SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
0R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
COMMISSION FILE NUMBER 33-93312
BEAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2583551
(State or other jurisdiction of (I.R.S. Employer)
incorporation of organization) Identification Number)
SUITE 300, LB66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS 75248
(Address of principal executive offices) (ZIP code)
Registrant's telephone number, including area code: (972) 404-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No [ ]
As of August 16, 1999, there were 300,000 shares of the Registrant's
common stock issued and outstanding.
BEAL FINANCIAL CORPORATION
INDEX
PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. - Financial Statements . . . . . . . . . . . . . . . 1
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 5
PART II. OTHER INFORMATION
SIGNATURES
BEAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands,except share data)
June 30, December 31,
1999 1998
------------------ -----------------
ASSETS
Cash $ 845 $ 5,540
Interest bearing deposits 99,360 66,599
---------- ----------
Cash and cash equivalents 100,205 72,139
Accrued interest receivable 13,885 12,983
Securities available for sale 77,491 89,581
Net loans receivable 1,081,191 1,059,413
Less allowance for losses (13,007) (13,867)
----------- ----------
1,068,184 1,045,546
Federal Home Loan Bank stock 10,469 9,877
Real estate held for investment or sale 102,536 106,353
Premises and equipment, net 5,709 5,699
Other assets 8,025 11,296
---------- ----------
Total Assets $1,386,504 $1,353,474
========== ==========
LIABILITIES
Deposit accounts $1,037,428 $1,005,617
Federal Home Loan Bank advances 95,000 80,000
Senior notes, net 57,354 57,295
Other borrowings 6,913 7,083
Other liabilities 32,343 12,253
---------- ----------
Total Liabilities 1,229,038 1,162,248
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
authorized 375,000
issued and outstanding 300,000 300 300
Paid-in capital 2,740 2,740
Accumulated other comprehensive
income 910 3,909
Retained earnings 213,516 184,277
------------ ----------
217,466 191,226
Stockholder note receivable (60,000) --
---------- ----------
Total Stockholders' Equity 157,466 191,226
---------- ----------
Total Liabilities and Stockholders' Equity $1,386,504 $1,353,474
========== ==========
See notes to consolidated financial statements
1
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- --------------------------------------
1999 1998 1999 1998
------------------ ------------ ------------------- ----------------
Interest Income:
Loans, including fees $39,827 $24,668 $69,773 $49,078
Purchased discount accretion 11,985 12,602 21,658 24,509
Investment securities 2,141 2,597 4,763 5,108
-------- -------- -------- --------
Total interest income 53,953 39,867 96,194 78,695
Interest expense:
Deposits 12,066 11,767 24,595 24,855
Federal Home Loan Bank
advances and other borrowings 1,406 521 2,696 933
Senior notes 2,042 2,016 4,077 4,027
-------- -------- -------- --------
Total interest expense 15,514 14,304 31,368 29,815
-------- -------- -------- --------
Net interest income 38,439 25,563 64,826 48,880
Provision for loan losses 742 (309) 1,915 1,064
-------- -------- -------- --------
Net interest income after
provision for loan losses 37,697 25,872 62,911 47,816
Other income
Gain on sale of loans 9 5 9 10
Gain on real estate transactions 10,739 9,138 11,849 12,152
Other real estate operations, net 1,129 2,745 2,452 4,230
Other operating income 225 224 1,506 361
-------- -------- -------- --------
Total noninterest Income 12,102 12,112 15,816 16,753
Other expense
Salaries and employee benefits 1,982 1,880 3,912 3,575
Occupancy and equipment 491 531 1,017 1,178
SAIF deposit insurance premium 181 159 336 317
Other operating expenses 2,897 2,608 5,019 4,818
-------- -------- -------- --------
Total noninterest expenses 5,551 5,178 10,284 9,888
-------- -------- -------- --------
Income before income taxes 44,248 32,806 68,443 54,681
Income Taxes 2,110 1,837 3,704 2,865
-------- -------- -------- --------
Net Income $42,138 $30,969 $64,739 $51,816
======== ======== ======== ========
Income per common share $140.46 $103.23 $215.80 $172.72
Weighted average number of common shares
outstanding 300 300 300 300
See notes to consolidated financial statements
2
BEAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
UNAUDITED
(In thousands)
Six Months
ended June 30
---------------------------------------
1999 1998
----------------- -----------------
Operating activities
Net income $ 64,739 $ 51,816
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 965 1,129
Accretion of purchased discount (21,658) (24,509)
Provision for loan losses 1,915 1,064
Amortization of bond premium and underwriting costs 411 362
Gains on real estate transactions (11,849) (12,152)
Gain on sales of loans (9) (10)
Loss on sale of premises and equipment -- 167
Changes in operating assets and liabilities
Accrued interest receivable (2,323) 408
Prepaid expenses and other assets 853 (1,356)
Accrued interest payable-bonds -- --
Other liabilities and accrued expenses 2,829 (4,765)
---------------- ----------------
Net cash provided by
operating activities 35,873 12,154
Investing activities
Proceeds from:
Sales of loans 278 10
Loan collections, less originations and advances 145,402 147,894
Maturities of securities available for sale 9,344 10,517
Sales of real estate 19,729 31,343
Sales of Federal Home Loan Bank stock -- 4,181
Sales of premises and equipment -- 70
Purchases of:
Loans and bid deposits on loan purchases (148,066) (1,284)
Federal Home Loan Bank stock (592) (246)
Real estate held for investment or sale (1,584) (1,584)
Premises and equipment (459) (143)
---------------- ----------------
Net cash provided by
investing activities 24,052 190,758
Financing activities
Net increase (decrease) in deposit accounts 31,811 (157,302)
Proceeds from long-term debt -- --
Repayments of long-term debt (170) (413)
Proceeds from (repayments of) advances from the
Federal Home Loan Bank 15,000 (62,000)
Loan to shareholder (60,000) --
Cash dividends paid (18,500) (49,100)
--------------- ---------------
Net cash used in
financing activities (31,859) (268,815)
--------------- ---------------
Net increase (decrease) in cash and
cash equivalents 28,066 (65,903)
Cash and cash equivalents at beginning of period 72,139 150,849
--------------- ---------------
Cash and cash equivalents at end of period $ 100,205 $ 84,946
=============== ===============
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 28,115 $ 30,517
Income taxes 3,969 7,288
Supplemental disclosure of noncash investing and financing
activities
Real estate acquired in foreclosure or in settlement of loans $ 15,416 $ 6,318
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which requires reporting of comprehensive
income in the financial statements. The components of comprehensive income are
as follows:
Three months ended June 30, Six months ended June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
------------ ---------------- ------------ -----------------
( In thousands) ( In thousands)
Net income $42,138 $30,969 $64,739 $51,816
Other comprehensive income net
unrealized gains (losses)
on investment securities
- available for sale (2,281) 209 (2,999) 177
----------- ----------------- ----------- ----------------
Comprehensive income $39,857 $31,178 $61,740 $51,993
=========== ================= =========== ================
NOTE B--LOAN TO SHAREHOLDER
In January, 1999, the Company funded a $60,000,000 loan to the majority
shareholder. As of June 30, 1999, Interest in the amount of $ 2,817,500 has been
earned and received\accrued on this loan. The aforementioned loan and interest
amounts were not used in the calculation of income\expense\yield ratios.
NOTE C--INCOME TAXES
On March 15, 1999, the Company filed an application with the Internal Revenue
Service to elect S Corporation status for federal income tax purposes effective
January 1, 1999. This election covered Beal Affordable Housing, Inc., BRE-1
Inc., and BRE-N, Inc. The Company's remaining subsidiaries have been S
Corporations since January 1, 1997.
The Company and all of it's subsidiaries no longer pay federal income taxes,
except for federal taxes related to the recognition of built-in gains which
existed at January 1, 1997, (January 1, 1999, for the above named subsidiaries.)
For the six months ended June 30, 1999, the Company recorded federal tax expense
of $ 1,818,619, related to the recognition of built-in gains. Except as
discussed above, the liability for federal income taxes of the Company is the
responsibility of it's shareholders.
4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
WHEN USED IN THIS FORM 10-Q, THE WORDS "BELIEVES", "ANTICIPATES",
"EXPECTS", AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY AS OF
THE DATE HEREOF, AND TO ADVISE READERS THAT VARIOUS FACTORS INCLUDING REGIONAL
AND NATIONAL ECONOMIC CONDITIONS, CHANGES IN LEVELS OF MARKET INTEREST RATES,
CREDIT RISK OF LENDING ACTIVITIES, AND COMPETITIVE AND REGULATORY FACTORS, COULD
AFFECT THE COMPANY'S FINANCIAL PERFORMANCE AND COULD CAUSE THE COMPANY'S ACTUAL
RESULTS FOR FUTURE PERIODS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR
PROJECTED. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS
OF ANY REVISIONS TO FORWARD LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
FINANCIAL CONDITION
Beal Financial Corporation ("Beal Financial" and with it's subsidiaries,
the "Company"), the parent company of Beal Bank, (the "Bank") had total assets
of $1.4 billion at June 30, 1999 and at December 31, 1998. Although total assets
remained unchanged, the composition of the assets changed slightly as cash and
cash equivalents increased $28.1 million or 38.9%, and net loans receivable
increased $22.6 million or 2.17%. These increases were offset by decreases in
securities available for sale of $12.1 million or 13.5%, real estate held for
investment or sale of $3.8 million or 3.6% and in other assets of $3.3 million
or 29.0%.
The increase in net loans receivable was primarily due to an increase of
$52.6 million in single-family residential loans due to bulk loan purchases of
primarily performing, well seasoned loans and the origination of $25.6 million
of development loans partially offset by declines in commercial and multi-family
loans.
Total liabilities at June 30, 1999 and December 31, 1998 were $1.2
billion. Deposit accounts increased $31.8 million and Federal Home Loan Bank
advances increased $15.0 million. The increases funded the increase in net loans
receivable discussed above. Other liabilities, increased $20.1 million,
primarily due to a $17.0 million dividend payable that was declared but not paid
until July, 1999.
Stockholders' equity decreased $33.8 million from $191.2 million at
December 31, 1998 to $157.5 million at June 30, 1999. The decrease was primarily
due to the accounting treatment of a $60.0 million note receivable from Beal
Financial's major stockholder. This loan was recorded as a Note Receivable and
treated as a deduction to capital. Stockholder's equity also reflects net income
of $64.7 million for the six months ended June 30, 1999, dividends declared to
shareholders since December 31, 1998 of $35.5 million and a decrease in
unrealized gains on investment securities of $3.0 million.
5
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
NET INCOME. For the six months ended June 30, 1999, net income of $64.7
million represented an increase of $12.9 million or 24.9% from the six months
ended June 30, 1998. As discussed in more detail below, the increase was
primarily due to an increase in net interest income of $15.9 million, offset by
an increase in provision for loan losses of $851,000, a decrease in non-interest
income of $937,000, an increase in non-interest expense of $396,000 and an
increase in income taxes of $839,000.
INTEREST INCOME. Interest income increased $17.5 million or 22.2%, from
$78.7 million at June 30, 1998 to $96.2 million at June 30, 1999. Of the total
increase in interest income, $20.7 million was due to an increase in interest
income on loans, including fees (one relationship accounted for approximately
$9.5 million of this increase), partially offset by decreases in purchased
discount accretion of $2.8 million and $345,000 in interest income on investment
securities. The average balance of interest-earning assets increased $219.9
million during this period, as compared to the same period a year ago, primarily
due to an increase in average net loans receivable of $221.2 million. The net
interest rate spread increased slightly from 9.6% for the period ended June 30,
1998 to 9.8% for the same period ended June 30, 1999.
INTEREST EXPENSE. Interest expense increased $1.6 million, or 5.2%, from
$29.8 million at June 30, 1998 to $31.4 million at June 30, 1999. The increase
resulted primarily from the average balance of interest-bearing liabilities
increasing $163.4 million to $1.2 billion at June 30, 1999, partially offset by
a decline in the average rate paid on interest bearing liabilities from 6.0% at
June 30, 1998 to 5.4% at June 30, 1999. The increase in average interest-
bearing liabilities was due primarily to an increase in the average balance of
deposits of $87.3 million and in the average balance of FHLB advances of $76.3
million.
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 $851,000 for the six months ended June 30,
1999, as compared to the six months ended June 30, 1998. The allowance for
losses as a percentage of net loans receivable decreased from 1.3% at June 30,
1998 to 1.2% at June 30, 1999, along with non accrual loans which decreased
$23.8 million during the same six months ending June 30, 1999.
The Company establishes an allowance for loan losses based upon a
systematic analysis of risk factors in the loan portfolio as well as a specific
analysis of certain impaired loans. This analysis includes an evaluation of the
Company's loan portfolio, past loan loss experience, current economic
conditions, loan volume and growth, composition of the loan portfolio and other
relevant factors. Management's analysis results in the establishment of
allowance amounts by loan type based on allocations by asset classification. The
allowance for loan losses as a percentage of net non-performing loans was 13.7%
at June 30, 1999 as compared to 8.4% at June 30, 1998. Net non-performing loans
decreased $32.3 million from $123.5 million at June 30, 1998 to $95.0 million at
June 30, 1999.
Although management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted wit absolute certainty in advance. In addition, bank regulatory
6
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 judgement of the
information available to them at the time of their examination.
NON-INTEREST INCOME. Total non-interest income decreased $937,000, or 5.6%
to $15.8 million at June 30, 1999 from $16.8 million at June 30, 1998. This
decrease was due primarily to a $1.8 million decrease in other real estate
operations, net, partially offset by a $1.1 million increase in other operating
income, due to the Company's collection of a loan deficiency.
NON-INTEREST EXPENSE. Non-interest expense increased slightly, by
$396,000, or 4.0% to $10.3 million at June 30, 1999, from $9.9 million at June
30, 1998. The increase was primarily due to an increase of $337,000 in salaries
and employee benefits and an increase in other operating expenses of $201,000,
partially offset by a decrease in occupancy and equipment of $161,000.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
NET INCOME. For the three months ended June 30, 1999, net income of $42.1
million represented an increase of $11.2 million, or 36.1% from the three months
ended June 30, 1998. As discussed in more detail below, the increase was
primarily due to an increase in net interest income, of $12.9 million, partially
offset by the increases in provision for loan losses of $1.1 million, in
non-interest expense of $373,000 and in income taxes of $273,000.
INTEREST INCOME. Interest income increased $14.1 million, or 35.3%, from
$39.9 million at June 30, 1998 to $54.0 million at June 30, 1999. Of the total
increase in interest income, $15.2 million was due to an increase in interest
income on loans, including fees, partially offset by a decrease in purchased
discount accretion of $617,000 and a decrease in interest income on investment
securities of $456,000. The average balance of interest-earning assets increased
$266.0 million during this period, as compared to the same period a year ago,
primarily due to an increase in average net loans receivable of $279.0 million.
The net interest spread increased from 10.45% for the three months ended June
30, 1998 to 11.57% for the same period ending June 30, 1999 primarily due to an
increase in yield on average interest-earning assets from 16.46% to 16.97% for
the three month periods ending June 30, 1998 and June 30, 1999, respectively.
7
INTEREST EXPENSE. Interest expense increase $1.2 million, or 8.5%, to
$15.5 million at June 30, 1999 from $14.3 million at June 30, 1998. The increase
resulted from the average balance of interest-bearing liabilities increasing
$197.1 million to $1.1 billion at June 30, 1999 partially offset by a decline in
the average rate paid on interest bearing liabilities from 6.01% at June 30,
1998 to 5.40% at June 30, 1999. The increase in average interest-bearing
liabilities was due to an increase in the average balance of deposits of $119.8
million and an increase in average FHLB advances of $77.1 million.
PROVISION FOR LOAN LOSSES. The provision for loan losses is determined by
management as an amount sufficient to maintain the allowance for loan losses at
a level considered adequate to absorb future losses inherent in the loan
portfolio in accordance with generally accepted accounting principles. The
provision for loan losses increased $1.1 million or 340.0% for the three months
ended June 30, 1999 as compared to a recovery of $309,000 during the three
months ended June 30, 1998. This increase was due primarily to an increase in
the general reserve as a result of a bulk purchase of $121.9 million, gross,
first lien, primarily performing, well seasoned, single-family residential loans
in the first quarter of 1999.
NON-INTEREST INCOME. Total non-interest income remained constant at $12.1
million at June 30, 1998 and 1999. A $1.6 million increase in gain on real
estate transactions, offset a $1.6 million net decrease in other real estate
operations.
NON-INTEREST EXPENSE. Non-interest expense increased $373,000, or 7.2%
from $5.2 million for the three months ended June 30, 1998 to $5.6 million for
the three months ended June 30, 1999. The increase was primarily due to an
increase of $289,000 in other operating expenses and an increase of $102,000 in
salaries and employee benefits, partially offset by a decrease in occupancy and
equipment expense of $40,000.
FEDERAL AND STATE TAXATION.
FEDERAL TAXATION. Beal Financial and all its subsidiaries have elected
Subchapter-S status for federal income tax purposes. Concurrent with the change
to Subchapter-S status, Beal Financial and all subsidiaries changed their tax
and fiscal year-ends to December 31, from their previous June 30 year-ends.
Beal Financial generally will not pay any federal taxes on net income. The
only exception will involve possible Subchapter-C tax liabilities on net
built-in gains as of January 1, 1997, which may be recognized during the 10 year
period ending December 31, 2006. Recognition of built-in gains/losses are also
subject to certain limitations. Approximately $1.8 million of the tax expense
for the six months ended June 30, 1999, related to tax on recognized built-in
8
gains. It is not anticipated that the tax expense related to recognized built-in
gains would be material in any given quarter.
The future tax liability for the taxable earnings of Beal Financial will
be the responsibility of the shareholders of Beal Financial. The Board of
Directors of Beal Financial, on August 11, 1999, declared a dividend payable to
the shareholders of $4.0 million. The dividend was paid to the shareholders on
August 13, 1999. It is anticipated that future dividend to shareholders will be
declared in an amount equal to at least their tax liability related to the
earnings of Beal Financial.
TEXAS STATE INCOME TAXATION. Beal Financial currently files Texas
franchise tax returns. Texas imposes a franchise tax on the taxable income of
savings institutions and other corporations. The franchise tax equals the
greater of $2.50 per $1,000 of taxable capital apportioned to Texas, of $45.00
per $1,000 of net taxable earned surplus apportioned to Texas. Taxable earned
surplus is the federal corporate taxable income of each company within the
corporate group determined on a separate company basis with certain
modifications. Approximately $1.9 million of the tax expense for the six month
ended June 30, 1999, related to franchise tax, primarily Texas franchise tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for operations are deposits
obtained from its market area, principal and interest payments on loans,
brokered deposits, and advances from the FHLB of Dallas and to a lesser extent,
from the sale of assets. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions, and
competition.
The primary investing activity of the Company has been the purchase of
discounted loans from various U.S. government agencies through the sealed bid
process or auctions and from private sector sellers. During the three and six
month periods ended June 30, 1999, the Company purchased $24.9 million and
$148.1 million of net loans, respectively as compared to purchases of $0 million
and $1.2 million for the same periods ended last year.
Loan originated during the three and six months ended June 30, 1999
totaled $34.7 million and $56.5 million, respectively as compared to $7.8
million and $17.5 million for the same periods last year.
The Company's primary financing activity has been the attraction of
deposits. During the six months ended June 30, 1999, the Company experienced an
increase in deposits of $31.8 million, primarily comprised of a decrease in
retail deposits of $77.2 million and an increase of $109.0 million in brokered
deposits.
9
The Company has the ability to borrow additional funds from the FHLB by
pledging assets as collateral, subject to certain restrictions. At June 30,
1999, the Company had an undrawn advance arrangement with the FHLB for $173.9
million.
The Bank is required to maintain minimum levels of liquid assets as
defined by the Texas Savings and Loan Department ("Texas Department"). Unless
approved in advance by the Texas Department, a Texas savings bank is required to
maintain a minimum of 10% of the previous quarters average deposits in liquid
assets. At June 30, 1999, the Bank's liquidity ratio was 17.2%.
The Company's most liquid asset is cash and cash equivalents. The level of
cash equivalents is dependent on the company's operating, financing, and
investing activities during any given period. At June 30, 1999 the Company had
cash and cash equivalents of $100.2 million.
The Company anticipates that it will have sufficient funds available to
meet its current foreseeable commitments. At June 30, 1999, the Company had
commitments to originate loans of $10.9 million and no outstanding commitments
to purchase loans. Certificates of deposits which are scheduled to mature in one
year of less at June 30, 1999 totaled $812.5 million. Due to the Company's high
interest rate spread, management has typically relied upon interest rate
sensitive short-term deposits to fund its loan purchases. The Company believes
that its overall cost of raising deposits is less then those institutions that
raise deposits through a costly branch network. Because of the Company's high
yield on interest-earning assets, the Company believes the potential interest
rate risk of relying on short-term deposits is acceptable and that it can
maintain an acceptable net interest spread.
At June 30, 1999, the Bank exceeded each of its three capital
requirements. The following is a summary of the Bank's regulatory capital
position at June 30, 1999.
AT JUNE 30, 1999
-----------------------------------------
REQUIRED ACTUAL
------------------ --------------------
Amount Percent Amount Percent
------ ------- ------ -------
Leverage capital $68,909 5.0% $197,831 14.4%
Tier 1 capital 58,138 6.0% 197,831 20.4%
Total risk-based capital 96,897 10.0% 209,954 21.7%
On October 13, 1997, the Texas Department notified the Bank's Board of
Directors that they were rescinding the requirement that the Bank maintain
minimum capital requirements of 9% for Tier 1 capital and 11% for risk-based
capital, based upon an acceptable business plan submitted to the Texas
Department by the Bank. The business plan on file with the Texas Department
generally anticipates a decline in total assets, absent the Company being the
successful bidder for additional bulk asset purchases; a continued improvement
in the company's level of classified assets; the discontinuation of the
company's foreign lending program; and the Bank maintaining a Tier 1 capital
ratio of at least 10%. The Texas Department must be provided with prior written
10
notice of any actions planned or anticipated that might reasonably be expected
to result in a material deviation form the business plan. The Bank requested and
received approval to deviate from the business plan during the last quarter of
1998 due to the bulk purchase of single family residential loans. The Bank is in
the process of revising its business plan. It is anticipated that the revised
business plan will show continued growth, a manageable level of classified
assets and the Bank maintaining its well capitalized status.
YEAR 2000
The company's Year 2000 project team has continued its efforts to ensure
that all mission critical and business essential system will continue to operate
through the transition to the next century.
The project team has completed the various phases of the project:
o Assessment - All systems were analyzed to identify mission critical systems
and processes.
o Renovation - Modifications were made to software, hardware and firmware to
make all system, including mission critical systems, Y2K complaint.
o Validation - Testing of all systems, including mission critical systems were
completed by the March 31, 1999.
o Implementation - All renovated software, firmware, and hardware is now being
used in production on a daily basis.
o Contingency Planning- A Business Resumption Contingency Plan (BRCP) was
completed by the end of June 1999. Validation of the BRCP has also been
completed.
o Year 2000 status information has been mailed to customers.
Current Y2K Activities include:
o Contingency plans are being revised based upon the BRCP validation process.
o Contingency training is being planned for all employees.
o Information brochures are being prepared to advise customers and the general
public of the banks current Y2K status.
o An Event Management plan has been developed and documented. The purpose of
the Event Management plan has been developed and documented. The purpose of
the Event management plans is to ensure that there is a smooth transition
into the year 2000.
11
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 Company's operations. Nearly all the
assets and liabilities of the corporation are financial, unlike most industrial
companies. As a result, the Company's performance is directly impacted by
changes in interest rates, which are indirectly influenced by inflationary
expectations. Since the Company has historically placed more emphasis on
increasing net interest margin rather than on matching the maturities of
interest rate sensitive assets and liabilities, changes in interest rates may
have a greater impact on the Company's financial condition and results of
operations. Changes in investment rates do not necessarily move to the same
extent as changes in the price of goods and services.
RATIOS OF EARNING TO FIXED CHARGES
The company's consolidated ratios of earnings to fixed charges for the
three months ended June 30, 1999 are set forth below. Earnings used in computing
the ratios shown consist of earnings from continuing operations before taxes and
interest expense. Fixed charges, excluding interest on deposits, represent
interest expense on borrowings. Fixed charges, including interest on deposits,
represent all of the foregoing items plus interest on deposits. Interest expense
(other than on deposits) includes interest on FHLB borrowings, the Senior Notes
and other borrowed funds.
For the Three Months Ended
June 30, 1999
--------------------------
Excluding interest on deposits...... 13.8:1
Including interest on deposits...... 3.1:1
12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings. The Bank
is involved in various legal proceedings occurring in the ordinary course of
business. Management of the Bank, based on discussions with litigation counsel,
believes that such proceedings will not have a material adverse effect on the
financial condition or operations of the Bank. There can be no assurance that
any of the outstanding legal proceedings to which the Bank is a party will not
be decided adversely to the Company's interests and have a material adverse
effect on the financial position or results of operations of the Company.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
13
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEAL FINANCIAL CORPORATION
Registrant
Date: August 16, 1999 /s/ D. Andrew Beal
---------------------------------
D. Andrew Beal, Chairman
Date: August 16, 1999 /s/ James W. Lewis, Jr.
---------------------------------
James W. Lewis, Jr.
Chief Accounting Officer