UNITED STATES
                           SECURITIES AND EXCHANGE COMMISSION
                                  WASHINGTON, DC  20549

                                        FORM 10-K

[X]   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 [FEE REQUIRED]

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                           OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         COMMISSION FILE NUMBER 33-93312


                           BEAL FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)


      TEXAS                                                 75-2583551
(State or other  jurisdiction                             (IRS  Employer
 of incorporation or organization)                        Identification No.)


SUITE 300, LB 66, 15770 NORTH DALLAS PARKWAY, DALLAS, TEXAS          75248
(Address of principal executive offices)                           (Zip Code)


Registrant's telephone number, including area code:    (972) 404-4000


           Securities Registered Pursuant to Section 12(b) of the Act:

                                      NONE

           Securities Registered Pursuant to Section 12(g) of the Act:

                                      NONE

                                (Title of class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO .

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

      The aggregate market value of the voting stock held by  non-affiliates  of
the registrant  was $0, as all shares of the Registrant  were held by affiliates
of the Registrant at December 31, 1999.

      As of December 31, 1999, there were issued and outstanding  300,000 shares
of the Registrant's Common Stock.

                           DOCUMENTS INCORPORATED BY REFERENCE

      None.



<PAGE>

                               TABLE OF CONTENTS


ITEM 1.     BUSINESS.........................................................1
      General................................................................1
      Forward-Looking Statements.............................................2
      Lending Activities.....................................................2
            GENERAL..........................................................2
            CONTRACTUAL PRINCIPAL REPAYMENTS.................................6
            GEOGRAPHIC DISTRIBUTION OF REAL ESTATE SECURED LOANS.............7
      Loan Acquisition, Resolution, Origination and Sale Activities..........9
            GENERAL..........................................................9
            ORIGINATIONS, PURCHASES AND SALES OF MORTGAGE LOANS.............10
            ACQUISITION OF LOANS............................................11
            ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING................13
            MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING.................13
            CONSTRUCTION, DEVELOPMENT AND LAND LENDING......................14
            CONSUMER LENDING................................................15
            COMMERCIAL BUSINESS LENDING.....................................15
      Loan Delinquencies and Non-Performing Assets..........................16
            OTHER LOANS OF CONCERN..........................................17
            CLASSIFIED ASSETS...............................................18
            ALLOWANCE FOR LOAN LOSSES.......................................18
      Investment Activities.................................................21
            GENERAL.........................................................21
      Sources of Funds......................................................21
            GENERAL.........................................................21
            DEPOSITS........................................................22
            BORROWINGS......................................................24
      Subsidiaries of the Company...........................................25
      Subsidiaries of the Bank..............................................25
            BEAL MORTGAGE,  INC.  ("BMI"),  BEAL PROPERTIES,  INC. ("BPI") AND
                  BEAL/H.S., INC ("BHS")....................................26
            LOAN ACCEPTANCE CORP. ("LAC")...................................26
            BRE, INC. ("BRE")...............................................26
            BEAL AFFORDABLE HOUSING, INC. ("BAH")...........................26
      Competition...........................................................27
      Employees.............................................................27
      Regulation............................................................27
            GENERAL.........................................................27
            TEXAS LAW AND SUPERVISION BY THE TEXAS DEPARTMENT...............27
            FEDERAL REGULATION OF STATE-CHARTERED SAVINGS BANKS.............28
            INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC................29
            REGULATORY CAPITAL  REQUIREMENTS AND PROMPT CORRECTIVE  REGULATORY
                  ACTION....................................................30
            LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS........32
            LIQUIDITY.......................................................32
            QUALIFIED THRIFT LENDER TEST....................................32
            COMMUNITY REINVESTMENT ACT......................................33
            TRANSACTIONS WITH AFFILIATES....................................33
            HOLDING COMPANY REGULATION......................................33
            FEDERAL SECURITIES LAW..........................................33
            FEDERAL RESERVE SYSTEM..........................................34
            FEDERAL HOME LOAN BANK SYSTEM...................................34
      Federal and State Taxation............................................34
            TEXAS STATE INCOME TAXATION.....................................35
            DELAWARE TAXATION...............................................35

ITEM 2.     PROPERTIES......................................................35

ITEM 3.     LEGAL PROCEEDINGS...............................................36

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............36

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS.............................................36

ITEM 6.     SELECTED FINANCIAL DATA.........................................37


                                      i

<PAGE>



ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS.......................................39
      General...............................................................39
      Financial Condition...................................................39
      Results of Operations.................................................40
            GENERAL.........................................................40
      Comparison of Operating  Results for the fiscal year ended  December 31,
            1999
       and twelve months ended December 31, 1998............................43
      Comparison of Operating Results for the Year Ended December 31, 1998
       and Year Ended December 31, 1997.....................................44
            NET INCOME......................................................44
            NET INTEREST INCOME.............................................44
            INTEREST INCOME.................................................44
            INTEREST EXPENSE................................................44
            PROVISION FOR LOAN LOSSES.......................................44
            NON-INTEREST INCOME.............................................44
            NON-INTEREST EXPENSE............................................44
            INCOME TAXES....................................................44
      Liquidity and Capital Resources.......................................44
      Impact of Inflation and Changing Prices...............................45
      Ratios of Earnings to Fixed Charges...................................46

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......46

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION..............48

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE.............................70

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS................................70
      Directors of Beal Financial ..........................................70
      Executive Officers of the Company.....................................70
      Board of Directors of the Bank........................................70
      Executive Officers of the Bank........................................71
      Meetings  and  Committees  of the Board of  Directors of the Company
       and the Bank.........................................................72
      Compensation Committee Interlocks and Insider Participation...........73
      Compensation of Directors.............................................73

ITEM 11.    EXECUTIVE COMPENSATION..........................................74
      Compensation of Executive Officers....................................74
      Executive Bonus Plan..................................................74
      Benefits..............................................................75

ITEM 12.    STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS....................76

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................76
      Certain Transactions..................................................76

ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
            FORM 8-K........................................................77


                                      ii

<PAGE>



                                    PART I


ITEM 1.     BUSINESS

GENERAL

      Beal Financial Corporation ("Beal Financial" and with its subsidiaries the
"Company"), a Texas corporation, was organized by the stockholders of Beal Bank,
SSB (the "Bank") for the purpose of  acquiring  all of the  outstanding  capital
stock of the Bank, which it indirectly owns through its wholly owned subsidiary,
Beal Banc  Holding  Company,  a Delaware  corporation.  Beal  Financial is owned
primarily  by D.  Andrew  Beal,  Chairman of the Board of Beal  Financial.  Beal
Financial,  through Beal Banc Holding Company, acquired ownership of the Bank in
July 1995 and is subject to regulation by the Office of Thrift  Supervision (the
"OTS").  The most significant asset of Beal Financial is its indirect  ownership
of the capital  stock of the Bank.  At December  31,  1999,  the business of the
Company  consisted  primarily of the business of the Bank and its  subsidiaries.
All references to the Company, unless otherwise indicated, prior to July 1, 1995
refer  to its  subsidiaries,  including  the  Bank  and  its  subsidiaries  on a
consolidated  basis.  In calendar year 1996, the Company changed its fiscal year
end from  June 30 to  December  31 in  connection  with its tax  election  to be
treated as a Subchapter S corporation. See "Federal and State Taxation - Federal
Taxation."

      The Bank, a privately held  Texas-chartered  savings bank headquartered in
Dallas, Texas, was originally chartered in 1985 as a Texas-chartered savings and
loan  association.  Effective  December 1, 1994,  the Bank  converted to a Texas
savings bank  charter.  This  conversion  was made  primarily  to eliminate  the
duplicative  regulation  and  supervision of the Bank by the OTS and the Federal
Deposit Insurance Corporation (the "FDIC").  Prior to December 1994, the name of
the Bank was "Beal Banc, S.A." See "Regulation."

      Beal Financial is subject to regulatory  oversight and  examination by the
OTS and the Texas Savings and Loan Department (the "Texas Department"). The Bank
is subject to regulation by the Texas Department,  as its chartering  authority,
and by the  FDIC  as a  result  of its  membership  in the  Savings  Association
Insurance  Fund  ("SAIF")  administered  by the FDIC,  which  insures the Bank's
deposits up to the maximum extent  permitted by law. The Bank also is subject to
certain  regulation  by the Board of  Governors  of the Federal  Reserve  System
("Federal  Reserve  Board") and  currently  is a member of the Federal Home Loan
Bank ("FHLB") of Dallas,  one of the 12 regional  banks which  comprise the FHLB
System.

      The Company's  primary business has  historically  consisted of purchasing
pools  of  performing  and,  to  a  lesser  extent,   purchasing  and  resolving
non-performing   mortgage  loans.  In  each  case  such  loans  are  secured  by
single-family  (one to four units)  residences,  multi-family  residential  real
estate (over four units),  commercial  real estate and, to a much lesser extent,
undeveloped  land and business  assets.  These loans are generally  purchased at
discounts  from  the  principal  balances  of  the  loans  ("discounted  loans")
primarily from the U.S. Department of Housing and Urban Development ("HUD"), the
FDIC and private sector sellers located nationwide.  The Company had purchased a
significant  amount of discounted  loans from the Resolution  Trust Company (the
"RTC") prior to December 31, 1995, the date of the RTC's termination.  Although,
the Company's  current business strategy  emphasizes the ongoing  identification
and  purchase of  discounted  loans,  primarily  secured by real  estate,  which
management  believes are  undervalued  due to market,  economic and  competitive
conditions,  due to the  termination  of the RTC and increased  competition  for
these assets,  the supply of discounted  loans meeting the Company's  investment
criteria has steadily decreased.  As a result there has been a steady decline in
discounted  loan  purchases.  Recent  purchases,  particularly  loans secured by
single-family  residences,  have been at approximately their aggregate principal
balance  at  the  time  of  purchase.  See  "-  Loan  Acquisition,   Resolution,
Origination and Sale Activities."

      The Company originates  commercial real estate,  land and land development
loans primarily  within its primary market area and other areas within the state
of Texas. The Company  considers its primary market area for deposits to consist
of Collin, Dallas, Denton, Ellis, Kaufman, Rockwall, Fort Bend, Harris, Liberty,
Montgomery and Waller  counties,  Texas.  These counties  consist of communities
comprising the Dallas and Houston metropolitan statistical areas, respectively.


                                      1

<PAGE>



     In addition to its loan  purchasing  and  lending  activities,  the Company
engages in direct equity real estate  investments,  including the development of
residential lots through the Bank's subsidiaries,  Beal Mortgage,  Inc. ("BMI"),
Beal  Properties  Inc.  ("BPI") and Beal/H.S.  Inc.  ("BHS") and through various
single  purpose  subsidiaries.  At December 31, 1999,  the Company's real estate
held  for  development  totaled  $16.3  million.  BMI and BPI  also  held in the
aggregate $9.9 million of income producing properties  (primarily  consisting of
the buildings  located  adjacent to the Bank's corporate  headquarters).  See "-
Subsidiaries of the Bank."

     In  addition,  the  Company  is engaged in the  ownership  of  multi-family
projects  that  qualify for  low-income  housing tax credits  through the Bank's
subsidiary,  Beal Affordable Housing ("BAH").  BAH has invested a total of $23.9
million in three affordable  housing  apartment  buildings at December 31, 1999.
See "-  Subsidiaries  of the Bank" and "-  Regulation  - Federal  Regulation  of
State-Chartered Savings Banks."

      The Bank funds its discounted loan purchases,  loan  originations and real
estate investments primarily through the attraction of deposits from the general
public,  including brokered deposits,  and, to a lesser extent,  borrowings from
the FHLB of Dallas and other  sources.  The Bank has branch  offices  located in
Dallas and Houston, Texas. See "Sources of Funds - Deposits."

      At December 31, 1999,  the Bank was a "well  capitalized  institution"  as
defined in FDIC  regulations  and had tier 1 capital to total assets  ("leverage
capital ratio"), tier 1 capital to risk-weighted assets ("tier 1 capital ratio")
and total capital to risk-weighted  assets ("total risk-based capital ratio") of
14.89%, 20.39% and 21.58%, respectively.

     The  executive  offices  of the  Company  are  located  at 15770 N.  Dallas
Parkway, Suite 300, Dallas, Texas 75248. Its telephone number at that address is
(972) 404-4000.

FORWARD-LOOKING STATEMENTS

      When  used in this Form 10-K or future  filings  by the  Company  with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive officer,  the words or phrases "will likely
result," "are  expected  to," "will  continue,"  "is  anticipated,"  "estimate,"
"project,"  "believe" or similar  expressions  or by use of the negative of such
terminology  are intended to identify  "forward-looking  statements"  within the
meaning of the Private  Securities  Litigation  Reform Act of 1995.  The Company
wishes  to  caution   readers   not  to  place   undue   reliance  on  any  such
forward-looking statements,  which speak only as of the date made, and to advise
readers  that  various  factors,   including   regional  and  national  economic
conditions,  particularly in the market areas the Company  operates,  changes in
the domestic or foreign business, financial and securities markets, financial or
legal  conditions,  changes in  prevailing  interest  rates and the credit risks
related  to  the  Company's  lending  activities,  and in  the  competitive  and
regulatory factors affecting financial  institutions and the availability of and
costs  associated  with sources of  liquidity,  all could  affect the  Company's
financial  performance  and could cause the Company's  actual results for future
periods to differ materially from those anticipated or projected.

      The  Company  does  not   undertake,   and   specifically   disclaims  any
obligations,  to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated  events or circumstances  after the date of such
statements.

LENDING ACTIVITIES

      GENERAL.  Commencing  in  1990,  the  Company  began  purchasing  pools of
performing  and,  to a  lesser  extent,  non-performing  discounted  loans.  The
discounted  loans  which  have been  acquired  by the  Company  to date  consist
primarily of single-family and multi-family  residential loans,  commercial real
estate  loans,  land,  consumer and  commercial  business  loans which have been
acquired  from the RTC, the FDIC and the HUD,  primarily in auctions of pools of
loans acquired by those  agencies from failed  financial  institutions  and to a
much lesser extent,  private sector  sellers.  Beginning in 1998, as a result of
the Company being unable to identify and purchase  discounted  loans meeting the
Company's  investment  objectives,  the Company  began  purchasing a significant
amount  of  predominately  performing  loans at  approximately  their  aggregate
principal  balance at the time of purchase or at a discount  significantly  less
than in prior years.


                                      2

<PAGE>



      At December  31, 1999 the  Company's  gross loan  portfolio  totaled  $1.3
billion.  The Company's  unaccreted  purchase discounts and fees at December 31,
1999 totaled $154.1 million.  The Company's gross loan portfolio at December 31,
1999 was comprised primarily of one- to four-family  residential  mortgage loans
(35.94%),  commercial  real estate loans (22.51%) and  multi-family  residential
real estate loans  (19.90%).  The balance of the gross loan portfolio  included,
construction,  development and land loans  (15.76%),  consumer loans (3.77%) and
commercial  business loans (2.12%).  At December 31, 1999 the Company's net loan
portfolio totaled $1.1 billion. The Company's net loan portfolio at December 31,
1999 was comprised primarily of one- to four-family  residential  mortgage loans
(40.60%),  commercial  real estate loans (22.81%) and  multi-family  residential
real estate  loans  (17.43%).  The balance of the net loan  portfolio  included,
construction,  development and land loans  (13.31%),  consumer loans (3.69%) and
commercial business loans (2.16%).

      At December 31, 1999,  approximately  20.80% of the  Company's  gross real
estate  mortgage  loans  (excluding  one-  to  four-family   junior  lien  loans
classified as consumer loans) were secured by real estate properties  located in
Texas. The Company also has loans secured by real estate  properties  (excluding
one- to  four-family  junior  lien  loans)  located in  California,  Florida and
Massachusetts, representing 24.47%, 11.55% and 5.15% of the Company's gross loan
portfolio,  respectively. At December 31, 1999, there were no other states where
loans secured by real estate  properties  (excluding one- to four-family  junior
lien loans) exceeded 5%. The balance of the Company's real estate mortgage loans
were secured by properties located in the northeast, the midwest, and throughout
the rest of the United  States.  See "- Geographic  Distribution  of Real Estate
Secured Loans."

      Texas law limits the maximum  amount the Bank may lend to one  borrower or
group of related  borrowers  to the greater of  $500,000,  or 15% of  unimpaired
capital and  surplus.  At December 31,  1999,  the Bank's loans to-one  borrower
limit was $31.9 million. At that date, the largest amount outstanding to any one
borrower or group of affiliated  borrowers  consisted of two loans,  aggregating
$19.3 million, net, secured by a first lien on 495 acres in Collin County plus a
first lien on both a 46 acre  retail  tract and a 27 acre  retail  tract both in
Collin County.  This loan is further  secured by a second lien on  approximately
1,100 acres also in Collin County. The Bank's next largest  relationship totaled
$16.3  million,  net primarily  secured by a first lien on  approximately  1,300
acres in Austin, Texas. See "Construction, Development and Land Lending."

      The  Company  has two  other  loans to any  borrower  or group of  related
borrowers in excess of $15 million,  net (aggregating $30.4 million,  net), four
other lending  relationships in excess of $10 million,  net  (aggregating  $46.0
million),  an additional six such lending relationships in excess of $5 million,
net (aggregating $45.8 million) and an additional 38 such lending  relationships
in excess of $2 million, net (aggregating $121.7 million). At December 31, 1999,
six of these lending  relationships  in excess of $2 million,  net,  aggregating
$36.0 million were non-performing.  See "- Loan Delinquencies and Non-Performing
Assets."


                                      3

<PAGE>



      LOAN PORTFOLIO  COMPOSITION.  The following  table sets forth  information
concerning the  composition of the Company's loan  portfolio,  in dollar amounts
and in percentages  (before  deductions for loans in process,  deferred fees and
discounts and allowances for losses) as of the dates indicated.


<TABLE>
<CAPTION>

                                 June 30,                                       December 31,
                             ----------------    ---------------------------------------------------------------------------
                                   1996                1996                1997               1998                1999
                             ----------------    ---------------------------------------------------------------------------
                             Amount   Percent     Amount  Percent    Amount   Percent    Amount   Percent   Amount   Percent
                             ------  --------    -------- --------  -------   -------    ------   -------   ------   -------
<S>                             <C>    <C>        <C>    <C>          <C>    <C>          <C>       <C>       <C>      <C>
                                                       (Dollars in Thousands)
REAL ESTATE LOANS:
 One- to four-family......$  273,780    22.47% $  276,591   19.37% $  213,584   18.60% $  490,717   38.93%  $477,847   35.94%
 Commercial...............   321,385    26.38     388,460   27.20     337,825   29.42     236,252   18.74    299,224   22.51
 Multi-family.............   341,696    28.05     466,697   32.68     321,423   27.99     270,337   21.45    264,590   19.90
 Construction, development
  and land................   185,180    15.20     170,121   11.91     169,882   14.79     142,108   11.28    209,504   15.76
                            --------   ------   ---------  ------    --------  ------    --------   -----   --------   -----
   Total real estate loans 1,122,041    92.10   1,301,869   91.16   1,042,714   90.80   1,139,414   90.40  1,251,165   94.11

OTHER LOANS:
 Consumer Loans:
  One- to four-family -
   junior liens...........    50,146     4.12      77,528    5.43      71,465    6.22      47,992    3.81     31,243    2.35
  Timeshares..............     7,809      .64       6,446     .45       3,615     .31       2,432     .19      1,832    0.14
  Automobile..............        59      ---          19     ---           1     ---      31,878    2.53     14,331    1.08
  Other...................     8,314      .69       7,076     .50       5,002     .44       3,121     .25      2,598    0.20
                            --------   ------    --------  ------    --------  ------    --------   -----   --------   -----
   Total consumer loans...    66,328     5.45      91,069    6.38      80,083    6.97      85,423    6.78     50,004    3.77
 Commercial business loans    29,886     2.45      35,131    2.46      25,554    2.23      35,537    2.82     28,224    2.12
                            --------   ------    --------  ------    --------  ------    --------   -----   --------   -----
   Total other loans......    96,214     7.90     126,200    8.84     105,637    9.20     120,960    9.60     78,228    5.89

   Total loans............ 1,218,255   100.00%  1,428,069  100.00%  1,148,351  100.00%  1,260,374  100.00% 1,329,393  100.00%
                                       ======              ======              ======              ======             ======

LESS:
 Loans in process.........    27,172               16,364              16,806               7,493             46,555
 Deferred fees and
 discounts                   281,837              344,312             231,800             193,468            154,085
 Allowance for loan losses    11,832               13,189              11,912              13,867             12,344
   Total loans receivable,
    net...................$  897,414           $1,054,204          $  887,833          $1,045,546         $1,116,409
                          ==========           ==========          ==========          ==========         ==========

</TABLE>


                                      4

<PAGE>



      The following table sets forth  information  concerning the composition of
the Company's loan portfolio after deduction for loans in process, deferred fees
and discounts, allowance for loan losses and loans held for sale at December 31,
1999.

<TABLE>
<CAPTION>

                                              AT DECEMBER 31, 1999

                                                                              Deferred
                                                                              Fees and
                                                                             Discounts
                                                                                as a
                            Gross             Deferred  Allowance            Percentage
                            Loan     Loans in Fees and   for Loan             of Gross
                           Amount    Process  Discounts   Losses      Net      Loans
                         ---------------------------------------------------------------
<S>                           <C>    <C>         <C>      <C>            <C>    <C>
                                             (Dollars In Thousands)
REAL ESTATE LOANS:
  One- to four-family -
   first liens..........     477,847      ---    19,248      5,321    453,278      4.03%
  Commercial............     299,224      ---    43,321      1,250    254,653     14.48
  Multi-family..........     264,590      ---    68,965      1,069    194,556     26.06
  Construction,
   development and land.     209,504   46,555    13,774        546    148,629      6.57
                           ---------   ------   -------     ------  ---------
    Total real
     estate loans.......   1,251,165   46,555   145,308      8,186  1,051,116     11.61

OTHER LOANS:
Consumer Loans:
  One- to four-family -
   junior liens.........      31,243      ---     2,343      1,476     27,424      7.50
  Timeshares............       1,832      ---       203        855        774     11.08
 Automobile.............      14,331      ---     2,092        985     11,254     14.60
  Other.................       2,598      ---       359        447      1,792     13.82
                           ---------   ------   -------     ------  ---------
  Total consumer loans..      50,004      ---     4,997      3,763     41,244      9.99
Commercial business
  loans.................      28,224      ---     3,780        395     24,049     13.39
                           ---------   ------   -------     ------  ---------
   Total other loans....      78,228      ---     8,777      4,158     65,293     11.22
 Total loans............   1,329,393   46,555   154,085     12,344  1,116,409     11.59%

Less:
   Loans in process.....      46,555  (46,555)
   Deferred fees and
    discounts...........     154,085           (154,085)
   Allowance for losses.      12,344                           ---
   Loans Held for Sale,
    net.................         ---
                           ---------   ------   -------     ------  ---------     -----
    Total loans
     receivable, net....   1,116,409      ---       ---     12,344  1,116,409
                           ========= ======== =========     ======  =========


</TABLE>


                                         5

<PAGE>



      CONTRACTUAL PRINCIPAL  REPAYMENTS.  The following schedule illustrates the
contractual maturity of the Company's loan portfolio at December 31, 1999. Loans
which have  adjustable or  renegotiable  interest rates are shown as maturing in
the period  during which the contract is due. The schedule  does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>
                                         Real Estate
                      -----------------------------------------------------
                                                              Construction,
                      One- to Four-                            Development            Commercial
                         Family      Multi-Family  Commercial   and Land   Consumer    Business    Total
                      -------------  ------------  ---------- ------------ --------   ----------   -----
<S>                      <C>            <C>            <C>       <C>            <C>    <C>          <C>
                                             (Dollars in Thousands)
      Due During
    Periods Ending
     December 31,
----------------------
2000..................   $    4,129  $  18,618   $  22,525   $  41,369     $  3,882    $16,257  $  106,780
2001 to 2004..........       27,778     59,530     134,425     103,401       17,307      5,649     348,090
2005 and following....      426,692    117,477      98,953       4,405       23,818      2,538     673,883
                          ---------  ---------   ---------   ---------     --------    -------  ----------
   Total..............      458,559    195,625     255,903     149,175       45,007     24,444   1,128,753

Less:
  Allowance for loan
   losses.............        5,321      1,069       1,250         546        3,763        395      12,344
                          ---------  ---------   ---------   ---------     --------    -------  ----------
  Total loans
   receivable, net....   $  453,278  $ 194,556   $ 254,653   $ 148,629     $ 41,244    $24,049  $1,116,409
                         =========   =========   =========   =========     ========    =======  ==========
</TABLE>


                                        6

<PAGE>



      The total  amount of gross  loans due after  December  31, 2000 which have
predetermined  interest rates is $524.4 million, while the total amount of gross
loans due after such date which have  floating or adjustable  interest  rates is
$497.6 million.

      Scheduled  contractual  principal  repayments  do not  reflect  the actual
maturities  of loans  because of  prepayments  and, in the case of  conventional
mortgage  loans,  due-on-sale  clauses.  The  average  life of  mortgage  loans,
particularly  fixed-rate  loans,  tends to increase  when current  mortgage loan
rates are  substantially  higher  than  rates on  existing  mortgage  loans and,
conversely,  decrease when rates on existing mortgages are substantially  higher
than current mortgage loan rates.  Further,  as a result of the use of the level
yield method or "interest method" of accretion of the purchase discount pursuant
to  generally  accepted  accounting  principles,  to the extent loan  repayments
exceed  scheduled loan  amortizations,  the accretion of the remaining  purchase
discount, if any, would be accelerated.

      GEOGRAPHIC  DISTRIBUTION OF REAL ESTATE SECURED LOANS. The Company's loans
are secured by properties  located  throughout the United States.  Some of these
loans are  located  in states  which are  reported  to be  experiencing  adverse
economic  conditions,  including a general  softening in real estate markets and
the local economies,  which may result in increased loan  delinquencies and loan
losses.  The Company attempts to address this geographic risk by only purchasing
loans that meet the Company's underwriting and investment standards.  Management
believes that purchasing loans secured by properties  located across the country
results in a diversified  loan  portfolio and overall lower risk. As of December
31, 1999 the Company's gross real estate  collateralized loans (excluding junior
liens secured by one- to  four-family  real estate  totaling $31.2 million) were
geographically distributed as follows:


<TABLE>
<CAPTION>

                           Outstanding               Non-performing
Total Real Estate Secured  Balance at       Percent    Balance at
   Loans By Geographic    December 31,     of Total   December 31,    Percent of
        Location             1999         Outstanding     1999       Non-performing
------------------------- ------------    ----------- -------------  --------------
<S>                            <C>           <C>        <C>           <C>
                                       (Dollars in Thousands)

California...............     294,767          24.47%     15,127        11.88%
Texas....................     250,542          20.80       3,782         2.97
Florida..................     139,111          11.55      40,898        32.12
Massachusetts............      62,051           5.15      25,873        20.32
All others...............     458,139          38.03      41,649        32.71
                           ----------         ------    --------       ------
Total real estate loan
portfolio................  $1,204,610         100.00%   $127,329       100.00%
                           ==========         ======    ========       ======
</TABLE>

      At December 31, 1999, there were no other loan concentrations in any other
state which exceeded five percent of the total real estate loan portfolio.



                                      7

<PAGE>



      The  following  tables  set  forth  the  geographic  distribution  of  the
Company's real estate loans by loan type at December 31, 1999.

<TABLE>
<CAPTION>

                                Outstanding             Non-performing
                                Balance at    Percent    Balance at
One- to Four-Family First Lien December 31,  of Total   December 31,        Percent of
 Loans by Geographic Location      1999     Outstanding     1999          Non-performing
------------------------------ ------------ ----------- -------------     --------------
<S>                                     <C>    <C>          <C>            <C>
                                              (Dollars in Thousands)

Texas.........................       95,716          20.03%     3,177            18.10%
California....................       69,029          14.45      3,326            18.94
Florida.......................       58,977          12.34      1,722             9.81
Virginia......................       30,865           6.46        410             2.33
Maryland......................       21,168           4.43        430             2.45
New York......................       16,089           3.37      1,074             6.12
Arizona.......................       15,252           3.19        387             2.20
Massachusetts.................       14,635           3.06        453             2.58
All others....................      156,116          32.67      6,576            37.47
                                  ---------        -------  ---------            -----
  Total One- to Four- Family
   Loans......................     $477,847         100.00%   $17,555           100.00%
                                  =========         ======    =======           ======

</TABLE>
<TABLE>
<CAPTION>

                                Outstanding              Non-performing
                                Balance at     Percent    Balance at
    Commercial Real Estate     December 31,   of Total   December 31,        Percent of
 Loans by Geographic Location      1999      Outstanding     1999          Non-performing
------------------------------ ------------ ------------ ------------      --------------
<S>                                <C>            <C>       <C>                 <C>
                                             (Dollars in Thousands)

California....................      136,915           45.76%    9,531           64.22%
Texas.........................       32,434           10.84       472            3.18
Florida.......................       27,868            9.31     1,098            7.40
Connecticut...................       20,870            6.97       ---             ---
Massachusetts.................       18,949            6.33        14            0.10
New York......................       10,022            3.35         7            0.05
New Jersey....................        9,241            3.09        72            0.49
All others....................       42,925           14.35     3,646           24.56
                                   --------          ------   -------          ------
Total Commercial Real
Estate Loans..................     $299,224          100.00%  $14,840          100.00%
                                   ========          ======   =======          ======
</TABLE>
<TABLE>
<CAPTION>
                                Outstanding              Non-performing
                                Balance at       Percent    Balance at
     Multi-Family              December 31,     of Total   December 31,     Percent of
 Loans by Geographic Location      1999       Outstanding     1999        Non-performing
------------------------------ ------------  ------------ ------------    --------------
<S>                                <C>            <C>       <C>            <C>
                                             (Dollars in Thousands)
California....................       56,654           21.41%    1,468            1.65%
Florida.......................       48,025           18.15    35,953           40.34
Massachusetts.................       28,473           10.76    25,462           28.57
Texas.........................       27,522           10.40       ---             ---
South Carolina................       12,898            4.87    10,334           11.59
Arkansas......................       11,765            4.45     3,286            3.69
Colorado......................       11,519            4.35     6,567            7.37
Missouri......................        8,638            3.26     2,416            2.71
Nevada........................        8,511            3.22       ---             ---
All others....................       50,585           19.13     3,646            4.08
                                   --------          ------   -------          ------
  Total Multi-Family..........     $264,590          100.00%  $89,132          100.00%
                                   ========          ======   =======          ======
</TABLE>

                                      8

<PAGE>
<TABLE>
<CAPTION>
                                Outstanding             Non-performing
                                Balance at    Percent    Balance at
 Construction and Development  December 31,  of Total   December 31,   Percent of
 Loans by Geographic Location      1999     Outstanding     1999      Non-performing
------------------------------ ------------ ----------- ------------- --------------
<S>                                <C>            <C>    <C>               <C>
                                              (Dollars in Thousands)
Texas.........................       41,876      65.88%     ---       ---%
Tennessee.....................       10,991      17.29      ---       ---
California....................        7,400      11.65      ---       ---
Louisiana.....................        3,034       4.77      ---       ---
All others....................          250       0.41      ---       ---
                                    -------     ------     ----      ----
  Total Construction and
   Development Loans..........      $63,551     100.00%     ---       ---%
                                    =======     ======     ====      ====
</TABLE>

<TABLE>
<CAPTION>
                                Outstanding              Non-performing
                                Balance at     Percent    Balance at
          Land Loans           December 31,   of Total   December 31,  Percent of
    By Geographic Location         1999      Outstanding     1999     Non-performing
------------------------------ ------------ ------------ ------------ --------------
<S>                               <C>            <C>        <C>            <C>
                                             (Dollars in Thousands)
Texas.........................       52,990           53.31%        6            0.11%
California....................       24,726           24.88       838           14.45
Illinois......................        7,045            7.09       ---             ---
Florida.......................        4,257            4.28     2,275           39.21
All others....................       10,380           10.44     2,683           46.23%
                                    -------          ------   -------          ------
  Total Land Loans............      $99,398          100.00%  $ 5,802          100.00%
                                    =======          ======   =======          ======
</TABLE>

      The  following  table  sets  forth  the  geographic  distribution  of  the
Company's  junior  lien  loans  secured  by one-to  four-family  real  estate at
December 31, 1999.

<TABLE>
<CAPTION>
                                 Outstanding            Non-performing
                                 Balance at    Percent   Balance at
One- to Four-Family Junior Lien December 31,  of Total  December 31,       Percent of
 Loans by Geographic Location       1999     Outstanding    1999         Non-performing
------------------------------- ------------ ----------- ------------    --------------
<S>                                <C>            <C>        <C>              <C>
                                              (Dollars in Thousands)
California.....................        7,357         23.55%       759           22.70%
Texas..........................        6,447         20.64        805           24.09
Louisiana......................        3,630         11.62         94            2.82
New York.......................        2,859          9.15        319            9.54
Connecticut....................        2,056          6.58        368           10.99
Florida........................        1,391          4.45         21            0.62
Arizona........................        1,122          3.59        ---             ---
New Jersey.....................        1,051          3.36        300            8.98
All others.....................        5,330         17.06        677           20.26
                                     -------        ------     ------          ------
  Total One- to Four- Family
   Junior Lien Loans...........      $31,243        100.00%    $3,343          100.00%
                                     =======        ======     ======          ======
</TABLE>

LOAN ACQUISITION, RESOLUTION, ORIGINATION AND SALE ACTIVITIES

      GENERAL.  The Company historically has invested and intends to continue to
invest,  subject to market  conditions,  a  significant  amount of its assets in
discounted loans. The Company believes that under appropriate  market conditions
the acquisition of discounted  loans offers a better return than the origination
of mortgage  loans.  Historically,  discounted  loans  purchased  by the Company
generally  have  collateral  coverage  which is  substantially  in excess of the
purchase price of the loan. In addition,  the Company  believes that  discounted
loans can be purchased on terms which  result in the  investment  having a total
return  which  is  substantially  in  excess  of  an  equivalent  investment  in
originated mortgage loans.


                                      9
<PAGE>



      In recent years,  however,  the acquisition of discounted loans has become
more  competitive  in the  marketplace,  in  part  because  of the  presence  of
additional  competitors  for  discounted  loans offered by the HUD, the FDIC and
private  sector  sellers and because  the HUD and the FDIC  generally  sought to
increase the number of purchasers  of assets sold by them.  Although the Company
continues to review and bid to acquire a substantial amount of discounted loans,
the Company  does not believe it will be able to continue to acquire  discounted
loans in the future at either the same volumes or the same level of discounts as
experienced in the past.  Moreover,  the  significant  earnings  achieved by the
Company on the discounted  loan portfolio in earlier periods may be attributable
in part to early  resolution  of the  least  difficult  non-performing  loans in
acquired  pools.  As a  result,  there  can be no  assurance  that the  level of
earnings on discounted loans  experienced by the Company to date are necessarily
indicative of the results to be experienced in future periods or that there will
not be substantial periodic variations in the results from such activities.

      All  reviews of loans are  initially  performed  through  Loan  Acceptance
Corporation  ("LAC"),  a wholly owned subsidiary of the Bank, of which D. Andrew
Beal is  President.  LAC  places  bids on  pools of  loans  in  anticipation  of
assigning its interest in the loan pool to the Bank following  acceptance of its
bid. All purchases by the Bank are made within the  parameters  set by the Board
of  Directors  of the Bank for loan  purchases  and  originations,  as discussed
below.

      Since 1998 the Company has been focusing on increasing its  origination of
land  development,  land and  commercial  business  loans.  This effort is being
managed  by Chief  Executive  Officer  Meek.  Consistent  with the  intent of an
executive  bonus plan entered into between Mr. Meek and the Company in February,
1998, Mr. Meek is focusing on increasing the Company's loan originations.

     The Bank's  Senior  Loan  Committee,  comprised  of  Chairman  Beal,  Chief
Executive Officer Meek,  President/Chief  Operating Officer Hartman, Senior Vice
President - Lending Saurenmann, Senior Vice President - Commercial Loans Enright
and Senior Vice President - Compliance  Curl, may approve all loan purchases and
originations up to $1.0 million in net book value.  In addition,  this committee
may approve a  modification  or extension of an existing  loan when the Borrower
Balance is up to $1.0 million. (Any three members shall constitute a quorum.)

      The Bank's  Executive Loan  Committee,  comprised of Chairman Beal,  Chief
Executive  Officer Meek and  Directors  Fults,  Goldstein  and  Weinstein  (with
Directors  Hartman,  Arnold and Eastland  substituting for a missing member) may
approve,  with  at  least  three  affirmative  votes,  all  loan  purchases  and
originations  in excess of $1.0  million in net book value.  In  addition,  this
committee  may approve a  modification  or extension of an existing  loan with a
Borrower  Balance,  in excess of $1.0 million.  Notwithstanding  the above, full
Bank Board approval is required for all purchases of non-performing assets which
would result in the Bank's ratio of classified assets to total capital exceeding
or  projected  to exceed  70% at any  month-end.  (A quorum is  defined  as four
members, two of which must be non-officer Directors.)

      Loan sales,  sales of foreclosed assets and other significant loan related
transactions are approved in accordance with written policies requiring approval
by a designated  officer,  two officers or by an appropriate  Committee based on
the type of transaction and the Borrower Balance of the asset.

     ORIGINATIONS,  PURCHASES  AND SALES OF MORTGAGE  LOANS.  For the year ended
December  31,  1999,  the  Company  purchased  $315.4  million of loans,  net of
discount compared to $387.9 million during the year ended December 31, 1998, and
originated  $82.9  million  of loans  for the years  ended  December  31,  1999,
compared to $85.4 million during the year ended December 31, 1998.

     The Company  services $740.8 million of its gross loan portfolio  directly,
including  virtually all of its  multi-family  and commercial real estate loans,
construction,  development and land loans.  The Company relies on  approximately
137 other  entities to service the remaining  $542.0 million of its gross loans.
Of this amount, at December 31, 1999, six entities individually service loans in
excess of $10.0 million,  aggregating $408.4 million, or 75.28% of the Company's
loans serviced by others.  No other entity  services  individually  in excess of
$9.7 million of the  Company's  gross loan  portfolio.  The Company  attempts to
consolidate  the loan  servicing when feasible,  taking into  consideration  the
relative costs and performance of the servicing entity.


                                      10

<PAGE>
      The  following  table  shows  the  loan  origination,  purchase,  sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
                                          Year         Year          Year
                                         Ended        Ended         Ended
                                      December 31, December 31,  December 31,
                                      ------------ ------------  ------------
                                          1997         1998          1999
                                      ------------ ------------  ------------
<S>                                     <C>            <C>            <C>
ORIGINATIONS BY TYPE:
 ADJUSTABLE RATE:
 ----------------
  Real estate - one- to four-family. $      ---    $      ---    $       ---
                - multi-family......      4,684         2,915          1,925
                - commercial........      4,651         6,075          4,201
                - construction,
                   development and
                   land.............     47,342        40,312         61,842
   Commercial Business..............      5,000            59            ---
                                     ----------    ----------    -----------
         Total adjustable-rate......     61,677        49,361         67,968
 FIXED RATE:
 ----------
  Real estate - one- to four-family.        ---           ---          3,065
                - multi-family......        ---         4,000          4,800
                - commercial........      2,147           ---          1,837
                - construction,
                   development and
                   land.............     10,785        14,513          3,790
  Consumer - one- to four-family
   junior liens.....................        ---           ---            ---
                - other.............      1,984         2,173          1,488
  Commercial Business...............        ---        15,336            ---
                                     ----------    ----------    -----------
         Total fixed-rate...........     14,916        36,022         14,980
                                     ----------    ----------    -----------
         Total loans originated.....     76,593        85,383         82,948
 PURCHASES:
 ---------
  Real estate - one- to four-family.      9,166       348,644        122,607
                - multi-family......     24,740         6,791         64,127
                - commercial........    112,873         9,584        135,052
                - construction,
                   development and
                   land.............      8,949         2,596          2,285

  Consumer  - one- to four-family -
   junior liens.....................        520           ---            ---
                - automobile........        ---        36,022            ---
                - other.............         14           ---            ---
  Commercial business...............      1,447           277            ---
                                     ----------    ----------    -----------
         Total loans purchased,
          gross.....................    157,709       403,914        324,071
  Purchase discounts................     27,291        16,056          8,665
                                     ----------    ----------    -----------
         Total loans purchased, net.    130,418       387,858        315,406
  Percentage of purchase discounts
    to total gross loans purchased..       17.3%          4.0%           2.7%
 SALES AND REPAYMENTS:
 --------------------
  Real estate - one- to four-family.        ---           ---            ---
                - multi-family......        ---           ---            ---
                - commercial........        ---           ---             14
  Consumer  - one- to four-family -
  junior liens......................        ---           ---            ---
  Commercial business...............        ---           ---            ---
                                     ----------    ----------    -----------
         Total loans sold...........        ---           ---             14
   Principal repayments.............    333,592       340,569        341,009
                                     ----------     ---------     ----------
         Total sales and repayments.    333,592       340,569        341,023
  Other reductions (additions):
         Transfers to real estate
          owned.....................     83,144        16,283         16,522
         Unearned discounts.........    (44,673)      (44,633)       (36,547)
         Decrease in other items,
          net.......................      2,596         1,354          8,016
                                     ----------     ---------     ----------
  Net Increase (decrease)..........  $ (167,648)    $ 159,668     $   69,340
                                     ==========     =========     ==========
</TABLE>

      ACQUISITION  OF LOANS.  Many of the loans  purchased  by the  Company  are
performing  loans.  In order to determine the amount that it will bid to acquire
loans,  the Company  considers,  among other  factors,  the yield expected to be
earned, the geographic location of the loans,  servicing  restrictions,  if any,
the type and value of the  collateral  securing  the loan and the length of time
during which the loan has performed in accordance  with its repayment  terms. In
order  to  determine  the  amount  that it will  bid to  acquire  non-performing
discounted loans, in addition to the factors stated above, the Company estimates
the amounts it will realize  through its collection  efforts or foreclosure  and
sale of

                                      11

<PAGE>

the  security  property,  net of  expenses,  and the  length  of time and  costs
required to complete the collection or foreclosure process.

      Prior to  acquiring a pool of loans,  LAC utilizes  primarily  third-party
subcontractors  to conduct an acquisition  review of each loan pool. This review
includes an evaluation of the seller's representations and warranties and of the
adequacy of the applicable loan  documentation  (E.G.,  the existence of a note,
including  confirmation  of the  interest  rate and  outstanding  loan  balance,
mortgage,   title   policy,   borrower   financial   statements,   tax  returns,
environmental  reports,  etc.).  The current  value of the security  property is
estimated utilizing various methods, considering,  among other factors, the type
of property,  the loan  balance,  the recourse  nature of the debt,  the age and
performance  of the loan,  and the  resources of the  borrower.  For example,  a
performing,  well  seasoned pool of single family loans may receive a relatively
limited  collateral  value review  consisting  of a drive by appraisal of select
properties  by a local  broker.  As the value  and  complexity  of the  property
increases,  LAC's efforts to value the property also increase.  For larger, more
complex  loans,  LAC personnel  may visit the  collateral  property,  conduct an
internal  rental  analysis  of the  property,  or order  asset  searches  on the
borrowers  and/or  guarantors to identify other sources of repayment.  New title
searches and tax reports may also be obtained. LAC may also retain environmental
consultants to review potential  environmental  issues.  The amount of resources
devoted to valuing collateral property is determined on a case by case basis for
each pool acquired.

      An estimated value is prepared for each loan or pool of loans. The factors
considered  by LAC  include  the  current  status  of the loan and the  borrower
(including payment history, bankruptcy and litigation considerations) taxes due,
and,  if  non-performing,  estimated  foreclosure  costs  and  length of time to
conduct a foreclosure  sale in the applicable  state,  estimated  current market
value of the property based on a limited  marketing  period,  costs of taxes and
insurance and maintenance of the property  during the marketing  period and fees
and other costs incurred in connection  with the sale of the property.  All bids
are prepared by or subject to the approval of LAC's President, D. Andrew Beal.

      If LAC is the  successful  bidder,  a bid deposit,  if  required,  will be
forwarded to the selling entity.  Prior to a loan being acquired,  the Company's
lending  personnel,  supplemented if necessary or appropriate by subcontractors,
(generally  different than the ones who conducted the initial evaluation review)
perform a more in-depth review of the loan documents to determine and categorize
the extent of loan  documentation  deficiencies  and review  LAC's  analysis  of
value. The Company reviews loans by conducting a comprehensive inspection of all
documentation  relating to the loans and by obtaining  current  credit  reports,
when appropriate.  Depending on the  circumstances,  the Company's due diligence
team may use local counsel and engineering and environmental  experts, to assist
in the  evaluation and  verification  of this  information  and the gathering of
other  information  not previously  made  available by the seller.  For example,
there may be maintenance and occupancy  problems  associated with the collateral
which this additional review may reveal.  Based upon the review performed by the
Company's lending personnel, a recommendation is made to the appropriate Company
loan committee  which  determines  whether the Company should purchase the loans
covered by the bid. In the event that the Company's  applicable  loan  committee
declines to  purchase  the loans,  the right to purchase  may be sold to a third
party or LAC may forfeit its deposit or be subject to  additional  penalties  as
set forth in the contract, including the remedy of specific performance.

      Upon  purchase,  each loan  file is then  reviewed  by the loan  servicing
department to ensure the adequacy and completeness of the documentation securing
the  Company's  interest  in  the  underlying  collateral  and to  correct  loan
documentation,  and as  appropriate,  other file  deficiencies.  Large loans are
assigned to a loan officer.  Loan  resolution  alternatives  for  non-performing
loans  consist  primarily of the  following:  (i) the  borrower  brings the loan
current in accordance with original or modified terms,  (ii) the borrower repays
the loan,  (iii) the borrower agrees to deed the property to the Company in lieu
of  foreclosure,  in which case it is classified as a foreclosed  asset and held
for sale by the  Company,  and (iv) the Company  forecloses  on the loan and the
property is either acquired at the  foreclosure  sale by a third party or by the
Company, in which case it is classified as a foreclosed asset owned and held for
sale by the Company.  The loan officer  evaluates all available  information and
pursues the best expected  means of resolving the loan on the Company's  behalf.
In this regard, because the Company generally acquires non-performing loans at a
substantial discount from the outstanding  principal balance of the loan and the
value of the  underlying  collateral,  the Company has the ability to modify the
loan terms or otherwise make  concessions  to a borrower in the loan  resolution
process and still meet or exceed the targeted return to the Company.

      In the event of the  bankruptcy  of the  borrower,  the loan officer works
closely with the Company's  outside  counsel.  The loan officer  determines  the
appropriate  course of action,  such as filing a proof of claim,  moving to have
the stay lifted or establishing  procedures for monitoring the bankruptcy  plan.
The loan officer may also order property

                                      12

<PAGE>

inspections and ensures that a current  broker's  opinion or appraisal is in the
loan file.  Property  inspections  continue until the loan is brought current or
refinanced  or the  property  is sold.  A current  broker's  opinion of value is
confirmed or an appraisal is also  obtained  prior to any  foreclosure  sale for
bidding purposes.

      If a security  property becomes a foreclosed  asset, the Company obtains a
new appraisal unless a current  acceptable  appraisal is available.  The Company
then  determines  whether any  repairs  should be made to the  property  and the
initial  price to list the property  under  circumstances  which are intended to
result in the highest  possible return to the Company.  The Company then markets
the property and supervises the management of the property until it is sold. The
Company also  generally  retains a management  firm to manage its commercial and
multi-family  foreclosed assets. For information about the Company's  foreclosed
assets, see "- Loan Delinquencies and Non-Performing Assets."

      The Company  generally  anticipates  a three to eighteen  month  period to
resolve large  non-performing  commercial  and  multi-family  real estate loans,
which is longer  than it  generally  takes to resolve the  Company's  discounted
non-performing  single-family  residential  loans due to the complexity and wide
variety of issues  that may occur with  respect to a  delinquent  commercial  or
multi-family real estate loan. Unlike non-performing  single-family  residential
loans,  however,  non-performing  commercial and multi-family  real estate loans
frequently  provide some income to the Company,  which may be the case even in a
bankruptcy situation if a receiver has been appointed for the property.

      ONE- TO FOUR-FAMILY  RESIDENTIAL  MORTGAGE LENDING.  At December 31, 1999,
the Company's  one- to  four-family  residential  mortgage  loans totaled $477.8
million,  or 35.94% of the Company's  gross loan  portfolio.  At that date,  the
Company's net one- to four-family  residential  mortgage loan portfolio  totaled
$453.3  million,  or 40.60% of the  Company's  net loan  portfolio.  The Company
generally does not originate  one-to  four-family  residential  loans other than
loans made to facilitate the sale of foreclosed assets, however, the Company has
purchased such loans individually from correspondent  financial institutions and
brokers and has  purchased  large pools of these  loans at  approximately  their
aggregate principal balance at the time of purchase.

      MULTI-FAMILY  AND COMMERCIAL  REAL ESTATE  LENDING.  At December 31, 1999,
$299.2 million,  or 22.51% of the Company's  gross loan portfolio,  consisted of
loans secured by  commercial  real estate and $264.6  million,  or 19.90% of the
Company's  gross loan  portfolio,  consisted  of loans  secured by  multi-family
residential properties. At that date, $254.7 million, or 22.81% of the Company's
net loan  portfolio,  consisted of loans secured by  commercial  real estate and
$194.6  million,  or 17.43% of the  Company's net loan  portfolio,  consisted of
loans secured by multi-family residential properties.

     A number of the  multi-family  residential  loans were  purchased from HUD.
These loans were acquired by HUD pursuant to various  insurance  programs of the
FHA.  Under  programs of the FHA, a lending  institution  may assign a defaulted
FHA-insured  loan to HUD  because  of an  economic  hardship  on the part of the
borrower  which  precludes the borrower from making the scheduled  principal and
interest  payment on the loan. Once a loan is assigned to HUD, the FHA insurance
is paid and the loan is no longer  insured.  As a result,  none of the HUD Loans
are insured by the FHA.

     HUD assistance to borrowers is provided in the form of Provisional  Workout
Agreements  ("PWA") which are  forbearance  agreements  under which the borrower
either  makes a  monthly  payment  less  than or equal to the  original  monthly
payment or makes a monthly  payment  more than the original  monthly  payment to
make up for arrearages.  These  agreements vary in duration.  Under the terms of
the contract  governing  the sale of the HUD Loans,  the Company is obligated to
comply with the terms of any PWA until the term of the  agreement  expires or is
canceled pursuant to its terms or there is a default under the PWA.

      The terms of commercial and  multi-family  real estate loans originated by
the Company are individually  negotiated on a case by case basis. In addition to
the payment of principal and interest on these loans, the Company may receive an
additional fee or a share in the profits from the project upon the completion of
the  construction or  refurbishment  of the underlying  property.  The Company's
commercial and  multi-family  real estate loans provide for recourse against the
security  property  and,  in most  circumstances,  require  the  borrower  to be
personally liable for all or a portion of the loan.

      Multi-family  and commercial real estate loans are generally  underwritten
in  amounts  of up to 85% of the  lesser of cost or the  appraised  value of the
underlying  property.   Appraisals  on  properties  securing   multi-family  and
commercial real estate loans  originated by the Company are generally  performed
by an independent fee appraiser

                                      13

<PAGE>
designated  by  the  Company   before  the  loan  is  made.  All  appraisals  on
multi-family  and  commercial  real estate loans are  reviewed by the  Company's
management.   In  addition,  the  Company's   underwriting   procedures  require
verification of the borrower's credit history, financial statements,  references
and income projections for the property.

      While the Company  continues to monitor  multi-family  and commercial real
estate loans through its semi-annual  asset review process,  updated  appraisals
are not  normally  obtained  after  loan  purchase  or  origination  unless  the
Company's  asset review  process  raises  questions  regarding  the value of the
collateral.  In order to monitor the adequacy of cash flows on  income-producing
properties,  the borrower  normally  provides monthly  financial  statements and
other information including but not limited to information  pertaining to rental
rates and income,  maintenance  costs and an update of real estate  property tax
payments.

      Multi-family  and commercial real estate loans generally  present a higher
level of risk than do loans  secured  by one- to  four-family  residences.  This
greater risk is due to several factors, including the concentration of principal
in a limited  number of loans and  borrowers,  the  effects of general  economic
conditions on commercial  properties and the increased  difficulty of evaluating
and monitoring these types of loans. Furthermore, the repayment of loans secured
by  multi-family  and  commercial  real estate is typically  dependent  upon the
successful  operation of the related real estate project.  If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed), the
borrower's  ability to repay the loan may be  impaired.  Commercial  real estate
loans also involve many of the same risks discussed below regarding construction
loans.   The  Company  has  attempted  to  minimize   these  risks  through  its
underwriting  and  investment  standards  and by lending  primarily  on existing
income-producing  properties. At December 31, 1999, $104.0 million, or 18.44% of
the multi-family and commercial real estate gross loan portfolio, was delinquent
90 days or more,  substantially  all of which was purchased  non-performing.  At
that date, net  non-performing  multi-family  and  commercial  real estate loans
totaled $53.3 million.

     CONSTRUCTION,   DEVELOPMENT  AND  LAND  LENDING.   The  Company  originates
development loans to developers,  based on demonstrated experience and financial
condition,  primarily for the  development  of single  family lots.  These loans
increase the yield on, and the proportion of interest rate  sensitive  loans in,
the Company's portfolio.  At December 31, 1999,  development loans totaled $95.5
million or 7.18% of its gross loan portfolio and $62.5 million, net, or 5.60% of
the  Company's  net  loan  portfolio.  At  December  31,  1999 the Bank had nine
development  loans  in  excess  of $2.0  million,  all of which  are to  develop
properties  located in Texas,  except for one  development  property  located in
Southern  California,  one  development  property  located in Louisiana  and one
development  property located in Tennessee.  See "Lending Activities - General."
All of these loans are performing in accordance with their respective  repayment
terms.

      In addition to development loans, the Company originates and has purchased
land loans  secured by  residential  lots and land held for the  development  of
single-family lots and, to a much lesser extent,  loans secured by land utilized
for  agricultural  or ranching  purposes.  As of December 31,  1999,  land loans
totaled $114.0 million, or 8.58% of the Company's gross loan portfolio.  At that
date,  net land loans totaled $86.1  million,  or 7.7% of the Company's net loan
portfolio.  At  December  31,  1999 the Bank had 12 land loans in excess of $2.0
million,  with aggregate net balances of $70.5 million, the largest of which has
a net  balance of $16.0  million.  All of these loans are secured by land in the
metropolitan  areas of Los  Angeles  and Texas.   Land loans  originated  by the
Company are generally  underwritten  in amounts up to 65% of appraised value and
typically have terms that are individually  negotiated on a case-by-case  basis.
The majority of land loans have adjustable rates of interest and some may have a
profit participation interest.

      Development  and land lending is generally  considered to involve a higher
level of credit risk than permanent one- to four-family residential lending, due
to the  concentration  of principal in a limited  number of loans and  borrowers
and/or the effects of general economic conditions on development projects,  real
estate developers,  managers or homebuilders.  In addition,  the nature of these
loans is such that they are more difficult to evaluate and monitor.  These loans
also  involve  many  of  the  same  risks  discussed  regarding  commercial  and
multi-family loans and tend to be more sensitive to general economic  conditions
than many other types of loans. The Company's risk of loss on a development loan
is dependent largely upon the accuracy of the initial estimate of the property's
value upon completion of the project and the estimated cost (including interest)
of  the  project.   Because  of  the   uncertainties   inherent  in   estimating
developmental  costs and the  market  for the  project  upon  completion,  it is
relatively  difficult to evaluate  accurately  the total loan funds  required to
complete a project,  the  related  loan-to-value  ratios and the  likelihood  of
ultimate  success of the project.  If the estimate of development cost proves to
be  inaccurate,  the Company may be required to advance  funds beyond the amount
originally  committed  in order to  permit  completion  of the  project.  If the
estimate of value proves to be inaccurate,  the Company may be confronted, at or
prior to the maturity of the loan, with a project having

                                      14
<PAGE>



a value which is  insufficient  to assure  full  repayment.  When loan  payments
become due,  borrowers may  experience  cash flow from the property which is not
adequate to service  total debt.  In such cases,  the Company may be required to
modify the terms of the loan.  The Company  attempts to mitigate  these risks by
dealing primarily with experienced developers.  In addition the Company monitors
the  development's  progress  prior to each draw  against  the  loan.  See "Loan
Delinquencies and Non-Performing Assets."

      At December 31, 1999, there were no single-family  construction  loans, no
development  loans, and 20 land loans with aggregate gross principal balances of
$5.8 million delinquent 90 days or more. At that date, net  non-performing  land
loans totaled $4.1 million.

      CONSUMER  LENDING.  At December 31, 1999,  the  Company's  consumer  loans
totalled $50.0 million or 3.77% of the Company's gross loan portfolio,  of which
$31.2 million were  purchased  one-to four family  junior lien loans,  and $14.3
million were purchased  sub-prime  automobile  loans. At that date, net consumer
loans totaled  $41.2  million,  or 3.69% of the Company's net loan  portfolio of
which $27.4 million were one-to-four  family junior lien loans and $11.3 million
were automobile loans.

      Prior to May, 1996, the Company  indirectly  originated and purchased one-
to  four-family  junior lien loans from  correspondent  financial  institutions,
brokers  and home  improvement  contractors.  Although  the  loan  documentation
utilized  was the  seller's,  the  Company  approved  the loan prior to purchase
utilizing  the  Company's  underwriting  standards  and,  in the  case  of  home
improvement  contractors,  funded  the loan upon  assignment.  The  underwriting
standards  employed included a determination of the applicant's  payment history
on other debts and an assessment of the ability to meet existing obligations and
payments on the proposed loan. Although  creditworthiness of the applicant was a
consideration,  because  these  loans  were  generally  made to  credit-impaired
borrowers,   the  primary  consideration  in  the  underwriting  process  was  a
comparison of the value of the security in relation to the proposed loan amount.

      One- to  four-family  junior lien loans were generally made at fixed rates
for terms of up to 15 years.  Generally,  such  loans did not  exceed 90% of the
property's  appraisal value less the amount owed, if any, on any other mortgages
or liens.  One- to  four-family  junior  lien loans are secured by a lien on the
underlying  real  estate.  The  Company  required a title  search on all one- to
four-family junior lien loans.

      During 1998, the Company  purchased a pool of sub-prime  automobile loans.
These loans were made to borrowers  unable to qualify for traditional  financing
generally due to negative or insufficient  credit history or high debt-to-income
or  payment--to-income  ratios.  The Company  does not  anticipate  purchasing a
significant amount of additional subprime automobile loans.

      Consumer loans may entail greater risk than do residential mortgage loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly depreciable  assets, such as automobiles.  In such cases, the collateral
for a defaulted consumer loan may not provide an adequate source of repayment of
the  outstanding  loan balance as a result of the greater  likelihood of damage,
loss or  depreciation.  In addition,  consumer loan collections are dependent on
the  borrower's  continuing  financial  stability and thus are more likely to be
affected by adverse  personal  circumstances.  Furthermore,  the  application of
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount  which may be  recovered  on such loans.  At December 31, 1999,
consumer  loans with  aggregate  gross  principal  balances of $5.5 million were
delinquent in excess of 90 days.

      COMMERCIAL  BUSINESS LENDING.  At December 31, 1999, the Company had $28.2
million in  commercial  business  loans  outstanding,  or 2.12% of the Company's
gross  loan  portfolio.  At that  date,  the  Company  had $24.0  million of net
commercial  business  loans  outstanding,  or  2.16% of the  Company's  net loan
portfolio.  The Company's  loans include loans to finance  accounts  receivable,
inventory  and  equipment.  At  that  date  commercial  business  loans  with an
aggregate  gross  principal  balance of $7.8 million were  delinquent 90 days or
more.

      Unlike  residential  mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income,  and which are  secured by real  property  whose  value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's  ability to make repayment from the cash
flow of the borrower's business.  As a result, the availability of funds for the
repayment of commercial  business  loans may be  substantially  dependent on the
success of the business itself.  Further,  the collateral securing the loans may
depreciate  over time,  may be difficult to appraise and may  fluctuate in value
based on the success of the business.

                                      15

<PAGE>



LOAN DELINQUENCIES AND NON-PERFORMING ASSETS

      When a borrower  fails to make a required  payment on a loan,  the Company
attempts to cause the delinquency to be cured by contacting the borrower. A past
due notice is sent when the loan is ten days past due. A  delinquency  notice is
sent 15 days after the due date and a late charge is assessed in accordance with
the loan  terms.  If the  delinquency  is not cured by the 30th  day,  a default
warning is sent to the borrower.  Other written and verbal  contacts may be made
with  the  borrower  between  five  and 90  days  after  the  due  date.  If the
delinquency  continues for a period of 90 days, the Company  usually  institutes
appropriate action to foreclose on the property. If foreclosed,  the property is
sold and may be purchased by the Company.  Delinquent consumer loans are handled
in a generally  similar manner.  The Company's  procedures for  repossession and
sale of  consumer  collateral  are  subject  to various  requirements  under the
consumer protection laws of the applicable state.

      The following table sets forth the Company's loan  delinquencies  by type,
by amount and by percentage of type at December 31, 1999.
<TABLE>
<CAPTION>

                                                 Loans Delinquent For:
                           ---------------------------------------------------------------
                                     60-89 Days                    90 Days and Over              Total Delinquent Loans
                           ------------------------------- -------------------------------  --------------------------------
                                                 Percent                          Percent                           Percent
                                                 of Loan                          of Loan                           of Loan
                             Number    Amount   Category    Number    Amount     Category     Number     Amount    Category
                           ---------  -------   --------    ------    ------     --------     ------     ------    --------
<S>                           <C>       <C>       <C>       <C>          <C>         <C>       <C>        <C>        <C>
                                                                 (Dollars in Thousands)
REAL ESTATE:
  One- to four-family -
    first liens............    122     3,192      0.67%      421      17,555       3.67%         543      20,747      4.34%
  Commercial...............      4       535      0.18        50      14,840       4.96           54      15,375      5.14
  Multi-family.............    ---       ---       ---        39      89,132      33.69           39      89,132     33.69
  Construction,
   development and land....      1        50      0.03        20       5,802       2.76           21       5,852      2.79
                              ----    ------     -----      ----     -------     ------          ---     -------     -----
    Total real estate......    127     3,777      0.30       530     127,329      10.18          657     131,106     10.48
OTHER LOANS:
 Consumer Loans:
  One-to four-family
    junior lien............     30       371      1.19       170       3,343      10.70          200       3,714     11.89
  Timeshares...............      1         3      0.16       323         949      51.80          324         952     51.96
 Automobile................    218     1,632     11.39       114         877       6.12          332       2,509     17.51
  Other....................      5        34      1.31        18         373      14.36           23         407     15.67
                              ----    ------     -----      ----     -------     ------          ---     -------     -----
   Total consumer loans....    254     2,040      4.08       625       5,542      11.08          879       7,582     15.16
Commercial business........      5        83      0.29        41       7,787      27.59           46       7,870     27.88
                              ----    ------     -----      ----     -------     ------          ---     -------     -----
   Total other loans.......    259     2,123      2.71       666      13,329      17.04          925      15,452     19.75
                              ----    ------     -----      ----     -------     ------          ---     -------     -----
   Total loans.............    386     5,900      0.44     1,196     140,658      10.58        1,582     146,558     11.02
LESS:
Unearned discounts.........              466       ---                58,959        ---                   59,425       ---
                                      ------     -----               -------     ------                  -------     -----
    Total Loans, net.......           $5,434      0.49%             $ 81,699       7.32%                $ 87,133      7.80%
                                      ======     =====               =======     ======                  =======     =====
</TABLE>
      At December 31, 1999,  the Company's  non-performing  loans included 1,196
loans aggregating $140.7 million in gross loan ($81.7 million of net loans).

                                      16

<PAGE>
      The   following   table  sets  forth  the   amounts  and   categories   of
non-performing  assets in the  Company's  loan  portfolio.  Loans are  placed on
non-accrual  status when the  collection  of principal  and/or  interest  become
doubtful.  Such loans  remain on  non-accrual  status until the earlier of legal
foreclosure,  or relinquishment of control of the collateral by the borrower, or
the  collection  of principal or interest is no longer  doubtful.  For all years
presented,  the Company has had no troubled debt  restructurings  (which involve
forgiving a portion of interest or  principal  on any loans below net book value
or making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.

<TABLE>
<CAPTION>

                              June 30,          December 31,
                             ---------  ----------------------------------------
                               1996        1996      1997      1998       1999
                             ---------  ----------------------------------------
<S>                                <C>    <C>          <C>    <C>         <C>
                                         (Dollars in Thousands)
Non-accruing loans:
Real estate:
  One- to four-family -
   first liens...............$    ---    $   ---  $  18,292  $  21,391  $ 17,555
  Commercial.................  35,004     59,903     37,345     23,525    14,688
  Multi-family...............  51,934    174,046    108,493    119,222    89,132
  Construction, development
   and land..................   8,117      4,687      6,245      5,160     5,539
Consumer:
  One- to four-family -
  junior liens...............  10,157      13,863    11,347      6,243     3,343
  Timeshares.................   1,630       1,624     1,026        963       949
  Automobile.................      41          13       ---      1,072       877
  Other consumer.............     600       1,822       519        248       373
Commercial business..........   7,777       9,562     7,554      9,997     7,787
  Purchase discounts......... (59,978)   (122,283)  (77,827)   (72,783)  (58,910)
                             --------    --------  --------    -------   -------
      Total (net)............  55,282     143,237   112,994    115,038    81,333

Accruing loans delinquent
 more than 90 days:
Real estate:
  One- to four-family -
   first liens...............   21,159      30,382       ---       ---       ---
  Commercial.................   17,811      23,818     1,740     3,027       152
  Multi-family...............   55,247      30,318    15,901     2,838       ---
  Construction, development
   and land..................    5,444       4,760     3,978       557       263
  Purchase discounts.........  (32,363)    (29,221)   (4,681)     (780)      (49)
                              --------    --------  --------   -------   -------
      Total (net)............   67,298      60,057    16,938     5,642       366

Foreclosed assets:
Real estate:
  One- to four-family -
   first liens...............    1,799       4,858     5,379     3,517     2,545
  Commercial.................    9,148      13,466    41,341    23,668    13,566
  Multi-family...............   15,010      24,781    64,461    20,263    22,949
  Construction or
   development, land.........    1,756       1,122     3,112     4,765     3,320
Consumer:
  Timeshares.................       32         402        21       ---       ---
  Automobile.................      ---         ---       ---       245       ---
  Other......................      ---         ---       ---        71       ---
                              --------    --------  --------   -------   -------
      Total (net)............   27,745      44,629   114,314    52,529    42,380
                              --------    --------  --------   -------   -------
Total non-performing assets.. $150,325    $247,923  $244,246  $173,209  $124,079
                              ========    ========  ========   =======   =======
Total as a percentage of
total assets.................    11.84%      17.77%    17.86%    12.80%     8.68%
                                 =====       =====     =====     =====      ====
</TABLE>

      For the year ended  December  31, 1999 gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to $11.0 million.  The amount that was included in
interest  income on such loans was $2.2 million for the year ended  December 31,
1999.

     OTHER LOANS OF CONCERN. In addition to the non-performing  assets set forth
in the previous table, as of December 31, 1999 the Company had one loan totaling
$11.0 million, net, which is a development land loan

                                      17

<PAGE>
with  respect to which known  information  about  unbudgeted  cost  coupled with
delays  in the  completion  of the  development  and  sale of lots  have  caused
management  to have  concern as to the ability of the  borrowers  to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such items in the  non-performing  asset  categories.  In  addition  to the land
collateral being developed, the Company is secured by additional  collateral and
the personal guarantees of the borrowers.  The Company believes the value of the
collateral  securing  this  loan is  sufficient  to  prevent  the  Company  from
incurring any losses related to this loan.

      CLASSIFIED  ASSETS.  The FDIC  requires  the  classification  of a savings
bank's problem assets.  Management of the Company  classifies all problem assets
as "substandard,"  "doubtful" or "loss." An asset is considered "substandard" if
it is inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct  possibility"  that the insured  institution will
sustain "some loss" if the deficiencies are not corrected.  An asset may also be
classified substandard if no loss is expected, however, the time it will take to
resolve the deficiency is uncertain. Assets classified as "doubtful" have all of
the  weaknesses  inherent  in those  classified  "substandard,"  with the  added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the establishment of a specific loss reserve is not warranted.

      When the  Company  classifies  problem  assets  as either  substandard  or
doubtful,  it may  establish  general  allowances  for loan  losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but which, unlike specific  allowances,  have not been allocated to
particular problem assets. When the Company classifies problem assets as "loss,"
it will charge off such  amount.  The Company  reviews its asset  portfolio  and
classifies   certain   assets   semi-annually.   In  addition,   the   Company's
determination  as to the  classification  of its  assets  and the  amount of its
valuation  allowances  is reviewed by the Texas  Department  and the FDIC during
their  examinations  of the Company,  which may result in the  establishment  of
additional general or specific loss allowances.

      The  Company  reviews  the  problem  loans and other  assets to  determine
whether any loans or other assets require classification on a monthly basis. Net
classified assets of the Company as of the date indicated were as follows:

                                       DECEMBER 31, 1999
                                       -----------------
                                     (Dollars In Thousands)

Substandard............................          $78,161
Doubtful...............................            1,539
                                                 -------
     Total Classified Assets...........          $79,700
                                                 =======

      ALLOWANCE FOR LOAN LOSSES.  The  allowance for loan losses is  established
through provisions for loan losses based on management's  evaluation of the risk
inherent in its loan  portfolio and changes in the nature and volume of its loan
activity.  Such  evaluation  includes a review of the loan  portfolio  including
those loans of which full collectibility may not be reasonably assured,  current
economic  conditions,  historical loan loss experience,  loan volume and growth,
the composition of the loan portfolio and other factors that warrant recognition
in  providing  for an adequate  allowance  for loan  losses.  The  Company  also
developed certain asset review policies and procedures which established minimum
general loan loss reserves for all types of loans.  In  determining  the general
reserves under these policies historical charge-offs and recoveries,  changes in
the mix and levels of the various types of loans, fair values,  the current loan
portfolio and current  economic  conditions are considered.  These policies also
require additional reserves for all delinquent and classified loans. See "Item 7
-  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations."

      The Company  establishes  a specific  allowance  against a given loan when
management  perceives  a problem  in that loan  that may  result in a loss.  The
Company  continues to monitor and modify its allowances for general and specific
loan losses as economic conditions  dictate.  Although the Company maintains its
allowance  for loan  losses at a level  which it  considers  to be  adequate  to
provide for potential  losses,  there can be no assurances that such losses will
not exceed the  estimated  amounts.  In addition,  various  regulatory  agencies
periodically review the allowance for loan losses and may require that additions
be made based upon their judgment of  information  available to them at the time
of their examination.

      Real estate properties  acquired  through,  or in lieu of loan foreclosure
are  initially  recorded  at fair value less  estimated  cost to sell at date of
foreclosure.   Valuations  are  periodically  performed  by  management  and  an
allowance

                                      18

<PAGE>



for losses is  established  by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value.

      The following table sets forth an analysis of the Company's  allowance for
loan losses at the dates indicated.

<TABLE>
<CAPTION>
                                                           Twelve
                                                Year       Months                     Year
                                               Ended        Ended                     Ended
                                              June 30,   December 31,             December 31,
                                             ----------  ------------  -------------------------------
                                                1996        1996          1997        1998        1999
                                             ----------  ------------- -------------------------------
<S>                                               <C>    <C>              <C>         <C>          <C>
                                                                (Dollars in Thousands)

Balance at beginning of period..............    $ 6,137     $ 10,406     $13,189     $11,912   $13,867

Charge-offs:
  One- to four-family.......................        845        1,366       2,177       1,370     1,461
  Commercial................................         28          232         740         812       709
  Multi-family..............................         80           90         ---         179       ---
  Construction, development and land........        397           60         687         228        13
  Consumer..................................        858          805       1,169       1,401     5,338
  Commercial business.......................      1,177        1,121         183         ---        59
                                                -------     --------     -------     -------   ---------
                                                  3,385        3,674       4,956       3,990     7,580
Recoveries:
  One- to four-family.......................          1          ---         112         ---        11
  Consumer..................................         18           32         157         368     2,185
  Commercial business.......................         17            3         ---         ---        40
                                                -------     --------     -------     -------   -------

Net charge-offs.............................      3,349        3,639       4,687       3,622     5,344

Additions charged to operations.............      9,044        6,422       3,410       5,577     3,821
                                                -------     --------     -------     -------   -------
Balance at end of period....................    $11,832     $ 13,189     $11,912     $13,867   $12,344
                                                =======     ========     =======     =======   =======
Ratio of net charge-offs during the
 period to average loans outstanding during
 the period.................................       .44%         .38%        .49%        .43%      .51%

Ratio of net charge-offs during the period        2.95%        1.84%       1.96%       1.52%     3.60%
 to average non-performing assets...........
</TABLE>



                                      19

<PAGE>



      The  distribution of the Company's  allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>

                                              June 30,                    December 31,
                                   --------------------------------------------------------------
                                                1996                           1996
                                   ------------------------------ -------------------------------
                                                         Percent                         Percent
                                                        of Loans                        of Loans
                                                Loan     in Each               Loan      in Each
                                    Amount of  Amounts  Category   Amount of  Amounts   Category
                                    Loan Loss    by     to Total   Loan Loss    by      to Total
                                    Allowance Category    Loans    Allowance Category     Loans
                                   ---------- -------- ---------- ---------- --------- ----------
<S>                                     <C>    <C>       <C>         <C>       <C>       <C>
                                                         (Dollars in Thousands)

One- to four-family...............    $ 3,153 $ 273,780    22.47% $  3,183  $ 276,591      19.37%
Multi-family......................        239   341,696    28.05     1,157    466,697      32.68
Commercial real estate............      2,788   321,385    26.38     2,706    388,460      27.20
Construction, development and land        771   185,180    15.20       603    170,121      11.91
One- to four-family junior liens..      1,873    50,146     4.12     1,680     77,528       5.43
Timeshares........................        374     7,809      .64       372      6,446        .45
Automobiles.......................          8        59      ---         3         19        ---
Other consumer....................      1,130     8,314      .68     1,135      7,076        .50
Commercial business...............      1,496    29,886     2.45     2,353     35,131       2.46
Unallocated.......................        ---       ---      ---       ---        ---        ---
                                      ------- ---------   ------  -------- ----------     ------
     Total........................    $11,832 1,218,255   100.00% $ 13,189  1,428,069     100.00%
                                      =======             ======  ========               =======
LESS:
  Loans in process................               27,172                        16,364
  Loans held for sale, net........                  ---                           ---
  Deferred fees and
    discounts.....................              281,837                       344,312
  Allowance for loan losses.......               11,832                        13,189
                                              ---------                    ----------
     Total loans receivable, net..           $  897,414                    $1,054,204
                                             ==========                    ==========
</TABLE>
<TABLE>
<CAPTION>

                                                                        December 31,
                                 -----------------------------------------------------------------------------------------------
                                             1997                           1998                           1999
                                 -----------------------------------------------------------------------------------------------
                                                        Percent                        Percent                        Percent
                                                       of Loans                       of Loans                       of Loans
                                              Loan      in Each              Loan      in Each               Loan     in Each
                                  Amount of  Amounts   Category  Amount of  Amounts   Category  Amount of   Amounts  Category
                                  Loan Loss    by      to Total  Loan Loss    by      to Total  Loan Loss     by     to Total
                                  Allowance Category     Loans   Allowance Category     Loans   Allowance  Category    Loans
                                 -----------------------------------------------------------------------------------------------
<S>                                 <C>      <C>          <C>        <C>      <C>        <C>      <C>        <C>        <C>
                                                                    (Dollars in Thousands)
One- to four-family...............  $ 4,051  $  213,584     18.60% $ 5,136  $  490,717    38.93% $  5,321  $  477,847     35.94%
Multi-family......................    1,316     321,423     27.99    1,055     270,337    21.45    1,069     264,590     19.90
Commercial real estate............    1,986     337,825     29.42    1,481     236,252    18.74    1,250     299,224     22.51
Construction, development and land      914     169,882     14.80      829     142,108    11.28      546     209,504     15.76
One- to four-family junior liens..    1,756      71,465      6.22    2,312      47,992     3.81    1,476      31,243      2.35
Timeshares........................      642       3,615       .31      839       2,432      .19      855       1,832      0.14
Automobiles.......................      ---           1       ---      773      31,878     2.53      985      14,331      1.08
Other consumer....................      684       5,002       .44      720       3,121      .25      447       2,598      0.20
Commercial business...............      563      25,554      2.23      722      35,537     2.82      395      28,224      2.12
Unallocated.......................      ---         ---       ---      ---         ---      ---      ---         ---       ---
                                    -------  ----------    ------  -------  ----------   ------  -------  ----------    ------
     Total........................  $11,912   1,148,351    100.00% $13,867  $1,260,374   100.00% $12,344  $1,329,393    100.00%
                                    =======                ======  =======               ======  =======                ======
LESS:
  Loans in process................               16,806                          7,493                         46,555
  Loans held for sale, net........                  ---                            ---                            ---
  Deferred fees and
    discounts.....................              231,800                        193,468                        154,085
  Allowance for loan losses.......               11,912                         13,867                         12,344
                                             ----------                     ----------                     ----------
     Total loans receivable, net..           $  887,833                     $1,045,546                     $1,116,409
                                             ==========                     ==========                     ==========
</TABLE>

<PAGE>

INVESTMENT ACTIVITIES

     GENERAL. The investment policy of the Company,  which is established by the
Investment  Committee  and  approved  by  the  Company's  and  Bank's  Board  of
Directors,  is  designed  primarily  to  provide a  portfolio  of high  quality,
diversified  instruments  while  seeking to optimize net interest  income within
acceptable  limits of interest rate risk,  credit risk and liquidity.

         Generally,  the investment  policy of the Company is to invest funds in
interest-bearing  deposits in banks,  FHLB  overnight  deposits,  FHLB of Dallas
stock and Government  National Mortgage  Association  ("GNMA")  securities based
upon  the  Company's  liquidity  needs  and  performance  objectives.  It is the
Company's  general  policy  to  purchase  investment  securities  which are U.S.
Government  securities  and federal  agency  obligations  and other issues rated
investment grade.

         The Bank must maintain  minimum levels of  investments  that qualify as
liquid assets under the Texas Department regulations.  Liquidity may increase or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments in relation to the return on loans. The Bank maintains its liquidity
at a level believed  adequate to meet  requirements of normal daily  activities,
repayment of maturing debt and potential deposit outflows. Cash flow projections
are  regularly  reviewed  and  updated  to assure  that  adequate  liquidity  is
maintained.  At December 31, 1999, the Bank's  liquidity  ratio was 17.14%.  See
"Regulation - Liquidity."

         Texas-chartered  savings  banks have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal  agencies,  certain  certificates of deposit of insured banks
and savings institutions,  certain bankers'  acceptances,  repurchase agreements
and federal funds.  Subject to various  restrictions,  Texas- chartered  savings
banks  may also  invest  their  assets in  commercial  paper,  investment  grade
corporate  debt  securities  and  mutual  funds  whose  assets  conform  to  the
investments that a Texas- chartered savings bank is otherwise authorized to make
directly.

         The  following  table  sets  forth  the  composition  of the  Company's
investment   in  FHLB   Stock,   interest-bearing   deposits   with   banks  and
mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>

                                                                 December 31,
                                 ----------------------------------------------------------------------
                                         1997                     1998                     1999
                                 ----------------------------------------------------------------------
                                     Book      % of         Book         % of        Book         % of
                                     Value     Total        Value        Total       Value        Total
                                 ----------- ----------  -----------  ----------  ----------    --------
<S>                                     <C>    <C>            <C>        <C>        <C>            <C>
                                                         (Dollars in Thousands)

FHLB stock....................... $  10,203    100.00%   $   9,877      100.00%   $    9,670     100.00%
                                  =========    ======    =========      ======    ==========     ======
Interest-bearing deposits
 with banks....................   $ 150,219    100.00%   $  66,599      100.00%   $  114,670     100.00%
                                  =========    ======    =========      ======    ==========     ======
Mortgage-backed securities:
GNMA............................. $110,079      98.84%   $  87,715       97.92%   $   72,067     102.84%
Gross unrealized gain (loss).....    3,722       3.34        3,909        4.36          (443)      (.63)
Unamortized premium
   (discount)....................   (2,425)     (2.18)      (2,043)      (2.28)       (1,544)     (2.20)
                                  --------     ------    ---------      ------    ----------     ------
Total mortgage-backed
 securities...................... $111,376     100.00%   $  89,581      100.00%  $    70,080     100.00%
                                  ========     ======    =========      ======   ===========     ======
</TABLE>

     The  Company's  investment  securities  portfolio  at  December  31,  1999,
contained  neither  tax-exempt  securities  nor securities of any issuer with an
aggregate  book value in excess of 10% of the  Company's  stockholders'  equity,
excluding those issued by the United States Government, or its agencies.

SOURCES OF FUNDS

     GENERAL.  Beal Financial's  primary source of funds are dividends which may
be paid by the Bank. In addition,  Beal  Financial has the ability to access the
capital markets, if necessary.

      The  Bank's  primary  sources  of funds  are  deposits,  amortization  and
prepayment of loan  principal,  borrowings,  and funds provided from  operations
and, from time to time, sales of assets. Management of the Bank closely monitors

                                      21

<PAGE>



rates and terms of competing  sources of funds on a regular  basis and generally
utilizes the sources which are the most cost effective.

      Borrowings,  predominantly  from  the  FHLB  of  Dallas,  may be used on a
short-term  basis to compensate for reductions in deposits or deposit inflows at
less than projected  levels,  and may be used on a longer-term  basis to support
expanded purchasing activities.

      DEPOSITS.  The Bank's  deposits  consist of  statement  savings  accounts,
commercial  demand  deposit  accounts,  money market and  certificate  accounts.
Certificates  of  deposit  are the  primary  source  of  deposits  because  they
generally  are more  responsive  to market  interest  rates than other  types of
deposits,  and thus more attractive to depositors.  The Bank relies primarily on
competitive pricing policies,  advertising,  and customer service to attract and
retain these deposits. In this regard, the Bank generally prices its deposits at
or above the highest rates offered by its competitors.

      In  addition  to retail  deposits,  the Bank  obtains  wholesale  deposits
through  deposit  brokers which  solicit funds from their  customers for deposit
with the  Bank.  Brokered  deposits  amounted  to  $262.9  million  or 25.35% of
deposits at December 31, 1999.  Brokered deposits  generally are more responsive
to changes in interest rates than retail  deposits and, thus, are more likely to
be withdrawn  from the Bank upon maturity as changes in interest rates and other
factors are perceived by investors to make other  investments  more  attractive.
The amount of brokered  deposits will vary depending on cost and the Bank's need
for liquidity and loan purchase activity.

      The Bank believes that it competes effectively for deposits;  however, the
Bank's ability to attract and retain  deposits and the Bank's cost of funds have
been,  and will  continue  to be,  significantly  affected  by general  economic
conditions,   changes  in  money  market  and  prevailing   interest  rates  and
competition.

      The rates paid on deposit  accounts offered by the Bank have allowed it to
be competitive in obtaining funds and to respond with  flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit  flows,  as customers have become more interest rate  conscious.  The
Bank  manages the pricing of its  deposits in keeping  with its  asset/liability
management  and  profitability  objectives.  Based on its  experience,  the Bank
believes that its  statement  savings and money market  accounts are  relatively
stable  sources of  deposits.  However,  the  ability of the Bank to attract and
maintain certificate  accounts,  and the rates paid on these deposits,  has been
and will continue to be significantly affected by market conditions.


                                      22

<PAGE>



      The following  table sets forth the dollar  amount of savings  deposits in
the  various  types  of  deposit  programs  offered  by the  Bank  at the  dates
indicated.

<TABLE>
<CAPTION>


                                                                   December 31,
                                      ---------------------------------------------------------------------
                                               1997                    1998                    1999
                                      ----------------------- -----------------------  --------------------
                                                     Percent                 Percent                Percent
                                         Amount     of Total     Amount     of Total    Amount     of Total
                                      ----------   ---------- ----------- -----------  --------    --------
<S>                                     <C>           <C>            <C>    <C>          <C>        <C>
                                                              (Dollars in Thousands)
Transactions and
SAVINGS DEPOSITS:
Money Market Accounts.................$  169,321     16.91%     $  180,154    17.91%    $165,308    16.64%
Commercial Demand.....................    14,272      1.42          12,667     1.26       11,580     1.17
Savings Deposits......................     1,193       .12           3,118      .31        9,424      .95
                                      ----------    ------      ----------   ------     --------   ------
Total Non-Certificates................   184,786     18.45%        195,939    19.48      186,312    18.76
                                      ----------    ------      ----------   ------     --------   ------
CERTIFICATES:
 2.01 -  4.00%........................         2       ---             ---      ---          ---      ---
 4.01 -  6.00%........................   785,865     78.47         797,002    79.26      704,843    70.96
 6.01 -  8.00%........................    30,823      3.08          12,676     1.26      102,134    10.28
 8.01 -  10.00%.......................       ---       ---             ---      ---          ---      ---
                                      ----------    ------      ----------   ------     --------   ------
Total Certificates....................   816,690     81.55         809,678    80.52      806,977    81.24
                                      ----------    ------      ----------   ------     --------   ------
Total Deposits(1).....................$1,001,476    100.00%     $1,005,617   100.00%     993,289   100.00%
                                      ==========    ======      ==========   ======     ========   ======
</TABLE>

(1)  At December 31, 1999,  the average  rates paid on  non-certificate  deposit
     accounts and certificate accounts were 4.78% and 5.43%, respectively.

      The  following  table sets forth the savings  flows at the Bank during the
periods indicated.  New deposits,  net refers to the amount of deposits during a
period less the amount of withdrawals during the period.



                                          December 31,
                               ----------------------------------
                                 1997         1998         1999
                               ---------   ----------  ----------
                                     (Dollars in Thousands)

Opening balance............... $1,043,435  $1,001,476  $1,005,617

New deposits, net.............    (70,120)    (21,211)    (32,129)
Interest credited.............     28,161      25,352      19,801
                               ----------  ----------  ----------
Ending balance................ $1,001,476  $1,005,617  $  993,289
                               ==========  ==========  ==========
Net increase (decrease)....... $  (41,959) $    4,141  $  (12,329)
                               ==========  ==========  ==========

Percent increase (decrease)...   (4.02)%          .41%    (1.23)%
                                 =====          =====     =====



                                      23

<PAGE>
      The  following  table shows rate and maturity  information  for the Bank's
certificates of deposit as of December 31, 1999.


                          4.00-      6.00-                 Percent
                          5.99%      7.99%      Total     of Total
                         --------  --------   --------    ---------
                                   (Dollars in Thousands)
Certificate accounts
 maturing in quarter
 ending:
March 31, 2000.......... $420,636  $ 4,376     $425,012       52.67%
June 30, 2000...........  132,779   22,842      155,621       19.29
September 30, 2000......   54,049    4,781       58,830        7.29
December 31, 2000.......   75,149   80,924      156,073       19.34
March 31, 2001..........    3,635      ---        3,635        0.45
June 30, 2001...........    1,543      ---        1,543        0.19
September 30, 2001......    1,941      ---        1,941        0.24
December 31, 2001.......    1,732      ---        1,732        0.21
March 31, 2002..........      616      ---          616        0.08
June 30, 2002...........        2      ---            2         ---
September 30, 2002......      559      ---          559        0.07
December 31, 2002.......      106      ---          106        0.01
Thereafter..............    1,307      ---        1,307        0.16
                         -------- --------     --------      ------
   Total................ $694,054 $112,923     $806,977      100.00%
                         ======== ========     ========      ======

   Percent of Total.....    86.02%   13.99%      100.00%
                            =====    =====       ======

      The following  table  indicates the amount of the Bank's  certificates  of
deposit by time remaining until maturity as of December 31, 1999.

<TABLE>
<CAPTION>
                                                 Maturity
                                  ---------------------------------------
                                              Over      Over
                                  3 Months   3 to 6    6 to 12    Over
                                   or Less   Months    Months   12 Months   Total
                                  --------- --------- -------- ---------- ---------
<S>                                     <C>    <C>     <C>     <C>            <C>
                                               (Dollars in Thousands)

Certificates of deposit less
than $100,000....................  $205,791  $ 82,462  $128,543   $ 8,465  $425,261
Certificates of deposit of
$100,000 or more.................   219,221    73,159    86,360     2,976   381,716
                                   --------  --------  --------   -------  --------
Total certificates of deposit....  $425,012  $155,621  $214,903   $11,441  $806,977
                                   ========  ========  ========   =======  ========
</TABLE>

      BORROWINGS.  Although deposits are the Bank's primary source of funds, the
Bank's policy has been to utilize  borrowings when they are a less costly source
of funds.  In  addition,  the Bank has  relied  upon  selective  borrowings  for
liquidity  needs. The Bank obtains FHLB advances upon the security of certain of
its residential  first mortgage loans,  and other assets,  including FHLB stock,
provided certain standards related to the creditworthiness of the Bank have been
met.  FHLB  advances  are  available  for  investment,  purchasing  and  lending
activities and other general business purposes.  FHLB advances are made pursuant
to several  different credit programs,  each of which has its own interest rate,
which may be fixed or adjustable, and range of maturities. At December 31, 1999,
the  Bank's  other  borrowings  consisted  primarily  of  loans  to  the  Bank's
subsidiaries  from  unaffiliated  third party  lenders  secured by certain  real
estate held for investment or sale.

      On August 9, 1995,  Beal  Financial  issued $57.5 million of 12.75% Senior
Notes due on August 15, 2000 (the "Senior Notes"). Of this amount, $46.3 million
was  contributed  to the Bank in the form of paid in capital.  The remaining net
proceeds of the Senior Notes were retained by Beal Financial for the maintenance
of a reserve  equal to the  annual  interest  expense  on the  Senior  Notes and
general   operating   expenses.   Interest  on  the  Senior   Notes  is  payable
semi-annually  on February 15 and August 15 of each year.  The Senior  Notes are
redeemable,  in whole or in part at the option of Beal Financial. As of December
31, 1999, Beal Financial had repurchased, in unsolicitated offers, $13.1 million
of the Senior Notes.  Since  December 31, 1999,  an additional  $4.5 million was
repurchased  and  retired.  See Note H to the  Notes to  Consolidated  Financial
Statements of the Company.


                                      24

<PAGE>



      At December 31, 1999, FHLB advances totaled $191.0 million.  FHLB advances
were used for liquidity and loan investment purposes. For additional information
relating to borrowings, see Notes G and H to the Notes to Consolidated Financial
Statements of the Company.

      The following table sets forth the maximum  month-end  balance and average
balance of FHLB advances and other borrowings for the periods indicated.



                                        Year Ended
                                       December 31,
                                ----------------------------
                                  1997      1998     1999
                                --------- -------- ---------
                                   (Dollars in Thousands)

MAXIMUM BALANCE:
  FHLB advances................. $146,000  $176,000 $204,000
  Senior notes, net.............   57,188    57,295   57,385
  Other borrowings..............   14,748     7,583    7,272

AVERAGE BALANCE:
  FHLB advances.................  $19,181  $ 39,822   64,801
  Senior notes, net.............   57,141    57,233   55,223
  Other borrowings..............   10,401     7,249    6,963

      The  following  table sets forth certain  information  as to the Company's
borrowings at the dates indicated.


                                               December 31,
                                        --------------------------
                                          1997    1998     1999
                                        -------- -------- --------
                                          (Dollars in Thousands)

FHLB advances.......................... $110,000 $ 80,000 $191,000
Senior notes, net......................   57,188   57,295   44,336
Other borrowings.......................    7,599    7,083    7,272
                                        -------- -------- --------
     Total borrowings.................. $174,787 $144,378 $242,608
                                        ======== ======== ========

Weighted average interest rate of FHLB
advances...............................    6.65%    4.87%    5.79%

Weighted average interest rate of
Senior notes, net......................   13.00%   13.00%   13.00%

Weighted average interest rate of
other borrowings.......................    8.03%    7.95%    7.81%

SUBSIDIARIES OF THE COMPANY

      In addition to the Bank, Beal Financial's  organized  subsidiaries include
Beal Banc Holding Company, a Delaware  corporation,  which was organized for tax
purposes by the Company in 1993 to hold all of the outstanding stock of the Bank
in  connection  with its  reorganization  into the holding  company  form.  This
corporation is not expected to engage in any  activities  other than holding the
stock of the Bank.

      In addition,  Beal  Financial  has a single  purpose  subsidiary to invest
approximately $697,000 in a limited partnership to develop property in McKinney,
Texas and other inactive subsidiaries.

SUBSIDIARIES OF THE BANK

      As a  Texas-chartered  savings  bank,  the Bank is  permitted  by  federal
regulations  to have  subsidiaries  engage only in those  subsidiary  activities
which are  permissible for a subsidiary of a national bank. The FDIC may approve
other  activities  for a subsidiary  provided that the Bank meets its applicable
minimum  capital  standards  and the FDIC  determines  that the  conduct  of the
activity of the subsidiary will not pose a significant  risk to the SAIF.  Under
state law, a  Texas-chartered  savings  bank is permitted to invest an unlimited
amount  in  operating  subsidiaries  which  are  engaged  solely  in  activities
permissible   for  the  Bank  to  engage  in   directly.   The  amount  which  a
Texas-chartered savings bank

                                      25

<PAGE>
may invest in other service  corporation  subsidiaries may not exceed 10% of the
savings bank's total assets without the prior approval of the Texas  Department.
At  December  31,  1999,  the net book  value of the  Bank's  investment  in its
subsidiaries was approximately  $931.5 million (including $23.2 million invested
in other service corporation subsidiaries).

      Under  FDIC  regulations,  if a savings  bank's  subsidiary  is engaged in
activities not permissible for a national bank subsidiary, it may only engage in
such  activities with the approval of the FDIC. In the absence of such approval,
the subsidiary must be divested.  The Company has received  regulatory  approval
for its real  estate  investment  and  development  activities  to date.  See "-
Regulation - Federal Regulation of State-Chartered Savings Banks."

      The activities of the Bank's principal operating  subsidiaries are briefly
described below.

      BEAL NEVADA CORP.,  ("BNC").  During the fourth  quarter of 1997, the Bank
formed BNC, a Nevada corporation for tax planning purposes. BNC is a 99% limited
partner in Loan  Participant  Partners,  Ltd.,  with Property  Acceptance  Corp.
("PAC"), a wholly-owned  subsidiary of the Bank, as the 1% general partner. This
partnership  owns an interest in a pool of loans  transferred from the Bank. The
Bank's  investment  in  BNC  and  PAC  was  $822.4  million  and  $8.2  million,
respectively, at December 31, 1999.

     BEAL MORTGAGE,  INC. ("BMI"), BEAL PROPERTIES,  INC. ("BPI") AND BEAL/H.S.,
INC ("BHS"). BMI and BPI are Texas corporations and BHS is a Nevada corporation.
These  corporations were organized to engage in certain real estate  development
activities  including  the  acquisition  and  development  of  land  and  direct
investments  in real estate  development  projects.  At December 31,  1999,  the
Bank's  investment  in BMI, BPI and BHS totaled $7.2  million,  $3.5 million and
$12.5 million, respectively.

      BMI,  BPI and BHS are engaged in holding  real estate held for  investment
and in real  estate  development  projects.  The  purchase  and  development  of
property  may  be  financed  by the  Bank  or an  unrelated  third  party.  Once
developed,  the lots are sold to  builders  primarily  for the  construction  of
single-family  dwellings.  The Board of Directors of the Bank has  determined to
limit the Bank's investment in real estate development and investment activities
to an amount which would enable the Bank to maintain  capital,  as calculated in
accordance with generally accepted accounting principles, at 6% of total assets,
after  deduction  of its  investment  in real estate.  In  addition,  the Bank's
individual  investment in BMI, BPI and BHS is limited by the FDIC to 10% of Tier
I capital and 20% of Tier 1 capital on an aggregate basis,  provided that Tier I
capital  is at least 6% after  deduction  of the Bank's  investment  in its real
estate  subsidiaries.  See " Regulation - Federal  Regulation of State-Chartered
Savings  Bank" and "-  Regulatory  Capital  Requirements  and Prompt  Corrective
Regulatory  Action." BMI, BPI and BHS have conducted  substantially all of their
real estate  development  activities  within the  Dallas/Fort  Worth and Houston
metropolitan areas.

      BMI also holds  $12.3  million in the  aggregate  of other real estate for
investment,  the  largest  component  of which is Beal Bank Center II, an office
building  purchased  in  March  1995  and  located  adjacent  to  the  Company's
headquarters. At December 31, 1999, Beal Bank Center II had a book value of $8.4
million  (subject to a $5.7 million  first  mortgage  lien from an  unaffiliated
lender)  and  was  86%  occupied.  Five  remaining  properties  held  by BMI for
investment, had book values aggregating $3.9 million at December 31, 1999.

     LOAN  ACCEPTANCE  CORP.  ("LAC").  LAC was  formed  in July  1994 to bid on
third-party  loan pools,  the majority of which are sold by the FDIC or the RTC.
This  activity was  formerly  conducted  through BMI. At December 31, 1999,  the
Bank's  investment  in LAC totaled  $576,000.  See "- Lending  Activities - Loan
Acquisition, Resolution, Origination and Sale Activities."

     BRE, INC. ("BRE").  BRE is a Texas corporation  organized to hold loans and
other assets which  management  of the Bank  believes  bear more than the normal
risk of  exposure to  litigation.  The most common  problems  with these  assets
include   environmental   contingencies  and  litigious   histories  of  certain
borrowers.   At  December  31,  1999,   BRE  held  15  mortgage   loans  (eleven
single-family  and four  multi-family and commercial real estate loans) totaling
$2.4  million  and five  foreclosed  real estate  properties  (one land and four
multi-family and commercial properties) totaling $4.7 million. BRE has performed
full environmental  reviews on all of its properties with minimal  environmental
problems  found.  The properties are  operational  and BRE actively  markets the
properties for sale. At December 31, 1999, the Bank's  investment in BRE totaled
$7.1 million.

     BEAL AFFORDABLE HOUSING,  INC. ("BAH").  BAH was organized in November 1994
to develop affordable  housing apartment  buildings to take advantage of certain
tax benefits  under  Section 42 of the  Internal  Revenue  Code.  BAH owns a 98%
limited partnership interest in the three limited partnerships  described below.
BMI owns a 1% interest in and

                                      26

<PAGE>
serves as the  managing  general  partner  for each  limited  partnership  and a
Texas-based,  non-profit  organization  owns the  remaining  1% interest in each
limited   partnership.   Income,  gain,  loss,   deductions,   tax  credits  and
distributions  of net cash flow for any partnership  fiscal year is allocated to
and among the partners in accordance with their respective percentage interests.
Each of the projects is managed by a non-affiliated fee management company which
specialize in the management of affordable housing  properties.  At December 31,
1999, the Company's investment in BAH totaled $26.5 million.

      It is  anticipated  that BAH is entitled  to tax credits of  approximately
$2.4  million per year,  for the next eight  years,  to the extent that they are
able to utilize them. The limited  partnerships are required to maintain minimum
occupancy levels of qualified  low-income  tenants  continuously  throughout the
15-year  compliance  period beginning in the year the first  low-income  housing
credit is claimed. Failure to comply with this occupancy requirement will result
in  recapture  of all or part of the  credits  previously  claimed.  Each of the
limited  partnerships  are in compliance with the required  occupancy  levels at
December 31, 1999.

      The Bank  also  owns  other  single  purpose  subsidiaries  formed to hold
foreclosed property for tax planning purposes. The Bank's net investment in such
subsidiaries at December 31, 1999 was $43.6 million.

COMPETITION

      The Company faces strong competition,  both in purchasing discounted loans
and  originating  real  estate  and  other  loans  and in  attracting  deposits.
Competition in purchasing  discounted  loans and  originating  real estate loans
comes  primarily from other savings  institutions,  commercial  banks,  mortgage
bankers,  real estate brokers and other private investors.  Commercial banks and
finance companies provide vigorous  competition in consumer lending. The Company
competes for real estate and other loan originations principally on the basis of
the interest  rates and loan fees it charges,  the types of loans it  originates
and the quality of services it  provides  to  borrowers.  Some of the  Company's
competitors, however, have higher lending limits than does the Company.

      The Company attracts  substantially  all of its deposits through newspaper
advertisements and its branch offices,  within the States of Texas.  Competition
for those deposits is principally from other savings institutions and commercial
banks  and  other  financial  intermediaries.  The  Company  competes  for these
deposits by offering deposit accounts at very competitive rates.

EMPLOYEES

     At December 31, 1999, the Company, including its subsidiaries,  had a total
of 97 employees.  The Company's  employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.

REGULATION

      GENERAL.  The Bank is a  Texas-chartered  savings  bank and is  subject to
broad  regulation  and  oversight by the Texas  Department  extending to all its
operations.  The Bank is also a member of the FHLB of Dallas  and is  subject to
certain  limited  regulation by the Federal  Reserve Board.  The deposits of the
Bank are  insured  and backed by the full faith and credit of the United  States
Government.  As a  result,  the  FDIC has  certain  regulatory  and  examination
authority  over the Bank.  As the savings and loan holding  company of the Bank,
the Company is also  subject to  regulation  and  oversight by OTS and the Texas
Department.

      TEXAS LAW AND SUPERVISION BY THE TEXAS  DEPARTMENT.  As a  state-chartered
savings bank,  the Bank is governed by the  provisions of the Texas Savings Bank
Act (the "Texas Act") and rules and  regulations  of the Texas  Department.  The
Texas  Act and  regulations  of the Texas  Department  are  administered  by the
Commissioner. Certain of these rules and regulations are discussed below.

     The Bank is required to file reports with the Texas  Department  concerning
its  financial  condition  and  activities  in addition to obtaining  regulatory
approval  prior to  engaging  in  certain  transactions.  The  Texas  Department
conducts  periodic  examinations  of the Bank in order to assess its  compliance
with  regulatory  requirements.  As a result  of such  examinations,  the  Texas
Department may require various corrective  actions.  See "Risk Factors - Capital
and Other Regulatory Matters."

      The Texas Act and the  regulations  promulgated  pursuant  thereto  impose
restrictions  on the  amount  and  types  of  loans  that may be made by a state
savings bank, which in some cases, are slightly broader than those applicable to

                                      27

<PAGE>
federally  chartered  savings  associations;  however,  the Texas  statute  also
permits a state savings bank to engage in any activity  permissible for national
banks.  Under the Texas Act,  however,  the Bank must  devote a majority  of its
assets to residential real estate lending.

      The Commissioner has general supervisory  authority over savings banks and
their holding companies.  Upon his finding that a savings bank is engaging in or
is about to engage in unsafe or unsound practices, or is engaging in or is about
to engage in a violation  of its  articles  of  incorporation  or bylaws,  or is
engaging in or is about to engage in a violation of any law, rule or supervisory
order  applicable to the savings bank or a violation of any  condition  that the
Commissioner  or the Finance  Commission  of the State of Texas has imposed upon
the  savings  bank by  written  order,  directive  or  agreement,  or has  filed
materially  false or misleading  information in a filing required under the Act,
or has failed to maintain  proper  books and  records,  he may order the savings
bank or its holding  company to  discontinue  the  violation or  practice.  Upon
failure of any savings bank, its holding company or any participating  person to
comply with his order, the  Commissioner  may bring an enforcement  action which
can include  issuing a cease and desist  order,  the  imposition  of civil money
penalties,  or placing  the  institution  under the  control  of a  conservator.
Furthermore,  if it appears  doubtful to the  Commissioner  that a savings  bank
subject to such a conservatorship order can be successfully  rehabilitated,  the
Commissioner may close and liquidate the savings bank.

      The Bank's general permissible lending limit for loans-to-one  borrower is
equal to the  greater of  $500,000  or 15% of  unimpaired  capital  and  surplus
(except for loans fully secured by certain  readily  marketable  collateral,  in
which case,  this limit is increased to 25% of unimpaired  capital and surplus).
At December 31, 1999, the Bank's lending limit under this  restriction was $31.9
million. The Bank is in compliance with the loans-to-one borrower limitation.

      A change in control (as defined  below) of a savings bank (which  includes
the Company for this purpose)  requires the prior approval of the  Commissioner.
For the purposes of Texas law,  control is be deemed to exist if any person owns
or controls 25% or more of the voting  securities of a savings bank.  There is a
rebuttable  presumption of control if any person owns or controls 10% or more of
the voting securities of the savings bank.

      The  Commissioner  also has the  authority  to  regulate  and  examine the
holding  companies of  Texas-chartered  savings banks.  Each holding  company is
required by Texas law to  register  with the  Commissioner  within 90 days after
becoming a holding company. Such holding companies,  like the Company, must file
periodic  reports  concerning  their  operations  with  the  Commissioner.   The
Commissioner also has enforcement  powers over such holding companies similar to
those applicable to savings banks.

      In addition to the laws of Texas specifically  governing savings banks and
their  holding  companies,  the Bank and the Company  are also  subject to Texas
corporate  law,  to the  extent  such  law  does  not  conflict  with  the  laws
specifically governing savings banks and their holding companies.

      FEDERAL REGULATION OF  STATE-CHARTERED  SAVINGS BANKS. The Bank's deposits
are  insured  by the FDIC.  As an insurer of  deposits,  the FDIC has  extensive
authority over the Bank.  The FDIC issues  regulations,  conducts  examinations,
requires  the filing of reports  and  generally  supervises  the  operations  of
institutions for which it provides deposit insurance.

      The Bank is subject to the rules and  regulations  of the FDIC to the same
extent as all other  state  banks that are not  members of the  Federal  Reserve
System.   The  approval  of  the  FDIC  is  required  prior  to  any  merger  or
consolidation, certain changes in control and the establishment or relocation of
any branch  office of the Bank.  This  supervision  and  regulation  is intended
primarily for the protection of the deposit insurance fund.

      With respect to a change in control,  federal law provides  that no person
directly  or  indirectly  or acting in  concert  with one or more  persons,  may
acquire "control" of a savings institution, such as the Bank (which includes the
Company for this  purpose) at any time  without  giving 60 days' prior notice to
the FDIC and having  received no FDIC objection to such  acquisition of control,
unless the transaction  involves an acquisition of control by a company or other
entity,  in which case, the transaction  would be subject to the approval of the
OTS, rather than the FDIC.

      Control,  as defined  under  federal  law,  means the power,  directly  or
indirectly,  to direct the management or policies of the  institution or to vote
25% or more of any class of voting  securities of the  institution.  In general,
acquisition  of  10% or  more  of any  class  of  voting  stock,  constitutes  a
rebuttable  determination  of  control if (i) the  institution  has any class of
securities  registered under the Securities and Exchange Act of 1934 or (ii) the
person  is the  largest  shareholder  of such  class of  securities  immediately
following  the  acquisition.  In  determining  whether to disapprove a notice of
change in control,  the FDIC must consider,  among other things, the competitive
effect of the

                                      28

<PAGE>
transaction,  the  financial  condition  of the  acquiror  and  the  competence,
integrity and experience of the acquiror and any proposed management  personnel.
The  determination  of control may be rebutted  by  submission  to the FDIC of a
statement  setting forth facts and  circumstances  which would support a finding
that no control relationship will exist and containing certain undertakings.

     The Bank is also subject to certain capital adequacy  guidelines  issued by
the FDIC. See "- Regulatory Capital Requirements."

      Federal  law  also  prohibits  insured  state-chartered  banks,  including
savings banks such as the Bank, from making equity  investments of a type, or in
an amount,  that are not  permissible  for national  banks.  In general,  equity
investments  include  equity  securities,   partnership   interests  and  equity
interests in real estate. Federal law also prohibits such banks from engaging as
principal  in any  activity  not  permissible  for a national  bank without FDIC
approval. Subsidiaries of such insured banks may also not engage as principal in
any activity that is not permissible for a subsidiary of a national bank without
FDIC  approval.  Through its service  corporations,  BMI,  BPI and BHS, the Bank
engages in real estate  development  and  investment  activities  ("Real  Estate
Activities"), which activities are not permissible for a national bank. The FDIC
has authorized  (the "FDIC Order") the Bank and its  subsidiaries to continue to
engage in these Real Estate  Activities  provided  that they comply with certain
requirements. These measures include requiring that any subsidiary through which
the Real Estate  Activities are conducted  (each a "Real Estate  Subsidiary") is
operated to ensure its separate  corporate  existence,  submission  of an annual
investment  plan to the FDIC,  measures to address  concentration  of risk,  and
calculating the Bank's compliance with regulatory capital standards exclusive of
any  investment  in a Real Estate  Subsidiary.  See "- Insurance of Accounts and
Regulation by the FDIC and Regulatory Capital Requirements and Prompt Corrective
Action." See "- Subsidiaries of the Bank."

      The FDIC and the other federal  banking  regulators have issued safety and
soundness  guidelines on matters such as loan  underwriting  and  documentation,
internal controls and audit systems,  interest rate risk exposure, asset growth,
asset quality,  earnings and compensation and other employee benefits.  The FDIC
has adopted final regulations providing that any institution it supervises which
fails to comply with these  guidelines must submit a compliance  plan. A failure
to submit a plan or to comply with an approved plan will subject the institution
to further enforcement action.

     In addition,  the OTS also has  extensive  enforcement  authority  over the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading  or untimely  reports  filed with the OTS. See "-
Holding Company Regulation."

     INSURANCE OF ACCOUNTS AND  REGULATION  BY THE FDIC.  The Bank is subject to
the  rules and  regulations  of the FDIC to the same  extent as all other  state
banks that are not members of the Federal Reserve System.  This  supervision and
regulation  is intended  primarily for the  protection of the deposit  insurance
fund.  In  addition,  the FDIC may prohibit any  FDIC-insured  institution  from
engaging in any activity the FDIC  determines  by  regulation or order to pose a
serious  risk  to the  FDIC.  The  FDIC  also  has  the  authority  to  initiate
enforcement  actions  against  savings  banks  and  may  terminate  the  deposit
insurance  if it  determines  that  the  institution  has  violated  any  law or
regulation or has engaged or is engaging in unsafe or unsound  practices,  or is
in an unsafe or unsound  condition.  Such  enforcement  actions  may include the
assessment of civil money penalties  against the institution and its management,
the imposition of a cease and desist order or supervisory  agreement restricting
any and all of the activities of the institution or requiring  corrective action
to be taken, the prohibition of dividends or other  distributions of capital and
the  prohibition of a person from serving the  institution in such capacity as a
director,  officer or employee. Any such enforcement action could be substantial
and  adversely  affect the Bank,  and  thereby  adversely  affect the  Company's
ability to meet its obligations  with respect to the Senior Notes. See "-Federal
Regulation of State-Chartered Savings Banks."

      The FDIC's deposit  insurance  premiums are assessed  through a risk-based
system,  under which all insured depository  institutions are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (I.E.,  a leverage ratio of at least 5%, a ratio of Tier 1 or
leverage capital to risk-weighted assets ("Tier 1 capital") of at least 6% and a
risk-based  capital ratio of at least 10%) and considered healthy pay the lowest
premium while  institutions  that are less than  adequately  capitalized  (I.E.,
leverage or Tier 1 capital ratios of less than 4% or a risk-based  capital ratio
of less than 8%) and  considered  of  substantial  supervisory  concern  pay the
highest premium.  The current assessment  schedule for both BIF and SAIF insured
institutions  ranges  from 0 to .27% of  deposits.  Risk  classification  of all
insured institutions is made by the FDIC for each semi-annual assessment period.
Deposit insurance  premiums for the fiscal year ended December 31, 1999, totaled
$691,000.

                                      29

<PAGE>
      Under the FDIC  Order,  the Bank's  capital  category  will be  determined
exclusive  of its  investment  in any Real  Estate  Subsidiary  for  purposes of
deposit insurance premium assessments except in determining whether the Bank has
become critically undercapitalized.

     Beginning in 2000, all  FDIC-insured  institutions are also required to pay
an assessment for the repayment of interest on obligations issued by a federally
chartered  corporation  to provide  financing for resolving the thrift crisis in
the 1980's,  in the amount equal to approximately two basis points for each $100
in  domestic  deposits.  Prior  to  2000,  SAIF-insured   institutions  paid  an
assessment  equal to  approximately  six basis  points for each $100 in domestic
deposits,  while  BIF-insured  institutions paid about 1.5 basis points for each
$100 on deposit. These assessments, which may be revised based upon the level of
BIF and SAIF deposits, will continue until the bonds mature in 2017.

      The FDIC has promulgated regulations  implementing limitations on brokered
deposits  pursuant to the  requirements  of federal law. Under the  regulations,
well   capitalized   institutions  are  not  subject  to  any  brokered  deposit
limitations, while adequately capitalized institutions are able to accept, renew
or roll over  brokered  deposits  only (i) with a waiver  from the FDIC and (ii)
subject  to the  limitation  as to all  such  deposits  that  they do not pay an
effective  yield which  exceeds by more than (a) 75 basis  points the  effective
yield paid on deposits of  comparable  size and  maturity in such  institution's
normal  market area for deposits  accepted in its normal market area or (b) 120%
for retail deposits and 130% for wholesale deposits,  respectively,  the current
yield on comparable  maturity U.S.  Treasury  obligations for deposits  accepted
outside the institution's normal market area. Undercapitalized  institutions are
not permitted to accept brokered  deposits,  and may not solicit any deposits by
offering  any  effective  yield that  exceeds  by more than 75 basis  points the
prevailing  effective yields on insured  deposits of comparable  maturity in the
institution's  normal  market area or in the market area in which such  deposits
are  being  solicited.  At  December  31,  1999,  the Bank  qualified  as a well
capitalized  institution  and, as a result,  was not subject to  restrictions on
brokered deposits. See "- Sources of Funds-Deposits."

     REGULATORY  CAPITAL  REQUIREMENTS AND PROMPT CORRECTIVE  REGULATORY Action.
All  state-chartered  institutions such as the Bank, which report to the FDIC as
their primary federal regulator,  must maintain regulatory capital in accordance
with FDIC regulations.

     The FDIC has adopted a minimum  leverage ratio of Tier 1 capital to average
total assets of 3% for banks that have a uniform composite supervisory rating of
1. Higher leverage ratios are required to be considered well  capitalized  under
the  prompt  corrective  action  provisions  of  federal  law.  The FDIC is also
authorized  to  impose  higher  capital   requirements   on  institutions  on  a
case-by-case basis.

     The FDIC has also issued  guidelines  to implement the  risk-based  capital
requirements. The guidelines require a minimum ratio of qualifying total capital
to  risk-weighted  assets of 8%. The  guidelines  are  intended  to  establish a
systematic  analytical framework that makes regulatory capital requirements more
sensitive to  differences  in risk profiles  among banking  organizations,  take
off-balance  sheet items into account in assessing capital adequacy and minimize
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit  equivalent  amounts of off-balance  sheet items,  such as letters of
credit and  outstanding  loan  commitments,  are assigned to one of several risk
categories,  which range from 0% for risk-free assets,  such as cash and certain
U.S.  government  securities,  to 100% for relatively  high-risk assets, such as
loans and investments in fixed assets, premises and other real estate owned. The
aggregate  dollar amount of each category is then  multiplied by the risk-weight
associated  with that category.  The resulting  weighted values from each of the
risk  categories  are then added  together to determine the total  risk-weighted
assets. The FDIC may also require an institution to maintain  additional capital
to account for the  concentration  of credit risk,  the risk of  non-traditional
activities and for interest rate risk.

      Pursuant to the FDIC Order,  the Bank must maintain a Tier 1 capital ratio
of 6%  after  excluding  the  amount  of its  investment  in  BMI  or any  other
subsidiary  (such  as BPI  and  BHS)  through  which  it  conducts  Real  Estate
Activities.  In addition, the aggregate investment in any one such subsidiary is
limited to 10% of Tier 1 capital,  and with respect to all such  subsidiaries is
limited to 20% of Tier 1 capital.

      A  banking  organization's   qualifying  total  capital  consists  of  two
components:  Tier 1 capital (leverage capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained  earnings,  qualifying  noncumulative  perpetual  preferred  stock  and
minority  interests  in  the  equity  accounts  of  consolidated   subsidiaries.
Intangibles,  such as  goodwill,  are  generally  deducted  from Tier 1 capital;
however,   purchased   mortgage  servicing  rights  and  purchased  credit  card
relationships may be included,  subject to certain limitations.  At least 50% of
the banking  organization's  total  regulatory  capital  must  consist of Tier 1
capital.


                                      30

<PAGE>
      Tier 2 capital  may consist of (i) the  allowance  for  possible  loan and
lease losses in an amount up to 1.25% of  risk-weighted  assets and (ii) certain
permanent and  non-permanent  capital  instruments such as cumulative  preferred
stock and subordinated  debt. The inclusion of the foregoing  elements of Tier 2
capital are subject to certain requirements and limitations.

      On October 13,  1997,  the Texas  Department  notified the Bank's Board of
Directors  that the Department  was  rescinding  the  requirement  that the Bank
maintain  minimum capital  requirements  of 9% for leverage  capital and 11% for
risk-based  capital,  based on a business plan submitted to the Texas Department
by the Bank and the Department's  evaluation of the Bank's latest examination as
of March 31, 1997. The business plan generally anticipates a significant decline
in total assets,  however,  the Bank will  continue to originate  loans that are
within the Bank's  loan  policy,  as  approved  by the Board,  and  continue  to
purchase  loan  packages;  a continued  improvement  in the  Company's  level of
classified assets; the discontinuation of the Company's foreign lending program;
and the Bank  maintaining  a leverage  capital  ratio of at least 10%. The Texas
Department  must be provided  with 30 days prior  written  notice of any actions
planned or anticipated that might reasonably be expected to result in a material
deviation  from the business  plan.  For purposes of such advance  notification,
material  deviation  would include,  but not necessarily be limited to, material
deviations in capital levels,  total asset growth or bulk asset purchases in any
quarter,  or any  resumption of foreign  lending.  On October 16, 1998, the Bank
received a no objection letter,  from the Texas Department to its acquisition of
approximately   $330.0  million  of  predominantly   performing   single  family
residential  loans. This acquisition  represented a material  deviation from the
total asset growth projections of the Bank's business plan.

      The following  table sets forth the Bank's  compliance with its regulatory
capital requirements at December 31, 1999:


                                       At December 31, 1999
                                 ---------------------------------
                                    Required          Actual
                                 ---------------- ----------------
                                 Amount  Percent  Amount   Percent
                                 ------  -------  ------   -------
                                      (Dollars in Thousands)

Leverage capital...............    71,365  5.00%  212,478   14.89%
Tier 1 risk-based capital......    62,518  6.00%  212,478   20.39%
Total risk-based capital.......   104,196 10.00%  224,822   21.58%


      When assessing the Bank's capital  adequacy the federal banking  agencies,
including the FDIC with respect to the Bank,  must take into  consideration  the
risk  of  loss  from  changes  in the  value  of the  institution's  assets  and
liabilities due to changes in interest rates. The agencies have adopted a policy
statement that provides  guidance to  institutions on the management of interest
rate risk. Although the FDIC may require the Bank to maintain additional capital
to address such risk,  the Bank believes that in light of its interest rate risk
profile it should not be required to maintain additional capital.

      The FDIC is authorized and, under certain circumstances  required, to take
certain actions against any state-chartered  bank that fails to meet its capital
requirements.  The FDIC is generally  required to restrict the  activities of an
"undercapitalized  institution"  (generally  defined  to be one with  less  than
either  a 4%  leverage  capital  ratio,  a 4%  Tier  1  capital  ratio  or an 8%
risk-based   capital  ratio).   Any  such  institution  must  submit  a  capital
restoration  plan and until such plan is approved  by the FDIC may not  increase
its assets, acquire another institution, establish a branch or engage in any new
activities,  and  generally  may not  make  capital  distributions.  The FDIC is
authorized to impose the  additional  restrictions,  discussed  below,  that are
applicable to significantly undercapitalized institutions.

      Any  institution  that  fails  to  comply  with  its  capital  plan  or is
"significantly  undercapitalized"  (I.E.,  Tier 1 or core capital ratios of less
than 3% or a risk-based  capital  ratio of less than 6%) must be made subject to
one or more of additional specified actions and operating  restrictions mandated
by federal law. These actions and restrictions include requiring the issuance of
additional  voting  securities;  limitations  on asset  growth;  mandated  asset
reduction; changes in senior management;  divestiture,  merger or acquisition of
the institution;  restrictions on executive  compensation;  and any other action
the  FDIC  deems   appropriate.   An   institution   that  becomes   "critically
undercapitalized"  (I.E., a tangible  capital ratio of 2% or less) is subject to
further mandatory restrictions on its activities in addition to those applicable
to  significantly  undercapitalized  associations.  In  addition,  the FDIC must
appoint a receiver or  conservator  for an  institution,  with  certain  limited
exceptions, within 90 days after it becomes critically undercapitalized.


                                      31

<PAGE>

      Under the FDIC  Order,  the Bank's  capital  category  will be  determined
exclusive of its investment in any Real Estate  Subsidiary for purposes of these
prompt corrective  regulations except in determining whether the Bank has become
critically  undercapitalized.  In the event that the Bank  fails to remain  well
capitalized  at the and of any  quarter as a result of these  conditions,  it is
required  to notify the FDIC within 15 days and to file an  acceptable  plan for
restoring capital to the well-capitalized level.

      Any  undercapitalized  institution  is  also  subject  to  other  possible
enforcement actions by the FDIC. Such actions could include a capital directive,
a  cease-and-desist   order,   civil  money  penalties,   the  establishment  of
restrictions on all aspects of the  association's  operations or the appointment
of a receiver or conservator or a forced merger into another institution.

      If the FDIC  determines  that an  institution  is in an unsafe or  unsound
condition  or is engaged in an unsafe or unsound  practice it is  authorized  to
reclassify  a  well  capitalized   institution  as  an  adequately   capitalized
association  and if the  institution  is adequately  capitalized,  to impose the
restrictions applicable to an undercapitalized  institution.  If the institution
is  undercapitalized,   the  FDIC  is  authorized  to  impose  the  restrictions
applicable to a significantly undercapitalized institution. The purpose of these
provisions is to resolve the problems of insured depository  institutions at the
least possible long-term cost to the appropriate deposit insurance fund.

      Any  undercapitalized  depository  institution  must submit an  acceptable
capital restoration plan to the appropriate federal banking agency 45 days after
becoming   undercapitalized.   In   addition,   each  company   controlling   an
undercapitalized  depository  institution  must  provide  a  guarantee  that the
institution  will comply with the capital plan until the depository  institution
has  been  adequately  capitalized  on an  average  basis  during  each  of four
consecutive  calendar quarters and must otherwise provide adequate assurances of
performance.  The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time  the  institution  became  undercapitalized  or (b)  the  amount  which  is
necessary to bring the institution  into  compliance with all capital  standards
applicable to such  institution as of the time the  institution  fails to comply
with its  capital  restoration  plan.  Finally,  the FDIC may  impose any of the
additional  restrictions  or  sanctions  that  it may  impose  on  significantly
undercapitalized institutions if it determines that such action will further the
purpose of the provisions.

      The imposition by the FDIC of any of these measures on the Bank may have a
substantial adverse effect on the Company's operations and profitability.

      LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Under Texas law,
a savings bank may declare and pay dividends out of current and retained  income
so long as the savings bank meets its capital requirements. The Bank is required
to provide  notice to the OTS at least 30 days'  prior to the  declaration  of a
dividend by the Bank to the Company.  In a letter from the OTS dated February 3,
1999, the OTS acknowledged prior notice and that the Bank may pay dividends,  as
needed, up to 100% of earnings for the fiscal  year-ended  December 31, 1999. On
December 22, 1999, the OTS approved an additional dividend of $55.0 million that
could be paid in  excess  of the 100% of  earnings  for the  fiscal  year  ended
December 31, 1999. As of March 31, 2000, this  additional  dividend has not been
paid.

      In a letter  dated March 5, 2000,  the OTS  acknowledged  prior notice and
that the Bank may pay dividends up to 100% of earnings for the fiscal year ended
December 31, 2000. The FDIC has the authority to prohibit the Bank from engaging
in an unsafe or unsound  practice  in  conducting  its  business  and under such
authority could impose dividend restrictions.  Further, the FDIC has established
guidelines with respect to the  maintenance of appropriate  levels of capital by
savings banks under its jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the prompt
corrective  action  provisions  described  herein  could  limit  the  amount  of
dividends  which  the Bank may pay to the  Company.  In  addition,  federal  law
prohibits an insured  depository from paying  dividends on its stock or interest
on its  debentures  (if such  interest  is  required  to be paid only out of net
profits) or distribute  any of its capital  assets while it is in default in the
payment of any assessment due to the FDIC.

      LIQUIDITY.  All Texas  savings  banks,  are  required to maintain  minimum
levels of liquid assets as defined by the Texas Department. A Texas savings bank
is required to  maintain  liquidity  in an amount not less than 10% of an amount
equal to its average  daily  deposits for the most recently  completed  calendar
quarter in cash or readily  marketable  securities.  At December 31,  1999,  the
Bank's liquidity ratio was 17.14%.

                                      32
<PAGE>

      QUALIFIED  THRIFT LENDER TEST.  All  institutions  with holding  companies
governed by the OTS, are required to meet a qualified thrift lender ("QTL") test
to avoid  certain  restrictions  on their  operations.  One version of this test
requires a savings  institution to have at least 65% of its portfolio assets (as
defined by regulation) in qualified thrift  investments on a monthly average for
nine out of every 12 months on a rolling basis. Such assets primarily consist of
residential  housing  related loans and  investments.  At December 31, 1999, the
Bank met the test for the twelve month period. In the event that the Bank should
fail to qualify as a QTL, it would not be able to requalify for a period of five
years.  Upon such a failure,  the Company would lose its status as a savings and
loan holding company and would be required to register as a bank holding company
and become subject to the activity  restrictions  applicable to such  companies.
See "- Holding Company Regulation."

      COMMUNITY  REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
all FDIC insured  institutions  have a  continuing  and  affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire community,  including low and moderate income neighborhoods.  The CRA
requires the FDIC, in connection with the examination of the Bank, to assess the
institution's  record of meeting the credit needs of its  community  and to take
this record into account in its  evaluation of certain  applications,  such as a
merger or the establishment of a branch, by such institution.  An unsatisfactory
rating  may be used as the basis for the denial of an  application  by the FDIC.
The Bank received a "satisfactory" rating on its last CRA examination.  The Bank
has received approval from the FDIC to be designated as a wholesale  institution
for purposes of evaluation under the revised CRA.

      In addition,  the Texas Act and  regulations  impose a requirement  that a
savings bank maintain investments equal to at least fifteen percent of its local
area deposits in first and second lien residential  mortgage loans or foreclosed
residential mortgage loans originated from within the Bank's local service area;
home improvement loans; interim residential  construction loans; mortgage backed
securities secured by loans from within the bank's local service area; and loans
for community  reinvestment purposes. The Bank's local service area is currently
delineated to include Collin, Dallas, Denton, Ellis, Fort Bend, Harris, Johnson,
Kaufman,  Liberty,  Montgomery,  Parker, Rockwall,  Tarrant and Waller Counties,
Texas. At December 31, 1999, the Bank was in compliance with the requirements of
the Texas Act.

      TRANSACTIONS WITH AFFILIATES.  The Bank is subject to certain restrictions
imposed by federal and state law on any extensions of credit to, or the issuance
of a  guarantee  or  letter  of  credit  on  behalf  of,  the  Company  or other
affiliates, the purchase of or investments in stock or other securities thereof,
the taking of such securities as collateral for loans and the purchase of assets
of the Company or other affiliates.  Such  restrictions  prevent the Company and
such other  affiliates from borrowing from the Bank unless the loans are secured
in accordance with federal law. Further,  such transactions by the Bank with the
Company or with any other  affiliate is limited to 10% of the Bank's capital and
surplus  (as  defined  by  federal  regulations)  and  such  secured  loans  and
investments  are limited,  in the  aggregate,  to 20% of the Bank's  capital and
surplus  (as defined by federal  law).  In  addition,  any  transaction  with an
affiliate  of the  Bank  must be on  terms  and  under  circumstances  that  are
substantially  the  same  as a  comparable  transaction  with  a  non-affiliate.
Additional  restrictions on  transactions  with affiliates may be imposed on the
Bank under the prompt corrective action provisions.

      HOLDING  COMPANY  REGULATION.  The  Company is a unitary  savings and loan
holding  company  subject to  regulatory  oversight  by the OTS.  The Company is
registered  with and files reports with the OTS and is subject to regulation and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its  non-savings  bank  subsidiaries  which also  permits the OTS to
restrict or prohibit  activities that are determined to be a serious risk to the
subsidiary  savings bank. The Company is also subject to regulation by the Texas
Department. See "- Texas Law and Supervision by the Texas Department."

      As a unitary savings and loan holding  company,  the Company  generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings institution)
would generally become subject to additions or restrictions.

      If the Bank fails the QTL test,  the Company  must  register  as, and will
become subject to, the restrictions applicable to bank holding companies.

      FEDERAL SECURITIES LAW. The Senior Notes are registered with the SEC under
the  Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act").  As a
result,  the  Company  is  subject  to  certain  information,   insider  trading
restrictions and other requirements of the SEC under the Exchange Act.

                                       33

<PAGE>
      The Senior Notes held by persons who are affiliates  (generally  officers,
directors and principal  shareholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of securities in any three-month period.

      FEDERAL RESERVE SYSTEM.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking accounts).  At December 31, 1999, the Bank was in compliance with these
reserve  requirements.  The balances maintained to meet the reserve requirements
imposed  by  the  Federal  Reserve  Board  may  be  used  to  satisfy  liquidity
requirements that may be imposed by the Texas Department. See "Liquidity."

      Savings  institutions  are  authorized to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve Board  regulations  require savings
institutions to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

      FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of Dallas,
which is one of 12 regional FHLBs,  that  administers the home financing  credit
function of savings institutions.  Each FHLB serves as a reserve or central bank
for its members  within its assigned  region.  It makes loans to members  (I.E.,
advances) in accordance with policies and procedures established by the board of
directors  of the  FHLB.  These  policies  and  procedures  are  subject  to the
regulation and oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition,  all long-term  advances must be used for  residential
home financing.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of Dallas.  At December 31, 1999,  the Bank had $9.7 million in FHLB stock,
which was in  compliance  with this  requirement.  In past  years,  the Bank has
received  substantial  dividends on its FHLB stock.  Over the past five calendar
years such dividends have averaged 5.95% and were 5.50% for calendar year 1999.

FEDERAL AND STATE TAXATION

      The Company and its  subsidiaries  have  elected  Subchapter  S status for
federal income tax purposes.  As a result the Company does not generally pay any
federal  taxes  on  net  income.  The  only  exception  would  involve  possible
Subchapter C tax  liability on net built-in  gains as of January 1, 1997,  which
may  potentially  be recognized  during the 10 year period  ending  December 31,
2006.  Recognition of built-in  gains/losses are subject to certain limitations.
At  December  31,  1999,  the  Company  had net  unrealized  built-in  gains  of
approximately $50.3 million.

      The future tax  liability for the taxable  earnings of Beal  Financial and
subsidiaries is the responsibility of the shareholders of Beal Financial.  It is
anticipated that future dividends to shareholders will be made to meet their tax
liability related to the earnings of Beal Financial.

      The Company and its  subsidiaries  filed  consolidated  federal income tax
returns on a fiscal year basis using the accrual method of  accounting.  Savings
associations,  such as the Bank, that file federal income tax returns as part of
a consolidated group are required by applicable U.S.  Department of the Treasury
regulations  to reduce  their  taxable  income for  purposes  of  computing  the
percentage  bad debt  deduction  for losses  attributable  to  activities of the
non-savings  association members of the consolidated group that are functionally
related to the activities of the savings association member.

      The  percentage  of  specially  computed  taxable  income that was used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable  income  method (the  "percentage  bad debt  deduction")  was 8%. The
percentage bad debt deduction thus computed was reduced by the amount  permitted
as a  deduction  for  non-qualifying  loans  under the  experience  method.  The
availability  of the  percentage of taxable income method  permitted  qualifying
savings  associations to be taxed at a lower  effective  federal income tax rate
than that applicable to corporations generally (approximately 32.2% assuming the
maximum percentage bad debt deduction).

                                       34

<PAGE>
     In August 1996, legislation was enacted that repealed the reserve method of
accounting  (including  the  percentage of taxable  income  method) used by many
thrifts,  including  the Bank,  to calculate  their bad debt reserve for federal
income tax purposes.  As a result, large thrifts such as the Bank must recapture
that  portion of the reserve  that exceeds the amount that could have been taken
under the specific  charge-off  method for post-1987 tax years.  The legislation
also requires  thrifts to account for bad debts for federal  income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The recapture will occur over a six-year period, the commencement of which
will be delayed until the first taxable year beginning  after December 31, 1997,
provided the institution meets certain  residential  lending  requirements.  The
Bank has met the residential lending requirement and recapture was delayed until
the 1998 taxable year. As a Subchapter-S Corporation,  recapture will be treated
as a built-in gain in the year recognized.  To the extent earnings  appropriated
to a savings  association's  bad debt  reserves for  "qualifying  real  property
loans" and deducted for federal income tax purposes exceed the allowable  amount
of such reserves  computed under the experience  method and to the extent of the
association's supplemental reserves for losses on loans ("Excess"),  such Excess
may not, without adverse tax  consequences,  be utilized for the payment of cash
dividends or other  distributions to a shareholder  (including  distributions on
redemption,  dissolution  or  liquidation)  or for any other purpose  (except to
absorb bad debt  losses).  As of December  31, 1999,  the Bank's  Excess for tax
purposes totaled  approximately $7.9 million. The management of the Company does
not believe that the  legislation  will have a material impact on the Company or
the Bank.

      The Bank and its  consolidated  subsidiaries  have been audited by the IRS
with respect to  consolidated  federal income tax returns  through  December 31,
1997.  With  respect to years  examined by the IRS, all  deficiencies  have been
resolved.  In the opinion of management,  any examination  (including returns of
subsidiaries  and predecessors of, or entities merged into, the Company or Bank)
would not result in a deficiency  which could have a material  adverse effect on
the  financial  condition  of the  Company,  the  Bank  and  their  consolidated
subsidiaries.

      TEXAS STATE INCOME TAXATION.  The Company, the Bank and their subsidiaries
currently file Texas franchise tax returns. Texas imposes a franchise tax on the
taxable income of savings  institutions and other corporations.  The Company and
the Bank each pay an annual  franchise  tax  equal to the  greater  of $2.50 per
$1,000 of taxable capital apportioned to Texas, or $45.00 per $1,000 net taxable
earned  surplus  apportioned  to Texas.  Taxable  earned  surplus is the federal
corporate  taxable income of each company within the corporate group  determined
on a separate  company  basis  with  certain  modifications.  For the year ended
December 31, 1999, total state taxes were $1.6 million.

      DELAWARE  TAXATION.  As a Delaware holding company,  the Beal Banc Holding
Company is exempt from the Delaware corporate income tax but is required to file
an annual  report with and pay an annual fee to the State of Delaware.  The Beal
Banc Holding  Company is also subject to an annual  franchise tax imposed by the
State of Delaware.

ITEM 2.     PROPERTIES


      The Company  conducts its business at its headquarters and branch offices.
The  following  table sets forth  information  relating to each of the Company's
properties as of December 31, 1999.
                                           Total
                                Owned   Approximate
                       Year      or       Square     Book
    Location         Acquired  Leased     Footage    Value
------------------   --------  ------   ----------- -------
                                                    (In
                                                    Thousands)
Corporate
Headquarters:          1992     Owned     167,138    $4,692
Beal Bank Center I
15770 North Dallas
Parkway
Dallas, Texas

Branch Office:
5100 Westheimer        1995    Leased       5,064       ---
Houston, Texas

      The Company  acquired  Beal Bank Center I in 1992 and  currently  occupies
33,800 square feet in the building.  At December 31, 1999,  the building was 78%
occupied.  At December 31, 1999, the Company's total  investment in the property
was $6.4 million with a net book value of $4.7 million.

      The total net book value of the Bank's  premises and equipment  (including
land, building and leasehold improvements and furniture, fixtures and equipment)
at December 31, 1999 was $5.5 million.

                                      35

<PAGE>
ITEM 3.     LEGAL PROCEEDINGS

      The Company is  involved in various  legal  proceedings  occurring  in the
ordinary  course of business.  Management of the Company,  based on  discussions
with litigation counsel, believes that such proceedings will not have a material
adverse  effect on the  financial  position  or  results  of  operations  of the
Company. There can be no assurance that any of the outstanding legal proceedings
to which the Company is a party will not be decided  adversely to the  Company's
interests  and have a  material  adverse  effect on the  financial  position  or
results of operations of the Company.


ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


      No matters  were  submitted  to a vote of security  holders of the Company
during the quarter ended December 31, 1999.


ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS


     There is no public market in the Company's  common stock.  The common stock
is held of  record by two  stockholders.  See  "Security  Ownership  of  Certain
Beneficial Owners and Management - Common Stock."


                                      36

<PAGE>



ITEM 6.     SELECTED FINANCIAL DATA


      The following  tables  present,  for the fiscal years  indicated,  certain
summary  historical  data for the  Company.  In the opinion of  management,  all
adjustments  (which consist of normal recurring  accruals)  necessary for a fair
presentation  of the results of operations  for such periods have been included.
This data should be read in conjunction with the separate consolidated financial
statements and related notes included herein.
<TABLE>
<CAPTION>
                                        Twelve
                                        Months
                                        Ended
                          At June 30, December 31,          At December 31,
                          ----------- ------------ ----------------------------------
                            1996         1996         1997        1998        1999
                          ----------- ------------ --------- ------------ -----------
<S>                           <C>      <C>            <C>       <C>            <C>
                                          (Dollars in Thousands)
Selected Financial
Condition Data:
Total assets..............$1,269,279  $1,394,906  $1,365,754   $1,353,474  $1,429,906
Loans receivable, net.....   897,414   1,054,204     887,833    1,045,546   1,116,409
Securities available for
sale......................   194,699     123,939     111,376       89,581      70,080
Deposits..................   891,304   1,043,433   1,001,476    1,005,617     993,289
Total borrowings..........   263,519     217,842     174,787      144,378     242,608
Stockholders' equity......    93,172     116,797     160,820      191,226     180,162
</TABLE>

<TABLE>
<CAPTION>
                                        Twelve
                                        Months
                                        Ended
                          At June 30, December 31,          At December 31,
                          ----------- ------------ ----------------------------------
                            1996         1996         1997        1998        1999
                          ----------- ------------ --------- ------------ -----------
<S>                           <C>      <C>            <C>       <C>            <C>
                                       (Dollars in Thousands)

Selected Operations Data:
Total interest income..... $140,948  $177,339      $169,181   $149,966     $171,999
Total interest expense....   56,818    67,708        67,856     57,817       62,495
                           --------  --------      --------   --------     --------
Net interest income.......   84,130   109,631       101,325     92,149      109,504
Provision for loan losses.    9,044     6,423         3,410      5,577        3,821
                           --------  --------      --------   --------     --------
Net interest income after
provision for loan losses.   75,086   103,208        97,915     86,572      105,683
Gain on sales of
interest-earning
assets....................    8,413     6,101           550        ---          ---
Gain on sales of real
estate....................    7,068    10,776        13,708     39,155       13,618
Other non-interest income.    1,202     2,615         3,013      6,055        6,111
                           --------  --------      --------   --------     --------
Total non-interest income.   16,683    19,492        17,271     45,210       19,729
Total non-interest expense   22,456    38,588        22,144     20,513       21,329
                           --------  --------      --------   --------     --------
Income before income taxes   69,313    84,112        93,042    111,269      104,083
Income taxes..............   25,153    30,280         6,408      6,049        3,230
                           --------  --------      --------   --------     --------
Net income................ $ 44,160  $ 53,832      $ 86,634   $105,220     $100,853
                           ========  ========      ========   ========     ========
</TABLE>




                                      37

<PAGE>

<TABLE>
<CAPTION>
                                              Twelve
                                              Months
                                               Ended
                                At June 30, December 31,          At December 31,
                                ----------- ------------ ----------------------------------
                                   1996         1996         1997        1998        1999
                                ----------- ------------ --------- ------------ -----------
<S>                                <C>      <C>            <C>       <C>            <C>
                                                (Dollars in Thousands)
SELECTED FINANCIAL RATIOS AND
OTHER DATA:
Performance Ratios:
   Return on assets (ratio of net
    income to average total
    assets)......................   4.46%      4.36%       6.66%        8.98%        7.59%
   Return on equity (ratio of net
   income to average equity).....  64.51      57.10       59.77        61.32        62.81
   Interest rate spread
    information, average
    during period.................  9.43       9.64        8.72         8.80         8.17
   Net interest margin(1).........  9.32       9.68        8.86         9.07         8.53
   Ratio of operating expense to
    average total assets..........  2.27       3.13        1.71         1.75         1.61
   Ratio of average
    interest-earning assets to
    average interest-bearing
    liabilities................... 98.30     102.29      102.60       104.78       107.06

Quality Ratios:
   Net non-performing assets to
    total assets, at
    end of period................. 11.84      17.77       17.88        12.80         8.68
   Allowance for loan losses to
    net non-performing loans......  9.65       6.49        9.17        11.49        15.11
   Allowance for loan losses to
    loans receivable, net.........  1.32       1.25        1.34         1.33         1.11
   Net charge-offs to average
   loans, net.....................   .39        .38         .49          .43          .51

Equity Ratios:
   Equity to total assets, at end
    of period.....................  7.34       8.37       11.78        14.13        12.60
   Average equity to average
    assets........................  6.91       7.64       11.19        14.65        12.08

Ratio of Earnings to Fixed
Charges:
   Excluding interest on deposits. 7.4:1      8.1:1       10.4:1       11.4:1       9.8:1
   Including interest on deposits. 1.4:1      1.4:1        1.5:1        2.1:1       1.9:1
Other Data:
   Number of full-service offices.     3          3            3            2           2
</TABLE>

(1) Net interest income divided by average interest-earning assets.



                                      38

<PAGE>
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS

GENERAL

      The  Company's  results  of  operations  are  dependent  primarily  on net
interest income,  which is determined by the difference between the yield earned
on  interest-earning  assets  and  rates  paid on  interest-costing  liabilities
("interest rate spread").  The yield on  interest-earning  assets is enhanced by
the  accretion of unearned  discounts,  which are  recognized on the level yield
method as dictated  by  generally  accepted  accounting  principles.  Results of
operations  are also  affected by the Company's  provision for loan losses,  the
level of operating expenses,  and the net gain (loss) from loans or other assets
which have been sold. Due to the substantial discounts generally associated with
the  majority  of the  Company's  purchased  loans in  prior  years,  the  gains
recognized  upon the sales of such loans or the underlying  collateral have been
significant.

     The Company's  results of  operations  are also  significantly  affected by
prevailing  economic  conditions,   competition,  regulatory  factors,  and  the
monetary and fiscal policies of  governmental  agencies.  The Company's  primary
business of purchasing  discounted loans and assets is influenced by the general
level of product available from U.S. government agencies and private sellers and
the competition for such loans from other purchasers.  Deposit flows and cost of
funds are  influenced  by  prevailing  market  rates of  interest  primarily  on
competing investments, account maturities, and the levels of personal income and
savings  in the  Company's  market  areas.  Future  changes in  applicable  law,
regulations  or  government  policies  may also  have a  material  impact on the
Company.

FINANCIAL CONDITION

      The Company's total assets remained relatively unchanged, increasing $76.4
million to $1.43 billion at December 31, 1999.  The asset  composition  changed,
however,  with net loans  increasing  approximately  $70.9 million,  due to loan
purchases and originations  exceeding loan payoffs and cash and cash equivalents
increasing  $43.3  million  due to  concerns  related to the year 2000  computer
issue.  This  increase  was  funded  primarily  by  proceeds  received  upon the
disposition  of securities  available for sale of $19.5  million,  $13.2 million
real estate  held for  investment  or sale and an increase in Federal  Home Loan
Bank advances of $111.0 million.

      The Company's total assets remained  unchanged at $1.4 billion at December
31, 1998 and December 31, 1997,  respectively.  The asset  composition  changed,
however,  with net loans increasing  approximately  $157.7 million,  due to loan
purchases and  originations  exceeding  loan  payoffs.  This increase was funded
primarily by a decline in cash balances of $78.7  million and proceeds  received
upon the disposition of $70.3 million real estate held for investment or sale.

      The Company's total assets remained  unchanged at $1.4 billion at December
31, 1997 and December 31, 1996,  respectively.  The asset  composition  changed,
however,  with net loans decreasing  approximately  $167.6 million,  due to loan
payoffs and foreclosure of non-performing loans, exceeding loan originations and
discounted loan purchases.  In addition,  cash balances  increased $84.5 million
and real  estate  held for  investment  or sale  increased  $74.0  million.  The
increase in cash and cash equivalents was the result of normal  operations.  The
increase in real estate held for  investment or sale was primarily the result of
additional  foreclosures  occurring as part of the normal resolution process for
non-performing assets.

      Total  liabilities  increased  $87.5  million  from  December  31, 1998 to
December  31,  1999,  primarily  due to an  increase  in Federal  Home Loan Bank
advances  of $111.0  million  partially  offset by a $12.3  million  decrease in
deposit accounts and a $13.0 million reduction in senior notes outstanding.

      Total  liabilities  decreased  $42.7  million  from  December  31, 1997 to
December  31,  1998,  primarily  due to a  decrease  in  Federal  Home Loan Bank
advances of $30.0 million and a $16.4 million decrease in other liabilities.

     Total  liabilities  decreased  $73.7  million  from  December  31,  1996 to
December 31, 1997,  primarily due to a decrease of $42.0 million in deposits and
a decrease in Federal Home Loan Bank advances of $36.0 million.  The decrease in
deposits  and  advances   from  the  FHLB  reflect  the  decrease  in  net  loan
receivables.

     Stockholders' equity decreased $11.1 million or 5.8% from $191.2 million at
December 31, 1998 to $180.2  million at December 31, 1999 due to a $60.0 million
loan to a shareholder  and dividends of $47.6 million paid in excess of earnings
of $100.9 million.  Stockholders' equity increased $30.4 million, or 18.9%, from
$160.8  million at December 31, 1997 to $191.2  million at December 31, 1998 due
to
                                      39

<PAGE>
earnings   exceeding   dividends  paid  to   stockholders.   Dividends  paid  to
stockholders  totaled  $47.6  million and $87.6  million  during the years ended
December 31, 1999 and 1998,  respectively.  Beal  Financial  anticipates  future
dividends to be significant,  subject to limitations imposed upon Beal Financial
by the Trust  Indenture  (the  "Indenture")  governing  the  Senior  Notes.  The
Indenture  limits  dividends to 50% of  consolidated  net income since August 1,
1995. At December 31, 1999,  under the terms of the  Indenture,  Beal  Financial
would have been permitted to dividend an additional $10.2 million.

RESULTS OF OPERATIONS

      GENERAL.  The level of net income  experienced  by the Company in the year
ended  December  31,  1997 and prior  periods  resulted  primarily  from (i) the
significant  increase in the  average  balance of  interest-earning  assets as a
result of the  Company's  efforts to return  non-performing  loans to performing
status  and (ii)  gains on the sales of loans and gains on sale of real  estate.
Gains on the sales of loans and real estate  generally  are dependent on various
factors which are not necessarily  within the control of the Company,  including
market and economic conditions.  As a result, there can be no assurance that the
gains on sales of loans and real estate reported by the Company in prior periods
will be  reported  in  future  periods  or that  there  will not be  substantial
periodic variation in the results from such activities.


                                      40

<PAGE>
     AVERAGE  BALANCE,  INTEREST  AND AVERAGE  YIELDS AND RATES.  The  following
tables  present for the periods  indicated  the total dollar  amount of interest
income from average interest-earning assets and the resultant yields, as well as
the interest expense on average interest-bearing liabilities,  expressed both in
dollars and rates. No tax equivalent adjustments were made. All average balances
are daily average balances.  Non-accruing  loans have been included in the table
as loans carrying a zero yield.
<TABLE>
<CAPTION>


                                                                     Year Ended December 31,
                                               1997                           1998                           1999
                                  --------------------------------------------------------------------------------------------
                                    Average   Interest             Average   Interest             Average   Interest
                                   Outstanding Earned/   Yield/   Outstanding Earned/   Yield/   Outstanding Earned/   Yield/
                                     Balance    Paid      Rate      Balance    Paid      Rate      Balance    Paid      Rate
                                  ----------- --------- --------  ----------- -------  -------- ------------ -------  --------
<S>                                <C>           <C>    <C>          <C>      <C>         <C>       <C>      <C>        <C>

Interest-Earning Assets:
 Loans receivable(1)..............  $  967,265 $157,458    16.28%  $  853,697 $139,456   16.34%  $1,064,125  $156,673    14.72%
 Mortgage-backed securities.......     117,141    8,407     7.18      101,805    7,334    7.20       78,661     5,932     7.54
 Interest-earning deposits........      49,653    2,730     5.50       52,940    2,709    5.12       62,187     2,927     4.71
 FHLB stock.......................       9,835      586     5.96        7,887      467    5.92        9,095       499     5.49
                                    ---------- --------            ---------- --------           ----------  --------
  Total interest-earning assets(1)  $1,143,894 $169,181    14.79   $1,016,329 $149,966   14.76   $1,214,068  $166,031    13.68
                                    ========== --------            ========== --------           ==========  --------

Interest-Bearing Liabilities:
 Savings deposits.................     185,233    9,025     4.87      173,491    8,323    4.80      182,227     8,249     4.53
 Certificate accounts.............     847,937   48,955     5.77      692,172   38,770    5.60      824,771    42,403     5.14
 Senior notes, net................      57,131    7,986    13.98       57,233    8,077   14.11       55,223     7,934    14.37
 Borrowings.......................      28,286    1,890     6.68       47,071    2,647    5.62       71,764     3,909     5.45
                                    ---------- --------            ---------- --------           ----------  --------
Total interest-bearing
liabilities.......................  $1,118,587   67,856     6.07   $  969,967   57,817    5.96   $1,133,985    62,495     5.51
                                    ========== --------            ========== --------           ==========  --------
Net interest income...............             $101,325                       $ 92,149                       $103,536
                                               ========                       ========                       ========
Net interest rate spread..........                          8.72%                         8.80%                           8.17%
Net earning assets................  $   25,307                     $   46,362                    $   80,083
                                    ==========                     ==========                    ==========
Net yield on average interest-
  earning assets..................                          8.86%                         9.07%                           8.53%
Average interest-earning assets to
  average interest-bearing
  liabilities.....................               102.26%                        104.78%                        107.06%

</TABLE>
(1) Calculated net of deferred loan fees, loan  discounts,  loans in process and
loss reserves.




                                41

<PAGE>



      RATE/VOLUME ANALYSIS. The following schedule presents the dollar amount of
changes  in  interest  income  and  interest  expense  for major  components  of
interest-earning  assets  and  interest-bearing  liabilities.  It  distinguishes
between the changes related to outstanding  balances and that due to the changes
in  interest   rates.   For  each  category  of   interest-earning   assets  and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (I.E.,  changes in volume multiplied by old rate) and (ii)
changes in rate (I.E.,  changes in rate multiplied by old volume).  For purposes
of this table,  changes  attributable  to both rate and volume,  which cannot be
segregated,  have been allocated proportionately to the change due to volume and
the change due to rate.

<TABLE>
<CAPTION>

                                                               Year Ended                          Year Ended
                                                          December 31, 1997 vs                December 31, 1998 vs
                                                            December 31, 1998                   December 31, 1999
                                                 -------------------------------------- ------------------------------
                                                        Increase                              Increase
                                                       (Decrease)                            (Decrease)
                                                         Due to               Total            Due to            Total
                                                 ----------------------     Increase    --------------------   Increase
                                                   Volume        Rate      (Decrease)     Volume      Rate    (Decrease)
                                                 ----------   ---------   ------------  -----------  -------  ----------
<S>                                               <C>           <C>            <C>            <C>     <C>        <C>
                                                                          (Dollars in Thousands)
Interest-Earning Assets:
 Loans receivable...............................   $(16,528)   $ (1,434)      $(17,962)    $ 16,754  $ 14,517    $ 31,271
 Loans receivable - discount....................     (2,026)       1,986           (40)      11,962  (26,016)     (14,054)
                                                   --------    ---------   -----------     --------  -------     --------
 Loans receivable - total.......................    (18,554)         552       (18,002)      28,716  (11,499)      17,217
 Mortgage-backed securities.....................     (1,105)          32        (1,073)     (1,766)      364       (1,402)
 Interest-earning deposits......................        448         (469)          (21)         403     (185)         218
 Other..........................................       (115)          (4)         (119)          61      (29)          32
                                                   --------    ---------   -----------     --------  -------     --------
   Total interest-earning assets................    (19,326)         111       (19,215)      27,414  (11,349)      16,065
                                                   ========    =========   ===========     ========  =======     ========


Interest-Bearing Liabilities:
 Savings deposits...............................   $   (565)   $    (137)  $      (702)    $    616  $  (690)    $    (74)
 Certificate accounts...........................     (8,762)      (1,423)      (10,185)       6,359   (2,726)       3,633
 Senior notes, net..............................         14           77            91         (294)     151         (143)
 Borrowings.....................................        994         (237)          757        1,342      (80)      (1,262)
                                                   --------    ---------   -----------     --------  -------     --------
   Total interest-bearing liabilities...........   $ (8,319)   $  (1,720)      (10,039)       8,023   (3,345)       4,678
                                                   ========    =========   -----------     ========  =======     --------

Change in net interest income...................                           $    (9,176)                          $ 11,387
                                                                           ===========                           ========
</TABLE>


                                      42

<PAGE>
COMPARISON OF OPERATING  RESULTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND
TWELVE MONTHS ENDED DECEMBER 31, 1998

      NET INCOME.  For the fiscal year ended  December 31,  1999,  net income of
$100.9  million  represented  a decrease  of $4.4  million,  or 4.2% from $105.2
million for the year ended December 31, 1998. As discussed in more detail below,
the  decrease  in net income  was  primarily  due to a decrease  in gain on real
estate  transaction of $25.5 million and an increase of $816,000 in non-interest
expenses.  This  decrease  was  offset by an  increase  of $17.4  million in net
interest  income,  a decrease in provision for loan losses of $1.8 million and a
decrease in income taxes of $2.8 million.

      NET INTEREST  INCOME.  Net interest  income  increased  $17.4 million,  or
18.8%, from $92.1 million at December 31, 1998 to $109.5 million at December 31,
1999.  The  average  balance  of  interest-earning  assets  increased  by $197.7
million.  The net interest  spread  however  decreased from 8.80% for the twelve
months ended December 31, 1998 to 8.17% for the twelve months ended December 31,
1999.

      INTEREST INCOME.  Interest income increased $22.0 million,  or 14.7%, from
$150.0 million at December 31, 1998 to $172.0 at December 31, 1999.  Interest on
loans, including fees increased $31.2 million, interest on investment securities
decreased $1.1 million and purchased discount accretion  decreased $8.1 million.
The average balance of interest earning assets increased,  however this increase
was offset by a decrease  in the yield on interest  earning  assets by 1.08% for
the year ended December 31, 1999, as compared to the same period ending December
31, 1998.  This  decrease in yield was  primarily  due to a decrease in yield on
loans,  net, from 16.34% for the year ended  December 31, 1998 to 14.72% for the
year ended December 31, 1999.

      INTEREST  EXPENSE.  Interest  expense  increased $4.7 or 8.1%,  from $57.8
million at December 31, 1998 to $62.5 million at December 31, 1999. The majority
of the increase was the $3.6  million  increase in interest  expense on deposits
coupled  with an  increase in interest  on FHLB  advances of $1.3  million.  The
average balance of interest-bearing liabilities increased $164.0 million for the
twelve  months  ended  December  31,  1999.  The 45 basis point  decrease in the
average  cost of  interest-bearing  liability  from 5.96% for the  twelve  month
period ended December 31, 1998 to 5.51% for the twelve months ended December 31,
1999 was  primarily  due to a decrease in the average  cost of  certificate  and
savings accounts.

      PROVISIONS FOR LOAN LOSSES. The provision for loan losses is determined by
management as an amount  sufficient to maintain the allowance for loan losses at
a level  considered  adequate  to  absorb  future  losses  inherent  in the loan
portfolio in accordance  with  generally  accepted  accounting  principles.  The
provision for loan losses  decreased $1.8 million or 31.5% for the twelve months
ended December 31, 1999 primarily as a result of a decrease in non-accrual loans
during this period.

      The  Company  establishes  an  allowance  for  loan  losses  based  upon a
systematic  analysis  of risk  factors  in the  loan  portfolio.  This  analysis
includes  an  evaluation  of  the  Company's  loan  portfolio,  past  loan  loss
experience,  current economic conditions, loan volume and growth, composition of
the loan portfolio and other relevant factors.  Management's analysis results in
the  establishment  of allowance  amounts by loan type based on  allocations  by
asset  classification  and  specific  allocations  based on asset  reviews.  The
allowance for loan losses as a percentage of net non-performing  loans was 15.1%
at December 31, 1999 as compared to 11.5% at December 31, 1998.

      Although management  believes that it uses the best information  available
to  determine  the  allowance,  unforeseen  market  conditions  could  result in
adjustment  and net income  could be  significantly  affected  if  circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted with
absolute certainty in advance. In addition,  regulatory agencies, as an integral
part of the examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize additions to the
allowance level based upon their judgment of the  information  available to them
at the time of their examination.

      NON-INTEREST INCOME. Total non-interest income decreased $25.5 million, or
56.4% from $45.2  million at December 31, 1998 to $19.7  million at December 31,
1999.  This  decrease was  primarily  due to a decrease of $25.5  million in the
income  attributable  to gain on real  estate  transactions  and a $1.7  million
decrease in other real estate operations, net.

     NON-INTEREST  EXPENSE.  Non-interest  expense increased $816,000,  or 4.0%,
from $20.5  million at December 31, 1998 to $21.3  million at December 31, 1999,
primarily due to an increase in other operating expenses of $779,000

                                      43

<PAGE>

during the twelve month period ended  December 31, 1999.

     INCOME TAXES.  Income taxes  decreased $2.8 million during the twelve month
period ending December 31, 1999.

COMPARISON OF OPERATING  RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND YEAR
ENDED DECEMBER 31, 1997

      NET INCOME.  For the fiscal year ended  December 31,  1998,  net income of
$105.2 million  represented  an increase of $18.6  million,  or 21.5% from $86.6
million for the year ended December 31, 1997. As discussed in more detail below,
the  increase  in net income was  primarily  due to an  increase in gain on real
estate transactions of $25.4 million. This increase,  coupled with a decrease of
$1.6 million in  non-interest  expense,  offsets a $2.2 million  increase in the
provision for loan losses and a $19.2 million decrease in total interest income.

      NET INTEREST INCOME. Net interest income decreased $9.2 million,  or 9.1%,
from $101.3  million at December 31, 1997 to $92.1 million at December 31, 1998,
primarily  due to a $127.6  million or 11.2%  decline in the average  balance of
interest-earning assets. The net interest spread, however, increased slightly to
8.8% for the year ended  December 31, 1998 from 8.7% for the year ended December
31, 1997.

      INTEREST INCOME.  Interest income decreased $19.2 million,  or 11.4%, from
$169.2  million at December  31, 1997 to $57.8  million at  December  31,  1998.
Interest on loans,  including fees, decreased $18.0 million primarily due to the
decrease  in the average  balance of loans  receivable.  Interest on  investment
securities  decreased  $1.2 million and purchased  discount  accretion  remained
virtually unchanged.

      INTEREST EXPENSE.  Interest expense decreased $10.0 million or 14.8%, from
$67.8  million at  December  31,  1997 to $57.8  million at  December  31,  1998
primarily due to a $10.9 million decrease in interest  expense on deposits.  The
average balance of interest-bearing  liabilities decreased $148.6 million during
the year ended December 31, 1998 reflecting the reduction in the average balance
of deposits.

      PROVISION FOR LOAN LOSSES.  The provision for loan losses is determined by
management as an amount  sufficient to maintain the allowance for loan losses at
a level  considered  adequate  to  absorb  future  losses  inherent  in the loan
portfolio in accordance  with  generally  accepted  accounting  principles.  The
provision for loan losses  increased  $2.2 million,  or 63.6% for the year ended
December 31, 1998  primarily as a result of an increase in net loans  receivable
during this period.

      NON-INTEREST INCOME. Total non-interest income increased $27.9 million, or
161.8% from $17.3  million at December 31, 1997 to $45.2 million at December 31,
1998.  This  increase was  primarily  due to an increase of $25.4 million in the
income  attributable  to gain on real  estate  transactions  and a $3.0  million
increase in other real estate operations, net.

      NON-INTEREST EXPENSE. Non-interest expense decreased $1.6 million, or 7.4%
from $22.1  million at December 31, 1997 to $20.5  million at December 31, 1998,
primarily due to a decrease in other  operating  expenses of $1.1 million during
the twelve month period ended December 31, 1998.

     INCOME TAXES.  Income taxes decreased  slightly by $359,000 during the year
ending December 31, 1998 as compared to the previous year.

LIQUIDITY AND CAPITAL RESOURCES

      Beal Financial's  primary sources of funds are dividends from the Bank and
interest  earned on its  investments.  The Bank's  primary  sources of funds for
operations  are deposits  obtained from its market area,  principal and interest
payments on loans,  and advances from the FHLB of Dallas and to a lesser extent,
from the sale of assets.  While  maturities and scheduled  amortization of loans
are  predictable  sources of funds,  deposit flows and mortgage  prepayments are
greatly  influenced  by  general  interest  rates,   economic  conditions,   and
competition.

     The primary investing activity of the Company is the purchase of discounted
loans from the HUD and FDIC through the sealed bid process or auctions and other
private sector sellers. During the years ended December 31, 1999, 1998 and 1997,
the Company  purchased $315.4 million,  $387.9 million and $130.4 million of net
loans, respectively.

                                      44

<PAGE>



Loan  originations  for the years ended  December 31,  1999,  1998 and 1997 were
$82.9 million, $85.4 million and $76.6 million, respectively.

     The Company's  primary  financing  activity is the  attraction of deposits.
During the years ended December 31, 1999, 1998 and 1997, the Company experienced
a net  increase  (decrease)  in deposits of $(12.3)  million,  $4.1  million and
$(42.0) million,  respectively.  The Company also utilizes FHLB advances to fund
the Bank's discounted loan purchases.  During the years ended December 31, 1999,
1998 and 1997, the Company's net financing  activity  (proceeds less repayments)
with the FHLB  totaled  $111.0  million,  $(30.0)  million and $(36.0)  million,
respectively.  The Company had other borrowings of $51.5 million at December 31,
1999, including $44.3 million of Senior Notes.

      The Company has the  ability to borrow  additional  funds from the FHLB of
Dallas  by  pledging  additional  assets  as  collateral,   subject  to  certain
restrictions.  At  December  31,  1999,  the  Company  had  an  undrawn  advance
arrangement with the FHLB for $95.7 million.

     The Bank is required to maintain minimum levels of liquid assets as defined
by the Texas Department.  A Texas savings bank is required to maintain liquidity
in an  amount  not less  than 10% of its  average  daily  deposits  for the most
recently completed calendar quarter in cash or readily marketable securities. At
December 31, 1999, the Bank's liquidity ratio was 17.14%.

      The Company's most liquid asset is cash and cash equivalents. The level of
cash and cash  equivalents is dependent on the Company's  operating,  financing,
and investing activities during any given period. At December 31, 1999, 1998 and
1997 cash and cash equivalents totaled $115.4 million,  $72.1 million and $150.8
million, respectively.

      The Company  anticipates  that it will have sufficient  funds available to
meet its current commitments.  At December 31, 1999, the Company had commitments
to originate one loan aggregating $12.5 million.  Certificates of deposits which
are scheduled to mature in one year or less at December 31, 1999 totaled  $795.5
million reflecting consumer preference for short-term investments in the current
interest  rate  environment.  Due to the  Company's  high  interest rate spread,
management has typically relied upon interest rate sensitive short-term deposits
to fund its loan  purchases.  The Company  believes the potential  interest rate
risk is  acceptable  in view of the  Company's  belief  that it can  maintain an
acceptable net interest  spread.  The Company further believes that based on the
levels of retention  of such  deposits in the recent  past,  that a  significant
portion of such deposits will remain with the Company.

      At  December  31,  1999,  the  Bank  exceeded  each of its  three  capital
requirements.  The  following  is a summary  of the  Bank's  regulatory  capital
position at December 31, 1999.


                                          At December 31, 1999
                                 ---------------------------------
                                     Required          Actual
                                 ----------------  ---------------
                                  Amount  Percent  Amount  Percent
                                 -------  -------  ------  -------
                                      (Dollars in Thousands)
Leverage capital...............  $71,365   5.00%  $212,478   14.89%
Tier 1 risk-based capital......   62,518   6.00%   212,478   20.39
Total risk-based capital.......  104,196  10.00%   224,822   21.58


      Due to the amount of dividends to stockholders  expected to be declared by
the  Board of  Director's  in 2000,  the  Company  anticipates  that the  Bank's
regulatory  capital  ratios  will be  reduced  if the  Bank  were to  experience
significant  growth. It is the Company's intention that any such dividends would
be limited to ensure that the Bank maintains its capital ratios in excess of the
ratios necessary to be classified as a "well capitalized institution" as defined
in FDIC  regulations.  See Item 1. Business - Regulation - Insurance of Accounts
and Regulation by the FDIC."

IMPACT OF INFLATION AND CHANGING PRICES

      The Consolidated  Financial  Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of  historical  dollars  without  considering  the change in the  relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations.  Nearly all the assets
and liabilities of the Company are financial,  unlike most industrial companies.
As a result, the Company's performance is

                                      45

<PAGE>
directly impacted by changes in interest rates, which are indirectly  influenced
by inflationary  expectations.  Since the Company has  historically  placed more
emphasis  on  increasing  net  interest  margin  rather  than  on  matching  the
maturities  of  interest  rate  sensitive  assets  and  liabilities,  changes in
interest  rates may have a greater impact on the Company's  financial  condition
and results of operations.  Investment  rates do not  necessarily  change to the
same extent as changes in the price of goods and services.

RATIOS OF EARNINGS TO FIXED CHARGES

      The  Company's  consolidated  ratios of earnings to fixed  charges for the
year ended December 31, 1999 are set forth below. Earnings used in computing the
ratios shown consist of earnings  from  continuing  operations  before taxes and
interest  expenses.  Fixed charges,  excluding  interest of deposits,  represent
interest expense on borrowings.  Fixed charges,  including interest on deposits,
represent all of the foregoing items plus interest on deposits. Interest expense
(other than on deposits)  includes  interest on FHLB of Dallas  borrowings,  the
Senior Notes and other borrowed funds.


                                     For the Year
                                        Ended
                                  December 31, 1999
                                  -----------------
Excluding interest on deposits.          9.8:1

Including interest on deposits.          1.9:1



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ASSET/LIABILITY MANAGEMENT

     The interest rate  sensitivity of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities will mature or reprice
within the same period.  The  interest  rate  sensitivity  gap is defined as the
difference between the amount of  interest-earning  assets maturing or repricing
within a specific  time  period and the amount of  interest-bearing  liabilities
repricing within that same period. A gap is considered  positive when the amount
of interest rate sensitive  assets exceeds the amount of interest rate sensitive
liabilities,  and is  considered  negative  when the  amount  of  interest  rate
sensitive  liabilities  exceeds the amount of interest  rate  sensitive  assets.
Generally,  during a period of  rising  interest  rates,  a  negative  gap would
adversely  affect net  interest  income  while a positive gap could result in an
increase in net interest income.  Conversely during a period of falling interest
rates,  a negative gap would result in an increase in net interest  income and a
positive gap would adversely affect net interest income.

      Management  monitors the Bank's interest rate risk as one component of its
business risk. The Bank has an Investment  Committee  consisting of the Chairman
of the Board,  the  President  and three  outside  Directors.  The Bank's  Chief
Executive  Officer,  and  Senior  Vice   President/Compliance  also  attend  all
Investment Committee meetings. This committee meets at least quarterly to review
the  Bank's  interest  rate  risk  position  and   profitability   and  to  make
recommendations for adjustments to the Bank's Board of Directors. This committee
also reviews the Bank's portfolio, formulates investment strategies and oversees
the  timing and  implementation  of  transactions  to assure  attainment  of the
Board's  objectives in the most  effective  manner.  In addition,  the Committee
reviews on a quarterly basis the Bank's asset/liability position,  including the
sensitivity  of the market value of portfolio  equity based on various  interest
rate scenarios.

     In  managing  its  asset/liability  mix,  the Bank  has,  depending  on the
relationship  between long- and short-term interest rates, market conditions and
consumer  preference,  placed more emphasis on increasing net interest margin to
enhance net interest  income than on matching the interest rate  sensitivity  of
its assets and liabilities.  Management  believes that due to the high yield the
Bank earns on its assets  resulting  from accretion of purchased  discount,  the
increased net interest  income  resulting from a mismatch in the maturity of its
asset and  liability  portfolios  can,  during  periods of  declining  or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates. In addition,  the majority of
the Bank's loan originations,  renewals, or modifications are made at adjustable
interest  rates to improve  the  interest  rate  sensitivity  of the Bank's loan
portfolio.  The  Bank  believes  that  it has the  ability  to  restructure  its
liabilities  very  quickly by  extending  the  maturities  of FHLB  advances and
pricing  deposits to attract  funds with longer terms to maturity.  It should be
noted that an extension of maturities may result in a higher cost of funds.


                                      46

<PAGE>
      As  indicated  in the table  below,  at  December  31,  1999,  the  Bank's
interest-bearing   liabilities   repricing   in  one   year  or  less   exceeded
interest-earning  assets  maturing  during  the same  period by $306.0  million,
resulting  in a one-year  negative  gap equal to 24.74% of its  interest-earning
assets at that  date.  Despite  the Bank's  negative  gap  position,  management
believes that the Bank's  interest rate risk is acceptable  given its high yield
on  earning  assets.  This  high  yield is a  direct  result  of (i)  purchasing
performing loans at a discount, (ii) prepayments of loans in full that have been
purchased at a discount and (iii) successfully resolving non-performing loans so
that they are  performing  and thus begin to amortize  the discount as the loans
are paid down.

      The following table sets forth the interest rate sensitivity of the Bank's
net assets and  liabilities  at December 31, 1999 on the basis of the  following
assumptions.  It is assumed that  adjustable-rate  assets and liabilities  would
reprice at their earliest  repricing date and fixed-rate  assets and liabilities
would reprice on their contractual  maturity date. Money market deposit accounts
("MMDA's")  and  savings  deposits  are  assumed to reprice in  accordance  with
FIDICIA  Section  305  guidelines,  as  follows:  Fifteen  percent of MMDA's are
assumed  to  reprice  in 0-3  months,  45% in 3-12  months and 40% in 1-3 years;
savings deposits are assumed to reprice at 5% in 0-3 months, 15% in 3-12 months,
40% in 1-3 years and 40% in 3-5 years.  All prepayment  assumptions are based on
the Bank's historical experience while liability repricing assumptions are based
on  industry   averages  used  for  the  purpose  of  assessing   interest  rate
sensitivity,  which the Company  believes  does not differ  materially  from its
historical  experience.  Balances  in all  instruments  are kept stable with the
assumption that runoff is reinvested in the same  instrument.  Nonaccrual  loans
are not reflected below.
<TABLE>
<CAPTION>
                                                                MATURING OR REPRICING
                                      -------------------------------------------------------------------------
                                                     Over 1       Over 2       Over 3      Over 5
                                        1 Year       Year to     Years to     Years to    Years to    Over 10
                                        or Less     Two Years   Three Years    5 Year     10 Years     Years        Total
                                      ---------------------------------------------------------------------------------------
<S>                                          <C>     <C>             <C>       <C>            <C>        <C>         <C>
                                                                      (Dollars in Thousands)
Fixed rate one- to four-family,
 commercial real estate and
 construction loans..................    $406,977     $   1,548    $  26,606  $    5,642  $      372  $     184    $  441,329
Adjustable rate one- to four-
 family, commercial real estate
 and construction loans..............      47,216        50,305       50,073     130,890     116,815    151,500       546,799
Commercial business loans............      15,805           343           75         512       1,343        742        18,820
Consumer loans.......................      17,982         2,093        2,642       5,063       3,425      4,267        35,472
Interest-earning deposits............     114,670           ---          ---         ---         ---        ---       114,670
FHLB Stock...........................       9,670           ---          ---         ---         ---        ---         9,670
Securities available for sale and                                        ---
  other investments..................      70,080           ---                      ---         ---        ---        70,080
                                        ---------     ---------    ---------    --------    --------  ---------     ---------
     Total interest-earning assets...     682,400        54,289       79,396     142,107     121,955    156,693     1,236,840
                                        ---------     ---------    ---------    --------    --------  ---------     ---------
Money market accounts................      99,185        33,062       33,061         ---         ---        ---       165,308
Commercial demand....................      11,580           ---          ---         ---         ---        ---        11,580
Savings deposits.....................       1,885         1,885        1,885       3,769         ---        ---         9,424
Certificate accounts.................     639,463       163,192        3,015       1,307         ---        ---       806,977
Subordinated debt, net...............      44,336           ---          ---         ---         ---        ---        44,336
FHLB advances........................     191,000           ---          ---         ---         ---        ---       191,000
Other borrowings.....................         901         5,674          ---         ---         ---        697         7,272
                                        ---------     ---------    ---------    --------    --------  ---------     ---------
 Total interest-bearing liabilities..     988,350       203,813       37,961       5,076         ---        697     1,235,897
                                        ---------     ---------    ---------    --------    --------  ---------     ---------
Interest-earning assets less
 interest-bearing liabilities........   ($305,950)    ($149,524)   $  41,435    $137,031    $121,955  $ 155,996     $     943
                                        =========     =========    =========    ========    ========  =========     =========
Cumulative interest-rate
 sensitivity gap.....................   ($305,950)    ($455,474)   $(414,039)  $(277,008)  $(155,053) $     943     $     943
                                        =========     =========    =========   =========   =========  =========     =========
Cumulative interest-rate gap
 as a percentage of total assets
 at December 31, 1999................      (21.40)%      (31.85)%     (28.96)%    (19.37)%    (10.84)%     0.07%         0.07%
                                        =========     =========    =========   =========   =========  =========     =========
Cumulative interest-rate gap as
 a percentage of interest-earning
 assets at December 31, 1999.........      (24.74)%      (36.83)%     (33.48)%    (22.40)%    (12.54)%     0.08%         0.08%
                                        =========     =========    =========   =========   =========  =========     =========

Cumulative interest-rate gap as a
 percentage of interest-bearing
 liabilities at December 31, 1999....      (24.76)%      (36.85)%     (33.50)%    (22.41)%    (12.55)%     0.08%         0.08%
                                        =========     =========    =========   =========   =========  =========     =========
</TABLE>
<PAGE>
      Certain  shortcomings are inherent in the method of analysis  presented in
the foregoing  table.  Although  certain assets and liabilities may have similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes in market  interest  rate. The interest rates on certain types of assets
and  liabilities  may fluctuate in advance of changes in market  interest rates,
while  interest  rates on other types of assets and  liabilities  may lag behind
changes  in market  interest  rates.  Certain  assets,  such as  adjustable-rate
mortgages,  have  features  which  restrict  changes  in  interest  rates  on  a
short-term  basis  and over the life of the  asset.  In the event of a change in
interest  rates,  prepayment  and early  withdrawal  levels would  significantly
change  the  results  set forth in the  foregoing  table.  The  ability  of many
borrowers to service  their debt may  decrease in the event of an interest  rate
increase.

      The table below sets forth, as of December 31, 1999, the estimated changes
in (i) the Bank's market value of portfolio  equity ("MVPE") (I.E.,  the present
value of expected  cash flows from assets,  liabilities  and  off-balance  sheet
contracts)  and (ii) the  Bank's  net  interest  income on  December  31,  1999,
presented  on an  annualized  basis  which  would  result  from  the  designated
instantaneous changes in the U.S. Treasury yield curve. Yields used in the table
to compute Net Interest Income and MVPE reflect actual  effective yields for the
quarter ended December 31, 1999, annualized.

<TABLE>
<CAPTION>

                       Percentage Change in:
                 -----------------------------------------
                 Net Interest Income         MVPE                       Change     Change               Dollar     Percent
  Change in      --------------------  -------------------    Net       in Net     in Net               Change     Change
Interest Rates     Board    Projected   Board   Projected  Interest    Interest   Interest                in          in
(Basis Points)   Limit%(1)   Change%   Limit%(1) Change %   Income      Income    Income %    MVPE       MVPE        MVPE
--------------   ---------  ---------  --------  --------- -------     --------  ---------    ----      ------     -------
<S>                 <C>          <C>        <C>    <C>          <C>       <C>        <C>       <C>       <C>       <C>
                                                  (Dollars in Thousands)
        +400        (75)       (8.0)    (75)      (26.6)    91,625       (8,020)     (8.0)  155,403    (56,260)      (26.6)
        +300        (50)       (6.0)    (50)      (20.6)    93,651       (5,994)     (6.0)  167,979    (43,684)      (20.6)
        +200        (35)       (4.0)    (35)      (14.3)    95,670       (3,975)     (4.0)  181,493    (30,170)      (14.3)
        +100        (25)       (2.0)    (25)       (7.4)    97,683       (1,962)     (2.0)  196,025    (15,638)       (7.4)
           0          0         0         0         0       99,645            0       0     211,663          0         0
        -100        (25)        2.0     (25)        8.0    101,600        1,955       2.0   228,580     16,917         8.0
        -200        (35)        3.8     (35)       14.5    103,422        3,777       3.8   242,331     30,668        14.5
        -300        (55)        5.4     (50)       19.9    104,977        5,332       5.4   253,753     42,090        19.9
        -400        (75)        6.5     (75)       23.2    106,088        6,443       6.5   260,839     49,176        23.2
</TABLE>
--------------
(1) Reflects the limits established by the Board of Directors.

      As indicated in the table above,  management has structured its assets and
liabilities to increase net interest margin rather than minimize its exposure to
interest rate risk. As a result,  the changes in the Bank's MVPE reflected above
exceed industry  averages.  In the event of a 400 basis point change in interest
rates, the Bank would experience a 23.2% increase in MVPE and a 6.5% increase in
net interest income in a declining rate environment and a 26.6% decrease in MVPE
and a 8.0%  decrease in net interest  income in a rising rate  environment.  The
Bank's asset and liability  structure  results in a decrease in MVPE in a rising
interest rate  environment and an increase in MVPE in a declining  interest rate
scenario.  During  periods of rising  rates,  the value of  monetary  assets and
monetary liabilities decline.  Conversely,  during periods of falling rates, the
value of monetary assets and liabilities increase. However, the amount of change
in value of specific  assets and  liabilities due to changes in rates is not the
same in a rising rate  environment as in a falling rate  environment  (I.E., the
amount of value  increase under a specific rate decline may not equal the amount
of value decrease under an identical upward rate movement). The decrease in MVPE
in a rising  interest  rate  environment  is the result of  management's  use of
relatively   short-term   liabilities  to  fund  its  purchases  of  loans  with
substantially  longer terms to  maturities.  While this results in a decrease in
MVPE during a rising rate  environment and an increase in MVPE in a falling rate
environment,  management  believes  that the level of the  Bank's  net  interest
spread enables the Bank to incur this additional interest rate risk.

     Management of the Bank believes that the assumptions used by it to evaluate
the  vulnerability  of the  Bank's  operations  to  changes  in  interest  rates
approximate  actual  experience  and considers  them  reasonable;  however,  the
interest rate sensitivity of the Bank's assets and liabilities and the estimated
effect of changes in interest  rates on the Bank's net interest  income and MVPE
could vary substantially if different assumptions were used or actual experience
differs from the historical  experience on which they are based. In addition, in
evaluating the Bank's exposure to interest rate risk, certain other shortcomings
inherent  in the method of analysis  presented  in the  foregoing  table must be
considered.  For  example,  although  certain  assets and  liabilities  may have
similar maturities or periods to repricing,  they may react in different degrees
to changes in market interest  rates.  Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Further,  in the event of a change in interest  rates,  prepayments  and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table.  Finally,  the ability of many borrowers to service their
debt may decrease in the event of an interest rate  increase.  As a result,  the
actual  effect of changing  interest  rates may differ  substantially  from that
presented in the foregoing table.


                                      47


<PAGE>

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION


                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                      PAGE

Report of Independent Certified Public Accountants......................   49

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1999 and 1998............   51

Consolidated  Statements of Income for the years ended
 December 31, 1999, 1998 and 1997.......................................   52

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................   53

Consolidated  Statements of Cash Flows for the years ended
 December 31, 1999, 1998 and 1997.......................................   54

Notes to Consolidated Financial Statements..............................   56



                                      48
<PAGE>
                        CONSOLIDATED FINANCIAL STATEMENTS
                            AND REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

                         BEAL FINANCIAL CORPORATION AND
                                  SUBSIDIARIES

                           December 31, 1999 and 1998












                                       49
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors
Beal Financial Corporation


We have audited the accompanying  consolidated  balance sheets of Beal Financial
Corporation  and  Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income,  stockholders' equity and cash flows for each
of the three  years in the period  ended  December  31,  1999.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of Beal
Financial Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
consolidated  results of their operations and their  consolidated cash flows for
each of the three years in the period ended  December 31,  1999,  in  conformity
with accounting principles generally accepted in the United States.





Dallas, Texas
February 4, 2000


                                       50
<PAGE>

                 BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share data)


                                                                DECEMBER 31,
                                                          ---------------------
                                                             1999        1998
                                                          ---------   ---------
ASSETS
   Cash                                                   $    746     $ 5,540
   Interest-bearing deposits with Federal Home Loan Bank   114,670      66,599
                                                           -------     -------
            Cash and cash equivalents                      115,416      72,139

   Accrued interest receivable                              12,879      12,983
   Securities - available for sale                          70,080      89,581
   Loans receivable, net                                 1,116,409   1,045,546
   Federal Home Loan Bank stock                              9,670       9,877
   Real estate held for investment or sale                  93,166     106,353
   Premises and equipment, net                               5,520       5,699
   Other assets                                              6,766      11,296
                                                           -------     -------
                                                        $1,429,906  $1,353,474
                                                        ==========  ==========

LIABILITIES
   Deposit accounts                                      $ 993,289  $1,005,617
   Federal Home Loan Bank advances                         191,000      80,000
   Senior notes, net                                        44,336      57,295
   Other borrowings                                          7,272       7,083
   Other liabilities                                        13,847      12,253
                                                           -------     -------

            Total liabilities                            1,249,744   1,162,248

COMMITMENTS AND CONTINGENCIES                                   -           -

STOCKHOLDERS' EQUITY
   Common stock, $1 par value per share; authorized, 375
     shares; issued and outstanding, 300 shares                300         300
   Additional paid-in capital                                2,740       2,740
   Accumulated other comprehensive income (loss)              (443)      3,909
   Retained earnings                                       237,565     184,277
   Stockholder note receivable                             (60,000)         -
                                                           -------     -------
            Total stockholders' equity                     180,162     191,226
                                                          --------    --------
                                                        $1,429,906  $1,353,474
                                       51
       The accompanying notes are an integral part of these statements.

<PAGE>


                 BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except share data)




                                                        Year ended
                                                        December 31,
                                                 1999        1998        1997
                                                ------      ------      ------

Interest income:
   Loans, including fees and purchase
     discount accretion                       $162,641    $139,456    $157,458
   Investment securities                         9,358      10,510      11,723
                                                ------     -------     -------
       Total interest income                   171,999     149,966     169,181

Interest expense:
   Deposits                                     50,652      47,093      57,980
   Federal Home Loan Bank advances
     and other borrowings                        3,909       2,647       1,890
   Senior notes                                  7,934       8,077       7,986
                                                ------      ------      ------
       Total interest expense                   62,495      57,817      67,856
                                               -------     -------     -------

       Net interest income                     109,504      92,149     101,325

Provision for loan losses                        3,821       5,577       3,410
                                                ------      ------      ------
       Net interest income after provision
           for loan losses                     105,683      86,572      97,915

Noninterest income:
   Gains on real estate transactions            13,618      39,155      13,708
   Other real estate operations, net             3,805       5,466       2,486
   Gain on sales of loans                            8          -          550
   Other operating income                        2,298         589         527
                                                ------        ----        ----
       Total noninterest income                 19,729      45,210      17,271

Noninterest expense:
   Salaries and employee benefits                8,230       8,083       8,318
   Occupancy and equipment                       1,993       2,185       2,392
   SAIF deposit insurance premium                  691         609         676
   Other operating expense                      10,415       9,636      10,758
                                               -------      ------     -------
       Total non-interest expenses              21,329      20,513      22,144
                                               -------     -------     -------

       Income before income taxes              104,083     111,269      93,042

Income taxes                                     3,230       6,049       6,408
                                                ------      ------      ------
       NET INCOME                             $100,853    $105,220    $ 86,634
                                               =======     =======     =======

Basic income per common share                  $336.18     $350.73     $288.78
                                                ======      ======      ======
Weighted average number of common
   shares outstanding                              300         300         300
                                                  ====        ====        ====
                                       52
       The accompanying notes are an integral part of these statements.

<PAGE>

        The accompanying notes are an integral part of this statement.

                 BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                (In thousands)
<TABLE>
<CAPTION>


                                                               Accumulated
                                     Common Stock  Additional    other                 Stockholder
                                  ----------------  paid-in  comprehensive   Retained     note
                                   Shares   Amount  Capital  Income (Loss)   Earnings  Receivable     Total
                                  -------  -------  -------  -------------  ---------- ----------- ---------
<S>                                    <C>    <C>         <C>    <C>          <C>       <C>           <C>

Balances at January 1, 1997          300     $300    $2,740        $ 709      $113,048        $ -   $116,797
  Comprehensive income:
   Net income                         -        -         -            -         86,634          -     86,634
   Unrealized gain on securities
     available for sale, net of
     tax effects                      -        -         -         3,013            -           -      3,013
                                                                                                      ------
       Total comprehensive income                                                                     89,647
                                                                                                     -------

  Dividends declared                  -        -         -            -        (45,626)         -    (45,626)
                                     ---      ---       ---       ------       -------         ---   -------

Balances at December 31, 1997        300      300     2,740        3,722       154,056          -    160,818
  Comprehensive income:
   Net income                         -        -         -            -        105,220          -    105,220
   Unrealized gain on securities
     available for sale, net of
     tax effects                      -        -         -           187            -           -        187
                                                                                                        ----
       Total comprehensive income                                                                    105,407
                                                                                                     -------

  Dividends declared                  -        -         -            -        (74,999)         -    (74,999)
                                     ---      ---       ---       ------       -------         ---   -------

Balances at December 31, 1998        300      300     2,740        3,909       184,277          -    191,226
  Comprehensive income:
   Net income                         -        -         -            -        100,853          -    100,853
   Unrealized loss on securities
     available for sale               -        -         -        (4,352)           -           -     (4,352)
                                                                                                     -------
       Total comprehensive income                                                                     96,501
                                                                                                     -------

  Funding of stockholder note
   receivable                         -        -         -           -              -      (60,000)  (60,000)

  Dividends declared                  -        -         -           -        (47,565)         -     (47,565)
                                     ---      ---       ---       ------     --------      -------   -------

Balances at December 31, 1999        300     $300    $2,740       $ (443)     $237,565    $(60,000) $180,162
                                     ===      ===     =====        =====       =======     =======   =======
</TABLE>

                                       53
       The accompanying notes are an integral part of these statements.

<PAGE>

                 BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)



                                                         Year ended
                                                         December 31,
                                               -------------------------------
                                                 1999        1998        1997
                                               -------      ------      ------

Operating activities
   Net income                                 $100,853   $ 105,220    $ 86,634
   Adjustments to reconcile net income
     to net cash provided by
     operating activities
       Depreciation and amortization             1,926       2,014       2,468
       Accretion of purchase discount          (36,547)    (44,633)    (44,673)
       Provision for loan losses                 3,821       5,577       3,410
       Amortization of bond discount
         and underwriting costs                    849         746         654
       Gains on real estate transactions       (13,618)    (39,155)    (13,708)
       Gain on sales of loans                       (8)         -         (550)
       Loss on sales of premises and
         equipment                                  -          189           7
   Changes in operating assets and liabilities
     Accrued interest receivable                (1,469)       (738)     (1,361)
     Prepaid expenses and other assets           2,104        (606)       (334)
     Other liabilities and accrued expenses      1,137      (6,154)      2,225
                                               -------     -------     -------
         Net cash provided by
              operating activities              59,048      22,460      34,772
                                               -------     -------     -------

Investing activities
   Proceeds from sales of loans                    378          -           26
   Proceeds from:
     Maturities of securities available
      for sale                                  15,648      22,363      15,306
     Sales of real estate                       34,903     112,222      34,929
     Sale of Federal Home Loan Bank stock        2,596       4,181          -
   Purchases of:
     Loans and bid deposits on loan purchases (315,406)   (387,858)   (130,418)
     Federal Home Loan Bank stock               (2,389)     (3,855)       (585)
     Real estate held for investment or sale    (4,346)     (3,541)    (17,395)
     Premises and equipment, net                  (670)       (404)       (443)
   Loan originations and advances, less loan
     collections                               275,299     269,697     266,850
   Origination of shareholder note receivable  (60,000)          -           -
                                               -------     -------     -------
         Net cash provided by
             investing activities              (53,987)     12,805     168,270
                                              --------     -------     -------

                                       54

       The accompanying notes are an integral part of these statements.

 <PAGE>
                BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                (In thousands)






                                                         December 31,
                                                ------------------------------
                                                 1999        1998        1997
                                                ------      ------      ------

Financing activities
   Net increase (decrease) in deposit
    accounts                                 $ (12,328)    $ 4,141   $ (41,958)
   Proceeds from long-term debt                    521          -          162
   Repayments of long-term debt                   (332)       (516)     (7,311)
   (Repayments) advances from the Federal
     Home Loan Bank                            111,000     (30,000)    (36,000)
   Prepayment of senior notes                  (13,080)         -           -
   Cash dividend paid                          (47,565)    (87,600)    (33,026)
                                              --------    --------    --------

       Net cash used in
           financing activities                 38,216    (113,975)   (118,133)
                                               -------    --------    --------

       Increase (decrease) in cash and cash
           equivalents                          43,277     (78,710)     84,909

Cash and cash equivalents at beginning of
 year                                           72,139     150,849      65,940
                                               -------    --------    --------

Cash and cash equivalents at end of year      $115,416    $ 72,139   $ 150,849
                                               =======     =======    ========
Supplemental disclosure of cash flow
  information
   Cash paid during the year for
     Interest                                 $ 58,829    $ 57,124    $ 66,661
     Income taxes                              $ 4,418    $ 11,541     $ 2,215

Supplemental disclosures of noncash investing
   and financing activities
     Real estate acquired in foreclosure
       or in settlement of loans              $ 18,964    $ 17,813    $ 89,850


                                      55

       The accompanying notes are an integral part of these statements.

<PAGE>

                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES

   NATURE OF OPERATIONS:  Beal Financial Corporation (the Company),  through its
   subsidiary,  Beal Bank (the Bank),  collectively,  (the Corporation) operates
   two  branches  in Dallas and  Houston,  Texas.  The Bank's  primary  business
   consists  of  purchasing  pools of loans  generally  at a  discount  from the
   principal balances of the loans. These loans are generally purchased from the
   Resolution  Trust   Corporation   ("RTC"),   the  Federal  Deposit  Insurance
   Corporation   ("FDIC"),   and  the  U.S.  Department  of  Housing  and  Urban
   Development  ("HUD").  The Bank also provides  loans and banking  services to
   consumer and  commercial  customers in the market areas in which its branches
   are located.

   A summary of the significant  accounting  policies of the Corporation applied
   in the  preparation of the  accompanying  consolidated  financial  statements
   follows.  The  accounting  principles  followed  by the  Corporation  and the
   methods of applying them are in conformity  with both  accounting  principles
   generally  accepted  in the United  States and  prevailing  practices  of the
   banking industry.

   BASIS OF PRESENTATION:  The accompanying  consolidated  financial  statements
   include the accounts of the Corporation,  its subsidiaries including the Bank
   and subsidiaries of the Bank, and partnerships in which  subsidiaries are the
   1% general and 98% limited partner. All significant intercompany transactions
   and balances are eliminated.

   USE OF ESTIMATES IN THE  PREPARATION  OF FINANCIAL  STATEMENTS:  In preparing
   financial  statements  in conformity  with  accounting  principles  generally
   accepted in the United  States,  management is required to make estimates and
   assumptions  that affect the reported  amounts of assets and  liabilities and
   the  disclosure  of  contingent  assets  and  liabilities  at the date of the
   financial  statements and revenues and expenses during the reporting  period.
   Actual results could differ from those estimates.

   LOANS:  Loans that  management  has the  intent  and  ability to hold for the
   foreseeable  future  or until  maturity  or  pay-off  are  stated  at  unpaid
   principal  balances less the allowance for loan losses,  loans in process and
   net deferred loan origination fees and discounts.

   A loan is  identified  as impaired  when it is  probable  that  interest  and
   principal  will not be collected  according to the  contractual  terms of the
   loan agreement.  For impaired loans,  the accrual of interest is discontinued
   when the net carrying  value of the loan equals the net  realizable  value of
   the  underlying  collateral.  Impairments  of loans are measured based on the
   present  value  of  expected  future  cash  flows  discounted  at the  loan's
   effective  interest  rate,  its  observable  market  price,  or fair value of
   collateral if the loan is collateral dependent.

   Discounts on mortgage  loans  purchased by the  Corporation  are amortized to
   income using the interest method over a remaining  period which is the longer
   of the contractual  maturity or the remaining  amortization term of the note.
   Upon early payoff,  any remaining discount collected is taken into income and
   reflected in the financial statements as interest income.  Discounts on loans
   originated  are  recognized  over the lives of the loans using  methods  that
   approximate the interest method. The amortization of
                                       56
<PAGE>


                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                                (In thousands)

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

   discounts is discontinued  when the net carrying value of the loan equals the
   net  realizable  value of the  underlying  collateral  or,  if  earlier,  the
   contractual maturity of the loan.

   Loans in process of foreclosure  are classified as loans until legal title is
   transferred.

   INVESTMENT  SECURITIES:  The Corporation  classifies investments as available
   for sale and records them at fair value,  with  unrealized  gains and losses,
   net  of  income   taxes,   excluded  from  earnings  and  reported  as  other
   comprehensive income.

   LOAN-ORIGINATION  FEES,  COMMITMENT  FEES, AND RELATED  COSTS:  Loan fees and
   certain direct loan origination  costs are deferred,  and the net fee or cost
   is recognized as an adjustment to interest  income using the interest  method
   over the estimated  life of the loans based on the  Corporation's  historical
   prepayment experience. Commitment fees and costs relating to commitments, for
   which  the  likelihood  of  exercise  is  remote,  are  recognized  over  the
   commitment  period on a  straight-line  basis. If the commitment is exercised
   during the commitment period, the remaining unamortized commitment fee at the
   time of exercise is recognized  over the life of the loan as an adjustment of
   yield.

   ALLOWANCE  FOR LOAN LOSSES:  The allowance for loan losses is maintained at a
   level believed  adequate by management to absorb potential losses in the loan
   portfolio.  Management's  determination  of the adequacy of the  allowance is
   based on an evaluation of the portfolio,  past loan loss experience,  current
   economic conditions,  volume, growth,  composition of the loan portfolio, and
   other  relevant  factors.  The allowance is increased by provisions  for loan
   losses charged to operations.

   Management  believes  the  allowance  for  loan  losses  is  adequate.  While
   management uses available  information to recognize  losses on loans,  future
   additions  to the  allowance  may be  necessary  based on changes in economic
   conditions. In addition,  various regulatory agencies, as an integral part of
   their examination  process,  periodically review the Corporation's  allowance
   for loan losses.

   REAL ESTATE HELD FOR  INVESTMENT  OR SALE:  Real estate  properties  held for
   investment are carried at the lower of cost,  including cost of  improvements
   and amenities  incurred  subsequent to acquisition,  or net realizable  value
   (fair value).  Costs  relating to  development  and  improvement  of the real
   estate are capitalized, whereas costs relating to the holding of property are
   expensed.  Real  estate  properties  acquired  through  or in  lieu  of  loan
   foreclosure  are  initially  recorded  at fair value less cost to sell at the
   date of foreclosure.

   Valuations are  periodically  performed by  management,  and an allowance for
   losses is  established  by a charge to operations if the carrying  value of a
   property exceeds its fair value.

   INCOME  PER COMMON  SHARE:  Basic  income  per  common  share is based on the
   weighted average number of common shares outstanding during each year.
   There are no potentially dilutive common shares.

   STATEMENTS OF CASH FLOWS:  For purposes of reporting cash flow, cash and cash
   equivalents include cash on hand, amounts due from banks and interest-bearing
   deposits in other banks.


                                       57
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

   PREMISES AND  EQUIPMENT:  Premises  and  equipment  are stated at cost,  less
   accumulated  depreciation  based on the estimated useful lives of the assets,
   as follows:

     Buildings and improvements                     10-45 years
     Furniture and equipment                         3-10 years

   Depreciation is computed using the straight-line method.

   Effective  January  1, 1997,  the  Corporation  and all of its  subsidiaries,
   except for Beal Affordable Housing, Inc. and BRE-N, Inc., elected to be taxed
   as S Corporations,  and their federal income taxes are the  responsibility of
   the Corporation's stockholders.

   Effective January 1, 1999, Beal Affordable  Housing,  Inc. and BRE-N,  Inc.,
   elected to be taxed as S Corporations.

   OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:  In the ordinary course of business,
   the Corporation  has entered into  off-balance  sheet  financial  instruments
   consisting  of  commitments  to extend  credit and  letters  of credit.  Such
   financial  instruments are recorded in the financial statements when they are
   funded or related fees are incurred or received.

   SEGMENT  INFORMATION:  The  Corporation  operates in one principal  business
   segment,  acquiring  and  providing  loans and banking  services  within the
   United States.

   FAIR VALUES OF FINANCIAL  INSTRUMENTS:  The Corporation  provides disclosures
   regarding   financial   instruments  as  prescribed  by  generally   accepted
   accounting  principles.  These  disclosures  do not purport to represent  the
   aggregate  net  fair  value  of the  Corporation.  Further,  the  fair  value
   estimates  are based on various  assumptions,  methodologies  and  subjective
   considerations  which vary widely among different financial  institutions and
   which are subject to change.  The following methods and assumptions were used
   by the Corporation in estimating financial instruments' fair values:

     CASH AND CASH EQUIVALENTS:  The balance sheet carrying amounts  approximate
     the estimated fair values of such assets.

     INVESTMENT  SECURITIES:  Fair values for investment securities are based on
     quoted  market  prices,  if  available.  If quoted  market  prices  are not
     available,  fair  values are based on quoted  market  prices of  comparable
     instruments.

     LOANS:  For  variable  rate loans  that  reprice  frequently  and entail no
     significant  change in credit  risk,  fair values are based on the carrying
     values.  The fair values of other loans are  estimated  based on discounted
     cash flow analysis using interest  rates  currently  offered for loans with
     similar terms to borrowers of similar credit quality.

                                       58
<PAGE>

                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)

NOTE A - NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING POLICIES - Continued

     DEPOSIT  LIABILITIES:   The  fair  values  estimated  for  demand  deposits
     (interest and non-interest  bearing accounts) are, by definition,  equal to
     the amount  payable on demand at the reporting  date (i.e.,  their carrying
     amounts).  The carrying  amounts of variable rate,  fixed-term money market
     accounts and certificates of deposit  approximate  their fair values.  Fair
     values  of  fixed  rate  certificates  of  deposit  are  estimated  using a
     discounted  cash flow  calculation  that applies  interest rates  currently
     being offered to a schedule of aggregated expected maturities.

     FEDERAL  HOME LOAN BANK  ADVANCES  AND OTHER  BORROWINGS:  Fair  values for
     Federal Home Loan Bank advances and other borrowings are based upon current
     market rates for instruments with similar maturities.

     SENIOR NOTES:  Fair value for senior notes is based upon the closing market
     price at December 31, 1999.


NOTE B -STOCKHOLDER NOTE RECEIVABLE

   On January 19, 1999, Beal Financial  Corporation funded a $60,000 note to the
   majority  stockholder  of the  Company.  The note  bears  interest  at 10.5%.
   Quarterly  interest  payments are required with the principal due at December
   30, 2001. The note is collateralized by stock in the Company and is presented
   in the balance sheet as a deduction from stockholders' equity.




                                       59
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)

NOTE C - LOANS RECEIVABLE

   A substantial  portion of the Corporation's  loan portfolio consists of first
   mortgage  loans in Texas,  California,  Florida and  Illinois.  A  borrower's
   ability  to pay in full is  dependent,  in some  respects,  upon the  general
   economic condition of the geographic  location of the underlying  collateral.
   Loans receivable consisted of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                            --------------------
                                                               1999       1998
                                                            --------    --------
<S>                                                              <C>    <C>
     Real estate loans
       One-to-four family first liens                      $ 477,847  $  490,717
       Multifamily                                           264,590     270,337
       Commercial                                            299,224     236,252
       Construction, development, and land                   209,504     142,108
                                                            --------    --------

            Total real estate loans                        1,251,165   1,139,414

     Other loans
       Consumer loans
          Automobiles                                         14,331      31,878
          One-to-four family junior liens                     31,243      47,992
          Timeshares                                           1,832       2,432
          Other                                                2,598       3,121
                                                              ------      ------

             Total consumer loans                             50,004      85,423

       Commercial business loans                              28,224      35,537
                                                             -------     -------

              Total other loans                               78,228     120,960
                                                             -------    --------

               Total loans                                 1,329,393   1,260,374

     Less:
       Loans in process                                      (46,555)     (7,493)
       Deferred fees and discounts                          (154,085)   (193,468)
       Allowance for loan losses                             (12,344)    (13,867)
                                                            --------    --------

               Total loans receivable,  net               $1,116,409  $1,045,546
</TABLE>

     The  amount of loans  being  serviced  by the  Corporation  for  others was
approximately $26,177 and $33,861 at December 31, 1999 and 1998, respectively.

                                       60
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)

NOTE C - LOANS RECEIVABLE - Continued

   Transactions in the allowance for loan losses were as follows:

                                                                 Year ended
                                                                December 31,
                                                           --------------------
                                                             1999        1998
                                                           --------    --------
     Balance at beginning of year                          $13,867     $11,912
       Provision for loan losses                             3,821       5,577
       Charge-offs                                          (7,580)     (3,990)
       Recoveries                                            2,236         368
                                                            ------        ----
     Balance at end of year                                $12,344     $13,867
                                                            ======      ======

   In the normal course of business,  the Corporation acquires pools of loans at
   a discount  from their unpaid  contractual  principal  balance.  The unearned
   discount  is then  accreted  over the life of the loans  using  the  interest
   method. In the Corporation's due diligence  procedures and bidding,  it takes
   into consideration potential loans to be modified in determining the price it
   is  willing  to pay for a  particular  pool.  In  connection  with these loan
   purchases, the Corporation subsequently may modify the terms of certain loans
   included in the pools. The Corporation does not consider these to be troubled
   debt  restructurings.  The  effective  interest  rate  on  the  Corporation's
   modified loans is equal to or greater than the rate the Corporation  would be
   willing to accept for a new loan with comparable risk.

   At  December  31, 1999 and 1998,  all  significant  impaired  loans have been
   determined  to be collateral  dependent and have been measured  utilizing the
   fair value of the collateral.

   The  Corporation's  recorded  investment  in  impaired  loans and the related
   valuation allowance are as follows:

                                         December 31, 1999   December 31, 1998
                                      --------------------  -------------------
                                       Recorded  Valuation   Recorded  Valuation
                                      Investment Allowance  Investment Allowance
                                      ---------- ---------  ---------- ---------

     Impaired loans - valuation
      allowance required               $ 3,422    $1,413    $ 5,503      $2,545
     Impaired loans - no valuation
      allowance                         59,202         -     87,044           -
                                        ------    ------    -------      ------
     Total impaired loans              $62,624    $1,413    $92,547      $2,545
                                        ======    ======    =======      ======

                                       61
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE C - LOANS RECEIVABLE - Continued

   The valuation  allowance for impaired  loans is included in the allowance for
   loan losses.

   The  average  recorded  investment  in  impaired  loans for the  years  ended
   December 31, 1999 and 1998, was $74,892 and $91,037,  respectively.  Interest
   income on impaired  loans for the years ended December 31, 1999 and 1998, was
   $2,126 and $7,300, respectively.  Interest income foregone under the original
   terms of impaired  loans for the years ended  December 31, 1999 and 1998, was
   $10,559 and $7,500, respectively.


NOTE D - REAL ESTATE HELD FOR INVESTMENT OR SALE

                                                                December 31,
                                                             ------------------
                                                               1999     1998
                                                             ------------------

     Real estate held for development and rental             $51,674  $ 54,642
     Real estate held for sale                                43,074    53,223
                                                             -------  --------
                                                              94,748   107,865
          Less accumulated depreciation                       (1,582)   (1,512)
                                                             -------  --------
                Total real estate held for investment
                 or sale                                     $93,166  $106,353
                                                             =======  ========

   Income from real estate  development and rental activities which has not been
   significant  is included in other  income in the  statement  of income.  Real
   estate  held for  sale  was  acquired  by  foreclosure  or by deed in lieu of
   foreclosure.



                                       62
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE E - SECURITIES AVAILABLE FOR SALE

                                                      Gross     Gross
                                        Amortized  unrealized unrealized  Fair
                                           cost       gains    losses     value
                                       ----------  ---------- ---------- ------
     Mortgage-backed securities:
       December 31, 1999                   $70,523     $ -       $443  $70,080
       December 31, 1998                    85,672    3,909        -    89,581

   The  mortgage-backed  securities at December 31, 1999 are scheduled to mature
   in 2025 and 2026.


NOTE F - DEPOSITS

                                                       December 31,
                                                  1999                1998
                                           ----------------    ---------------
                                            Amount Percent      Amount Percent
                                           ------- --------    ------- -------
   Noninterest-bearing demand deposits     $ 11,579    1.2%    $ 12,667    1.3%
   Statement savings deposits (4.8% at
     December 31, 1999)                       9,424     .9        3,118     .3
   Money market demand deposit accounts
     (5.1% at December 31, 1999)            165,308   16.6      180,154   17.9
                                            -------   ----     --------  -----
                                            186,311   18.7      195,939   19.5

   Certificates of deposit
     4.01% to 4.50%                              -      -         2,702     .3
     4.51% to 5.00%                         269,045   27.1      367,685   36.5
     5.01% to 5.50%                         175,724   17.7      222,985   22.2
     5.51% to 6.00%                         260,075   26.2      203,630   20.2
     6.01% to 6.50%                          97,636    9.8        2,489     .3
     6.51% to 7.00%                             660     .1        1,124     .1
     7.01% to 7.50%                           3,838     .4        9,063     .9
                                             ------    ---       ------    ---

     Total certificates of deposit          806,978   81.3      809,678   80.5
                                            -------  -----     --------  -----
     Total deposits                        $993,289  100.0%  $1,005,617  100.0%
                                            =======  =====    =========  =====


                                       63
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE F - DEPOSITS - Continued

   The aggregate amount of deposits with a minimum  denomination of $100 or more
   was approximately $381,716 and $309,000 at December 31, 1999 and 1998.

   At December 31, 1999,  the scheduled  maturities of  certificates  of deposit
   were as follows:

                 DECEMBER 31,

                   2000                             $794,516
                   2001                                9,870
                   2002                                1,284
                   2003                                  768
                   2004                                  540
                                                    --------
                                                    $806,978
                                                    ========

   Interest expense on deposits consists of the following:

                                                           Year ended
                                                          December 31,
                                               --------------------------------
                                                   1999     1998         1997
                                               ----------  --------   ---------
     Savings deposits                          $ 8,249     $ 8,323     $ 9,025
     Certificates of deposit                    42,403      38,770      48,955
                                                ------      ------      ------
                                               $50,652     $47,093     $57,980
                                                ======      ======      ======

NOTE G - FEDERAL HOME LOAN BANK ADVANCES

   Pursuant to  collateral  agreements  with the Federal  Home Loan Bank (FHLB),
   advances are  collateralized  by all stock in the FHLB,  certain premises and
   qualifying   first  mortgage  loans,   with  a  total   collateral  value  of
   approximately $330,000 at December 31, 1999. The FHLB advances of $191,000 at
   December  31,  1999 bears  interest  at 5.8% per annum and mature in January,
   2000.


NOTE H - SENIOR NOTES

   On August 9, 1995,  the Company  issued $57,500 of 12.75% Senior Notes due on
   August 15, 2000 at a discount of $500 which is being  accreted  over the life
   of the notes.  Interest is payable semi-annually on February 15 and August 15
   of each year.  The Senior Notes are  redeemable,  in whole or in part, at the
   option of the  Company.  During  1999,  senior notes in the amount of $13,080
   were redeemed by the Company.  Outstanding  principal balance at December 31,
   1999 is $44,420.

                                       64
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE I - REGULATORY MATTERS

   The Company is not subject to capital  adequacy  requirements  by its primary
   regulator, the Office of Thrift Supervision.

   The Bank is subject to various regulatory capital  requirements  administered
   by the Texas Savings and Loan  Department  (the  Department)  and the Federal
   Deposit Insurance Corporation (FDIC), collectively,  (regulators). Failure to
   meet minimum capital requirements can initiate certain mandatory and possibly
   additional  discretionary  actions by regulators  that, if undertaken,  could
   have a direct  material  effect on the  Bank's  financial  statements.  Under
   capital  adequacy   guidelines  and  the  regulatory   framework  for  prompt
   corrective  action,  the Bank  must meet  specific  capital  guidelines  that
   involve quantitative measures of the Bank's assets, liabilities,  and certain
   off-balance-sheet  items as calculated under regulatory accounting practices.
   The Bank's capital amounts and classification are also subject to qualitative
   judgments by the regulators  about  components,  risk  weightings,  and other
   factors.

   Quantitative  measures  established by regulation to ensure capital  adequacy
   require  the Bank to  maintain  minimum  amounts and ratios (set forth in the
   table below) of total risk based and tier I capital to risk-weighted  assets,
   and of leverage capital to total assets.  Management believes, as of December
   31, 1999, that the Bank meets all capital  adequacy  requirements to which it
   is subject.

   Texas savings  banks,  including  the Bank,  are required to maintain a daily
   balance of liquid  assets at least equal to 10% of the average  daily balance
   of deposits for the  preceding  quarter.  At December 31, 1999 and 1998,  the
   Bank's liquidity ratio was 17.14% and 17.97%, respectively.

   The most recent notification from the regulators categorized the Bank as well
   capitalized  under the  regulatory  framework for prompt  corrective  action.
   There are no conditions  or events since that  notification  that  management
   believes have changed the Bank's category.

   To be categorized as well  capitalized by the federal banking  agencies,  the
   Bank must maintain minimum total risk-based,  tier I risk-based, and leverage
   ratios as set forth in the table below.

<TABLE>
<CAPTION>
                                                                          To be well
                                                                       capitalized under
                                                      For capital      prompt corrective
                                       Actual       adequacy purposes  action provisions
                                 -----------------  -----------------  -----------------
                                   Amount   Ratio     Amount   Ratio     Amount  Ratio
                                 --------  -------  --------  ------    ------- ------
<S>                                <C>      <C>       <C>       <C>       <C>    <C>
     December 31, 1999
       Total risk based capital   224,822   21.58%   83,537    >8%     104,196    >10%
       Tier I risk based capital  212,478   20.39%   41,679    >4%      62,518    > 6%
       Leverage capital           212,478   14.89%   57,092    >4%      71,365    > 5%

     December 31, 1998
       Total risk based capital   184,261   18.56%   79,420    >8%      99,275    >10%
       Tier I risk based capital  171,834   17.31%   39,710    >4%      59,565    > 6%
       Leverage capital           171,834   12.80%   53,703    >4%      67,133    > 5%

</TABLE>

                                       65
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE J - INCOME TAXES

                                                      Year ended December 31,
                                                ------------------------------
                                                 1999        1998        1997
                                                ------      ------      ------
     Federal
       Current                                  $1,584      $3,682      $3,249
       Deferred                                     -           -           -
                                                ------      ------      ------
                                                 1,584       3,682       3,249
     State                                       1,646       2,367       3,159
                                                ------      ------      ------
                                                $3,230      $6,049      $6,408
                                                ======      ======      ======

   On March 13, 1997, the Company filed an application with the Internal Revenue
   Service  to elect S  Corporation  status  for  federal  income  tax  purposes
   effective  January 1, 1997.  This election  covered all  subsidiaries  of the
   Company except Beal Affordable Housing, Inc., and BRE-N, Inc.

   As a result of the aforementioned application, beginning January 1, 1997, the
   Company and all of its  subsidiaries  electing S Corporations  status will no
   longer pay federal income taxes,  except for the federal taxes related to the
   recognition of built-in gains which existed at January 1, 1997. At January 1,
   1997,  the  Corporation  had net unrealized  built-in gains of  approximately
   $80,000 which may potentially be recognized  during the ten-year  recognition
   period  beginning on January 1, 1997.  For the years ended December 31, 1999,
   1998,  and 1997 the  Corporation  recorded  federal  tax  expense  of $1,300,
   $2,400,  and $3,249,  respectively,  related to the  recognition  of built-in
   gains.  Except as discussed above,  beginning  January 1, 1997, the liability
   for federal income taxes on income of the  Corporation is the  responsibility
   of its stockholders.


NOTE K - OTHER OPERATING EXPENSE

                                                    Year ended December 31,
                                                -------------------------------
                                                    1999      1998        1997
                                                ---------   -------      ------

     Advertising and promotion                  $  301       $ 266       $ 248
     Office supplies and expense                   233         175         250
     Legal and professional                      4,459       5,849       6,448
     Expenses related to loan purchases            562         262         630
     Loan servicing fees                         4,114       2,076       2,376
     Other                                         746       1,008         806
                                                  ----       -----        ----
                                               $10,415      $9,636     $10,758
                                                ======       =====      ======



                                       66
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE L - COMMITMENTS AND CONTINGENCIES

   The Corporation's  financial statements do not reflect various commitments to
   extend  credit or  commitments  to  purchase  loans which arise in the normal
   course of business and which involve  elements of credit risk,  interest rate
   risk or  liquidity  risk.  At December 31, 1999,  there were  commitments  to
   purchase loans of $59,055. Unfunded commitments to extend credit were $1,557.

   Commitments to purchase  loans are agreements to purchase  certain loans at a
   specified  percentage  of the  outstanding  principal  balance as long as all
   conditions  established  in the contract are met.  Commitments  do not have a
   fixed  expiration  date.  Since the conditions in the contract may not be met
   for all  loans  covered  by the  commitments,  the total  commitments  do not
   necessarily  represent  future  cash  requirements.  Collateral  on the loans
   consists primarily of single family residences.

   Commitments  to extend credit are agreements to lend to a customer as long as
   there  is  no  violation  of  any  condition  established  in  the  contract.
   Commitments  generally  have  fixed  expiration  dates or  other  termination
   clauses and may require  payment of a fee by the customer.  Since many of the
   commitments are expected to expire without being funded, the total commitment
   amounts  do  not  necessarily   represent  future  cash   requirements.   The
   Corporation  evaluates  each  customer's  creditworthiness  on a case-by-case
   basis.  The  amount  of  collateral  obtained,  if  deemed  necessary  by the
   Corporation  upon  extension  of  credit  is  based  on  management's  credit
   evaluation.  Collateral  held  varies but may  include  accounts  receivable,
   inventory, property, plant and equipment and liens on real estate.

   The  Corporation is a defendant in various  matters in litigation  which have
   arisen in the normal course of business.  In the opinion of management,  such
   litigation will not have a material effect on the Corporation's  consolidated
   financial position or results of operations.


NOTE M - COMPREHENSIVE INCOME

   Accounting  principles  generally require that recognized revenue,  expenses,
   gains and losses be included in net income.  Although  certain changes in net
   assets   and   liabilities,   such  as   unrealized   gains  and   losses  on
   available-for-sale  securities,  are reported as a separate  component of the
   equity section of the balance sheet, such items,  along with net income,  are
   components of comprehensive income.

   The components of other  comprehensive  income and related tax effects are as
   follows:

                                                      Year ended December 31,
                                                --------------------------------
                                                    1999      1998        1997
                                                ---------  ---------    --------

     Unrealized holding gains (losses) on
       available-for-sale securities           $(4,356)       $187      $2,632

     Tax effect                                     -           -          381
                                                   ---         ---         ---
                                               -------        ----      ------
     Net-of-tax amount                         $(4,356)       $187      $3,013
                                               =======        ====      ======


                                       67
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS

                                    December 31, 1999       December 31, 1998
                                 ---------------------  ----------------------
                                 Carrying        Fair    Carrying        Fair
                                  Amount        Value     Amount         Value
                                 ---------   ---------  ---------    ---------
     Financial assets:
       Cash and cash equivalents  $115,416    $115,416    $ 72,139    $ 72,139
       Securities available for
        sale                        70,080      70,080      89,581      89,581
       Loans receivable          1,116,409   1,116,409   1,045,546   1,111,943

     Financial liabilities:
       Deposit liabilities         993,289     993,660   1,005,617   1,005,472
       Federal Home Loan Bank
        advances                   191,000     191,000      80,000      80,000
       Other borrowings              7,272       7,272       7,083       7,083
       Senior notes                 44,336      44,336      57,295      59,078


NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

                          Beal Financial Corporation

                                Balance Sheet

                                                                 December 31,
                                                            ------------------
                                                               1999      1998
                                                            --------  --------
     Assets
       Cash                                                 $  7,431  $ 68,553
       Investment in subsidiary                              212,038   175,744
       Loans receivable, net                                   4,455     4,455
       Real estate held for investment                           693       693
       Other assets                                            2,255     1,925
                                                            --------  --------

                                                            $226,872  $251,370
                                                            ========  ========
       Liabilities and stockholders' equity
         Senior notes                                       $ 44,336  $ 57,295
         Other liabilities                                     2,374     2,849
       Stockholder's equity:
           Common stock                                          300       300
           Additional paid-in capital                          2,740     2,740
           Retained earnings                                 237,565   184,277
           Accumulated other comprehensive income               (443)    3,909
         Stockholder note receivable                         (60,000)       -
                                                            --------  --------

         Total stockholders' equity                          180,162   191,226
                                                            --------  --------

                                                            $226,872  $251,370
                                                            ========  ========
                                       67
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued

                             Statement of Income


                                                          December 31,
                                                ------------------------------
                                                    1999      1998      1997
                                                ---------  ---------  --------

   Income
     Equity (deficit) in undistributed
      income of subsidary                     $ 40,636   $ (31,291)    $41,771
     Dividends from subsidiary                  61,300     133,701      47,369
     Interest income                             7,290         525       5,817
     Gain on sale of real estate held
       for investment                               51      11,046          -
     Other operating income                         -           19          -
                                                   ---         ---         ---

            Total income                       109,277     114,000      94,957

   Interest expense
     Other borrowings                               -           -           36
     Senior notes                                7,934       8,077       7,986
                                                ------      ------      ------

            Total interest expense               7,934       8,077       8,022

   Noninterest expense
     Salary and employee benefits                   95          23          -
     Other operating expenses                      367         662         285
                                                  ----        ----        ----

            Total noninterest expense              462         685         285
                                                  ----        ----        ----

            Income before taxes                100,881     105,238      86,650

   Income tax expense                               28          18          16
                                                   ---         ---         ---
            Net income                        $100,853     $105,220    $86,634
                                               =======      =======     ======


                                       68
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE O - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued

                           Statement of Cash Flows

<TABLE>
<CAPTION>

                                                            December 31,
                                                    1999       1998        1997
                                                ---------    -------      ------
<S>                                               <C>           <C>           <C>
Operating activities
   Net income                                   $100,853    $105,220     $ 86,634
   Adjustments to reconcile net income to
    net cash provided by operating
    activities (Equity) deficit in
    undistributed income of subsidiary           (40,636)     31,291      (54,362)
     Gain on sales of real estate held for
      investment                                      51     (11,047)           -
     Accretion of purchase discount                    -           -       (4,820)
     Amortization of bond
      discount and underwriting costs                726         746          654
   Changes in operating assets and liabilities
     Increase (decrease) in other assets          (1,107)      2,377      (13,072)
     Increase (decrease) in other liabilities       (475)     (3,181)      15,388
                                                 -------     -------     --------
            Net cash provided by
             operating activities                 59,412     125,406       30,422

Investing activities
  Capital contributed to subsidiary                  (10)     (4,400)         (10)
  Proceeds from sales of real estate                   -      21,696            -
  Purchase of loans                                    -      (4,455)           -
   Repayment of loans                                  -           -       12,670
   Origination of shareholder note receivable    (60,000)          -            -
                                                 -------     -------     --------
            Net cash provided by (used in)
                 investing activities            (60,010)     12,841       12,660

Financing activities
   Repayments of other borrowings                      -           -       (1,774)
   Repurchase of senior notes                    (12,959)          -            -
   Cash dividends paid                           (47,565)    (87,600)     (33,026)
                                                 -------     -------     --------
          Net cash used in
           financing activities                  (60,524)    (87,600)     (34,800)
                                                 -------     -------     --------

            Net increase (decrease) in cash
             and cash equivalents                (61,122)     50,647        8,282

 Cash and cash equivalents, beginning of year     68,553      17,906        9,624
                                                 -------     -------     --------
 Cash and cash equivalents, end of year         $  7,431    $ 68,553     $ 17,906
                                                 =======     =======     ========
</TABLE>

                                       67
<PAGE>


                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
                        (In thousands, except share data)


NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued


                                               Year Ended December 31, 1999
                                              ------------------------------
                                              1st      2nd      3rd      4th
                                             -----    -----    -----    -----
   Interest income                         $ 42,241 $ 53,953 $ 36,662 $ 39,143
   Interest expense                         (15,854) (15,514) (15,455) (15,672)
                                            -------  -------  -------  -------
       Net interest income                   26,387   38,439   21,207   23,471

   (Provision) credit for losses             (1,173)    (742)  (1,312)    (594)
   Other income                               3,714   12,102    2,140    1,773
   Other expenses                            (4,733)  (5,551)  (5,943)  (5,102)
                                           --------  -------  -------  -------

       Income before income tax              24,195   44,248   16,092   19,548

   Income tax expense                         1,594    2,210      382     (856)
                                             ------   ------     ----    -----

       Net income                          $ 22,601 $ 42,138  $15,710 $ 20,404
                                            =======  =======   ======  =======
   Income per common share                  $ 75.24 $ 140.46  $ 52.37  $ 68.01
                                             ======  =======   ======   ======

                                              Year Ended December 31, 1998
                                             -------------------------------
                                             1st       2nd      3rd      4th
                                             ---       ---      ---      ---
   Interest income                          $38,828  $39,868  $34,945  $36,325
   Interest expense                          15,511   14,304   13,007   14,995
                                             ------   ------   ------   ------

       Net interest income                   23,317   25,564   21,938   21,330

   (Provision) credit for losses             (1,373)     309     (176)  (4,337)
   Other income                               4,641   12,112   23,165    5,292
   Other expenses                            (4,709)  (5,179)  (5,048)  (5,577)
                                             ------   ------   ------   ------

       Income before income tax              21,876   32,806   39,879   16,708

   Income tax expense                         1,028    1,837      953    2,231
                                             ------   ------     ----   ------
       Net income                           $20,848  $30,969  $38,926  $14,477
                                             ======   ======   ======   ======

   Income per common share                  $ 69.49  $103.23  $129.75  $ 48.26
                                             ======   ======   ======   ======


                                       68
<PAGE>
                  BEAL FINANCIAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                (In thousands)


NOTE P - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - Continued

                                               Year Ended December 31, 1997
                                             --------------------------------
                                              1st      2nd      3rd      4th
                                              ---      ---      ---      ---
   Interest income                          $54,945  $37,531  $34,261  $42,444
   Interest expense                          17,555   16,929   16,327   17,045
                                             ------   ------   ------   ------

       Net interest income                   37,390   20,602   17,934   25,399

   (Provision) credit for losses               (933)     261   (1,764)    (974)
   Other income                               2,651    3,397    6,430    4,793
   Other expenses                            (4,602)  (5,625)  (6,490)  (5,427)
                                             ------   ------   ------   ------

       Income before income tax              34,506   18,635   16,110   23,791

   Income tax expense                         1,203      961      999    3,245
                                             ------     ----     ----   ------
       Net income                           $33,303  $17,674  $15,111  $20,546
                                             ======   ======   ======   ======

   Income per common share                  $111.01   $58.91   $50.37   $68.49
                                             ======    =====    =====    =====


NOTE Q - 401(K) PLAN

   The  Corporation  offers a 401(k)  plan to all full time  employees  who have
   reached the age of 21 and  completed  three  months of  service.  The Company
   matches 50% of the employees'  contribution up to 6% of base salary.  For the
   years ended December 31, 1999,  1998, and 1997 the Corporation  made matching
   contributions of $123, $107 and $103, respectively.


                                       69


ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE

      None.


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS


DIRECTORS OF BEAL FINANCIAL

      The Board of  Directors  of Beal  Financial  currently  consists  of three
members  including  D. Andrew Beal,  Timothy M. Fults and Bernard L.  Weinstein.
Each member of Beal  Financial's  Board of  Directors  is also a director of the
Bank.  See " Board of  Directors  of the  Bank."  Directors  Beal and Fults have
served as such since Beal  Financial's  incorporation  in  September  1993,  and
Director  Weinstein has served since June 1995.  The directors of Beal Financial
are elected at each annual meeting of stockholders for terms of one year.

EXECUTIVE OFFICERS OF THE COMPANY

      The executive officers of Beal Financial,  who are currently  directors or
executive officers of Beal Bank, are identified below. The executive officers of
Beal Financial are elected annually by Beal Financial's Board of Directors.  The
executive  officers of Beal Financial do not receive any  remuneration  in their
capacity as Beal Financial executive officers.


         NAME                   POSITION WITH COMPANY
---------------------    ---------------------------------
D. Andrew Beal           Chairman of the Board and
                         President
Timothy M. Fults         Secretary
Margaret M. Curl         Vice President/Assistant
                         Secretary
James W. Lewis, Jr.      Vice President/Treasurer

BOARD OF DIRECTORS OF THE BANK

     The Board of Directors of Beal Bank is currently composed of eight members.
The following table sets forth certain  information  with respect to the current
directors of the Bank.  Under the Bank's Bylaws,  directors are elected annually
by stockholders for terms of one year. Except as described herein,  there are no
arrangements  or  understandings  between the persons named and any other person
pursuant to which such director was selected.


                                                               Term of
                                                      Director  Office
     Name          Age(1)  Position(s) Held            Since   Expires
-----------------  ------  ------------------         -------- --------

D. Andrew Beal      47   Chairman of the Board          1985     2000
David C. Meek       55   Chief Executive  Officer and   1996     2000
                         Director
Gerald Hartman      62   President,  Chief  Operating
                         Officer and Director           1998     2000
Timothy M. Fults    46   Director and Secretary         1985     2000
Bernard L.          57   Director                       1991     2000
 Weinstein
Susan D. Arnold     57   Director                       1992     2000
R. Michael Eastland 54   Director                       1992     2000
David L.            41   Director                       1993     2000
 Goldstein, CPA


(1)  At December 31, 1999.

      The business experience of each director is set forth below. All directors
have held their present  positions  for at least the past five years,  except as
otherwise indicated.


                                      70

<PAGE>



     D. ANDREW  BEAL.  Mr. Beal is  Chairman of the Board and  President  of the
Company and Chairman of the Board of the Bank. He is the owner of  approximately
99% of the Company's  outstanding  common  stock.  Mr. Beal has been involved in
buying and  operating  apartment  complexes  since the mid 1970s.  Mr. Beal is a
member of various real estate groups located in the Dallas area and a member and
supporter of various civic organizations.

     DAVID C. MEEK.  Mr. Meek is Chief  Executive  Officer of the Bank. Mr. Meek
joined the Bank in January 1996. Immediately prior to joining the Bank, Mr. Meek
was a self-employed  investor and  consultant.  From February 1991 until January
1995, Mr. Meek was President/Chief  Executive Officer/Chief Operating Officer of
Coventry  Properties,   Inc.,  and  Partnership  Services,   Inc.,  real  estate
management corporations located in Dallas, Texas.

     GERALD HARTMAN.  Mr. Hartman has been President and Chief Operating Officer
of the Bank since joining the Bank in October  1998.  Prior to joining the Bank,
Mr.  Hartman was President of Pacific  Southwest  Bank,  FSB,  located in Corpus
Christi,  Texas,  since May  1994.  From 1981  until  1994 he served in  various
capacities until becoming  President in 1983 of Colonial Savings,  F.A., located
in Fort Worth,  Texas.  Mr.  Hartman was also  formerly a partner with Coopers &
Lybrand and is a certified public accountant.

     TIMOTHY M. FULTS.  Mr. Fults is the  Secretary of the Company and the Bank,
positions  he has held since  September  1993 and June 1995,  respectively.  Mr.
Fults is a  self-employed  trial attorney  engaged in the practice of law in the
Dallas, Texas area.

     BERNARD  L.  WEINSTEIN.  Dr.  Weinstein  has been a  Professor  of  Applied
Economics at the University of North Texas in Denton, Texas since June 1989. Dr.
Weinstein  has also  taught  at  Rensselaer  Polytechnic  Institute,  the  State
University of New York, the University of Texas at Dallas and Southern Methodist
University.  Dr.  Weinstein  has  authored  or  co-authored  numerous  books and
articles on the subject of economic development, public policy and taxation. Dr.
Weinstein  currently  serves as a director and consultant to various  non-public
companies, non-profit organizations and government agencies.

     SUSAN D. ARNOLD.  Mrs.  Arnold is the  President of Coldwell  Bankers/Paula
Stringer Realtors located in Dallas,  Texas, a position she has held since 1996.
Mrs.  Arnold was previously the President of Murray  Realtors from 1980 to 1996,
which was acquired by Coldwell  Bankers/Paula  Stringer  Realtors in 1996.  Mrs.
Arnold is a former director of both the Greater Dallas Board of Realtors and the
Texas  Association  of Realtors and the former  President of the Greater  Dallas
Association of Realtors.  Mrs.  Arnold  currently  holds various  positions with
numerous community service organizations.

     R. MICHAEL EASTLAND. Mr. Eastland has been the Executive Director and Chief
Executive  Officer of the North Central Texas Council of Governments  located in
Arlington,  Texas since December 1992. Prior thereto,  Mr. Eastland was the City
Manager for the City of  Carrollton,  Texas from June 1984 to December 1992. Mr.
Eastland  has over 25 years of service in municipal  positions in various  Texas
localities.  He has also  served as  President  and a member of the board of the
Texas City Management Association Board. Mr. Eastland is also a former President
of the North Texas City Management Association.

     DAVID L.  GOLDSTEIN,  CPA.  Mr.  Goldstein is a self  employed  information
systems consultant.  In addition, he served as an information systems consultant
with Work Flow Design,  Inc., an information  systems consulting firm located in
Dallas,  Texas from April 1996 through July 1997.  From  November 1993 to August
1994, he was Vice President of Advanced Thought Systems,  an information systems
consulting  firm located in Dallas,  Texas,  and a consultant  with Compucom,  a
systems  integration  company  located  in  Dallas,  Texas,  from  March 1993 to
November 1993. He was a consultant with Coopers & Lybrand, a national accounting
and consulting  firm,  from July 1990 to March 1993 and Corporate  Controller of
Singer  Management  Company,  a family amusement  company located in Carrollton,
Texas, from February 1983 to July 1990.

EXECUTIVE OFFICERS OF THE BANK

     The  executive  officers of the Bank are  elected  annually by the Board of
Directors of the Bank. Except as described herein,  there are no arrangements or
understandings  between the person named and any other person  pursuant to which
such officer was selected.


                                      71

<PAGE>



      The following  information as to business  experience during the past five
years is supplied  with respect to each  executive  officer of the Bank who does
not serve on the Bank's Board of Directors.

     MARGARET  M.  (MOLLY)  CURL.  Ms.  Curl,  age 45 has been the  Senior  Vice
President of the Bank since February 1994. She is also the Bank's compliance and
CRA  officer,  positions  she has held since  March  1994.  Ms.  Curl also holds
various  positions  with the Bank's  subsidiaries.  Prior to joining the Bank in
1994,  Ms. Curl was employed by Grant Thornton LLP, a national  accounting  firm
located in Dallas,  Texas,  as a Senior  Associate  from August 1993 to February
1994 and a Senior Consulting  Manager from October 1986 to August 1993. Ms. Curl
was  employed  by the Office of the  Comptroller  of the  Currency,  the primary
regulator of national banks,  as Manager of the Licensing  Division from 1983 to
1984, as a National Bank Examiner from 1980 to 1984 and as an Assistant National
Bank Examiner from 1975 to 1980. Ms. Curl is also a certified public accountant.

     WILLIAM  T.  SAURENMANN.   Mr.  Saurenmann,  age  51  is  the  Senior  Vice
President-Lending  of the Bank.  Prior to such time, he was a Vice  President of
the Bank from August 1991 to November 1994 and an independent  consultant to the
Bank from May 1991 through August 1991. Mr.  Saurenmann is also a Vice President
in virtually all of the Bank's subsidiaries.  Prior to joining the Bank in 1991,
he was  Senior  Vice  President  -  Lending  of San  Jacinto  Savings  and  Loan
Association, Houston, Texas, from October 1990 to May 1991 and Vice President of
Murray Federal Savings and Loan Association,  Dallas,  Texas, from April 1982 to
October 1990.

     STEPHEN K. O'NEAL.  Mr.  O'Neal,  age 44, has been a Vice President of Loan
Administration  since  joining  the Bank in July  1996.  From 1987 to 1995,  Mr.
O'Neal was employed in various positions with Metropolitan Federal Bank, FSB, an
$8  billion  financial  institution  headquartered  in  Minneapolis,  Minnesota,
including  Vice  President  and Manager of Commercial  Loan  Servicing and Asset
Management.  Prior to that Mr.  O'Neal was employed  with Grant  Thornton LLP, a
national public accounting firm located in Dallas,  Texas from 1986 to 1987 as a
Manager in the  consulting  department.  Mr.  O'Neal is also a certified  public
accountant.

     CLARK E. ENRIGHT.  Mr. Enright, age 47, joined the Bank in February 1996 as
the Vice  President - Special Assets  Department  and was appointed  Senior Vice
President-Commercial  Loans in October  1996.  Prior to such time,  Mr.  Enright
served  as  President  and  Chief  Executive  Officer  of  Kelly,   Enright  and
Associates,   Inc.,   a   corporation   involved   in  all  levels  of  property
administration  as  well  as  receivable  management,  investment  and  mortgage
banking,   venture   capital  and  litigation   support.   He  was  Senior  Vice
President/Manager  Special Assets Division of San Jacinto Savings Association in
Houston, Texas from 1988 to 1991.

     JAMES   W.   LEWIS,   JR.   Mr.   Lewis,   age  56,   has   been  the  Vice
President/Treasurer  of the Company since  October,  1998 and Vice  President of
Accounting/Operations  and Treasurer of the Bank since  February 1993. Mr. Lewis
was appointed Senior Vice  President-Controller  in October 1996. He is also the
Assistant  Secretary  and  Treasurer of BMI,  BPI and  Assistant  Secretary  and
Treasurer of various Bank subsidiaries.  Prior to being appointed to his current
positions,  Mr. Lewis was an Executive  Vice President of the Bank from December
1988 until February 1993. Mr. Lewis is also a certified public accountant.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY AND THE BANK

     MEETINGS AND COMMITTEES OF THE COMPANY.  Meetings of the Company's Board of
Directors are generally  held on an as needed basis.  The Board of Directors met
seven times during the year ended  December 31, 1999.  No incumbent  director of
the Company  attended  fewer than 90% of the  aggregate  of the total  number of
Board  meetings and the total number of meetings  held by the  committees of the
Board of Directors on which they served.

     The Board of Directors of the Company has a standing Audit Committee.

     The Company's Audit Committee  recommends  independent auditors to the full
Board,  reviews the results of the auditors'  services,  reviews with management
and the  internal  auditor the systems of internal  control and  internal  audit
reports and  assures  that the books and records of the Company and the Bank are
kept in accordance  with  applicable  accounting  principles and standards.  The
members of the Audit  Committee are Directors  Fults and  Weinstein.  During the
year ended December 31, 1999, this committee met one time.

     The Bank has standing  Executive,  Executive  Loan,  Audit,  Investment and
Compensation Committees.  Set forth below is a description of the Bank's primary
committees.

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<PAGE>



      The Executive Committee is comprised of Directors Beal and Weinstein.  The
Committee  meets when necessary in lieu of the full board of directors.  Certain
matters that would come under the purview of the full board are addressed by the
Executive Committee in lieu of a full board meeting. This committee did not meet
during the year ended December 31, 1999.

      The Executive  Loan Committee was formed in December 1994 and is comprised
of Directors Beal, Meek, Fults, Blanton,  Weinstein and Goldstein with directors
Hartman,  Arnold and Eastland as alternates.  The Committee meets when necessary
and approves all loans or purchases in excess of $1.0  million.  This  Committee
met 32 times during the year ended December 31, 1999.

     The  Audit  Committee  maintains  a  liaison  with the  Bank's  independent
auditors and the Bank's  internal  auditor  throughout  the year and reviews the
adequacy of the Bank's internal controls. The Committee is composed of Directors
Eastland,  Fults and  Goldstein.  This Committee met three times during the year
ended December 31, 1999.

      The  Investment  Committee  meets monthly to review the Bank's  current or
planned activities to ensure adequate  liquidity,  to maintain a high quality of
diversified  investments,  and to provide collateral for pledging  requirements.
The Committee also acts as the Bank's  asset/liability  management committee and
reviews the Bank's interest rate risk position and  profitability on a quarterly
basis and makes  recommendations  for  adjustments in the Bank's asset liability
management  strategy to the full board.  The Committee is comprised of Directors
Beal, Hartman,  Weinstein and Goldstein.  This Committee met 12 times during the
year ended December 31, 1999.

      The Compensation Committee is comprised of Directors Eastland,  Arnold and
Weinstein.  The  Committee  meets  on  an  as  needed  basis  to  establish  the
compensation of the Chief Executive Officer,  approve the compensation of senior
officers and the  compensation  and benefits paid to employees of the Bank. This
Committee did not meet during the year ended December 31, 1999.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      During the year ended  December 31, 1999, the  Compensation  Committee was
comprised of non-employee Directors Eastland, Arnold and Weinstein.

COMPENSATION OF DIRECTORS

      CASH COMPENSATION.  Mr. Beal receives a salary of $120,000 in his capacity
as  Chairman  of the  Board of the  Company  and the  Bank and does not  receive
compensation as an officer in various Bank subsidiaries.  Non-employee directors
of the  Company  were paid fees of $500 per meeting  for  attendance  at regular
meetings of the  Company's  Board of Directors  and $200 per  committee  meeting
attended.  Non-employee  directors  of the Bank were  paid  fees of  $1,500  per
meeting for  attendance  at regular  meetings of the Bank's Board of  Directors.
Directors are also paid $200 for each committee meeting  attended.  In addition,
all non-employee directors of the Bank were paid a $10,000 bonus during the year
ended December 31, 1999.


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ITEM 11.    EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

      The  following  table sets forth the  compensation  paid or accrued by the
Company  for  services  rendered  by the  Company's  Chairman  of the  Board and
President,  the  Chief  Executive  Officer  of the Bank and the  President/Chief
Operating Officer of the Bank in 1999 (the "Named Officers").



                         SUMMARY COMPENSATION TABLE
                                           ANNUAL COMPENSATION    ALL OTHER
                                           SALARY      BONUS     COMPENSATION
 NAME AND PRINCIPAL POSITION     YEAR       ($)         ($)        ($)(1)
------------------------------ --------- ---------- ------------ -----------
D. Andrew Beal, Chairman of      1999      $120,000         $---         N/A
the Board and                    1998       120,000          ---         N/A
   President                     1997       120,000                      N/A
                                                             ---
David C. Meek, Chief             1999       200,000       88,395       6,000
Executive Officer of the         1998       200,000          ---       6,000
   Bank(2)                       1997       200,000      150,000       6,000
Gerald Hartman, President and    1999       187,500          ---       6,000
Chief Operating                  1998        33,412       12,260       1,000
Officer of the Bank(3)
William T. Saurenmann, Senior    1999       114,618       70,000       6,000
Vice President-                  1998       100,000       82,500       3,000
Lending of the Bank              1997       100,000       90,000       3,000


(1)  Includes the Company's  contribution  to the 401(k) Plan and life insurance
     premiums paid.
(2)  In addition to serving as Chief  Executive  Officer,  Mr. Meek will succeed
     Mr. Hartman as President of the Bank.
(3)  Mr.  Hartman  joined  the Bank on October  28,  1998 and he  announced  his
     retirement effective March 31, 2000.

EXECUTIVE BONUS PLAN

     In February, 1998, Mr. Meek and the Company entered into an executive bonus
plan (the  "Plan").  The Plan  provides that Mr. Meek shall be entitled to bonus
compensation equal to ten percent of the earnings (as described below) in excess
of prime plus 150 basis points  attributable to a designated pool of loans.  The
earnings,  losses and related expenses from each loan (including profit,  losses
and expenses resulting from the sale of the underlying  collateral if foreclosed
upon) shall be aggregated in determining the amount of the bonus. Mr. Meek shall
be entitled to bonus  compensation  for the life of the loan pool  regardless of
whether or not he remains employed by the Company or its subsidiaries.

     As of the  December  31, 1999 the initial loan pool is comprised of certain
loans  originated  by the Company and its  subsidiaries  after  January 1, 1997,
aggregating  approximately  $146.5 million. New loan originations shall become a
part of the loan pool when  specifically  identified in writing by both Mr. Meek
and Mr. Beal and ratified by the board of directors. Loans shall be removed from
the loan pool once a loan is paid in full  (including  any profit  participation
interest),  an amount less than full payment is accepted as payment in full,  or
the underlying  collateral  obtained  through the foreclosure or deed in lieu of
foreclosure is sold.

      Earnings  subject to the bonus  calculation  are  intended  to include all
income and  expenses  attributable  to the loan pool assets  including  interest
income, profit participation payments, release fees, loan origination or renewal
fees and income or losses  created from former loans or assets in the loan pool,
all  charge-offs,  write downs and specific  loan loss  provisions,  expenses of
collection, attorneys fees, as well as any other income or expenses attributable
to the loan pool as  determined  by the board of directors  (except that cost of
funds (i.e., interest paid to depositors) and normal non-default servicing costs
shall  not be  included  as  expenses).  Expenses  incurred  during  Mr.  Meek's
employment  which are directly  attributable  to loans held in the pool shall be
deducted from earnings.

     Bonuses  shall  be  calculated  as of  October  1 of each  year and paid on
December  1 of each  year.  Twenty-five  percent  of the bonus  amount  shall be
retained as a reserve and seventy-five percent shall be paid to Mr. Meek. All

                                      74

<PAGE>



remaining  reserves  shall be paid to Mr. Meek when no assets remain in the loan
pool.  No bonus shall be paid that would result in a failure to maintain the 25%
reserve  amount,  and prior bonus  payments shall be refunded by Mr. Meek to the
extent  the  reserve  is  below  25% as  calculated  at the  time  of any  bonus
calculation.

      Upon final  resolution  of all  assets in the pool,  in the event that Mr.
Meek  has been  overpaid  in total  bonus  payments,  Mr.  Meek  has  agreed  to
immediately repay any overpayments to the Company.

      Under certain circumstances,  including the failure by the Company to make
timely  payments to holders of the Senior Notes,  payment of any bonus due shall
be  deferred.  In this  event,  the Company  shall owe Mr. Meek  interest on the
delinquent  payment(s)  at a rate of prime  plus 150  basis  points,  compounded
monthly, until such payments and applicable interest is paid in full.

      The maximum  bonus amount to be paid pursuant to the Plan shall not exceed
$3.0 million.

BENEFITS

     GENERAL.   The  Bank  currently   maintains  an  employee  benefit  program
providing,  among other  benefits,  major medical  insurance,  dental  benefits,
disability  insurance and life insurance.  The Bank also maintains a 401(k) plan
for the benefit of its employees.  In addition,  as of January 1, 1999, the Bank
established a deferred bonus program.

      DEFERRED  BONUS PROGRAM (THE  "PROGRAM").  The program runs in conjunction
with the Bank's annual cash bonus program.  The program  provides that each time
an  employee  is awarded a cash bonus they will also be awarded  with a deferred
bonus of an equal  amount.  There is no actual  cash  contributions  made to the
program by the Bank until such time as the employee becomes vested. The employee
becomes 100% vested on the third  anniversary of the date the deferred bonus was
awarded. The employee will be zero percent vested prior to the third anniversary
on the date the bonus was awarded.  The deferred bonus amount will earn interest
as prime rate during the period it is deferred.  Upon termination of employment,
for any reason, the employee will forfeit  permanently any deferred balance that
they are not 100% vested in.

      401(K) PLAN. The Bank maintains the Beal Bank 401(k) Plan,  designed to be
qualified under Section 401(k) of the Code (the "401(k) Plan").  The 401(k) Plan
covers all full-time salaried employees of the Bank. Any employee of the Bank or
its  subsidiaries  over the age of 21 is eligible to  participate  in the 401(k)
Plan  following the  completion of three months of service to the Bank or any of
its subsidiaries.  Under the 401(k) Plan, a participant may elect to defer up to
a maximum of $10,000 of his salary for  calendar  1998 to the 401(k)  Plan.  The
Bank makes discretionary matching and profit-sharing contributions to the 401(k)
Plan,  up to a maximum  of 25% of the  participant's  compensation  for the plan
year.  "Compensation"  for  purposes  of the 401(k)  Plan  generally  includes a
participant's  base  compensation,  including amounts  contributed to the 401(k)
Plan by the employer.  A Participant  is always 100% vested in his or her salary
deferral contributions and the earnings thereon. A Participant becomes vested in
Bank  contributions  to the 401(k)  Plan at the rate of 25% per year  commencing
with the completion of two years of service.

      Participants  can allocate  their salary  deferral  contributions  and the
Bank's  contributions  to the 401(k) Plan, if any,  among one or more of the six
investment  options  available under the 401(k) Plan. These  investment  options
include two fixed interest funds, a bond fund, a bond and stock fund and two
growth stock funds.

      The 401(k)  Plan  provides  for  in-service  hardship  distributions  of a
participant's salary deferral contributions.  Distributions from the 401(k) Plan
are made upon  termination  of  service  in the form of a lump sum.  The  Bank's
contributions to the 401(k) Plan on behalf of the Named Officers are included in
the Summary Compensation Table.



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<PAGE>



ITEM 12.    STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The  following  table  sets  forth  information  as of  December  31,  1999
regarding the share  ownership of those persons or entities  known by management
to beneficially  own the Company's  Common Stock.  Except as set forth below, no
other  director or  executive  officer owns any shares of the  Company's  Common
Stock.


                                                     Shares
                                                  Beneficially    Percent
   Name and Address of Beneficial Owner               Owned       Of Class
-----------------------------------------------   ------------  -----------
D. Andrew Beal, Chairman of the Board and             297,000      99.0%
President of the Company and Chairman of the
Board of the Bank
Suite 902, 15770 N. Dallas Parkway
Dallas, TX  75248

Timothy M. Fults, Director and Secretary of the         3,000       1.0%
Company and Director and Secretary of the Bank
5956 Sherry Lane #800
Dallas, TX  75225


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

      On  January  20,  1999,  Beal  Financial  made a term loan to its  primary
shareholder,  Mr. D. Andrew Beal (the "Borrower"),  in the amount of $60,000,000
(the "Loan").  The Loan is secured by a first priority  security interest in the
Borrower's  stock or other  ownership  interests  (including  all  products  and
proceeds thereof) in Beal Financial and other companies which are not affiliated
with  Beal  Financial.  Accrued  interest  is paid  quarterly  on the  Loan at a
fixed-rate of 10.5% per annum, and the Loan matures on December 30, 2001.

      Pursuant  to the  Indenture  relating to Beal  Financial's  12 3/4% Senior
Notes due August 15, 2000 (the "Senior Notes"),  Beal Financial has delivered to
the Indenture Trustee an Officer's Certificate  certifying that the Loan: (1) is
on terms that in good faith would be offered in an arm's length transaction to a
person  that is not an  affiliate  of Beal  Financial;  (2)  was  approved  by a
majority  of the  disinterested  board  of  directors,  and  (3) is fair to Beal
Financial  from a  financial  point of view based upon an opinion by a certified
expert with experience in appraising transactions of a type similar to the Loan.
Prior to the closing of the Loan,  the  independent  Board of  Directors of Beal
Financial  approved the Loan based upon,  among other things, a fairness opinion
from Valuation Research  Corporation  stating that (1) the Loan is on terms that
are no less  favorable to Beal Financial than would be available in a comparable
transaction in an arm's length dealing with a person that is not an affiliate of
Beal  Financial  or in good faith  would be  offered to a person  that is not an
affiliate of Beal Financial;  (2) after the Loan is made, Beal Financial remains
solvent under applicable state and Federal law; and (3) the Loan is fair to Beal
Financial and the holders of the Senior Notes from a financial point of view.

      All loans by the Bank to its directors and executive  officers are subject
to federal  regulations  restricting loan and other transactions with affiliated
persons of the Bank.  Federal  regulations  currently  require that all loans to
directors and executive  officers be made on terms and conditions  comparable to
those for similar transactions with  non-affiliates.  Except as described above,
at December 31, 1999, there were no loans outstanding to any director, executive
officer,  member  of their  immediate  families  or  business  interest  of such
individuals.



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ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
            FORM 8-K

     (a)(1)Financial Statements:

     The following  information appearing in Part I, Item 8 of this Form 10-K is
     incorporated herein by reference.

     Independent Auditor's Report
     Consolidated  Statements  of  Financial  Condition at December 31, 1999 and
     1997
     Consolidated  Statements of Income for the Year Ended December 31, 1999 and
     1997,  the Six Months  Ended  December 31, 1996 and the Year Ended June 30,
     1996
     Consolidated  Statements of Changes in  Stockholders'  Equity for the Years
     Ended  December 31, 1999 and 1997,  the Six Months Ended  December 31, 1996
     and the Year Ended June 30, 1996
     Consolidated Statements of Cash Flows for the Years Ended December 31, 1999
     and 1997,  the Six Months  Ended  December 31, 1996 and the Year Ended June
     30, 1996
     Notes to Consolidated Financial Statements


     (a)(2) Financial Statement Schedules:

     All financial  statement  schedules have been omitted as the information is
     not required.

     (a)(3)Exhibits:

     See Index to Exhibits.

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed  during the quarter  ended  December  31,
     1999.




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<PAGE>

                                  SIGNATURES


      Pursuant to the  requirements of Section 13 or 15(d) of the Securities Act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                    BEAL FINANCIAL CORPORATION



Date: March 28, 2000                      By:   /s/ D. Andrew Beal
     --------------------                 -------------------------------
                                          D. Andrew Beal, President
                                           (DULY AUTHORIZED REPRESENTATIVE)


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.



/s/ D. Andrew Beal                       /s/ James W. Lewis
-------------------------------          ---------------------------------
D. Andrew Beal, Chairman                 James W. Lewis, Vice President
                                         /Treasurer
                                         (Principal Financial Officer and
                                         Principal Accounting Officer)


Date: March 28, 2000                     Date:  March 28, 2000
     --------------------------                ---------------------------




/s/ Timothy M. Fults                     /s/ Dr. Bernard L. Weinstein
-------------------------------          ---------------------------------
Timothy M. Fults, Director               Dr. Bernard L. Weinstein, Director


Date: March 28, 2000                     Date:  March 28, 2000
     --------------------------                ---------------------------






<PAGE>



                               INDEX TO EXHIBITS


 EXHIBIT
 NUMBER        DOCUMENT

     3.1  Certificate of Incorporation*

     3.2  Bylaws*

     4.1  Form of  Indenture  dated as of August 11,  1995,  with respect to the
          Registrant's 12-3/4% Senior Notes, due August 15, 2000*

     4.2  Specimen  Senior Note (found at Sections  2.02 and 2.03 of the Form of
          Indenture filed as Exhibit 4.1)*

     10   Material contracts:
          (a)  Employment Agreement with Margaret Curl*
          (b)  Executive Bonus Plan with David C. Meek**

     21   Subsidiaries of Registrant***

     27   Financial Data Schedule***


*     Filed as  exhibits to the  Company's  Registration  Statement  on Form S-1
      under the Securities  Act of 1993,  filed with the Securities and Exchange
      Commission  on June  7,  1995  (Registration  No.  33-93212).  All of such
      previously filed documents are hereby  incorporated herein by reference in
      accordance with Item 601 of Regulation S-K.
**    Filed as exhibits to the Company's 1997 Annual Report on Form 10-K,  filed
      with the  Securities  and Exchange  Commission on April 14, 1998 (File No.
      33-93212).  All of such previously filed documents are hereby incorporated
      herein by reference in accordance with Item 601 of Regulation S-K.
***   Exhibit filed herewith.