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, 1998, 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 and 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, construction, development and land loans within its primary market area and other areas within the state of Texas. The Company considers its primary market area for deposits and loan originations to consist of Collin, Dallas, Denton, Ellis, Kaufman, Rockwall, Fort Bend, Harris, Liberty, Montgomery and Waller counties, Texas. These counties consist of communities comprising the Dallas and Houston metropolitan statistical areas, respectively.
In addition to its loan purchasing and lending activities, the Company is actively engaged 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, 1998, the Company's real estate held for development totaled $53.8 million. BMI and BPI also held in the aggregate $10.1 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 $24.9 million in three affordable housing apartment buildings at December 31, 1998. 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, 1998, 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 12.8%, 17.3% and 18.6%, 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 single-family residential mortgage loans at approximately their aggregate principal balance at the time of purchase.
At December 31, 1998 the Company's gross loan portfolio totaled $1.3 billion. The Company's unaccreted purchase discounts and fees at December 31, 1998 totaled $193.5 million. The Company's gross loan portfolio at December 31, 1998 was comprised primarily of one- to four-family residential mortgage loans (38.9%), commercial real estate loans (18.7%) and multi-family residential real estate loans (21.5%). The balance of the gross loan portfolio included land loans (6.9%), construction and development loans (4.4%), consumer loans (6.8%) and commercial business loans (2.8%). At December 31, 1998 the Company's net loan portfolio totaled $1.0 billion. The Company's net loan portfolio at December 31, 1998 was comprised primarily of one- to four-family residential mortgage loans (43.7%), commercial real estate loans (18.1%) and multi-family residential real estate loans (17.6%). The balance of the net loan portfolio included land loans (6.7%), construction and development loans (4.4%), consumer loans (6.8%) and commercial business loans (2.7%).
At December 31, 1998, approximately 16.7% of the Company's gross real estate mortgage loans (including one- to four-family junior lien loans classified as consumer loans) were secured by real estate properties located in Texas. The Company also has loans secured by real estate properties (including one- to four-family junior lien loans) located in California, Florida and Massachusetts, representing 19.1%, 12.6% and 5.3% of the Company's gross loan portfolio, respectively. At December 31, 1998, there were no other states where loans secured by real estate properties (including one- to four-family junior lien loans) exceeded 5%. The balance of the Company's real estate mortgage loans were secured by properties located in the northeast, the midwest, and throughout the rest of the United States. See "- Geographic Distribution of Real Estate Secured Loans."
Texas law limits the maximum amount the Bank may lend to one borrower or group of related borrowers to the greater of $500,000, or 15% of unimpaired capital and surplus. At December 31, 1998, the Bank's loans to-one borrower limit was $24.8 million. At that date, the largest amount outstanding to any one borrower or group of affiliated borrowers consisted of six loans, aggregating $25.6 million, net, secured by a first lien on 727 acres located in Denton County, Texas, a pledge of a 49% partnership interest in a partnership which owns an additional 1,490 acres in Collin County, Texas and a $750,000 certificate of deposit. These loans were in compliance with the Bank's loan to one borrower limitation at the time of origination. See "Loan Delinquencies and Non-Performing Assets -- Other Loans of Concern." The Bank's next largest relationship totaled $19.7 million, net and consisted of seven letters of credit aggregating $17.6 million, net, which, if drawn against shall be secured by first liens on nine office buildings located in Houston, Texas and the balance of $2.1 million, secured by first liens on two small office buildings located in Houston, Texas. See "Multi-family and Commercial Real Estate Lending" and "Regulation - Texas Law and Supervision by the Texas Department".
The Company has three other loans to any borrower or group of related borrowers in excess of $15.0 million, net (aggregating $47.5 million, net), three other lending relationships in excess of $10.0 million, net (aggregating $33.5 million), an additional two such lending relationships in excess of $7.5 million, net (aggregating $16.0 million), five additional lending relationships in excess of $5.0 million, net (aggregating $33.7 million) and an additional 43 such lending relationships in excess of $2.0 million, net (aggregating $130.0 million). At December 31, 1998, 14 of these lending relationships in excess of $2.0 million, net, aggregating $68.6 million were non-performing. See "- Loan Delinquencies and Non-Performing Assets."
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.
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, 1998.
Contractual Principal Repayments. The following schedule illustrates the contractual maturity of the Company's loan portfolio at December 31, 1998. 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.
The total amount of gross loans due after December 31, 1999 which have predetermined interest rates is $376.7 million, while the total amount of gross loans due after such date which have floating or adjustable interest rates is $548.4 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, 1998 the Company's gross real estate collateralized loans (excluding junior liens secured by one- to four-family real estate totaling $48.0 million) were geographically distributed as follows:
At December 31, 1998, there were no other loan concentrations in any other state which exceeded three percent of the total real estate loan portfolio.
The following tables set forth the geographic distribution of the Company's real estate loans by loan type at December 31, 1998.
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, 1998.
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.
Recently, 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. As a result, the Company has recently purchased a significant amount of predominately performing one-to four family residential mortgage loans at approximately their aggregate principal balance at the time of purchase. 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 recent periods may be attributable in part to early resolution of the least difficult non-performing loans in acquired pools. As a result, there can be no assurance that the level of earnings on discounted loans experienced by the Company to date are necessarily indicative of the results to be experienced in future periods or that there will not be substantial periodic variations in the results from such activities.
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.
Although the Company has focused in prior years on the acquisition of discounted loans, in 1998 the Company began focusing on increasing its origination of construction and/or 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 Blanton, 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, 1998, the Company purchased $387.9 million of loans, net of discount compared to $130.4 million during the year ended December 31, 1997, and originated $85.4 million of loans for the years ended December 31, 1998, compared to $76.6 million during the year ended December 31, 1997.
The Company services $642.0 million of its gross loan portfolio directly, including virtually all of its multi-family and commercial real estate loans, construction and land loans. The Company relies on approximately 166 other entities to service the remaining $607.0 million of its gross loans. Of this amount, at December 31, 1998, six entities individually service loans in excess of $9.8 million, aggregating $486.0 million, or 80.1% of the Company's loans serviced by others. No other entity services individually in excess of $6.4 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.
The following table shows the loan origination, purchase, sale and repayment activities of the Company for the periods indicated.
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 the security property, net of expenses, and the length of time and costs required to complete the collection or foreclosure process.
Prior to acquiring a pool of loans, LAC utilizes primarily third-party subcontractors to conduct an acquisition review of each loan pool. This review includes an evaluation of the seller's representations and warranties and of the adequacy of the applicable loan documentation (E.G., the existence of a note, including confirmation of the interest rate and outstanding loan balance, mortgage, title policy, borrower financial statements, tax returns, environmental reports, etc.). The current value of the security property is estimated utilizing various methods, considering, among other factors, the type of property, the loan balance, the recourse nature of the debt, the age and performance of the loan, and the resources of the borrower. For example, a performing, well seasoned pool of single family loans may receive a relatively limited collateral value review consisting of a drive by appraisal of select properties by a local broker, or in some cases, obtaining multiple broker opinions of value on all loans in the pool. As the value and complexity of the property increases, LAC's efforts to value the property also increase. For larger, more complex loans, LAC personnel may visit the collateral property, conduct an internal rental analysis of competing properties, or order asset searches on the borrowers and/or guarantors to identify other sources of repayment. New title searches and tax reports may also be obtained. LAC may also retain environmental consultants to review potential environmental issues. The amount of resources devoted to valuing collateral property is determined on a case by case basis for each pool acquired.
An estimated value is prepared for each loan or pool of loans. The factors considered by LAC include the current status of the loan and the borrower (including payment history, bankruptcy and litigation considerations) taxes due, and, if non-performing, estimated foreclosure costs and length of time to conduct a foreclosure sale in the applicable state, estimated current market value of the property based on a limited marketing period, costs of taxes and insurance and maintenance of the property during the marketing period and fees and other costs incurred in connection with the sale of the property. All bids are prepared by or subject to the approval of LAC's President, D. Andrew Beal.
If LAC is the successful bidder, a bid deposit, if required, will be forwarded to the selling entity. Prior to a loan being acquired, the Company's lending personnel, supplemented if necessary or appropriate by subcontractors, (generally different than the ones who conducted the initial evaluation review) perform a more in-depth review of the loan documents to determine and categorize the extent of loan documentation deficiencies and review LAC's analysis of value. The Company reviews loans by conducting a comprehensive inspection of all documentation relating to the loans and by obtaining current credit reports, when appropriate. Depending on the circumstances, the Company's due diligence team may use local counsel and engineering and environmental experts, to assist in the evaluation and verification of this information and the gathering of other information not previously made available by the seller. For example, there may be maintenance and occupancy problems associated with the collateral which this additional review may reveal. Based upon the review performed by the Company's lending personnel, a recommendation is made to the appropriate Company loan committee which determines whether the Company should purchase the loans covered by the bid. In the event that the Company's applicable loan committee declines to purchase the loans, the right to purchase may be sold to a third party or LAC may forfeit its deposit or be subject to additional penalties as set forth in the contract, including the remedy of specific performance.
Upon purchase, each loan file is then reviewed by the loan servicing department to ensure the adequacy and completeness of the documentation securing the Company's interest in the underlying collateral and to correct loan documentation, and as appropriate, other file deficiencies. Large loans are assigned to a loan officer. Loan resolution alternatives for non-performing loans consist primarily of the following: (i) the borrower brings the loan current in accordance with original or modified terms, (ii) the borrower repays the loan, (iii) the Company sells the loan to a third party to resolve, (iv) the borrower agrees to deed the property to the Company in lieu of foreclosure, in which case it is classified as a foreclosed asset and held for sale by the Company, and (v) the Company forecloses on the loan and the property is either acquired at the foreclosure sale by a third party or by the Company, in which
case it is classified as a foreclosed asset owned and held for sale by the Company. The loan officer evaluates all available information and pursues the best expected means of resolving the loan on the Company's behalf. In this regard, because the Company generally acquires 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 inspections and ensures that a current broker's opinion or appraisal is in the loan file. Property inspections continue until the loan is brought current or refinanced or the property is sold. A current broker's opinion of value is confirmed or an appraisal is also obtained prior to any foreclosure sale for bidding purposes.
If a security property becomes a foreclosed asset, the Company obtains a new appraisal unless a current acceptable appraisal is available. The Company then determines whether any repairs should be made to the property and the initial price to list the property under circumstances which are intended to result generally in a quick sale of the property. The Company then markets the property and supervises the management of the property until it is sold. The Company also generally retains a management firm to manage its commercial and multi-family foreclosed assets. For information about the Company's foreclosed assets, see "- Loan Delinquencies and Non-Performing Assets."
The Company generally anticipates a three to eighteen month period to resolve large non-performing commercial and multi-family real estate loans, which is longer than it generally takes to resolve the Company's discounted non-performing single-family residential loans due to the complexity and wide variety of issues that may occur with respect to a delinquent commercial or multi-family real estate loan. Unlike 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, 1998, the Company's one- to four-family residential mortgage loans totaled $490.7 million, or 38.9% of the Company's gross loan portfolio. At that date, the Company's net one- to four-family residential mortgage loan portfolio totaled $457.3 million, or 43.7% 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. During 1998, the Company purchased $348.6 million of predominately performing one-to four family residential mortgage loans. Consistent with its asset/liability objectives, the Company may sell a portion of the purchased one- to four-family residential mortgage loans to the FNMA and other secondary market purchasers after the loan files have been reviewed and deficiencies corrected by Bank personnel to ensure loan documentation complies with the purchaser's standards.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING. The Company has historically originated a limited amount of loans for the purchase, construction, refurbishing and development of commercial and multi-family real estate. Substantially all of the multi-family and commercial real estate loans originated by the Company are secured by properties located in the Company's primary market area and within the state of Texas. At December 31, 1998, $236.3 million, or 18.7% of the Company's gross loan portfolio, consisted of loans secured by commercial real estate and $270.3 million, or 21.5% of the Company's gross loan portfolio, consisted of loans secured by multi-family residential properties. At that date, $188.9 million, or 18.1% of the Company's net loan portfolio, consisted of loans secured by commercial real estate and $184.6 million, or 17.7% of the Company's net loan portfolio, consisted of loans secured by multi-family residential properties.
Included in the multi-family residential portfolio are 48 loans aggregating $143.1 million in gross principal amount at December 31, 1998 ($85.3 million net of purchase discount). These loans were purchased from HUD primarily in three purchases occurring in October 1995, September 1996 and December 1996.
All of these HUD Loans are secured by first mortgage liens. In addition, the Company has second mortgage liens on two of these properties. Properties which secure the HUD loans are located in 21 states throughout the country.
The HUD Loans were acquired by HUD pursuant to various insurance programs of the FHA. Under programs of the FHA, a lending institution may assign a defaulted FHA-insured loan to HUD because of an economic hardship on the part of the borrower which precludes the borrower from making the scheduled principal and interest payment on the loan. Once a loan is assigned to HUD, the FHA insurance is paid and the loan is no longer insured. As a result, none of the HUD Loans are insured by the FHA.
HUD assistance to borrowers is provided in the form of Provisional Workout Agreements ("PWA") which are forbearance agreements under which the borrower either makes a monthly payment less than or equal to the original monthly payment or makes a monthly payment more than the original monthly payment to make up for arrearages. These agreements vary in duration. Under the terms of the contract governing the sale of the HUD Loans, the Company is obligated to comply with the terms of any PWA until the term of the agreement expires or is canceled pursuant to its terms or there is a default under the PWA.
The terms of commercial and multi-family real estate loans originated by the Company are individually negotiated on a case by case basis, however, these loans generally have terms ranging up to seven years with adjustable rates of interest. Rates on these loans generally float with changes in the prime rate. Such loans generally do not contain caps on the maximum amount of interest which may be charged over the term of the loan but may contain a floor below which the interest rate on the loan may not fall. In addition to the payment of principal and interest on these loans, the Company may receive an additional fee or a share in the profits from the project upon the completion of the construction or refurbishment of the underlying property. The Company's commercial and multi-family real estate loans provide for recourse against the security property and, in most circumstances, require the borrower to be personally liable for all or a portion of the loan.
Multi-family and commercial real estate loans are generally underwritten in amounts of up to 85% of the lesser of cost or the appraised value of the underlying property. Appraisals on properties securing multi-family and commercial real estate loans originated by the Company are generally performed by an independent fee appraiser designated by the Company before the loan is made. All appraisals on multi-family and commercial real estate loans are reviewed by the Company's management. In addition, the Company's underwriting procedures require verification of the borrower's credit history, financial statements, references and income projections for the property.
While the Company continues to monitor both purchased and originated multi-family and commercial real estate loans through its semi-annual asset review process, updated appraisals are not normally obtained after loan purchase or origination unless the Company's asset review process raises questions regarding the value of the collateral. In order to monitor the adequacy of cash flows on income-producing properties, the borrower is notified semi-annually, requesting financial statements and other information from the borrower and guarantor, including but not limited to information pertaining to rental rates and income, maintenance costs and an update of real estate property tax payments.
Multi-family and commercial real estate loans generally present a higher level of risk than do loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on commercial properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed), 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, 1998, $148.6 million, or 29.3% 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 $84.4 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, 1998, development loans totaled $55.0 million or 4.4% of its gross loan portfolio and $46.5 million, net, or 4.4% of the Company's net loan portfolio. At December 31, 1998 the Bank had six 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 and one development property located in Louisiana. 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, 1998, land loans totaled $87.1 million, or 6.9% of the Company's gross loan portfolio. At that date, net land loans totaled $69.8 million, or 6.7% of the Company's net loan portfolio. At December 31, 1998 the Bank had seven land loans in excess of $2.0 million, with aggregate net balances of $44.7 million, the largest of which has a net balance of $11.8 million. All of these loans are secured by land in the metropolitan areas of Los Angeles and Dallas. 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 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, 1998, there were no single-family construction loans, three development loans with an aggregate gross principal balance of $325,000 and 25 land loans with aggregate gross principal balances of $8.0 million delinquent 90 days or more. At that date, net non-performing land loans totaled $4.8 million.
CONSUMER LENDING. At December 31, 1998, the Company's consumer loans totalled $85.4 million or 6.8% of the Company's gross loan portfolio, of which $48.0 million were purchased one-to four family junior lien loans, and $31.9 million were purchased sub-prime automobile loans. At that date, net consumer loans totaled $70.7 million, or 6.8% of the Company's net loan portfolio of which $41.7 million were one-to-four family junior lien loans and $25.9 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 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, 1998, there were 768 consumer loans with aggregate gross principal balances of $8.5 million delinquent in excess of 90 days.
COMMERCIAL BUSINESS LENDING. At December 31, 1998, the Company had $35.5 million in commercial business loans outstanding, or 2.8% of the Company's gross loan portfolio. At that date, the Company had $27.9 million of net commercial business loans outstanding, or 2.7% of the Company's net loan portfolio. The Company's loans include loans to finance accounts receivable, inventory and equipment. Management does not currently contemplate any significant increase in the ratio of this portfolio to the Company's total loan portfolio. At that date 46 commercial business loans with an aggregate gross principal balance of $10.0 million were delinquent 90 days or more. Included in this amount is a $4.4 million loan originated under the Company's now discontinued foreign lending program.
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.
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, 1998.
At December 31, 1998, the Company's non-performing loans included 235 loans aggregating $40.7 million in gross loan ($26.1 million of net loans) for which foreclosure proceedings had been commenced. At that date, 506 loans involved borrowers involved in bankruptcy proceedings representing approximately $115.5 million in gross loans ($80.1 million of net loans) of delinquent loans in the Company's loan portfolio.
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.
For the year ended December 31, 1998 gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $15.3 million. The amount that was included in interest income on such loans was $8.1 million for the year ended December 31, 1998.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth in the previous table, as of December 31, 1998 the Company had six loans totaling $25.6 million of net loans, all of which are land loans made to the Company's largest borrower, with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have concern as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing asset categories. The Company is monitoring these loans due to periodic delinquencies. The Company believes the value of the collateral securing these loans is sufficient to prevent the Company from incurring any losses related to these loans.
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, 1998 ---------------------- (Dollars In Thousands)
Substandard ............................. $94,289 Doubtful ................................ 1,142 ------- Total Classified Assets ............ $95,431 =======
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through provisions for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation includes a review of the loan portfolio including those loans of which full collectibility may not be reasonably assured, current economic conditions, historical loan loss experience, loan volume and growth, the composition of the loan portfolio and other factors that warrant recognition in providing for an adequate allowance for loan losses. The Company also developed certain asset review policies and procedures which established minimum general loan loss reserves for all types of loans. In determining the general reserves under these policies historical charge-offs and recoveries, changes in the mix and levels of the various types of loans, fair values, the current loan portfolio and current economic conditions are considered. These policies also
require additional reserves for all delinquent and classified loans. See "Item 7 - - Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Company establishes a specific allowance against a given loan when management perceives a problem in that loan that may result in a loss. The Company continues to monitor and modify its allowances for general and specific loan losses as economic conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurances that such losses will not exceed the estimated amounts. In addition, various regulatory agencies periodically review the allowance for loan losses and may require that additions be made based upon their judgment of information available to them at the time of their examination.
Real estate properties acquired through, or in lieu of loan foreclosure are initially recorded at fair value less estimated cost to sell at date of foreclosure. Valuations are periodically performed by management and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated net realizable value.
The following table sets forth an analysis of the Company's allowance for loan losses at the dates indicated.
The distribution of the Company's allowance for loan losses at the dates indicated is summarized as follows:
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, 1998, the Bank's liquidity ratio was 18.0%. 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.
DECEMBER 31, ------------------------------------------------------- 1996 1997 1998 ------------------------------------------------------- Book % of Book % of Book % of VALUE TOTAL VALUE TOTAL VALUE TOTAL ------- ----- ----- ----- ----- ----- (Dollars in Thousands)
FHLB stock............ $ 9,618 100.00% $ 10,203 100.00% $ 9,877 100.00% ========= ====== ======== ====== ======= ====== Interest-bearing deposits with banks.. $ 65,491 100.00% $150,219 100.00% $66,599 100.00% ========= ====== ======== ====== ======= ======
Mortgage-backed securities: GNMA................. $ 125,386 101.17% $110,079 98.84% $87,715 97.92% Gross unrealized gain (loss)............. 1,090 .88 3,722 3.34 3,909 4.36 Unamortized premium (discount)........ (2,537) (2.05) (2,425) (2.18) (2,043) (2.28) --------- ------ -------- ----- ------- ------ Total mortgage-backed securities........... $ 123,939 100.00% $111,376 100.00% $89,581 100.00% ========= ====== ======== ====== ======= ======
The Company's investment securities portfolio at December 31, 1998, contained neither tax-exempt securities nor securities of any issuer with an aggregate book value in excess of 10% of the Company's stockholders' equity, excluding those issued by the United States Government, or its agencies.
SOURCES OF FUNDS
GENERAL. Beal Financial's primary source of funds are dividends which may be paid by the Bank. In addition, Beal Financial has the ability to access the capital markets, if necessary.
The Bank's primary sources of funds are deposits, amortization and prepayment of loan principal, borrowings, and funds provided from operations and, from time to time, sales of assets. Management of the Bank closely monitors rates and terms of competing sources of funds on a regular basis and generally utilizes the sources which are the most cost effective.
Borrowings, predominantly from the FHLB of Dallas, may be used on a short-term basis to compensate for reductions in deposits or deposit inflows at less than projected levels, and may be used on a longer-term basis to support expanded purchasing activities.
DEPOSITS. The Bank's deposits consist of statement savings accounts, commercial demand deposit accounts, money market and certificate accounts. Certificates of deposit are the primary source of deposits because they generally are more responsive to market interest rates than other types of deposits, and thus more attractive to depositors. The Bank relies primarily on competitive pricing policies, advertising, and customer service to attract and retain these deposits. In this regard, the Bank generally prices its deposits at or above the highest rates offered by its competitors.
In addition to retail deposits, the Bank obtains wholesale deposits through deposit brokers which solicit funds from their customers for deposit with the Bank. Brokered deposits amounted to $207.6 million or 20.6% of deposits at December 31, 1998. 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.
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.
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.
Twelve Months Ended Year Ended December 31, December 31, ------------ ------------------------- 1996 1997 1998 ------------ ----------- ---------- (Dollars in Thousands)
Opening balance............... $ 985,961 $1,043,435 $1,001,476 New deposits, net............. 26,406 (70,120) (21,211) Interest credited............. 31,068 28,161 25,352 ----------- ---------- ---------- Ending balance................ $ 1,043,435 $1,001,476 $1,005,617 =========== ========== ========== Net increase (decrease)....... $ 57,474 $ (41,959) $ 4,141 =========== ========== ========== Percent increase (decrease)... 5.83% (4.02)% .41% ==== ===== ======
The following table shows rate and maturity information for the Bank's certificates of deposit as of December 31, 1998.
4.00- 6.00- Percent 5.99% 7.99% Total of Total --------- ------ ------- -------- (Dollars in Thousands) CERTIFICATE ACCOUNTS MATURING IN QUARTER ENDING: March 31, 1999.......... $359,345 $ 3,298 $362,643 44.79% June 30, 1999........... 169,490 431 169,921 21.00 September 30, 1999...... 81,390 750 82,140 10.14 December 31, 1999....... 162,944 2,502 165,446 20.43 March 31, 2000.......... 2,160 4,208 6,368 .79 June 30, 2000........... 286 1,017 1,303 .16 September 30, 2000...... 1,550 784 2,334 .29 December 31, 2000....... 11,005 4,008 15,013 1.85 March 31, 2001.......... 1,070 --- 1,070 .13 June 30, 2001........... 936 --- 936 .11 September 30, 2001...... 122 --- 122 .02 December 31, 2001....... 1,165 --- 1,165 .14 Thereafter.............. 1,217 --- 1,217 .15 -------- ------- -------- ------ Total................ $792,680 $16,998 $809,678 100.00% ======== ======= ======== ======
Percent of Total..... 97.90% 2.10% 100.00% ======
The following table indicates the amount of the Bank's certificates of deposit by time remaining until maturity as of December 31, 1998.
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, 1998, 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. See Note H to the Notes to Consolidated Financial Statements of the Company.
At December 31, 1998, FHLB advances totaled $80.0 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.
Twelve Months Ended Year Ended December 31, December 31, ------------ ---------------- 1996 1997 1998 ------------ ------- ------ (Dollars In Thousands)
MAXIMUM BALANCE: FHLB advances................. $185,000 $146,000 $176,000 Senior notes, net............. 57,094 57,188 57,295 Other borrowings.............. 21,756 14,748 7,583
AVERAGE BALANCE: FHLB advances................. $ 41,146 $19,181 $ 39,822 Senior notes, net............. 57,042 57,141 57,233 Other borrowings.............. 28,931 10,401 7,249
The following table sets forth certain information as to the Company's borrowings at the dates indicated.
December 31, ----------------------- 1996 1997 1998 ----------------------- (Dollars in Thousands)
FHLB advances.......................... $146,000 $110,000 $ 80,000 Senior notes, net...................... 57,094 57,188 57,295 Other borrowings....................... 14,748 7,599 7,083 -------- -------- -------- Total borrowings.................. $217,842 $174,787 $144,378 ======== ======== ======== Weighted average interest rate of FHLB advances......................... 6.33% 6.65% 4.87%
Weighted average interest rate of Senior notes, net..................... 13.00% 13.00% 13.00%
Weighted average interest rate of other borrrowings.................... 8.24% 8.03% 7.95%
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 $575,000 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 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, 1998, the net book value of the Bank's investment in its subsidiaries was approximately $539.2 million (including $25.8 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 $431.2 million and $4.3 million, respectively, at December 31, 1998.
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, 1998, the Bank's investment in BMI, BPI and BHS totaled $8.2 million, $4.0 million and $13.5 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 Company intends to expand its direct investment activities in the future, subject to market conditions and regulatory approval. The Board of Directors of the Bank has determined to limit the Bank's investment in real estate development and investment activities to an amount which would enable the Bank to maintain capital, as calculated in accordance with generally accepted accounting principles, at 6% of total assets, after deduction of its investment in real estate. In addition, the Bank's individual investment in BMI, 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 $14.0 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, 1998, Beal Bank Center II had a book value of $8.4 million (subject to a $5.9 million first mortgage lien from an unaffiliated lender) and was 85% occupied. Five remaining properties held by BMI for investment, had book values aggregating $5.6 million at December 31, 1998.
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, 1998, the Bank's investment in LAC totaled $252,000. 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, 1998, BRE held 16 mortgage loans (11 single-family and five multi-family and commercial real estate loans) totaling $2.3 million and six foreclosed real estate properties (two land and four multi-family and commercial properties) totaling $7 million. BRE has performed full environmental reviews on all of its properties with minimal environmental problems found. The properties are operational and BRE plans to actively market the properties for sale. At December 31, 1998, the Bank's investment in BRE totaled $9.6 million.
BEAL AFFORDABLE HOUSING, INC. ("BAH"). BAH was organized in November 1994 to develop affordable housing apartment buildings to take advantage of certain tax benefits under Section 42 of the Internal Revenue Code. BAH owns a 98% limited partnership interest in the three limited partnerships described below. BMI owns a 1% interest in and serves as the managing general partner for each limited partnership and a Texas-based, non-profit organization owns the remaining 1% interest in each limited partnership. The limited partners will receive 100% of any profits or cash distributions on their respective projects and will incur 100% of any cash related operating deficiencies and losses. Each of the projects is managed by a non-affiliated fee management company which specialize in the management of affordable housing properties. At December 31, 1998, 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 nine 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, 1998.
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, 1998 was $41.5 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, 1998, the Company, including its subsidiaries, had a total of 98 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 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, 1998, the Bank's lending limit under this restriction was $24.8 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 transaction, the financial condition of the acquiror and the competence, integrity and experience of the acquiror and any proposed management personnel. The determination of control may be rebutted by submission to the FDIC of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings.
The Bank is also subject to certain capital adequacy guidelines issued by the FDIC. See "- Regulatory Capital Requirements."
Federal law also prohibits insured state-chartered banks, including savings banks such as the Bank, from making equity investments of a type, or in an amount, that are not permissible for national banks. In general, equity investments include equity securities, partnership interests and equity interests in real estate. Under these regulations, non-permissible investments must have been divested by no later than December 19, 1996. Federal law also prohibits such banks from engaging as principal in any activity not permissible for a national bank without FDIC approval. Subsidiaries of such insured banks may also not engage as principal in any activity that is not permissible for a subsidiary of a national bank without FDIC approval. Through its service corporations, BMI, 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, 1998, totaled $608,600.
Under the FDIC Order, the Bank's capital category will be determined exclusive of its investment in any Real Estate Subsidiary for purposes of deposit insurance premium assessments except in determining whether the Bank has become critically undercapitalized.
The premium schedule for BIF and SAIF insured institutions ranges from 0 to 27 basis points. SAIF-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 ("FICO") for resolving the thrift crisis in the 1980's, in the amount equal to approximately six basis points for each $100 in domestic deposits. While BIF-insured institutions pay an assessment equal to approximately 1.5 basis points for each $100 in domestic deposits. The assessment of SAIF-insured institutions is expected to be reduced to approximately two basis points for each $100 in domestic deposits no later than January 1, 2000, by which point BIF-insured institutions will participate fully in the FICO bond interest repayment. 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%
has adopted final regulations 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, 1997, 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 ("CAMELS") 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.
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.
The following table sets forth the Bank's compliance with its regulatory capital requirements at December 31, 1998:
At December 31, 1998 --------------------------------- Required Actual --------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in Thousands)
Leverage capital............... $67,133 5.00% $171,834 12.80% Tier 1 risk-based capital...... 59,565 6.00 171,834 17.31 Total risk-based capital....... $99,275 10.00% $184,261 18.56%
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.
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 that notice has been given by the Bank to pay additional dividends, as needed, up to 100% of earnings for the fiscal year-ended December 31, 1999.
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, 1998, the Bank's liquidity ratio was 18.0%.
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, 1998, 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, 1998, 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.
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, 1998, 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, 1998, the Bank had $9.9 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 5.81% and were 5.94% for calendar year 1998.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Beal Financial Corporation filed with the Internal Revenue Service on March 13, 1997, to elect Subchapter S status for federal income tax purposes effective January 1, 1997. This election covered all subsidiaries of Beal Financial, including the Bank, except for BAH and BRE-N, Inc., which elected to remain Subchapter C Corporations for federal tax purposes. These subsidiaries subsequently filed in March 1999 to elect Subchapter S status for federal income tax purposes effective January 1, 1999. Concurrent with the change to Subchapter S status, Beal Financial and all subsidiaries changed their tax and fiscal year ends to December 31 from the previous June 30 year ends. Therefore, Beal Financial and subsidiaries filed a consolidated Subchapter C federal tax return for the six months ended December 31, 1996 and will file a consolidated Subchapter S federal tax return for subsequent years.
In the future, Beal Financial and all subsidiaries electing Subchapter S status will generally not pay any federal taxes on net income. The only exception will involve possible Subchapter C tax liability on net built-in gains as of January 1, 1997, which may 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, 1998, the Company had net unrealized built-in gains of approximately $55.2 million. For the year ended December 31, 1998, the Company recorded federal tax expense of $3.7 million.
The future tax liability for the taxable earnings of Beal Financial and subsidiaries will be the responsibility of the shareholders of Beal Financial. It is anticipated that future dividends to shareholders will be made to meet their tax liability related to the earnings of Beal Financial.
The Company and its subsidiaries filed consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. Savings associations, such as the Bank, that file federal income tax returns as part of a consolidated group are required by applicable U.S. Department of the Treasury regulations to reduce their taxable income for purposes of computing the percentage bad debt deduction for losses attributable to activities of the non-savings association members of the consolidated group that are functionally related to the activities of the savings association member.
The percentage of specially computed taxable income that was used to compute a savings association's bad debt reserve deduction under the percentage of taxable income method (the "percentage bad debt deduction") was 8%. The percentage bad debt deduction thus computed was reduced by the amount permitted as a deduction for non-qualifying loans under the experience method. The availability of the percentage of taxable income method permitted qualifying savings associations to be taxed at a lower effective federal income tax rate than that applicable to corporations generally (approximately 32.2% assuming the maximum percentage bad debt deduction).
In August 1996, legislation was enacted that repealed the reserve method of accounting (including the percentage of taxable income method) used by many thrifts, including the Bank, to calculate their bad debt reserve for federal income tax purposes. As a result, large thrifts such as the Bank must recapture that portion of the reserve that exceeds the amount that could have been taken under the specific charge-off method for post-1987 tax years. The legislation also requires thrifts to account for bad debts for federal income tax purposes on the same basis as commercial banks for tax years beginning after December 31, 1995. The recapture will occur over a six-year period, the commencement of which will be delayed until the first taxable year beginning after December 31, 1997, provided the institution meets certain residential lending requirements. 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, 1998, the Bank's Excess for tax purposes totaled approximately $10.0 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, 1996. 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, 1998, total state taxes were $2.4 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.
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, 1998.
Owned Total Year or Approximate Location Acquired Leased Square Footage Book Value - ----------------------- -------- ------ -------------- ---------- (In Thousands) Corporate Headquarters: Beal Bank Center I 1992 Owned 167,138 $4,597 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 35,270 square feet in the building. At December 31, 1998, the building was 79% occupied. At December 31, 1998, the Company's total investment in the property was $6.3 million with a net book value of $4.6 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, 1998 was $5.7 million.
ITEM 3.
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.
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, 1998.
ITEM 5.
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."
ITEM 6.
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.
Twelve Months Ended Year Ended Year Ended June 30, December 31, December 31, ------------------- ------------ ----------------- 1995 1996 1996 1997 1998 -------- -------- ------------ -------- -------- (Dollars In Thousands) Selected Operations Data:
Total interest income..... $63,795 $140,948 $177,339 $169,181 $149,966 Total interest expense.... 20,981 56,818 67,708 67,856 57,817 ------- -------- -------- -------- -------- Net interest income....... 42,814 84,130 109,631 101,325 92,149 Provision for loan losses. 4,045 9,044 6,423 3,410 5,577 ------- -------- -------- -------- -------- Net interest income after provision for loan losses 38,769 75,086 103,208 97,915 86,572 Gain on sales of interest- earning assets........... 9,408 8,413 6,101 550 --- Gain on sales of real estate 4,412 7,068 10,776 13,708 39,155 Other non-interest income. 109 1,202 2,615 3,013 6,055 -------- ------- -------- -------- -------- Total non-interest income. 13,929 16,683 19,492 17,271 45,210 Total non-interest expense 12,145 22,456 38,588 22,144 20,513 ------- ------- -------- -------- -------- Income before income taxes 40,553 69,313 84,112 93,042 111,269 Income taxes.............. 15,176 25,153 30,280 6,408 6,049 ------- ------- -------- -------- -------- Net income................ $25,377 $44,160 $ 53,832 $ 86,634 $105,220 ======= ======= ======== ======== ========
Twelve Months Year Ended Ended Year Ended June 30, December 31, December 31, ------------------- ------------ ------------ 1995 1996 1996 1997 1998 --------- --------- ------------ ----- ------
SELECTED FINANCIAL RATIOS AND OTHER DATA: Performance Ratios: Return on assets (ratio of net income to average total assets)......... 5.76% 4.46% 4.36% 6.66% 8.98% Return on equity (ratio of net income to average equity)............... 64.76 64.51 57.10 59.77 61.32 Interest rate spread information, average during period................. 10.50 9.43 9.64 8.72 8.80 Net interest margin(1)......... 10.65 9.32 9.68 8.86 9.07 Ratio of operating expense to average total assets........................ 2.74 2.27 3.13 1.71 1.75 Ratio of average interest -earning assets to average interest-bearing liabilities................... 102.89 98.30 102.29 102.60 104.78
Quality Ratios: Net non-performing assets to total assets, at end of period................. 7.07 11.84 17.77 17.88 12.80 Allowance for loan losses to net non- performing loans.. 17.06 9.65 6.49 9.17 11.49 Allowance for loan losses to loans receivable, net......... 1.24 1.32 1.25 1.34 1.33 Net charge-offs to average loans, net.................... .41 .39 .38 .49 .43
Equity Ratios: Equity to total assets, at end of period................. 8.28 7.34 8.37 11.78 14.13 Average equity to average assets 8.84 6.91 7.64 11.19 14.65
Ratio of Earnings to Fixed Charges: Excluding interest on deposits. 6.6:1 7.4:1 8.1:1 10.4:1 11.4:1 Including interest on deposits. 2.3:1 1.4:1 1.4:1 1.5:1 2.1:1
Other Data: Number of full-service offices. 2 3 3 3 2
(1) Net interest income divided by average interest-earning assets.
ITEM 7.
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 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 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.
The Company had total assets of $1.4 billion at December 31, 1996 representing an increase of $125.6 million or 9.9%, from $1.3 billion at June 30, 1996. The increase resulted primarily from an increase in net loans receivable of $156.8 million, an increase in cash and cash equivalents of $10.6 million and an increase in real estate held for investment or sale of $18.4 million; partially offset by a decrease in securities available for sale of $70.8 million. The increase in net loans receivable was due primarily to the Company being the successful bidder on loan pools sold by various U.S. governmental agencies and to a lesser extent, to loan origination activity. The increase in cash and cash equivalents was the result of normal operations, including proceeds received from the sale of certain mortgage-backed securities from the securities available for sale portfolio. The increase in real estate held for investment or sale was primarily the result of additional real estate direct investments by the Bank's subsidiaries.
Total 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 $73.2 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.
Total liabilities increased $102.0 million, or 8.7% from $1.2 billion at June 30, 1996 to $1.3 billion at December 31, 1996, primarily due to an increase in deposits of $152.1 million, or 17.1%, partially offset by a decline in FHLB advances of $39.0 million, a decline in other borrowings of $6.7 million and a decline of $4.5 million in other liabilities. The $152.1 million increase in deposits was made up of a $194.6 million increase in retail deposits from the Bank's three branches, offset by a $42.5 million decrease in brokered deposits. Advances from the FHLB of Dallas were repaid with the increased deposits and proceeds from the sale of mortgage backed securities.
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. Stockholders' equity increased $44.0 million, or 41.0%, from $116.8 million at December 31, 1996 to $160.8 million at December 31, 1997. These increases were due to earnings, net of dividends paid to stockholders. Dividends paid to stockholders totaled $87.6 million and $33.0 million during the years ended December 31, 1998 and 1997, respectively. The Company anticipates future dividends to be significant, subject to limitations imposed upon the Company 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, 1998, under the terms of the Indenture, the Company would have been permitted to dividend an additional $7.3 million.
RESULTS OF OPERATIONS
GENERAL. The level of net income experienced by the Company in the years ended June 30, 1996, 1995, and the year ended December 31, 1997 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.
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.
(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
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.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1998 AND 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 twelve months ended December 31, 1997.
INTEREST INCOME. Interest income decreased $19.2 million, or 11.4%, from $169.2 million at December 31, 1997 to $150.0 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 twelve months ended December 31, 1998 primarily as a result of an increase in net loans receivable 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 11.5% at December 31, 1998 as compared to 9.2% at December 31, 1997.
Although management believes that it uses the best information available to determine the allowance, unforeseen market conditions could result in adjustment and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Future additions to the Company's allowance will be the result of periodic loan, property and collateral reviews and thus cannot be predicted with absolute certainty in advance. In addition, regulatory agencies, as an integral part of the examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance level based upon their judgment of the information available to them at the time of their examination.
NON-INTEREST INCOME. Total non-interest income increased $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.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 AND TWELVE MONTHS ENDED DECEMBER 31, 1996
NET INCOME. For the fiscal year ended December 31, 1997, net income of $86.6 million represented an increase of $32.8 million, or 60.9% from $53.8 million for the twelve months ended December 31, 1996. As discussed in more detail below, the increase in net income was primarily due to a decrease of $23.9 million in income tax expense as a result of the Company's election of Subchapter S tax status, a decrease of $3.0 million in the provision for loan losses and a decline of $16.4 million in non-interest expense, partially offset by a $8.3 million decline in net interest income.
NET INTEREST INCOME. Net interest income decreased $8.3 million, or 7.6%, from $109.6 million for the twelve months ended December 31, 1996 to $101.3 million for the year ended December 31, 1997. Although the average balance of interest-earning assets remained virtually unchanged, the net interest spread, however, decreased from 9.5% for the twelve months ended December 31, 1996 to 8.7% for the year ended December 31, 1997.
INTEREST INCOME. Interest income decreased $8.2 million, or 4.6%, from $177.4 million for the twelve months ended December 31, 1996 to $169.2 for the year ended December 31, 1997. The increase of $1.1 million in interest income on loans including fees was offset by a decrease of $8.3 million in purchased discount accretion and $941,000 in interest income on investment securities. The average balance of interest earning assets increased slightly, however, this increase was offset by a decrease in the yield on interest earning assets by .8% for the year ending December 31, 1997, as compared to the twelve months ended December 31, 1996. This decrease in yield was primarily due to a decrease in yield on loans, net, from 17.4% for the twelve months ended December 31, 1996 to 16.3% for the year ended December 31, 1997.
INTEREST EXPENSE. Interest expense increased $148,000, or 0.22%, from $67.7 million for the twelve months ended December 31, 1996 to $67.9 million for the year ended December 31, 1997. The average balance of interest-bearing liabilities remained virtually the same, increasing only $11.2 million during the year ended December 31, 1997 reflecting the increase in deposit accounts and comparable decline in other borrowings during the year. The slight decrease in the average cost of interest-bearing liabilities during this period was primarily due to the shift from higher cost FHLB advances to deposit accounts.
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by management as an amount sufficient to maintain the allowance for loan losses at a level considered adequate to absorb future losses inherent in the loan portfolio in accordance with generally accepted accounting principles. The provision for loan losses decreased $3.0 million, or 46.9% for the twelve months ended December 31, 1997 primarily as a result of a decline in net loans receivable and non-performing loans.
NON-INTEREST INCOME. Total non-interest income decreased $2.2 million, or 11.4% to $19.5 million for the twelve months ended December 31, 1996 to $17.3 million for the year ended December 31, 1997. This decrease was primarily due to a decrease of $5.5 million in the income attributable to gain on sale of loans and a $6.4 million decrease in gain of sales of securities available for sale, partially offset by an increase of $8.2 million on the gain on sale of real estate transactions and a $1.1 million increase in other real estate operations.
NON-INTEREST EXPENSE. Non-interest expense decreased $16.4 million, or 42.6%, from $38.6 million at December 31, 1996 to $22.1 million at December 31, 1997, primarily due to a decrease in salaries and employee benefits of $11.2 million, $10.5 million of which related to a bonus paid to the Bank's Chairman, Andrew Beal in December 1996. The SAIF deposit insurance premium decreased $2.8 million, of which $2.2 million related to the one time assessment to recapitalize the SAIF which was paid in 1996. In addition, other operating expenses decreased by $1.5 million during the year ended December 31, 1997.
INCOME TAXES. Income taxes decreased $23.9 million, or 78.8%, from $30.3 million for the twelve months ended December 31, 1996 to $6.4 million for the twelve months period ended December 31, 1997. This decrease was due to the Company's election of Subchapter S tax status at December 31, 1996.
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, 1998 and 1997 and the twelve months ended December 31, 1996, the Company purchased $387.9 million, $130.4 million and $308.0 million of net loans, respectively. Loan originations for the years ended December 31, 1998 and 1997 and the twelve months ended December 31, 1996 were $85.4 million, $76.6 million and $132.5 million, respectively.
The Company's primary financing activity is the attraction of deposits. During the years ended December 31, 1998 and 1997 and the twelve months ended December 31, 1996, the Company experienced a net increase (decrease) in deposits of $4.1 million, $(42.0) million and $57.5 million, respectively. The Company also utilizes FHLB advances to fund the Bank's discounted loan purchases. During the years ended December 31, 1998 and 1997 and the twelve months ended December 31, 1996, the Company's net financing activity (proceeds less repayments) with the FHLB totaled $(30.0) million, $(36.0) million and $(39.0) million, respectively. The Company had other borrowings of $64.4 million at December 31, 1998, including $57.3 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, 1998, the Company had an undrawn advance arrangement with the FHLB for $178.9 million.
The Bank is required to maintain minimum levels of liquid assets as defined by the Texas Department. A Texas savings bank is required to maintain liquidity in an amount not less than 10% of its average daily deposits for the most recently completed calendar quarter in cash or readily marketable securities. At December 31, 1998, the Bank's liquidity ratio was 18.0%.
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, 1998, 1997 and 1996 cash and cash equivalents totaled $72.1 million, $150.8 million and $65.9 million, respectively.
The Company anticipates that it will have sufficient funds available to meet its current commitments. At December 31, 1998, the Company had commitments to originate four loans aggregating $53.4 million. Certificates of deposits which are scheduled to mature in one year or less at December 31, 1998 totaled $780.2 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, 1998, the Bank exceeded each of its three capital requirements. The following is a summary of the Bank's regulatory capital position at December 31, 1998.
At December 31, 1998 ---------------------------------------- Required Actual ------------------ -------------------- Amount Percent Amount Percent -------- -------- --------- -------- (Dollars in Thousands) Leverage capital............... $67,133 5.00% $171,834 12.80% Tier 1 risk-based capital...... 59,565 6.00 171,834 17.31 Total risk-based capital....... 99,275 10.00 184,261 18.56
Due to the amount of dividends to stockholders expected to be declared by the Board of Director's in 1999, 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 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, 1998 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, 1998 ----------------- Excluding interest on deposits.................. 11.4:1 Including interest on deposits.................. 2.1:1
ITEM 7A.
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 two outside Directors. The Bank's Chief Executive Officer, Senior Vice President/Controller and Senior Vice President/Compliance also attend all Investment Committee meetings. This committee meets at least quarterly to review the Bank's interest rate risk position and profitability and to make recommendations for adjustments to the Bank's Board of Directors. This committee also reviews the Bank's portfolio, formulates investment strategies and oversees the timing and implementation of transactions to assure attainment of the Board's objectives in the most effective manner. In addition, the Committee reviews on a quarterly basis the Bank's asset/liability position, including the sensitivity of the market value of portfolio equity based on various interest rate scenarios.
In managing its asset/liability mix, the Bank has, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, placed more emphasis on increasing net interest margin 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.
As indicated in the table below, at December 31, 1998, the Bank's interest-bearing liabilities repricing in one year or less exceeded interest-earning assets maturing during the same period by $296.7 million, resulting in a one-year negative gap equal to 26.7% 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, 1998 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.
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, 1998, 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, 1998, 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, 1998, annualized.
- --------------------------- (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 23.0% increase in MVPE and a 55.6% increase in net interest income in a declining rate environment and a 31.5% decrease in MVPE and a 10.6% 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----
Report of Independent Certified Public Accountants...................... 54
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997............ 55
Consolidated Statements of Income for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996................................................... 56
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996....................................... 57
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996.................................................... 58
Notes to Consolidated Financial Statements.............................. 61
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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended, the six months ended December 31, 1996 and the year ended June 30, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beal Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their consolidated cash flows for the years then ended, the six months ended December 31, 1996 and the year ended June 30, 1996, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Dallas, Texas February 12, 1999
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of this statement.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of this statement.
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 generally accepted accounting principles and prevailing practices of the banking industry.
BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of the Corporation, its subsidiaries including the Bank and subsidiaries of the Bank, and partnerships in which subsidiaries are the 1% general and 98% limited partner. All significant intercompany transactions and balances are eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ 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 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.
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands)
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued
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.
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.
INCOME TAXES: Prior to January, 1997, the Corporation and its subsidiaries filed a Federal income tax return on a consolidated basis. Deferred tax assets and liabilities were recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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.
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.
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, 1998.
NOTE B - FORMATION OF HOLDING COMPANY
On April 5, 1995, the Company filed an application with the Office of Thrift Supervision for approval to acquire, indirectly, 100% of the outstanding common stock of the Bank in exchange for 100% of the Company's common stock. The application was approved on June 29, 1995 and the acquisition was effective on July 1, 1995. In connection with the acquisition of the Bank's common stock, the Company assumed certain related indebtedness of $2,500 from the majority shareholder. This amount has been reflected in stockholders' equity as a dividend.
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:
December 31, -------------------------- 1998 1997 ----------- ----------- Real estate loans One-to-four family first liens $ 490,717 $ 213,584 Multifamily 270,337 321,423 Commercial 236,252 337,825 Construction and development 55,040 98,503 Land 87,068 71,379 ----------- ----------- Total real estate loans 1,139,414 1,042,714
Other loans Consumer loans One-to-four family junior liens 47,992 71,465 Automobiles 31,878 1 Timeshares 2,432 3,615 Other 3,121 5,002 ----------- ----------- Total consumer loans 85,423 80,083
Commercial business loans 35,537 25,554 ----------- ----------- Total other loans 120,960 105,637 ----------- ----------- Total loans 1,260,374 1,148,351
Less: Loans in process (7,493) (16,806) Deferred fees and discounts (193,468) (231,800) Allowance for loan losses (13,867) (11,912) ----------- ----------- Total loans receivable, net $ 1,045,546 $ 887,833 =========== ===========
The amount of loans being serviced by the Corporation for others was approximately $33,861 and $36,484 at December 31, 1998 and 1997, respectively.
NOTE C - LOANS RECEIVABLE - Continued
Transactions in the allowance for loan losses were as follows:
Year ended Six months December 31, ended Year ended -------------------- December 31, June 30, 1998 1997 1996 1996 -------- -------- -------- --------
Balance at beginning of year $ 11,912 $ 13,189 $ 11,832 $ 6,137 Provision for loan losses 5,577 3,410 3,314 9,044 Charge-offs (3,990) (4,956) (1,978) (3,385) Recoveries 368 269 21 36 -------- -------- -------- --------
Balance at end of year $ 13,867 $ 11,912 $ 13,189 $ 11,832 ======== ======== ======== ========
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, 1998 and 1997, 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:
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, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996, was $91,037, $132,277, $136,000, and $94,007 respectively. Interest income on impaired loans for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996 and the year ended June 30, 1996 was $7,300, $8,576, $3,830, and $8,206 respectively. Interest income foregone under the original terms of impaired loans for the years ended December 31, 1998 and 1997, the six months ended December 31, 1996, and the year ended June 30, 1996 was $7,500, $4,189, $4,341 and $5,400, respectively.
NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE
Real estate held for investment or sale is comprised of the following:
DECEMBER 31, ------------------------ 1998 1997 --------- ---------
Real estate held for development and rental $ 54,642 $ 64,390 Real estate held for sale 53,223 113,852 --------- --------- 107,865 178,242 Less accumulated depreciation (1,512) (1,560) --------- ---------
Total real estate held for investment or sale $ 106,353 $ 176,682 ========= =========
Income from real estate development and rental activities which has not been significant is included in other income in the statements of income. Real estate held for sale was acquired by foreclosure or by deed in lieu of foreclosure.
NOTE E - SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following:
Gross Gross Amortized unrealized unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- Mortgage-backed securities: December 31, 1998 $ 85,672 $3,909 $-- $ 89,581 December 31, 1997 107,654 3,722 -- 111,376
At December 31, 1998, mortgage-backed securities valued at approximately $18,660 were pledged to another institution for the benefit of a customer of the Bank.
The mortgage-backed securities at December 31, 1998 are scheduled to mature in 2025 and 2026.
NOTE F - DEPOSITS
DECEMBER 31, 1998 1997 ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ -------
Noninterest-bearing demand deposits $ 12,667 1.3% $ 14,272 1.4% Statement savings deposits (4.8% at December 31, 1998) 3,118 .3 1,193 .1 Money market demand deposit accounts (4.5% at December 31, 1998) 180,154 17.9 169,321 17.0 ---------- ----- ---------- ----- 195,939 19.5 184,786 18.5
Certificates of deposit 4.01% to 4.50% 2,702 .3 3 -- 4.51% to 5.00% 367,685 36.5 1,524 .2 5.01% to 5.50% 222,985 22.2 198,607 19.8 5.51% to 6.00% 203,630 20.2 585,733 58.4 6.01% to 6.50% 2,489 .3 13,329 1.3 6.51% to 7.00% 1,124 .1 2,960 .3 7.01% to 7.50% 9,063 .9 14,522 1.5 7.51% to 8.00% -- -- 12 -- ---------- ----- ---------- -----
Total certificates of deposit 809,678 80.5 816,690 81.5 ---------- ----- ---------- -----
Total deposits $1,005,617 100.0% $1,001,476 100.0% ========== ===== ========== =====
NOTE F - DEPOSITS - Continued
The aggregate amount of deposits with a minimum denomination of $100 or more was approximately $309,164 at December 31, 1998 and $377,183 at December 31, 1997.
At December 31, 1998, the scheduled maturities of certificates of deposit were as follows:
DECEMBER 31, ------------
1999 $780,150 2000 25,018 2001 3,293 2002 700 2003 517 -------- $809,678 ========
Interest expense on deposits consists of the following:
Six months Year ended ended Year ended December 31, December 31, June 30, ------------------ ------------ ---------- 1998 1997 1996 1996 ------- ------- ------------ ----------
Savings deposits $ 8,323 $ 9,025 $ 4,683 $ 6,675 Certificates of deposit 38,770 48,955 23,538 39,240 ------- ------- ------- ------- $47,093 $57,980 $28,221 $45,915 ======= ======= ======= =======
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 $276,831 at December 31, 1998. The FHLB advances of $80,000 at December 31, 1998 bears interest at 4.87% per annum and mature in April 1999.
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.
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, 1998, 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, 1998 and 1997, the Bank's liquidity ratio was 17.97% and 19.11%, 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.
NOTE J - INCOME TAXES
Taxes on income consist of the following:
Six months Year ended ended Year ended December 31, December 31, June 30, ---------------- ----------- ---------- 1998 1997 1996 1996 ------ ------ ----------- ---------- Federal Current $3,682 $3,249 $11,214 $ 21,095 Deferred -- -- (1,251) 1,249 ------ ------ -------- -------- 3,682 3,249 9,963 22,344 State - current and deferred 2,367 3,159 2,189 2,809 ------ ------ -------- -------- $6,049 $6,408 $ 12,152 $ 25,153 ====== ====== ======== ========
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, 1998 and 1997 the Corporation recorded federal tax expense of $2,400 and $3,249 related to the recognition of built-in gains. Except as discussed above, beginning January 1, 1997, the liability for federal income taxes on the income of the Corporation is the responsibility of its stockholders.
Income taxes for financial reporting purposes differed from the amount computed by applying the statutory federal income tax rate to the income before income taxes for the years ended below as follows:
Six months ended Year ended December 31, June 30, ------------ ----------- 1996 1996 ------------ -----------
Computed tax at statutory Federal income tax rate $ 11,972 $ 24,260 Increase (decrease) in taxes resulting from State tax, net of federal tax benefit 1,246 2,195 Tax credits (1,182) (1,469) Other 116 167 -------- -------- Total $ 12,152 $ 25,153 ======== ========
NOTE K - OTHER OPERATING EXPENSE
Other operating expense consists of the following:
Six months Year ended ended Year ended December 31, December 31, June 30, ----------------- ------------ ---------- 1998 1997 1996 1996 ------- ------- ------------ ----------
Advertising and promotion $ 266 $ 248 $ 448 $ 714 Office supplies and expense 175 250 127 394 Legal and professional 5,849 6,448 3,327 3,599 Expenses related to loan purchases 262 630 1,108 2,409 Loan servicing fees 2,076 2,376 1,332 2,278 Other 1,008 806 509 862 ------- ------- ------- ------- $ 9,636 $10,758 $ 6,851 $10,256 ======= ======= ======= =======
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, 1998, there were commitments to purchase loans of $10,143. Unfunded commitments to extend credit were $19,561.
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.
On December 8, 1998, the Beal Financial Corporation entered into an agreement to loan up to $60,000 to its majority shareholder. No amounts were outstanding at December 31, 1998.
NOTE M - COMPREHENSIVE INCOME
The Corporation adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS 130) as of January 1, 1998. 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 adoption of SFAS 130 had no effect on the Corporation's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are as follows:
NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments were as follows:
Beal Financial Corporation
Balance Sheet
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31, --------------------- 1998 1997 --------- --------- Assets Cash $ 68,553 $ 17,906 Investment in subsidiary 175,744 189,846 Loans receivable, net 4,455 -- Real estate held for investment 693 14,190 Other assets 1,925 14,694 -------- -------- $251,370 $236,636
Liabilities and stockholders' equity Senior notes $ 57,295 $ 57,188 Other liabilities 2,849 18,630 Stockholder's equity: Common stock 300 300 Additional paid-in capital 2,740 2,740 Retained earnings 184,277 154,056 Accumulated other comprehensive income 3,909 3,722 -------- -------- Total stockholders' equity 191,226 160,818 -------- -------- $251,370 $236,636 ======== ========
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
Statement of Cash Flows
BEAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED (In thousands, except per share data)
NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued
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 ======== ======== ======== ========
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, 1998 and 1997, the Corporation made matching contributions of $107 and $103, respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
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 presently composed of nine members. The following table sets forth certain information with respect to the current directors of the Bank. Under the Bank's Bylaws, directors are elected annually by stockholders for terms of one year. Except as described herein, there are no arrangements or understandings between the persons named and any other person pursuant to which such director was selected.
- ------------------ (1) At December 31, 1998.
The business experience of each director is set forth below. All directors have held their present positions for at least the past five years, except as otherwise indicated.
D. ANDREW BEAL. Mr. Beal is Chairman of the Board 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.
LAWRENCE C. BLANTON. Mr. Blanton is Chairman of the Montford Mortgage Company of Dallas, Texas, since August, 1998 and President of Crest Mortgage Corporation of Dallas, Texas since April, 1997. He previously was the Chairman and Chief Executive Officer of Providers Funding Corporation of Dallas, Texas from 1989 to 1996, a medical receivables financing company. Mr. Blanton has over 25 years of commercial lending experience.
R. MICHAEL EASTLAND. Mr. Eastland has been the Executive Director and Chief Executive Officer of the North Central Texas Council of Governments located in Arlington, Texas since December 1992. Prior thereto, Mr. Eastland was the City Manager for the City of Carrollton, Texas from June 1984 to December 1992. Mr. Eastland has over 25 years of service in municipal positions in various Texas localities. He has also served as President and a member of the board of the Texas City Management Association Board. Mr. Eastland is also a former President of the North Texas City Management Association.
DAVID L. GOLDSTEIN, CPA. Mr. Goldstein 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.
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 44 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 50 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 43, 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 46, 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 55, 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.
RICHARD L. KILLMON. Mr. Killmon, age 63, joined the Bank as Vice President-Retail Operations in April 1995. Prior to such time, Mr. Killmon served as a self-employed management consultant with Richard L. Killmon & Associates located in Tyler, Texas since 1991. He was Vice President of First
Pinnacle, Inc., a financial institution holding company located in Dallas, Texas, from 1989 to 1991. Mr. Killmon has had extensive operational experience with various consulting firms and several large commercial banks located primarily in Texas.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE BANK
MEETINGS AND COMMITTEES OF THE COMPANY. Meetings of the Company's Board of Directors are generally held on an as needed basis. For the year ended December 31, 1998, the Board of Directors met eight times during the year ended December 31, 1998. 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, 1998, 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.
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, 1998.
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 33 times during the year ended December 31, 1998.
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 five times during the year ended December 31, 1998.
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, Meek, Weinstein and Goldstein. This Committee met ten times during the year ended December 31, 1998.
The Compensation Committee is comprised of Directors Eastland, Arnold and Weinstein. The Committee meets on an as needed basis to establish the compensation of the Chief Executive Officer, approve the compensation of senior officers and the compensation and benefits paid to employees of the Bank. This Committee met one time during the year ended December 31, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1998, 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, 1998.
ITEM 11.
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, Chief Executive Officer and the other two most highly compensated executive officers of the Company in 1998 (the "Named Officers").
- -------------- (1) Includes the Company's contribution to the 401(k) Plan and life insurance premiums paid. (2) Mr. Enright joined the Bank in February 1996.
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. Bonus calculations shall be determined in the sole discretion and judgment of the board of directors. 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, 1998 the initial loan pool is comprised of certain loans originated by the Company and its subsidiaries after January 1, 1997, aggregating approximately $117.7 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 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.
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.
ITEM 12.
ITEM 12. STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of December 31, 1998 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 3,000 1.0% of the Company and Director and Secretary of the Bank 5956 Sherry Lane #800 Dallas, TX 75225
ITEM 13.
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, 1998, there were no loans outstanding to any director, executive officer, member of their immediate families or business interest of such individuals.
ITEM 14.
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, 1998 and Consolidated Statements of Income for the Year Ended December 31, 1998 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, 1998 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, 1998 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.
Reference to Prior Filing Regulation or Exhibit S-k Number Exhibit Attached Number Document Hereto - ------------ ------------------------------------------------ ----------
2 Plan of Acquisition, Reorganization, Arrangement, None Liquidation or Succession 3.1 Certificate of Incorporation * 3.2 Bylaws * 4.1 Form of Indenture dated as of August 11, 1995, * with respect to the Registrant's 12-3/4% Senior Notes, due August 15, 2000. 4.2 Specimen Senior Note (found at Sections 2.02 * and 2.03 of the Form of Indenture filed as Exhibit 4.1) 9 Voting Trust Agreement None 10 Material contracts: (a) Employment Agreement with Margaret Curl * (b) Executive Bonus Plan with David C. Meek ** 11 Statement re: computation of per share earnings Not required 12 Statement re: computation of ratios Not required 13 Annual Report to Security Holders Not required 16 Letter re: change in certifying accountants Not required 18 Letter re: change in accounting principles None 21 Subsidiaries of Registrant *** 22 Published report regarding matters submitted to None vote of security holders 23 Consents of Experts and Counsel None 24 Power of Attorney Not required 27 Financial Data Schedule *** 99 Additional Exhibits Not applicable
- ------------------ * Filed as exhibits to the Company's Registration Statement on Form S-1 under the Securities Act of 1993, filed with the Securities and Exchange Commission on June 7, 1995 (Registration No. 33-93212). All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. ** Filed as 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
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: 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: Date: ---------------------------- ---------------------------------
/s/ Timothy M. Fults /s/ Dr. Bernard L. Weinstein - ---------------------------------- --------------------------------------- Timothy M. Fults, Director Dr. Bernard L. Weinstein, Director
Date: Date: ---------------------------- ---------------------------------
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.