TELEBANC FINANCIAL CORPORATION
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 33-76930
TELEBANC FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3759196
-------- ----------
(State or other jurisdiction of I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. Highland Street, Arlington, Virginia 22201
--------------------------------------------------
(Address of principal executive office) (Zip code)
(703) 247-3700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months ( or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of November 8, 1996.
$.01 par value of common stock 2,049,500
------------------------------ ---------
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Consolidated Statements of Financial Condition --
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations --
Three and nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Changes in Stockholders' Equity -
Nine months ended September 30, 1996 and 1995 8
Consolidated Statements of Cash Flows -- Nine months
ended September 30, 1996 and 1995 9
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II -- Other Information
Item 5, Other Information 22
Item 6, Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
Assets: 1996 1995
- ------- ---- ----
(unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 2,008 $ 2,817
Interest-bearing deposits 2,360 5,243
Federal funds sold 656 905
-------- ---------
Total cash and cash equivalents 5,024 8,965
Investment securities available for sale, at fair value 70,251 40,058
Mortgage-backed securities available for sale, at fair value 203,876 234,210
Loans receivable, net 191,674 248,667
Loans receivable held for sale, lower of cost or market 123,160 --
Investment in subsidiaries 1,383 --
Real estate acquired through foreclosure 1,127 790
Accrued interest receivable 4,994 4,377
Premises and equipment, net 2,663 2,229
Stock in Federal Home Loan Bank of Atlanta, at cost 6,600 5,275
Acquisition costs, goodwill, and core deposit premium 378 416
Deferred charges 971 1,066
Other assets 9,415 7,890
-------- ---------
$ 621,516 $ 553,943
======= =======
</TABLE>
(continued)
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONTINUED
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Stockholders' Equity: 1996 1995
- ------------------------------------- ---- ----
(unaudited)
<S> <C> <C>
Liabilities:
Deposits $ 397,477 $ 306,500
Advances from the Federal Home Loan Bank of Atlanta 121,500 105,500
Securities sold under agreements to repurchase 47,687 93,905
Subordinated debt 16,564 16,496
Advances from borrowers for taxes and insurance 629 521
Income taxes payable 1,126 1,760
Accrued interest payable 2,762 2,682
Other accrued expenses and other liabilities 9,932 5,014
----- -----
597,677 532,378
------- -------
Stockholders' equity:
Common stock, $.01 par value, 3,500,000 shares authorized;
2,049,500 issued and outstanding 20 20
Additional paid-in capital 14,637 14,637
Retained earnings, substantially restricted 6,698 5,352
Unrealized gain on securities available for sale, net of
deferred tax 2,484 1,556
----- -----
Total stockholders' equity 23,839 21,565
------ ------
Commitments and contingencies
$ 621,516 $ 553,943
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans and other loans $ 6,080 $ 4,478 $ 16,946 $ 12,297
Mortgage-backed and related securities -- 5,015 -- 14,447
Investment securities and interest-bearing deposits 229 97 652 680
Mortgage-backed and related securities available for sale 4,483 402 14,117 1,187
Investment securities available for sale 1,060 625 2,609 918
Trading account assets -- 52 -- 167
Repurchase agreements 10 -- 12 17
Federal funds sold 9 12 31 37
------ ------ ------- ------
Total interest income 11,871 10,681 34,367 29,750
------ ------ ------ ------
Interest expense:
Deposits 5,635 4,524 15,419 12,413
Advances from the Federal Home Loan Bank of Atlanta 1,902 1,491 4,980 4,475
Reverse repurchase agreements 840 1,526 3,504 4,630
Other borrowed money 138 148 381 440
Subordinated debt 519 526 1,556 1,563
----- ----- ----- -----
Total interest expense 9,034 8,215 25,840 23,521
----- ----- ------ ------
Net interest income 2,837 2,466 8,527 6,229
Provision for loan and mortgage related security losses 125 502 744 1,111
----- ------ ------ -----
Net interest income after provision for loan and
mortgage related security losses 2,712 1,964 7,783 5,118
----- ------- ------ -----
Non-interest income:
Loan fees and service charges 195 28 653 68
Gain (loss) on sale of loans held for sale 98 (14) 415 48
Gain on sale of mortgage-backed securities 237 -- 105 251
(Loss) gain on sale of investment securities (56) 453 158 447
Loss on equity investment (108) -- (114) --
Gain on trading account -- 32 -- 669
Gain (loss) on sale of assets 100 -- 100 (6)
</TABLE>
(continued)
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Other $ 74 $ (80) $ 119 $ (65)
----- ----- ----- -----
Total non-interest income 540 419 1,436 1,412
----- ----- ----- -----
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 882 771 2,670 2,340
Office occupancy and equipment 135 102 364 319
Federal insurance premiums 1,881 146 2,224 371
Professional services 192 232 821 700
Other 197 150 635 393
----- ----- ----- -----
Total general and administrative expenses 3,287 1,401 6,714 4,123
----- ----- ----- -----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure, including provision
for losses 126 58 173 139
Amortization of acquisition costs, goodwill and
core deposit premium 13 -- 38 22
Other 108 32 419 95
----- ----- ----- -----
Total other non-interest expenses 247 90 630 256
----- ----- ----- -----
Total non-interest expenses 3,534 1,491 7,344 4,379
----- ----- ----- -----
(Loss) income before income tax expense (282) 892 1,875 2,151
Income tax (benefit) expense (220) 343 528 772
----- ----- ----- -----
Net (loss) income $ (62) $ 549 $ 1,347 $ 1,379
==== === ===== =====
(continued)
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earnings per share:
Net (loss) income $ (0.03) $ 0.27 $ 0.63 $ 0.67
Weighted average shares outstanding 2,171,000 2,049,500 2,124,488 2,049,500
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the nine months ended September 30, 1996 and 1995
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Additional on Available
Common Paid-in Retained for Sale
Stock Capital Earnings Securities Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 20 $ 14,637 $ 2,633 $ (262) $ 17,028
Net income for the nine months ended
September 30, 1995 -- -- 1,379 -- 1,379
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- 1,023 1,023
-- -- -- ----- -----
Balances at September 30, 1995 $ 20 $ 14,637 $ 4,012 $ 761 $ 19,430
== ====== ===== === ======
Balances at December 31, 1995 $ 20 $ 14,637 $ 5,352 $ 1,556 $ 21,565
Net income for the nine months ended
September 30, 1996 -- -- 1,346 -- 1,346
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- 928 928
-- -- -- --- ---
Balances at September 30, 1996 $ 20 $ 14,637 $ 6,698 $ 2,484 $ 23,839
== ====== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 20,082 $ 12,780
------ ------
Cash flows from investing activities:
Mortgage loan originations (25) (395)
Mortgage loans purchased (126,392) (98,691)
Proceeds from sale of mortgage loans available for sale 16,334 (62)
Principal payments on loans and mortgage-backed and
related securities 83,667 50,848
Purchases of mortgage-backed and related securities (160,911) (84,609)
Proceeds from sale of mortgage-backed securities available
for sale 150,649 22,598
Purchases of investment securities held to maturity -- (1,379)
Proceeds from the maturity of investment securities held to
maturity -- 19,743
Purchases of investment securities available for sale (111,911) (28,139)
Proceeds from sale or maturity of investment securities
available for sale 55,990 9,297
Principal repayments on investment securities
available for sale 25,687 --
Proceeds from maturity of securities purchased under
agreement to resell -- 1,181
Increase in stock of the Federal Home Loan Bank (1,325) (187)
Proceeds from sale of real estate acquired through
foreclosure 514 39
Investment in subsidiaries (1,383) --
Purchase of premises and equipment (623) (434)
----- -----
Net cash used in investing activities (69,729) (110,190)
-------- ---------
</TABLE>
(continued)
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits and passbook
savings accounts $ 21,741 $ 55,881
Net increase in certificates of deposit, net of
interest credited 54,183 20,512
Increase in advances from Federal Home Loan Bank of Atlanta 237,000 59,000
Payment on advances from Federal Home Loan Bank of
Atlanta (221,000) (49,500)
Net increase (decrease) in securities sold under agreements
to repurchase (46,218) 11,223
-------- ------
Net cash provided by financing activities 45,706 97,116
------ ------
Net decrease in cash and cash equivalents (3,941) (294)
Cash and cash equivalents at beginning of period 8,965 6,078
----- -----
Cash and cash equivalents at end of period $ 5,024 $ 5,784
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 11,770 $ 11,402
Income taxes paid 822 436
Transfers from loans to real estate acquired through foreclosures 326 193
Gross unrealized gain (loss) on securities available for sale 4,140 1,168
Tax effect of gain (loss) on available for sale securities 1,656 397
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Note 1. Basis of Presentation
TeleBanc Financial Corporation, (the "Company") was incorporated on January
26, 1994 and in March, 1994 became the direct savings and loan holding company
parent of TeleBank (the "Bank"), formerly known as Metropolitan Bank for
Savings, F.S.B. The primary business of the Company is the business of the Bank
and the Bank's subsidiaries. The Bank is a federally chartered savings bank,
deposit accounts in which are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The consolidated financial statements include accounts of
TeleBanc Financial Corporation and its wholly-owned subsidiary, the Bank.
The financial statements as of September 30, 1996 and for the three and
nine months ended September 30, 1996 and 1995 are unaudited but in the opinion
of management, contain all adjustments, consisting solely of normal recurring
entries, necessary to present fairly the consolidated financial condition as of
September 30, 1996 and the results of consolidated operations for the three and
nine months ended September 30, 1996 and 1995. The results of consolidated
operations for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year.
The Notes to Consolidated Financial Statements for the year ended December 31,
1995, included in the Company's Annual Report to Stockholders for 1995, should
be read in conjunction with these statements.
Note 2. Reclassification
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Note 3. Earnings per Share
Earnings per common share are computed by dividing adjusted net income by
the total of the weighted average number of common shares outstanding during the
respective periods. The year to date weighted average number of common shares
outstanding was 2,171,000 and 2,049,500 for the Company at September 30, 1996
and 1995, respectively. Weighted average shares outstanding also include common
stock equivalents which consist of outstanding stock options and warrants, if
such options or warrants are dilutive. The Company has not separately reported
fully diluted earnings per share as it is not materially different from earnings
per share.
<PAGE>
TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
This discussion and analysis includes descriptions of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (SEPTEMBER 30, 1996 COMPARED TO DECEMBER 31, 1995)
The Company's total assets increased by $67.6 million or 12.2% from $553.9
million at December 31, 1995 to $621.5 million at September 30, 1996. The
increase in total assets primarily reflects increases in loans receivable, net
of $66.2 million, or 26.6% and investment securities available for sale of $30.2
million, or 75.4% offset by a decline in mortgage-backed securities available
for sale of $(30.3) million, or (12.9)%. In the second quarter of 1996, the
Company re-evaluated its loan investment strategy. The Company determined that
the probable sale of loans, subsequent to a restructuring or credit enhancement,
would add value to the portfolio. Pursuant to this strategy, the Company created
a loans held for sale category with a one-time transfer of loans from the held
for investment portfolio that have characteristics that make them susceptible to
sell after restructuring, credit enhancement, or other improvements. Loans held
for sale are recorded at the lower of cost or market. The Company maintains
loans held for sale and loans held for investment categories. The increase in
loans receivable includes purchases of primarily adjustable rate loans.
The Company continues to gather deposits on a nationwide basis by the
direct marketing of money market accounts and certificates of deposit. In
addition, the Bank entered into an Agreement to Assume Deposit Liabilities by
and among First Commonwealth Savings Bank F.S.B. ("First Commonwealth"), First
Commonwealth Financial Corp., John York, Jr. and the Bank on May 2, 1996.
Pursuant to this agreement, the Bank assumed certain brokered and telephone
solicited deposit accounts of First Commonwealth. These deposits had a current
balance of $41.8 million as of August 2, 1996, the date of transfer. In the
deposit assumption, First Commonwealth paid the Bank the amount of the deposit
liabilities assumed, plus the amount of the deposit liabilities (less certain
renewals) multiplied by .25%. As a result of the acquisition of the First
Commonwealth deposits coupled with the Bank's marketing efforts, total deposits
increased by $91.0 million, or 29.7% from $306.5 million at December 31, 1995 to
$397.5 million at September 30, 1996. The average term for the new time deposits
gathered in the three months ended September 30, 1996 was approximately 21.2
months with an average percentage yield of 6.2%. The Company has continued to
focus on building core deposit accounts. Money market checking and savings
accounts increased 31.5% from $79.7 million at December 31, 1995 to $104.8
million at September 30, 1996. During the third quarter of 1996, approximately
$5.4 million of interest was credited to accounts while deposits exceeded
withdrawals by $45.9 million, which reflects the acquisition of the First
Commonwealth deposits. Federal Home Loan Bank Advances increased to $121.5
million at September 30, 1996 from $105.5 million at December 31, 1995. As of
September 30, 1996, the weighted average interest rate and weighted average
maturity for Federal Home Loan Bank Advances was 5.86%
<PAGE>
and 647 days, respectively. Securities sold under agreements to repurchase,
decreased by $46.2 million or 49.2% from $93.9 million at December 31, 1995 to
$47.7 million at September 30, 1996 largely as a result of management's
intention to replace these borrowings with the deposits acquired in the third
quarter. As of September 30, 1996, the weighted average interest rate and
weighted average maturity for securities sold under agreements to repurchase was
5.76% and 19 days, respectively. As of September 30, 1996, subordinated debt,
net of original issue discount was $16.6 million with a coupon rate of 11.5%.
Stockholders' equity increased $2.2 million, from $21.6 million at December
31, 1995 to $23.8 million at September 30, 1996. The increase was due to $1.3
million in net income for the nine months ended September 30, 1996 and an
unrealized gain on securities available for sale, net of deferred taxes, of
$928,000, which pursuant to SFAS 115 affects the Company's stockholders' equity
but does not impact the statement of operations.
The growth in total assets reflects the Company's efforts to prudently
invest and leverage the $21.9 million of net proceeds from its initial public
offering in June 1995. The result has been a growth in total assets from $220.3
million at December 31, 1993 to $621.5 million at September 30, 1996. This
growth has been supported by increasing total deposits from $113.1 million at
December 31, 1993 to $397.5 million at September 30, 1996 and total other
liabilities from $94.8 million at December 31, 1993 to $169.2 million at
September 30, 1996. Asset growth has slowed considerably from the prior two
years, as the Bank has utilized most of the capital contributed after the
initial public offering. The Company is exploring alternatives to raise
significant amounts of additional equity capital to fund continued growth,
introduce new products and build core franchise value.
As the Company intends to continue to pursue its telephone banking
strategy, it also continues to explore potential expansion opportunities through
the analysis of related alternative lines of business that will further enhance
franchise value. In May 1996, the Company entered into an agreement with its
63.4% stockholder, MET Holdings to merge MET Holdings into the Company. After
the proposed merger, TeleBanc will own 100% of MET Holdings and its other
businesses, including primarily Arbor Capital Partners, Inc., an investment
advisor and broker dealer. On October 8, 1996, the Company filed a Form S-4
which details the proposed transaction. However, as noted above, TeleBanc
currently is exploring alternatives to raise additional equity capital.
Accordingly, until TeleBanc makes a final determination with respect to raising
additional equity capital, it does not intend to seek shareholder approval or
proceed with the proposed MET Holdings merger transaction. TeleBanc presently
anticipates making such a final determination in that regard, updating the Form
S-4 and seeking shareholder approval in the fourth quarter of 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires entities to measure compensation costs related to
awards of stock-based compensation using either the fair value method or the
intrinsic value method. Under the fair value method, compensation expense is
measured at the grant date based on the fair value of the award. Under the
intrinsic value method, compensation expense is equal to the
<PAGE>
TELEBANC FINANCIAL CORPORATION
excess, if any, of the quoted market price of the stock at the grant date over
the amount the employee must pay to acquire the stock. Entities electing to
measure compensation costs using the intrinsic value method must make pro forma
disclosures, beginning after the effective date of January 1, 1996, of net
income and earnings per share as if the fair value method had been applied. The
Company has elected to account for stock-based compensation programs using the
intrinsic value method consistent with existing accounting, therefore, the
standard will not have an effect on the consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense and
related interest yields and rates at September 30, 1996 and 1995 are shown
below. The table also presents information for the periods indicated with
respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which saving institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning assets,"
which is its net interest income divided by the average balance of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate interest income.
<TABLE>
<CAPTION>
Quarter ended September 30, 1996 Quarter ended September 30, 1995
------------------------------------------ ------------------------------------------
Interest Interest
(Dollars in thousands) Average Income/ Average Average Income/ Average
unaudited Balance Expense Yield/Cost Balance Expense Yield/Cost
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 302,358 $ 6,089 8.06% $ 200,817 $ 4,478 8.92%
Mortgage-backed and related securities -- -- -- 245,189 5,015 8.18
Investment securities 7,531 115 5.99 6,228 97 6.11
Mortgage-backed and related securities
available for sale 218,350 4,453 8.16 18,846 402 8.53
Investment securities available for 67,263 1,109 6.59 30,897 691 8.75
sale
Federal funds sold 659 9 5.19 864 12 5.66
Investment in FHLB 7,059 129 7.25 5,275 92 6.99
Trading account -- -- -- 2,632 52 7.85
---------- ----------- --------- ---------- -- ----
Total interest-earning assets $ 603,220 $ 11,904 7.90% $ 510,748 $ 10,839 8.49%
Non-interest-earning assets $ 12,817 $ 16,234
------ ------
Total assets $ 616,037 $ 526,982
======= =======
Interest-bearing liabilities:
Savings deposits $ 104,033 $ 1,247 4.77% $ 52,214 $ 676 5.13%
Time deposits 275,302 4,384 6.34 229,752 3,849 6.65
FHLB advances 136,332 2,040 5.85 105,500 1,638 6.08
Other borrowings 57,204 839 5.74 95,504 1,520 6.23
Subordinated debt, net 17,250 519 12.03 16,445 526 12.80
------ ----------- --------- ------ --- ---------
Total interest-bearing liabilities $ 590,121 $ 9,029 6.06% $ 499,415 $ 8,209 6.58%
Non-interest-bearing liabilities $ 2,283 $ 8,929
----- -----
Total liabilities $ 592,404 $ 508,344
Stockholders' equity $ 23,633 $ 18,638
------ ------
Total liabilities and stockholders'
equity $ 616,037 $ 526,982
======= =======
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income/interest rate spread $ 13,099 $ 2,875 1.84% $ 11,333 $ 2,630 1.91%
====== ===== ===== ====== ===== =====
Net yield on interest earning assets 1.91% 2.06%
===== =====
Ratio of interest-earning assets to
interest-bearing liabilities 102.22% 102.27%
======= =======
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORTION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
1995
Net Income. Net income for the three and nine months ended September 30,
1996 was $(62,000) and $1.3 million, compared to $549,000 and $1.4 million for
the three and nine months ended September 30, 1995, respectively. Net income for
the three months ended September 30, 1996 consisted primarily of $2.8 million in
net interest income, $237,000 on the sale of mortgage-backed securities,
non-interest income gains of $98,000 on the sale of loans and $195,000 for loan
fees and service charges, reduced by $125,000 in provision for loan and
mortgage-related security losses and $3.3 million in general and administrative
expenses. General and administrative expenses for the quarter include a $1.7
million accrual for a special assessment mandated by the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Net income for the three months ended September 30, 1995
consisted primarily of $2.5 million of net interest income and $419,000 in
non-interest income primarily due to gains on the sale of certain securities
reduced by $502,000 in provision for loan and mortgage related security losses
and $1.4 million of general and administrative expenses. Net income for the nine
months ended September 30, 1996 consisted of net interest income of $8.5 million
and non-interest income of $1.4 million offset by $744,000 of provision for loan
and mortgage related security losses and $7.3 million of non-interest expense.
Net income for the nine months ended September 30, 1995 consisted of $6.2 of net
interest income and $1.4 million of non-interest income offset by $1.1 million
of provision for loan and mortgage related security losses and $4.4 million of
non-interest expenses.
Net Interest Income. Net interest income was $2.8 million and $2.5 million
for the three months ended September 30, 1996 and 1995, respectively, reflecting
an annualized interest rate spread of 1.84% and 1.91% for the three months ended
September 30, 1996 and 1995, respectively. In the quarter ending September 30,
1996, total interest earning assets, consisting primarily of loans receivable,
net and mortgage-backed and related securities, yielded 7.90% as compared to
8.49% for the same period in 1995. The decline is attributed to the transfer of
loans to the held for sale category and an increase in non-accrual loans. In
June 1996, the Bank made a one-time transfer of approximately $106.6 million
from loans receivable, net to loans held for sale. According to generally
accepted accounting principles, purchase discounts on mortgage loans held for
sale are not amortized as interest revenue. Discounts on prepayments on loans
held for sale are recognized as non-interest income. In the third quarter, the
Company recognized $98,000 in discounts on prepayments on loans held for sale.
Non-accrual loans increased from $4.3 million at September 30, 1995 to $8.9
million at September 30, 1996 causing a decline in loan interest income. The
Company anticipates that the subsidiary will add value by improving the
servicing of non-performing assets, both for the Bank and third parties. Average
interest-earning assets were $603.2 million and $510.7 million for the quarters
ending September 30, 1996 and 1995, respectively. Average interest bearing
liabilities were $590.1 million and $499.4 million for the quarters ending
September 30, 1996 and 1995, respectively. Interest-bearing liabilities cost
6.06% in the third quarter of 1996 as compared 6.58% in the same period in 1995.
Yield on interest-earning assets for the quarter ending September 30, 1996
decreased 59 basis points over the same quarter in 1995. Third quarter decreases
in interest-earning assets and interest-bearing liabilities primarily reflect an
overall decrease in interest rates. Net interest income was $8.5 million and
$6.2 million for the nine months ended September 30,
<PAGE>
TELEBANC FINANCIAL CORPORATION
1996 and 1995, respectively. For the first nine months of 1996 the Company
experienced a 21 basis point increase in annualized interest rate spread
compared to the same period in 1995. The increase reflects a 47 basis point
decline in the cost of interest bearing liabilities. This decrease reflects
decreases in the interest rates paid on savings and time deposits and other
borrowings and the benefit of a swap on the savings deposits. In addition, total
liabilities have grown and the subordinated debt, a stable and relatively
expensive source of funds, has become a smaller percentage of total liabilities,
thereby decreasing average interest costs. Third quarter increases in
interest-bearing liabilities and increases in interest-earning assets primarily
reflected an increase in volume. Average interest bearing liabilities were
$562.0 million and $471.3 million for the nine months ended September 30, 1996
and 1995, respectively. In the nine months ended September 30, 1996, total
interest earning assets, consisting primarily of loans receivable, net and
mortgage-backed and related securities, yielded 8.03% for the nine months ending
September 30, 1996 compared to 8.29% for the same period in 1995. Average
interest-earning assets were $572.8 million and $481.9 million for the nine
months ended September 30, 1996 and 1995, respectively. Interest-bearing
liabilities cost 6.11% in the first nine months of 1996 as compared 6.58% in the
same period in 1995. Net yield on interest-earning assets for the nine months
ending September 30, 1996 increased 22 basis points over the same period in
1995.
Provision for Loan and Mortgage Related Security Losses. Total provision
for loan and mortgage related security losses decreased $377,000 from $502,000
for the three months ending September 30, 1995 to $125,000 for the three months
ending September 30, 1996. The provision for loan and mortgage related security
losses reflects management's intent to provide prudent reserves for potential
loan losses and for loan acquisitions made during the quarter. During the
quarter ended September 30, 1996, the Company provided additional reserves for
single-family loans acquired during the quarter. The Company had recoveries of
$110,000 and charge-offs of $139,000 on five one-to-four family mortgage loans.
During the third quarter of 1995, the Company provided specific reserves for
several loan investments as well as additional general reserves for loan
acquisitions. Total provision for loan and mortgage related security losses
decreased $367,000 from $1.1 million for the nine months ended September 30,
1995 to $744,000 for the nine months ended September 30, 1996. For the first
nine months of 1996, the Company provided reserves for several single-family
loans and for loan acquisitions in accordance with the Company's loan loss
reserve policy. For the nine months ended September 30, 1996, the Company
acquired $126.4 million in mortgage loans. The provision for the same period of
1995 was attributable to an increase in reserves for several single-family loans
and for reserves on approximately $98.7 million in loan acquisitions. The
Company experienced a slower growth in loans for the three and nine months ended
September 30, 1996 as compared to the same periods in 1995. During 1995, the
Company recorded more provision for loan and mortgage related security losses to
match loan acquisitions. The Company also maintains an allowance for mortgage
related security losses against certain mortgage backed securities held to
maturity for which the Company has credit risk on the underlying loans. The
total loan loss allowance at September 30, 1996 was $2.6 million which was 0.8%
of total loans outstanding. Total loss allowance as a percentage of total
non-performing assets was 16.7%.
<PAGE>
TELEBANC FINANCIAL CORPORATION
Non-Interest Income. Total non-interest income increased by $121,000 from
$419,000 for the three months ended September 30, 1995 to $540,000 for the three
months ended September 30, 1996. For the three months ending September 30, 1996,
the Company reported $195,000 in loan fees and service charges on the Bank's
portfolio and on the purchase mortgage servicing rights, a net gain of $181,000
on the sale of several liquid bonds in the mortgage-backed security and
investment portfolio, $100,000 on the sale of real estate held for sale offset
by $108,000 loss on the Bank's equity investments in a mortgage service company
and a company that acquires and collects delinquent consumer debt obligations
for its own portfolio. During the third quarter of 1995, the Company sold a
corporate bond held for liquidity purposes for a gain of $453,000 and a security
held in the trading account and restructured earlier in the year by management
for a $32,000 gain. These gains were offset by a $100,000 loss recorded in
connection with the kiting of a deposit. Total non-interest income increased by
$394,000 from $1.0 million for the nine months ended September 30, 1995 to $1.4
million for the nine months ended September 30, 1996. The increase is related
primarily to the Company's acquisition of approximately $2.5 million of
purchased mortgage servicing rights which contributed to the increase in loan
fees and service charges. As a result of the newly created loans held for sale
category, the Company recognized non-interest income on the prepayments of loans
held for sale. In prior quarters, this income would have been recognized as
interest income. During the first quarter of 1995, the Company completed the
restructuring of a mortgage-backed security with underlying collateral of
one-to-four family dwellings, resulting in a $641,000 gain, offset by a $28,000
gain in marking the security in the trading account to market and subsequently
selling the security. Management purchased the mortgage-backed security in 1995
and subsequently enhanced the credit through the purchase of insurance.
Non-Interest Expenses. Non-interest expenses for the three and nine months
ended September 30, 1996 were $3.5 million and $7.3 million, respectively. On
September 30, 1996, President Clinton signed legislation calling for a one-time
assessment on the FDIC's SAIF-insured deposits held by depository institutions
as of March 31, 1995 to recapitalize SAIF. TeleBank recorded an accrual of $1.7
million, $1.1 million after-tax, for this assessment. The recapitalization of
SAIF will result in lower deposit insurance premiums in the future for most
SAIF-insured institutions, including TeleBank. Non-interest expenses for the
three and nine months ended September 30, 1995 were $1.5 million and $4.4
million, respectively. Total non-interest expenses, excluding the special
assessment, increased by $371,000 from $1.5 million for the three months ended
September 30, 1995 to $1.9 million for the three months ended September 30,
1996. The increase is largely the result of a $214,000 increase in general and
administrative expenses, excluding the special assessment, attributable to a an
increase of expenses associated with a higher volume of deposit accounts, an
increase in marketing expenses, and an overall increase in compensation levels.
Excluding the special assessment, total non-interest expenses increased $1.3
million for the nine months ended September 30, 1995 to $5.7 million for the
nine months ended September 30, 1996. The increase is primarily the result of a
$919,000 increase in general and administrative expenses. The increase in
general and administrative expense for the nine months ended September 30, 1996
is the result of increases in compensation, increases in personnel, marketing
expenditures and an accrual for bonuses. Overall deposit growth has precipitated
the need for additional personnel to handle the increased volume of sales,
distribution, and back office operations. Additionally, in an effort to build
core
<PAGE>
TELEBANC FINANCIAL CORPORATION
deposit franchise value, the Company has hired an affinity program manager and a
sales and customer service manager to oversee the TeleBanking operation.
Income Tax Expense. For the quarter ended September 30, 1996, the Company
recorded a $220,000 tax benefit, or 78.1% of the quarter's net loss before
income tax as compared to tax expenses of $343,000, or an effective tax rate of
38.5%, for the quarter ended September 30, 1995. The effective tax rate declined
due to the $1.7 million federal insurance assessment. The effective tax rate for
the nine months ended September 30, 1996 was 28.2% compared to 35.9% for the
nine months ended September 30, 1995. The Company carried a deferred tax payable
of $1.2 million on its Consolidated Statement of Financial Condition as of
September 30, 1996.
LIQUIDITY
Liquidity is the ability of the Company to generate cash flows sufficient
to fund operations and to meet present and future financial obligations to
borrowers and depositors in a timely manner. Cash flows from operating
activities, consisting primarily of interest received less interest paid on
deposits and borrowings, were $20.1 million and $12.8 million for the nine
months ended September 30, 1996 and 1995, respectively. Net cash flow used in
investing activities (primarily purchases of mortgage-backed and related
securities and mortgage loans, offset by principal payments on loans and
mortgage-backed and related securities and proceeds from sale or maturity of
investment securities) was $69.7 million and $110.2 million for the nine months
ended September 30, 1996 and 1995, respectively. The increase in cash flows
related to investing activities for the nine months ended September 30, 1996
reflects a significant increase in the amount of mortgage-backed securities,
mortgage loans and investment securities purchased. Net financing activities
(primarily net activity in deposits and borrowings) were $45.7 million and $97.1
million for the nine months ended September 30, 1996 and 1995, respectively. The
decrease in net cash provided by financing activities for the nine months ended
September 30, 1996 is primarily the result of slower growth in 1996 as compared
to the same period in 1995. The total net decrease in cash and cash equivalents
was $3.9 million and $294,000 for the nine months ended September 30, 1996 and
1995, respectively.
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, and proceeds from sales and
maturities of mortgage-backed and related securities and investment securities.
Investment maturities, and scheduled amortization of loans and mortgage-backed
securities are generally a predictable source of funds. Deposit flows and
mortgage prepayments are greatly influenced by the general level of interest
rates, economic conditions, and competition. The Company also accesses FHLB
advances, and has utilized securities sold under agreements to repurchase.
The Bank is required to maintain minimum levels of liquid assets as defined
by the OTS regulations. This requirement, which may vary at the discretion of
the OTS depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The minimum required ratio is
5.0%. At September 30, 1996, the Company's liquidity ratio was 6.38%.
<PAGE>
TELEBANC FINANCIAL CORPORATION
In the second quarter of 1994, the Company completed its initial public
offering, raising an aggregate of $21.9 million through the issuance of common
stock and subordinated notes with warrants. The subordinated debt represents a
stable, although relatively expensive, source of funds. Upon completion of the
offering, the Company invested $15 million of the proceeds as capital of the
Bank. The annual expense to service the debt is $2.0 million. Subject to
regulatory approval, the Bank will dividend this balance to the Company to
service the debt. There are various regulatory limitations on the extent to
which federally chartered savings institutions may pay dividends. Also, savings
institution subsidiaries of holding companies generally are required to provide
their OTS Regional Director with no less than 30 days notice of any proposed
declaration on the institution's stock. Under terms of the indenture pursuant to
which the subordinated notes were issued, the Company presently is required to
maintain, on an unconsolidated basis, liquid assets in an amount equal to or
greater than $2.0 million, which represents 100% of the aggregate interest
expenses for one year on the subordinated debt.
The Company's most liquid assets are cash and cash equivalents, which
include investments in liquid short-term investments and federal funds sold with
maturities of nine months or less. The levels of these assets are dependent upon
the Company's operating, financing, and investing activities during any given
period. Cash equivalents totaled $5.0 million and $9.0 million as of September
30, 1996 and December 31, 1995, respectively. As of September 30, 1996, the
Company had commitments to purchase $18.0 million in loans. Also, certificates
of deposit which are scheduled to mature in less than one year as of September
30, 1996 totaled $133.4 million.
In the normal course of business, the Company makes various commitments to
extend credit and incurs contingent liabilities which are not reflected in the
balance sheets.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CAPITAL RESOURCES
Capital ratios at September 30, 1996 exceeded each of the three OTS
capital requirements on a fully phased-in basis. The following table sets forth
the actual and required minimum levels of regulatory capital for the Company
under applicable OTS regulations as of September 30, 1996:
<TABLE>
<CAPTION>
Actual Percent Required Percent Excess
------ ------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Core $31,024 5.07% $18,357 3.00% $12,667
Tangible 31,008 5.07 9,170 1.50 21,838
Risk-based 33,153 10.50 25,260 8.00 7,893
</TABLE>
RECENT DEVELOPMENTS
On August 8, 1996, the Office of Thrift Supervision (the "OTS")
terminated the May 24, 1993 Supervisory Agreement.
<PAGE>
TELEBANC FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 5. Other Information
No information to report.
Item 6. Exhibits and Reports on Form 8-K
No information to report.
<PAGE>
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleBanc Financial Corporation
------------------------------
(Registrant)
Date: November 13, 1996 By: /s/ Mitchell H. Caplan
---------------------------
Mitchell H. Caplan
President
Date: November 13, 1996 By: /s/ Aileen Lopez Pugh
---------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 2,008
<INT-BEARING-DEPOSITS> 2,360
<FED-FUNDS-SOLD> 656
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 274,127
<INVESTMENTS-CARRYING> 271,517
<INVESTMENTS-MARKET> 2,610
<LOANS> 1,427,457
<ALLOWANCE> 2,623
<TOTAL-ASSETS> 621,516
<DEPOSITS> 397,477
<SHORT-TERM> 169,187
<LIABILITIES-OTHER> 14,449
<LONG-TERM> 16,564
0
0
<COMMON> 20
<OTHER-SE> 23,819
<TOTAL-LIABILITIES-AND-EQUITY> 621,516
<INTEREST-LOAN> 6,080
<INTEREST-INVEST> 5,772
<INTEREST-OTHER> 19
<INTEREST-TOTAL> 11,871
<INTEREST-DEPOSIT> 5,635
<INTEREST-EXPENSE> 3,399
<INTEREST-INCOME-NET> 2,837
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 171
<EXPENSE-OTHER> 3,165
<INCOME-PRETAX> (282)
<INCOME-PRE-EXTRAORDINARY> (282)
<EXTRAORDINARY> 0
<CHANGES> (220)
<NET-INCOME> (62)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<YIELD-ACTUAL> 1.91
<LOANS-NON> 8,949
<LOANS-PAST> 5,595
<LOANS-TROUBLED> 437
<LOANS-PROBLEM> 11,053
<ALLOWANCE-OPEN> 2,653
<CHARGE-OFFS> 139
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 2,623
<ALLOWANCE-DOMESTIC> 2,623
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,932
</TABLE>
