December 31, 1996, $288.1 million, 
or 33.7% 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 $123.3 million.
 
    Construction, Development and Land Lending. The Company initiated a 
construction and development lending program in January 1993. In August 1996, 
the Company decided to cease construction lending while continuing 
development lending. The Company originates development loans to developers, 
based on demonstrated experience and financial condition, primarily 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. At 
December 31, 1996, development loans totaled $60.7 million or 4.3% of its 
gross loan portfolio and $45.0 million, net, or 4.3% of the Company's net 
loan portfolio. At December 31, 1996 the Bank has five development loans in 
excess of $2.0 million, net of $6.9 million, $4.9 million, $4.1 million, $3.9 
million and $2.8 million, all of which are to develop properties located in 
Texas and all of which are performing in accordance with their respective 
repayment terms. 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 December 31, 1996, the Company's construction loan 
portfolio totaled $13.7 million. At that date, the Company's construction 
loan portfolio, totaled $12.0 million, or 1.1% 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 required 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 established a guidance limit which represents the maximum amount
of credit the Company will consider lending to the builder. At December 31,
1996, the Company had residential construction lines of credit outstanding to
approximately 20 builders. The Company extended a builder a loan for up to a
maximum of $400,000 per house. The Company obtains personal guarantees for
substantially all of its construction loans. At December 31, 1996, the Company
had 149 construction loans to builders of one- to four-family residences
totaling $13.7 million gross (of which approximately 29.5% represented pre-sold
homes) of which $12.1 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 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 included a submission to the Company of
accurate plans, specifications and costs of the project to be constructed. The
Company also reviewed 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
were 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.
 
                                       16

<PAGE>

    In addition to construction and development 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 December 31, 1996,
land loans totaled $95.7 million, or 6.7% of the Company's gross loan portfolio.
At that date, net land loans totaled $74.2 million, or 7.0% of the Company's net
loan portfolio. At December 31, 1996 the Bank has four land loans in excess of
$2.0 million, net of $14.5 million, $10.6 million, $7.5 million, and $4.1
million, secured by land in the metropolitan areas of Chicago, Los Angeles,
Dallas and Los Angeles, respectively and all of which are performing in
accordance with their respective repayment terms. 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 history credit no less
frequently than semi-annually through an independent credit reporting service.
See "--Loan Delinquencies and Non-Performing Assets."
 
    At December 31, 1996, there were no construction loans and 42 land loans
with aggregate gross principal balances of $9.4 million delinquent 90 days or
more. At that date, net non-performing land loans totaled $2.9 million.
 
    CONSUMER LENDING.  The Company originates loans secured by savings deposits
and has purchased other consumer loans, including loans secured by timeshare
agreements. At December 31, 1996, the gross consumer loan portfolio totaled
$91.1 million, or 6.4% of the gross loan portfolio, and was predominately
comprised of fixed-rate loans. At that date, net consumer loans totaled $75.7
million, or 7.2% 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.
 
                                       17
<PAGE>
    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 December 31, 1996, there were 1,202 consumer loans with aggregate
gross principal balances of $17.3 million ($13.2 million, net of purchase
discount) delinquent in excess of 90 days.
 
    COMMERCIAL BUSINESS LENDING.  At December 31, 1996, the Company had $35.1
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 $12.5 million of net commercial business loans outstanding, or 1.2%
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 ACTIVITIES.  The Company conducts its foreign lending in a
subsidiary, 100% owned by Beal Bank, known as Foreign Lending Corporation. This
lending is currently limited to Mexico, with the Texas Department posing no
objection to this lending activity. The Bank's Board of Directors, with no
objection from the Texas Department has set limits of $5.0 million per borrower,
a requirement of underlying collateral with an appraised value at least equal to
twice the loan amount and no more than $25.0 million in aggregate loans under
this program. These limits may be increased in the future, with the concurrence
of the Texas Department, as the subsidiary continues to develop relationships
with borrowers that meet the programs criteria.
 
    The Company will opportunistically engage in lending in other countries.
Foreign activity in any other country or expansion of the current Mexican
program, will require prior written approval from the Texas Department.
 
    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. Therefore, all of the Bank's lending in
Mexico requires that the loans be repaid in United States currency. Further,
there may be less government regulation in various countries, and difficulty in
enforcing legal 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. The
Company's management has limited experience in the area of foreign lending or
investment.
 
    As of December 31, 1996, one loan with a book balance of $4.5 million had
been funded under this program. See "--Subsidiaries--Foreign Lending
Corporation."
 
    At December 31, 1996, the Company had less than $1.5 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.
 
                                      18

<PAGE>

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.
 
    The following table sets forth the Company's loan delinquencies by type, by
amount and by percentage of type at December 31, 1996.
<TABLE>
<CAPTION>
                                                        LOANS DELINQUENT FOR:
                               ------------------------------------------------------------------------
                                           60-89 DAYS                        90 DAYS AND OVER            
                               ----------------------------------  ------------------------------------  
                                                        PERCENT                               PERCENT    
                                                        OF LOAN                               OF LOAN    
                                 NUMBER      AMOUNT     CATEGORY     NUMBER       AMOUNT     CATEGORY    
                               -----------  ---------  ----------  -----------  ----------  -----------  
                                                       (DOLLARS IN THOUSANDS)                            
<S>                            <C>          <C>        <C>         <C>          <C>         <C>          
Real Estate:                                                                                             
  One- to four-family -first                                                                             
    liens....................         137   $   3,116        1.13%        712   $   30,382       10.98%  
  Commercial.................          10       2,045         .53          97       83,721       21.55   
  Multi-family...............           7       3,018         .65          63      204,364       43.79   
  Construction or                                                                                        
    development..............      --          --          --          --          --             --     
  Land.......................           5         534         .56          42        9,447        9.87   
                               -----------  ---------  ----------       -----   ----------       -----   
  Total real estate..........         159       8,713         .67         914      327,914       25.19   
Other Loans:                                                                                             
  Consumer Loans:                                                                                        
    One-to four-family junior                                                                            
      lien...................          98       1,697        2.19         660       13,863       17.88   
  Timeshares.................          29          47         .73         490        1,624       25.19   
  Other......................           7          32         .45          52        1,835       25.86   
                               -----------  ---------  ----------       -----   ----------       -----   
    Total consumer loans.....         134       1,776        1.95       1,202       17,322       19.02   
Commercial business..........           4          25         .07          75        9,562       27.22   
                               -----------  ---------  ----------       -----   ----------       -----   
  Total other loans..........         138       1,801        1.43       1,277       26,884       21.30   
                               -----------  ---------  ----------       -----   ----------       -----   
  Total loans................         297      10,514         .74       2,191      354,798       24.84   
Less:                                                                                                    
Unearned discounts...........                   1,982                              151,504               
                                            ---------                           ----------
Total Loans, net.............               $   8,532         .81               $  203,294       19.28   
                                            ---------                           ----------
                                            ---------                           ----------
<CAPTION>
                                     TOTAL DELINQUENT LOANS        
                               ----------------------------------- 
                                                         PERCENT   
                                                         OF LOAN   
                                 NUMBER      AMOUNT     CATEGORY   
                               -----------  ---------  ----------- 
                                      (DOLLARS IN THOUSANDS)       
<S>                            <C>          <C>        <C>         
Real Estate:                                                       
  One- to four-family -first                                       
    liens....................         849   $  33,498       12.11% 
  Commercial.................         107      85,766       22.08  
  Multi-family...............          70     207,382       44.44  
  Construction or                                                  
    development..............        --          --           --   
  Land.......................          47       9,981       10.43  
                                    -----   ---------       -----  
  Total real estate..........       1,073     336,627       25.86  
Other Loans:                                                       
  Consumer Loans:                                                  
    One-to four-family junior                                      
      lien...................         758      15,560       20.07  
  Timeshares.................         519       1,671       25.92  
  Other......................          59       1,867       26.31  
                                    -----   ---------              
    Total consumer loans.....       1,336      19,098       20.97  
Commercial business..........          79       9,587       27.29  
                                    -----   ---------              
  Total other loans..........       1,415      28,685       22.73  
                                    -----   ---------              
  Total loans................       2,488     365,312       25.58  
Less:                                                              
Unearned discounts...........                 153,486              
                                            ---------              
Total Loans, net.............               $ 211,826       20.09  
                                            ---------              
                                            ---------              
</TABLE>
 
    At December 31, 1996, the Company's non-performing loans included 300 loans
aggregating $31.6 million for which foreclosure proceedings had been commenced.
At that date, 486 loans involved borrowers involved in bankruptcy proceedings
representing approximately $114.9 million of delinquent loans in the Company's
loan portfolio.
 
                                      19

<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,                          DECEMBER 31,
                                                       ------------------------------------------------------  -------------
                                                         1992       1993       1994       1995        1996          1996
                                                       ---------  ---------  ---------  ---------  ----------  -------------
<S>                                                    <C>        <C>        <C>        <C>        <C>         <C>
                                                                              (DOLLARS IN THOUSANDS)
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       59,903
  Construction.......................................     --            --         --          93         156          --
  Multi-family.......................................     --            580      4,883      9,507      51,934      174,046
  Land...............................................     --          2,433      3,282      8,056       7,961        4,687
Consumer:
  One- to four-family--junior liens..................      14           193      1,185      2,850      10,157       13,863
  Timeshares.........................................     308           554      1,019      1,673       1,630        1,624
  Other consumer.....................................      98           525        476        545         641        1,835
  Commercial business................................     --             78      2,320      7,357       7,777        9,562
  Purchase discounts.................................  (1,230)       (1,864)   (14,063)   (22,011)    (59,978)    (122,283)
                                                       -------    ---------  ---------  ---------  ----------  ------------
      Total (net)....................................   1,822         4,479     16,779     35,979      55,282      143,237
Accruing loans delinquent more than
  90 days:
Real estate:
  One- to four-family................................     --            --         583        --       21,159       30,382
  Multi-family.......................................     --            --         106        --       55,247       30,318
  Commercial.........................................     --            200         77        --       17,811       23,818
  Land...............................................     --            --         --         --        5,444        4,760
Consumer:
  One to four-family--junior liens...................     202           --          80        --          --           --
  Purchase discounts.................................     (77)          (62)      (347)       --      (32,363)     (29,221)
                                                       ---------    -------  ---------  ---------  ----------  ------------
      Total (net)....................................     125           138        499        --       67,298       60,057
Foreclosed assets:
Real estate:
  One- to four-family................................      82           651        481      1,525       1,799        4,858
  Commercial.........................................     269           302      1,456      3,026       9,148       13,466
  Multi-family.......................................     --            --         --       3,633      15,010       24,781
  Construction.......................................     --          1,987        --         --          300          250
  Land...............................................      13           --         365        570       1,456          872
Consumer:
  Timeshares.........................................     --            --         --          36          32          402
                                                       ---------  ---------  ---------  ---------  ----------  ------------
      Total (net)....................................     364         2,940      2,302      8,790      27,745       44,629
                                                       ---------  ---------  ---------  ---------  ----------  ------------
Total non-performing assets..........................  $2,311     $   7,557  $  19,580  $  44,769  $  150,325   $  247,923
                                                       ---------  ---------  ---------  ---------  ----------  ------------
                                                       ---------  ---------  ---------  ---------  ----------  ------------
Total as a percentage of total assets................    3.58%         6.36%      7.95%      7.07%      11.84%       17.77%
                                                       ---------  ---------  ---------  ---------  ----------  ------------
                                                       ---------  ---------  ---------  ---------  ----------  ------------
</TABLE>
 
    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.
 
                                      20

<PAGE>

    For the six months ended December 31, 1996 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $6.3 million. The amount that was included in
interest income on such loans was $3.5 million for the six months ended December
31, 1996.
 
    Non-Accruing Loans. As of December 31, 1996, the Company had 
approximately $143.2 million in net non-accruing loans, which constituted 
13.6% of the Company's net loan portfolio. The following is a brief summary 
of each non-accruing loan with a net principal balance of over $2.5 million 
at December 31, 1996.
 
    Apartment Complex, Ann Arbor, Michigan. The Company purchased this
non-performing loan in December 1996. The net book balance at December 31, 1996
of $7.5 million is secured by a first lien on an apartment complex of
approximately 312 units. The Company intends to proceed with foreclosure
proceedings.
 
    Apartment Complex, Fresno, California. The Company purchased this loan in
December 1996. The net book balance at December 31, 1996 of $7.8 million is
secured by a first lien on an apartment project of 284 units. The Company has
initiated foreclosure proceedings.
 
    Retirement Facility, Northern Florida. The Company purchased this loan in
fiscal 1996. The net book balance at December 31, 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.
 
    Apartment/Office Complex, Columbia, South Carolina. The Company purchased
this non-performing loan in November 1996. The net book balance at December 31,
1996 of $6.3 million is secured by a first lien on an apartment/office complex
consisting of approximately 240 units and a three story office building. The
Company has initiated foreclosure proceedings.
 
    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
December 31, 1996 was $3.8 million. The Company is attempting to foreclose on
the property and anticipates doing so in July, 1997. The Company has a receivor
in place collecting rents on its behalf. 

    Retirement Center, Southern Arizona. The Company purchased this loan in 
fiscal 1996. The net book balance at December 31, 1996 of $3.4 million is 
secured by a first lien on a retirement center with approximately 200 units. 
The borrower was performing in accordance with a PWA, which was cancelled by 
the Company in accordance with its terms. As a result, the borrower filed for 
bankruptcy in October, 1996.
 
    Apartment Complex, South Texas. The Company purchased this loan in fiscal
1996. The net book balance at December 31, 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 bankruptcy protection.
 
    Adult Congregate Living Facility, Miami, Florida. This non-performing loan
with a net book balance of $2.5 million at December 31, 1996 is secured by a
first lien on a 180 bed facility. Subsequent to December 31, 1996 the Company
initiated foreclosure proceedings due to the borrowers failure to pay an agreed
payment in November, 1996. The borrower subsequently filed for bankruptcy
protection.
 
    Accruing Loans Delinquent More than 90 Days. As of December 31, 1996, the
Company had $60.1 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 December 31, 
1996 net principal balance in excess of $2.5 million.
 
    Medical Office Complex, Jacksonville, Florida. The Company purchased this
non-performing loan in August 1996. The Company's net book balance at December
31, 1996 of $3.7 million is secured by four two-story medical office complexes.
The borrower filed for bankruptcy protection in 1996.
 
                                      21

<PAGE>

    Apartment Complex, Baton Rouge, Louisiana. The Company purchased this loan
in October 1995. The net book balance at December 31, 1996 of $2.9 million is
secured by a first lien on an apartment complex of approximately 200 units. The
loan became non-performing in August 1996. The Company has initiated foreclosure
proceedings.
 
    Apartment Complex, Carson City, Nevada. The Company purchased this
non-performing loan in October 1996. The net book balance at December 31, 1996
of $4.8 million is secured by a first lien on an apartment complex of
approximately 200 units. The borrower filed for bankruptcy protection prior to
the Company's purchase.
 
    Apartment Complex, Fresno, California. The Company purchased this
non-performing loan in October 1996. The net book balance at December 31, 1996
of $3.4 million is secured by a first lien on an apartment complex of
approximately 120 units. The borrower has subsequently filed for bankruptcy
relief prior to the Company's purchase.
 
    Apartment Complex, Hollywood, California. The Company purchased this
non-performing loan in October 1995. The net book balance at December 31, 1996
of $2.9 million is secured by a first lien on an apartment complex of
approximately 203 units. The Company intends to proceed with foreclosure
proceedings.
 
    FORECLOSED ASSETS.  As of December 31, 1996, the Company had approximately
$44.6 million in carrying value of foreclosed assets. Included in foreclosed
assets were 64 one- to four-family mortgage loans aggregating $4.9 million (of
which $1.3 million of assets are held by the Company's subsidiary, BRE-2), 48
commercial and multi-family real estate loans totaling $38.2 million (of which
$3.4 million of assets are held by the Company's subsidiary, BRE), seven
construction, development and land loans aggregating $1.1 million and four
consumer timeshare loans totaling $.4 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 December 31, 1996 the Company had approximately
eight loans totaling $7.7 million of net loans, all of which are commercial and
multi-family real estate 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
largest other loan of concern totaled $1.9 million, net, at December 31, 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, "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.
 
                                      22

<PAGE>

    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:


                                                      DECEMBER 31, 1996
                                                    ----------------------
                                                    (DOLLARS IN THOUSANDS)
   
   Substandard.................................            $168,554
   Doubtful....................................               1,409
   Loss........................................                  --
                                                           --------
         Total Classified Assets...............            $169,963
                                                           --------
                                                           --------

 
    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.
 
                                      23

<PAGE>

    The following table sets forth an analysis of the Company's allowance for
loan losses at the dates indicated.
 
<TABLE>
<CAPTION>
                                                                                                    SIX MONTHS
                                                             YEAR ENDED JUNE 30,                      ENDED
                                            -----------------------------------------------------  DECEMBER 31,
                                              1992       1993       1994       1995       1996         1996
                                            ---------  ---------  ---------  ---------  ---------  ------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>
Balance at beginning of period............    $189      $  550     $1,245     $3,547     $ 6,137     $11,832
Charge-offs:
  One- to four-family.....................      46          30        174        440         845       1,107
  Commercial..............................      --          --         36        534          28         220
  Multi-family............................      --          --         --         --          80          10
  Construction and development............      --          --         --         --          35          --
  Land....................................      --          --        203         39         362          60
  Consumer................................      --          59        173        449         858         581
  Commercial business.....................      --          --         --         --       1,177          --
                                               ---     -------     ------     ------      ------      ------
                                                46          89        586      1,462       3,385       1,978
Recoveries:
  One- to four-family.....................      --          --         --          2           1          --
  Consumer................................      --          --         --          5          18          18
  Commercial business.....................      --          --         --         --          17           3
                                               ---      ------     ------     ------      ------      ------
Net charge-offs...........................      46          89        586      1,455       3,349       1,957
Additions charged to operations...........     407         784      2,888      4,045       9,044       3,314
                                               ---      ------     ------     ------      ------      ------
Balance at end of period..................    $550      $1,245     $3,547    $ 6,137     $11,832     $13,189
                                               ---      ------     ------     ------      ------      ------
                                               ---      ------     ------     ------      ------      ------
Ratio of net charge-offs during the 
 period to average loans outstanding during
 the period...............................     .12%        .11%       .40%       .40%        .44%        .41%

Ratio of net charge-offs during the
 period to average non-performing assets..    2.86%       1.80%      4.32%      4.52%       2.95%       1.86%
</TABLE>
 
                                      24

<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                          PERCENT
                                        OF LOANS                         OF LOANS                         OF LOANS
                               LOAN     IN EACH                  LOAN    IN EACH                  LOAN    IN EACH
                 AMOUNT OF   AMOUNTS    CATEGORY   AMOUNT OF   AMOUNTS   CATEGORY   AMOUNT OF   AMOUNTS   CATEGORY
                 LOAN LOSS      BY      TO TOTAL   LOAN LOSS      BY     TO TOTAL   LOAN LOSS      BY     TO TOTAL
                 ALLOWANCE   CATEGORY    LOANS     ALLOWANCE   CATEGORY   LOANS     ALLOWANCE   CATEGORY   LOANS
                 ---------   --------   --------   ---------   --------  --------   ---------   --------  --------
                                                      (DOLLARS IN THOUSANDS)
<S>              <C>         <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     21.81%
Multi-family...      26       10,516      12.24        110     20,675      14.06        139     55,633      18.07
Commercial real
  estate.......       5       13,234      15.40        216     30,271      20.58        303     93,496      30.37
Construction
  and
  development..    --          1,600       1.86         17     3,893        2.65         50     27,100       8.80
Land...........    --          6,332       7.37        101     7,089        4.82         81     9,889        3.21
One- to
  four-family
  junior
  liens........       1        2,654       3.09         92     9,993        6.80         29     19,549       6.35
Timeshares.....       2           74        .09      --        1,599        1.09      --        18,249       5.93
Other
  consumer.....    --          6,442       7.50        200     3,747        2.55        151     7,139        2.32
Commercial
  business.....     112          919       1.07        200     7,253        4.93        151     9,662        3.14
Unallocated....     310        --         --           195      --         --         2,553      --         --
                 ---------   --------   --------   ---------   --------  --------   ---------   --------  --------
Total..........    $550       85,930     100.00%    $1,245     147,060    100.00     $3,547     307,886    100.00%
                 ---------              --------   ---------             --------   ---------             --------
                 ---------              --------   ---------             --------   ---------             --------
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
                            --------                          --------                         --------
                            --------                          --------                         --------

<CAPTION>
                                             JUNE 30,  
                  ----------------------------------------------------------------
                               1995                            1996
                  -----------------------------   --------------------------------
                                        PERCENT                           PERCENT
                                       OF LOANS                          OF LOANS
                               LOAN    IN EACH                  LOAN     IN EACH
                  AMOUNT OF  AMOUNTS   CATEGORY   AMOUNT OF    AMOUNTS   CATEGORY
                  LOAN LOSS     BY     TO TOTAL   LOAN LOSS      BY      TO TOTAL
                  ALLOWANCE  CATEGORY   LOANS     ALLOWANCE   CATEGORY    LOANS
                  ---------  --------  --------   ---------   ---------  --------
                                     (DOLLARS IN THOUSANDS)
<S>               <C>        <C>       <C>        <C>         <C>        <C>
One- to                     
 four-family...    $1,881    $237,585    35.70%    $ 3,153    $273,780     22.47%
Multi-family...       604    109,080     16.39         239     341,696     28.05
Commercial real             
  estate.......     1,276    124,985     18.78       2,788     321,385     26.38
Construction                
  and                       
  development..        88    51,284       7.71          19      85,133      6.99
Land...........       474    35,997       5.41         752     100,047      8.21
One- to                     
  four-family               
  junior                    
  liens........       577    44,999       6.76       1,873      50,146      4.12
Timeshares.....       595    11,668       1.75         374       7,809       .64
Other                       
  consumer.....       266    4,791         .72       1,138       8,373       .69
Commercial                  
  business.....       376    45,060       6.77       1,496      29,886      2.45
Unallocated....     --        --         --          --         --          --
                  ---------  --------  --------   ---------   ---------  --------
Total..........    $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
                             --------                         ---------
                             --------                         ---------
 
<CAPTION>
                             JUNE 30,  
                 --------------------------------
                           DECEMBER 31,
                 --------------------------------
                              1996
                 --------------------------------
                                         PERCENT
                                         OF LOANS
                                LOAN     IN EACH
                 AMOUNT OF    AMOUNTS    CATEGORY
                 LOAN LOSS       BY      TO TOTAL
                 ALLOWANCE    CATEGORY    LOANS
                 ---------   ----------  --------
                       (DOLLARS IN THOUSANDS)
<S>              <C>         <C>         <C>
One- to
 four-family...   $ 3,183    $276,591      19.37%
Multi-family...     1,157    466,697       32.68
Commercial real
  estate.......     2,706    388,460       27.20
Construction
  and
 development...         7     74,437        5.21
Land...........       596     95,684        6.70
One- to
  four-family
  junior
  liens........     1,680     77,528        5.43
Timeshares.....       372      6,446         .45
Other
  consumer.....     1,135      7,095         .50
Commercial
  business.....     2,353     35,131        2.46
Unallocated....     --         --          --
                 ---------   ----------  --------
Total..........   $13,189    1,428,069    100.00%
                 ---------               --------
                 ---------               --------
Less:
Loans in
  process......               16,364
Loans held for
  sale, net....                --
Deferred fees
  and
  discounts....              344,312
Allowance for
  loan losses..               13,189
                             ----------
Total loans
  receivable,
  net..........              $1,054,204
                             ----------
                             ----------
</TABLE>
 

                                      25
<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 December 31, 1996, the Bank's liquidity ratio was 16.5%. 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,                                   DECEMBER 31,
                                           -----------------------------------------------------------------  --------------------
                                                   1994                  1995                  1996                 1996
                                           --------------------  --------------------  ---------------------  --------------------
                                             BOOK       % OF       BOOK       % OF        BOOK       % OF        BOOK       % OF
                                             VALUE      TOTAL      VALUE      TOTAL      VALUE       TOTAL      VALUE       TOTAL
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
                                                                            (DOLLARS IN THOUSANDS)
<S>                                        <C>        <C>        <C>        <C>        <C>         <C>        <C>         <C>
FHLB stock...............................  $   1,573     100.00% $   7,475     100.00% $    9,340     100.00% $    9,618     100.00%
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
Interest-bearing deposits with banks.....  $   4,930     100.00% $  31,044     100.00% $   54,838     100.00% $   65,491     100.00%
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
Mortgage-backed securities:
GNMA.....................................  $   2,000     100.00% $  40,184      98.70% $  199,429     102.43% $  125,386     101.17%
Gross unrealized gain (loss).............     --         --         --         --          (1,328)      (.68)      1,090        .88
Unamortized premium (discount)...........          1     --            530       1.30      (3,402)     (1.75)     (2,537)     (2.05)
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
Total mortgage-backed securities.........  $   2,001     100.00% $  40,714     100.00% $  194,699     100.00% $  123,939     100.00%
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
                                           ---------  ---------  ---------  ---------  ----------  ---------  ----------  ---------
</TABLE>
 
                                     26

<PAGE>

    The Company's investment securities portfolio at December 31, 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.
 
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 $108.3 million or 10.4% of
deposits at December 31, 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.
 
                                     27

<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>
                                                                    June 30,                                      December 31,
                                       -------------------------------------------------------------------   ---------------------
                                                1994                   1995                   1996                    1996
                                       ----------------------  ---------------------  --------------------   ---------------------
                                                    Percent                 Percent                Percent                Percent
                                        Amount     of Total      Amount    of Total     Amount    of Total      Amount    of Total
                                       ---------  -----------  ----------  ---------  ----------  --------   -----------  --------
<S>                                    <C>        <C>          <C>         <C>        <C>         <C>        <C>          <C>     
                                                                                                                         
                                                                (Dollars in Thousands)

Transactions and Savings Deposits:
-----------------------------------

Money Market Accounts..........        $  7,462     4.01%      $ 57,616      12.58%   $159,689     17.92%     $  188,466    18.06%
Commercial Demand..............           1,428      .77          1,522        .33       2,813       .31           2,870      .28 
Savings Deposits...............             106      .06            827        .18         893       .10             653      .06 
                                      ---------    -----       --------    ---------  --------    -------     ----------   -------
Total Non-Certificates.........           8,996     4.84         59,965      13.09     163,395     18.33         191,989    18.40 
                                      ---------    -----       --------    ---------  --------    -------     ----------   -------
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       687,756      65.91 
6.01-8.00%.....................           5,956     3.20        301,981      65.91      69,630      7.81       163,688      15.69 
8.01-10.00%....................             664      .36            594        .13        --         --           --         --   
                                      ---------    -----       --------     -------  ---------    -------   ----------     -------
Total Certificates.............         177,052    95.16        398,200      86.91     727,909     81.67       851,444      81.60 
                                      ---------   -------      --------     -------  ---------    -------   ----------     -------
Total Deposits(1)..............        $186,048   100.00%      $458,165     100.00%   $891,304    100.00%   $1,043,433     100.00%
                                       --------   -------      --------     -------   --------    -------   ----------     -------
                                       --------   -------      --------     -------   --------    -------   ----------     -------

</TABLE>

------------------------
(1) At December 31, 1996, the average rates paid on non-certificate deposit
    accounts and certificate accounts were 4.68% and 5.72%, 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>
                                                                                                Six Months Ended
                                                                   Year Ended June 30,             December 31
                                                            ----------------------------------     ------------
                                                               1994        1995        1996           1996
                                                            ----------  ----------  ----------     ------------
<S>                                                         <C>         <C>         <C>         <C>
                                                                           (Dollars in Thousands)

Opening balance...........................................    $ 92,826    $186,048    $458,165      $  891,304
New deposits, net.........................................      91,390     267,454     407,482         135,201
Interest credited.........................................       1,832       4,663      25,657          16,930
                                                            ----------  ----------  ----------  --------------
Ending balance............................................    $186,048    $458,165    $891,304      $1,043,435
                                                            ----------  ----------  ----------  --------------
                                                            ----------  ----------  ----------  --------------
Net increase..............................................  $   93,222  $  272,117  $  433,139      $  152,131
                                                            ----------  ----------  ----------  --------------
                                                            ----------  ----------  ----------  --------------
Percent increase..........................................      100.43%     146.26%      94.54%          17.07%
                                                            ----------  ----------  ----------  --------------
                                                            ----------  ----------  ----------  --------------
</TABLE>
 
                                       28


<PAGE>

    The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1996.
 
<TABLE>
<CAPTION>
                                                                     4.00-         6.00-                  Percent
                                                                     5.99%         7.99%       Total     of Total
                                                                ---------------  --------    ----------  -------
<S>                                                             <C>              <C>         <C>         <C>

Certificate accounts maturing in quarter ending:
March 31, 1997................................................    $ 137,291      $ 11,697    $148,988      17.50%
June 30, 1997.................................................       84,884        11,565      96,449      11.34
September 30, 1997............................................      135,778        94,210     229,988      27.01
December 31, 1997.............................................      267,450        21,429     288,879      33.93
March 31, 1998................................................       17,326         6,562      23,888       2.81
June 30, 1998.................................................          964         3,660       4,624        .54
September 30, 1998............................................        1,974         2,659       4,633        .54
December 31, 1998.............................................        5,018           432       5,450        .64
March 31, 1999................................................        4,057         3,218       7,275        .85
June 30, 1999.................................................          649           404       1,053        .12
September 30, 1999............................................          194           760         954        .11
December 31, 1999.............................................          288         2,414       2,702        .32
Thereafter....................................................       26,827         9,733      38,561       4.29
                                                                -----------      ---------   --------    -------
     Total....................................................    $ 682,700       $168,743   $851,444     100.00%
                                                                -----------      ---------  ---------  ---------
                                                                -----------      ---------  ---------  ---------
     Percent of Total.........................................     80.19%         19.82%     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 December 31,
1996.

<TABLE>
<CAPTION>

                                                                                   Maturity
                                                                 --------------------------------------------
                                                                               Over       Over
                                                                  3 Months    3 to 6     6 to 12      Over
                                                                   or Less    Months     Months     12 months     Total
                                                                  ---------  ---------  ---------  -----------  ---------
<S>                                                               <C>        <C>        <C>        <C>          <C>
                                                                                      (In Thousands)
Certificates of deposit less than $100,000......................  $123,340    $62,847   $388,119     $48,447    $622,753
Certificates of deposit of $100,000 or more.....................    25,648     33,602    130,748      38,692     228,690
                                                                  ---------  ---------  ---------  -----------  ---------
Total certificates of deposit...................................  $148,988    $96,449   $518,867     $87,139    $851,443
                                                                  ---------  ---------  ---------  -----------  ---------
                                                                  ---------  ---------  ---------  -----------  ---------
</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 December 31, 1996, advances were secured by stock in the FHLB totaling
$9.6 million, qualifying first mortgage loans of approximately $144.0 million
and other real estate of $3.9 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 December 31, 1996, the Bank's 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.

                                      29

<PAGE>
 
    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 of each year. The Senior 
Notes are 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 Notes G and H to 
the Notes to Consolidated Financial Statements of the Company.
 
    At December 31, 1996, FHLB advances totaled $146.0 million, representing
10.5% 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>
                                                                                                Six Months Ended
                                                                    Year Ended June 30,            December 31
                                                             ---------------------------------  -----------------
                                                               1994        1995        1996           1996
                                                             ---------  ----------  ----------  -----------------
<S>                                                          <C>        <C>         <C>         <C>   
                                                                            (Dollars in Thousands)
Maximum Balance:
  FHLB advances..............................................  $44,600    $182,173    $185,000       $146,000
  Senior notes, net..........................................     --          --        57,051         57,094
  Other borrowings...........................................    3,220       5,059      61,326         21,756
  
Average Balance:
  FHLB advances..............................................  $23,662    $123,184    $ 45,052       $ 32,152
  Senior notes, net..........................................     --          --        50,093         57,062
  Other borrowings...........................................    2,511       2,803      25,894         21,307
</TABLE>
 
    The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
 
<TABLE>
<CAPTION>
                                                                              June 30,               December 31
                                                                  ---------------------------------  ------------
                                                                    1994        1995        1996         1996
                                                                  ---------  ----------  ----------  ------------
<S>                                                               <C>        <C>         <C>         <C>
                                                                              (Dollars in Thousands)

FHLB advances...................................................   $25,000    $111,000    $185,000    $146,000
Senior notes, net...............................................     --          --         57,051      57,094
Other borrowings................................................     2,932       4,898      21,468      14,748
                                                                  ---------    -------    --------    --------
Total borrowings................................................   $27,932    $115,898    $263,519    $217,842
                                                                  ---------    -------    --------    --------
                                                                  ---------    -------    --------    --------
Weighted average interest rate of FHLB advances.................      4.48%       6.67%       5.55%       6.33%

Weighted average interest rate of Senior notes, net.............      --%         --%        13.00%      13.00%
                                                                        
Weighted average interest rate of other borrowings..............      8.38%       9.54%       8.44%       8.24%
</TABLE>
 
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.

                                      30

<PAGE>

    During the six months ending December 31, 1996, the Company purchased the
inactive Bank subsidiaries Beal Delaware Corp. and its subsidiary BBT from the
Bank and invested, through BBT, $2.6 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 formed a new single purpose
subsidiary to invest approximately $575,000 in a limited partnership to develop
property in McKinney, Texas.

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 December 31, 1996, the net book value
of the Bank's investment in its subsidiaries was approximately $64.7 million
(including $20.2 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 principal operating subsidiaries are briefly
described below.
 
    BEAL MORTGAGE, INC. ("BMI") AND BEAL PROPERTIES, INC. ("BPI"). BMI and BPI
are Texas corporations organized to engage in certain real estate development
activities including the acquisition and development of land and direct
investments in real estate development projects. At December 31, 1996, the
Bank's investment in BMI and BPI totaled $12.4 million and $7.8 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 land undergoing development 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 was exercised subsequent to December 31, 1996, with a loan provided
by the Bank. In addition, BMI has entered into a contract with the same
individual to sell an additional 65.5 acres of single-family land for a purchase
price of $2.1 million.
 
    BMI's second largest single investment in single-family real estate
development consists of 68 acres located in Mesquite, Texas currently platted
for 302 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 $3.5 million. BMI obtained third party
financing for the development of Phase I which contains 123 lots and was
completed in late 1996. A national home builder currently has a commitment to
purchase all of the lots in Phase I and an option on all lots in Phase II and
III. At December 31, 1996 three lots had been sold in Phase I.

                                      31

<PAGE>

    BMI has an investment of $914,000 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 $1.9 million investment in Phases
IV, VII and VIII of the same development, containing a total of 88 acres. BPI
also has $3.5 million invested in a single purpose subsidiary to develop a
commercial/industrial park in Houston, Texas. At December 31, 1996, BPI had an
additional investment in land with a book value of approximately $930,000 and an
investment in a motel property of $1.4 million.
 
    BMI also holds $10.6 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 Company's
headquarters. At December 31, 1996, Beal Bank Center II had a book value of $8.7
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 $1.0 million and $942,000, respectively, at
December 31, 1996.
 
    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 December 31, 1996, the
Bank's investment in LAC totaled $7.3 million. See "--Lending Activities--Loan
Acquisition, Resolution, Origination and Sale Activities."
 
    BRE, INC. ("BRE") AND BRE-2, INC. These Texas corporations were organized 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 December 31, 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 December 31, 1996, the Bank's investment in BRE
totaled $7.0 million. At December 31, 1996, BRE-2 held one condominium project
with a book value of $1.3 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 December 31, 1996, the Bank's
investment in BAH totaled $24.2 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 December 31, 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, 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 Mexican loans originated by this subsidiary may not exceed $25.0
million. At December 31, 1996, the Bank's investment in FLC totaled $4.6
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
 
                                       32
<PAGE>

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.
 
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 December 31, 1996, the Company, including its subsidiaries, had a total
of 123 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 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.

                                      33

<PAGE>
 
    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 December 31, 1996, the Bank's lending limit under this restriction was $21.3
million. The Bank is in compliance with the loans-to-one borrower limitation.
 
    A change in 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 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.
 
    Pursuant to its agreement with the Commissioner, the Bank has also 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.

                                      34
<PAGE>


    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
Company 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 have been 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 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."

                                      35
<PAGE>

 
    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.
 
    For the first six months of 1995, the assessment schedule for BIF members
and SAIF members ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium rates for banks
that are insured by the BIF of the FDIC in order to maintain the reserve ratio
of the BIF 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. In addition, the BIF rates were
further revised, effective January 1996, to provide a range of 0% to .27%. The
SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result, SAIF insured members would continue to be generally subject to higher
deposit insurance premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
 
    In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provided for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate was
established at .657% of deposits by the FDIC and the resulting assessment of
$2.0 million was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Bank's results of
operations for the six months ended December 31, 1996. As a result of the
special assessment, the Bank's deposit insurance premiums were reduced to zero
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. These premiums are subject to change in future
periods.

                                      36

<PAGE>

    Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing ("FICO") for resolving the
thrift crisis in the 1980s. Although the SAIF assessment schedule has been
equalized with the BIF assessment schedule, effective October 1, 1996,
SAIF-insured institutions will continue to be subject to a FICO assessment as a
result of this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, effective
January 1, 1997, that assessment will be limited to 20% of the rate imposed on
SAIF assessable deposits until the earlier of December 31, 1999 or when no
savings association continues to exist, thereby imposing a greater burden on
SAIF member institutions such as the Bank. Thereafter, however, assessments on
BIF-member institutions will be made on the same basis as SAIF-member
institutions. The rates established by the FDIC to implement this requirement
for all FDIC-insured institutions is 6.48 basis points assessment on SAIF
deposits and 1.3 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment. These rates may be revised in the future
based upon changes in the BIF and SAIF assessment base.
 
    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 
December 31, 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 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.
 
                                      37


<PAGE>    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 December 31, 1996:


<TABLE>
<CAPTION>
                                                                                           At December 31, 1996
                                                                             ------------------------------------------------
                                                                                   Required(1)                Actual
                                                                             -----------------------  -----------------------
 
                                                                               Amount      Percent      Amount      Percent
                                                                             ----------  -----------  ----------  -----------
                                                                                       (Dollars in Thousands)
    <S>                                                                      <C>         <C>          <C>         <C>
    Leverage capital.......................................................  $  123,125        9.00%  $  137,514       10.05%
    Tier 1 risk-based capital..............................................      42,951        4.00      137,514       12.81
    Total risk-based capital...............................................     118,117       11.00      150,703       14.03
</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 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 



                                38

<PAGE>

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.
 
    The imposition by the FDIC of any of these measures on the Bank may have 
a substantial adverse effect on the Company'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 Company. In a letter from the 
OTS dated July 8, 1996, the OTS acknowledged that notice has been given by 
the Bank to pay additional dividends, as needed, up to 60% of earnings from 
July 1, 1995 through June 30, 1996.
 
    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 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 December 31, 1996, the Bank's liquidity ratio was 16.5%.


                                           39

<PAGE>
 
    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 
December 31, 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. Subsequent to that examination, the Bank applied for 
and received approval from the FDIC, to be designated as a wholesale 
institution for purposes of evaluation under the revised CRA.
 
    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 December 31,1996, 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 
service area; and loans for community reinvestment purposes. The Bank's local 
service area is currently delineated to include Collin, Dallas, Denton, 
Ellis, Fort Bend, Harris, Johnson, Kaufman, Liberty, Montgomery, Parker, 
Rockwall, Tarrant and Waller Counties, Texas. At December 31, 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 

                                       40

<PAGE>

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.
 
    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 
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 December 31, 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 December 31, 1996, the Bank had $9.6 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 six months ended 
December 31, 1996, dividends paid by the FHLB of Dallas to the Bank totaled 
$278,420, which constitutes an $144,362 increase over the amount of dividends 
received in the six months ended December 31, 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 


                                      41

<PAGE>

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.    Beal Financial Corporation 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 BAH and BRE-N, 
Inc. (an inactive subsidiary), 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 June 30 year ends. 
Therefore, Beal Financial and subsidiaries will file a consolidated 
Subchapter C federal tax return for the six months ended December 31, 1996.
 
    In the future, Beal Financial and all subsidiaries electing Subchapter S 
status 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.
 
    Except as discussed above, the future tax liability for the taxable 
earnings of Beal Financial and subsidiaries will be the responsibility of the 
shareholders of Beal Financial. It is anticipated that future dividends to 
shareholders will be made to meet their tax liability related to the earnings 
of Beal Financial.
 
    The Company and its subsidiaries filed 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 percentage of specially computed taxable income that was used to 
compute a savings association's bad debt reserve deduction under the 
percentage of taxable income method (the "percentage bad debt deduction") was 
8%. The percentage bad debt deduction thus computed was 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 permitted 
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).
 
    In August 1996, legislation was enacted that repealed 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. As a Subchapter-S Corporation, recapture will be treated 
as a built-in gain in the year recognized. 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 December 31, 1996, the Bank's Excess for tax purposes totaled 
approximately $11.9 million. The management of the Company does not believe 
that the legislation will have a material impact on the Company or the Bank.


                                       42

<PAGE>
 
    The Bank and its consolidated subsidiaries have been audited by the IRS 
with respect to consolidated federal income tax returns through June 30, 
1995. 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.
 
    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 December 31, 1996.

 
<TABLE>
<CAPTION>
                                                                             Owned       Total
                                                                 Year         or       Approximate    
      Location                                                 Acquired     Leased    Square Footage  Book Value
-------------------                                            --------     ------    --------------  -------------
                                                                                                      (In Thousands)
<S>                                                            <C>          <C>       <C>             <C>
Corporate Headquarters:              
Beal Bank Center I                                             1992          Owned         167,138       $4,909 
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 December 31, 1996, the building was 
82% occupied. At December 31, 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 December 31, 1996 was $6.8 million.


                                           43

<PAGE>
 
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 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 six months ended December 31, 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."


                                    44

<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,
                                              -----------------------------------------------------------  At December 31
                                                1992        1993        1994        1995         1996           1996
                                              ---------  ----------  ----------  ----------  ------------  --------------
                                                             (Dollars In Thousands)
Selected Financial Condition Data:
<S>                                           <C>        <C>         <C>         <C>         <C>           <C>
Total assets................................  $  64,556  $  118,849  $  246,308  $  632,866  $  1,269,279   $  1,394,906
Loans receivable, net.......................     57,768     100,810     219,914     493,168       897,414      1,054,204
Mortgage-backed securities..................         --          --       1,999      40,714       194,699        123,939
Deposits....................................     53,161      92,826     186,048     458,165       891,304      1,043,433
Total borrowings............................        830       8,203      27,932     115,898       263,519        217,842
Stockholders' equity........................      7,755      16,211      27,023      52,400        93,172        116,797

</TABLE>





<TABLE>
<CAPTION>
                                                                     Year Ended June 30,
                                                    ------------------------------------------------------  At December 31,
                                                      1992       1993       1994       1995        1996          1996
                                                    ---------  ---------  ---------  ---------  ----------  ---------------
                                                                    (Dollars In Thousands)
Selected Operations Data:
<S>                                                 <C>        <C>        <C>        <C>        <C>         <C>
Total interest income.............................  $   9,242  $  21,706  $  34,580  $  63,795  $  140,948     $  88,052
Total interest expense............................      2,353      3,639      6,559     20,981      56,818        33,941
Net interest income...............................      6,889     18,067     28,021     42,814      84,130        54,111
Provision for loan losses.........................        407        784      2,888      4,045       9,044         3,314
Net interest income after provision for 
loan losses.......................................      6,482     17,283     25,133     38,769      75,086        50,797
Gain on sales of interest-earning assets..........      2,303        994        451      9,408       8,413         1,701
Gain on sales of real estate......................        118         --        912      4,412       7,068         6,434
Other non-interest income.........................        124        406        173        109       1,202         1,925
Total non-interest income.........................      2,545      1,400      1,536     13,929      16,683        10,060
Total non-interest expense........................      2,437      5,113      9,085     12,145      22,456        26,651
Income before income taxes........................      6,590     13,570     17,584     40,553      69,313        34,206
Income taxes......................................      2,458      5,115      6,772     15,176      25,153        12,152
Net income........................................  $   4,132  $   8,455  $  10,812  $  25,377  $   44,160     $  22,054
</TABLE>

                                             45

<PAGE>

 
<TABLE>
<CAPTION>                                                                                                              Six Months
                                                                                                                         Ended
                                                                                 Year Ended June 30,                   December 31,
                                                                ----------------------------------------------------  -------------
                                                                   1992       1993       1994       1995       1996      1996
                                                                ---------  ---------  ---------  ---------  --------  -------------
<S>                                                             <C>        <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%     3.52%
  Return on equity (ratio of net income to average equity)....      76.31      71.77      51.23      64.76      64.51     39.29
  Interest rate spread information, average during period.....      14.58      20.61      16.92      10.50       9.43      9.38
  Net interest margin(1)......................................      15.16      21.03      17.15      10.65       9.32      9.55
  Ratio of operating expense to average total assets..........       5.12       5.53       5.09       2.74       2.27      4.25
  Ratio of average interest-earning assets to average
     interest-bearing liabilities.............................     111.19     109.90     105.62     102.89      98.30    101.65


Quality Ratios:
  Net non-performing assets to total assets, at end of period.       3.58       6.36       7.95       7.07      11.84     17.77
  Allowance for loan losses to net non-performing loans.......      30.19      27.80      21.14      17.06       9.65      6.49
  Allowance for loan losses to loans receivable, net..........        .97       1.24       1.62       1.24       1.32      1.25
  Net charge-offs to average loans, net.......................        .12        .11        .40        .41        .39       .41


Equity Ratios:
  Equity to total assets, at end of period....................      12.01      13.64      10.97       8.28       7.34      8.37
  Average equity to average assets............................      11.37      12.74      11.83       8.84       6.91      8.96


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      7.0:1
  Including interest on deposits..............................      2.8:1      4.5:1      3.5:1      2.3:1      1.4:1      1.2:1


Other Data:
  Number of full-service offices..............................          1          1          1          2          3          3

</TABLE>
 
------------------------
(1) Net interest income divided by average interest-earning assets.
 
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.
                                              

                                       46

<PAGE>

 
    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 President, the Executive Vice President and two 
outside Directors. The Bank's Senior Vice 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 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 December 31, 1996, the Bank's 
interest-bearing liabilities repricing in one year or less exceeded 
interest-earning assets maturing during the same period by $537.9 million, 
resulting in a one-year negative gap equal to 47.9% 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.
 
                                       47
<PAGE>

    The following table sets forth the interest rate sensitivity of the 
Bank's net assets and liabilities at December 31, 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 20% per year and fixed rate loans 
are assumed to prepay at the rate of 10% 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 prepayment 
assumptions are based on the Bank's historical experience while 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.

<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 YEAR      10 YEARS       YEARS       TOTAL
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
<S>                               <C>         <C>          <C>          <C>          <C>          <C>          <C>
                                                                  (DOLLARS IN THOUSANDS)
Fixed rate one- to four-family,
  commercial real estate and
  construction loans............  $   28,589  $    16,438   $  33,938   $    68,446  $   127,384  $   242,117  $  516,912
Adjustable rate one- to four-
  family, commercial real estate
  and construction loans........     245,990       38,025      17,988        25,997          639      --          328,639
Commercial business loans.......       3,601          482       2,908         1,229        2,623        2,120      12,963
Consumer loans..................      17,832        2,550       3,365         3,630       10,604       27,661      65,642
Interest-earning deposits.......      65,491      --           --           --           --           --           65,491
FHLB Stock......................       9,618      --           --           --           --           --            9,618
Securities available for sale
  and other investments.........     123,939      --           --           --           --           --          123,939
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Total interest-earning assets...     495,060       57,495      58,199        99,302      141,250      271,898   1,123,204
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Money market accounts...........     113,080       37,694      37,694       --           --           --          188,468
Commercial demand...............       2,871      --           --           --           --           --            2,871
Savings deposits................         131          131         131           130          130      --              653
Certificate accounts............     764,304       38,595      11,985        36,550            9      --          851,443
Subordinated debt, net..........      --          --           --            57,094      --           --           57,094
FHLB advances...................     146,000      --           --           --           --           --          146,000
Other borrowings................       6,624      --           --               935        6,749          440      14,748
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Total interest-bearing
  liabilities...................   1,033,010       76,420      49,810        94,709        6,888          440   1,261,277
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Interest-earning assets less
  interest-bearing liabilities..  $ (537,950) $   (18,925)  $   8,389   $     4,593  $   134,362  $   271,458  $ (138,073)
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Cumulative interest-rate
  sensitivity gap...............  $ (537,950) $  (556,875)  $(548,486)  $  (543,893) $  (409,531) $  (138,073) $ (138,073)
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Cumulative interest-rate gap as
  a percentage of total assets
  at December 31, 1996..........     (38.57)%     (39.92)%     (39.32)%     (38.99)%     (29.36)%      (9.90)%     (9.90)%
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Cumulative interest-rate gap as
  a percentage of
  interest-earning assets at
  December 31, 1996.............     (47.89)%     (49.58)%     (48.83)%     (48.42)%     (36.46)%     (12.29)%    (12.29)%
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
Cumulative interest-rate gap as
  a percentage of
  interest-bearing liabilities
  at December 31, 1996..........     (42.65)%     (44.15)%     (43.49)%     (43.12)%     (32.47)%     (10.95)%    (10.95)%
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
                                  ----------  -----------  -----------  -----------  -----------  -----------  ----------
</TABLE>
 
                                       48
<PAGE>
    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.
 
    The table below sets forth, as of December 31, 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 
December 31, 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 December 31, 1996, annualized.

<TABLE>
<CAPTION>

                          PERCENTAGE CHANGE IN: 
                --------------------------------------------



                  NET INTEREST IN              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     
--------------  ----------  ---------  ----------  ---------  --------  ---------  --------- --------  ----------   ----------- 
<S>             <C>         <C>        <C>         <C>        <C>       <C>        <C>       <C>       <C>          <C>         
                                   (DOLLARS IN THOUSANDS)                                                                       

    +400           -75%   (15.2)%     -75%       (62.0)%    $69,605  $(12,487)   (15.2)%   $ 52,856  $ (86,304)     (62.0)%
    +300           -50    (11.3)      -50        (47.7)      72,775    (9,317)   (11.3)      72,736    (66,424)     (47.7) 
    +200           -35     (7.4)      -35        (30.3)      76,016    (6,076)    (7.4)      96,958    (42,201)     (30.3) 
    +100           -25     (3.6)      -25        (13.9)      79,160    (2,932)    (3.6)     119,838    (19,322)     (13.9) 
       0                                                                                                                    
    -100           -25      3.1       -25          9.6       84,678     2,585      3.1      152,521     13,361        9.6  
    -200           -35      6.0       -35         15.1       87,028     4,935      6.0      160,213     21,053       15.1  
    -300           -50      8.0       -50         15.8       88,690     6,598      8.0      161,204     22,043       15.8  
    -400           -75      8.5       -75         14.8       89,031     6,938      8.5      159,780     20,620       14.8  
 
</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 14.8% increase in MVPE and a $6.9 
million increase in net interest income in a declining rate environment and a 
62.0% decrease in MVPE and a $12.5 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

                                       49
<PAGE>
 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 
increase. As a result, the actual effect of changing interest rates may 
differ substantially from that presented in the foregoing table.
 
FINANCIAL CONDITION
 
    The Company had total assets of $1.4 billion at December 31, 1996 
representing an increase of $125.6 million or 9.9%, from $1.3 billion at June 
30, 1996. The increase resulted primarily from an increase in net loans 
receivable of $156.8 million, an increase in cash and cash equivalents of 
$10.6 million and an increase in real estate held for investment or sale of 
$18.4 million; partially offset by a decrease in securities available for 
sale of $70.8 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 and to a lesser extent, to loan origination activity. 
The increase in cash and cash equivalents was the result of normal 
operations, including proceeds received from the sale of certain 
mortgage-backed securities from the securities available for sale portfolio. 
The increase in real estate held for investment or sale was primarily the 
result of additional real estate direct investments by the Bank's 
subsidiaries.
 
    Total 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 
regulatory compliance with the QTL 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 $102.0 million, or 8.7% from $1.2 billion at 
June 30, 1996 to $1.3 billion at December 31, 1996, primarily due to an 
increase in deposits of $152.1 million, or 17.1%, partially offset by a 
decline in FHLB advances of $39.0 million, a decline in other borrowings of 
$6.7 million and a decline of $4.5 million in other liabilities. The $152.1 
million increase in deposits was made up of a $194.6 million increase in 
retail deposits from the Bank's three branches, offset by a $42.5 million 
decrease in brokered deposits. Advances from the FHLB of Dallas were repaid 
with the increased deposits and proceeds from the sale of mortgage backed 
securities.
 
    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 $23.6 million, or 25.4%, from $93.2 
million at June 30, 1996 to $116.8 million at December 31, 1996. 
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. These increases were due to 
earnings.
 
RESULTS OF OPERATIONS
 
    GENERAL.  The level of net income experienced by the Company in the years 
ended June 30, 1996, 1995 and 1994, and the six months ended December 31, 
1996 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.
 
                                       50
<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
                                          ---------------------------------   --------------------------------
                                             AVERAGE     INTEREST               AVERAGE     INTEREST
                                           OUTSTANDING    EARNED/    YIELD/   OUTSTANDING    EARNED/    YIELD/
                                             BALANCE       PAID       RATE      BALANCE       PAID       RATE
                                           -----------   ---------   ------   -----------   ---------   ------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>        <C>     <C>          <C>         <C>
Interest-Earning Assets:
  Loans receivable(1)....................  $147,609     $33,889   22.96%   $359,317     $61,185    17.03%
  Mortgage-backed securities.............     3,828         254    6.64      18,694       1,328     7.10
  Interest-earning deposits..............    10,425         370    3.55      15,993         896     5.60
  FHLB stock.............................     1,522          67    4.40       6,381         386     6.05
                                          -----------  ---------          -----------  ---------  
    Total interest-earning assets(1).....  $163,384      34,580   21.16    $400,385      63,795    15.93
                                          -----------  ---------          -----------  ---------   
                                          -----------  ---------          -----------  ---------   
Interest-Bearing Liabilities:
  Savings deposits.......................     9,636         247    2.56      29,276       1,435     4.90
  Certificate accounts...................   118,885       5,354    4.50     233,875      12,282     5.25
  Senior notes, net......................    --           --       --        --           --        --
  Borrowings.............................    26,173         958    3.66     125,987       7,264     5.77
                                          -----------  ---------          -----------  ---------   
    Total interest-bearing liabilities...  $154,694       6,559    4.24    $389,138      20,981     5.39
                                          -----------  ---------          -----------  ---------   
                                          -----------  ---------          -----------  ---------   
Net interest income.....................                $28,021                         $42,814
Net interest rate spread................                          16.92%                           10.54%
Net earning assets......................   $  8,690                        $ 11,247
                                          -----------  ---------          -----------  ---------  
                                          -----------  ---------          -----------  ---------   
Net yield on average 
  interest-earning assets...............                          17.15%                           10.69%
Average interest-earning assets to
  average interest-bearing liabilities...               105.62%                         102.89%
 
<CAPTION>
                                                                  1996
                                                    --------------------------------
                                                      AVERAGE     INTEREST
                                                    OUTSTANDING    EARNED/    YIELD/
                                                      BALANCE       PAID       RATE
                                                    -----------   ---------   ------
 
<S>                                                 <C>           <C>         <C>
Interest-Earning Assets:
  Loans receivable(1).............................   $760,906     $ 131,544   17.29%
  Mortgage-backed securities......................     99,495         6,916    6.95
  Interest-earning deposits.......................     36,890         2,183    5.92
  FHLB stock......................................      4,984           305    6.12
                                                    -----------   ---------   
    Total interest-earning assets(1)..............   $902,275       140,948   15.62
                                                    -----------   ---------   
                                                    -----------   ---------   
Interest-Bearing Liabilities:
  Savings deposits................................    127,126         6,099    4.80
  Certificate accounts............................    669,269        39,816    5.95
  Senior notes, net...............................     50,093         6,904   13.78
  Borrowings......................................     71,360         3,999    5.60
                                                    -----------   ---------   
    Total interest-bearing liabilities............   $917,848        56,818    6.19
                                                    -----------   ---------   
                                                    -----------   ---------   
Net interest income...............................                $  84,130
Net interest rate spread..........................                             9.43%
Net earning assets................................   $(15,573)
                                                    -----------   ---------   
                                                    -----------   ---------   
Net yield on average interest-earning assets......                             9.32%
Average interest-earning assets to average
  interest-bearing liabilities....................                    98.30%
 
<CAPTION>
                                                            SIX MONTHS ENDED                    SIX MONTHS ENDED
                                                            DECEMBER 31, 1995                   DECEMBER 31, 1996
                                                    --------------------------------   --------------------------------
                                                      AVERAGE     INTEREST               AVERAGE     INTEREST
                                                    OUTSTANDING    EARNED/    YIELD/   OUTSTANDING    EARNED/    YIELD/
                                                      BALANCE       PAID       RATE      BALANCE       PAID       RATE
                                                    -----------   ---------   ------   -----------   ---------   ------
<S>                                                  <C>           <C>        <C>      <C>            <C>        <C> 
Interest-Earning Assets:
  Loans receivable(1).............................   $639,065      $49,046    15.35%   $  963,649     $82,177    17.06%
  Mortgage-backed securities......................     39,825        1,330     6.68       132,376       4,848     7.32
  Interest-earning deposits.......................     36,271        1,151     6.35        28,187         749     5.31
  FHLB stock......................................      4,737          134     5.66         9,411         278     5.91
                                                    -----------   ---------            -----------   ---------   
    Total interest-earning assets(1)..............   $719,898       51,661    14.36    $1,133,623      88,052    15.53
                                                    -----------   ---------            -----------   ---------   
                                                    -----------   ---------            -----------   ---------   
Interest-Bearing Liabilities:
  Savings deposits................................     88,454        2,369     5.36       170,204       4,381     5.15
  Certificate accounts............................    543,050       15,876     5.85       822,881      23,840     5.79
  Senior notes, net...............................     42,749        2,948    13.79        57,062       3,962    13.89
  Borrowings......................................     59,232        1,859     6.28        53,263       1,758     6.60
                                                    -----------   ---------            -----------   ---------   
    Total interest-bearing liabilities............   $733,485       23,052     6.30    $1,103,410      33,941     6.15
                                                    -----------   ---------            -----------   ---------   
                                                    -----------   ---------            -----------   ---------   
Net interest income...............................                 $28,609                            $54,111
Net interest rate spread..........................                             8.06%                              9.38%
Net earning assets................................   $(13,587)                         $   30,213
                                                    -----------   ---------            -----------   ---------   
                                                    -----------   ---------            -----------   ---------   
Net yield on average interest-earning assets......                             7.96%                              9.55%
Average interest-earning assets to average
  interest-bearing liabilities....................                   98.15%                            102.74%
</TABLE>
 
------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
    loss reserves.
 
                                       51
<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)   
                                          ---------  ---------  -----------  ---------  ---------  -----------  
<S>                                       <C>        <C>        <C>          <C>        <C>        <C>          
                                                                                  (DOLLARS IN THOUSANDS)        
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    
                                          ---------  ---------  -----------  ---------  ---------  -----------   
                                          ---------  ---------  -----------  ---------  ---------  -----------   
 
<CAPTION>
                                                                                        SIX MONTHS ENDED
                                                                                          DECEMBER 31,
                                                                               ---------------------------------
                                                                                         1995 VS. 1996
                                                                               ---------------------------------
                                                                                      INCREASE
                                                                                     (DECREASE)
                                                                                       DUE TO           TOTAL    
                                                                               --------------------   INCREASE   
                                                                                VOLUME      RATE     (DECREASE)  
                                                                               ---------  ---------  ----------- 
<S>                                                                            <C>        <C>                    
Interest-Earning Assets:                                                                                         
  Loans receivable..........................................................   $  16,729  $   2,383   $  19,112  
  Loans receivable--discount................................................      10,453      3,566      14,019  
                                                                               ---------  ---------  ----------- 
  Loans receivable--total...................................................      27,182      5,949      33,131  
  Mortgage-backed securities................................................       3,378        140       3,518  
  Interest-earning deposits.................................................        (232)      (170)       (402) 
  Other.....................................................................         138          6         144  
                                                                               ---------  ---------  ----------- 
    Total interest-earning assets...........................................   $  30,466  $   5,925      36,391  
                                                                               ---------  ---------  ----------- 
                                                                               ---------  ---------  ----------- 
Interest-Bearing Liabilities:                                                                                    
  Savings deposits..........................................................   $   2,100  $     (88)  $   2,012  
  Certificate accounts......................................................       8,106       (142)      7,964  
  Senior notes, net.........................................................         994         20       1,014  
  Borrowings................................................................         106       (207)       (101) 
                                                                               ---------  ---------  ----------- 
    Total interest-bearing liabilities......................................   $  11,306  $    (417)     10,889  
                                                                               ---------  ---------  ----------- 
                                                                               ---------  ---------  
Change in net interest income...............................................                          $  25,502  
                                                                               ---------  ---------  ----------- 
                                                                               ---------  ---------  ----------- 
</TABLE>
                                       52
<PAGE>

    Comparison of Operating Results for the Six Months Ended December 31, 
1996 and 1995
 
    Net Income.  For the six months ended December 31, 1996, net income of 
$22.1 million represented an increase of $9.7 million, or 78.1% from $12.4 
million for the six months ended December 31, 1995. As discussed in more 
detail below, the increase in net income was primarily due to a $28.1 million 
increase in net interest income after provision for loan losses coupled with 
a $2.4 million increase in non-interest income, partially offset by an 
increase in non-interest expense of $16.1 million and an increase in income 
taxes of $5.1 million.
 
    Net Interest Income.  Net interest income increased $25.5 million, or 
89.1%, from $28.6 million at December 31, 1995, to $54.1 million at December 
31, 1996, due to an increase in average interest-earning assets. The average 
balance of interest-earning assets increased $413.7 million during this 
period primarily due to increases in the average balance of both loans 
receivable and mortgage-backed securities. In addition, net interest rate 
spread increased from 8.1% for the six months ended December 31, 1995, to 
9.4% for the six months ended December 31, 1996 primarily due to an increase 
in the yield on interest earning assets from 14.4% to 15.5% for the six month 
period ending December 31, 1995 and 1996, respectively.
 
    Interest Income.  Interest income increased by $36.4 million, or 70.4%, 
from $51.7 million at December 31, 1995 to $88.1 million at December 31, 
1996. The increase in interest income was primarily due to a $16.8 million 
increase due to an increase in the amount of loans receivable and, to a $14.0 
million increase in the discount accretion. In addition, the yield on 
interest earning assets increased by 1.17% for the six months ended December 
31, 1996 compared to the same prior year period. This increased yield was 
primarily due to an increase in the yield on loans, net, from 15.4% for the 
six months ended December 31, 1995 to 17.1% for the six months ended December 
31, 1996.
 
    Interest Expense.  Interest expense increased $10.9 million, or 47.2%, 
from $23.0 million at December 31, 1995 to $33.9 million at December 31, 1996 
due primarily to an increase in the average balance of interest-bearing 
liabilities of $369.9 million primarily due to an increase in the average 
balance of deposits of $361.6 million. The increase in the average balance of 
interest-bearing liabilities more than offset the 15 basis point decrease in 
the average cost of interest-bearing liabilities from 6.30% for the six month 
period ending December 31, 1995 to 6.15% for the six month period ending 
December 31, 1996.
 
    Provision For Loan Losses.  The provision for loan losses is determined 
by management as an amount sufficient to maintain the allowance for loan 
losses at a level considered adequate to absorb future losses inherent in the 
loan portfolio in accordance with generally accepted accounting principles. 
The provision for loan losses decreased $2.6 million, or 44.2% for the six 
months ended December 31, 1996 as compared to $5.9 million for the same 
period last year. The majority of this decrease was the result of a decline 
in the amount of loans purchased during the six months ended December 31, 
1996, as compared to the same period last year.
 
    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 6.5% at December 31, 1996 as compared to 5.2% at December 31, 1995. 
The primary reason for the increase in this ratio was due to an increase of 
$2.8 million in the allowance for loan losses from $10.4 million at December 
31, 1995 to $13.2 million at December 31, 1996.
 
    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.

 
                                       53
<PAGE> 

    Non-Interest Income. Total non-interest income increased $2.8 million, or 
38.8% to $10.1 million at December 31, 1996 from $7.3 million at December 31, 
1995. This increase was primarily due to an increase in the income 
attributable to gain on real estate transactions of $3.7 million, partially 
offset by a decrease in the income attributable to the sale of loans of $2.3 
million.
 
    Non-Interest Expense. Non-interest expense increased $16.2 million, or 
153.4%, from $10.5 million at December 31, 1995 to $26.7 million for the same 
period in fiscal 1996, primarily due to an increase in salaries and employee 
benefits of $11.3 million, an increase in SAIF deposit insurance of $2.2 
million related to the recapitalization of the SAIF, and an increase in other 
operating expenses of $2.0 million. The increase of $11.3 million in salaries 
and employee benefits was primarily due to a $10.5 million bonus paid to the 
Bank's Chairman, Andrew Beal in December 1996 for past services.
 
    The increases in other operating expenses, consisting principally of 
increases in legal expenses and loan servicing expenses, offset by a decrease 
in loan acquisition and origination expenses. The increases were primarily 
due to the Company's increased asset size, while the decrease was primarily 
due to the Company's decreased purchasing activities.
 
    Income Taxes.  Income taxes increased $5.1 million from $7.0 million for 
the six months ended December 31, 1996 to $12.1 million for the six months 
ended December 31, 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. The Company 
was subject to the highest federal corporate tax rate of 35% at December 31, 
1996.
 
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 

                                       54
<PAGE>

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 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.
 
    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 $3.6 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 $3.6 million in 
gains 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.
 
    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 

                                       55
<PAGE>

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%. 

     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.

                                       56
<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 $524.7 million, $346.2 million 
and $124.7 million, respectively, of net loans. During the six months ending 
December 31, 1996, the Company purchased $273.9 million of net loans. Loan 
originations for the years ended June 30, 1996, 1995, and 1994 were $138.4 
million, $76.4 million and $67.3 million, respectively. Loan originations for 
the six months ending December 31, 1996 were $69.4 million.
 
    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. During the six months ending December 31, 1996, 
the Company experienced a net increase in deposits of $152.1 million. The 
Company also utilizes FHLB advances to fund the Bank's discounted loan 
purchases. During the six months ending December 31, 1996 and the years ended 
June 30, 1996, 1995 and 1994, the Company's net financing activity (proceeds 
less repayments) with the FHLB totaled $(39.0) million, $74.0 million, $86.0 
million and $17.5 million, respectively. The Company had other borrowings of 
$21.8 million at December 31, 1996, including $57.1 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 December 31, 1996, the Company had an undrawn advance 
arrangement with the FHLB for $1.9 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 December 31, 1996, the Bank's liquidity 
ratio was 16.5%.
 
    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. At December 31, 1996, cash and cash 
equivalents totaled $65.9 million.
 
    The Company anticipates that it will have sufficient funds available to 
meet its current commitments. At December 31 1996, the Company had 
commitments to purchase loans of $1.6 million and to originate loans of $33.4 
million. Certificates of deposits which are scheduled to mature in one year 
or less at December 31, 1996 totaled $518.9 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.

                                       57
<PAGE> 

    At December 31, 1996, the Bank exceeded each of its three capital 
requirements. The following is a summary of the Bank's regulatory capital 
position at December 31, 1996.
 
<TABLE>
<CAPTION>
                                                       AT DECEMBER 31, 1996
                                         ------------------------------------------------
                                               REQUIRED(1)                ACTUAL
                                         -----------------------  -----------------------
                                           AMOUNT      PERCENT      AMOUNT      PERCENT
                                         ----------  -----------  ----------  -----------
                                                      (DOLLARS IN THOUSANDS)
<S>                                      <C>         <C>          <C>         <C>

Leverage capital.......................  $  123,125        9.00%  $  137,514       10.05%

Tier 1 risk-based capital..............      42,951        4.00      137,514       12.81

Total risk-based capital...............     118,117       11.00      150,703       14.03
</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.
 
Ratios of Earnings to Fixed Charges
 
    The Company's consolidated ratios of earnings to fixed charges for six 
months ended December 31, 1996 are set forth below. Earnings used in 
computing the ratios shown consist of earnings from continuing operations 
before taxes and interest expenses. Fixed charges, excluding interest of 
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 SIX
                                           MONTHS ENDED
                                        DECEMBER 31, 1996
                                        -----------------
Excluding interest on deposits........        7.0:1
Including interest on deposits........        1.2:1

                                       58
<PAGE>

           ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
 
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                            -----
<S>                                                                                      <C>
Report of Independent Certified Public Accountants.....................................       60
Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996 and 1995.....         61
  Consolidated Statements of Income for the six months ended December 31, 1996 and 1995
    (unaudited) and the years ended June 30, 1996, 1995 and 1994.......................       62
  Consolidated Statement of Stockholders' Equity for the six months ended December 31,
    1996 and for the years ended June 30, 1996, 1995 and 1994..........................       63
  Consolidated Statements of Cash Flows for the six months ended December 31, 1996 and
    1995 (unaudited) and the years ended June 30, 1996, 1995 and 1994..................       64
  Notes to Consolidated Financial Statements...........................................       67
</TABLE>
                                       59
<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 December 31, 1996, June 30, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for the six months ended December 31, 1996, and 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 December 31, 1996, and June
30, 1996 and 1995, and the consolidated results of their operations and their
consolidated cash flows for the six months ended December 31, 1996, and for each
of the three years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
 
Dallas, Texas 
May 9, 1997
                                       60
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                        CONSOLIDATED BALANCE SHEETS 
                    (In thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                                                                 JUNE 30,
                                                                           DECEMBER 31,  ------------------------
                                                                               1996          1996         1995
                                                                           ------------  ------------  ----------
<S>                                                                        <C>           <C>           <C>
ASSETS
  Cash...................................................................   $      449   $        532  $      463
  Interest bearing deposits with Federal Home Loan Bank..................       65,491         54,838      31,044
                                                                           ------------  ------------  ----------
     Cash and cash equivalents...........................................       65,940         55,370      31,507

  Accrued interest receivable............................................       16,361         16,146       6,306
  Securities available for sale..........................................      123,939        194,699      40,714
  Loans receivable, net..................................................    1,054,204        897,414     492,302
  Loans held for sale....................................................       --            --              866
  Federal Home Loan Bank stock...........................................        9,618          9,340       7,475
  Real estate held for investment or sale................................      102,680         77,632      41,212
  Premises and equipment, net............................................        6,802          6,918       7,324
  Other assets...........................................................       15,362         11,760       5,160
                                                                           ------------  ------------  ----------
                                                                            $1,394,906   $  1,269,279  $  632,866
                                                                           ------------  ------------  ----------
                                                                           ------------  ------------  ----------
LIABILITIES
  Deposit accounts.......................................................   $1,043,433   $    891,304  $  458,165
  Federal Home Loan Bank advances........................................      146,000        185,000     111,000
  Senior notes, net......................................................       57,094         57,051      --
  Other borrowings.......................................................       14,748         21,468       4,898
  Other liabilities......................................................       16,834         21,284       6,403
                                                                           ------------  ------------  ----------
      Total liabilities..................................................    1,278,109      1,176,107     580,466

COMMITMENTS AND CONTINGENCIES............................................       --            --           --

STOCKHOLDERS' EQUITY
  Common stock, $1 par value per share; authorized 375,000 shares; issued 
    and outstanding, 300,000 shares........................................        300            300         300
  Additional paid-in capital.............................................        2,740          2,740       2,740
  Unrealized gain (loss) on available for sale securities, net of tax
    of $381 and $466 at December 31, 1996 and June 30,
    1996, respectively...................................................          709           (862)     --
  Retained earnings......................................................      113,048         90,994      49,360
                                                                           ------------  ------------  ----------
      Total stockholders' equity.........................................      116,797         93,172      52,400
                                                                           ------------  ------------  ----------
                                                                            $1,394,906   $  1,269,279  $  632,866
                                                                           ------------  ------------  ----------
                                                                           ------------  ------------  ----------
                           The accompanying notes are an integral part of these statements.

</TABLE>
                                      61

<PAGE>

                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF INCOME 
                     (In thousands, except per share data)
 
                              Year ended June 30,
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                DECEMBER 31,             YEAR ENDED JUNE 30,
                                                           ----------------------  -------------------------------
                                                             1996        1995        1996       1995       1994
                                                           ---------  -----------  ---------  ---------  ---------
                                                                      (UNAUDITED)
<S>                                                        <C>        <C>          <C>        <C>        <C>

Interest income:
  Loans, including fees..................................  $  51,726   $  32,614   $  92,618  $  41,858  $  20,176
  Purchase discount accretion............................     30,451      16,432      38,926     19,327     13,713
  Investment securities..................................      5,875       2,615       9,404      2,610        691
                                                           ---------  -----------  ---------  ---------  ---------
      Total interest income..............................     88,052      51,661     140,948     63,795     34,580

Interest expense:
  Deposits...............................................     28,221      18,245      45,915     13,717      5,601
  Federal Home Loan Bank advances and other borrowings...      1,758       1,859       3,999      7,264        958
  Senior notes...........................................      3,962       2,948       6,904     --         --
                                                           ---------  -----------  ---------  ---------  ---------
      Total interest expense.............................     33,941      23,052      56,818     20,981      6,559
                                                           ---------  -----------  ---------  ---------  ---------
      Net interest income................................     54,111      28,609      84,130     42,814     28,021

Provision for loan losses................................      3,314       5,935       9,044      4,045      2,888
                                                           ---------  -----------  ---------  ---------  ---------
      Net interest income after provision for loan 
        losses...........................................     50,797      22,674      75,086     38,769     25,133

Noninterest income:
  Gains on real estate transactions......................      6,434       2,726       7,068      4,412        912
  Other real estate operations, net......................      1,202         431       1,108     --         --
  Gain on sales of loans.................................      1,701       4,013       8,413      8,620        451
  Gain on sales of securities available for sale.........     --          --          --            788     --
  Other operating income.................................        723          80          94        109        173
                                                           ---------  -----------  ---------  ---------  ---------
      Total noninterest income...........................     10,060       7,250      16,683     13,929      1,536

Noninterest expense:
  Salaries and employee benefits.........................     15,615       4,313       8,232      4,944      3,394
  Occupancy and equipment................................      1,143         916       2,049        922        491
  SAIF deposit insurance premium.........................      2,605         440       1,332        471        212
  Other real estate operations, net......................     --          --          --         --          1,214
  Loss on sales of securities available for sale.........        437      --             587     --            131
  Other operating expense................................      6,851       4,849      10,256      5,808      3,643
                                                           ---------  -----------  ---------  ---------  ---------
      Total non-interest expenses........................     26,651      10,518      22,456     12,145      9,085
                                                           ---------  -----------  ---------  ---------  ---------
      Income before income taxes.........................     34,206      19,406      69,313     40,553     17,584

Income taxes.............................................     12,152       7,024      25,153     15,176      6,772
                                                           ---------  -----------  ---------  ---------  ---------
      NET INCOME.........................................  $  22,054   $  12,382   $  44,160  $  25,377  $  10,812
                                                           ---------  -----------  ---------  ---------  ---------
                                                           ---------  -----------  ---------  ---------  ---------
Income per common share..................................  $   73.51   $   41.27   $  147.20  $   84.59  $   36.04
                                                           ---------  -----------  ---------  ---------  ---------
                                                           ---------  -----------  ---------  ---------  ---------
Weighted average number of common shares outstanding.....    300,000     300,000     300,000    300,000    300,000
                                                           ---------  -----------  ---------  ---------  ---------
                                                           ---------  -----------  ---------  ---------  ---------

                      The accompanying notes are an integral part of these statements. 

</TABLE>
                                      62

<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                       UNREALIZED GAIN
                                                                                          (LOSS) ON
                                                        COMMON STOCK      ADDITIONAL      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
  Net income.......................................      --        --         --               --          22,054      22,054
  Net unrealized gain on securities available for
    sale, net of tax expense of $847...............      --        --         --             1,571           --         1,571
                                                        ---       ---       ------           -----       --------    --------
Balance at December 31, 1996.......................     300      $300       $2,740          $  709       $113,048    $116,797
                                                        ---       ---       ------           -----       --------    --------
                                                        ---       ---       ------           -----       --------    --------
</TABLE>

               The accompanying notes are an integral part of this statement.
                                      63

<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                    CONSOLIDATED STATEMENTS OF CASH FLOWS 
                               (In thousands)
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                DECEMBER 31,             YEAR ENDED JUNE 30,
                                                           ----------------------  -------------------------------
                                                             1996        1995       1996       1995       1994
                                                           ---------  -----------  ---------  ---------  ---------
                                                                      (UNAUDITED)
<S>                                                        <C>        <C>          <C>        <C>        <C>
Operating activities
  Net income.............................................  $  22,054   $  12,382   $  44,160  $  25,377  $  10,812
  Adjustments to reconcile net income to net cash provided
    by (used in) operating activities
      Depreciation and amortization......................      1,071         703       1,791        585        360
      Accretion of purchase discount.....................    (30,451)    (16,432)    (38,926)   (19,327)   (13,713)
      Provision for loan losses..........................      3,314       5,935       9,044      4,045      2,888
      Amortization of bond premium and underwriting 
        costs............................................        297         199         477       --         --
      Gains on real estate transactions..................     (6,434)     (2,726)     (7,068)    (4,412)      (912)
      Gain on sales of loans.............................     (1,701)     (4,013)     (8,413)    (8,620)    --
      (Gain) loss on sales of securities available for 
        sale.............................................        437        --           587       (788)    --
      Losses on sales of securities......................       --          --          --         --          131
      Loss on sale of premises and equipment.............         71        --          --         --         --

  Changes in operating assets and liabilities
    Accrued interest receivable..........................     (1,249)     (2,995)    (11,102)    (3,822)    (1,169)
    Prepaid expenses and other assets....................       (191)     (3,003)     (4,515)    (3,300)      (938)
    Other liabilities and accrued expenses...............     (7,573)      7,140      14,842      1,098      3,541
    Accrued interest payable bonds.......................       --         2,749        --         --         --
                                                           ---------  -----------  ---------  ---------  ---------
      Net cash provided by (used in) operating 
        activities.......................................    (20,355)        (61)        877     (9,164)     1,000
</TABLE>
 
                                      64
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
                                (In thousands)
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                             DECEMBER 31,              YEAR ENDED JUNE 30,
                                                        ----------------------  ----------------------------------
<S>                                                     <C>         <C>         <C>         <C>         <C>
                                                           1996        1995        1996        1995        1994
                                                        ----------  ----------  ----------  ----------  ----------
 
<CAPTION>
                                                             (UNAUDITED)
<S>                                                     <C>         <C>         <C>         <C>         <C>
Investing activities
 Proceeds from sales of loans..........................  $    8,477  $    6,943  $   19,045  $   64,469  $   --
 Proceeds from sales of securities available for
   sale................................................      68,134      --         151,744      43,372      --
 Proceeds from paydowns of securities available for
  sale................................................       4,674       2,522      10,954         116      --
 Proceeds from sales of real estate....................      16,446       7,311      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...........................................    (273,885)   (507,045)   (541,173)   (374,403)   (124,714)
 Purchases of securities available for sale............      --          --        (318,769)    (81,426)     --
 (Purchase) sales of Federal Home Loan Bank stock......        (278)      2,078      (1,865)     (5,902)       (746)
 Capitalized interest on real estate investments.......      --          --            (482)     --          --
 Purchase of real estate held for investment or sale...     (10,525)    (14,310)    (18,037)    (28,776)     (4,471)
 Loan originations and advances, less loan
   collections.........................................     111,791      51,084     136,265      49,499      12,161
 Purchases of premises and equipment...................        (460)       (906)     (1,406)     (2,488)     (2,296)
 Proceeds from sale of premises and equipment..........          48      --
 Purchases of other investments........................      --          (6,300)     --          --          --
                                                        ----------  ----------  ----------  ----------  ----------
  Net cash used in investing activities................     (75,578)   (458,623)   (552,657)   (324,452)   (115,679)
</TABLE>
 
                                       65

<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
                               (In thousands)
<TABLE>
<CAPTION>
                                                           SIX MONTHS ENDED
                                                             DECEMBER 31,              YEAR ENDED JUNE 30,
                                                        ----------------------  ---------------------------------
<S>                                                     <C>         <C>         <C>         <C>         <C>
                                                           1996        1995        1996        1995       1994
                                                        ----------  ----------  ----------  ----------  ---------
 
<CAPTION>
                                                                    (UNAUDITED)
<S>                                                     <C>         <C>         <C>         <C>         <C>
Financing activities
 Net increase in deposit accounts......................  $  152,130  $  505,818  $  433,168  $  272,117  $  93,222
 Proceeds from long-term debt..........................       1,158      14,223      17,776       2,501      2,229
 Repayments of long-term debt..........................      (7,785)       (388)     (3,767)       (535)    --
 (Repayments) advances from the Federal Home Loan
   Bank................................................     (39,000)   (111,000)     74,000      86,000     17,500
 Proceeds from issuance of senior notes................      --          54,492      54,492      --         --
 Cash dividend paid....................................      --             (26)        (26)     --         --
                                                         ----------  ----------  ----------  ----------  ---------
  Net cash provided by financing activities............     106,503     463,119     575,643     360,083    112,951
                                                         ----------  ----------  ----------  ----------  ---------
  Increase (decrease) in cash and cash equivalents.....      10,570       4,435      23,863      26,467     (1,728)
Cash and cash equivalents at beginning of period.......      55,370      31,507      31,507       5,040      6,768
                                                         ----------  ----------  ----------  ----------  ---------
Cash and cash equivalents at end of period.............  $   65,940  $   35,942  $   55,370  $   31,507  $   5,040
                                                         ----------  ----------  ----------  ----------  ---------
                                                         ----------  ----------  ----------  ----------  ---------
Supplemental disclosure of cash flow information
  Cash paid during the period for
   Interest............................................  $   36,319      19,049  $   50,707  $   20,968  $   6,558
   Income taxes........................................      18,780       5,550      19,668      14,680      4,920
Supplemental disclosures of noncash investing and
  financing activities
   Real estate acquired in foreclosure or in settlement
    of loans...........................................  $   27,615  $    6,752  $   22,520  $   11,684  $   4,274
   Assumption of majority stockholders' indebtedness in
    lieu of cash dividend..............................  $   --      $    2,500  $    2,500  $   --      $  --
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      66
                                      
<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 bank 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"). The Bank also provides loans and 
banking services to consumer and commercial customers in the market areas in 
which its branches are located.
 
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 banking industry.
 
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of the Corporation, its subsidiaries including the Bank and
subsidiaries of the Bank, and partnerships in which 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 that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are stated at unpaid principal
balances less the allowance for loan losses, loans in process and net deferred
loan origination fees and discounts.
 
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. Impairment on non-performing loans may 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.
 
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 collected 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.
 
 
                                      67

<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)
 
NOTE A--NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES--CONTINUED
 

Loans collateralized by real estate are classified as loans until legal
title is transferred.
 
Investment Securities: The Corporation classifies investments as available
for sale and records them at fair value, with unrealized gains and losses, net
of income taxes, excluded from earnings and reported as a separate component of
stockholders' equity.
 
Realized gains and losses on securities 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.
 
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 the real estate 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.
 
                                      68
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (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.
 
New Accounting Pronouncement: The Financial Accounting Standards Board 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.
 
Fair Values of Financial Instruments: The Corporation provides disclosures
regarding financial instruments as prescribed by generally accepted accounting
principles. These disclosures 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:
                                       
                                      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

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 value for senior notes is based upon the closing market
price at December 31, 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.
 
                                       70

<PAGE>

                          BEAL FINANCIAL CORPORTION 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 Illinois. A borrower's ability
to pay in full is dependent, in some respects, upon the general economic
condition of the geographic location of the underlying collateral. Loans
receivable, net, consisted of the following:
 
<TABLE>
<CAPTION>
                                                                            December 31,         June 30,
                                                                                          ----------------------
                                                                                1996         1996        1995
                                                                            ------------  ----------  ----------
<S>                                                                         <C>           <C>         <C>
Real estate loans
  One-to-four family first liens..........................................   $  276,591   $  273,780  $  237,585
  Multifamily.............................................................      466,697      341,696     109,080
  Commercial..............................................................      388,460      321,385     124,985
  Construction and development............................................       74,437       85,133      51,284
  Land....................................................................       95,684      100,047      35,997
                                                                            ------------  ----------  ----------
    Total real estate loans...............................................    1,301,869    1,122,041     558,931

Other loans
  Consumer loans
    One-to-four family junior lien........................................       77,528       50,146      44,999
    Timeshares............................................................        6,446        7,809      11,668
    Other.................................................................        7,095        8,373       4,791
                                                                            ------------  ----------  ----------
     Total consumer loans.................................................       91,069       66,328      61,458
  Commercial business loans...............................................       35,131       29,886      45,060
                                                                            ------------  ----------  ----------
Total other loans.........................................................      126,200       96,214     106,518
                                                                            ------------  ----------  ----------
Total loans...............................................................    1,428,069    1,218,255     665,449

Less:
  Loans held for sale.....................................................       --           --            (866)
  Loans in process........................................................      (16,364)     (27,172)    (21,217)
  Deferred fees and discounts.............................................     (344,312)    (281,837)   (144,927)
  Allowance for loan losses...............................................      (13,189)     (11,832)     (6,137)
                                                                            ------------  ----------  ----------
Total loans receivable, net...............................................   $1,054,204   $  897,414  $  492,302
                                                                            ------------  ----------  ----------
                                                                            ------------  ----------  ----------
</TABLE>
 
The amount of loans being serviced by the Corporation for others was
approximately $46,402 at December 31, 1996, $50,299 and $40,388 at June 30, 1996
and 1995, respectively.
                                      71
<PAGE>


                          BEAL FINANCIAL CORPORTION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                        (In thousands)

NOTE C - LOAN RECEIVABLE-Continued

 Transactions in the allowance for loan losses were as follows:


<TABLE>
<CAPTION>

                                                                   Six months ended
                                                                   December 31,            Years ended June 30,
                                                                                     -------------------------------
                                                                         1996          1996       1995       1994
                                                                   ----------------  ---------  ---------  ---------
<S>                                                                <C>               <C>        <C>        <C>
Balance at beginning of year.....................................     $   11,832     $   6,137  $   3,547  $   1,245
   Provision for loan losses.....................................          3,314         9,044      4,045      2,888
   Charge-offs...................................................         (1,978)       (3,385)    (1,462)      (586)
   Recoveries....................................................             21            36          7     --
                                                                         -------     ---------  ---------  ---------
Balance at end of year...........................................     $   13,189     $  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.
 
At December 31, 1996, all significant impaired loans have been determined 
to be collateral dependent and have been measured utilizing the fair value of 
the collateral.
 
The Corporation's recorded investment in impaired loans and the related
valuation allowance are as follows:


<TABLE>
<CAPTION>
                                                                        December 31, 1996           June 30, 1996
                                                                     ------------------------  ------------------------
<S>                                                                  <C>          <C>          <C>          <C>
                                                                      Recorded     Valuation    Recorded     Valuation
                                                                     Investment    Allowance   Investment    Allowance
                                                                     -----------  -----------  -----------  -----------
Impaired loans--valuation allowance required.......................   $  12,755    $   3,454    $  24,233    $   2,789
Impaired loans--no valuation allowance.............................     153,677       --           71,035       --
                                                                     -----------  -----------  -----------  -----------
Total impaired loans...............................................   $ 166,432    $   3,454    $  95,268    $   2,789
                                                                     -----------  -----------  -----------  -----------
                                                                     -----------  -----------  -----------  -----------
</TABLE>
                                      72

<PAGE>

                          BEAL FINANCIAL CORPORTION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                        (In thousands)

NOTE C - LOAN 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 six months ended
December 31 and the year ended June 30, 1996 was $136,000 and $94,007,
respectively. Interest income on impaired loans for the six months ended
December 31, 1996 and for the year ended June 30, 1996 was $3,830 and $8,206,
respectively. Interest income foregone under the original terms of impaired
loans for the six months ended December 31, 1996 and the year ended June 30,
1996 was approximately $4,341 and $5,400, respectively.
 
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>
                                                                                 December 31,         June 30,
                                                                                                --------------------
                                                                                    1996          1996       1995
                                                                                  ----------    ---------- ---------
<S>                                                                               <C>          <C>        <C>
Real estate held for development and rental.....................................  $   59,773    $  50,649  $  32,536
Real estate held for sale.......................................................      44,630       27,745      8,790
                                                                                  ----------    ---------  ---------
                                                                                     104,403       78,394     41,326
  Less accumulated depreciation....... .........................................      (1,723)        (762)      (114)
                                                                                  ----------    ---------  ---------
     Total real estate held for investment or sale... ..........................  $  102,680    $  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.

                                      73

<PAGE>


                          BEAL FINANCIAL CORPORTION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                        (In thousands)

NOTE E--SECURITIES AVAILABLE FOR SALE
 
  Securities available for sale consist of the following:

<TABLE>
<CAPTION>
                                                                                   Gross        Gross
                                                                    Amortized   unrealized   unrealized      fair
                                                                       cost        gains       losses       value
                                                                    ----------  -----------  -----------  ----------
<S>                                                                 <C>         <C>          <C>          <C>
Mortgage-backed securities:
  December 31, 1996...............................................  $  122,849   $   1,090    $  --       $  123,939
  June 30, 1996...................................................     196,027         142       (1,470)     194,699
  June 30, 1995...................................................      40,714      --           --           40,714

</TABLE>

Mortgage-backed securities valued at approximately $18,287 were pledged to
another institution for the benefit of a customer of the Bank, for which the
Bank receives fees.

The mortgage-backed securities at December 31, 1996 are scheduled to mature
in 2025 and 2026.

NOTE F--DEPOSITS

<TABLE>
<CAPTION>
                                                                                            June 30,
                                                December 31,              ------------------------------------------
                                                     1996                         1996                      1995
                                              ---------------             ------------------      ------------------
                                              Amount  Percent             Amount     Percent      Amount     Percent
                                              ------  -------             -------    -------      ------     -------
<S>                                         <C>        <C>            <C>          <C>         <C>         <C>
Noninterest-bearing demand                  $   2,870     .3%           $   2,813        .3%   $   1,522         .3%
Statement savings deposits(4.75% at
    June 30, 1996)                                653      .1                 893        .1          827         .2
Money market demand deposit accounts
    (3.0% to 5.87% at June 30, 1996)          188,466    18.0             159,689      17.9       57,616       12.6
                                              -------    ----             -------      ----     ---------  ---------

                                              191,989    18.4             163,395      18.3       59,965       13.1
Certificates of deposit
  3.51% to 4.00%                                  --      --                  --         --          152         .1
  4.01% to 4.50%                                  138                         359        --        2,751         .6
  4.51% to 5.00%                               25,039     2.4              37,966        4.3       8,840        1.9
  5.01% to 5.50%                              220,903    21.2             285,176       32.0      41,839        9.1
  5.51% to 6.00%                              441,676    42.3             334,778       37.6      42,043        9.2
  6.01% to 6.50%                              133,013    12.7              38,467        4.3     218,693       47.7
  6.51% to 7.00%                               16,522     1.6              16,822        1.9      68,971       15.1
  7.01% to 7.50%                               14,153     1.4              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 deposits            851,444    81.7             727,909       81.7     398,200       86.9
                                             --------   -----             -------      -----    --------   --------
    Total deposits                         $1,043,433   100.0%           $891,304      100.0%   $458,165      100.0%
                                            ---------   -----             -------      -----    --------   --------
                                            ---------   -----             -------      -----    --------   --------
</TABLE>

                                      74

<PAGE>


                          BEAL FINANCIAL CORPORTION AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                        (In thousands)

NOTE F - DEPOSITS - Continued

The aggregate amount of deposits with a minimum denomination of $100 or more
was approximately $228,690 at December 31, 1996, $281,582 and $56,645 at June
30, 1996 and 1995, respectively.

At December 31, 1996, the scheduled maturities of certificates of deposit
were as follows:
 
<TABLE>
<CAPTION>

                 December 31,
                 ------------
                 <C>                      <C>
                    1997...................  $764,305
                    1998...................    38,595
                    1999...................    11,985
                    2000...................    17,186
                    2001...................    19,373
                                             --------
                                             $851,444
                                             ========
</TABLE>

Interest expense on deposits consists of the following:
 
<TABLE>
<CAPTION>
                                                                      December 31,           June 30,
                                                                                    -------------------------------
                                                                          1996        1996       1995       1994
                                                                      ------------  ---------  ---------  ---------
<S>                                                                   <C>         <C>        <C>        <C>
Savings deposits....................................................   $    4,683   $   6,675  $   1,435  $     247
Certificates of deposit.............................................       23,538      39,240     12,282      5,354
                                                                      ------------  ---------  ---------  ---------
                                                                       $   28,221   $  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 collateralized by all stock in the FHLB, certain premises and
equipment and certain qualifying first mortgage loans, with a total collateral
value of approximately $147,602 at December 31, 1996. The FHLB advances of
$146,000 at December 31, 1996 mature in January 1997.
 
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.
 
                                      75
<PAGE>

             BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                          (In thousands)

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 
the Federal Deposit Insurance Corporation (FDIC), collectively, (regulators). 
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.

    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 
December 31, 1996, that the Bank meets all capital adequacy requirements to 
which it is subject.

    The Department set a capital standard of 11% for total risked 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 
December 31 and June 30, 1996 and June 30, 1995, the Bank's liquidity ratios 
were 16.53%, 15.41% and 11.44%, respectively. Effective May 1995, the 
Department reduced the Bank's minimum total risked 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 regulators 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.

                                     76

<PAGE>

             BEAL RINANCIAL CORPORATION AND SUBSIDIARIES

        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                          (In thousands)

NOTE I--REGULATORY MATTERS (CONTINUED)

    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>
                                                                                                       TO BE WELL
                                                                                                   CAPITALIZED UNDER
                                                            FOR CAPITAL                            PROMPT CORRECTIVE
                                    ACTUAL               ADEQUACY PURPOSES                         ACTION PROVISIONS
                               ---------------  ------------------------------------  -----------------------------------------
                                AMOUNT   RATIO  AMOUNT              RATIO               AMOUNT                  RATIO
-----------------------------  --------  -----  -------  ---------------------------  ----------    ---------------------------
<S>                            <C>       <C>    <C>      <C>                          <C>           <C>

As of December 31, 1996
  Total risk based capital...  $150,703  14.03% $85,903  GREATER THAN OR EQUAL TO 8%    $  107,379  GREATER THAN OR EQUAL TO 10%
  Tier I risk based capital..   137,514  12.81   42,951  GREATER THAN OR EQUAL TO 4         64,427  GREATER THAN OR EQUAL TO  6
  Leverage capital...........   137,514  10.05   54,722  GREATER THAN OR EQUAL TO 4         68,403  GREATER THAN OR EQUAL TO  5

As of June 30, 1996
  Total risk based capital...   149,984  16.57%  72,409  GREATER THAN OR EQUAL TO 8%        90,512  GREATER THAN OR EQUAL TO 10%
  Tier I risk based capital..   138,664  15.32   36,205  GREATER THAN OR EQUAL TO 4         54,307  GREATER THAN OR EQUAL TO  6
  Leverage capital...........   138,664  10.84   51,186  GREATER THAN OR EQUAL TO 4         63,982  GREATER THAN OR EQUAL TO  5

As of June 30, 1995 
  Total risk based capital...    58,189  12.56%  37,057  GREATER THAN OR EQUAL TO 8%        46,321  GREATER THAN OR EQUAL TO 10%
  Tier I risk based capital..    52,400  11.31%  18,528  GREATER THAN OR EQUAL TO 4%        27,793  GREATER THAN OR EQUAL TO  6%
  Leverage capital...........    52,400   8.26%  25,367  GREATER THAN OR EQUAL TO 4%        31,709  GREATER THAN OR EQUAL TO  5%

</TABLE>

                                     77

<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:
 
<TABLE>
<CAPTION>
                                                                                                        JUNE 30,
                                                                                   DECEMBER 31,   --------------------
                                                                                       1996         1996       1995
                                                                                   -------------  ---------  ---------
<S>                                                                                <C>            <C>        <C>
Deferred tax assets
  Accrued interest receivable....................................................    $   2,870    $   2,092  $     776
  Loan acquisition cost..........................................................          352          321        224
  Deferred loan fees.............................................................           80           28        189
  Accrued expenses...............................................................          109           42         50
  Allowance for loan loss........................................................          486
  Real estate held for investment or sale........................................          177          167        141
  Premises and equipment.........................................................          139          167         36
  Unrealized loss on investment securities.......................................          --            466       --
  Other..........................................................................          777          777        --
                                                                                        ------    ---------  ---------
    Gross deferred tax asset.....................................................        4,990        4,060      1,416

Deferred tax liabilities
  Loan discounts.................................................................          176          272        383
  Allowance for loan losses......................................................          --           714        645
  FHLB stock dividends...........................................................          281          175        148
  Gains on real estate transactions..............................................        1,785        1,303        --
  Accrued interest...............................................................        2,442        2,168        --
  Unrealized gains on investment securities......................................          382
  Other..........................................................................          --           --          28
                                                                                        ------    ---------  ---------
    Gross deferred tax liability.................................................        5,066        4,632      1,204
                                                                                        ------    ---------  ---------
    Net deferred tax asset (liability)...........................................    $     (76)   $    (572) $     212
                                                                                        ------    ---------  ---------
                                                                                        ------    ---------  ---------
</TABLE>
 
    Taxes on income consisted of the following:
 
<TABLE>
<CAPTION>
                                                                                               JUNE 30,
                                                                      DECEMBER 31,  -------------------------------
                                                                          1996        1996       1995       1994
                                                                      ------------  ---------  ---------  ---------
<S>                                                                   <C>           <C>        <C>        <C>
Federal
  Current...........................................................   $   11,214   $  21,095  $  13,646  $   6,354
  Deferred..........................................................       (1,251)      1,249        (57)      (373)
                                                                      ------------  ---------  ---------  ---------
                                                                            9,963      22,344     13,589      5,981
State...............................................................        2,189       2,809      1,587        791
                                                                      ------------  ---------  ---------  ---------
                                                                       $   12,152   $  25,153  $  15,176  $   6,772
                                                                      ------------  ---------  ---------  ---------
                                                                      ------------  ---------  ---------  ---------
</TABLE>
 
                                     78
<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 below were as follows:
 
<TABLE>
<CAPTION>
                                                                                               JUNE 30,
                                                                      DECEMBER 31,  -------------------------------
                                                                          1996        1996       1995       1994
                                                                      ------------  ---------  ---------  ---------
<S>                                                                   <C>           <C>        <C>        <C>
Computed tax at statutory Federal income tax rate...................   $   11,972   $  24,260  $  14,193  $   5,979
Increase (decrease) in taxes resulting from   
State tax, net of federal tax benefit...............................        1,246       2,195      1,047        505
  Tax credits.......................................................       (1,182)     (1,469)    --         --
  Other.............................................................          116         167        (64)       288
                                                                      ------------  ---------  ---------  ---------
   Total............................................................   $   12,152   $  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 a Section 
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. As of July 1, 
1996, the Bank was no longer permitted to utilize the reserve methodology for 
determining the allowable bad debt deduction 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 the next six years. However, special provisions of the Law allows the 
Bank to defer the recapture period for up to two years. At December 31, 1996, 
the Bank's tax bad debt reserves are approximately $11.9 million. It is 
expected the Bank will be able to meet the requirements for deferral of the 
recapture period for the next two years and, therefore, approximately $2.0 
million will be taken into taxable income annually beginning January 1, 1998.

NOTE K--OTHER OPERATING EXPENSE
 
OTHER OPERATING EXPENSE CONSISTS OF THE FOLLOWING:
 
<TABLE>
<CAPTION>
                                                                      FOR THE SIX         FOR THE YEARS ENDED
                                                                      MONTHS ENDED               JUNE 30,
                                                                      DECEMBER 31,   -------------------------------
                                                                          1996         1996       1995       1994
                                                                      -------------  ---------  ---------  ---------
<S>                                                                   <C>            <C>        <C>        <C>
Advertising and promotion...........................................    $     448    $     714  $     584  $     230
Office supplies and expense.........................................          127          394        267         94
Legal and professional..............................................        3,327        3,599      1,351        700
Expenses related to loan purchases..................................        1,108        2,409      1,375      1,191
Loan servicing fees.................................................        1,332        2,278      1,611        467
Other...............................................................          509          862        620        961
                                                                           ------    ---------  ---------  ---------
                                                                        $   6,851    $  10,256  $   5,808  $   3,643
                                                                           ------    ---------  ---------  ---------
                                                                           ------    ---------  ---------  ---------
</TABLE>

                                     79

<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 December 31, 1996, there were commitments to 
purchase loans of $1,649. Unfunded commitments to extend credit were $50,948.

    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.

                                     80
<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>
                                                                    DECEMBER 31, 1996         JUNE 30, 1996
                                                                 -----------------------  ----------------------
<S>                                                              <C>          <C>         <C>         <C>
                                                                  CARRYING       FAIR      CARRYING      FAIR
                                                                   AMOUNT       VALUE       AMOUNT      VALUE
                                                                 -----------  ----------  ----------  ----------
Financial assets:
  Cash and cash equivalents....................................  $    65,490  $   65,490  $   55,370  $   55,370
  Securities available for sale................................      123,939     123,939     194,699     194,699
  Loans receivable.............................................    1,054,204   1,055,653     897,414     934,999

Financial liabilities:
  Deposit liabilities..........................................   (1,043,433)               (891,304)   (892,756)
  Federal Home Loan Bank advances..............................     (146,000)   (146,000)   (185,000)   (185,000)
  Other borrowings.............................................      (14,748)    (14,748)    (21,468)    (21,468)
  Senior notes.................................................      (57,094)    (60,950)    (57,051)    (59,225)

</TABLE>
 
NOTE N--CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
 
                                      BEAL FINANCIAL CORPORATION
 
                                          BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,   JUNE 30,
                                                                         1996         1996
                                                                     ------------  ----------
<S>                                                                  <C>           <C>
Assets
  Cash.............................................................   $    9,624   $    8,420
  Investment in subsidiary.........................................      145,063      143,438
  Loans receivable, net............................................        5,817       --
  Other assets.....................................................       18,500        2,900
                                                                     ------------  ----------
                                                                      $  179,004   $  154,758
                                                                     ------------  ----------
                                                                     ------------  ----------
Liabilities and shareholders' equity
  Senior notes.....................................................   $   57,094   $   57,051
  Other borrowings.................................................        1,775        1,900
  Other liabilities................................................        3,337        2,635
  Shareholder's equity:
    Common stock...................................................          300          300
    Additional paid-in capital.....................................        2,740        2,740
    Retained earnings..............................................      113,049       90,994
    Unrealized gain (loss) on available for sale securities........          709         (862)
                                                                     ------------  ----------
     Total shareholders' equity....................................      116,798       93,172
                                                                     ------------  ----------
                                                                      $  179,004   $  154,758
                                                                     ------------  ----------
                                                                     ------------  ----------
</TABLE>
 
                                     81
<PAGE>


                                BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                                           (In thousands)

NOTE N-CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS-Continued

                                     BEAL FINANCIAL CORPORATION 

                                        STATEMENT OF INCOME

<TABLE>
<CAPTION>
                                                                    SIX
                                                                MONTHS ENDED      YEAR ENDED
                                                              DECEMBER 31, 1996  JUNE 30, 1996
                                                              -----------------  -------------
<S>                                                           <C>                <C>
Income
   Equity in undistributed earnings of subsidiary...........      $      53       $    45,648
   Dividends from subsidiary................................         25,000             3,181
       Total income.........................................         25,053            48,829
                                                                    -------      -------------
              
Interest expense
   Federal Home Loan Bank advances and other borrowings.....             66               162
   Senior notes.............................................          3,962             6,903
                                                                    -------      -------------
       Total interest expense...............................          4,028             7,065

Noninterest expense
   Salary and employee benefits.............................             15                 2
   Other operating expenses.................................            436               116
                                                                    -------      -------------
       Total noninterest expense............................            451               118
                                                                    -------      -------------
       Income before taxes..................................         20,574            41,646

Income tax benefit..........................................          1,480             2,514
                                                                    -------      -------------
       Net income...........................................      $  22,054       $    44,160
                                                                    -------      -------------
</TABLE>
 
                                     82
<PAGE>


                                BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                                           (In thousands)

NOTE N-CONDENSED PARENT OCMPANY ONLY FINANCIAL STATEMENTS-Continued

                                     BEAL FINANCIAL CORPORATION
 
                                     STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                    SIX
                                                                MONTHS ENDED      YEAR ENDED
                                                              DECEMBER 31, 1996  JUNE 30, 1996
                                                              -----------------  -------------
<S>                                                           <C>                <C>
Operating activities
  Net income................................................      $  22,054       $    44,160
  Adjustments to reconcile net income to net cash used in
  operating activities
    Equity in undistributed earnings of subsidiary, less
     dividends..............................................            (53)          (45,648)
    Changes in operating assets and liabilities 
     Increase in other assets...............................         (2,916)           (2,900)
     Increase in other liabilities..........................            744             2,635
                                                                    -------        -----------
      Net cash provided by (used in) operating activities...         19,829            (1,753)

Investing activities
  Capital contributed to subsidiary.........................         --               (46,252)
  Purchase of loans.........................................        (18,500)          --
                                                                    -------        -----------
      Net cash used in investing activities.................        (18,500)          (46,252)
 
Financing activities
  Dividends paid to minority shareholders...................         --                   (26)
  Repayments of other borrowings............................           (125)             (600)
  Proceeds from issuance of senior notes....................         --                57,051
                                                                    -------        -----------
      Net cash provided by (used in) financing activities...           (125)           56,425
                                                                    -------        -----------
      Net increase in cash and cash equivalents.............          1,204             8,420

Cash and cash equivalents, beginning of year................          8,420           --
                                                                    -------        -----------
Cash and cash equivalents, end of year......................      $   9,624       $     8,420
                                                                    -------        -----------
                                                                    -------        -----------

</TABLE>
 
                                     83
<PAGE>


                                BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
                                   (In thousands, except per share data)



NOTE O--SUMMARIZED 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>
                                                                              FOR THE SIX
                                                                              MONTHS ENDED
                                                                           DECEMBER 31, 1996
                                                                          --------------------
<S>                                                                       <C>        <C>
                                                                             1ST        2ND
                                                                          ---------  ---------
Interest income.........................................................  $  46,743  $  41,309
Interest expense........................................................     16,718     17,223
                                                                          ---------  ---------
  Net interest income...................................................     30,025     24,086

Provision for losses....................................................       (334)    (2,980)
Other income............................................................      4,022      6,038
Other expenses..........................................................     (9,288)   (17,363)
                                                                          ---------  ---------
  Income before income tax..............................................     24,425      9,781

Income tax expense......................................................      8,749      3,403
                                                                          ---------  ---------
  Net income............................................................  $  15,676  $   6,378
                                                                          ---------  ---------
                                                                          ---------  ---------
Income per common share.................................................  $   52.25  $   21.26
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>

                                     84

<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>
                                                                             FOR THE YEAR ENDED JUNE 30, 1996
                                                                        ------------------------------------------
<S>                                                                     <C>        <C>        <C>        <C>
                                                                           1ST        2ND        3RD        4TH
                                                                        ---------  ---------  ---------  ---------
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)
                                                                        ---------  ---------  ---------  ---------
  Net earnings before income tax......................................      8,741     10,666     25,694     24,212

Income tax expense (benefit)..........................................      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 0-SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)-Continued

<TABLE>
<CAPTION>
                                                                             FOR THE YEAR ENDED JUNE 30, 1995
                                                                        ------------------------------------------
<S>                                                                     <C>        <C>        <C>        <C>
                                                                           1ST        2ND        3RD        4TH
                                                                        ---------  ---------  ---------  ---------
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>
 

NOTE P--401 (K) PLAN
 
    The Company offers a 401K plan to all full time employees who have 
reached the age of 21 and completed three months of service. The Company 
matches 50% of the employees contribution up to 6% of base salary. During the 
six months ended December 31, 1996, the Company made matching contributions 
of $37.
 
NOTE Q - SUBSEQUENT EVENT

    On March 13, 1997, the Corporation 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 Corporation, except Beal Affordable Housing, Inc. and BRE-N, Inc.

    As a result of the aforementioned application, beginning January 1, 1997, 
the Corporation and all of its subsidiaries electing S Corporation status 
will no longer 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 Corporation 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 the Corporation will be the responsiblity of its 
stockholders.
                                     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.
 
Executive Officers of the Company
 
    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 COMPANY
         -----------------               ----------------------------------
  
         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

                                      87


<PAGE>

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             44      Chairman of the Board                                  1985           1997
David C. Meek              52      President, Chief Executive Officer and Director        1996           1997
David R. Farmer            48      Executive Vice President, Chief Operating
                                     Officer and Director                                 1993           1997
Timothy M. Fults           43      Director and Secretary                                 1985           1997
Bernard L. Weinstein       54      Director                                               1991           1997
Susan D. Arnold            54      Director                                               1992           1997
Lawrence C. Blanton        60      Director                                               1992           1997
R. Michael Eastland        51      Director                                               1992           1997
David L. Goldstein, CPA    38      Director                                               1993           1997

</TABLE>
 
------------------------
(1) At December 31, 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.
 
    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.

                                       88


<PAGE>

    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.
 
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 42 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.

                                       89


<PAGE>

    William T. Saurenmann. Mr. Saurenmann, age 48 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 and was appointed Senior Vice
President-Commercial Loans in October 1996.. 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. Mr. Lewis
was appointed Senior Vice President-Controller in October 1996. 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.
 
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 six months ended
December 31, 1996, the Board of Directors met six times. During the six months
ended December 31, 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 six
months ended December 31, 1996, this committee met one time.

                                       90


<PAGE>

    Meetings and Committees of the Bank.  The Bank's Board of Directors meets at
least once every month and held seven meetings during the six months ended
December 31, 1996. During the six months ended December 31, 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 one time during the six months ended December 31, 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 19 times during the six months ended December 31, 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 one time during the six months ended
December 31, 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 four times during the
six months ended December 31, 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 met one time during the six months ended December 31, 1996.
 
Compensation Committee Interlocks and Insider Participation
 
    During the six months ended December 31, 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. In addition, during 
the six months ended December 31, 1996, Mr. Beal received a bonus of 
$10,000,000 in recognition of his past services to the Company and the Bank. 
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 during the six months ended December 31, 1996.
 
                                       91


<PAGE>

ITEM 11. EXECUTIVE COMPENSATION [DMM TO CHECK]
 
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.

                         SUMMARY COMPENSATION TABLE(1)
 
<TABLE>
<CAPTION>
                                                                                  ANNUAL COMPENSATION
                                                                                  --------------------     ALL OTHER
                                                                                   SALARY      BONUS     COMPENSATION
    NAME AND PRINCIPAL POSITION                                          YEAR        ($)        ($)         ($)(1)
---------------------------------------------------------------------  ---------  ---------  ---------  ---------------
<S>                                                                    <C>        <C>        <C>        <C>
David C. Meek, President and Chief Executive Officer(2)                     1996  $ 200,000  $ 638,390     $   4,894
                                                                            1995        N/A        N/A           N/A
                                                                            1994        N/A        N/A           N/A
David R. Farmer, Executive Vice President and Chief Operating Officer       1996    147,980    125,000         3,747
                                                                            1995    149,555    102,500         3,615
                                                                            1994    114,375     75,000         2,598
William T. Saurenmann, Senior Vice President-Lending                        1996    103,845    105,000         2,622
                                                                            1995     91,666    102,500         2,724
                                                                            1994     78,084     90,181         2,629
Molly Curl, Senior Vice President/ Compliance(3)                            1996     90,000    100,000         3,047
                                                                            1995     95,727    122,500         2,940
                                                                            1994     77,076     15,000         3,048
James W. Lewis, Jr. Senior Vice President/ Controller                       1996     77,971     65,000         2,608
                                                                            1995     70,021     52,500         2,280
                                                                            1994     61,825     30,000         2,148
Clark Enright, Senior Vice President/ Commercial Loans(4)                   1996     77,916     82,500         1,250
                                                                            1995        N/A        N/A           N/A
                                                                            1994        N/A        N/A           N/A
</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.
 
(4) Mr. Clark joined the Bank in February 1996.
 
EMPLOYMENT AGREEMENTS
 
    The Bank has entered into an employment agreement with Senior Vice President
Curl. The employment agreement with Ms. Curl provides for an initial term of
three years starting in February, 1997 and a base salary equal to $120,000,
subject to annual review and adjustment by the Board of Directors. The agreement
also provides participation in an equitable manner in employee benefits
applicable to executive personnel.
 
    The agreement is terminable by Ms. Curl upon 30 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 December 31, 1996 under circumstances
entitling her to benefits pay as described above, she would have been entitled
to a lump sum payment of approximately $82,500.

                                      92
<PAGE>
BENEFITS
 
    General.  The Bank currently maintains an employee benefit program 
providing, among other benefits, major medical insurance, dental benefits, 
disability insurance and life insurance. The Bank also maintains 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 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. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
 
    The following table sets forth information as of December 31, 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.
 
                                                    SHARES
                                                 BENEFICIALLY    PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED        OF CLASS
--------------------------------------------     ------------    --------

D. Andrew Beal, Chairman of the Board of the        297,000        99.0%
  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 Company and Director and Secretary of
  the Bank 
5956 Sherry Lane #800 
Dallas, TX 75225

                                       93

<PAGE>

ITEM 13. 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 December 
31, 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 by a certificate of deposit owned by D. Andrew Beal. The debt 
had a balance of $1.8 million at December 31, 1996 and was repaid in full 
subsequent to December 31, 1996.
 
                                       94

<PAGE>

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 December 31, 1996 and at
      June 30, 1996 and 1995
    Consolidated Statements of Income for the six months ending December 31,
      1996 and the Years Ended June 30, 1996, 1995 and 1994
    Consolidated Statements of Changes in Stockholders' Equity for the six
      months ending December 31, 1996 and the Years Ended June 30, 1996, 1995
      and 1994
    Consolidated Statements of Cash Flows for the six months ending December
      31, 1996 and the Years Ended June 30, 1996, 1995 and 1994
    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:
 
                                                                  REFERENCE
                                                                     TO
                                                                    PRIOR
                                                                    FILING
REGULATION                                                        OR EXHIBIT
  S-K                                                               NUMBER
 EXHIBIT                                                           ATTACHED
 NUMBER                    DOCUMENT                                 HERETO
----------  -----------------------------------------            -----------

  2         Plan of Acquisition, Reorganization,                 None 
              Arrangement, Liquidation or Succession
  3.1       Certificate of Incorporation                           *
  3.2       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 Section 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               Not required
              earnings
  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
  21        Subsidiaries of Registrant                             ***
  22        Published report regarding matters                   None
              submitted to vote of security holders
  23        Consents of Experts and Counsel                      None
  24        Power of Attorney                                    Not required
  27        Financial Data Schedule                                ***
  99        Additional Exhibits                                  Not applicable
 
------------------------
 
*   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.

    (b) Reports on Form 8-K
 
    No reports on Form 8-K were filed during the six-month period ended
    December 31, 1996.
 
                                       96

<PAGE>

                               INDEX TO EXHIBITS
 
EXHIBIT
NUMBER                                  DOCUMENT
--------  --------------------------------------------------------------------
 
 3.1      Certificate of Incorporation*
 
 3.2      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)*
 
 10       Material contracts:
          (a) Employment Agreement with Margaret Curl* 
          (b) Employment Agreement with David C. Meek**
 
 21       Subsidiaries of Registrant***
 
 27       Financial Data Schedule***
 
------------------------
 
*   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.