<PAGE>
TELEBANC FINANCIAL CORPORATION
25
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 June 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 August 13, 1996.
$.01 par value of common stock 2,049,500
------------------------------ ---------
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
<PAGE>
<TABLE>
<CAPTION>
Part I -- Financial Information Page
- ------------------------------- ----
<S> <C>
Consolidated Statements of Financial Condition -- June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -- Three and six months ended June 30, 1996 and
1995 5
Consolidated Statements of Changes in Stockholders' Equity -- Six months ended June
30, 1996 and 1995 8
Consolidated Statements of Cash Flows -- Six months ended June 30, 1996 and 1995 9
Notes to Consolidated Financial Statements 11
Management's Discussion and Analysis of Financial Condition and Results of Operations
13
Part II -- Other Information
- ----------------------------
Item 4, Submission of Matters to Security Holders 22
Item 5, Other Information 22
Item 6, Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets: 1996 1995
----- ----
(unaudited)
<S> <C> <C>
Cash and amounts due from depository institutions $ 1,356 $ 2,817
Interest-bearing deposits 2,840 5,243
Federal funds sold 809 905
--- ---
Total cash and cash equivalents 5,005 8,965
Investment securities available for sale, at fair value 60,897 40,058
Mortgage-backed securities available for sale, at fair value 216,206 234,210
Loans receivable, net 185,509 248,667
Loans receivable held for sale, lower of cost or market 106,563 --
Investment in Subsidiaries 925 --
Real estate acquired through foreclosure 1,127 790
Accrued interest receivable 4,784 4,377
Premises and equipment, net 2,291 2,229
Stock in Federal Home Loan Bank of Atlanta, at cost 6,325 5,275
Acquisition costs, goodwill, and core deposit premium 390 416
Deferred charges 1,003 1,066
Other assets 8,797 7,890
----- -----
$ 599,822 $ 553,943
======= =======
(continued)
</TABLE>
3
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition, continued
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and Stockholders' Equity: 1996 1995
---- ----
(unaudited)
<S> <C> <C>
Liabilities:
Deposits $ 346,257 $ 306,500
Advances from the Federal Home Loan Bank of Atlanta 120,500 105,500
Securities sold under agreements to repurchase 79,944 93,905
Subordinated debt 16,541 16,496
Advances from borrowers for taxes and insurance 627 521
Income taxes payable 2,019 1,760
Accrued interest payable 2,399 2,682
Other accrued expenses and other liabilities 8,555 5,014
----- -----
576,842 532,378
------- -------
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 6,760 5,352
Unrealized gain on securities available for sale, net of
deferred tax 1,563 1,556
----- -----
Total stockholders' equity 22,980 21,565
------ ------
Commitments and contingencies
$ 599,822 $ 553,943
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans and other loans $ 5,570 $ 4,339 $ 10,866 $ 7,821
Mortgage-backed and related securities 93 5,006 216 9,432
Investment securities and interest-bearing deposits 232 212 423 470
Mortgage-backed and related securities available for sale 4,593 527 9,418 785
Investment securities available for sale 864 261 1,548 406
Trading account assets -- 57 -- 115
Repurchase agreements -- -- 2 16
Federal funds sold 12 12 22 22
-- -- -- --
Total interest income 11,364 10,414 22,495 19,067
------ ------ ------ ------
Interest expense:
Deposits 4,915 4,181 9,783 7,888
Advances from the Federal Home Loan Bank of Atlanta 1,613 1,535 3,078 2,984
Reverse repurchase agreements 1,278 1,747 2,664 3,104
Other borrowed money 124 147 244 293
Subordinated debt 519 541 1,037 1,037
--- --- ----- -----
Total interest expense 8,449 8,151 16,806 15,306
----- ----- ------ ------
Net interest income 2,915 2,263 5,689 3,761
Provision for loan and mortgage related security losses 200 353 619 661
--- --- --- ---
Net interest income after provision for loan and
mortgage related security losses 2,715 1,910 5,070 3,100
----- ----- ----- -----
Non-interest income:
Loan fees and service charges 109 22 457 40
Gain on sale of loans held for sale 316 62 316 62
Gain (loss) on sale of Mortgage-backed securities (133) 250 (132) 251
Gain on sale of investment securities (27) 47 214 47
Loss on equity investment (6) -- (6) --
Gain on trading account -- 17 -- 634
Other 32 14 47 8
-- -- -- -
Total non-interest income 291 412 896 1,042
--- --- --- -----
(continued)
</TABLE>
5
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits $ 864 $ 809 $ 1,788 $ 1,569
Office occupancy and equipment 120 121 229 217
Federal insurance premiums 175 114 344 225
Professional services 301 293 629 469
Other 289 136 437 241
--- --- --- ---
Total general and administrative expenses 1,749 1,473 3,427 2,721
----- ----- ----- -----
Other non-interest expenses:
Net operating costs (gain) of real estate acquired
through foreclosure, including provision 40 38 47 80
for losses
Amortization of acquisition costs, goodwill and
core deposit premium 9 9 273 22
Amortization of deferred charges 32 32 63 64
Other -- -- -- --
-- -- -- --
Total other non-interest expenses 81 79 383 166
-- -- --- ---
Total non-interest expenses 1,830 1,552 3,810 2,887
----- ----- ----- -----
Income before income tax expense 1,176 770 2,156 1,255
Income tax expense 417 264 748 429
--- --- --- ---
Net income $ 759 $ 506 $ 1,408 $ 826
===== ===== ======= =====
(continued)
</TABLE>
6
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Operations (continued)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Earnings per share:
<S> <C> <C> <C> <C>
Net income $ .35 $ .25 $ .65 $ .40
Weighted average shares outstanding 2,171,354 2,049,500 2,166,947 2,041,485
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 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 six months ended -- -- 826 -- 826
June 30, 1995
Unrealized Gain (Loss) on Available
for Sale Securities, net of tax -- -- -- 294 294
--- ---
effect
Balances at June 30, 1995 $ 20 $ 14,637 $ 3,459 $ 32 $ 18,148
== ====== ======== == ========
Balances at December 31, 1995 $ 20 $ 14,637 $ 5,352 $ 1,556 $ 21,565
Net income for the six months ended -- -- 1,408 -- 1,408
June 30, 1996
Unrealized Gain (Loss) on Available
for Sale Securities, net of tax -- -- -- 7 7
- -
effect
Balances at June 30, 1996 $ 20 $ 14,637 $ 6,760 $ 1,563 $ 22,980
==== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S>
<C> <C>
Net cash provided by operating activities 13,576 3,451
Cash flows from investing activities:
Mortgage loan originations $ (25) $ (395)
Mortgage loans purchased (90,352) (56,816)
Proceeds from sale of mortgage loans available for sale 22,499 --
Principal payments on loans and mortgage-backed and
related securities 50,454 37,607
Purchases of mortgage-backed and related securities (94,315) (65,296)
Proceeds from sale of mortgage-backed securities available
for sale 86,204 14,075
Purchases of investment securities held to maturity -- (1,379)
Proceeds from the maturity of investment securities held to
maturity -- 2,448
Purchases of investment securities available for sale (84,998) (16,411)
Proceeds from sale or maturity of investment securities
available for sale 45,311 2,050
Principal repayments on investment securities
available for sale 18,531 --
Proceeds from maturity of securities purchased under agreement
to resell -- 1,181
Increase in stock of the Federal Home Loan Bank (1,050) (187)
Proceeds from maturity of real estate acquired through
foreclosure 219 --
Investment in subsidiaries (925) --
Purchase of premises and equipment (139) (412)
----- -----
Net cash used in investing activities (48,586) (83,535)
-------- --------
(continued)
</TABLE>
9
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits and passbook savings accounts $ 20,433 $ 20,929
Net increase in certificates of deposit, net of
interest credited 9,533 31,515
Net increase in subordinated debt 45 46
Increase in advances from Federal Home Loan Bank of Atlanta 85,000 59,000
Payment on advances from Federal Home Loan Bank of
Atlanta (70,000) (49,500)
Net increase (decrease) in securities sold under agreements
to repurchase (13,961) 17,162
Increase in common stock and additional paid in capital -- --
Dividends paid on common stock -- --
Dividends paid on preferred stock -- --
------ ------
Net cash provided by financing activities 31,050 79,152
------ ------
Net decrease in cash and cash equivalents (3,960) (932)
Cash and cash equivalents at beginning of period 8,965 6,078
----- -----
Cash and cash equivalents at end of period $ 5,005 $ 5,146
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds 7,986 8,151
Income taxes paid 768 151
Transfers from loans to real estate acquired through foreclosures 354 26
Gross unrealized gain (loss) on securities available for sale 2,610 447
Tax effect of gain (loss) on available for sale securities 1,047 153
See accompanying notes to consolidated financial statements.
</TABLE>
10
<PAGE>
TELEBANC FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
For the Three and Six Months Ended June 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.
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 June 30, 1996 and for the three and six
months ended June 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
June 30, 1996 and the results of consolidated operations for the three and six
months ended June 30, 1996 and 1995. The consolidated balance sheet as of
December 31, 1995 is derived from audited financial statements of the Bank. The
results of consolidated operations for the three and six months ended June 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. Trading Account
Trading account securities are purchased with the intent to be
subsequently sold in the near term. Assets purchased for trading are recorded at
fair value. Unrealized holding gains and losses are included in earnings.
Transfers of securities between the trading account, available-for-sale
securities, and held-to-maturity securities are recorded at fair value at the
date of transfer. Unrealized holding gains and losses are recognized in earnings
for transfers into trading securities.
11
<PAGE>
TELEBANC FINANCIAL CORPORATION
Note 4. 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 2,171,354 and 2,049,500 for the Company at June 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.
12
<PAGE>
TELEBANC FINANCIAL CORPORATION
Management's Discussion and Analysis of
Financial Condition and Results of Operations, as of and for
the Three and Six Months Ended June 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 (June 30, 1996 compared to December 31, 1995)
The Company's total assets increased by $45.9 million or 8.3% from
$553.9 million at December 31, 1995 to $599.8 million at June 30, 1996. The
increase in total assets primarily reflects increases in loans receivable, net
of $43.4 million, or 17.5% and investment securities available for sale of $20.8
million, or 52.0% offset by a decline in mortgage-backed securities available
for sale of $(18.0) million, or (7.7)%. 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
loans held for sale category with a one-time transfer of loans from the
investment portfolio that have characteristics that make them susceptible to
sell after restructuring, credit enhancement, or other related improvements.
Loans held for sale are recorded at the lower of cost or market. Going forward,
the Company will maintain 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. As a result of these efforts, deposits increased by $39.8 million, or
13.0% from $306.5 million at December 31, 1995 to $346.3 million at June 30,
1996. The average term for the new time deposits gathered in the three months
ended June 30, 1996 was approximately 42 months with an average percentage yield
of 5.9%. The Company has continued to focus on building core deposit accounts.
Money market checking and savings accounts increased 31.5% from $74.7 million at
December 31, 1995 to $98.2 million at June 30, 1996. During the second quarter
of 1996, approximately $4.9 million of interest was credited to accounts while
deposits exceeded withdrawals by $10.2 million. Federal Home Loan Bank Advances
increased to $120.5 million at June 30, 1996 from $105.5 million at December 31,
1995. As of June 30, 1996, the weighted average interest rate and weighted
average maturity for Federal Home Loan Bank Advances was 5.9% and 375 days,
respectively. Securities sold under agreements to repurchase, decreased by $14.0
million or 14.9% from $93.9 million at December 31, 1995 to $79.9 million at
June 30, 1996. As of June 30, 1996, the weighted average interest rate and
weighted average maturity for securities sold under agreements to repurchase was
5.7% and 39 days, respectively. As of June 30, 1996, subordinated debt, net of
original issue discount was $16.5 million with a coupon rate of 11.5%.
Stockholders' equity increased $1.4 million, from $21.6 million at
December 31, 1995 to $23.0 million at June 30, 1996. The increase was due to
$1.4 million in net income for the six months ended June 30, 1996 and an
unrealized gain on securities available for sale, net of deferred taxes, of
$7,000, which pursuant to SFAS 115 affects the Company's capital but does not
impact the statement of operations.
13
<PAGE>
TELEBANC FINANCIAL CORPORATION
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 $599.8 million at June 30, 1996. This growth has
been supported by increasing total deposits from $113.1 million at December 31,
1993 to $346.3 million at June 30, 1996 and total other liabilities from $94.8
million at December 31, 1993 to $230.6 million at June 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 increase 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 merger, TeleBanc will own 100% of MET Holdings and its other businesses,
including primarily Arbor Capital Partners, Inc., an investment advisor and
broker dealer. The merger is subject to shareholder approval which is expected
to be sought in the third quarter of 1996.
During the first quarter of 1996, management 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 services performing loans
for a fee (principally those held by TeleBank) and performs servicing and
workout for troubled or defaulted loans for a fee. Operations commenced on May
1, 1996 and have not had significant financial impact on the Company.
In addition, management also received regulatory approval during the
first quarter 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 is its
investment in Portfolio Recovery Associates, LLC ("PRA"). PRA acquires and
collects delinquent consumer debt obligations for its own portfolio. PRA
operations commenced on May 1, 1996 and have not had significantly financial
impact on the Company.
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 Bank.
Pursuant to this agreement, the Bank assumed certain brokered and telephone
solicited deposit accounts of First Commonwealth. These deposits had a current
balance of $42.0 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%. 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.
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
14
<PAGE>
TELEBANC FINANCIAL CORPORATION
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.
15
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense
and related interest yields and rates at June 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 June 30, 1996 Quarter ended June 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 $ 257,484 $ 5,575 8.66% $ 190,852 $ 4,326 9.07%
Mortgage-backed and related -- -- -- 246,715 5,006 8.12
securities
Investment securities 8,627 234 10.89 8,471 129 6.09
Mortgage-backed and related
securities available for sale 235,085 4,659 7.93 22,907 453 7.91
Investment securities available 53,114 913 6.88 16,707 388 9.29
for sale
Federal funds sold 973 12 5.06 757 12 6.34
Investment in FHLB 6,174 111 7.21 5,282 95 7.19
Trading account -- -- -- 2,727 57 8.36
--------- ---------- ------- --------- ---------- -------
Total interest-earning assets $ 561,457 $ 11,504 8.20% $ 494,418 $ 10,466 8.47%
Non-interest-earning assets $ 30,756 $ 17,015
----------- ---------
Total assets $ 592,213 $ 511,433
========== ==========
Interest-bearing liabilities:
Savings deposits $ 98,618 $ 1,178 4.81% $ 22,510 $ 287 5.10%
Time deposits 234,605 3,736 6.41 229,913 3,895 6.78
FHLB advances 116,973 1,738 5.88 105,302 1,681 6.39
Other borrowings 88,919 1,278 5.68 106,794 1,731 6.48
Subordinated debt, net 17,250 519 12.03 17,250 541 12.55
---------- ---------- ------- --------- ---------- -------
Total interest-bearing $ 556,365 $ 8,449 6.07% $ 481,769 $ 8,135 6.75%
liabilities
Non-interest-bearing liabilities $ 15,302 $ 11,877
----------- -----------
Total liabilities $ 571,667 $ 493,646
Stockholders' equity $ 20,546 $ 17,787
----------- -----------
Total liabilities and
stockholders' equity $ 592,213 $ 511,433
========== ===========
Excess of interest-earning assets
over interest-bearing
liabilities/net interest $ 5,092 $ 3,055 2.13% $ 12,649 $ 2,331 1.72%
=========== ============= ===== =========== ============= =====
income/interest rate spread
Net yield on interest earning 2.18% 1.89%
===== =====
assets
Ratio of interest-earning asset
to interest-bearing liabilities 100.92% 102.63%
======= =======
16
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
Results of Operations for the Three and Six Months ended June 30, 1996 and 1995
Net Income. Net income for the three and six months ended June 30, 1996
was $759,000 and $1.4 million, compared to $506,000 and $826,000 for the three
and six months ended June 30, 1995, respectively. Net income for the three
months ended June 30, 1996 consisted primarily of $2.9 million in net interest
income and non-interest income gains of $316,000 on the sale of loans and
$109,000 for loan fees and service charges, reduced by $200,000 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 June 30, 1995
consisted primarily of $2.3 million of net interest income and a $250,000 gain
on the sale of a MBS pass through certificate offset by $353,000 in provision
for loan and mortgage related security losses and $1.5 million of general and
administrative expenses. Net income for the six months ended June 30, 1996
consisted of net interest income of $5.7 million and non-interest income of
$896,000 offset by $619,000 of provision for loan and mortgage related security
losses and $3.8 million of non-interest expense. Net income for the six months
ended June 30, 1995 consisted of $3.8 of net interest income and $1.0 million of
non-interest income offset by $661,000 of provision for loan and mortgage
related security losses and $2.9 million of non-interest expenses.
Net Interest Income. Net interest income was $2.9 million and $2.3
million for the three months ended June 30, 1996 and 1995, respectively,
reflecting an annualized interest rate spread of 2.13% and 1.72% for the three
months ended June 30, 1996 and 1995, respectively. In the quarter ending June
30, 1996, total interest earning assets, consisting primarily of loans
receivable, net and mortgage-backed and related securities, yielded 8.20% as
compared to 8.47% for the same period in 1995. Average interest-earning assets
were $561.5 million and $494.4 million for the quarters ending June 30, 1996 and
1995, respectively. Average interest bearing liabilities were $556.4 million and
$481.8 million for the quarters ending June 30, 1996 and 1995, respectively.
Interest-bearing liabilities cost 6.07% in the first quarter of 1996 as compared
6.75% in the same period in 1995. Yield on interest-earning assets for the
quarter ending June 30, 1996 decreased 27 basis points over the same quarter in
1995. Second quarter decreases in interest-earning assets and interest-bearing
liabilities primarily reflect an overall decrease in interest rates. Net
interest income was $5.7 million and $3.8 million for the six months ended June
30, 1996 and 1995, respectively. For the first six months of 1996 the Company
experienced an increase in annualized interest rate spread compared to the same
period in 1995. The increase reflects a 68 basis point decrease 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. Second quarter increases in interest-bearing liabilities and
increases in interest-earning assets primarily reflected an increase in volume.
Average interest bearing liabilities were $547.8 million and $456.4 million for
the six months ended June 30, 1996 and 1995, respectively. In the six months
ended June 30, 1996, total interest earning assets, consisting primarily of
loans receivable, net and mortgage-backed and
17
<PAGE>
TELEBANC FINANCIAL CORPORATION
related securities, yielded 8.2% for the same period in 1996 and 1995. Average
interest-earning assets were $555.6 million and $466.2 million for the six
months ended June 30, 1996 and 1995, respectively. Interest-bearing liabilities
cost 6.13% in the first six months of 1996 as compared 6.76% in the same period
in 1995. Net yield on interest-earning assets for the quarter ending June 30,
1996 increased 29 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 decreased $(153,000) or
(43.3)% from $353,000 for the three months ending June 30, 1995 to $200,000 for
the three months ending June 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 June 30, 1996, the Company provided additional reserves
for single-family loans. The Company had recoveries of $54,000 and charge-offs
of $174,000 on three one to four family mortgage loans. During the second
quarter of 1995, the Company provided additional general reserves for loan
acquisitions and unrated whole loan securities. Total provision for loan and
mortgage related security losses decreased $(42,000) or (6.4)% from $661,000 for
the six months ended June 30, 1995 to $619,000 for the six months ended June 30,
1996. For the first six 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. 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 $56.9 million in loan acquisitions. The Company
experienced a slower growth in loans for the three and six months ended June 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 June 30, 1996 was $2.7 million which was 0.9% of total loans
outstanding. Total loss allowance as a percentage of total non-performing assets
was 17.8%.
Non-Interest Income. Total non-interest income decreased by $(121,000)
from $412,000 for the three months ended June 30, 1995 to $291,000 for the three
months ended June 30, 1996. During the second quarter of 1995, the Company sold
an agency pass through for a $250,000 gain and municipal bonds for a $47,000
gain. The Company sold these assets from the available for sale portfolio during
the second quarter to manage growth levels. Additionally, the Company sold $2.1
million of loans for a gain of $62,000. Total non-interest income decreased by
$(146,000) from $1.0 million for the six months ended June 30, 1995 to $896,000
for the six months ended June 30, 1996. 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 $24,000 loss in marking the security in the trading account to
market. Management purchased the mortgage-backed security in 1995 and
subsequently enhanced the credit through the purchase of insurance. The security
remained in the trading account until it was subsequently sold.
18
<PAGE>
TELEBANC FINANCIAL CORPORATION
Non-Interest Expenses. Non-interest expenses for the three and six
months ended June 30, 1996 were $1.8 million and $3.8 million, compared to $1.6
million and $2.9 million for the three and six months ended June 30, 1995,
respectively. Total non-interest expenses increased by $279,000 for the three
months ended June 30, 1995 to $1.8 million for the three months ended June 30,
1996. The increase is largely the result of a $276,000 increase in general and
administrative expenses attributable to a compensation bonus accrual of $250,000
and an overall increase in compensation levels. Total non-interest expenses
increased $923,000 for the six months ended June 30, 1995 to $3.8 million for
the six months ended June 30, 1996. The increase is primarily the result of a
$706,000 increase in general and administrative expenses. The increase in
general and administrative expense for the six months ended June 30, 1996 is
almost entirely a result of increases in compensation, increases in personnel,
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 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. The effective tax rate for the quarter ended June
30, 1996 was 35.5% compared to 34.3% for the quarter ended June 30, 1995. The
income tax expense for the quarter ended June 30, 1996 was $417,000 compared to
$264,000 for the quarter ended June 30, 1995. The effective tax rate increased
slightly in the second quarter of 1996 as a result of a decrease in non-taxable
municipal bond interest. The effective tax rate for the six months ended June
30, 1996 was 34.7% compared to 34.2% for the six months ended June 30, 1995. The
Company carried a deferred tax receivable of $2.4 million on its Consolidated
Statement of Financial Condition as of June 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 $13.6 million and $3.5 million for the six
months ended June 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 $48.6 million and $83.5 million for the six months
ended June 30, 1996 and 1995, respectively. The increase in cash flows related
to investing activities for the six months ended June 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 $31.1 million and $79.2 million for
the six months ended June 30, 1996 and 1995, respectively. The increase in net
cash provided by financing activities for the six months ended June 30, 1996 is
primarily the result of an increase of $39.8 million in deposits. The total net
decrease in cash and cash equivalents was $4.0 million and $932,000 for the six
months ended June 30, 1996 and 1995, respectively.
19
<PAGE>
TELEBANC FINANCIAL CORPORATION
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 June 30, 1996, the Company's liquidity ratio was
5.2%.
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 six 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 June 30,
1996 and December 31, 1995, respectively. As of June 30, 1996, the Company had
commitments to purchase $4.7 million in loans and $6.4 million in mortgage pool
securities. Also, certificates of deposit which are scheduled to mature in less
than one year as of June 30, 1996 totaled $37.2 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.
20
<PAGE>
TELEBANC FINANCIAL CORPORATION
Capital Resources
Capital ratios at June 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 June 30, 1996:
<TABLE>
<CAPTION>
Actual Percent Required Percent Excess
------ ------- -------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Core $30,594 5.18% $17,712 3.00% $12,882
Tangible 30,576 5.18 8,566 1.50 22,010
Risk-based 32,633 11.06 23,612 8.00 9,021
</TABLE>
Recent Developments
The Office of Thrift Supervision (the "OTS") recently completed a full
scope safety and soundness examination of TeleBanc. Based upon the examination
results, on August 8, 1996, the OTS terminated the May 24, 1993 Supervisory
Agreement.
21
<PAGE>
TELEBANC FINANCIAL CORPORATION
Part II -- Other Information
Item 4. Submission of Matters to Security Holders
On May 29, 1996 the Company held its 1996 Annual Meeting of
Shareholders (the "Annual Meeting"). At the Annual Meeting, Arlen W. Gelbard was
elected to the Board of Directors for three-year terms ending in 1999. The
Directors continuing in office were David DeCamp and Mark Rollinson, whose terms
expire in 1997 and Mitchell H. Caplan and David Smilow whose terms expire in
1998. The shareholders also voted at the Annual Meeting to ratify the Board's
appointment of Arthur Andersen LLP as the independent auditors of Company for
the fiscal year ending December 31, 1996.
The votes cast at the Annual Meeting were as follows:
Election of Arlen W. Gelbard FOR - 1,823,126
AGAINST - 0
WITHHELD - 226,374
Ratification of Appointment
of Arthur Andersen LLP: FOR - 1,823,126
AGAINST - 0
WITHHELD - 226,374
Item 5. Other Information
No information to report.
22
<PAGE>
TELEBANC FINANCIAL CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on May 20, 1996.
23
<PAGE>
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: August 14, 1996 By: /s/ Mitchell H. Caplan
------------------------- ------------------------------------
Mitchell H. Caplan
President
Date: August 14, 1996 By: /s/ Aileen Lopez Pugh
------------------------- ------------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> US CURRENCY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> $1,356
<INT-BEARING-DEPOSITS> $2,840
<FED-FUNDS-SOLD> $809
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> $277,103
<INVESTMENTS-CARRYING> $274,510
<INVESTMENTS-MARKET> $2,593
<LOANS> $294,797
<ALLOWANCE> $2,725
<TOTAL-ASSETS> $599,822
<DEPOSITS> $346,257
<SHORT-TERM> $200,444
<LIABILITIES-OTHER> $13,600
<LONG-TERM> $16,541
0
0
<COMMON> $20
<OTHER-SE> $22,960
<TOTAL-LIABILITIES-AND-EQUITY> $599,822
<INTEREST-LOAN> $5,570
<INTEREST-INVEST> 5,782
<INTEREST-OTHER> 12
<INTEREST-TOTAL> $11,364
<INTEREST-DEPOSIT> $4,915
<INTEREST-EXPENSE> $3,534
<INTEREST-INCOME-NET> $2,915
<LOAN-LOSSES> $200
<SECURITIES-GAINS> $291
<EXPENSE-OTHER> $1,830
<INCOME-PRETAX> $1,176
<INCOME-PRE-EXTRAORDINARY> $1,176
<EXTRAORDINARY> $0
<CHANGES> $417
<NET-INCOME> $759
<EPS-PRIMARY> $0.36
<EPS-DILUTED> $0.35
<YIELD-ACTUAL> 1.94
<LOANS-NON> $7,977
<LOANS-PAST> $4,903
<LOANS-TROUBLED> $465
<LOANS-PROBLEM> $10,116
<ALLOWANCE-OPEN> $2,606
<CHARGE-OFFS> $174
<RECOVERIES> $55
<ALLOWANCE-CLOSE> $2,725
<ALLOWANCE-DOMESTIC> $2,725
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> $2,039
</TABLE>
