maverick banker in texas chases distressed assets

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Maverick Banker In Texas Chases Distressed Assets

Once, Andrew Beal Fixed Up Old Houses; Now He Buys Marked-Down Mortgages

By George Anders Staff Reporter of THE WALL STREET JOURNALUpdated Jan. 13, 2005 12:01 a.m. ET

PLANO, Texas -- Shortly after Sept. 11, 2001, U.S. airlines' prospects looked dire. But Texas banker Andrew Bealsaw a bargain. He began buying airline bonds at deeply depressed prices.

It's been a bumpy ride, but many of the $1 billion of bonds he bought have rallied substantially. That means profitsof at least $70 million a year, Mr. Beal says.

Such bets have made the 52-year-old Mr. Beal a billionaire and a controversial figure in banking. His wholly ownedBeal Bank ranked seventh in profitability among 8,000 U.S. banks as of Sept. 30, as measured by a five-year averagereturn on equity, according to Highline Banking Data Services. But Mr. Beal likes to pour money into financiallystrained areas that others won't touch, creating some concern about how long his winning streak can last.

His banks have loaded up on everything from hurricane-relief loans to bankrupt-utility obligations. Beyond banking,Mr. Beal's spending tastes are even more eclectic. In the late 1990s, he spent $200 million creating a rocketry business that ultimately failed.

Since then he has taken up high-stakes poker, playing against top Las Vegas gamblers for $100,000 minimum bets --with wagers sometimes running to $1 million a hand. Bank regulators recently urged him to leave the cards alone.

Some friends of Mr. Beal see him as banking's eternal teenager: strong-willed, rambunctious and defiant of industrytraditions. In a series of interviews, Mr. Beal railed against mainstream banking as stodgy and lethargic. "If peoplesay I'm doing something crazy," he said, "that's usually a good sign."

Unlike many bankers, Mr. Beal never earned an M.B.A. or climbed the corporate ladder. He is a college dropoutwho has been self-employed his whole career. He bought and fixed up old homes in his 20s, then opened a small bank 16 years ago. Today, he owns 100% of Beal Financial Corp., a bank holding company doing business in Texas, Nevada and California with combined assets of $7.8 billion and a net worth of more than $1.7 billion.

For all his wealth, Mr. Beal remains unabashedly cheap, pestering employees to turn off the lights when they go

home, driving an aging Ford Expedition and frequently eating at fast-food restaurants. He takes an ornery delight inavoiding mainstream banking areas, such as credit-card and home-mortgage lending, in favor of his idiosyncraticinvestments. "We do business where no one else wants to," he says. "If it's straightforward, it probably isn't for us."

Bank analysts have worried for years that Mr. Beal's appetite for investing in troubled sectors could backfire. DannyPayne, head of the Texas Savings & Loan Department, calls Beal Bank's profitability quite attractive but says hisagency from time to time "may have expressed concern" about its asset quality. He says those qualms aren't anongoing consideration.

There is a toughness to Mr. Beal's formula that bothers some people, too. His Texas bank has sued at least 90delinquent borrowers in federal courts in the past five years and many more in state courts. In the U.S. Virgin






Islands, small borrowers are fuming about tactics his lawyers have used in pursuing people behind on their payments.

Mr. Beal acknowledges that some debt collectors engaged by his banks may have pushed too hard. He says he hastightened standards in that area. As for risk, he says his banks' portfolios are safer than they seem.

The son of a Michigan civil servant, Mr. Beal raced through a stream of money-making ideas while in high school.At various stages, he fixed television sets, hawked carnival games and installed apartment buzzers. "Andy always

was enthusiastic about jumping into new areas," recalls Larry Fowler, a Lansing lawyer and early adviser to Mr.Beal. "He never researched very well where he was going to land."

In one scheme, Mr. Beal talked the city of Lansing into letting him relocate houses being dislodged by a road-widening project. He linked a bunch of hydraulic jacks so he and a few friends could raise the houses at night beforemoving them. But when a supporting steel beam cracked, a house suddenly thudded onto a major roadway. Trafficwas snarled for most of a day.

Mr. Beal enrolled at Michigan State University but lost focus on classes when he spotted chances to do small-timereal-estate deals. He bought a Lansing house for $500 down and a $6,000 loan, fixed it up and rented it out profitablyfor $119 a month. "At first my mother was horrified," he recalls. "She had higher hopes for me. A week later, shedecided that even if it was a dumpy little house, she'd be supportive."

More fixer-uppers followed, with some scary adventures along the way. He and two partners in 1981 acquired theBrick Towers public housing project in Newark, N.J., for less than $25,000. Wanting to inspect its facade, he rode upon a scaffold to the 12th-floor level. Suddenly, the scaffold tilted uncontrollably. Mr. Beal and a friend smashed anapartment window and crawled inside to safety.

Along the way, Mr. Beal honed his model for finding bargains. He scouted for steeply marked-down properties with problems that seemed fixable. He courted exhausted sellers who wanted out at any price. And he targetedinvestments where unpopular locations, paperwork hassles or other taints meant that rival bidders were rare. Ifowners wanted out, they had to work with him.

"He was such a great negotiator," says Jerry Holley, who invested alongside Mr. Beal in some 1980s deals. "He'd gointo government agencies just before the end of their fiscal year, when he knew they needed to get properties offtheir books. He'd ask for an extra year to pay. He'd ask for more help fixing up the property. He just wouldn't givein."

Mr. Beal decided his formula would work even better if he switched to the lending side of real-estate finance. Thatway he could get into hundreds of obscure deals, and with cheap capital: customers' deposits.

In 1988, Mr. Beal opened a tiny bank in a one-story cinderblock building next to a Wendy's in suburban Dallas. Atthe time, Texas was awash with banking failures. To him, this wasn't a problem but an opportunity. The ResolutionTrust Corp. was taking control of failed savings and loans and aiming to unload their loan portfolios.

A San Antonio S&L's loans went on the block in 1989. "I spent a weekend in San Antonio driving past every pieceof collateral to make sure that most of the homes were worth their loan balances," Mr. Beal recalls. Then he boughtthe maximum allowable number by law of its mortgage loans, at 62 cents on the dollar. The discounted pricetranslated to loan yields of about 15%, Mr. Beal says. Beal Bank's profits surged.

To expand its balance sheet, the bank courted affluent, cautious, older depositors wanting an extra fraction of a percentage point on their certificates of deposit. That makes Beal Bank seem like an old-fashioned institution, withsix quiet branches, in Texas and California, that don't appear to do much except issue CDs. The action is on thelending side, rarely visible to the public.



Not everything Mr. Beal tries works. His bank in Plano hunted for profitable loans in Russia in the mid-1990s butcame away empty-handed. It also closed down a Mexican lending operating after several years when localregulations made it hard to earn adequate profits. A commitment to finance a New Mexico ski resort didn't work outwell.

But Beal Bank's profitability gauges, such as net interest margin or return on assets, typically are double or triple thenorms for commercial banks, says John McCune, head of research at data firm SNL Financial LC. For the ninemonths ended Sept. 30, Beal Bank reported net income of $605 million and assets of $4.6 billion.

When evaluating portfolios, Mr. Beal has been known to herd employees into a small, windowless room dubbed "the bat cave." He sits in front of a monitor shielded by a big cardboard viewing tube so no one else can see what he isdoing. Then he quizzes employees about individual loans and raises or lowers their valuations, without saying why."It lets me make adjustments without having people start tailoring their answers to what they think I want to hear,"Mr. Beal says.

In 2000, Beal Bank bought more than $1 billion of commercial loans from the Small Business Administration, paying as little as 42% of their face value. Some were in default. Others were in jurisdictions such as Palau, where itwasn't clear whether they were governed by U.S. or local law. "It wasn't an easy package of loans to analyze, but itturned out to the best deal I've ever done," says the bank's head of loan acquisitions, Jonathan Goodman.

The SBA at the time was being asked to look at private-sector solutions to servicing its loan portfolio, as part of ashrink-government initiative. SBA spokesman Michael Stamler says that when the agency sold loans, it lacked anaccounting model to determine whether such transactions helped its overall finances. That has led to concerns thatthe agency may have sold loans too cheaply. Mr. Beal replies that his biggest purchases were in open auctions,where others could have outbid him but did not.

About 3,000 SBA loans that Beal Bank bought had been made in the Virgin Islands after 1989's Hurricane Hugo.About 500 borrowers were behind on payments. Beal Bank pursued them much more aggressively than the SBAhad. The bank in 2003 said that it had sued 175 people, in some cases raising the possibility of seizing homes that the business borrowers had used as collateral.

One such suit, in Virgin Islands bankruptcy court, names Susan Allick, a schoolteacher who borrowed to repair a boat used in a tourist business. The bank is seeking repayment of $58,000 she owed the SBA, plus about $12,000 forcollection expenses of lawyers the bank hired. Those fees ran as high as $280 an hour for handling phone calls withMs. Allick. The case is pending.

The Virgin Islands' congressional delegate, Donna Christian-Christensen, has been urging Beal Bank to take agentler approach. Foreclosures are "devastating to an individual," she wrote to the bank. The bank's general counsel,Stephen Costas, says, "We'd like people to pay as agreed. We look at individual cases and do what's appropriate." Hesays the bank tries to keep costs down when it hires outside lawyers.

Mr. Beal says he has sometimes treated a delinquent borrower leniently out of compassion, although "I don't knowhow many times I've done that in my career. Probably fewer than 10."

Beal Bank has become more active as an originator of loans, recently leading a bankruptcy financing for DonaldTrump's casinos in Atlantic City, N.J. And, in keeping with its taste for what others shun, the bank has lent toCalifornia coastal logging, an industry that faces high regulatory and environmental hurdles.

"I winced at their terms at first," says Richard Pedula, a Willits, Calif., timber executive who borrowed $50 millionfrom Beal Bank in 2004 at about 10% interest. "They want their pound of flesh. But coastal forest properties areconsidered radioactive by traditional lenders. They were able to see past that and strike a deal. I'd like to do more business with them."



Mr. Beal says he has grown frustrated with Texas regulations making it hard to do certain kinds of loans, so lastsummer he opened a Nevada bank, Beal Savings Bank. It reported assets of $3.2 billion and net income of $20.8million as of Sept. 30. The Las Vegas operation could become the largest part of his banking business, says MollyCurl, a senior vice president at parent Beal Financial.

Mr. Beal has other interests in Las Vegas. Since 2000, he has been visiting casinos to play marathon sessions ofTexas hold 'em poker against some of the world's top gamblers. Participants say Mr. Beal sits practically immobilefor hours. He wears sunglasses and headphones to shut out voices, so he won't inadvertently betray a clue about his

hand by making eye contact or chatting.

Other players say he lost several million dollars in these games, though a winning spree last spring brought him closeto break-even. Mr. Beal doesn't dispute that account. He is known for blasting away with big bets even if he has badcards, sometimes inducing opponents with better hands to fold.

"It's almost as if he's playing with disdain for the value of money," says one opponent, Doyle Brunson, a former poker world champion. Mr. Brunson, a legendary bluffer in his own right, calls Mr. Beal "a very difficult person to play against."

This fall, Mr. Payne, the Texas regulator, phoned a Beal Bank official to voice concern about the boss's poker habit."We normally don't interfere with someone's private life," Mr. Payne says. "But there is some concern about public perceptions in this case, and we shared that."

Mr. Beal says he is through playing high-stakes poker, in part because he and the professional gamblers can't agreeon terms for a rematch.

Some of his friends are hoping that's the case. "I'm the fretful uncle about this," says Mr. Fowler, the Michiganattorney. "I tell him: 'Now, Andrew, don't get carried away too much with this. You get on the radar screen and the bank examiners are going to take a dimmer view of a guy who runs a bank and is gambling for high stakes.' "

Still, Mr. Fowler adds, "I think Andy has a capacity to keep things under control. If he loses a few dollars, he's notgoing to chase it."

Write to George Anders at [email protected]

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maverick banker in texas chases distressed assets

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