<PAGE>
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 March 31, 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 April 17, 1996.
$.01 par value of common stock 2,049,500
------------------------------ ---------
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
Part I -- Financial Information Page
- - ------------------------------- ----
Consolidated Statements of Financial Condition -- March 31, 1996 and 3
December 31, 1995
Consolidated Statements of Operations -- Three months ended March
31, 1996 and 1995 5
Consolidated Statements of Changes in Stockholders' Equity -- Three
months ended March 31, 1996 and 1995 8
Consolidated Statements of Cash Flows -- Three months ended March
31, 1996 and 1995 9
Notes to Consolidated Financial Statements 12
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II -- Other Information 21
- - ----------------------------
Signatures 22
2
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)
unaudited
Assets: March 31, December 31,
1996 1995
---- ----
Cash and amounts due from depository
institutions $ 1,485 $ 2,817
Interest-bearing deposits 1,177 5,243
Federal funds sold 465 905
--- ---
Total cash and cash equivalents 3,127 8,965
Investment securities available for sale,
at fair value 44,066 40,058
Mortgage-backed securities available for
sale, at fair value 257,904 234,210
Loans receivable, net 253,177 248,667
Real estate acquired through foreclosure 1,166 790
Accrued interest receivable 4,648 4,377
Premises and equipment, net 2,319 2,229
Stock in Federal Home Loan Bank of
Atlanta, at cost 5,275 5,275
Acquisition costs, goodwill, and core
deposit premium 402 415
Deferred financing costs 1,035 1,066
Other assets 7,495 7,891
----- -----
$ 580,614 $ 553,943
========== ==========
(continued)
3
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition, continued
(Dollars in Thousands, Except Per Share Data)
unaudited
March 31, December 31,
Liabilities and Stockholders' Equity: 1996 1995
---- ----
Liabilities:
Deposits $ 331,662 $ 306,500
Advances from the Federal Home
Loan Bank of Atlanta 105,500 105,500
Securities sold under agreements
to repurchase 92,508 93,905
Subordinated debt, net of original
issue discount 16,518 16,496
Advances from borrowers for taxes
and insurance 258 521
Accrued interest payable 3,056 2,682
Accrued expenses and other liabilities 8,677 6,774
Commitments and contingencies -- --
-- --
Total liabilities 558,179 532,378
------- -------
Stockholders' equity:
Common stock, $.01 par value, 3,500,000
shares authorized; 2,049,500 issued
and outstanding at March 31, 1996 and
December 31, 1995 20 20
Additional paid-in capital 14,637 14,637
Retained earnings 6,002 5,353
Unrealized gain on securities available
for sale, net of taxes 1,776 1,555
----- -----
Total stockholders' equity 22,435 21,565
------ ------
$ 580,614 $ 553,943
=========== ===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations
(Dollars in Thousands, Except Share Data)
unaudited
Three Months Ended
March 31,
1996 1995
---- ----
Interest income:
Mortgage loans $ 5,296 $ 3,482
Mortgage-backed and related securities 4,948 4,684
Investment securities available for sale 875 403
Other interest income 12 84
----- ----
Total interest income 11,131 8,653
------ -----
Interest expense:
Deposits 4,868 3,707
Advances from the Federal Home Loan Bank
of Atlanta 1,464 1,449
Reverse repurchase agreements 1,386 1,357
Other borrowed money 120 146
Subordinated debt 519 496
--- ---
Total interest expense 8,357 7,155
----- -----
Net interest income 2,774 1,498
Provision for loan and mortgage related
security losses 419 309
--- ---
Net interest income after provision
for loan and mortgage related
security losses 2,355 1,189
----- -----
Non-interest income:
Loan fees and service charges 348 18
Gain on sale of mortgage-backed
securities and investment securities
available for sale 241 --
Profit on trading account -- 617
Other 16 (5)
-- ---
Total non-interest income 605 630
---- ----
(continued)
5
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Data)
unaudited
Three Months Ended
March 31,
1996 1995
---- ----
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits $ 924 $760
Office occupancy and equipment 109 96
Federal insurance premiums 168 111
Professional services 329 176
Other 149 105
--- ---
Total general and administrative expenses 1,679 1,248
----- -----
Other non-interest expenses:
Net cost of operation of real estate acquired
through foreclosure, including provision
for losses 10 42
Amortization of cost over fair value of net
assets acquired and other intangibles 260 13
Amortization of deferred financing costs 30 32
-- --
Total other non-interest expenses 300 87
--- ---
Total non-interest expenses 1,979 1,335
----- -----
Income before income tax 981 484
Income tax expense 332 164
--- ---
Net income $ 649 $ 320
======= =======
(continued)
6
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Data)
unaudited
Three Months Ended
March 31,
1996 1995
---- ----
Earnings per share:
Net income $ .31 $ .16
=== ===
Weighted average shares outstanding 2,068,314 2,049,500
========= =========
See accompanying notes to consolidated financial statements.
7
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For the three months ended March 31, 1996 and 1995
(Dollars in Thousands)
unaudited
<TABLE>
<CAPTION>
Unrealized
Gains/Losses
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 year ended December 31, 1995 -- -- 2,720 -- 2,720
Unrealized Gain on Available for Sale Securities, net
of tax effect -- -- -- 1,817 1,817
--- --- --- ------ ------
Balances at December 31, 1995 $ 20 $ 14,637 $ 5,353 $ 1,555 $ 21,565
Net income for the three months ended
March 31, 1996 -- -- 649 -- 649
Unrealized Gain on Available for Sale Securities,
net of tax effect -- -- -- 221 221
--- --- --- --- ---
Balances at March 31, 1996 $ 20 $ 14,637 $ 6,002 $ 1,776 $ 22,435
== ====== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)
unaudited
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 649 $ 320
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Amortization of excess of purchase price over fair value of
net assets acquired -- 13
Amortization of premiums, discounts and fees on loans and
mortgage-backed and related securities (308) (703)
Net amortization (accretion) of premiums and discounts on
investment securities 169 --
Provision for loan and mortgage related security losses 419 309
Provision for losses on real estate acquired through fore-
closure and real estate held for sale -- 4
Gain on sales of investment securities (241) --
Loss on mark-to-market of trading account -- 23
Gain on trading account -- (641)
Depreciation and amortization of premises and equipment 37 101
Gain on sale or real estate owned (22) --
Interest credited to deposits 4,868 1,981
Stock dividends from Federal Home Loan Bank of Atlanta -- (93)
Amortization of goodwill and other intangible assets 14 --
Change in assets and liabilities
Decrease (increase) in accrued interest receivable 125 (357)
Increase in other assets -- (60)
Decrease in deferred financing costs 31 32
Net (decrease) increase in advances from borrowers for
taxes and insurance (264) 778
Increase in accrued expenses and other liabilities 2,484 975
(Decrease) increase in deferred income taxes payable (332) 404
Decrease in deferred loans fees (2) (3)
Decrease in current income taxes payable (488) (232)
----- -----
Net cash provided by operating activities 7,139 2,851
------- ------
</TABLE>
(continued)
9
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from investing activities:
Mortgage loan originations $ (25) $ (98)
Mortgage loans purchased (22,331) (39,150)
Proceeds from sale of mortgage loans available for sale 5,659 --
Principal payments on loans and mortgage-backed and
related securities 23,175 13,688
Purchases of mortgage-backed and related securities (39,614) (32,872)
Proceeds from sale of mortgage-backed securities
available for sale 5,793 2,289
Purchases of investment securities held to maturity -- (1,336)
Proceeds from the maturity of investment securities held
to maturity -- 1,122
Purchases of investment securities available for sale (47,210) --
Proceeds from sale or maturity of investment securities
available for sale 42,784 --
Proceeds from sale of securities purchased under
agreement to resell -- 1,181
Increase in stock of the Federal Home Loan Bank -- 193
Proceeds from sale of real estate acquired through
foreclosure -- --
Purchase of premises and equipment (127) (354)
------- -----
Net cash used in investing activities (31,896) (55,337)
-------- --------
</TABLE>
(continued)
10
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits and passbook savings accounts $ 17,133 $ (1,673)
Net increase in deposits, net of interest credited 3,161 41,142
Net increase in subordinated debt 22 --
Increase in advances from Federal Home Loan Bank of Atlanta -- 40,800
Payment on advances from Federal Home Loan Bank of
Atlanta -- (40,800)
Net (decrease) increase in securities sold under agreements
to repurchase (1,397) 15,280
Dividends paid on common stock -- --
Dividends paid on preferred stock -- --
--
Net cash provided by financing activities 18,919 54,749
------ ------
Net (decrease) increase in cash and cash equivalents (5,838) 2,263
Cash and cash equivalents at beginning of period 8,965 6,078
----- -----
Cash and cash equivalents at end of period 3,127 8,341
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds 3,988 2,504
Income taxes paid 37 46
Transfers from loans to real estate acquired through foreclosures 596 --
Gross unrealized gain on available for sale securities 368 130
Tax effect of gain on available for sale securities (147) (52)
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
TELEBANC FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
For the Three Ended March 31, 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.
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 March 31, 1996 and for the three months
ended March 31, 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 of the Company
as of March 31, 1996 and the results of consolidated operations for the three
months ended March 31, 1996 and 1995. The results of consolidated operations for
the three months ended March 31, 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. 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 2,068,314 and 2,049,500 for the Company at March 31, 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.
12
<PAGE>
TELEBANC FINANCIAL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations, as of and for
the Three Months Ended March 31, 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 (March 31, 1996 compared to December 31, 1995)
The Company's total assets increased by $26.7 million or 4.8% from $553.9
million at December 31, 1995 to $580.6 million at March 31, 1996. The increase
in total assets primarily reflects increases in mortgage-backed securities
available for sale of $23.7 million, or 10.1%, loans receivable, net of $4.5
million, or 1.8%, and investment securities available for sale of $4.0 million,
or 10.0%. These increases were offset by a decrease of $5.8 million in
interest-bearing deposits. Mortgage-backed and related security purchases were
comprised of 91.6% privately issued, mortgage pass-through securities and 8.4%
agency securities. Scheduled maturities for fixed rate and adjustable rate
mortgage-backed securities were approximately 287 and 269 months, respectively.
In accordance with liquidity requirements, the Company purchased qualifying
corporate bonds and agency securities during the first three months of 1996
evidenced by the increase in both investment securities available for sale and
mortgage backed securities available for sale. The Company continues to gather
deposits on a nationwide basis by the direct marketing of money market accounts
certificates of deposit. As a result of these efforts, deposits increased by
$25.2 million, or 8.2% from $306.5 million at December 31, 1995 to $331.7
million at March 31, 1996. The average contractual term for the new time
deposits gathered in the three months ended March 31, 1996 was approximately 26
months with an average percentage yield of 5.5%. As in 1995, the Company has
continued to focus on building core deposit accounts. As a result of these
efforts, money market checking and money market savings accounts have increased
24.3% from $74.7 million at December 31, 1995 to $92.9 million at March 31,
1996. During the first quarter of 1996, approximately $4.9 million of interest
was credited to accounts while deposits exceeded withdrawals by $20.3 million.
Federal Home Loan Bank advances remained stable at $105.5 million at March 31,
1996. As of March 31, 1996, the weighted average interest rate and weighted
average maturity for Federal Home Loan Bank advances was 5.6% and 481 days,
respectively. Securities sold under agreements to repurchase decreased slightly
by $1.4 million or (1.5)% from $93.9 million at December 31, 1995 to $92.5
million at March 31, 1996. As of March 31, 1996, the weighted average interest
rate and weighted average maturity for securities sold under agreements to
repurchase was 5.6% and 81 days, respectively. As of March 31, 1996,
subordinated debt, net of original issue discount was $16.5 million with a
coupon rate of 11.5%.
13
<PAGE>
TELEBANC FINANCIAL CORPORATION
Stockholders' equity increased $870,000, from $21.6 million at December 31,
1995 to $22.4 million at March 31, 1996. The increase is attributed to $649,000
in net income for the three months ended March 31, 1996 and an unrealized gain
on securities available for sale, net of deferred taxes, of $221,000, which
affects the Company's capital but does not impact the statement of operations.
The growth in total assets reflects the Company's efforts to invest and
leverage the $21.9 million of net proceeds from its initial public offering in
June 1994. The result has been a growth in total assets from $221.1 million at
December 31, 1993 to $580.6 million at March 31, 1996. This growth has been
supported by increasing total deposits from $113.1 million at December 31, 1993
to $331.7 million at March 31, 1996 and total other liabilities from $94.8
million at December 31, 1993 to $226.5 million at March 31, 1996. The Company
does not anticipate continued growth of total assets and associated liabilities
at rates comparable to recent periods.
14
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense and
related interest yields and rates at March 31, 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 March 31, 1996 Quarter ended March 31, 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>
Loans receivable, net $243,227 $5,296 8.71% $167,075 $3,482 8.34%
Mortgage-backed and related securities -- -- -- 226,406 4,426 7.82
Investment securities -- -- -- 10,780 105 3.90
Mortgage-backed and related securities
available for sale 245,822 4,874 7.93 13,258 258 7 78
Investment securities available for sale 54,564 898 6.58 10,888 179 6.59
Federal funds sold 859 10 4.66 757 10 5.28
Investment in FHLB 5,275 153 11.60 5,275 153 11.60
Trading account -- -- -- 2,386 58 9.67
------ -------- ----- ------ ---- -----
Non-interest-earning assets $ 15,020 $15,913 $8,671 7.94%
-------- -------
Total Assets $564,767 $452,738
======== ========
Interest-bearing liabilities:
Savings deposits $87,161 $ 1,001 4.57% 14,492 $184 5.15%
Time deposits 236,360 3,867 6.51 214,601 3,523 6.66
FHLB advances 105,500 1,584 5.88 99,921 1,596 6.39
Other borrowings 93,040 1,386 5.83 84,817 1,357 6.40
Subordinated debt, net 16,504 519 12.58 17,250 496 11.50
------ ----- ------ ------- ----- ------
Total interest-bearing liabilities $538,565 $8,357 6.14% $431,081 $7,156 6.64%
Non-interest-bearing liabilities $5,656 $4,214
------ ------
Total liabilities $544,221 $435,295
Stockholders' equity $20,546 $17,444
-------- --------
Total liabilities and stockholders'
equity $564,767 $452,739
======== ========
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income/interest rate spread $11,182 $2,874 2.03% $7,005 $1,516 1.30%
======= ===== ==== ===== ===== ====
Net yield on interest earning assets 2.09% 1.40%
Ratio of interest-earning assets to ==== ====
interst-bearing liabilities 102.08% 101.63%
====== ======
</TABLE>
15
<PAGE>
TELEBANC FINANCIAL CORPORATION
Results of Operations for the Three Months ended March 31, 1996 and 1995
Net Income. Net income for the three months ended March 31, 1996 was
$649,000 comparied to $320,00 for the three months ended March 31, 1995. Net
income for the three months ended March 31, 1996 consisted primarily of $2.8
million in net interest income and $605,000 in non-interest income, primarily
due to a gain on the sale of a corporate debt security and loan fee income from
purchased mortgage servicing rights, reduced by $419,000 in provision for loan
and mortgage-related security losses and $1.7 million in general and
administrative expenses. Net income for the three months ended March 31, 1995
consisted primarily of $1.5 million of net interest income and $617,000 of
profit on trading account, reduced by $309,000 in provision for loan and
mortgage related security losses and $1.2 million in general and administrative
expenses.
Net Interest Income. Net interest income was $2.8 million and $1.5
million for the three months ended March 31, 1996 and 1995, respectively,
reflecting an annualized interest rate spread of 2.03% and 1.30% for the three
months ended March 31, 1996 and 1995, respectively. In the quarter ending March
31, 1996, total interest earning assets, consisting primarily of loans
receivable, net and mortgage-backed and related securities, yielded 8.17% as
compared to 7.94% for the same period in 1995. Average interest-earning assets
were $549.7 million and $436.8 million for the quarters ending March 31, 1996
and 1995, respectively. Average interest bearing liabilities were $538.6 million
and $431.1 million for the quarters ending March 31, 1996 and 1995,
respectively. Total interest-bearing liabilities cost 6.14% in the first quarter
of 1996 as compared to 6.64% in the same period in 1995. The decrease in the
cost of interest-bearing liabilities reflects decreases in the interest rates
paid on savings and time deposits and other borrowings. As total liabilities
have grown, the subordinated debt, a stable and relatively expensive source of
funds, has become a smaller percentage of total liabilities, thereby decreasing
average interest costs. Net yield on interest-earning assets for the quarter
ending March 31, 1995 increased 73 basis points over the same quarter in 1995.
Provision for Loan and Mortgage Related Security Losses. Total provision
for loan and mortgage related security losses increased $110,000 or 35.6% from
$309,000 for the three months ending March 31, 1995 to $419,000 for the three
months ending March 31, 1996. The increase in the provision for loan and
mortgage related security losses reflects management's intent to provide prudent
reserves for potential loan and mortgage related security losses. During the
quarter ended March 31, 1996, the Company provided additional general reserves
for loan acquisitions and unrated whole loan securities and charged off $19,000
on a one to four family mortgage loan. The provision for the first quarter of
1995 was primarily attributable to an increase in reserves for a commercial loan
removed from non-accrual status and for general reserves on approximately $39.2
million in loan acquisitions in accordance with the Company's loan loss reserve
policy. The Company also maintains an allowance for mortgage related security
losses against certain mortgage backed securities for which the Company has
credit risk on the underlying loans. The total loan loss allowance at March 31,
1996 and December 31,
16
<PAGE>
TELEBANC FINANCIAL CORPORATION
1995 was $2.6 million and $2.2 million, respectively, which was 0.9% and 1.0%,
respectively, of total loans outstanding.
Non-Interest Income. Total non-interest income decreased by $25,000
from $630,000 for the three months ended March 31, 1995 to $605,000 for the
three months ended March 31, 1996. Non-interest income for the first quarter of
1996 consisted of a $241,000 net gain from the sale of a corporate bond held for
liquidity purposes and $348,000 on purchased mortgage servicing rights fee
income. Total non-interest income at March 31, 1995 primarily reflects the
Company's restructuring of a mortgage-backed security with underlying collateral
of one-to-four family dwellings during the first quarter of 1995, resulting in a
$641,000 gain. Management purchased the mortgage-backed security in 1995 and
subsequently enhanced the credit through the purchase of insurance.
Non-Interest Expenses. Total non-interest expenses increased by $644,000
from $1.3 million for the three months ended March 31, 1995 to $2.0 million for
the three months ended March 31, 1996. The increase results from a $431,000
increase in general and administrative expenses attributable to a compensation
bonus accrual of $250,000, increased federal insurance premiums of $57,000 due
to a larger deposit base, and a $124,000 increase in professional and other
services for a marketing campaign which management believes will ultimately
enhance core franchise value. Other non-interest expenses increased by $213,000
due to the amortization of purchased mortgage servicing rights. It is the
Company's compensation policy to pay a combination of salary and highly
incentivized additional compensation consisting of bonuses based on the overall
Company performance and individual performance. Annualized general and
administrative expenses net of bonuses as a percentage of assets for the three
months ended March 31, 1996 and 1995 was 0.99% and 0.82%, respectively.
Annualized general and administrative expenses as a percentage of assets for the
three months ended March 31, 1996 and 1995 was 1.16% and 0.90%, respectively.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. Deposit insurance premiums to both the SAIF and the Bank
Insurance Fund ("BIF") of the FDIC were identical when both funds were created
in 1989, with an eight cent differential between premiums paid by
well-capitalized institutions and the premiums paid by under-capitalized
institutions (23 cents to 31 cents per $100 of assessable deposits). Such
premiums were set to facilitate each fund achieving its designated reserve
ratios. As each fund achieves its designated reserve ratio, however, the FDIC
has the authority to lower the premium assessments for that fund to a rate that
would be sufficient to maintain the designated reserve ratio. In August 1995,
the FDIC determined that the BIF had achieved its designated reserve ratio and
approved lower BIF premium rates for deposit insurance by the BIF for all but
the riskiest institutions. Under the new BIF deposit insurance premium schedule,
deposit insurance premiums range from a low of four cents per $100 of assessable
deposits for well-capitalized institutions to 31 cents per $100 of assessable
deposits for under-capitalized institutions. Because the SAIF remains
significantly below its designated reserve ratio, insurance premiums for
assessable SAIF deposits were not reduced by this recent FDIC action.
17
<PAGE>
TELEBANC FINANCIAL CORPORATION
The current financial condition of the SAIF has resulted in the
introduction of various legislation in both the United States Senate ("Senate")
and the United States House of Representatives ("House") to recapitalize the
SAIF and then to merge SAIF into BIF. Both the Senate and the House legislation,
as currently proposed, would generally impose a special one-time assessment of
approximately 85 cents to 90 cents per $100 of assessable SAIF deposits, which
would apply retroactively to approximately $269.6 million of assessable SAIF
deposits at the Bank at June 30, 1995 (e.g., a special assessment of $2.3
million to $2.4 million before giving effect to applicable tax rates). After the
special assessment, it is proposed that SAIF premium rates would then become the
same as BIF rates until the funds are merged. The Company is unable to predict
whether this legislation will be enacted or the amount or the applicable
retroactive date of any one-time assessment or the rates that would then apply
to assessable SAIF deposits.
Income Tax Expense. The effective tax rate for the quarter ended March 31,
1996 was 33.8% compared to 33.9% for the quarter ended March 31, 1995. The
income tax expense for the quarter ended March 31, 1996 was $332,000 compared to
$164,000 for the quarter ended March 31, 1995. The Company carried a deferred
tax payable of $1.4 million on its Consolidated Statement of Financial Condition
as of March 31, 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 $7.1 million and $2.9 million for the three months
ended March 31, 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 $31.9 million and $55.3 million for the three months ended March 31, 1996
and 1995, respectively. The decrease in cash used in investing activities for
the three months ended March 31, 1996 reflects an increase in principal payments
on loans and mortgage-backed securities and proceeds from the sale of investment
securities, offset by an increase in the amount of mortgage loans and investment
securities purchased. Net cash provided by financing activities (primarily net
activity in deposits and borrowings) were $18.9 million and $54.7 million for
the three months ended March 31, 1996 and 1995, respectively. The decrease in
net cash provided by financing activities for the three months ended March 31,
1996 reflects lower growth in 1996 as compared to 1995. The total net (decrease)
increase in cash and cash equivalents was $(5.8) and $2.3 for the three months
ended March 31, 1996 and 1995, respectively.
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-
18
<PAGE>
TELEBANC FINANCIAL CORPORATION
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 March 31, 1996, the Bank's liquidity ratio was 5.46%.
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. On an unconsolidated basis, the Company had liquid assets of $5.2 million
and subordinated debt of $16.5 million at March 31, 1996. The annual expense to
service the debt is $2.0 million. Subject to regulatory limitations, the Bank
will dividend this balance to the Company to service the debt. Savings
institutions such as the Bank which have capital in excess of all fully
phased-in capital requirements before and after a proposed capital distribution
are permitted, after giving prior notice to the OTS, to make capital
distributions during a calendar year up to the greater of (i) 100% of net income
to date during the calendar year, plus the amount that would reduce by 1/2 its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period. 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 three 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 $3.1 million and $8.0 million as of March
31, 1996 and December 31, 1995, respectively. As of March 31, 1996, the Company
had commitments to purchase $22.3 million in mortgage pool securities. Also,
certificates of deposit which are scheduled to mature in less than one year as
of March 31, 1996 totaled $35.9 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.
19
<PAGE>
TELEBANC FINANCIAL CORPORATION
Capital Resources
Capital ratios at March 31, 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 March 31, 1996:
Actual Percent Required Percent Excess
------ ------- -------- ------- ------
(Dollars in thousands)
Core $30,373 5.32% $17,133 3.00% $13,240
Tangible 30,353 5.32 8,566 1.50 21,787
Risk-based 32,617 11.94 21,852 8.00 10,765
Elimination of Federal Savings Association Charter
Legislation has been introduced in the United State House of
Representatives that would eliminate the federal savings association charter by
January 1, 1998. If such legislation is enacted, the Bank would be required to
convert its federal savings bank charter to either a national bank charter or to
a state depository institution charter. Under current tax law, if the Bank were
to become a national or state bank, the Company would be required to become
regulated at the holding company level by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board") rather than by the OTS. Current rules
and regulations of the Federal Reserve Board would subject the Company to
capital requirements that are not currently applicable to the Company as a
holding company under OTS regulation and impose statutory limitations on the
type of business activities in which the Company may engage at the holding
company level, which business activities currently are not restricted. Also
under current law, if the Bank were to become a national or state bank, it would
be subject to recapture of its bad debt reserve. However, additional legislation
has been introduced which would provide relief from such recapture if the Bank
otherwise continued to meet certain conditions analogous to its current
qualified savings institution status for federal tax purposes. The Company is
unable to predict whether any such legislation will be enacted in its current or
any other form.
Recent Developments
Management has received regulatory approval for the Bank to establish and
fund 50% of the capital commitment for a new entity, AGT Mortgage Services, LLC
("AGT"). AGT will service performing loans for a fee (including those held by
TeleBank) and perform servicing and workout for troubled or defaulted loans for
a fee. Operations commenced on May 1, 1996.
In addition, management has received regulatory approval for the Bank to
fund 50% of the capital commitment for a new entity, AGT PRA, LLC ("AGT PRA").
The primary business of AGT PRA will be its investment in Portfolio Recovery
Associates, LLC ("PRA"). PRA will acquire and collect delinquent consumer debt
obligations for its own portfolio and may also service troubled consumer loans
for third parties. It is anticipated that operations will commence in the second
quarter of 1996.
On May 2, 1996, 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
20
<PAGE>
TELEBANC FINANCIAL CORPORATION
Bank. Pursuant to this agreement, the Bank will assume certain brokered and
telephone solicited deposit accounts of First Commonwealth, which deposits had a
current balance of $53.1 million as of April 30, 1996. In the deposit
assumption, First Commonwealth will pay the Bank the amount of the deposit
liabilities assumed, plus the amount of the deposit liabilities (less certain
renewals) multiplied by .25%. Also, if federal law is enacted or other federal
action is taken requiring the payment by the Bank of a one-time fee to
recapitalize the Savings Association Insurance Fund, First Commonwealth will pay
the tax effected amount of that fee as to the deposits transferred, up to .527%
of such deposits. The agreement may be terminated by the Bank following its
completion of a corporate investigation of First Commonwealth by May 16, 1996,
if the Bank reasonably determines that the business and operations of First
Commonwealth relating to the deposit liabilities or the deposit liabilities are
not substantially as represented and warranted on the date of the agreement.
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 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.
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
21
<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: May 14, 1996 By: /s/ Mitchell H. Caplan
------------------------- -------------------------------------
Mitchell H. Caplan
President
Date: May 14, 1996 By: /s/ Aileen Lopez Pugh
------------------------- -------------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
22
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> US
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> $1,485
<INT-BEARING-DEPOSITS> $1,177
<FED-FUNDS-SOLD> $465
<TRADING-ASSETS> $0
<INVESTMENTS-HELD-FOR-SALE> $301,970
<INVESTMENTS-CARRYING> $299,176
<INVESTMENTS-MARKET> $2,794
<LOANS> $255,822
<ALLOWANCE> $2,645
<TOTAL-ASSETS> $580,614
<DEPOSITS> $331,662
<SHORT-TERM> $198,008
<LIABILITIES-OTHER> $11,991
<LONG-TERM> $16,518
$0
$0
<COMMON> $20
<OTHER-SE> $22,415
<TOTAL-LIABILITIES-AND-EQUITY> $580,614
<INTEREST-LOAN> $5,296
<INTEREST-INVEST> $5,823
<INTEREST-OTHER> $12
<INTEREST-TOTAL> $11,131
<INTEREST-DEPOSIT> $4,868
<INTEREST-EXPENSE> $3,489
<INTEREST-INCOME-NET> $2,774
<LOAN-LOSSES> $419
<SECURITIES-GAINS> $241
<EXPENSE-OTHER> $1,615
<INCOME-PRETAX> $981
<INCOME-PRE-EXTRAORDINARY> $981
<EXTRAORDINARY> $0
<CHANGES> $332
<NET-INCOME> $649
<EPS-PRIMARY> $0.31
<EPS-DILUTED> $0.31
<YIELD-ACTUAL> 2.09
<LOANS-NON> $6,916
<LOANS-PAST> $4,567
<LOANS-TROUBLED> $613
<LOANS-PROBLEM> $8,977
<ALLOWANCE-OPEN> $2,602
<CHARGE-OFFS> $43
<RECOVERIES> $0
<ALLOWANCE-CLOSE> $2,645
<ALLOWANCE-DOMESTIC> $2,645
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> $2,296
<PAGE>
</TABLE>
