SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
( ) 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 of other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
As of June 30, 2000, 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 . . . . . . . . . . . . . . . . . . . . . .. .13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .14
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands,except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash $ 252 $ 746
Interest bearing deposits 64,789 114,670
------------ -----------
CASH AND CASH EQUIVALENTS 65,041 115,416
Accrued interest receivable 12,479 12,879
Securities available for sale 162,395 70,080
Net loans receivable 1,197,396 1,128,753
Less allowance for losses -10,280 -12,344
----------- ----------
1,187,116 $1,116,409
Federal Home Loan Bank stock 12,115 9,670
Real estate held for investment or sale 84,930 93,166
Premises and equipment, net 5,375 5,520
Other assets 6,714 6,766
----------- ----------
TOTAL ASSETS $1,536,165 $1,429,906
=========== ==========
LIABILITIES
Deposit accounts $1,104,831 993,289
Federal Home Loan Bank advances 170,000 191,000
Senior notes, net 31,418 44,336
Other borrowings 7,143 7,272
Other liabilities 21,170 13,847
---------- ----------
TOTAL LIABILITIES 1,334,562 1,249,744
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 300
Paid-in capital 2,740 2,740
Accumulated other comprehensive
income 2,118 -443
Retained earnings 256,445 237,565
--------- ----------
261,603 240,162
Stockholder note receivable -60,000 -60,000
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 201,603 180,162
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,536,165 $1,429,906
========== ==========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $29,940 $39,827 $58,772 $69,773
Purchased discount accretion 6,424 11,985 12,958 21,658
Investment securities 2,895 2,141 5,182 4,763
------- ------- ------- -------
TOTAL INTEREST INCOME 39,259 53,953 76,912 96,194
Interest expense:
Deposits 14,824 12,066 28,606 24,595
Federal Home Loan Bank
advances and other borrowings 2,728 1,406 4,675 2,696
Senior notes 1,385 2,042 2,931 4,077
------- ------- ------- -------
TOTAL INTEREST EXPENSE 18,937 15,514 36,212 31,368
------- ------- ------- -------
NET INTEREST INCOME 20,322 38,439 40,700 64,826
Provision for loan losses 962 742 1,586 1,915
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,360 37,697 39,114 62,911
Other income
Gain on real estate transactions 3,985 10,739 4,874 11,849
Other real estate operations, net 1,362 1,129 2,298 2,452
Gain on sale of loans --- 9 --- 9
Other operating income 1,480 225 1,791 1,506
------- ------- ------- -------
TOTAL NONINTEREST INCOME 6,827 12,102 8,963 15,816
Other expense
Salaries and employee benefits 2,127 1,982 4,227 3,912
Occupancy and equipment 456 491 1,040 1,017
SAIF deposit insurance premium 58 181 117 336
Other operating expenses 2,331 2,897 4,480 5,019
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 4,972 5,551 9,864 10,284
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 21,215 44,248 38,213 68,443
Income Taxes 651 2,110 833 3,704
------- ------- ------- -------
NET INCOME $20,564 $42,138 $37,380 $64,739
======= ======= ======= =======
Income per common share $68.55 $140.46 $124.60 $215.80
Weighted average number of common
shares outstanding 300 300 300 300
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
Six Months
ended June 30
-----------------------
2000 1999
--------- ----------
OPERATING ACTIVITIES
Net income $ 37,380 $ 64,739
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 926 965
Accretion of purchased discount (12,958) (21,658)
Provision for loan losses 1,586 1,915
Amortization of bond premium and
underwriting costs 469 411
Gains on real estate transactions (4,874) (11,849)
Gain on sales of loans --- (9)
Changes in operating assets and liabilities
Accrued interest receivable 437 (2,323)
Prepaid expenses and other assets (93) 853
Accrued interest payable-bonds (621) ---
Other liabilities and accrued expenses 1,709 2,829
-------- ---------
Net cash provided by operating activities 23,961 35,873
INVESTING ACTIVITIES
Proceeds from:
Sales of loans --- 278
Loan collections, less originations and
advances 50,064 145,402
Maturities of securities available for sale 4,735 9,344
Sales of real estate 11,109 19,729
Purchases of:
Loans and bid deposits on loan purchases (99,675) (148,066)
Securities available for sale (94,272) ---
Federal Home Loan Bank stock (2,445) (592)
Real estate held for investment or sale (2,554) (1,584)
Premises and equipment (226) (459)
--------- --------
Net cash provided by (used in)
investing activities (133,264) 24,052
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 111,542 31,811
Prepayment of senior notes (12,985) ---
Repayments of long-term debt (129) (170)
Proceeds from (repayments of) advances from
the Federal Home Loan Bank (21,000) 15,000
Loan to shareholder --- (60,000)
Cash dividends paid (18,500) (18,500)
--------- ---------
Net cash provided by (used in)
financing activities 58,928 (31,859)
--------- ---------
Net increase (decrease) in cash and
cash equivalents (50,375) 28,066
Cash and cash equivalents at beginning of period 115,416 72,139
-------- ---------
Cash and cash equivalents at end of period $ 65,041 $ 100,205
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 33,911 $ 28,115
Income taxes 1,816 3,969
Supplemental disclosure of noncash investing and
financing activities Real estate acquired in
foreclosure or in settlement of loans $ 4,828 $ 15,416
See Notes to Consolidated Financial Statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue,expenses,
gains and losses be included in net income. Although certain changes in net
assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate conponent of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- ------
(In thousands)
<S> <C> <C> <C> <C>
Net income $20,564 $42,138 $37,380 $64,739
Other comprehensive income net
unrealized gains (losses) on investment
securities - available for sale 2,442 -2,281 2,561 -2,999
------- ------- ------- -------
Comprehensive income $23,006 $39,857 $39,941 $61,740
======= ======= ======= =======
</TABLE>
NOTE B--SUBSEQUENT EVENT
On August 3, 2000, the Company was notified that it was the winning bidder
on a package of loans aggregating approximately $1.2 billion that were offered
for sale by the U.S. Small Business Admninistration ("SBA"). The Company has
entered into a contract with the SBA to purchase 26,167 performing,
sub-performing, and non-performing loans at a discounted price. The loans were
originated or guaranteed by the SBA under their disaster loan programs or
business loan programs. Approximately $747.0 million of the loans are
performing, $136.0 million are sub-performing and $309.0 million are
non-performing. Approximately $898.0 million of the loans are secured by first
liens or subordinated liens on commercial or residential real estate,
approximately $197.0 million of the loans are secured by other commercial and
consumer assets and loan balances of approximately $97.0 million are unsecured.
Approximately $986.0 million of the loans are located in the U.S., $112.0
million in Guam, $82.0 million in the Virgin Islands and $12.0 million are in
the Pacific Islands.
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 $1.5 billion at June 30, 2000, an increase of $106.3 million or 7.4%,
from $1.4 billion at December 31, 1999. This increase was primarily due to $92.3
million increase in securities available for sale and a $68.6 million increase
in net loans receivable. These increases were funded by a $50.4 million decrease
in cash and cash equivalents of, and an increase in deposits
Total liabilities increased $84.8 million or 6.8%, to $1.3 billion at June
30, 2000 from $1.2 billion at December 31, 1999 due primarily to a $111.5
million increase in deposits partially offset by a $21.0 million decrease in
Federal Home Loan Bank Advances and a decrease of $12.9 million in Senior Notes,
net..
Stockholders' equity increased $21.4 million or 11.9%, from $180.2 million
at December 31, 1999 to $201.6 million at June 30, 2000. The increase was the
result of $37.4 million in net income and $2.5 million in unrealized gain on
securities available for sale, less dividends to stockholders of $16.0 million.
SUBSEQUENT EVENT
On August 3, 2000, the Company was notified that it was the winning bidder
on a package of loans aggregating approximately $1.2 billion that were offered
for sale by the U.S. Small Business Admninistration ("SBA"). The Company has
entered into a contract with the SBA to purchase 26,167 performing,
sub-performing, and non-performing loans at a discounted price. The loans were
originated or guaranteed by the SBA under their disaster loan programs or
business loan programs. . Approximately $747.0 million of the loans are
performing, $136.0 million are sub-performing and $309.0 million are
non-performing. Approximately $898.0 million of the loans are secured by first
liens or subordinated liens on commercial or residential real estate,
5
<PAGE>
approximately $197.0 million of theloans are secured by other commercial and
consumer assets and loan balances of approximately $97.0 million are unsecured.
Approximately $986.0 million of the loans are located in the U.S., $112.0
million in Guam, $82.0 million in the Virgin Islands and $12.0 million are in
the Pacific Islands.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NET INCOME. For the six months ended June 30, 2000, net income of $37.4
million represented a decrease of $27.4 million, or 42.3% from the six months
ended June 30, 1999. As discussed in more detail below, the decrease was
primarily due to a decrease in net interest income of $24.1 million and a
decrease in total noninterest income of $6.9 million, which was partially offset
by a decrease in income taxes of $2.9 million.
INTEREST INCOME. Interest income decreased $19.3 million, or 20.0%, from
$96.2 million at June 30, 1999 to $76.9 million at June 30, 2000. The primary
reason for the decrease was a decrease in interest income on loans, including
fees of $11.0 million, and a decrease in purchased discount accretion of $8.7
million. The average balance of interest-earning assets increased $60.9 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 $69.9 million, and an
increase in the average balance of investment securities, primarily
mortgage-backed securities, of $4.7 million, partially offset by a decrease in
the average balance of interest-earning deposits of $14.3 million. The net
interest spread decreased from 9.8% for the six months ended June 30, 1999, to
5.3% for the same period ended June 30, 2000, primarily due to a decrease in the
yield on average earning assets from 15.2% to 11.5% for the six month periods
ending June 30, 1999 and 2000, respectively. This decrease was due primarily to
$9.5 million of loan fees taken in relation to one loan during the second
quarter of 1999. The decline in net interest spread also reflects an increase in
the yield on average interest-bearing liabilities from 5.4% to 6.1% as a result
of the general increase in market interest rates.
INTEREST EXPENSE. Interest expense increased $4.8 million, or 15.4%, from
$31.4 million at June 30, 1999 to $36.2 million at June 30, 2000. The increase
resulted primarily from an increase in the average balance of interest-bearing
liabilities of $22.2 million coupled with an increase in the rate paid on
interest-bearing liabilities from 5.4% at June 30, 1999 to 6.1% at June 30,
2000. The increase in the average balance of interest bearing liabilities was
due primarily to an increase in the average balance of FHLB advances of $43.3
million and an increase in the average balance of certificate accounts of $4.8
million. The increase in the rate paid on average interest-bearing liabilities
was due primarily to an increase in the yield on the average balance of
certificate accounts from 5.1% at June 30, 1999 to 5.9% at June 30, 2000 and an
increase in the rate paid on the average balance of FHLB advances from 4.9% to
6.2% for the same time period reflecting the general rise in market interest
rates.
6
<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 decreased $329,000 to $1.6 million for the six months
ended June 30, 2000, as compared $1.9 million for six months ended June 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 15.1%
at December 31, 1999 as compared to 13.1% at June 30, 2000. Net non-performing
loans totalled $78.5 million at June 30, 2000.
Although management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted with absolute certainty in advance. In addition, bank regulatory
agencies, as an integral part of the examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance level based upon their judgment of the
information available to them at the time of their examination.
NON-INTEREST INCOME. Total non-interest income decreased $6.9 million, or
43.3% to $9.0 million at June 30, 2000 from $15.8 million at June 30, 1999. The
decrease was due primarily to a decrease in gain on real estate transactions of
$7.0 million.
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.
NON-INTEREST EXPENSE. Non-interest expense decreased $420,000, or 4.1% to
$9.9 million at June 30, 2000 from $10.3 million at June 30, 1999. The decrease
was due primarily to a decrease of $539,000 in other operating expenses and a
decrease in SAIF deposit insurance premiums of $219,000 offset by an increase in
salaries and employee benefits of $315,000.
7
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
NET INCOME. For the three months ended June 30, 2000, net income of $20.6
million represented a decrease of $21.6 million, or 51.2% from the three months
ended June 30, 1999. As discussed in more detail below, the decrease was
primarily due to a decrease in net interest income of $18.1 million and a
decrease in total non-interest income of $5.3 million, which was partially
offset by a decrease in income taxes of $1.5 million and a decrease in
noninterest expense of $579,000.
INTEREST INCOME. Interest income decreased $14.7 million, or 27.2%, from
$54.0 million at June 30, 1999 to $39.3 million at June 30, 2000. The primary
reason for the decrease was a decrease in interest income on loans, including
fees of $9.9 million, and a decrease in purchased discount accretion of $5.6
million. The average balance of interest-earning assets increased $88.9 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 $71.8 million, and an
increase in the average balance of investment securities, primarily
mortgage-backed securities, of $27.5 million, partially offset by a decrease in
the average balance of interest-earning deposits of $11.8 million. The net
interest spread decreased from 11.6% for the three months ended June 30, 1999,
to 5.1% for the same period ended June 30, 2000, primarily due to a decrease in
the yield on average earning assets from 17.0% to 11.4% for the three month
periods ending June 30, 1999 and 2000, respectively. This decrease was due
primarily to $9.5 million of loan fees taken in relation to one loan during the
second quarter of 1999. The decline in net interest spread also reflects an
increase in the yield on average interest-bearing liabilities from 5.4% to 6.3%
as a result of the general increase in market interest rates.
INTEREST EXPENSE. Interest expense increased $3.4 million, or 22.1%, from
$15.5 million at June 30, 1999 to $18.9 million at June 30, 2000. The increase
resulted primarily from an increase in the average balance of interest-bearing
liabilities of $56.0 million coupled with an increase in the rate paid on
interest-bearing liabilities from 5.4% at June 30, 1999 to 6.3% at June 30,
2000. The increase in the average balance of interest bearing liabilities was
due primarily to an increase in the average balance of FHLB advances of $57.4
million and an increase in the average balance of certificate accounts of $31.3
million. The increase in the rate paid on average interest-bearing liabilities
was due primarily to an increase in the yield on the average balance of
certificate accounts from 5.0% at June 30, 1999 to 6.1% at June 30, 2000 and an
increase in the rate paid on the average balance of FHLB advances from 4.9% to
6.4% for the same time period, reflecting the general rise in market interest
rates.
8
<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 loss expense increased $220,000 or 30.0% for the three months
ended June 30, 2000 to $962,000 as compared $742,000 during the three months
ended June 30, 1999.
NON-INTEREST INCOME. Total non-interest income decreased $5.3 million, or
43.6% to $6.8 million at June 30, 2000 from $12.1 million at June 30, 1999. The
decrease was due primarily to a decrease in gain on real estate transactions of
$6.8 million partially offset by an increase in other operating income of $1.3
million.
NON-INTEREST EXPENSE. Non-interest expense decreased $579,000, or 10.4% to
$5.0 million at June 30, 2000 from $5.6 million at June 30, 1999. The decrease
was due primarily to a decrease of $566,000 in other operating expenses and a
decrease in SAIF deposit insurance premiums of $123,000 partially offset by an
increase in salaries and employee benefits of $145,000.
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, 2000,
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 $250,000 of the tax expense for the six months ended
June 30, 2000, 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, declared and paid dividends to the shareholders, of $18.5
million in the first six months of 2000. 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.
9
<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, or $45.00 per $1,000
of net taxable earned surplus apportioned to Texas. Taxable earned surplus is
the federal corporate taxable income of each company within the corporate group
determined on a separate company basis with certain modifications. Franchise tax
expense for the six months ended June 30, 2000 was $553,000, primarily relating
to Texas franchise tax. During this same period however, the Company received a
$270,000 refund of California state taxes which had the net effect of decreasing
franchise tax expense by $283,000.
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 six month periods ended June 30, 2000, the Company purchased $72.8 million
and $99.6 million of net loans, respectively, as compared to purchases of $24.9
million and $148.1 million of net loans for the same periods ended last year.
Loan originations for the three and six month periods, ended June 30, 2000
totaled $58.2 million and $108.7 million, respectively as compared to loan
originations of $34.7 million and $56.5 million for the same periods last year.
The Company's primary financing activity has historically been the
attraction of deposits. During the six months ended June 30, 2000, the Company's
deposit levels increased $111.5 million. The Company had senior notes, net, of
$31.4 million and other borrowings of $7.1 million at June 30, 2000.
The Company continues to have the ability to borrow additional funds from
the FHLB by pledging assets as collateral, subject to certain restrictions. At
June 30, 2000, the Company had an undrawn advance arrangement with the FHLB for
$175.5 million.
The Bank is required to maintain minimum levels of liquid assets as defined
by the Texas Savings and Loan Department ("Texas Department"). Unless approved
in advance by the Texas Department, a Texas savings bank is required to maintain
a minimum of 10% of the previous quarters average deposits in liquid assets. At
June 30, 2000, the Bank's liquidity ratio was 23.1%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash equivalents is dependent on the Company's operating, financing, and
investing activities during any given period. At June 30, 2000, the Company had
cash and cash equivalents of $65.0 million.
10
<PAGE>
The Company anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At June 30, 2000, the Company had no
outstanding commitment to originate or purchase loans. Certificates of deposit
that are scheduled to mature in one year or less at June 30, 2000 totaled $911.8
million. Due to the Company's high interest rate spread, management has
typically relied upon interest rate sensitive short-term deposits to fund its
loan purchases. The Company believes the potential interest rate risk is
acceptable in view of the Company's belief that it can maintain an acceptable
net interest spread.
At June 30, 2000, the Bank exceeded each of its six capital requirements
and is considered well capitalized for regulatory purposes. The following is a
summary of the Bank's regulatory capital position at June 30, 2000.
AT JUNE 30, 2000
----------------------------------------
REQUIRED ACTUAL
----------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- -------- --------
(Dollars in Thousands)
Leverage capital.............$ 76,694 5.0% $223,939 14.6%
Tier 1 capital............... 64,756 6.0 223,939 20.8
Total risk-based capital..... 107,927 10.0 234,219 21.7
The Bank submitted a new business plan during the second quarter of this
year to the Texas Savings and Loan Department which was approved This plan
reflects the Senior Notes being repaid upon maturity in the third quarter of
2000. In addition it anticipated the loan growth achieved in the third quarter
of 2000 through the $1.2 billion bulk loan purchase described above. The plan
reflects Tier 1 capital remaining in excess of 9% during the three-year period
set forth in the plan. Reflecting the purchase of the SBA loans and the dividend
for the repayment of the Senior Notes, the Bank is in compliance with the
business plan subsequent to June 30, 2000.
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's 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.
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RATIOS OF EARNINGS TO FIXED CHARGES
The Company's consolidated ratios of earnings to fixed charges for the six
months ended June 30, 2000 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 Six Months Ended
JUNE 30, 2000
------------------------
Excluding interest on deposits........... 6.0:1
Including interest on deposits........... 1.3:1
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, 1999.
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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
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
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Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. BEAL FINANCIAL CORPORATION Registrant
Date: August 14, 2000 /s/ D. Andrew Beal
-------------------- ------------------------------------
D. Andrew Beal
Chairman and President
Date: August 14, 2000 /s/ James W. Lewis, Jr.
-------------------- ------------------------------------
James W. Lewis, Jr.
Chief Accounting Officer
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