SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________
FORM 10-Q
[X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
0R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Texas 75-2583551
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
Suite 300, LB66, 15770 North Dallas Parkway, Dallas, Texas 75248
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No [ ]
As of September 30, 1999, there were 300,000 shares of the Registrant's
common stock issued and outstanding.
<PAGE>
BEAL FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements. . . . . . . . . . . . . . . . . 1
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 5
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands,except share data)
September 30, December 31,
1999 1998
------------ ------------
Cash $ 501 $ 5,540
Interest bearing deposits 77,783 66,599
----------- -----------
CASH AND CASH EQUIVALENTS 78,284 72,139
Accrued interest receivable 12,000 12,983
Securities available for sale 73,319 89,581
Net loans receivable 1,046,838 1,059,413
Less allowance for losses (12,684) (13,867)
----------- ----------
1,034,154 1,045,546
Federal Home Loan Bank stock 7,983 9,877
Real estate held for investment or sale 95,354 106,353
Premises and equipment, net 5,689 5,699
Other assets 10,867 11,296
----------- ----------
TOTAL ASSETS $ 1,317,650 $1,353,474
=========== ==========
Deposit accounts $ 1,042,681 $1,005,617
Federal Home Loan Bank advances 25,000 80,000
Senior notes, net 57,385 57,295
Other borrowings 6,860 7,083
Other liabilities 22,007 12,253
---------- ----------
TOTAL LIABILITIES 1,153,933 1,162,248
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 300
Paid-in capital 2,740 2,740
Accumulated other comprehensive
income 601 3,909
Retained earnings 220,076 184,277
----------- ----------
223,717 191,226
Stockholder note receivable (60,000) ---
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 163,717 191,226
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,317,650 $1,353,474
=========== ==========
See notes to consolidated financial statements
1
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $28,098 $22,016 $97,871 $71,094
Purchased discount accretion 6,230 10,035 27,888 34,544
Investment securities 2,334 2,894 7,097 8,002
--------- --------- ---------- --------
TOTAL INTEREST INCOME 36,662 34,945 132,856 113,640
Interest expense:
Deposits 13,227 10,836 37,822 35,691
Federal Home Loan Bank
advances and other borrowings 179 148 2,875 1,081
Senior notes 2,049 2,022 6,126 6,049
--------- --------- ---------- --------
TOTAL INTEREST EXPENSE 15,455 13,006 46,823 42,821
--------- --------- ---------- --------
NET INTEREST INCOME 21,207 21,939 86,033 70,819
Provision for loan losses 1,312 176 3,227 1,240
--------- --------- ---------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,895 21,763 82,806 69,579
Other income
Gain on sale of loans --- --- 9 10
Gain on real estate transactions 1,022 22,017 12,871 34,169
Other real estate operations, net 640 994 3,092 5,224
Other operating income 478 154 1,984 515
--------- --------- ---------- -------
TOTAL NONINTEREST INCOME 2,140 23,165 17,956 39,918
Other expense
Salaries and employee benefits 2,594 2,625 6,506 6,200
Occupancy and equipment 487 512 1,504 1,690
SAIF deposit insurance premium 170 150 506 467
Other operating expenses 2,692 1,761 7,711 6,579
--------- --------- ---------- -------
TOTAL NONINTEREST EXPENSES 5,943 5,048 16,227 14,936
--------- --------- ---------- -------
INCOME BEFORE INCOME TAXES 16,092 39,880 84,535 94,561
Income Taxes 382 954 4,086 3,819
--------- --------- ---------- -------
NET INCOME $15,710 $38,926 $80,449 $90,742
========= ========= ========== =======
Income per common share $52.37 $129.75 $268.16 $302.47
Weighted average number of
common shares outstanding 300 300 300 300
</TABLE>
See notes to consolidated financial statements
2
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BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
Nine Months
ended September 30
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 80,449 $ 90,742
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,426 1,531
Accretion of purchased discount (27,888) 4,544)
Provision for loan losses 3,227 1,240
Amortization of bond premium and underwriting costs 627 551
Gains on real estate transactions (12,871) (4,169)
Gain on sales of loans (9)
Loss on sale of premises and equipment --- 189
Changes in operating assets and liabilities
Accrued interest receivable (575) 1,506
Prepaid expenses and other assets 834 (1,072)
Accrued interest payable-bonds (1,833) (1,833)
Other liabilities and accrued expenses 5,994 (6,730)
---------- ---------
Net cash provided by
operating activities 49,381 17,411
INVESTING ACTIVITIES
Proceeds from:
Sales of loans 278 ---
Loan collections, less originations and advances 209,452 230,977
Maturities of securities available for sale 13,331 14,657
Sales of real estate 30,489 98,079
Sales of Federal Home Loan Bank stock 2,596 4,181
Sales of premises and equipment --- 79
Purchases of:
Loans and bid deposits on loan purchases (177,401) (3,144)
Federal Home Loan Bank stock (702) (340)
Real estate held for investment or sale (2,987) (3,020)
Premises and equipment (633) (245)
---------- ---------
Net cash provided by
investing activities 74,423 341,224
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 37,064 (214,942)
Proceeds from long-term debt --- ---
Repayments of long-term debt (223) (464)
Proceeds from (repayments of) advances
from the Federal Home Loan Bank (55,000) (110,000)
Loan to shareholder (60,000) ---
Cash dividends paid (39,500) (68,200)
--------- ---------
Net cash used in
financing activities (117,659) (393,606)
--------- ---------
Net increase (decrease) in cash
and cash equivalents 6,145 (34,971)
Cash and cash equivalents at beginning of period 72,139 150,849
--------- ---------
Cash and cash equivalents at end of period $ 78,284 $ 115,878
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 42,934 $ 45,059
Income taxes 4,571 10,386
Supplemental disclosure of noncash investing
and financing activities
Real estate acquired in foreclosure or in
settlement of loans $ 17,957 $ 9,236
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which requires reporting of comprehensive
income in the financial statements. The components of comprehensive income are
as follows:
Three months Nine months
ended ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- -------- ------
(In thousands) (In thousands)
Net income $15,710 $38,926 $80,449 $90,742
Other comprehensive income net
unrealized gains (losses) on
investment securities - available
for sale (309) 892 (3,308) 1,068
------- ------- ------- -------
Comprehensive income $15,401 $39,818 $77,141 $91,810
======= ======= ======= =======
NOTE B--LOAN TO SHAREHOLDER
In January, 1999, the Company funded a $60,000,000 loan to the majority
shareholder. As of September 30, 1999, Interest in the amount of $4,392,500 has
been earned on this loan. The aforementioned loan and interest amounts were not
used in the calculation of income\expense\yield ratios.
NOTE C--INCOME TAXES
On March 15, 1999, the Company filed an application with the Internal Revenue
Service to elect S Corporation status for federal income tax purposes effective
January 1, 1999. This election covered Beal Affordable Housing, Inc., BRE-1
Inc., and BRE-N, Inc. The Company's remaining subsidiaries have been S
Corporations since January 1, 1997.
The Company and all of it's subsidiaries no longer pay federal income taxes,
except for federal taxes related to the recognition of built-in gains which
existed at January 1, 1997, (January 1, 1999, for the above named subsidiaries.)
For the nine months ended September 30, 1999, the Company recorded federal tax
expense of $ 2,313,619, related to the recognition of built-in gains. Except as
discussed above, the liability for federal income taxes of the Company is the
responsibility of it's shareholders.
4
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
When used In this Form 10-Q, the words "believes", "anticipates",
"expects", and similar expressions are intended to identify forward looking
statements. Such statements are subject to certain risks and uncertainties which
could cause actual results to differ materially. Readers are cautioned not to
place undue reliance on these forward looking statements which speak only as of
the date hereof, and to advise readers that various factors including regional
and national economic conditions, changes in levels of market interest rates,
credit risk of lending activities, and competitive and regulatory factors, could
affect the Company's financial performance and could cause the Company's actual
results for future periods to differ materially from those anticipated or
projected. The company undertakes no obligation to publicly release the results
of any revisions to forward looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Financial Condition
Beal Financial Corporation ("Beal Financial" and with it's subsidiaries, the
"Company"), the parent company of Beal Bank, ssb, (the "Bank") had total assets
of $1.3 billion at September 30, 1999 representing a slight decrease of $35.8
million or 2.7% at December 31, 1998. The decrease resulted primarily from a
decrease in securities available for sale of $16.3 million, a decrease in net
loans receivable of $12.6 million, a decrease in real estate held for investment
or sale of $11.0 million and a decrease of $1.9 million in Federal Home Loan
Bank ("FHLB") stock. These decreases were partially offset by an increase of
$6.1 million in cash and cash equivalents. The decrease in securities available
for sale was the result of repayments in the ordinary course of business. The
decrease in net loans receivable was due primarily to normal principal
repayments of loans, early loan payoffs and foreclosures of loans partially
offset by $242.8 million in loan purchases and loan originations. The decreases
in real estate held for investment or sale was primarily the result of $29.8
million in sales of other real estate, partially offset by foreclosures of loans
of $18.0 million. The increase in cash and cash equivalents was due to normal
operations. (See also - Liquidity and Capital Resources)
Total liabilities at September 30, 1999 and December 31, 1998 remained
virtually unchanged at $1.2 billion. A decline of $55.0 million in FHLB advances
was partially offset by an increase in deposit accounts of $37.1 million and an
increase of $9.8 million in other liabilities. The repayment of the advances
from the FHLB was primarily funded with cash flow provided from normal
operations.
Stockholders' equity decreased $27.5 million or 14.4%, from $191.2 million
at December 31, 1998 to $163.7 million at September 30, 1999. The decrease was
primarily due to the accounting treatment of a $60.0 million loan made to the
Company's primary stockholder and $44.7 million of cash dividends to
stockholders, partially offset by net income of $80.4 million for the nine
months ended September 30, 1999. Even though the $60.0 million Note Receivable
is an asset of the Company, due to its nature as an affiliate transaction,
accounting standards and regulatory oversight have prompted the Company to
deduct it from capital and treat it in the same manner as a dividend.
5
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1999 and 1997
Net income. For the nine months ended September 30, 1999, net income of
$80.4 million represented a decrease of $10.3 million, or 10.6% from the nine
months ended September 30, 1998. As discussed in more detail below, the decrease
was primarily due to a decrease in total noninterest income of $22.0 million and
an increase of $1.3 million in total noninterest expense which offset an
increase of $13.2 million in net interest income after provision for loan
losses.
Interest income. Interest income increased $19.2 million, or 16.9%, from
$113.6 million at September 30, 1998 to $132.9 million at September 30, 1999.
The majority of the total increase in interest income was due to an increase in
interest income on loans including fees, of $26.8 million. This increase was
partially offset by decreases in purchased discount accretion of $6.7 million
and in interest income on investment securities of $905,000. The average balance
of interest-earning assets increased $241.0 million during this period, as
compared to the same period a year ago, primarily due to an increase in the
average balance of loans receivable of $250.5 million and an increase in the
average balance of interest-earning deposits of $12.1 million, partially offset
by a decrease in the average balance of investment securities, primarily
mortgage-backed securities, of $23.4 million. The net interest spread decreased
from 9.4% for the nine months ended September 30, 1998, to 8.6% for the same
period ended September 30, 1999, primarily due to a decrease in the yield on
average earning assets from 15.5% to 14.0% for the nine month periods ending
September 30, 1998 and 1999, respectively. This decrease was due primarily to a
decrease in the amount of purchased discount accretion taken in relation to the
amount of loans outstanding.
Interest expense. Interest expense increased $4.0 million, or 9.4%, from
$42.8 million at September 30, 1998 to $46.8 million at September 30, 1999. The
increase resulted primarily from an increase of $198.9 million in the average
balance of interest-bearing liabilities from $946.4 million to $1.1 billion at
September 30, 1999. The average rate paid on interest bearing liabilities
decreased from 6.0% at September 30, 1998 to 5.5% at September 30, 1999. The
increase in average interest-bearing liabilities was due primarily to an
increase in the average balance of certificate accounts of $134.3 million, an
increase in the average balance of FHLB advances of $51.7 million , and an
increase of $13.1 million in the average balance of savings 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 at
a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses increased $2.0 million for the nine months ended
September 30, 1999, as compared to the nine months ended September 30, 1998. The
allowance for losses as a percentage of net loans receivable decreased slightly
from 1.3% at December 30, 1998 to 1.2% at September 30, 1999.
The Company establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio as well as a specific
analysis of certain impaired loans. This analysis includes an evaluation of the
Company's loan portfolio, past loan loss experience, current economic
conditions, loan volume and growth, composition of the loan portfolio and other
relevant factors. Management's analysis results in the establishment of
allowance amounts by loan type based on allocations by asset classification. The
allowance for loan losses as a percentage of net non- performing loans was 14.0%
as compared to 8.4% at September 30, 1998. Net non-performing loans decreased
$28.9 million, from $119.6 million at September 30, 1998 to $90.7 million at
September 30, 1999.
Although management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted with absolute certainty in advance. In addition, bank regulatory
agencies, as an integral part of the examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance level based upon their judgment of the
information available to them at the time of their examination.
6
<PAGE>
Non-interest income. Total non-interest income decreased $22.0 million, or
55.0% to $18.0 million at September 30, 1999 from $39.9 million at September 30,
1998. The decrease was due primarily to a decrease in the income attributable to
the gain on real estate transactions of $21.3 million and a decrease in the
income from other real estate operations, net of $2.1 million partially offset
by an increase in other operating income of $1.5 million.
Non-interest expense. Non-interest expense increased $1.3 million, or 8.6%
to $16.2 million at September 30, 1999 from $14.9 million at September 30, 1998.
The increase was primarily due to an increase in other operating expenses of
$1.1 million. The majority of this increase was due to an increase of $694,000
in loan servicing expense as a result of an increase in one- to four-family
residential loans and automobile loans purchased. These loans require additional
servicing efforts due to the number of relatively small balance loans.
Results of Operations for the Three Months Ended September 30, 1999 and 1998
Net income. For the three months ended September 30, 1999, net income of
$15.7 million represented a decrease of $23.2 million, or 60.0% from the three
months ended September 30, 1998. As discussed in more detail below, the decrease
was primarily due to a decrease in noninterest income of $21.0 million, a
decrease in net interest income after provision for loan losses of $1.9 million
and an increase in noninterest expenses of $895,000, offset slightly by a
decrease in income taxes of $572,000.
Interest income. Interest income increased $1.7 million or 4.9%, from $34.9
million at September 30, 1998 to $36.7 million at September 30, 1999. The
increase was due primarily to an increase in interest income on loans, including
fees of $6.1 million, partially offset by a decrease in purchased discount
accretion of $3.8 million and a decrease in interest income on investment
securities of $560,000. The average balance of interest-earning assets increased
$282.6 million during this period, as compared to the same period a year ago,
primarily due an increase in the average balance of net loans receivable of
$308.2 million, and an increase in the average balance of FHLB stock of $1.6
million, partially offset by a decrease in the average balance of investment
securities, primarily mortgage-backed securities, of $24.4 million and a
decrease in the average balance of interest earning deposits of $2.8 million.
The net interest spread decreased from 9.1% for the three months ended September
30, 1998 to 6.1% for the same period ending September 30, 1999 primarily due to
a decrease in the yield on average earning assets from 15.14% to 11.64% for the
three month periods ending September 30, 1998 and September 30, 1999,
respectively. This decrease was due primarily to a decrease in the amount of
purchased discount accretion taken.
Interest expense. Interest expense increased $2.4 million, or 18.8%, from
$13.0 million at September 30, 1998 to $15.5 million at September 30, 1999. The
increase in expense was due to an increase of $268.8 million in the average
balance of interest-bearing liabilities from September 30, 1998 to September 30,
1999. The average rate paid on interest bearing liabilities decreased from 6.1%
at September 30, 1998 to 5.5% at September 30, 1999. The increase in average
interest-bearing liabilities was due primarily to an increase in the average
balance of certificate accounts of $248.4 million, an increase in the average
balance of savings deposits of $17.2 million, and an increase in the average
balance of FHLB advances of $3.3 million.
7
<PAGE>
Provision for loan losses. The provision for loan losses is determined by
management as an amount sufficient to maintain the allowance for loan losses at
a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses increased $1.1 million for the three months ended
September 30, 1999, as compared to the three months ended September 30, 1998.
Non-interest income. Total non-interest income decreased $21.0 million, or
90.8% to $2.1 million at September 30, 1999 from $23.2 million at September 30,
1998. This decrease was due to a decrease in the income attributable to the gain
on real estate transactions of $21.0 million.
Non-interest expense. Non-interest expense increased $895,000, or 17.7%
from $5.0 million for the three months ended September 30, 1998 to $5.9 million
for the three months ended September 30, 1999. The increase was due primarily to
an increase of $931,000 in other operating expenses of which $694,000 was
specifically related to an increase in loan servicing expenses as a result of
the loan purchases described above in the last quarter of 1998.
Federal and State Taxation
Federal Taxation. Beal Financial and all of its subsidiaries have elected
Subchapter-S status for federal income 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 their previous June 30 year-ends.
Beal Financial generally will not be responsible to pay any federal taxes
on its net income. The only exception will involve possible Subchapter-C tax
liabilities on net built -in gains which the Company had as of January 1, 1997,
which may have to be recognized during the 10 year period ending December 31,
2006. Recognition of built-in gains/losses are also subject to certain
limitations. Approximately $2.3 million of the tax expense for the nine months
ended September 30, 1999, related to tax on recognized built-ins gains. It is
not anticipated that the tax expenses related to recognized built-ins gains will
be material in any given quarter.
The future tax liability for the taxable earnings of Beal Financial will be
the responsibility of the shareholders of Beal Financial. The Board of Directors
of Beal Financial in October, 1999, declared dividends due and payable to the
shareholders, of $2.9 million. It is anticipated that future dividends to
shareholders will be declared in an amount equal to at least their tax liability
related to the earnings of Beal Financial.
8
<PAGE>
Texas State Income Taxation. Beal Financial currently files Texas franchise
tax returns. Texas imposes a franchise tax on the taxable income of savings
institutions and other corporations. The franchise tax equals the greater of
$2.50 per $1,000 of taxable capital apportioned to Texas, of $45.00 per $1,000
or net taxable earned surplus apportioned to Texas. Taxable earned surplus is
the federal corporate taxable income of each company within the corporate group
determined on a separate company basis with certain modifications. Approximately
$1.8 million of the tax expense for the nine months ended September 30, 1999,
related to franchise tax, primarily Texas franchise tax.
Liquidity and Capital Resources
The Company's primary sources of funds for operations are deposits obtained
from its market area, principal and interest payments on loans, brokered
deposits, and advances from the FHLB of Dallas and to a lesser extent, from the
sale of assets. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.
Historically, the primary investing activity of the Company has been the
purchase of discounted loans from various U.S. government agencies through the
sealed bid process or auctions and from other private sellers. During the three
and nine month periods ended September 30, 1999, the Company purchased $29.2
million and $177.3 million of net loans, respectively as compared to purchases
of $2.0 million and $3.2 million for the same periods ended last year. Loan
originations for the three and nine month periods ended September 30, 1999
totaled $9.0 million and $65.5 million, respectively as compared to loan
originations of $17.5 million and $24.9 million for the same periods last year.
The Company's primary financing activity has historically been the
attraction of deposits. During the nine months ended September 30, 1999, the
Company's deposit levels remained virtually unchanged, increasing only $37.1
million. The Company had senior notes, net, of $57.5 million and other
borrowings of $6.9 million at September 30, 1999. Subsequent to quarter end the
Company repurchased $12.9 million of the senior notes at par plus one-eighth in
an unsolicited transaction.
The Company continues to have the ability to borrow additional funds from
the FHLB by pledging assets as collateral, subject to certain restrictions. At
September 30, 1999, the Company had an undrawn advance arrangement with the FHLB
for $278.9 million.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Texas Savings and Loan Department ("Texas Department"). Unless approved
in advance by the Texas Department, a Texas savings bank is required to maintain
a minimum of 10% of the previous quarters average deposits in liquid assets. At
September 30, 1999, the Bank's liquidity ratio was 15.0%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash equivalents is dependent on the Company's operating, financing, and
investing activities during any given period. At September 30, 1999, the Company
had cash and cash equivalents of $78.3 million.
The Company anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At September 30, 1999, the Company had
one outstanding commitment to originate a loan for $15.0 million and no
outstanding commitments to purchase loans. Certificates of deposits which are
scheduled to mature in one year or less at September 30, 1999 totaled $835.6
million. Due to the Company's high interest rate spread, management has
typically relied upon interest rate sensitive short-term deposits to fund its
loan purchases. The Company believes the potential interest rate risk is
acceptable in view of the Company's belief that it can maintain an acceptable
net interest spread.
9
<PAGE>
At September 30, 1999, the Bank exceeded each of its three capital
requirements and is considered well capitalized for regulatory purposes. The
following is a summary of the Bank's regulatory capital position at September
30, 1999.
At September 30, 1999
--------------------------------------
Required Actual
----------------- ------------------
Amount Percent Amount Percent
--------- ------- -------- -------
(Dollars in Thousands)
Leverage capital................ $65,508 5.0% $200,022 15.3%
Tier 1 capital.................. 56,456 6.0 200,022 21.3
Total risk-based capital........ 94,094 10.0 211,795 22.5
On October 13, 1997, the Texas Department notified the Bank's Board of
Directors that they were rescinding the requirement that the Bank maintain
minimum capital requirements of 9% for Tier 1 capital and 11% for risk-based
capital, based upon an acceptable business plan submitted to the Texas
Department by the Bank. The business plan on file with Texas Department
generally anticipates a decline in total assets, absent the Company being the
successful bidder for additional bulk asset purchases; a continued improvement
in the Company's level of classified assets; the discontinuation of the
Company's foreign lending program; and the Bank maintaining a Tier 1 capital
ratio of at least 10%. The Texas Department must be provided with prior written
notice of any actions planned or anticipated that might reasonably be expected
to result in a material deviation from the business plan. The Bank requested and
received approval to deviate from the business plan during the last quarter of
1998 due to the bulk purchase of single family residential loans. Aside from the
approval by the regulators to deviate from the business plan with respect to the
bulk loan purchase, the Bank is in compliance with the plan as classified asset
levels continue to improve, the Bank's Tier 1 capital level is significantly
above 10% and the Bank discontinued its foreign lending program prior to
October, 1997 when the plan was submitted.
Year 2000
The company's Year 2000 project team has continued its efforts to ensure
that all mission critical and business essential system will continue to operate
through the transition to the next century.
The project team has completed the various phases of the project:
o Assessment - All systems were analyzed to identify mission critical
systems and processes.
o Renovation - Modifications were made to software, hardware and
firmware to make all system, including mission critical systems, Y2K
complaint.
o Validation - The Validation Test Plan included in the Year 2000 Test
Plan was used to as a guideline to test and document all mission
critical systems. Test dates and results are included as appendices.
Testing of all systems, including mission critical systems has been
completed.
10
<PAGE>
o Implementation - The Project Action Plan included in the Year 2000
Test Plan was used to as a guideline to implement and document all
mission critical system upgrades and renovations. All renovated
software, firmware, and hardware is now being used in production on a
daily basis.
o Contingency Planning - A Business Resumption Contingency Plan ("BRCP")
was completed by the end of June 1999. Validation of the BRCP has also
been completed through internal testing and third party audits.
Contingency training has been completed for employees.
o Year 2000 status information has been mailed to customers on an
ongoing basis. Multiple mass mailings of letters and brochures
regarding our Year 2000 status have been issued and are slated through
year end.
The Company is expensing the cost of all required system changes and such
costs are funded through operating cash flows. The total estimated cost of the
Year 2000 conversion project is approximately $150,000. The Company does not
expect significant increases in future data processing costs relating to Year
2000 compliance.
Impact on Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Nearly all the
assets and liabilities of the 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 no necessarily move to the same
extent as changes in the price of goods and services.
11
<PAGE>
Ratios of Earnings to Fixed Charges
The Company's consolidated ratios of earnings to fixed charges for the
three months ended September 30, 1999 are set forth below. Earnings used in
computing the ratios shown consist of earnings from continuing operations before
taxes and interest expense. Fixed charges, excluding interest on deposits,
represent interest expense on borrowings. Fixed charges, including interest on
deposits, represent all of the foregoing items plus interest on deposits.
Interest expense (other than on deposits) includes interest on FHLB borrowings,
the Senior Notes and other borrowed funds.
For the
Three Months Ended
September 30, 1999
Excluding interest on deposits................... 8.2:1
Including interest on deposits................... 1.2:1
Market Risk
The Company's estimated sensitivity to interest rate risk, as measured by
the estimated interest earnings sensitivity profile and the interest sensitivity
gap analysis, has not materially changed from the information disclosed in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 1. 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 condition or 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.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item. 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Subsequent to quarter end the Company purchased $12.9 million of the senior
notes at par plus one eighth in an unsolicited transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 27 - Financial Data Schedule
12
<PAGE>
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEAL FINANCIAL CORPORATION
Registrant
Date: November 15, 1999 /s/ D. Andrew Beal
---------------------------------------
D. Andrew Beal, Chairman and President
Date: November 15, 1999 /s/ James W. Lewis, Jr.
---------------------------------------
James W. Lewis, Jr.
Chief Accounting Officer
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