UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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, 1999.
As of December 31, 1999, 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.....................................................2
GENERAL..........................................................2
CONTRACTUAL PRINCIPAL REPAYMENTS.................................6
GEOGRAPHIC DISTRIBUTION OF REAL ESTATE SECURED LOANS.............7
Loan Acquisition, Resolution, Origination and Sale Activities..........9
GENERAL..........................................................9
ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS.............10
ACQUISITION OF LOANS............................................11
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING................13
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING.................13
CONSTRUCTION, DEVELOPMENT AND LAND LENDING......................14
CONSUMER LENDING................................................15
COMMERCIAL BUSINESS LENDING.....................................15
Loan Delinquencies and Non-Performing Assets..........................16
OTHER LOANS OF CONCERN..........................................17
CLASSIFIED ASSETS...............................................18
ALLOWANCE FOR LOAN LOSSES.......................................18
Investment Activities.................................................21
GENERAL.........................................................21
Sources of Funds......................................................21
GENERAL.........................................................21
DEPOSITS........................................................22
BORROWINGS......................................................24
Subsidiaries of the Company...........................................25
Subsidiaries of the Bank..............................................25
BEAL MORTGAGE, INC. ("BMI"), BEAL PROPERTIES, INC. ("BPI") AND
BEAL/H.S., INC ("BHS")....................................26
LOAN ACCEPTANCE CORP. ("LAC")...................................26
BRE, INC. ("BRE")...............................................26
BEAL AFFORDABLE HOUSING, INC. ("BAH")...........................26
Competition...........................................................27
Employees.............................................................27
Regulation............................................................27
GENERAL.........................................................27
TEXAS LAW AND SUPERVISION BY THE TEXAS DEPARTMENT...............27
FEDERAL REGULATION OF STATE-CHARTERED SAVINGS BANKS.............28
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC................29
REGULATORY CAPITAL REQUIREMENTS AND PROMPT CORRECTIVE REGULATORY
ACTION....................................................30
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS........32
LIQUIDITY.......................................................32
QUALIFIED THRIFT LENDER TEST....................................32
COMMUNITY REINVESTMENT ACT......................................33
TRANSACTIONS WITH AFFILIATES....................................33
HOLDING COMPANY REGULATION......................................33
FEDERAL SECURITIES LAW..........................................33
FEDERAL RESERVE SYSTEM..........................................34
FEDERAL HOME LOAN BANK SYSTEM...................................34
Federal and State Taxation............................................34
TEXAS STATE INCOME TAXATION.....................................35
DELAWARE TAXATION...............................................35
ITEM 2. PROPERTIES......................................................35
ITEM 3. LEGAL PROCEEDINGS...............................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............36
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................36
ITEM 6. SELECTED FINANCIAL DATA.........................................37
i
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................39
General...............................................................39
Financial Condition...................................................39
Results of Operations.................................................40
GENERAL.........................................................40
Comparison of Operating Results for the fiscal year ended December 31,
1999
and twelve months ended December 31, 1998............................43
Comparison of Operating Results for the Year Ended December 31, 1998
and Year Ended December 31, 1997.....................................44
NET INCOME......................................................44
NET INTEREST INCOME.............................................44
INTEREST INCOME.................................................44
INTEREST EXPENSE................................................44
PROVISION FOR LOAN LOSSES.......................................44
NON-INTEREST INCOME.............................................44
NON-INTEREST EXPENSE............................................44
INCOME TAXES....................................................44
Liquidity and Capital Resources.......................................44
Impact of Inflation and Changing Prices...............................45
Ratios of Earnings to Fixed Charges...................................46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION..............48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................70
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS................................70
Directors of Beal Financial ..........................................70
Executive Officers of the Company.....................................70
Board of Directors of the Bank........................................70
Executive Officers of the Bank........................................71
Meetings and Committees of the Board of Directors of the Company
and the Bank.........................................................72
Compensation Committee Interlocks and Insider Participation...........73
Compensation of Directors.............................................73
ITEM 11. EXECUTIVE COMPENSATION..........................................74
Compensation of Executive Officers....................................74
Executive Bonus Plan..................................................74
Benefits..............................................................75
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................76
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................76
Certain Transactions..................................................76
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K........................................................77
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 Beal Financial. 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, 1999, 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. In calendar year 1996, 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 1985 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 has historically consisted of purchasing
pools of performing and, to a lesser extent, purchasing and resolving
non-performing mortgage loans. In each case such loans are 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. Although,
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, due to the termination of the RTC and increased competition for
these assets, the supply of discounted loans meeting the Company's investment
criteria has steadily decreased. As a result there has been a steady decline in
discounted loan purchases. Recent purchases, particularly loans secured by
single-family residences, have been at approximately their aggregate principal
balance at the time of purchase. See "- Loan Acquisition, Resolution,
Origination and Sale Activities."
The Company originates commercial real estate, land and land development
loans primarily within its primary market area and other areas within the state
of Texas. The Company considers its primary market area for deposits to consist
of Collin, Dallas, Denton, Ellis, Kaufman, Rockwall, Fort Bend, Harris, Liberty,
Montgomery and Waller counties, Texas. These counties consist of communities
comprising the Dallas and Houston metropolitan statistical areas, respectively.
1
<PAGE>
In addition to its loan purchasing and lending activities, the Company
engages in direct equity real estate investments, including the development of
residential lots through the Bank's subsidiaries, Beal Mortgage, Inc. ("BMI"),
Beal Properties Inc. ("BPI") and Beal/H.S. Inc. ("BHS") and through various
single purpose subsidiaries. At December 31, 1999, the Company's real estate
held for development totaled $16.3 million. BMI and BPI also held in the
aggregate $9.9 million of income producing properties (primarily consisting of
the buildings located adjacent to the Bank's corporate headquarters). See "-
Subsidiaries of the Bank."
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 $23.9
million in three affordable housing apartment buildings at December 31, 1999.
See "- Subsidiaries of the Bank" and "- Regulation - Federal Regulation of
State-Chartered Savings Banks."
The Bank funds its discounted loan purchases, loan originations and real
estate investments 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 Bank has branch offices located in
Dallas and Houston, Texas. See "Sources of Funds - Deposits."
At December 31, 1999, 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
14.89%, 20.39% and 21.58%, respectively.
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 or by use of the negative of such
terminology 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, particularly in the market areas the Company operates, changes in
the domestic or foreign business, financial and securities markets, financial or
legal conditions, changes in prevailing interest rates and the credit risks
related to the Company's lending activities, and in the competitive and
regulatory factors affecting financial institutions and the availability of and
costs associated with sources of liquidity, all 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.
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. Beginning in 1998, as a result of
the Company being unable to identify and purchase discounted loans meeting the
Company's investment objectives, the Company began purchasing a significant
amount of predominately performing loans at approximately their aggregate
principal balance at the time of purchase or at a discount significantly less
than in prior years.
2
<PAGE>
At December 31, 1999 the Company's gross loan portfolio totaled $1.3
billion. The Company's unaccreted purchase discounts and fees at December 31,
1999 totaled $154.1 million. The Company's gross loan portfolio at December 31,
1999 was comprised primarily of one- to four-family residential mortgage loans
(35.94%), commercial real estate loans (22.51%) and multi-family residential
real estate loans (19.90%). The balance of the gross loan portfolio included,
construction, development and land loans (15.76%), consumer loans (3.77%) and
commercial business loans (2.12%). At December 31, 1999 the Company's net loan
portfolio totaled $1.1 billion. The Company's net loan portfolio at December 31,
1999 was comprised primarily of one- to four-family residential mortgage loans
(40.60%), commercial real estate loans (22.81%) and multi-family residential
real estate loans (17.43%). The balance of the net loan portfolio included,
construction, development and land loans (13.31%), consumer loans (3.69%) and
commercial business loans (2.16%).
At December 31, 1999, approximately 20.80% of the Company's gross real
estate mortgage loans (excluding 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 (excluding
one- to four-family junior lien loans) located in California, Florida and
Massachusetts, representing 24.47%, 11.55% and 5.15% of the Company's gross loan
portfolio, respectively. At December 31, 1999, there were no other states where
loans secured by real estate properties (excluding 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, 1999, the Bank's loans to-one borrower
limit was $31.9 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated borrowers consisted of two loans, aggregating
$19.3 million, net, secured by a first lien on 495 acres in Collin County plus a
first lien on both a 46 acre retail tract and a 27 acre retail tract both in
Collin County. This loan is further secured by a second lien on approximately
1,100 acres also in Collin County. The Bank's next largest relationship totaled
$16.3 million, net primarily secured by a first lien on approximately 1,300
acres in Austin, Texas. See "Construction, Development and Land Lending."
The Company has two other loans to any borrower or group of related
borrowers in excess of $15 million, net (aggregating $30.4 million, net), four
other lending relationships in excess of $10 million, net (aggregating $46.0
million), an additional six such lending relationships in excess of $5 million,
net (aggregating $45.8 million) and an additional 38 such lending relationships
in excess of $2 million, net (aggregating $121.7 million). At December 31, 1999,
six of these lending relationships in excess of $2 million, net, aggregating
$36.0 million were non-performing. See "- Loan Delinquencies and Non-Performing
Assets."
3
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of the Company's loan portfolio, in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
---------------- ---------------------------------------------------------------------------
1996 1996 1997 1998 1999
---------------- ---------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ -------- -------- -------- ------- ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
REAL ESTATE LOANS:
One- to four-family......$ 273,780 22.47% $ 276,591 19.37% $ 213,584 18.60% $ 490,717 38.93% $477,847 35.94%
Commercial............... 321,385 26.38 388,460 27.20 337,825 29.42 236,252 18.74 299,224 22.51
Multi-family............. 341,696 28.05 466,697 32.68 321,423 27.99 270,337 21.45 264,590 19.90
Construction, development
and land................ 185,180 15.20 170,121 11.91 169,882 14.79 142,108 11.28 209,504 15.76
-------- ------ --------- ------ -------- ------ -------- ----- -------- -----
Total real estate loans 1,122,041 92.10 1,301,869 91.16 1,042,714 90.80 1,139,414 90.40 1,251,165 94.11
OTHER LOANS:
Consumer Loans:
One- to four-family -
junior liens........... 50,146 4.12 77,528 5.43 71,465 6.22 47,992 3.81 31,243 2.35
Timeshares.............. 7,809 .64 6,446 .45 3,615 .31 2,432 .19 1,832 0.14
Automobile.............. 59 --- 19 --- 1 --- 31,878 2.53 14,331 1.08
Other................... 8,314 .69 7,076 .50 5,002 .44 3,121 .25 2,598 0.20
-------- ------ -------- ------ -------- ------ -------- ----- -------- -----
Total consumer loans... 66,328 5.45 91,069 6.38 80,083 6.97 85,423 6.78 50,004 3.77
Commercial business loans 29,886 2.45 35,131 2.46 25,554 2.23 35,537 2.82 28,224 2.12
-------- ------ -------- ------ -------- ------ -------- ----- -------- -----
Total other loans...... 96,214 7.90 126,200 8.84 105,637 9.20 120,960 9.60 78,228 5.89
Total loans............ 1,218,255 100.00% 1,428,069 100.00% 1,148,351 100.00% 1,260,374 100.00% 1,329,393 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process......... 27,172 16,364 16,806 7,493 46,555
Deferred fees and
discounts 281,837 344,312 231,800 193,468 154,085
Allowance for loan losses 11,832 13,189 11,912 13,867 12,344
Total loans receivable,
net...................$ 897,414 $1,054,204 $ 887,833 $1,045,546 $1,116,409
========== ========== ========== ========== ==========
</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,
1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
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
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars In Thousands)
REAL ESTATE LOANS:
One- to four-family -
first liens.......... 477,847 --- 19,248 5,321 453,278 4.03%
Commercial............ 299,224 --- 43,321 1,250 254,653 14.48
Multi-family.......... 264,590 --- 68,965 1,069 194,556 26.06
Construction,
development and land. 209,504 46,555 13,774 546 148,629 6.57
--------- ------ ------- ------ ---------
Total real
estate loans....... 1,251,165 46,555 145,308 8,186 1,051,116 11.61
OTHER LOANS:
Consumer Loans:
One- to four-family -
junior liens......... 31,243 --- 2,343 1,476 27,424 7.50
Timeshares............ 1,832 --- 203 855 774 11.08
Automobile............. 14,331 --- 2,092 985 11,254 14.60
Other................. 2,598 --- 359 447 1,792 13.82
--------- ------ ------- ------ ---------
Total consumer loans.. 50,004 --- 4,997 3,763 41,244 9.99
Commercial business
loans................. 28,224 --- 3,780 395 24,049 13.39
--------- ------ ------- ------ ---------
Total other loans.... 78,228 --- 8,777 4,158 65,293 11.22
Total loans............ 1,329,393 46,555 154,085 12,344 1,116,409 11.59%
Less:
Loans in process..... 46,555 (46,555)
Deferred fees and
discounts........... 154,085 (154,085)
Allowance for losses. 12,344 ---
Loans Held for Sale,
net................. ---
--------- ------ ------- ------ --------- -----
Total loans
receivable, net.... 1,116,409 --- --- 12,344 1,116,409
========= ======== ========= ====== =========
</TABLE>
5
<PAGE>
CONTRACTUAL PRINCIPAL REPAYMENTS. The following schedule illustrates the
contractual maturity of the Company's loan portfolio at December 31, 1999. 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
-----------------------------------------------------
Construction,
One- to Four- Development Commercial
Family Multi-Family Commercial and Land Consumer Business Total
------------- ------------ ---------- ------------ -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During
Periods Ending
December 31,
- ----------------------
2000.................. $ 4,129 $ 18,618 $ 22,525 $ 41,369 $ 3,882 $16,257 $ 106,780
2001 to 2004.......... 27,778 59,530 134,425 103,401 17,307 5,649 348,090
2005 and following.... 426,692 117,477 98,953 4,405 23,818 2,538 673,883
--------- --------- --------- --------- -------- ------- ----------
Total.............. 458,559 195,625 255,903 149,175 45,007 24,444 1,128,753
Less:
Allowance for loan
losses............. 5,321 1,069 1,250 546 3,763 395 12,344
--------- --------- --------- --------- -------- ------- ----------
Total loans
receivable, net.... $ 453,278 $ 194,556 $ 254,653 $ 148,629 $ 41,244 $24,049 $1,116,409
========= ========= ========= ========= ======== ======= ==========
</TABLE>
6
<PAGE>
The total amount of gross loans due after December 31, 2000 which have
predetermined interest rates is $524.4 million, while the total amount of gross
loans due after such date which have floating or adjustable interest rates is
$497.6 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, 1999 the Company's gross real estate collateralized loans (excluding junior
liens secured by one- to four-family real estate totaling $31.2 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 1999 Outstanding 1999 Non-performing
- ------------------------- ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
California............... 294,767 24.47% 15,127 11.88%
Texas.................... 250,542 20.80 3,782 2.97
Florida.................. 139,111 11.55 40,898 32.12
Massachusetts............ 62,051 5.15 25,873 20.32
All others............... 458,139 38.03 41,649 32.71
---------- ------ -------- ------
Total real estate loan
portfolio................ $1,204,610 100.00% $127,329 100.00%
========== ====== ======== ======
</TABLE>
At December 31, 1999, there were no other loan concentrations in any other
state which exceeded five 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, 1999.
<TABLE>
<CAPTION>
Outstanding Non-performing
Balance at Percent Balance at
One- to Four-Family First Lien December 31, of Total December 31, Percent of
Loans by Geographic Location 1999 Outstanding 1999 Non-performing
- ------------------------------ ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Texas......................... 95,716 20.03% 3,177 18.10%
California.................... 69,029 14.45 3,326 18.94
Florida....................... 58,977 12.34 1,722 9.81
Virginia...................... 30,865 6.46 410 2.33
Maryland...................... 21,168 4.43 430 2.45
New York...................... 16,089 3.37 1,074 6.12
Arizona....................... 15,252 3.19 387 2.20
Massachusetts................. 14,635 3.06 453 2.58
All others.................... 156,116 32.67 6,576 37.47
--------- ------- --------- -----
Total One- to Four- Family
Loans...................... $477,847 100.00% $17,555 100.00%
========= ====== ======= ======
</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 1999 Outstanding 1999 Non-performing
- ------------------------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
California.................... 136,915 45.76% 9,531 64.22%
Texas......................... 32,434 10.84 472 3.18
Florida....................... 27,868 9.31 1,098 7.40
Connecticut................... 20,870 6.97 --- ---
Massachusetts................. 18,949 6.33 14 0.10
New York...................... 10,022 3.35 7 0.05
New Jersey.................... 9,241 3.09 72 0.49
All others.................... 42,925 14.35 3,646 24.56
-------- ------ ------- ------
Total Commercial Real
Estate Loans.................. $299,224 100.00% $14,840 100.00%
======== ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Outstanding Non-performing
Balance at Percent Balance at
Multi-Family December 31, of Total December 31, Percent of
Loans by Geographic Location 1999 Outstanding 1999 Non-performing
- ------------------------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
California.................... 56,654 21.41% 1,468 1.65%
Florida....................... 48,025 18.15 35,953 40.34
Massachusetts................. 28,473 10.76 25,462 28.57
Texas......................... 27,522 10.40 --- ---
South Carolina................ 12,898 4.87 10,334 11.59
Arkansas...................... 11,765 4.45 3,286 3.69
Colorado...................... 11,519 4.35 6,567 7.37
Missouri...................... 8,638 3.26 2,416 2.71
Nevada........................ 8,511 3.22 --- ---
All others.................... 50,585 19.13 3,646 4.08
-------- ------ ------- ------
Total Multi-Family.......... $264,590 100.00% $89,132 100.00%
======== ====== ======= ======
</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 1999 Outstanding 1999 Non-performing
- ------------------------------ ------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Texas......................... 41,876 65.88% --- ---%
Tennessee..................... 10,991 17.29 --- ---
California.................... 7,400 11.65 --- ---
Louisiana..................... 3,034 4.77 --- ---
All others.................... 250 0.41 --- ---
------- ------ ---- ----
Total Construction and
Development Loans.......... $63,551 100.00% --- ---%
======= ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Outstanding Non-performing
Balance at Percent Balance at
Land Loans December 31, of Total December 31, Percent of
By Geographic Location 1999 Outstanding 1999 Non-performing
- ------------------------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Texas......................... 52,990 53.31% 6 0.11%
California.................... 24,726 24.88 838 14.45
Illinois...................... 7,045 7.09 --- ---
Florida....................... 4,257 4.28 2,275 39.21
All others.................... 10,380 10.44 2,683 46.23%
------- ------ ------- ------
Total Land Loans............ $99,398 100.00% $ 5,802 100.00%
======= ====== ======= ======
</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, 1999.
<TABLE>
<CAPTION>
Outstanding Non-performing
Balance at Percent Balance at
One- to Four-Family Junior Lien December 31, of Total December 31, Percent of
Loans by Geographic Location 1999 Outstanding 1999 Non-performing
- ------------------------------- ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
California..................... 7,357 23.55% 759 22.70%
Texas.......................... 6,447 20.64 805 24.09
Louisiana...................... 3,630 11.62 94 2.82
New York....................... 2,859 9.15 319 9.54
Connecticut.................... 2,056 6.58 368 10.99
Florida........................ 1,391 4.45 21 0.62
Arizona........................ 1,122 3.59 --- ---
New Jersey..................... 1,051 3.36 300 8.98
All others..................... 5,330 17.06 677 20.26
------- ------ ------ ------
Total One- to Four- Family
Junior Lien Loans........... $31,243 100.00% $3,343 100.00%
======= ====== ====== ======
</TABLE>
LOAN ACQUISITION, RESOLUTION, ORIGINATION AND SALE ACTIVITIES
GENERAL. The Company historically has invested and intends to continue to
invest, subject to market conditions, a significant amount 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.
9
<PAGE>
In recent years, however, 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. Although the Company
continues to review and bid to acquire a substantial amount of discounted loans,
the Company does not believe it 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 earlier 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.
All reviews of 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 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.
Since 1998 the Company has been focusing on increasing its origination of
land development, land and commercial business loans. This effort is being
managed by Chief Executive Officer Meek. Consistent with the intent of an
executive bonus plan entered into between Mr. Meek and the Company in February,
1998, Mr. Meek is focusing on increasing the Company's loan originations.
The Bank's Senior Loan Committee, comprised of Chairman Beal, Chief
Executive Officer Meek, President/Chief Operating Officer Hartman, Senior Vice
President - Lending Saurenmann, Senior Vice President - Commercial Loans Enright
and Senior Vice President - Compliance Curl, may approve all loan purchases and
originations up to $1.0 million in net book value. In addition, this committee
may approve a modification or extension of an existing loan when the Borrower
Balance is up to $1.0 million. (Any three members shall constitute a quorum.)
The Bank's Executive Loan Committee, comprised of Chairman Beal, Chief
Executive Officer Meek and Directors Fults, Goldstein and Weinstein (with
Directors Hartman, Arnold and Eastland substituting for a missing member) may
approve, with at least three affirmative votes, all loan purchases and
originations in excess of $1.0 million in net book value. In addition, this
committee may approve a modification or extension of an existing loan with a
Borrower Balance, in excess of $1.0 million. 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.)
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 Borrower Balance of the asset.
ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS. For the year ended
December 31, 1999, the Company purchased $315.4 million of loans, net of
discount compared to $387.9 million during the year ended December 31, 1998, and
originated $82.9 million of loans for the years ended December 31, 1999,
compared to $85.4 million during the year ended December 31, 1998.
The Company services $740.8 million of its gross loan portfolio directly,
including virtually all of its multi-family and commercial real estate loans,
construction, development and land loans. The Company relies on approximately
137 other entities to service the remaining $542.0 million of its gross loans.
Of this amount, at December 31, 1999, six entities individually service loans in
excess of $10.0 million, aggregating $408.4 million, or 75.28% of the Company's
loans serviced by others. No other entity services individually in excess of
$9.7 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.
10
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, December 31, December 31,
------------ ------------ ------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
ORIGINATIONS BY TYPE:
ADJUSTABLE RATE:
----------------
Real estate - one- to four-family. $ --- $ --- $ ---
- multi-family...... 4,684 2,915 1,925
- commercial........ 4,651 6,075 4,201
- construction,
development and
land............. 47,342 40,312 61,842
Commercial Business.............. 5,000 59 ---
---------- ---------- -----------
Total adjustable-rate...... 61,677 49,361 67,968
FIXED RATE:
----------
Real estate - one- to four-family. --- --- 3,065
- multi-family...... --- 4,000 4,800
- commercial........ 2,147 --- 1,837
- construction,
development and
land............. 10,785 14,513 3,790
Consumer - one- to four-family
junior liens..................... --- --- ---
- other............. 1,984 2,173 1,488
Commercial Business............... --- 15,336 ---
---------- ---------- -----------
Total fixed-rate........... 14,916 36,022 14,980
---------- ---------- -----------
Total loans originated..... 76,593 85,383 82,948
PURCHASES:
---------
Real estate - one- to four-family. 9,166 348,644 122,607
- multi-family...... 24,740 6,791 64,127
- commercial........ 112,873 9,584 135,052
- construction,
development and
land............. 8,949 2,596 2,285
Consumer - one- to four-family -
junior liens..................... 520 --- ---
- automobile........ --- 36,022 ---
- other............. 14 --- ---
Commercial business............... 1,447 277 ---
---------- ---------- -----------
Total loans purchased,
gross..................... 157,709 403,914 324,071
Purchase discounts................ 27,291 16,056 8,665
---------- ---------- -----------
Total loans purchased, net. 130,418 387,858 315,406
Percentage of purchase discounts
to total gross loans purchased.. 17.3% 4.0% 2.7%
SALES AND REPAYMENTS:
--------------------
Real estate - one- to four-family. --- --- ---
- multi-family...... --- --- ---
- commercial........ --- --- 14
Consumer - one- to four-family -
junior liens...................... --- --- ---
Commercial business............... --- --- ---
---------- ---------- -----------
Total loans sold........... --- --- 14
Principal repayments............. 333,592 340,569 341,009
---------- --------- ----------
Total sales and repayments. 333,592 340,569 341,023
Other reductions (additions):
Transfers to real estate
owned..................... 83,144 16,283 16,522
Unearned discounts......... (44,673) (44,633) (36,547)
Decrease in other items,
net....................... 2,596 1,354 8,016
---------- --------- ----------
Net Increase (decrease).......... $ (167,648) $ 159,668 $ 69,340
========== ========= ==========
</TABLE>
ACQUISITION OF LOANS. Many of the loans purchased by the Company are
performing loans. In order to determine the amount that it will bid to acquire
loans, the Company 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
11
<PAGE>
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. 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 the property, 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. 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 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 (iv) 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 non-performing loans 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
12
<PAGE>
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 in the highest possible return to the Company. 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 non-performing single-family residential
loans, however, non-performing 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, 1999,
the Company's one- to four-family residential mortgage loans totaled $477.8
million, or 35.94% of the Company's gross loan portfolio. At that date, the
Company's net one- to four-family residential mortgage loan portfolio totaled
$453.3 million, or 40.60% 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 individually from correspondent financial institutions and
brokers and has purchased large pools of these loans at approximately their
aggregate principal balance at the time of purchase.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. At December 31, 1999,
$299.2 million, or 22.51% of the Company's gross loan portfolio, consisted of
loans secured by commercial real estate and $264.6 million, or 19.90% of the
Company's gross loan portfolio, consisted of loans secured by multi-family
residential properties. At that date, $254.7 million, or 22.81% of the Company's
net loan portfolio, consisted of loans secured by commercial real estate and
$194.6 million, or 17.43% of the Company's net loan portfolio, consisted of
loans secured by multi-family residential properties.
A number of the multi-family residential loans were purchased from HUD.
These 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. 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
13
<PAGE>
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 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 normally provides monthly financial statements and
other information 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), 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, 1999, $104.0 million, or 18.44% 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 $53.3 million.
CONSTRUCTION, DEVELOPMENT AND LAND 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, 1999, development loans totaled $95.5
million or 7.18% of its gross loan portfolio and $62.5 million, net, or 5.60% of
the Company's net loan portfolio. At December 31, 1999 the Bank had nine
development loans in excess of $2.0 million, all of which are to develop
properties located in Texas, except for one development property located in
Southern California, one development property located in Louisiana and one
development property located in Tennessee. See "Lending Activities - General."
All of these loans are performing in accordance with their respective repayment
terms.
In addition to 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, 1999, land loans
totaled $114.0 million, or 8.58% of the Company's gross loan portfolio. At that
date, net land loans totaled $86.1 million, or 7.7% of the Company's net loan
portfolio. At December 31, 1999 the Bank had 12 land loans in excess of $2.0
million, with aggregate net balances of $70.5 million, the largest of which has
a net balance of $16.0 million. All of these loans are secured by land in the
metropolitan areas of Los Angeles and Texas. Land loans originated by the
Company 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.
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. These 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 development 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
developmental costs and the market for the project upon completion, it is
relatively difficult to evaluate accurately the total loan funds required to
complete a project, the related loan-to-value ratios and the likelihood of
ultimate success of the project. If the estimate of 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
14
<PAGE>
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 developers. In addition the Company monitors
the development's progress prior to each draw against the loan. See "Loan
Delinquencies and Non-Performing Assets."
At December 31, 1999, there were no single-family construction loans, no
development loans, and 20 land loans with aggregate gross principal balances of
$5.8 million delinquent 90 days or more. At that date, net non-performing land
loans totaled $4.1 million.
CONSUMER LENDING. At December 31, 1999, the Company's consumer loans
totalled $50.0 million or 3.77% of the Company's gross loan portfolio, of which
$31.2 million were purchased one-to four family junior lien loans, and $14.3
million were purchased sub-prime automobile loans. At that date, net consumer
loans totaled $41.2 million, or 3.69% of the Company's net loan portfolio of
which $27.4 million were one-to-four family junior lien loans and $11.3 million
were automobile loans.
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.
During 1998, the Company purchased a pool of sub-prime automobile loans.
These loans were made to borrowers unable to qualify for traditional financing
generally due to negative or insufficient credit history or high debt-to-income
or payment--to-income ratios. The Company does not anticipate purchasing a
significant amount of additional subprime automobile loans.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets, such as automobiles. In such cases, the collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance as a result of the greater likelihood of damage,
loss or depreciation. 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, 1999,
consumer loans with aggregate gross principal balances of $5.5 million were
delinquent in excess of 90 days.
COMMERCIAL BUSINESS LENDING. At December 31, 1999, the Company had $28.2
million in commercial business loans outstanding, or 2.12% of the Company's
gross loan portfolio. At that date, the Company had $24.0 million of net
commercial business loans outstanding, or 2.16% of the Company's net loan
portfolio. The Company's loans include loans to finance accounts receivable,
inventory and equipment. At that date commercial business loans with an
aggregate gross principal balance of $7.8 million were delinquent 90 days or
more.
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.
15
<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 ten 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, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------------- ------------------------------- --------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
--------- ------- -------- ------ ------ -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
REAL ESTATE:
One- to four-family -
first liens............ 122 3,192 0.67% 421 17,555 3.67% 543 20,747 4.34%
Commercial............... 4 535 0.18 50 14,840 4.96 54 15,375 5.14
Multi-family............. --- --- --- 39 89,132 33.69 39 89,132 33.69
Construction,
development and land.... 1 50 0.03 20 5,802 2.76 21 5,852 2.79
---- ------ ----- ---- ------- ------ --- ------- -----
Total real estate...... 127 3,777 0.30 530 127,329 10.18 657 131,106 10.48
OTHER LOANS:
Consumer Loans:
One-to four-family
junior lien............ 30 371 1.19 170 3,343 10.70 200 3,714 11.89
Timeshares............... 1 3 0.16 323 949 51.80 324 952 51.96
Automobile................ 218 1,632 11.39 114 877 6.12 332 2,509 17.51
Other.................... 5 34 1.31 18 373 14.36 23 407 15.67
---- ------ ----- ---- ------- ------ --- ------- -----
Total consumer loans.... 254 2,040 4.08 625 5,542 11.08 879 7,582 15.16
Commercial business........ 5 83 0.29 41 7,787 27.59 46 7,870 27.88
---- ------ ----- ---- ------- ------ --- ------- -----
Total other loans....... 259 2,123 2.71 666 13,329 17.04 925 15,452 19.75
---- ------ ----- ---- ------- ------ --- ------- -----
Total loans............. 386 5,900 0.44 1,196 140,658 10.58 1,582 146,558 11.02
LESS:
Unearned discounts......... 466 --- 58,959 --- 59,425 ---
------ ----- ------- ------ ------- -----
Total Loans, net....... $5,434 0.49% $ 81,699 7.32% $ 87,133 7.80%
====== ===== ======= ====== ======= =====
</TABLE>
At December 31, 1999, the Company's non-performing loans included 1,196
loans aggregating $140.7 million in gross loan ($81.7 million of net loans).
16
<PAGE>
The following table sets forth the amounts and categories of
non-performing assets in the Company's loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. Such loans remain on non-accrual status until the earlier of legal
foreclosure, or relinquishment of control of the collateral by the borrower, or
the collection of principal or interest is no longer doubtful. For all years
presented, the Company has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans below net book value
or making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30, December 31,
--------- ----------------------------------------
1996 1996 1997 1998 1999
--------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Non-accruing loans:
Real estate:
One- to four-family -
first liens...............$ --- $ --- $ 18,292 $ 21,391 $ 17,555
Commercial................. 35,004 59,903 37,345 23,525 14,688
Multi-family............... 51,934 174,046 108,493 119,222 89,132
Construction, development
and land.................. 8,117 4,687 6,245 5,160 5,539
Consumer:
One- to four-family -
junior liens............... 10,157 13,863 11,347 6,243 3,343
Timeshares................. 1,630 1,624 1,026 963 949
Automobile................. 41 13 --- 1,072 877
Other consumer............. 600 1,822 519 248 373
Commercial business.......... 7,777 9,562 7,554 9,997 7,787
Purchase discounts......... (59,978) (122,283) (77,827) (72,783) (58,910)
-------- -------- -------- ------- -------
Total (net)............ 55,282 143,237 112,994 115,038 81,333
Accruing loans delinquent
more than 90 days:
Real estate:
One- to four-family -
first liens............... 21,159 30,382 --- --- ---
Commercial................. 17,811 23,818 1,740 3,027 152
Multi-family............... 55,247 30,318 15,901 2,838 ---
Construction, development
and land.................. 5,444 4,760 3,978 557 263
Purchase discounts......... (32,363) (29,221) (4,681) (780) (49)
-------- -------- -------- ------- -------
Total (net)............ 67,298 60,057 16,938 5,642 366
Foreclosed assets:
Real estate:
One- to four-family -
first liens............... 1,799 4,858 5,379 3,517 2,545
Commercial................. 9,148 13,466 41,341 23,668 13,566
Multi-family............... 15,010 24,781 64,461 20,263 22,949
Construction or
development, land......... 1,756 1,122 3,112 4,765 3,320
Consumer:
Timeshares................. 32 402 21 --- ---
Automobile................. --- --- --- 245 ---
Other...................... --- --- --- 71 ---
-------- -------- -------- ------- -------
Total (net)............ 27,745 44,629 114,314 52,529 42,380
-------- -------- -------- ------- -------
Total non-performing assets.. $150,325 $247,923 $244,246 $173,209 $124,079
======== ======== ======== ======= =======
Total as a percentage of
total assets................. 11.84% 17.77% 17.86% 12.80% 8.68%
===== ===== ===== ===== ====
</TABLE>
For the year ended December 31, 1999 gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $11.0 million. The amount that was included in
interest income on such loans was $2.2 million for the year ended December 31,
1999.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the previous table, as of December 31, 1999 the Company had one loan totaling
$11.0 million, net, which is a development land loan
17
<PAGE>
with respect to which known information about unbudgeted cost coupled with
delays in the completion of the development and sale of lots 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. In addition to the land
collateral being developed, the Company is secured by additional collateral and
the personal guarantees of the borrowers. The Company believes the value of the
collateral securing this loan is sufficient to prevent the Company from
incurring any losses related to this loan.
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. An asset may also be
classified substandard if no loss is expected, however, the time it will take to
resolve the deficiency is uncertain. 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.
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 date indicated were as follows:
DECEMBER 31, 1999
-----------------
(Dollars In Thousands)
Substandard............................ $78,161
Doubtful............................... 1,539
-------
Total Classified Assets........... $79,700
=======
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
18
<PAGE>
for losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value.
The following table sets forth an analysis of the Company's allowance for
loan losses at the dates indicated.
<TABLE>
<CAPTION>
Twelve
Year Months Year
Ended Ended Ended
June 30, December 31, December 31,
---------- ------------ -------------------------------
1996 1996 1997 1998 1999
---------- ------------- -------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at beginning of period.............. $ 6,137 $ 10,406 $13,189 $11,912 $13,867
Charge-offs:
One- to four-family....................... 845 1,366 2,177 1,370 1,461
Commercial................................ 28 232 740 812 709
Multi-family.............................. 80 90 --- 179 ---
Construction, development and land........ 397 60 687 228 13
Consumer.................................. 858 805 1,169 1,401 5,338
Commercial business....................... 1,177 1,121 183 --- 59
------- -------- ------- ------- ---------
3,385 3,674 4,956 3,990 7,580
Recoveries:
One- to four-family....................... 1 --- 112 --- 11
Consumer.................................. 18 32 157 368 2,185
Commercial business....................... 17 3 --- --- 40
------- -------- ------- ------- -------
Net charge-offs............................. 3,349 3,639 4,687 3,622 5,344
Additions charged to operations............. 9,044 6,422 3,410 5,577 3,821
------- -------- ------- ------- -------
Balance at end of period.................... $11,832 $ 13,189 $11,912 $13,867 $12,344
======= ======== ======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding during
the period................................. .44% .38% .49% .43% .51%
Ratio of net charge-offs during the period 2.95% 1.84% 1.96% 1.52% 3.60%
to average non-performing assets...........
</TABLE>
19
<PAGE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------------------------------------
1996 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
---------- -------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
One- to four-family............... $ 3,153 $ 273,780 22.47% $ 3,183 $ 276,591 19.37%
Multi-family...................... 239 341,696 28.05 1,157 466,697 32.68
Commercial real estate............ 2,788 321,385 26.38 2,706 388,460 27.20
Construction, development and land 771 185,180 15.20 603 170,121 11.91
One- to four-family junior liens.. 1,873 50,146 4.12 1,680 77,528 5.43
Timeshares........................ 374 7,809 .64 372 6,446 .45
Automobiles....................... 8 59 --- 3 19 ---
Other consumer.................... 1,130 8,314 .68 1,135 7,076 .50
Commercial business............... 1,496 29,886 2.45 2,353 35,131 2.46
Unallocated....................... --- --- --- --- --- ---
------- --------- ------ -------- ---------- ------
Total........................ $11,832 1,218,255 100.00% $ 13,189 1,428,069 100.00%
======= ====== ======== =======
LESS:
Loans in process................ 27,172 16,364
Loans held for sale, net........ --- ---
Deferred fees and
discounts..................... 281,837 344,312
Allowance for loan losses....... 11,832 13,189
--------- ----------
Total loans receivable, net.. $ 897,414 $1,054,204
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
One- to four-family............... $ 4,051 $ 213,584 18.60% $ 5,136 $ 490,717 38.93% $ 5,321 $ 477,847 35.94%
Multi-family...................... 1,316 321,423 27.99 1,055 270,337 21.45 1,069 264,590 19.90
Commercial real estate............ 1,986 337,825 29.42 1,481 236,252 18.74 1,250 299,224 22.51
Construction, development and land 914 169,882 14.80 829 142,108 11.28 546 209,504 15.76
One- to four-family junior liens.. 1,756 71,465 6.22 2,312 47,992 3.81 1,476 31,243 2.35
Timeshares........................ 642 3,615 .31 839 2,432 .19 855 1,832 0.14
Automobiles....................... --- 1 --- 773 31,878 2.53 985 14,331 1.08
Other consumer.................... 684 5,002 .44 720 3,121 .25 447 2,598 0.20
Commercial business............... 563 25,554 2.23 722 35,537 2.82 395 28,224 2.12
Unallocated....................... --- --- --- --- --- --- --- --- ---
------- ---------- ------ ------- ---------- ------ ------- ---------- ------
Total........................ $11,912 1,148,351 100.00% $13,867 $1,260,374 100.00% $12,344 $1,329,393 100.00%
======= ====== ======= ====== ======= ======
LESS:
Loans in process................ 16,806 7,493 46,555
Loans held for sale, net........ --- --- ---
Deferred fees and
discounts..................... 231,800 193,468 154,085
Allowance for loan losses....... 11,912 13,867 12,344
---------- ---------- ----------
Total loans receivable, net.. $ 887,833 $1,045,546 $1,116,409
========== ========== ==========
</TABLE>
<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 Government National Mortgage Association ("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, 1999, the Bank's liquidity ratio was 17.14%. 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>
December 31,
----------------------------------------------------------------------
1997 1998 1999
----------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----------- ---------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
FHLB stock....................... $ 10,203 100.00% $ 9,877 100.00% $ 9,670 100.00%
========= ====== ========= ====== ========== ======
Interest-bearing deposits
with banks.................... $ 150,219 100.00% $ 66,599 100.00% $ 114,670 100.00%
========= ====== ========= ====== ========== ======
Mortgage-backed securities:
GNMA............................. $110,079 98.84% $ 87,715 97.92% $ 72,067 102.84%
Gross unrealized gain (loss)..... 3,722 3.34 3,909 4.36 (443) (.63)
Unamortized premium
(discount).................... (2,425) (2.18) (2,043) (2.28) (1,544) (2.20)
-------- ------ --------- ------ ---------- ------
Total mortgage-backed
securities...................... $111,376 100.00% $ 89,581 100.00% $ 70,080 100.00%
======== ====== ========= ====== =========== ======
</TABLE>
The Company's investment securities portfolio at December 31, 1999,
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
21
<PAGE>
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, the Bank obtains wholesale deposits
through deposit brokers which solicit funds from their customers for deposit
with the Bank. Brokered deposits amounted to $262.9 million or 25.35% of
deposits at December 31, 1999. 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.
The amount of brokered deposits will vary depending on cost and 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.
22
<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>
December 31,
---------------------------------------------------------------------
1997 1998 1999
----------------------- ----------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ---------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Transactions and
SAVINGS DEPOSITS:
Money Market Accounts.................$ 169,321 16.91% $ 180,154 17.91% $165,308 16.64%
Commercial Demand..................... 14,272 1.42 12,667 1.26 11,580 1.17
Savings Deposits...................... 1,193 .12 3,118 .31 9,424 .95
---------- ------ ---------- ------ -------- ------
Total Non-Certificates................ 184,786 18.45% 195,939 19.48 186,312 18.76
---------- ------ ---------- ------ -------- ------
CERTIFICATES:
2.01 - 4.00%........................ 2 --- --- --- --- ---
4.01 - 6.00%........................ 785,865 78.47 797,002 79.26 704,843 70.96
6.01 - 8.00%........................ 30,823 3.08 12,676 1.26 102,134 10.28
8.01 - 10.00%....................... --- --- --- --- --- ---
---------- ------ ---------- ------ -------- ------
Total Certificates.................... 816,690 81.55 809,678 80.52 806,977 81.24
---------- ------ ---------- ------ -------- ------
Total Deposits(1).....................$1,001,476 100.00% $1,005,617 100.00% 993,289 100.00%
========== ====== ========== ====== ======== ======
</TABLE>
(1) At December 31, 1999, the average rates paid on non-certificate deposit
accounts and certificate accounts were 4.78% and 5.43%, 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.
December 31,
----------------------------------
1997 1998 1999
--------- ---------- ----------
(Dollars in Thousands)
Opening balance............... $1,043,435 $1,001,476 $1,005,617
New deposits, net............. (70,120) (21,211) (32,129)
Interest credited............. 28,161 25,352 19,801
---------- ---------- ----------
Ending balance................ $1,001,476 $1,005,617 $ 993,289
========== ========== ==========
Net increase (decrease)....... $ (41,959) $ 4,141 $ (12,329)
========== ========== ==========
Percent increase (decrease)... (4.02)% .41% (1.23)%
===== ===== =====
23
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1999.
4.00- 6.00- Percent
5.99% 7.99% Total of Total
-------- -------- -------- ---------
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending:
March 31, 2000.......... $420,636 $ 4,376 $425,012 52.67%
June 30, 2000........... 132,779 22,842 155,621 19.29
September 30, 2000...... 54,049 4,781 58,830 7.29
December 31, 2000....... 75,149 80,924 156,073 19.34
March 31, 2001.......... 3,635 --- 3,635 0.45
June 30, 2001........... 1,543 --- 1,543 0.19
September 30, 2001...... 1,941 --- 1,941 0.24
December 31, 2001....... 1,732 --- 1,732 0.21
March 31, 2002.......... 616 --- 616 0.08
June 30, 2002........... 2 --- 2 ---
September 30, 2002...... 559 --- 559 0.07
December 31, 2002....... 106 --- 106 0.01
Thereafter.............. 1,307 --- 1,307 0.16
-------- -------- -------- ------
Total................ $694,054 $112,923 $806,977 100.00%
======== ======== ======== ======
Percent of Total..... 86.02% 13.99% 100.00%
===== ===== ======
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1999.
<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>
(Dollars in Thousands)
Certificates of deposit less
than $100,000.................... $205,791 $ 82,462 $128,543 $ 8,465 $425,261
Certificates of deposit of
$100,000 or more................. 219,221 73,159 86,360 2,976 381,716
-------- -------- -------- ------- --------
Total certificates of deposit.... $425,012 $155,621 $214,903 $11,441 $806,977
======== ======== ======== ======= ========
</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. 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, 1999,
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 investment or sale.
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. As of December
31, 1999, Beal Financial had repurchased, in unsolicitated offers, $13.1 million
of the Senior Notes. Since December 31, 1999, an additional $4.5 million was
repurchased and retired. See Note H to the Notes to Consolidated Financial
Statements of the Company.
24
<PAGE>
At December 31, 1999, FHLB advances totaled $191.0 million. FHLB advances
were used for liquidity and loan investment purposes. For additional information
relating to borrowings, see Notes G and H to the Notes to Consolidated Financial
Statements of the Company.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings for the periods indicated.
Year Ended
December 31,
----------------------------
1997 1998 1999
--------- -------- ---------
(Dollars in Thousands)
MAXIMUM BALANCE:
FHLB advances................. $146,000 $176,000 $204,000
Senior notes, net............. 57,188 57,295 57,385
Other borrowings.............. 14,748 7,583 7,272
AVERAGE BALANCE:
FHLB advances................. $19,181 $ 39,822 64,801
Senior notes, net............. 57,141 57,233 55,223
Other borrowings.............. 10,401 7,249 6,963
The following table sets forth certain information as to the Company's
borrowings at the dates indicated.
December 31,
--------------------------
1997 1998 1999
-------- -------- --------
(Dollars in Thousands)
FHLB advances.......................... $110,000 $ 80,000 $191,000
Senior notes, net...................... 57,188 57,295 44,336
Other borrowings....................... 7,599 7,083 7,272
-------- -------- --------
Total borrowings.................. $174,787 $144,378 $242,608
======== ======== ========
Weighted average interest rate of FHLB
advances............................... 6.65% 4.87% 5.79%
Weighted average interest rate of
Senior notes, net...................... 13.00% 13.00% 13.00%
Weighted average interest rate of
other borrowings....................... 8.03% 7.95% 7.81%
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.
In addition, Beal Financial has a single purpose subsidiary to invest
approximately $697,000 in a limited partnership to develop property in McKinney,
Texas and other inactive subsidiaries.
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
25
<PAGE>
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, 1999, the net book value of the Bank's investment in its
subsidiaries was approximately $931.5 million (including $23.2 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 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 NEVADA CORP., ("BNC"). During the fourth quarter of 1997, the Bank
formed BNC, a Nevada corporation for tax planning purposes. BNC is a 99% limited
partner in Loan Participant Partners, Ltd., with Property Acceptance Corp.
("PAC"), a wholly-owned subsidiary of the Bank, as the 1% general partner. This
partnership owns an interest in a pool of loans transferred from the Bank. The
Bank's investment in BNC and PAC was $822.4 million and $8.2 million,
respectively, at December 31, 1999.
BEAL MORTGAGE, INC. ("BMI"), BEAL PROPERTIES, INC. ("BPI") AND BEAL/H.S.,
INC ("BHS"). BMI and BPI are Texas corporations and BHS is a Nevada corporation.
These corporations were 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, 1999, the
Bank's investment in BMI, BPI and BHS totaled $7.2 million, $3.5 million and
$12.5 million, respectively.
BMI, BPI and BHS 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 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, BPI and BHS is limited by the FDIC to 10% of Tier
I capital and 20% of Tier 1 capital on an aggregate basis, 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, BPI and BHS have conducted substantially all of their
real estate development activities within the Dallas/Fort Worth and Houston
metropolitan areas.
BMI also holds $12.3 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, 1999, Beal Bank Center II had a book value of $8.4
million (subject to a $5.7 million first mortgage lien from an unaffiliated
lender) and was 86% occupied. Five remaining properties held by BMI for
investment, had book values aggregating $3.9 million at December 31, 1999.
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, 1999, the
Bank's investment in LAC totaled $576,000. See "- Lending Activities - Loan
Acquisition, Resolution, Origination and Sale Activities."
BRE, INC. ("BRE"). BRE is a Texas corporation 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, 1999, BRE held 15 mortgage loans (eleven
single-family and four multi-family and commercial real estate loans) totaling
$2.4 million and five foreclosed real estate properties (one land and four
multi-family and commercial properties) totaling $4.7 million. BRE has performed
full environmental reviews on all of its properties with minimal environmental
problems found. The properties are operational and BRE actively markets the
properties for sale. At December 31, 1999, the Bank's investment in BRE totaled
$7.1 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
26
<PAGE>
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. Income, gain, loss, deductions, tax credits and
distributions of net cash flow for any partnership fiscal year is allocated to
and among the partners in accordance with their respective percentage interests.
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,
1999, the Company's investment in BAH totaled $26.5 million.
It is anticipated that BAH is entitled to tax credits of approximately
$2.4 million per year, for the next eight years, to the extent that they are
able to utilize them. 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, 1999.
The Bank also owns other single purpose subsidiaries formed to hold
foreclosed property for tax planning purposes. The Bank's net investment in such
subsidiaries at December 31, 1999 was $43.6 million.
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. 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, 1999, the Company, including its subsidiaries, had a total
of 97 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 deposits of the
Bank are insured and 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.
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.
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
27
<PAGE>
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, 1999, the Bank's lending limit under this restriction was $31.9
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.
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.
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
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 or other
entity, 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
28
<PAGE>
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. 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, BPI and BHS, 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 its subsidiaries to continue to
engage in these Real Estate Activities provided that they comply 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."
INSURANCE OF ACCOUNTS AND REGULATION 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. The current assessment schedule for both BIF and SAIF insured
institutions ranges from 0 to .27% of deposits. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment period.
Deposit insurance premiums for the fiscal year ended December 31, 1999, totaled
$691,000.
29
<PAGE>
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.
Beginning in 2000, all FDIC-insured institutions are also required to pay
an assessment for the repayment of interest on obligations issued by a federally
chartered corporation to provide financing for resolving the thrift crisis in
the 1980's, in the amount equal to approximately two basis points for each $100
in domestic deposits. Prior to 2000, SAIF-insured institutions paid an
assessment equal to approximately six basis points for each $100 in domestic
deposits, while BIF-insured institutions paid about 1.5 basis points for each
$100 on deposit. These assessments, which may be revised based upon the level of
BIF and SAIF deposits, will continue until the bonds mature in 2017.
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, 1999, 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 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 and BHS) 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.
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 purchased 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.
30
<PAGE>
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.
On October 13, 1997, the Texas Department notified the Bank's Board of
Directors that the Department was rescinding the requirement that the Bank
maintain minimum capital requirements of 9% for leverage capital and 11% for
risk-based capital, based on a business plan submitted to the Texas Department
by the Bank and the Department's evaluation of the Bank's latest examination as
of March 31, 1997. The business plan generally anticipates a significant decline
in total assets, however, the Bank will continue to originate loans that are
within the Bank's loan policy, as approved by the Board, and continue to
purchase loan packages; 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 leverage capital ratio of at least 10%. The Texas
Department must be provided with 30 days prior written notice of any actions
planned or anticipated that might reasonably be expected to result in a material
deviation from the business plan. For purposes of such advance notification,
material deviation would include, but not necessarily be limited to, material
deviations in capital levels, total asset growth or bulk asset purchases in any
quarter, or any resumption of foreign lending. On October 16, 1998, the Bank
received a no objection letter, from the Texas Department to its acquisition of
approximately $330.0 million of predominantly performing single family
residential loans. This acquisition represented a material deviation from the
total asset growth projections of the Bank's business plan.
The following table sets forth the Bank's compliance with its regulatory
capital requirements at December 31, 1999:
At December 31, 1999
---------------------------------
Required Actual
---------------- ----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Leverage capital............... 71,365 5.00% 212,478 14.89%
Tier 1 risk-based capital...... 62,518 6.00% 212,478 20.39%
Total risk-based capital....... 104,196 10.00% 224,822 21.58%
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 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.
31
<PAGE>
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 February 3,
1999, the OTS acknowledged prior notice and that the Bank may pay dividends, as
needed, up to 100% of earnings for the fiscal year-ended December 31, 1999. On
December 22, 1999, the OTS approved an additional dividend of $55.0 million that
could be paid in excess of the 100% of earnings for the fiscal year ended
December 31, 1999. As of March 31, 2000, this additional dividend has not been
paid.
In a letter dated March 5, 2000, the OTS acknowledged prior notice and
that the Bank may pay dividends up to 100% of earnings for the fiscal year ended
December 31, 2000. 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, 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, 1999, the
Bank's liquidity ratio was 17.14%.
32
<PAGE>
QUALIFIED THRIFT LENDER TEST. All institutions with holding companies
governed by the OTS, are required to meet a qualified thrift lender ("QTL") test
to avoid certain restrictions on their operations. One version of this test
requires a savings institution to have at least 65% of its portfolio assets (as
defined by regulation) 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, 1999, the
Bank met the test for the twelve month period. 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
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
this 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. The Bank
has received approval from the FDIC to be designated as a wholesale institution
for purposes of evaluation under the revised CRA.
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, 1999, 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. 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 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 generally become subject to additions or restrictions.
If the Bank fails the QTL test, the Company must register as, and will
become subject to, the restrictions applicable to bank holding companies.
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.
33
<PAGE>
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, 1999, 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 institutions are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require savings
institutions 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 institutions. Each FHLB serves as a reserve or central bank
for its members within its assigned region. 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 must be used for residential
home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas. At December 31, 1999, the Bank had $9.7 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five calendar
years such dividends have averaged 5.95% and were 5.50% for calendar year 1999.
FEDERAL AND STATE TAXATION
The Company and its subsidiaries have elected Subchapter S status for
federal income tax purposes. As a result the Company does not generally pay any
federal taxes on net income. The only exception would involve possible
Subchapter C tax liability on net built-in gains as of January 1, 1997, which
may potentially be recognized during the 10 year period ending December 31,
2006. Recognition of built-in gains/losses are subject to certain limitations.
At December 31, 1999, the Company had net unrealized built-in gains of
approximately $50.3 million.
The future tax liability for the taxable earnings of Beal Financial and
subsidiaries is 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).
34
<PAGE>
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. The
Bank has met the residential lending requirement and recapture was delayed until
the 1998 taxable year. 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, 1999, the Bank's Excess for tax
purposes totaled approximately $7.9 million. The management of the Company does
not believe that the legislation will have a material impact on the Company or
the Bank.
The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1997. With respect to years examined by the IRS, all deficiencies have been
resolved. 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 $1,000 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. For the year ended
December 31, 1999, total state taxes were $1.6 million.
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, 1999.
Total
Owned Approximate
Year or Square Book
Location Acquired Leased Footage Value
- ------------------ -------- ------ ----------- -------
(In
Thousands)
Corporate
Headquarters: 1992 Owned 167,138 $4,692
Beal Bank Center I
15770 North Dallas
Parkway
Dallas, Texas
Branch Office:
5100 Westheimer 1995 Leased 5,064 ---
Houston, Texas
The Company acquired Beal Bank Center I in 1992 and currently occupies
33,800 square feet in the building. At December 31, 1999, the building was 78%
occupied. At December 31, 1999, the Company's total investment in the property
was $6.4 million with a net book value of $4.7 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, 1999 was $5.5 million.
35
<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.
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 quarter ended December 31, 1999.
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."
36
<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>
Twelve
Months
Ended
At June 30, December 31, At December 31,
----------- ------------ ----------------------------------
1996 1996 1997 1998 1999
----------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Selected Financial
Condition Data:
Total assets..............$1,269,279 $1,394,906 $1,365,754 $1,353,474 $1,429,906
Loans receivable, net..... 897,414 1,054,204 887,833 1,045,546 1,116,409
Securities available for
sale...................... 194,699 123,939 111,376 89,581 70,080
Deposits.................. 891,304 1,043,433 1,001,476 1,005,617 993,289
Total borrowings.......... 263,519 217,842 174,787 144,378 242,608
Stockholders' equity...... 93,172 116,797 160,820 191,226 180,162
</TABLE>
<TABLE>
<CAPTION>
Twelve
Months
Ended
At June 30, December 31, At December 31,
----------- ------------ ----------------------------------
1996 1996 1997 1998 1999
----------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Selected Operations Data:
Total interest income..... $140,948 $177,339 $169,181 $149,966 $171,999
Total interest expense.... 56,818 67,708 67,856 57,817 62,495
-------- -------- -------- -------- --------
Net interest income....... 84,130 109,631 101,325 92,149 109,504
Provision for loan losses. 9,044 6,423 3,410 5,577 3,821
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses. 75,086 103,208 97,915 86,572 105,683
Gain on sales of
interest-earning
assets.................... 8,413 6,101 550 --- ---
Gain on sales of real
estate.................... 7,068 10,776 13,708 39,155 13,618
Other non-interest income. 1,202 2,615 3,013 6,055 6,111
-------- -------- -------- -------- --------
Total non-interest income. 16,683 19,492 17,271 45,210 19,729
Total non-interest expense 22,456 38,588 22,144 20,513 21,329
-------- -------- -------- -------- --------
Income before income taxes 69,313 84,112 93,042 111,269 104,083
Income taxes.............. 25,153 30,280 6,408 6,049 3,230
-------- -------- -------- -------- --------
Net income................ $ 44,160 $ 53,832 $ 86,634 $105,220 $100,853
======== ======== ======== ======== ========
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Twelve
Months
Ended
At June 30, December 31, At December 31,
----------- ------------ ----------------------------------
1996 1996 1997 1998 1999
----------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
Performance Ratios:
Return on assets (ratio of net
income to average total
assets)...................... 4.46% 4.36% 6.66% 8.98% 7.59%
Return on equity (ratio of net
income to average equity)..... 64.51 57.10 59.77 61.32 62.81
Interest rate spread
information, average
during period................. 9.43 9.64 8.72 8.80 8.17
Net interest margin(1)......... 9.32 9.68 8.86 9.07 8.53
Ratio of operating expense to
average total assets.......... 2.27 3.13 1.71 1.75 1.61
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................... 98.30 102.29 102.60 104.78 107.06
Quality Ratios:
Net non-performing assets to
total assets, at
end of period................. 11.84 17.77 17.88 12.80 8.68
Allowance for loan losses to
net non-performing loans...... 9.65 6.49 9.17 11.49 15.11
Allowance for loan losses to
loans receivable, net......... 1.32 1.25 1.34 1.33 1.11
Net charge-offs to average
loans, net..................... .39 .38 .49 .43 .51
Equity Ratios:
Equity to total assets, at end
of period..................... 7.34 8.37 11.78 14.13 12.60
Average equity to average
assets........................ 6.91 7.64 11.19 14.65 12.08
Ratio of Earnings to Fixed
Charges:
Excluding interest on deposits. 7.4:1 8.1:1 10.4:1 11.4:1 9.8:1
Including interest on deposits. 1.4:1 1.4:1 1.5:1 2.1:1 1.9:1
Other Data:
Number of full-service offices. 3 3 3 2 2
</TABLE>
(1) Net interest income divided by average interest-earning assets.
38
<PAGE>
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 in prior years, the gains
recognized upon the sales of such loans or the underlying collateral have been
significant.
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.
FINANCIAL CONDITION
The Company's total assets remained relatively unchanged, increasing $76.4
million to $1.43 billion at December 31, 1999. The asset composition changed,
however, with net loans increasing approximately $70.9 million, due to loan
purchases and originations exceeding loan payoffs and cash and cash equivalents
increasing $43.3 million due to concerns related to the year 2000 computer
issue. This increase was funded primarily by proceeds received upon the
disposition of securities available for sale of $19.5 million, $13.2 million
real estate held for investment or sale and an increase in Federal Home Loan
Bank advances of $111.0 million.
The Company's total assets remained unchanged at $1.4 billion at December
31, 1998 and December 31, 1997, respectively. The asset composition changed,
however, with net loans increasing approximately $157.7 million, due to loan
purchases and originations exceeding loan payoffs. This increase was funded
primarily by a decline in cash balances of $78.7 million and proceeds received
upon the disposition of $70.3 million real estate held for investment or sale.
The Company's total assets remained unchanged at $1.4 billion at December
31, 1997 and December 31, 1996, respectively. The asset composition changed,
however, with net loans decreasing approximately $167.6 million, due to loan
payoffs and foreclosure of non-performing loans, exceeding loan originations and
discounted loan purchases. In addition, cash balances increased $84.5 million
and real estate held for investment or sale increased $74.0 million. The
increase in cash and cash equivalents was the result of normal operations. The
increase in real estate held for investment or sale was primarily the result of
additional foreclosures occurring as part of the normal resolution process for
non-performing assets.
Total liabilities increased $87.5 million from December 31, 1998 to
December 31, 1999, primarily due to an increase in Federal Home Loan Bank
advances of $111.0 million partially offset by a $12.3 million decrease in
deposit accounts and a $13.0 million reduction in senior notes outstanding.
Total liabilities decreased $42.7 million from December 31, 1997 to
December 31, 1998, primarily due to a decrease in Federal Home Loan Bank
advances of $30.0 million and a $16.4 million decrease in other liabilities.
Total liabilities decreased $73.7 million from December 31, 1996 to
December 31, 1997, primarily due to a decrease of $42.0 million in deposits and
a decrease in Federal Home Loan Bank advances of $36.0 million. The decrease in
deposits and advances from the FHLB reflect the decrease in net loan
receivables.
Stockholders' equity decreased $11.1 million or 5.8% from $191.2 million at
December 31, 1998 to $180.2 million at December 31, 1999 due to a $60.0 million
loan to a shareholder and dividends of $47.6 million paid in excess of earnings
of $100.9 million. Stockholders' equity increased $30.4 million, or 18.9%, from
$160.8 million at December 31, 1997 to $191.2 million at December 31, 1998 due
to
39
<PAGE>
earnings exceeding dividends paid to stockholders. Dividends paid to
stockholders totaled $47.6 million and $87.6 million during the years ended
December 31, 1999 and 1998, respectively. Beal Financial anticipates future
dividends to be significant, subject to limitations imposed upon Beal Financial
by the Trust Indenture (the "Indenture") governing the Senior Notes. The
Indenture limits dividends to 50% of consolidated net income since August 1,
1995. At December 31, 1999, under the terms of the Indenture, Beal Financial
would have been permitted to dividend an additional $10.2 million.
RESULTS OF OPERATIONS
GENERAL. The level of net income experienced by the Company in the year
ended December 31, 1997 and prior periods resulted primarily from (i) the
significant increase in the average balance of interest-earning assets as a
result of the Company's efforts to return non-performing loans to performing
status and (ii) gains on the sales of loans and gains on sale of real estate.
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.
40
<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 daily average balances. Non-accruing loans have been included in the table
as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998 1999
--------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- --------- -------- ----------- ------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).............. $ 967,265 $157,458 16.28% $ 853,697 $139,456 16.34% $1,064,125 $156,673 14.72%
Mortgage-backed securities....... 117,141 8,407 7.18 101,805 7,334 7.20 78,661 5,932 7.54
Interest-earning deposits........ 49,653 2,730 5.50 52,940 2,709 5.12 62,187 2,927 4.71
FHLB stock....................... 9,835 586 5.96 7,887 467 5.92 9,095 499 5.49
---------- -------- ---------- -------- ---------- --------
Total interest-earning assets(1) $1,143,894 $169,181 14.79 $1,016,329 $149,966 14.76 $1,214,068 $166,031 13.68
========== -------- ========== -------- ========== --------
Interest-Bearing Liabilities:
Savings deposits................. 185,233 9,025 4.87 173,491 8,323 4.80 182,227 8,249 4.53
Certificate accounts............. 847,937 48,955 5.77 692,172 38,770 5.60 824,771 42,403 5.14
Senior notes, net................ 57,131 7,986 13.98 57,233 8,077 14.11 55,223 7,934 14.37
Borrowings....................... 28,286 1,890 6.68 47,071 2,647 5.62 71,764 3,909 5.45
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities....................... $1,118,587 67,856 6.07 $ 969,967 57,817 5.96 $1,133,985 62,495 5.51
========== -------- ========== -------- ========== --------
Net interest income............... $101,325 $ 92,149 $103,536
======== ======== ========
Net interest rate spread.......... 8.72% 8.80% 8.17%
Net earning assets................ $ 25,307 $ 46,362 $ 80,083
========== ========== ==========
Net yield on average interest-
earning assets.................. 8.86% 9.07% 8.53%
Average interest-earning assets to
average interest-bearing
liabilities..................... 102.26% 104.78% 107.06%
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
41
<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 Year Ended
December 31, 1997 vs December 31, 1998 vs
December 31, 1998 December 31, 1999
-------------------------------------- ------------------------------
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............................... $(16,528) $ (1,434) $(17,962) $ 16,754 $ 14,517 $ 31,271
Loans receivable - discount.................... (2,026) 1,986 (40) 11,962 (26,016) (14,054)
-------- --------- ----------- -------- ------- --------
Loans receivable - total....................... (18,554) 552 (18,002) 28,716 (11,499) 17,217
Mortgage-backed securities..................... (1,105) 32 (1,073) (1,766) 364 (1,402)
Interest-earning deposits...................... 448 (469) (21) 403 (185) 218
Other.......................................... (115) (4) (119) 61 (29) 32
-------- --------- ----------- -------- ------- --------
Total interest-earning assets................ (19,326) 111 (19,215) 27,414 (11,349) 16,065
======== ========= =========== ======== ======= ========
Interest-Bearing Liabilities:
Savings deposits............................... $ (565) $ (137) $ (702) $ 616 $ (690) $ (74)
Certificate accounts........................... (8,762) (1,423) (10,185) 6,359 (2,726) 3,633
Senior notes, net.............................. 14 77 91 (294) 151 (143)
Borrowings..................................... 994 (237) 757 1,342 (80) (1,262)
-------- --------- ----------- -------- ------- --------
Total interest-bearing liabilities........... $ (8,319) $ (1,720) (10,039) 8,023 (3,345) 4,678
======== ========= ----------- ======== ======= --------
Change in net interest income................... $ (9,176) $ 11,387
=========== ========
</TABLE>
42
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND
TWELVE MONTHS ENDED DECEMBER 31, 1998
NET INCOME. For the fiscal year ended December 31, 1999, net income of
$100.9 million represented a decrease of $4.4 million, or 4.2% from $105.2
million for the year ended December 31, 1998. As discussed in more detail below,
the decrease in net income was primarily due to a decrease in gain on real
estate transaction of $25.5 million and an increase of $816,000 in non-interest
expenses. This decrease was offset by an increase of $17.4 million in net
interest income, a decrease in provision for loan losses of $1.8 million and a
decrease in income taxes of $2.8 million.
NET INTEREST INCOME. Net interest income increased $17.4 million, or
18.8%, from $92.1 million at December 31, 1998 to $109.5 million at December 31,
1999. The average balance of interest-earning assets increased by $197.7
million. The net interest spread however decreased from 8.80% for the twelve
months ended December 31, 1998 to 8.17% for the twelve months ended December 31,
1999.
INTEREST INCOME. Interest income increased $22.0 million, or 14.7%, from
$150.0 million at December 31, 1998 to $172.0 at December 31, 1999. Interest on
loans, including fees increased $31.2 million, interest on investment securities
decreased $1.1 million and purchased discount accretion decreased $8.1 million.
The average balance of interest earning assets increased, however this increase
was offset by a decrease in the yield on interest earning assets by 1.08% for
the year ended December 31, 1999, as compared to the same period ending December
31, 1998. This decrease in yield was primarily due to a decrease in yield on
loans, net, from 16.34% for the year ended December 31, 1998 to 14.72% for the
year ended December 31, 1999.
INTEREST EXPENSE. Interest expense increased $4.7 or 8.1%, from $57.8
million at December 31, 1998 to $62.5 million at December 31, 1999. The majority
of the increase was the $3.6 million increase in interest expense on deposits
coupled with an increase in interest on FHLB advances of $1.3 million. The
average balance of interest-bearing liabilities increased $164.0 million for the
twelve months ended December 31, 1999. The 45 basis point decrease in the
average cost of interest-bearing liability from 5.96% for the twelve month
period ended December 31, 1998 to 5.51% for the twelve months ended December 31,
1999 was primarily due to a decrease in the average cost of certificate and
savings accounts.
PROVISIONS 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 $1.8 million or 31.5% for the twelve months
ended December 31, 1999 primarily as a result of a decrease in non-accrual loans
during this period.
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 15.1%
at December 31, 1999 as compared to 11.5% at December 31, 1998.
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 decreased $25.5 million, or
56.4% from $45.2 million at December 31, 1998 to $19.7 million at December 31,
1999. This decrease was primarily due to a decrease of $25.5 million in the
income attributable to gain on real estate transactions and a $1.7 million
decrease in other real estate operations, net.
NON-INTEREST EXPENSE. Non-interest expense increased $816,000, or 4.0%,
from $20.5 million at December 31, 1998 to $21.3 million at December 31, 1999,
primarily due to an increase in other operating expenses of $779,000
43
<PAGE>
during the twelve month period ended December 31, 1999.
INCOME TAXES. Income taxes decreased $2.8 million during the twelve month
period ending December 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND YEAR
ENDED DECEMBER 31, 1997
NET INCOME. For the fiscal year ended December 31, 1998, net income of
$105.2 million represented an increase of $18.6 million, or 21.5% from $86.6
million for the year ended December 31, 1997. As discussed in more detail below,
the increase in net income was primarily due to an increase in gain on real
estate transactions of $25.4 million. This increase, coupled with a decrease of
$1.6 million in non-interest expense, offsets a $2.2 million increase in the
provision for loan losses and a $19.2 million decrease in total interest income.
NET INTEREST INCOME. Net interest income decreased $9.2 million, or 9.1%,
from $101.3 million at December 31, 1997 to $92.1 million at December 31, 1998,
primarily due to a $127.6 million or 11.2% decline in the average balance of
interest-earning assets. The net interest spread, however, increased slightly to
8.8% for the year ended December 31, 1998 from 8.7% for the year ended December
31, 1997.
INTEREST INCOME. Interest income decreased $19.2 million, or 11.4%, from
$169.2 million at December 31, 1997 to $57.8 million at December 31, 1998.
Interest on loans, including fees, decreased $18.0 million primarily due to the
decrease in the average balance of loans receivable. Interest on investment
securities decreased $1.2 million and purchased discount accretion remained
virtually unchanged.
INTEREST EXPENSE. Interest expense decreased $10.0 million or 14.8%, from
$67.8 million at December 31, 1997 to $57.8 million at December 31, 1998
primarily due to a $10.9 million decrease in interest expense on deposits. The
average balance of interest-bearing liabilities decreased $148.6 million during
the year ended December 31, 1998 reflecting the reduction in the average balance
of 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 $2.2 million, or 63.6% for the year ended
December 31, 1998 primarily as a result of an increase in net loans receivable
during this period.
NON-INTEREST INCOME. Total non-interest income increased $27.9 million, or
161.8% from $17.3 million at December 31, 1997 to $45.2 million at December 31,
1998. This increase was primarily due to an increase of $25.4 million in the
income attributable to gain on real estate transactions and a $3.0 million
increase in other real estate operations, net.
NON-INTEREST EXPENSE. Non-interest expense decreased $1.6 million, or 7.4%
from $22.1 million at December 31, 1997 to $20.5 million at December 31, 1998,
primarily due to a decrease in other operating expenses of $1.1 million during
the twelve month period ended December 31, 1998.
INCOME TAXES. Income taxes decreased slightly by $359,000 during the year
ending December 31, 1998 as compared to the previous year.
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 December 31, 1999, 1998 and 1997,
the Company purchased $315.4 million, $387.9 million and $130.4 million of net
loans, respectively.
44
<PAGE>
Loan originations for the years ended December 31, 1999, 1998 and 1997 were
$82.9 million, $85.4 million and $76.6 million, respectively.
The Company's primary financing activity is the attraction of deposits.
During the years ended December 31, 1999, 1998 and 1997, the Company experienced
a net increase (decrease) in deposits of $(12.3) million, $4.1 million and
$(42.0) million, respectively. The Company also utilizes FHLB advances to fund
the Bank's discounted loan purchases. During the years ended December 31, 1999,
1998 and 1997, the Company's net financing activity (proceeds less repayments)
with the FHLB totaled $111.0 million, $(30.0) million and $(36.0) million,
respectively. The Company had other borrowings of $51.5 million at December 31,
1999, including $44.3 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, 1999, the Company had an undrawn advance
arrangement with the FHLB for $95.7 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 its average daily deposits for the most
recently completed calendar quarter in cash or readily marketable securities. At
December 31, 1999, the Bank's liquidity ratio was 17.14%.
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 December 31, 1999, 1998 and
1997 cash and cash equivalents totaled $115.4 million, $72.1 million and $150.8
million, respectively.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1999, the Company had commitments
to originate one loan aggregating $12.5 million. Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1999 totaled $795.5
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.
At December 31, 1999, the Bank exceeded each of its three capital
requirements. The following is a summary of the Bank's regulatory capital
position at December 31, 1999.
At December 31, 1999
---------------------------------
Required Actual
---------------- ---------------
Amount Percent Amount Percent
------- ------- ------ -------
(Dollars in Thousands)
Leverage capital............... $71,365 5.00% $212,478 14.89%
Tier 1 risk-based capital...... 62,518 6.00% 212,478 20.39
Total risk-based capital....... 104,196 10.00% 224,822 21.58
Due to the amount of dividends to stockholders expected to be declared by
the Board of Director's in 2000, the Company anticipates that the Bank's
regulatory capital ratios will be reduced if the Bank were to experience
significant growth. It is the Company's intention that any such dividends would
be limited to ensure that the Bank maintains its capital ratios in excess of the
ratios necessary to be classified as a "well capitalized institution" as defined
in FDIC regulations. See Item 1. Business - Regulation - Insurance of Accounts
and Regulation by the FDIC."
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
45
<PAGE>
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. Investment rates do not necessarily change 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 the
year ended December 31, 1999 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 Year
Ended
December 31, 1999
-----------------
Excluding interest on deposits. 9.8:1
Including interest on deposits. 1.9:1
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 and three outside Directors. The Bank's Chief
Executive Officer, 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 to
enhance net interest income than on matching the interest rate sensitivity of
its assets and liabilities. 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.
46
<PAGE>
As indicated in the table below, at December 31, 1999, the Bank's
interest-bearing liabilities repricing in one year or less exceeded
interest-earning assets maturing during the same period by $306.0 million,
resulting in a one-year negative gap equal to 24.74% 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.
The following table sets forth the interest rate sensitivity of the Bank's
net assets and liabilities at December 31, 1999 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. 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.................. $406,977 $ 1,548 $ 26,606 $ 5,642 $ 372 $ 184 $ 441,329
Adjustable rate one- to four-
family, commercial real estate
and construction loans.............. 47,216 50,305 50,073 130,890 116,815 151,500 546,799
Commercial business loans............ 15,805 343 75 512 1,343 742 18,820
Consumer loans....................... 17,982 2,093 2,642 5,063 3,425 4,267 35,472
Interest-earning deposits............ 114,670 --- --- --- --- --- 114,670
FHLB Stock........................... 9,670 --- --- --- --- --- 9,670
Securities available for sale and ---
other investments.................. 70,080 --- --- --- --- 70,080
--------- --------- --------- -------- -------- --------- ---------
Total interest-earning assets... 682,400 54,289 79,396 142,107 121,955 156,693 1,236,840
--------- --------- --------- -------- -------- --------- ---------
Money market accounts................ 99,185 33,062 33,061 --- --- --- 165,308
Commercial demand.................... 11,580 --- --- --- --- --- 11,580
Savings deposits..................... 1,885 1,885 1,885 3,769 --- --- 9,424
Certificate accounts................. 639,463 163,192 3,015 1,307 --- --- 806,977
Subordinated debt, net............... 44,336 --- --- --- --- --- 44,336
FHLB advances........................ 191,000 --- --- --- --- --- 191,000
Other borrowings..................... 901 5,674 --- --- --- 697 7,272
--------- --------- --------- -------- -------- --------- ---------
Total interest-bearing liabilities.. 988,350 203,813 37,961 5,076 --- 697 1,235,897
--------- --------- --------- -------- -------- --------- ---------
Interest-earning assets less
interest-bearing liabilities........ ($305,950) ($149,524) $ 41,435 $137,031 $121,955 $ 155,996 $ 943
========= ========= ========= ======== ======== ========= =========
Cumulative interest-rate
sensitivity gap..................... ($305,950) ($455,474) $(414,039) $(277,008) $(155,053) $ 943 $ 943
========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate gap
as a percentage of total assets
at December 31, 1999................ (21.40)% (31.85)% (28.96)% (19.37)% (10.84)% 0.07% 0.07%
========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate gap as
a percentage of interest-earning
assets at December 31, 1999......... (24.74)% (36.83)% (33.48)% (22.40)% (12.54)% 0.08% 0.08%
========= ========= ========= ========= ========= ========= =========
Cumulative interest-rate gap as a
percentage of interest-bearing
liabilities at December 31, 1999.... (24.76)% (36.85)% (33.50)% (22.41)% (12.55)% 0.08% 0.08%
========= ========= ========= ========= ========= ========= =========
</TABLE>
<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, 1999, 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, 1999,
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, 1999, annualized.
<TABLE>
<CAPTION>
Percentage Change in:
-----------------------------------------
Net Interest Income 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) (8.0) (75) (26.6) 91,625 (8,020) (8.0) 155,403 (56,260) (26.6)
+300 (50) (6.0) (50) (20.6) 93,651 (5,994) (6.0) 167,979 (43,684) (20.6)
+200 (35) (4.0) (35) (14.3) 95,670 (3,975) (4.0) 181,493 (30,170) (14.3)
+100 (25) (2.0) (25) (7.4) 97,683 (1,962) (2.0) 196,025 (15,638) (7.4)
0 0 0 0 0 99,645 0 0 211,663 0 0
-100 (25) 2.0 (25) 8.0 101,600 1,955 2.0 228,580 16,917 8.0
-200 (35) 3.8 (35) 14.5 103,422 3,777 3.8 242,331 30,668 14.5
-300 (55) 5.4 (50) 19.9 104,977 5,332 5.4 253,753 42,090 19.9
-400 (75) 6.5 (75) 23.2 106,088 6,443 6.5 260,839 49,176 23.2
</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 23.2% increase in MVPE and a 6.5% increase in
net interest income in a declining rate environment and a 26.6% decrease in MVPE
and a 8.0% 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 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.
47
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Certified Public Accountants...................... 49
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 51
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997....................................... 52
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................ 53
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................................... 54
Notes to Consolidated Financial Statements.............................. 56
48
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
BEAL FINANCIAL CORPORATION AND
SUBSIDIARIES
December 31, 1999 and 1998
49
<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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
Dallas, Texas
February 4, 2000
50
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
---------------------
1999 1998
--------- ---------
ASSETS
Cash $ 746 $ 5,540
Interest-bearing deposits with Federal Home Loan Bank 114,670 66,599
------- -------
Cash and cash equivalents 115,416 72,139
Accrued interest receivable 12,879 12,983
Securities - available for sale 70,080 89,581
Loans receivable, net 1,116,409 1,045,546
Federal Home Loan Bank stock 9,670 9,877
Real estate held for investment or sale 93,166 106,353
Premises and equipment, net 5,520 5,699
Other assets 6,766 11,296
------- -------
$1,429,906 $1,353,474
========== ==========
LIABILITIES
Deposit accounts $ 993,289 $1,005,617
Federal Home Loan Bank advances 191,000 80,000
Senior notes, net 44,336 57,295
Other borrowings 7,272 7,083
Other liabilities 13,847 12,253
------- -------
Total liabilities 1,249,744 1,162,248
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $1 par value per share; authorized, 375
shares; issued and outstanding, 300 shares 300 300
Additional paid-in capital 2,740 2,740
Accumulated other comprehensive income (loss) (443) 3,909
Retained earnings 237,565 184,277
Stockholder note receivable (60,000) -
------- -------
Total stockholders' equity 180,162 191,226
-------- --------
$1,429,906 $1,353,474
51
The accompanying notes are an integral part of these statements.
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
Year ended
December 31,
1999 1998 1997
------ ------ ------
Interest income:
Loans, including fees and purchase
discount accretion $162,641 $139,456 $157,458
Investment securities 9,358 10,510 11,723
------ ------- -------
Total interest income 171,999 149,966 169,181
Interest expense:
Deposits 50,652 47,093 57,980
Federal Home Loan Bank advances
and other borrowings 3,909 2,647 1,890
Senior notes 7,934 8,077 7,986
------ ------ ------
Total interest expense 62,495 57,817 67,856
------- ------- -------
Net interest income 109,504 92,149 101,325
Provision for loan losses 3,821 5,577 3,410
------ ------ ------
Net interest income after provision
for loan losses 105,683 86,572 97,915
Noninterest income:
Gains on real estate transactions 13,618 39,155 13,708
Other real estate operations, net 3,805 5,466 2,486
Gain on sales of loans 8 - 550
Other operating income 2,298 589 527
------ ---- ----
Total noninterest income 19,729 45,210 17,271
Noninterest expense:
Salaries and employee benefits 8,230 8,083 8,318
Occupancy and equipment 1,993 2,185 2,392
SAIF deposit insurance premium 691 609 676
Other operating expense 10,415 9,636 10,758
------- ------ -------
Total non-interest expenses 21,329 20,513 22,144
------- ------- -------
Income before income taxes 104,083 111,269 93,042
Income taxes 3,230 6,049 6,408
------ ------ ------
NET INCOME $100,853 $105,220 $ 86,634
======= ======= =======
Basic income per common share $336.18 $350.73 $288.78
====== ====== ======
Weighted average number of common
shares outstanding 300 300 300
==== ==== ====
52
The accompanying notes are an integral part of these statements.
<PAGE>
The accompanying notes are an integral part of this statement.
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional other Stockholder
---------------- paid-in comprehensive Retained note
Shares Amount Capital Income (Loss) Earnings Receivable Total
------- ------- ------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997 300 $300 $2,740 $ 709 $113,048 $ - $116,797
Comprehensive income:
Net income - - - - 86,634 - 86,634
Unrealized gain on securities
available for sale, net of
tax effects - - - 3,013 - - 3,013
------
Total comprehensive income 89,647
-------
Dividends declared - - - - (45,626) - (45,626)
--- --- --- ------ ------- --- -------
Balances at December 31, 1997 300 300 2,740 3,722 154,056 - 160,818
Comprehensive income:
Net income - - - - 105,220 - 105,220
Unrealized gain on securities
available for sale, net of
tax effects - - - 187 - - 187
----
Total comprehensive income 105,407
-------
Dividends declared - - - - (74,999) - (74,999)
--- --- --- ------ ------- --- -------
Balances at December 31, 1998 300 300 2,740 3,909 184,277 - 191,226
Comprehensive income:
Net income - - - - 100,853 - 100,853
Unrealized loss on securities
available for sale - - - (4,352) - - (4,352)
-------
Total comprehensive income 96,501
-------
Funding of stockholder note
receivable - - - - - (60,000) (60,000)
Dividends declared - - - - (47,565) - (47,565)
--- --- --- ------ -------- ------- -------
Balances at December 31, 1999 300 $300 $2,740 $ (443) $237,565 $(60,000) $180,162
=== === ===== ===== ======= ======= =======
</TABLE>
53
The accompanying notes are an integral part of these statements.
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended
December 31,
-------------------------------
1999 1998 1997
------- ------ ------
Operating activities
Net income $100,853 $ 105,220 $ 86,634
Adjustments to reconcile net income
to net cash provided by
operating activities
Depreciation and amortization 1,926 2,014 2,468
Accretion of purchase discount (36,547) (44,633) (44,673)
Provision for loan losses 3,821 5,577 3,410
Amortization of bond discount
and underwriting costs 849 746 654
Gains on real estate transactions (13,618) (39,155) (13,708)
Gain on sales of loans (8) - (550)
Loss on sales of premises and
equipment - 189 7
Changes in operating assets and liabilities
Accrued interest receivable (1,469) (738) (1,361)
Prepaid expenses and other assets 2,104 (606) (334)
Other liabilities and accrued expenses 1,137 (6,154) 2,225
------- ------- -------
Net cash provided by
operating activities 59,048 22,460 34,772
------- ------- -------
Investing activities
Proceeds from sales of loans 378 - 26
Proceeds from:
Maturities of securities available
for sale 15,648 22,363 15,306
Sales of real estate 34,903 112,222 34,929
Sale of Federal Home Loan Bank stock 2,596 4,181 -
Purchases of:
Loans and bid deposits on loan purchases (315,406) (387,858) (130,418)
Federal Home Loan Bank stock (2,389) (3,855) (585)
Real estate held for investment or sale (4,346) (3,541) (17,395)
Premises and equipment, net (670) (404) (443)
Loan originations and advances, less loan
collections 275,299 269,697 266,850
Origination of shareholder note receivable (60,000) - -
------- ------- -------
Net cash provided by
investing activities (53,987) 12,805 168,270
-------- ------- -------
54
The accompanying notes are an integral part of these statements.
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
December 31,
------------------------------
1999 1998 1997
------ ------ ------
Financing activities
Net increase (decrease) in deposit
accounts $ (12,328) $ 4,141 $ (41,958)
Proceeds from long-term debt 521 - 162
Repayments of long-term debt (332) (516) (7,311)
(Repayments) advances from the Federal
Home Loan Bank 111,000 (30,000) (36,000)
Prepayment of senior notes (13,080) - -
Cash dividend paid (47,565) (87,600) (33,026)
-------- -------- --------
Net cash used in
financing activities 38,216 (113,975) (118,133)
------- -------- --------
Increase (decrease) in cash and cash
equivalents 43,277 (78,710) 84,909
Cash and cash equivalents at beginning of
year 72,139 150,849 65,940
------- -------- --------
Cash and cash equivalents at end of year $115,416 $ 72,139 $ 150,849
======= ======= ========
Supplemental disclosure of cash flow
information
Cash paid during the year for
Interest $ 58,829 $ 57,124 $ 66,661
Income taxes $ 4,418 $ 11,541 $ 2,215
Supplemental disclosures of noncash investing
and financing activities
Real estate acquired in foreclosure
or in settlement of loans $ 18,964 $ 17,813 $ 89,850
55
The accompanying notes are an integral part of these statements.
<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 (the Bank), collectively, (the Corporation) operates
two branches in Dallas and Houston, Texas. 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 accounting principles
generally accepted in the United States 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 accounting principles generally
accepted in the United States, 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 from 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. For impaired loans, the accrual of interest is discontinued
when the net carrying value of the loan equals the net realizable value of
the underlying collateral. Impairments of loans are 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 loans
originated are recognized over the lives of the loans using methods that
approximate the interest method. The amortization of
56
<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
discounts is discontinued when the net carrying value of the loan equals the
net realizable value of the underlying collateral or, if earlier, the
contractual maturity of the loan.
Loans in process of foreclosure 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 other
comprehensive income.
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 OR 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.
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: Basic income per common share is based on the
weighted average number of common shares outstanding during each year.
There are no potentially dilutive common shares.
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.
57
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued
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.
Effective January 1, 1997, the Corporation and all of its subsidiaries,
except for Beal Affordable Housing, Inc. and BRE-N, Inc., elected to be taxed
as S Corporations, and their federal income taxes are the responsibility of
the Corporation's stockholders.
Effective January 1, 1999, Beal Affordable Housing, Inc. and BRE-N, Inc.,
elected to be taxed as S Corporations.
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.
SEGMENT INFORMATION: The Corporation operates in one principal business
segment, acquiring and providing loans and banking services within the
United States.
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:
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.
58
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued
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, 1999.
NOTE B -STOCKHOLDER NOTE RECEIVABLE
On January 19, 1999, Beal Financial Corporation funded a $60,000 note to the
majority stockholder of the Company. The note bears interest at 10.5%.
Quarterly interest payments are required with the principal due at December
30, 2001. The note is collateralized by stock in the Company and is presented
in the balance sheet as a deduction from stockholders' equity.
59
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Real estate loans
One-to-four family first liens $ 477,847 $ 490,717
Multifamily 264,590 270,337
Commercial 299,224 236,252
Construction, development, and land 209,504 142,108
-------- --------
Total real estate loans 1,251,165 1,139,414
Other loans
Consumer loans
Automobiles 14,331 31,878
One-to-four family junior liens 31,243 47,992
Timeshares 1,832 2,432
Other 2,598 3,121
------ ------
Total consumer loans 50,004 85,423
Commercial business loans 28,224 35,537
------- -------
Total other loans 78,228 120,960
------- --------
Total loans 1,329,393 1,260,374
Less:
Loans in process (46,555) (7,493)
Deferred fees and discounts (154,085) (193,468)
Allowance for loan losses (12,344) (13,867)
-------- --------
Total loans receivable, net $1,116,409 $1,045,546
</TABLE>
The amount of loans being serviced by the Corporation for others was
approximately $26,177 and $33,861 at December 31, 1999 and 1998, respectively.
60
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE C - LOANS RECEIVABLE - Continued
Transactions in the allowance for loan losses were as follows:
Year ended
December 31,
--------------------
1999 1998
-------- --------
Balance at beginning of year $13,867 $11,912
Provision for loan losses 3,821 5,577
Charge-offs (7,580) (3,990)
Recoveries 2,236 368
------ ----
Balance at end of year $12,344 $13,867
====== ======
In the normal course of business, the Corporation acquires pools of loans at
a discount from their unpaid contractual 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, it takes
into consideration potential loans to be modified in determining the price it
is willing to pay for a particular pool. In connection with these loan
purchases, the Corporation subsequently may modify 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, 1999 and 1998, 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:
December 31, 1999 December 31, 1998
-------------------- -------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Impaired loans - valuation
allowance required $ 3,422 $1,413 $ 5,503 $2,545
Impaired loans - no valuation
allowance 59,202 - 87,044 -
------ ------ ------- ------
Total impaired loans $62,624 $1,413 $92,547 $2,545
====== ====== ======= ======
61
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE C - LOANS 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 years ended
December 31, 1999 and 1998, was $74,892 and $91,037, respectively. Interest
income on impaired loans for the years ended December 31, 1999 and 1998, was
$2,126 and $7,300, respectively. Interest income foregone under the original
terms of impaired loans for the years ended December 31, 1999 and 1998, was
$10,559 and $7,500, respectively.
NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE
December 31,
------------------
1999 1998
------------------
Real estate held for development and rental $51,674 $ 54,642
Real estate held for sale 43,074 53,223
------- --------
94,748 107,865
Less accumulated depreciation (1,582) (1,512)
------- --------
Total real estate held for investment
or sale $93,166 $106,353
======= ========
Income from real estate development and rental activities which has not been
significant is included in other income in the statement of income. Real
estate held for sale was acquired by foreclosure or by deed in lieu of
foreclosure.
62
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE E - SECURITIES AVAILABLE FOR SALE
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ------
Mortgage-backed securities:
December 31, 1999 $70,523 $ - $443 $70,080
December 31, 1998 85,672 3,909 - 89,581
The mortgage-backed securities at December 31, 1999 are scheduled to mature
in 2025 and 2026.
NOTE F - DEPOSITS
December 31,
1999 1998
---------------- ---------------
Amount Percent Amount Percent
------- -------- ------- -------
Noninterest-bearing demand deposits $ 11,579 1.2% $ 12,667 1.3%
Statement savings deposits (4.8% at
December 31, 1999) 9,424 .9 3,118 .3
Money market demand deposit accounts
(5.1% at December 31, 1999) 165,308 16.6 180,154 17.9
------- ---- -------- -----
186,311 18.7 195,939 19.5
Certificates of deposit
4.01% to 4.50% - - 2,702 .3
4.51% to 5.00% 269,045 27.1 367,685 36.5
5.01% to 5.50% 175,724 17.7 222,985 22.2
5.51% to 6.00% 260,075 26.2 203,630 20.2
6.01% to 6.50% 97,636 9.8 2,489 .3
6.51% to 7.00% 660 .1 1,124 .1
7.01% to 7.50% 3,838 .4 9,063 .9
------ --- ------ ---
Total certificates of deposit 806,978 81.3 809,678 80.5
------- ----- -------- -----
Total deposits $993,289 100.0% $1,005,617 100.0%
======= ===== ========= =====
63
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE F - DEPOSITS - Continued
The aggregate amount of deposits with a minimum denomination of $100 or more
was approximately $381,716 and $309,000 at December 31, 1999 and 1998.
At December 31, 1999, the scheduled maturities of certificates of deposit
were as follows:
DECEMBER 31,
2000 $794,516
2001 9,870
2002 1,284
2003 768
2004 540
--------
$806,978
========
Interest expense on deposits consists of the following:
Year ended
December 31,
--------------------------------
1999 1998 1997
---------- -------- ---------
Savings deposits $ 8,249 $ 8,323 $ 9,025
Certificates of deposit 42,403 38,770 48,955
------ ------ ------
$50,652 $47,093 $57,980
====== ====== ======
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
qualifying first mortgage loans, with a total collateral value of
approximately $330,000 at December 31, 1999. The FHLB advances of $191,000 at
December 31, 1999 bears interest at 5.8% per annum and mature in January,
2000.
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. The Senior Notes are redeemable, in whole or in part, at the
option of the Company. During 1999, senior notes in the amount of $13,080
were redeemed by the Company. Outstanding principal balance at December 31,
1999 is $44,420.
64
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1999, that the Bank meets all capital adequacy requirements to which it
is subject.
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, 1999 and 1998, the
Bank's liquidity ratio was 17.14% and 17.97%, respectively.
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.
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>
December 31, 1999
Total risk based capital 224,822 21.58% 83,537 >8% 104,196 >10%
Tier I risk based capital 212,478 20.39% 41,679 >4% 62,518 > 6%
Leverage capital 212,478 14.89% 57,092 >4% 71,365 > 5%
December 31, 1998
Total risk based capital 184,261 18.56% 79,420 >8% 99,275 >10%
Tier I risk based capital 171,834 17.31% 39,710 >4% 59,565 > 6%
Leverage capital 171,834 12.80% 53,703 >4% 67,133 > 5%
</TABLE>
65
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE J - INCOME TAXES
Year ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
Federal
Current $1,584 $3,682 $3,249
Deferred - - -
------ ------ ------
1,584 3,682 3,249
State 1,646 2,367 3,159
------ ------ ------
$3,230 $6,049 $6,408
====== ====== ======
On March 13, 1997, the Company filed an application with the Internal Revenue
Service to elect S Corporation status for federal income tax purposes
effective January 1, 1997. This election covered all subsidiaries of the
Company except Beal Affordable Housing, Inc., and BRE-N, Inc.
As a result of the aforementioned application, beginning January 1, 1997, the
Company and all of its subsidiaries electing S Corporations status will no
longer pay federal income taxes, except for the federal taxes related to the
recognition of built-in gains which existed at January 1, 1997. At January 1,
1997, the Corporation had net unrealized built-in gains of approximately
$80,000 which may potentially be recognized during the ten-year recognition
period beginning on January 1, 1997. For the years ended December 31, 1999,
1998, and 1997 the Corporation recorded federal tax expense of $1,300,
$2,400, and $3,249, respectively, related to the recognition of built-in
gains. Except as discussed above, beginning January 1, 1997, the liability
for federal income taxes on income of the Corporation is the responsibility
of its stockholders.
NOTE K - OTHER OPERATING EXPENSE
Year ended December 31,
-------------------------------
1999 1998 1997
--------- ------- ------
Advertising and promotion $ 301 $ 266 $ 248
Office supplies and expense 233 175 250
Legal and professional 4,459 5,849 6,448
Expenses related to loan purchases 562 262 630
Loan servicing fees 4,114 2,076 2,376
Other 746 1,008 806
---- ----- ----
$10,415 $9,636 $10,758
====== ===== ======
66
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 1999, there were commitments to
purchase loans of $59,055. Unfunded commitments to extend credit were $1,557.
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.
The Corporation is 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.
NOTE M - 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 component 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 and related tax effects are as
follows:
Year ended December 31,
--------------------------------
1999 1998 1997
--------- --------- --------
Unrealized holding gains (losses) on
available-for-sale securities $(4,356) $187 $2,632
Tax effect - - 381
--- --- ---
------- ---- ------
Net-of-tax amount $(4,356) $187 $3,013
======= ==== ======
67
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
December 31, 1999 December 31, 1998
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial assets:
Cash and cash equivalents $115,416 $115,416 $ 72,139 $ 72,139
Securities available for
sale 70,080 70,080 89,581 89,581
Loans receivable 1,116,409 1,116,409 1,045,546 1,111,943
Financial liabilities:
Deposit liabilities 993,289 993,660 1,005,617 1,005,472
Federal Home Loan Bank
advances 191,000 191,000 80,000 80,000
Other borrowings 7,272 7,272 7,083 7,083
Senior notes 44,336 44,336 57,295 59,078
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Beal Financial Corporation
Balance Sheet
December 31,
------------------
1999 1998
-------- --------
Assets
Cash $ 7,431 $ 68,553
Investment in subsidiary 212,038 175,744
Loans receivable, net 4,455 4,455
Real estate held for investment 693 693
Other assets 2,255 1,925
-------- --------
$226,872 $251,370
======== ========
Liabilities and stockholders' equity
Senior notes $ 44,336 $ 57,295
Other liabilities 2,374 2,849
Stockholder's equity:
Common stock 300 300
Additional paid-in capital 2,740 2,740
Retained earnings 237,565 184,277
Accumulated other comprehensive income (443) 3,909
Stockholder note receivable (60,000) -
-------- --------
Total stockholders' equity 180,162 191,226
-------- --------
$226,872 $251,370
======== ========
67
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
Statement of Income
December 31,
------------------------------
1999 1998 1997
--------- --------- --------
Income
Equity (deficit) in undistributed
income of subsidary $ 40,636 $ (31,291) $41,771
Dividends from subsidiary 61,300 133,701 47,369
Interest income 7,290 525 5,817
Gain on sale of real estate held
for investment 51 11,046 -
Other operating income - 19 -
--- --- ---
Total income 109,277 114,000 94,957
Interest expense
Other borrowings - - 36
Senior notes 7,934 8,077 7,986
------ ------ ------
Total interest expense 7,934 8,077 8,022
Noninterest expense
Salary and employee benefits 95 23 -
Other operating expenses 367 662 285
---- ---- ----
Total noninterest expense 462 685 285
---- ---- ----
Income before taxes 100,881 105,238 86,650
Income tax expense 28 18 16
--- --- ---
Net income $100,853 $105,220 $86,634
======= ======= ======
68
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
Statement of Cash Flows
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
--------- ------- ------
<S> <C> <C> <C>
Operating activities
Net income $100,853 $105,220 $ 86,634
Adjustments to reconcile net income to
net cash provided by operating
activities (Equity) deficit in
undistributed income of subsidiary (40,636) 31,291 (54,362)
Gain on sales of real estate held for
investment 51 (11,047) -
Accretion of purchase discount - - (4,820)
Amortization of bond
discount and underwriting costs 726 746 654
Changes in operating assets and liabilities
Increase (decrease) in other assets (1,107) 2,377 (13,072)
Increase (decrease) in other liabilities (475) (3,181) 15,388
------- ------- --------
Net cash provided by
operating activities 59,412 125,406 30,422
Investing activities
Capital contributed to subsidiary (10) (4,400) (10)
Proceeds from sales of real estate - 21,696 -
Purchase of loans - (4,455) -
Repayment of loans - - 12,670
Origination of shareholder note receivable (60,000) - -
------- ------- --------
Net cash provided by (used in)
investing activities (60,010) 12,841 12,660
Financing activities
Repayments of other borrowings - - (1,774)
Repurchase of senior notes (12,959) - -
Cash dividends paid (47,565) (87,600) (33,026)
------- ------- --------
Net cash used in
financing activities (60,524) (87,600) (34,800)
------- ------- --------
Net increase (decrease) in cash
and cash equivalents (61,122) 50,647 8,282
Cash and cash equivalents, beginning of year 68,553 17,906 9,624
------- ------- --------
Cash and cash equivalents, end of year $ 7,431 $ 68,553 $ 17,906
======= ======= ========
</TABLE>
67
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(In thousands, except share data)
NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued
Year Ended December 31, 1999
------------------------------
1st 2nd 3rd 4th
----- ----- ----- -----
Interest income $ 42,241 $ 53,953 $ 36,662 $ 39,143
Interest expense (15,854) (15,514) (15,455) (15,672)
------- ------- ------- -------
Net interest income 26,387 38,439 21,207 23,471
(Provision) credit for losses (1,173) (742) (1,312) (594)
Other income 3,714 12,102 2,140 1,773
Other expenses (4,733) (5,551) (5,943) (5,102)
-------- ------- ------- -------
Income before income tax 24,195 44,248 16,092 19,548
Income tax expense 1,594 2,210 382 (856)
------ ------ ---- -----
Net income $ 22,601 $ 42,138 $15,710 $ 20,404
======= ======= ====== =======
Income per common share $ 75.24 $ 140.46 $ 52.37 $ 68.01
====== ======= ====== ======
Year Ended December 31, 1998
-------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Interest income $38,828 $39,868 $34,945 $36,325
Interest expense 15,511 14,304 13,007 14,995
------ ------ ------ ------
Net interest income 23,317 25,564 21,938 21,330
(Provision) credit for losses (1,373) 309 (176) (4,337)
Other income 4,641 12,112 23,165 5,292
Other expenses (4,709) (5,179) (5,048) (5,577)
------ ------ ------ ------
Income before income tax 21,876 32,806 39,879 16,708
Income tax expense 1,028 1,837 953 2,231
------ ------ ---- ------
Net income $20,848 $30,969 $38,926 $14,477
====== ====== ====== ======
Income per common share $ 69.49 $103.23 $129.75 $ 48.26
====== ====== ====== ======
68
<PAGE>
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued
Year Ended December 31, 1997
--------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Interest income $54,945 $37,531 $34,261 $42,444
Interest expense 17,555 16,929 16,327 17,045
------ ------ ------ ------
Net interest income 37,390 20,602 17,934 25,399
(Provision) credit for losses (933) 261 (1,764) (974)
Other income 2,651 3,397 6,430 4,793
Other expenses (4,602) (5,625) (6,490) (5,427)
------ ------ ------ ------
Income before income tax 34,506 18,635 16,110 23,791
Income tax expense 1,203 961 999 3,245
------ ---- ---- ------
Net income $33,303 $17,674 $15,111 $20,546
====== ====== ====== ======
Income per common share $111.01 $58.91 $50.37 $68.49
====== ===== ===== =====
NOTE Q - 401(K) PLAN
The Corporation offers a 401(k) 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. For the
years ended December 31, 1999, 1998, and 1997 the Corporation made matching
contributions of $123, $107 and $103, respectively.
69
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 three
members including D. Andrew Beal, Timothy M. Fults and Bernard L. Weinstein.
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, and
Director Weinstein has served since June 1995. 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 and
President
Timothy M. Fults Secretary
Margaret M. Curl Vice President/Assistant
Secretary
James W. Lewis, Jr. Vice President/Treasurer
BOARD OF DIRECTORS OF THE BANK
The Board of Directors of Beal Bank is currently composed of eight 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.
Term of
Director Office
Name Age(1) Position(s) Held Since Expires
- ----------------- ------ ------------------ -------- --------
D. Andrew Beal 47 Chairman of the Board 1985 2000
David C. Meek 55 Chief Executive Officer and 1996 2000
Director
Gerald Hartman 62 President, Chief Operating
Officer and Director 1998 2000
Timothy M. Fults 46 Director and Secretary 1985 2000
Bernard L. 57 Director 1991 2000
Weinstein
Susan D. Arnold 57 Director 1992 2000
R. Michael Eastland 54 Director 1992 2000
David L. 41 Director 1993 2000
Goldstein, CPA
(1) At December 31, 1999.
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.
70
<PAGE>
D. ANDREW BEAL. Mr. Beal is Chairman of the Board and President of the
Company and Chairman of the Board of the Bank. He is the owner of approximately
99% of the Company's outstanding common stock. Mr. Beal 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 Chief Executive Officer of the Bank. Mr. Meek
joined the Bank 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.
GERALD HARTMAN. Mr. Hartman has been President and Chief Operating Officer
of the Bank since joining the Bank in October 1998. Prior to joining the Bank,
Mr. Hartman was President of Pacific Southwest Bank, FSB, located in Corpus
Christi, Texas, since May 1994. From 1981 until 1994 he served in various
capacities until becoming President in 1983 of Colonial Savings, F.A., located
in Fort Worth, Texas. Mr. Hartman was also formerly a partner with Coopers &
Lybrand and is a certified public accountant.
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.
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.
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 is a self employed information
systems consultant. In addition, he served as an information systems consultant
with Work Flow Design, Inc., an information systems consulting firm located in
Dallas, Texas from April 1996 through July 1997. From November 1993 to August
1994, he was Vice President of Advanced Thought Systems, an information systems
consulting firm located in Dallas, Texas, 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.
71
<PAGE>
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 45 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.
WILLIAM T. SAURENMANN. Mr. Saurenmann, age 51 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
in virtually all of the Bank's subsidiaries. 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 44, 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, FSB, 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 47, joined the Bank in February 1996 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 56, has been the Vice
President/Treasurer of the Company since October, 1998 and 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, BPI and Assistant Secretary and
Treasurer of various Bank subsidiaries. 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.
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. The Board of Directors met
seven times during the year ended December 31, 1999. No incumbent director of
the Company attended fewer than 90% 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
year ended December 31, 1999, this committee met one time.
The Bank has standing Executive, Executive Loan, Audit, Investment and
Compensation Committees. Set forth below is a description of the Bank's primary
committees.
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The Executive Committee is comprised of Directors Beal 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 did not meet
during the year ended December 31, 1999.
The Executive Loan Committee was formed in December 1994 and is comprised
of Directors Beal, Meek, Fults, Blanton, Weinstein and Goldstein with directors
Hartman, Arnold and Eastland as alternates. The Committee meets when necessary
and approves all loans or purchases in excess of $1.0 million. This Committee
met 32 times during the year ended December 31, 1999.
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 three times during the year
ended December 31, 1999.
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, Hartman, Weinstein and Goldstein. This Committee met 12 times during the
year ended December 31, 1999.
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 did not meet during the year ended December 31, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1999, 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. 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 $10,000 bonus during the year
ended December 31, 1999.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation paid or accrued by the
Company for services rendered by the Company's Chairman of the Board and
President, the Chief Executive Officer of the Bank and the President/Chief
Operating Officer of the Bank in 1999 (the "Named Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1)
- ------------------------------ --------- ---------- ------------ -----------
D. Andrew Beal, Chairman of 1999 $120,000 $--- N/A
the Board and 1998 120,000 --- N/A
President 1997 120,000 N/A
---
David C. Meek, Chief 1999 200,000 88,395 6,000
Executive Officer of the 1998 200,000 --- 6,000
Bank(2) 1997 200,000 150,000 6,000
Gerald Hartman, President and 1999 187,500 --- 6,000
Chief Operating 1998 33,412 12,260 1,000
Officer of the Bank(3)
William T. Saurenmann, Senior 1999 114,618 70,000 6,000
Vice President- 1998 100,000 82,500 3,000
Lending of the Bank 1997 100,000 90,000 3,000
(1) Includes the Company's contribution to the 401(k) Plan and life insurance
premiums paid.
(2) In addition to serving as Chief Executive Officer, Mr. Meek will succeed
Mr. Hartman as President of the Bank.
(3) Mr. Hartman joined the Bank on October 28, 1998 and he announced his
retirement effective March 31, 2000.
EXECUTIVE BONUS PLAN
In February, 1998, Mr. Meek and the Company entered into an executive bonus
plan (the "Plan"). The Plan provides that Mr. Meek shall be entitled to bonus
compensation equal to ten percent of the earnings (as described below) in excess
of prime plus 150 basis points attributable to a designated pool of loans. The
earnings, losses and related expenses from each loan (including profit, losses
and expenses resulting from the sale of the underlying collateral if foreclosed
upon) shall be aggregated in determining the amount of the bonus. Mr. Meek shall
be entitled to bonus compensation for the life of the loan pool regardless of
whether or not he remains employed by the Company or its subsidiaries.
As of the December 31, 1999 the initial loan pool is comprised of certain
loans originated by the Company and its subsidiaries after January 1, 1997,
aggregating approximately $146.5 million. New loan originations shall become a
part of the loan pool when specifically identified in writing by both Mr. Meek
and Mr. Beal and ratified by the board of directors. Loans shall be removed from
the loan pool once a loan is paid in full (including any profit participation
interest), an amount less than full payment is accepted as payment in full, or
the underlying collateral obtained through the foreclosure or deed in lieu of
foreclosure is sold.
Earnings subject to the bonus calculation are intended to include all
income and expenses attributable to the loan pool assets including interest
income, profit participation payments, release fees, loan origination or renewal
fees and income or losses created from former loans or assets in the loan pool,
all charge-offs, write downs and specific loan loss provisions, expenses of
collection, attorneys fees, as well as any other income or expenses attributable
to the loan pool as determined by the board of directors (except that cost of
funds (i.e., interest paid to depositors) and normal non-default servicing costs
shall not be included as expenses). Expenses incurred during Mr. Meek's
employment which are directly attributable to loans held in the pool shall be
deducted from earnings.
Bonuses shall be calculated as of October 1 of each year and paid on
December 1 of each year. Twenty-five percent of the bonus amount shall be
retained as a reserve and seventy-five percent shall be paid to Mr. Meek. All
74
<PAGE>
remaining reserves shall be paid to Mr. Meek when no assets remain in the loan
pool. No bonus shall be paid that would result in a failure to maintain the 25%
reserve amount, and prior bonus payments shall be refunded by Mr. Meek to the
extent the reserve is below 25% as calculated at the time of any bonus
calculation.
Upon final resolution of all assets in the pool, in the event that Mr.
Meek has been overpaid in total bonus payments, Mr. Meek has agreed to
immediately repay any overpayments to the Company.
Under certain circumstances, including the failure by the Company to make
timely payments to holders of the Senior Notes, payment of any bonus due shall
be deferred. In this event, the Company shall owe Mr. Meek interest on the
delinquent payment(s) at a rate of prime plus 150 basis points, compounded
monthly, until such payments and applicable interest is paid in full.
The maximum bonus amount to be paid pursuant to the Plan shall not exceed
$3.0 million.
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. In addition, as of January 1, 1999, the Bank
established a deferred bonus program.
DEFERRED BONUS PROGRAM (THE "PROGRAM"). The program runs in conjunction
with the Bank's annual cash bonus program. The program provides that each time
an employee is awarded a cash bonus they will also be awarded with a deferred
bonus of an equal amount. There is no actual cash contributions made to the
program by the Bank until such time as the employee becomes vested. The employee
becomes 100% vested on the third anniversary of the date the deferred bonus was
awarded. The employee will be zero percent vested prior to the third anniversary
on the date the bonus was awarded. The deferred bonus amount will earn interest
as prime rate during the period it is deferred. Upon termination of employment,
for any reason, the employee will forfeit permanently any deferred balance that
they are not 100% vested in.
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 $10,000 of his salary for calendar 1998 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.
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ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of December 31, 1999
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 and 297,000 99.0%
President of the Company and Chairman of the
Board of the Bank
Suite 902, 15770 N. Dallas Parkway
Dallas, TX 75248
Timothy M. Fults, Director and Secretary of the 3,000 1.0%
Company and Director and Secretary of the Bank
5956 Sherry Lane #800
Dallas, TX 75225
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
On January 20, 1999, Beal Financial made a term loan to its primary
shareholder, Mr. D. Andrew Beal (the "Borrower"), in the amount of $60,000,000
(the "Loan"). The Loan is secured by a first priority security interest in the
Borrower's stock or other ownership interests (including all products and
proceeds thereof) in Beal Financial and other companies which are not affiliated
with Beal Financial. Accrued interest is paid quarterly on the Loan at a
fixed-rate of 10.5% per annum, and the Loan matures on December 30, 2001.
Pursuant to the Indenture relating to Beal Financial's 12 3/4% Senior
Notes due August 15, 2000 (the "Senior Notes"), Beal Financial has delivered to
the Indenture Trustee an Officer's Certificate certifying that the Loan: (1) is
on terms that in good faith would be offered in an arm's length transaction to a
person that is not an affiliate of Beal Financial; (2) was approved by a
majority of the disinterested board of directors, and (3) is fair to Beal
Financial from a financial point of view based upon an opinion by a certified
expert with experience in appraising transactions of a type similar to the Loan.
Prior to the closing of the Loan, the independent Board of Directors of Beal
Financial approved the Loan based upon, among other things, a fairness opinion
from Valuation Research Corporation stating that (1) the Loan is on terms that
are no less favorable to Beal Financial than would be available in a comparable
transaction in an arm's length dealing with a person that is not an affiliate of
Beal Financial or in good faith would be offered to a person that is not an
affiliate of Beal Financial; (2) after the Loan is made, Beal Financial remains
solvent under applicable state and Federal law; and (3) the Loan is fair to Beal
Financial and the holders of the Senior Notes from a financial point of view.
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. Except as described above,
at December 31, 1999, there were no loans outstanding to any director, executive
officer, member of their immediate families or business interest of such
individuals.
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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, 1999 and
1997
Consolidated Statements of Income for the Year Ended December 31, 1999 and
1997, the Six Months Ended December 31, 1996 and the Year Ended June 30,
1996
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999 and 1997, the Six Months Ended December 31, 1996
and the Year Ended June 30, 1996
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999
and 1997, the Six Months Ended December 31, 1996 and the Year Ended June
30, 1996
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is
not required.
(a)(3)Exhibits:
See Index to Exhibits.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
Date: March 28, 2000 By: /s/ D. Andrew Beal
-------------------- -------------------------------
D. Andrew Beal, President
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ D. Andrew Beal /s/ James W. Lewis
- ------------------------------- ---------------------------------
D. Andrew Beal, Chairman James W. Lewis, Vice President
/Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Date: March 28, 2000 Date: March 28, 2000
-------------------------- ---------------------------
/s/ Timothy M. Fults /s/ Dr. Bernard L. Weinstein
- ------------------------------- ---------------------------------
Timothy M. Fults, Director Dr. Bernard L. Weinstein, Director
Date: March 28, 2000 Date: March 28, 2000
-------------------------- ---------------------------
<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) Executive Bonus Plan 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 exhibits to the Company's 1997 Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on April 14, 1998 (File No.
33-93212). All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
*** Exhibit filed herewith.
SUBSIDIARIES OF THE REGISTRANT
State or
Other
Jurisdiction
of
Percentage Incorporation
of of
Parent Subsidiary Ownership Subsidiary
- ------------------------- ---------------- ---------- -------------
Beal Financial Corporation Beal Banc Holding 100% Delaware
Company
Beal Financial Corporation Beal Delaware Corp. 100% Delaware
Beal Financial Corporation 380 Investors, Inc. 100% Nevada
Beal Banc Holding Company Beal Bank, SSB 100% Texas
Beal Bank, SSB Beal Mortgage, Inc. 100% Texas
Beal Bank, SSB Loan Acceptance Corp. 100% Texas
Beal Bank, SSB Property Acceptance 100% Texas
Corp.
Beal Bank, SSB BRE, Inc. 100% Texas
BRE-1, Inc. BRE-N, Inc. 100% Texas
Beal Bank, SSB Beal Properties, Inc. 100% Texas
Beal Bank, SSB BRE - 3, Inc. 100% Texas
BRE-1, Inc. Beal Affordable 100% Texas
Housing, Inc.
Beal Bank, SSB BRE-2, Inc. 100% Texas
Beal Affordable Housing, Hebron Trail, Ltd.(1) 99% Texas
Inc.
Beal Affordable Housing, Lewisville Manor, 99% Texas
Inc. Ltd.(1)
Beal Affordable Housing, Valley River Trail, 99% Texas
Inc. Ltd.(1)
Beal Properties, Inc. Houston Central Green, 50% Texas
LP
Beal Bank, SSB Beal Nevada Corp. 100% Nevada
Beal Bank, SSB BRE-1, Inc. 100% Texas
Beal Bank, SSB Beal/H.S., Inc. 100% Nevada
Beal/H.S., Inc. Beal Development, 100% Texas
Ltd.(2)
BRE-2, Inc. OC One, Inc. 100% Texas
BRE-2, Inc. OC Two, Inc. 100% Texas
Beal Nevada Corp. Loan Participant 100% Texas
Partners, Ltd.(3)
(1) Beal Affordable Housing, Inc. is a 98% limited partner and Beal
Mortgage, Inc. is a 1% general partner in these entities.
(2) Beal/H.S., Inc. is a 99% limited partner and Beal Properties, Inc. is a
1% general partner.
(3) Beal Nevada Corp. is a 99% limited partner and Property Acceptance
Corp. is a 1% general partner.
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 746
<INT-BEARING-DEPOSITS> 114,670
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,080
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<LOANS> 1,128,753
<ALLOWANCE> 12,344
<TOTAL-ASSETS> 1,429,906
<DEPOSITS> 993,289
<SHORT-TERM> 235,336
<LIABILITIES-OTHER> 13,847
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0
0
<COMMON> 300
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<TOTAL-LIABILITIES-AND-EQUITY> 1,429,906
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<INTEREST-TOTAL> 171,999
<INTEREST-DEPOSIT> 50,652
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<INTEREST-INCOME-NET> 109,504
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<INCOME-PRETAX> 104,083
<INCOME-PRE-EXTRAORDINARY> 104,083
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<NET-INCOME> 100,853
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<LOANS-PAST> 366
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