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, 1997
[ ] 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 6, 1997.
$.01 par value of common stock 2,224,161
------------------------------- ---------
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Consolidated Statements of Financial Condition -September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations - Three and nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders' Equity - Nine
months ended September 30, 1997 and 1996 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II - Other Information
- ---------------------------
Item 5, Other Information 21
Item 6, Exhibits and Reports on Form 8-K 21
Signatures 22
2
<PAGE>
TELEBANC FINANCIAL CORPORATION
Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets: 1997 1996
---- -----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 5,123 $ 3,259
Investment securities available for sale 65,750 78,826
Mortgage-backed securities available for sale and trading 240,091 184,743
Loans receivable, net 324,968 185,757
Loans receivable held for sale 170,343 166,064
Other assets 32,258 29,316
------ ------
Total assets $ 838,533 $ 647,965
======= =======
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 445,241 $ 390,486
Advances from the Federal Home Loan Bank of Atlanta 170,000 144,800
Securities sold under agreements to repurchase 122,408 57,581
Subordinated debt 29,556 16,586
Other liabilities 16,466 13,854
------ ------
Total liabilities 783,671 623,307
------- -------
Corporation-Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Corporation
9,602 --
Commitments and contingencies -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value,
500,000 shares authorized
Series A, 18,850 issued and outstanding -- --
Series B, 4,050 issued and outstanding -- --
Series C, 7,000 issued and outstanding -- --
Common stock, $0.01 par value, 3,500,000 shares authorized;
2,211,961 and 2,049,500 issued and outstanding 22 20
Additional paid-in capital 31,392 14,637
Retained earnings, substantially restricted 10,496 7,905
Unrealized gain on securities available for sale, net of deferred tax 3,350 2,096
----- -----
Total stockholders' equity 45,260 24,658
------ ------
Total liabilities & stockholders' equity $ 838,533 $ 647,965
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<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,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Mortgage loans and other loans $ 8,855 $ 6,080 $ 24,727 $ 16,946
Mortgage-backed and related securities 4,248 4,483 13,179 14,117
Investment securities 1,348 1,289 4,330 3,261
Other 369 19 697 43
--- -- --- --
Total interest income 14,820 11,871 42,933 34,367
------ ------ ------ ------
Interest expense:
Deposits 6,649 5,635 18,686 15,419
Advances from the Federal Home Loan Bank of Atlanta 2,528 1,902 6,784 4,980
Reverse repurchase agreements 1,493 978 5,422 3,885
Subordinated debt 878 519 2,399 1,556
--- --- ----- -----
Total interest expense 11,548 9,034 33,291 25,840
------ ----- ------ ------
Net interest income 3,272 2,837 9,642 8,527
Provision for loan losses 120 125 671 744
--- --- --- ---
Net interest income after provision for loan losses 3,152 2,712 8,971 7,783
----- ----- ----- -----
Non-interest income:
Gain on sale of available for sale & trading securities 408 181 1,827 263
Gain on sale of loans 226 98 636 415
Fees, service charges and other 450 261 472 758
--- --- --- ---
Total non-interest income 1,084 540 2,935 1,436
----- --- ----- -----
(continued)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Eneded Nine Months Ended
September 30, September 30,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 1,049 882 3,427 2,670
Federal insurance assessment -- 1,671 -- 1,671
Other 1,029 734 2,798 2,373
----- ----- ----- -----
Total general and administrative expenses 2,078 3,287 6,225 6,714
----- ----- ----- -----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure 55 126 185 173
Amortization of goodwill and other intangibles 204 121 486 457
--- --- --- ---
Total other non-interest expenses 259 247 671 630
--- --- --- ---
Total non-interest expenses 2,337 3,534 6,896 7,344
----- ----- ----- -----
Income (loss) before income tax expense and
minority interest 1,899 (282) 5,010 1,875
Income tax expense (benefit) 709 (220) 1,682 528
Minority interest in subsidiary (286) -- (353) --
----- -- ----- --
Net income (loss) $ 904 $ (62) $ 2,975 $ 1,347
=== ==== ===== =====
Preferred stock dividends 162 -- 384 --
--- -- --- --
Net income after preferred stock dividends $ 742 $ (62) $ 2,591 $ 1,347
=== ==== ===== =====
Net income per common share:
Primary $ 0.26 $(0.02) $ 0.94 $ 0.63
Fully diluted 0.26 (0.03) 0.93 0.63
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain
Additional on Available
Preferred Common Paid-in Retained for Sale
Stock Stock Capital Earnings Securities Total
----- ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
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
== == ====== ===== ===== ======
Balances at December 31, 1996 $ -- $ 20 $ 14,637 $ 7,905 $ 2,096 $ 24,658
Net income for the nine months ended
September 30, 1997 -- -- -- 2,975 -- 2,975
Stock issued -- 2 1,474 -- -- 1,476
Issuance of 4% cumulative Preferred -- -- 9,634 -- -- 9,634
Stock, Series A
Issuance of 4% cumulative Preferred -- -- 2,070 -- -- 2,070
Stock, Series B
Issuance of 4% cumulative Preferred -- -- 3,577 -- -- 3,577
Stock, Series C
Dividends on 4% cumulative Preferred -- -- -- (384) -- (384)
Stock
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- -- 1,254 1,254
-- -- ------ ------ ----- ------
Balances at September 30, 1997 $ -- $ 22 $ 31,392 $ 10,496 $ 3,350 $ 45,260
== == ====== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities $ (16,375) $ 15,692
-------- ------
Cash flows from investing activities:
Purchases of held-to-maturity loans (184,634) (105,761)
Equity investments in subsidiaries (1,608) (1,383)
Purchases of available-for-sale securities (250,956) (274,147)
Proceeds from sale of available-for-sale securities 125,520 206,639
Proceeds from maturities of and principal payments on
Available-for-sale securities and loans 162,030 109,354
Net sales (purchases) of premises and equipment 420 (623)
Proceeds from sale of foreclosed real estate 1,239 514
----- ---
Net cash used in investing activities (147,989) (65,407)
--------- ---------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in non-interest bearing demand, savings, and
NOW deposit accounts and certificates of deposit accounts 37,256 75,924
Increase in advances from FHLB 244,000 237,000
Payments on advances from FHLB 218,800) (221,000)
Net decrease (increase) in securities sold under agreements
to repurchase 64,827 (46,218)
Net increase in other borrowed funds 12,970 68
Issuance of trust preferred stock 9,602 --
Issuance of common stock and 4% preferred stock 16,757 --
Dividends paid on common and preferred stock (384) --
Net cash provided by financing activities 166,228 45,774
------- -------
Net increase (decrease) in cash and cash equivalents 1,864 (3,941)
Cash and cash equivalents at beginning of period 3,259 8,965
----- -----
Cash and cash equivalents at end of period $ 5,123 $ 5,024
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 26,526 $ 11,770
Income taxes paid 853 822
Transfers from loans to real estate acquired through foreclosures 568 326
Gross unrealized gain on securities available for sale 1,888 1,292
Tax effect of gain on available for sale securities 634 364
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
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's subsidiaries and TeleBanc Capital Markets, Inc. ("TCM"), a registered
investment advisor, funds manager and broker-dealer. The Bank is a federally
chartered savings bank in which deposit accounts are insured to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). The consolidated
financial statements include financial information from TeleBanc Financial
Corporation and its wholly-owned subsidiaries.
The financial statements as of September 30, 1997 and for the three and
nine months ended September 30, 1997 and 1996 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, 1997 and the results of consolidated operations for the three and
nine months ended September 30, 1997 and 1996. The results of consolidated
operations for the three and nine months ended September 30, 1997 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,
1996, included in the Company's Annual Report to Stockholders for 1996, should
be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
NOTE 2. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
128"), effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. The impact
on the Company has been calculated below:
9
<PAGE>
TELEBANC FINANCIAL CORPORATION
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------
Per share amounts 1997 1996 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary EPS as reported $ 0.26 $ (0.02) $ 0.94 $ 0.63
Effect of SFAS 128 0.07 (0.01) 0.25 0.03
---- ------ ---- ----
Pro forma basic EPS $ 0.33 $ (0.03) $ 1.19 $ 0.66
==== ====== ==== ====
Fully diluted EPS as reported $ 0.26 $ (0.03) $ 0.93 $ 0.63
Effect of SFAS 128 (0.02) 0.01 (0.11) (0.18)
------ ------ ------ ------
Pro Forma diluted EPS $ 0.24 $ (0.02) $ 0.82 $ 0.45
==== ====== ==== ====
</TABLE>
Basic earnings per common share, as required by SFAS 128, is 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 2,179,510 and 2,049,500
for the Company at September 30, 1997 and 1996, 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.
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Income Shares Per Share Amount
------ ------ ----------------
For the Quarter Ended September 30, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income $ (62,000) 2,049,500 $ (0.03)
=========================
Options issued to management -- 528,019
Warrants -- 127,373
------------------------------------------
Diluted earnings per share $ (62,000) 2,704,892 $ (0.02)
======================================================================
For the Quarter Ended September 30, 1997
-----------------------------------------------------------------------
Net income $ 904,000
less: Preferred Stock Dividends (162,000)
-----------------------
Basic earnings per share
Income available to common shareholders
$ 742,000 2,218,513 $ 0.33
=======================
Options issued to management -- 382,677
Warrants -- 254,261
Convertible preferred stock 162,000 910,180
----------------------------------------------
Diluted earnings per share $ 904,000 3,765,631 $ 0.24
======================================================================
</TABLE>
10
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTE 3. RECENT EVENTS
On February 28, 1997, the Company sold $29.9 million of units in the
form of 4% convertible preferred stock, 9.5% senior subordinated notes and
warrants, and purchased substantially all of the assets of Arbor Capital
Partners, Inc. ("Arbor"), a registered investment advisor, funds manager and
broker-dealer. MET Holdings, TeleBanc's majority shareholder, owned a majority
of Arbor. In connection with this sale, the Company incurred approximately $1.7
million of expenses, of which, approximately $725,000 is attributed to the
senior subordinated notes which will be amortized through March 31, 2004.
The $29.9 million of units were sold to investment partnerships managed
by Conning & Co., CIBC Wood Gundy Argosy Merchant Fund 2, LLC, The Progressive
Corporation and The Northwestern Mutual Life Insurance Company. Upon the sale of
the units, representatives from the Conning partnerships and the CIBC Merchant
Fund were appointed to the Company's Board. The units consist of $13.7 million
in 9.5% senior subordinated notes with 198,088 detachable warrants, $16.2
million in 4.0% convertible preferred stock, and rights to 205,563 contingent
warrants. The senior subordinated notes are due on March 31, 2004 and stipulate
increases over time in interest rates subsequent to March 31, 2002 from 9.5% up
to 15.25%. The warrants are exercisable at $9.50 with an expiration date of
February 28, 2005. Consisting of Series A Voting Convertible Preferred Stock,
Series B Nonvoting Convertible Preferred Stock and Series C Nonvoting
Convertible Preferred Stock, the preferred stock is convertible to 1,199,743
shares of common stock. Series A and Series B shares may be converted at any
time into fully-paid and non-assessable shares of Voting Common Stock. Series C
shares may be converted at any time to Series A or Series B shares or at any
time into fully-paid and non-assessable nonvoting common stock. The contingent
warrants may be exercised upon a change of control or at any time after February
29, 2002 ("Exercise Event"). If the Company's annual internal rate of return is
less than 25% at the time of an Exercise Event, unit holders may exercise the
contingent warrants for $0.01 until an internal rate of return of 25% is
obtained.
Also in connection with the sale of units, the Arbor asset acquisition
was structured as a tax free issuance of 162,461 shares of TeleBanc common stock
and a $500,000 cash payment for the Arbor assets. An independent appraisal
valued the assets to be acquired from Arbor at $3.1 million. Consistent with
TeleBanc's charter, the number of shares issued to Arbor as consideration was
limited to 5% of total market value of outstanding TeleBanc stock at the time of
acquisition.
In June 1997, the Company formed TeleBanc Capital Trust I, which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10,000,000 in a private placement.
TeleBanc Capital Trust I is a business trust formed for the purpose of issuing
capital securities and investing the proceeds in junior subordinated debentures
issued by the company. The trust preferred securities mature in 2027 and have an
annual dividend rate of 11.0% payable semi-annually, beginning in December 1997.
The net proceeds will be used for general corporate purposes which include the
funding of Bank operations to create and expand its financial service and
product operations.
11
<PAGE>
NOTE 4. COMMITMENTS AND CONTINGENT LIABILITIES
In managing the Company's interest-rate risk, the Company utilizes
financial derivatives in the normal course of business. These products consist
primarily of interest rate cap and swap agreements. Financial derivatives are
employed to assist in the management and/or reduction of interest rate risk for
the Company and can effectively alter the interest sensitivity of segments of
the balance sheet for specified periods of time.
The Company accounts for interest rate swap agreements and cap
agreements as hedges of debt issuances, deposit balances and investment in loan
portfolio to which such agreements have been specifically designated. Cash
remittances due or received pursuant to these agreements are reported as
adjustments to interest expense on an accrual basis. Any premiums paid in
conjunction with these interest rate swap and cap agreements are amortized as
additional interest expense on a straight-line basis over the term of these
agreements. Any gain or loss upon early termination of these instruments would
be deferred and amortized as an adjustment to interest expense over the term of
the applicable interest rate agreement.
12
<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, 1997
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, 1997 COMPARED TO DECEMBER 31, 1996)
The Company's total assets increased by $190.5 million or 29.4% from
$648.0 million at December 31, 1996 to $838.5 million at September 30, 1997. The
increase in total assets primarily reflects increases in loans receivable, net
and loans held for sale of $143.5 million, or 40.8% and mortgage-backed
securities available for sale and trading of $55.3 million, or 30.0%. The
increase in loans receivable includes purchases of primarily adjustable rate
loans. In February, 1997, the Company raised $28.2 million of net proceeds from
the sale of units consisting of debt and equity securities. In June 1997, the
Company raised $10.0 million from the sale of Trust Preferred securities (see
Note 1 to Consolidated Financial Statements for the three and nine months ended
September 30, 1997 and 1996). The Company continues to invest the net proceeds
as additional equity capital of the Bank. The increase in asset size reflects
management's initial efforts to leverage the proceeds raised from the sale of
units and capital securities. The Company intends to continue to leverage such
proceeds, as well as capital raised from earnings, for additional growth in the
foreseeable future.
The Company funded its asset growth with a mix of securities sold under
agreements to repurchase ("reverse repos"), Federal Home Loan Bank advances and
deposits. Total deposits increased by $54.8 million, or 14.0% from $390.5
million at December 31, 1996 to $445.2 million at September 30, 1997. The
average term for the new time deposits gathered in the three months ended
September 30, 1997 was approximately 30.7 months with an average percentage
yield of 5.95%. The Company has continued to focus on building core deposit
accounts. Money market checking and savings accounts increased 25.0% from $109.8
million at December 31, 1996 to $137.3 million at September 30, 1997. Federal
Home Loan Bank Advances remained relatively stable. As of September 30, 1997,
the weighted average interest rate (excluding hedges) and weighted average
maturity for Federal Home Loan Bank Advances was 5.70% and 554 days,
respectively. Securities sold under agreements to repurchase, increased by $64.8
million or 112.5% from $57.6 million at December 31, 1996 to $122.4 million at
September 30, 1997 largely as a result of management's intention to fund high
growth after the capital raising and to replace these borrowings with the core
deposits over the year. As of September 30, 1997, the weighted average interest
rate (excluding hedges) and weighted average maturity for securities sold under
agreements to repurchase was 5.80% and 128 days, respectively. As of September
30, 1997, subordinated debt, net of original issue discount was $29.6 million,
which includes the 9.5% senior subordinated debt raised in February, 1997 and
the 11.5% subordinated debt raised in the second quarter of 1994. In June 1997,
the Company formed TeleBanc Capital Trust I, which in turn sold shares of trust
preferred securities, Series A, for a total of $10,000,000
13
<PAGE>
TELEBANC FINANCIAL CORPORATION
in a private placement. The trust preferred securities have an annual dividend
rate of 11.0% payable semi-annually, beginning in December 1997.
Stockholders' equity increased $20.6 million, from $24.7 million at
December 31, 1996 to $45.3 million at September 30, 1997. The increase was due
to the $15.3 million issuance of 4% convertible preferred stock, $1.5 million
stock issuance in exchange for Arbor's assets, $3.0 million in net income for
the nine months ended September 30, 1997 and an unrealized gain on securities
available for sale, net of deferred taxes, of $1.3 million, which pursuant to
SFAS 115 affects the Company's stockholders' equity but does not impact the
statement of operations. This increase is partially offset by $384,000 of
preferred stock dividends.
14
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense
and related interest yields and rates for the quarters ended September 30, 1997
and 1996 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, 1997 Quarter ended September 30, 1996
----------------------------------- ------------------------------------
Interest Average Interest Average
(Dollars in thousands) Average Income/ Annualized Average Income/ Annualized
unaudited Balance Expense Yield/Cost Balance Expense Yield/Cost
------- -------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 456,059 $ 8,864 7.77% $ 302,358 $ 6,089 8.06%
Investment securities 8,244 116 5.59 7,531 115 5.99
Mortgage-backed and related
securities available for sale 212,961 4,397 8.26 218,350 4,453 8.16
Investment securities available
for sale (a) 66,609 1,111 6.67 67,263 1,109 6.59
Federal funds sold 1,566 22 5.58 659 9 5.19
Investment in FHLB 8,346 152 7.25 7,059 129 7.25
Trading account 19,663 360 7.25 -- -- --
------- ------- ---- ------- ------ ----
Total interest-earning assets 773,448 15,022 7.74% 603,220 11,904 7.90%
Non-interest-earning assets 70,621 12,817
------ ------
Total assets $ 844,069 $ 616,037
======= =======
Interest-bearing liabilities:
Savings deposits $ 147,009 $ 1,953 5.27% $ 104,033 $ 1,247 4.77%
Time deposits 315,627 4,995 6.28 275,302 4,384 6.34
FHLB advances 161,871 2,528 6.11 136,332 2,040 5.85
Other borrowings 98,924 1,493 5.91 57,204 839 5.74
Subordinated debt, net 39,519 1,153 11.67 17,250 519 12.03
Total interest-bearing 762,950 12,122 6.28% 590,121 9,029 6.06%
liabilities
Non-interest-bearing liabilities 37,256 2,283
------ -----
Total liabilities 800,206 592,404
Stockholders' equity 43,863 23,633
------ ------
Total liabilities and
stockholders' equity $ 844,069 $ 616,037
======= =======
Excess of interest-earning assets
over interest-bearing
liabilities/net interest $ 10,498 $ 2,900 1.46% $ 13,099 $ 2,875 1.84%
====== ===== ==== ====== ===== ====
income/interest rate spread
Net yield on interest earning assets 1.50% 1.91%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 101.38% 102.22%
====== ======
</TABLE>
(a) Interest income and average yields on municipal bonds are presented on a tax
equivalent basis.
15
<PAGE>
TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
Net Income. Net income for the three and nine months ended September
30, 1997 was $904,000 and $3.0 million, compared to $(62,000) and $1.3 million
for the three and nine months ended September 30, 1996, respectively. Net income
for the three months ended September 30, 1997 consisted primarily of $3.3
million of net interest income reduced by $120,000 in provision for loan losses,
$1.1 million in non-interest income, $2.3 million in non-interest expenses and
$709,000 in income tax expense. Net income for the three months ended September
30, 1996 consisted primarily of $2.8 million in net interest income offset by
$125,000 in provision for loan losses, non-interest income of $540,000, $3.5
million in non-interest expenses and a tax benefit of $220,000. General and
administrative expenses for the quarter ended September 30, 1996 included a $1.7
million accrual for a one-time assessment mandated by the Federal Deposit
Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance
Fund ("SAIF"). Net income for the nine months ended September 30, 1997 consisted
of $9.6 million of net interest income offset by $671,000 in provision for loan
losses, $2.9 million of non-interest income, $6.9 million of non-interest
expenses and $1.7 million in income tax expense. Net income for the nine months
ended September 30, 1996 consisted of net interest income of $8.5 million
reduced by $744,000 of provision for loan losses, non-interest income of $1.4
million offset by $7.3 million of non-interest expense and $528,000 in income
tax expense.
Net Interest Income. Net interest income was $3.3 million and $2.8
million for the three months ended September 30, 1997 and 1996, respectively,
reflecting an annualized interest rate spread of 1.46% and 1.84% for the three
months ended September 30, 1997 and 1996, respectively. The decline in yield is
attributable to a decrease in loan yield due to a larger held for sale portfolio
than in the same quarter last year and an increase in hedging instruments used
to reduce interest rate risk matched against the deposit portfolio resulting in
higher costs. In the quarter ending September 30, 1997, total interest earning
assets, consisting primarily of loans receivable, net and mortgage-backed and
related securities, yielded 7.74% as compared to 7.90% for the same period in
1996. The decline is attributed to an increase in the held for sale category and
an increase in non-accrual loans. In 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
loans held for sale are recognized as non-interest income when principal
repayments are received or when loans are sold. Non-accrual loans increased from
$8.9 million at September 30, 1996 to $11.1 million at September 30, 1997
causing a decline in loan interest income. Average interest-earning assets were
$773.4 million and $603.2 million for the quarters ending September 30, 1997 and
1996, respectively. Average interest bearing liabilities were $763.0 million and
$590.1 million for the quarters ending September 30, 1997 and 1996,
respectively. Interest-bearing liabilities cost 6.28% in the third quarter of
1997 as compared 6.06% in the same period in 1996. Third quarter decreases in
interest-earning assets and interest-bearing liabilities primarily reflect an
overall decrease in interest rates.
16
<PAGE>
TELEBANC FINANCIAL CORPORATION
Provision for Loan Losses. Total provision for loan losses decreased
$5,000 from $125,000 for the three months ending September 30, 1996 to $120,000
for the three months ending September 30, 1997. The provision for loan losses
reflects management's intent to provide prudent reserves for loan losses. During
the quarters ended September 30, 1997 and 1996, the Company provided additional
reserves for single-family loans acquired during each quarter. Total provision
for loan losses decreased $73,000 from $744,000 for the nine months ended
September 30, 1996 to $671,000 for the nine months ended September 30, 1997. For
the first nine months of 1997 and 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, 1997
and 1996, the Company purchased approximately $231.3 and $132.6 million in whole
loans. The total loan loss allowance at September 30, 1997 was $3.2 million
which was 0.7% of total loans outstanding. Total loss allowance as a percentage
of total non-performing assets was 17.1%. 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%.
Non-Interest Income. Total non-interest income increased by $544,000
from $540,000 for the three months ended September 30, 1996 to $1.1 million for
the three months ended September 30, 1997. During the third quarter of 1997, the
Company sold corporate bonds held for liquidity purposes for a gain of $259,000,
recognized $226,000 on prepayments in the loan held for sale portfolio, $213,000
in gains in the trading account and the remainder in loan fees and service
charges. For the three months ending September 30, 1996, non-interest income
primarily consists of $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. Total non-interest income increased by $1.5 million from
$1.4 million for the nine months ended September 30, 1996 to $2.9 million for
the nine months ended September 30, 1997. During the first nine months of 1997,
the Company reported non-interest income of $1.8 million in trading income
attributed to the second quarter securitization of cooperative mortgage loans
held for sale, the sale of mortgage-backed securities and investments held for
liquidity purposes, $636,000 on the sale of loans, and $472,000, net, in loan
fees and TCM commission income offset by a loss on its equity investment in AGT
Mortgage Services ("AGT"). AGT serviced performing and non-performing loans for
a fee. Given lower than anticipated non-performing loan levels, AGT did not
achieve adequate economies of scale to generate sufficient revenue. Accordingly,
management decided to cease operations of AGT on July 31, 1997. Non-interest
income of $1.4 million for the nine months ended September 30, 1996 primarily
reflects $263,000 in income resulting from the sale of securities, $415,000 on
the sale of loans and $758,000, net, in loan fees, service charges, and equity
investment.
Non-Interest Expenses. Non-interest expenses for the three and nine
months ended September 30, 1997 were $2.3 million and $6.9 million,
respectively. 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
17
<PAGE>
TELEBANC FINANCIAL CORPORATION
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 has resulted in lower deposit insurance premiums in the future for most
SAIF-insured institutions, including TeleBank. Total non-interest expenses,
excluding the special assessment, increased by $474,000 from $1.9 million for
the three months ended September 30, 1996 to $2.3 million for the three months
ended September 30, 1997. Excluding the special assessment, this increase is
largely the result of a $462,000 increase in general and administrative expenses
associated with a higher volume of deposit accounts, an increase in marketing
expenses, and an overall increase in compensation levels. Total non-interest
expenses, excluding the special assessment, increased by $1.2 million from $5.7
million for the nine months ended September 30, 1996 to $6.9 million for the
nine months ended September 30, 1997. The increase in general and administrative
expense for the nine months ended September 30, 1997 is the result of increases
in compensation, increases in personnel, marketing expenditures and an accrual
for bonuses as well as the inclusion of TCM's expenses.
Income Tax Expense. The effective tax rate for the nine months ended
September 30, 1997 was 33.6% compared to 28.2% for the nine months ended
September 30, 1996. The effective tax rate increased due to the $1.7 million
federal insurance assessment which was incurred in 1996. The Company carried a
deferred tax payable of $474,000 on its Consolidated Statement of Financial
Condition as of September 30, 1997.
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 provided
from operating activities, consisting primarily of interest received less
interest paid on borrowings and purchases less sales of loans held for sale,
were $(16.4) million and $15.7 million for the nine months ended September 30,
1997 and 1996, 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
$148.0 million and $65.4 million for the nine months ended September 30, 1997
and 1996, respectively. The increase in cash flows related to investing
activities for the nine months ended September 30, 1997 reflects a significant
increase in the amount of mortgage-backed securities, mortgage loans and
investment securities purchased. Net cash provided by financing activities
(primarily net activity in deposits and borrowings) were $166.2 million and
$45.8 million for the nine months ended September 30, 1997 and 1996,
respectively. The increase in net cash provided by financing activities for the
nine months ended September 30, 1997 is primarily the result of increased growth
in 1997 as compared to the same period in 1996. The total net increase in cash
and cash equivalents was $1.9 and $(3.9) million for the nine months ended
September 30, 1997 and 1996, respectively.
18
<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 September 30, 1997, the Company's liquidity ratio was
5.43%.
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. Upon completion of this offering,
the Company invested $15 million of the proceeds as capital of the Bank. In
February, 1997, the Company raised an additional $29.9 million in aggregate
through the issuance of 4.0% cumulative preferred stock and 9.5% senior
subordinated notes with warrants. Upon completion of this offering, the Company
invested $10 million of the proceeds as capital of the Bank. The subordinated
debt represents a stable, although relatively expensive, source of funds. In
addition, the Company formed TeleBanc Capital Trust I, which in turn sold shares
of trust preferred securities, Series A, for a total of $10,000,000 in a private
placement. The annual expense to service the total subordinated debt and the
trust preferred securities are $3.3 million and $1.1 million, respectively.
Annual dividends on the 4% preferred stock are $648,000.
Subject to regulatory approval, the Bank anticipates distributing
dividends of $3.9 million to the Company at year end to service the debt and
preferred stock. 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 indentures 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 $3.3 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 $5.1 million and $3.3 million as of September
30, 1997 and December 31, 1996, respectively. As of September 30, 1997, the
Company had commitments to purchase $10.2 million in loans.
19
<PAGE>
TELEBANC FINANCIAL CORPORATION
In the normal course of business, the Company makes various commitments
to extend credit and incurs contingent liabilities which are not reflected in
the consolidated statements of financial condition.
CAPITAL RESOURCES
Capital ratios at September 30, 1997 exceeded each of the three OTS
capital requirements on a fully phased-in basis. The following table sets forth
the actual and required minimum levels of regulatory capital for the Company
under applicable OTS regulations as of September 30, 1997 ($ in thousands):
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
-------------------------------------------------------------------------------------
As of September 30, 1997 AMOUNT RATIO AMOUNT RATIO AMOUNT
------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Total Capital (to risk
weighted assets) $51,228 13.37% $30,663 8.00% $20,565
Tier 1 Capital (to risk
weighted assets) $48,354 12.62% $15,331 4.00% $33,023
Tier 1 Capital (to average
assets) $48,354 5.99% $32,278 4.00% $16,076
Tangible $48,344 6.15% $11,788 1.50% $36,556
</TABLE>
20
<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
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No information to report.
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: November 14, 1997 By: /s/ Mitchell H. Caplan
----------------------------------- ---------------------------------
Mitchell H. Caplan
President
Date: November 14, 1997 By: /s/ Aileen Lopez Pugh
----------------------------------- ---------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 2,705
<INT-BEARING-DEPOSITS> 1,024
<FED-FUNDS-SOLD> 1,394
<TRADING-ASSETS> 15,467
<INVESTMENTS-HELD-FOR-SALE> 290,374
<INVESTMENTS-CARRYING> 286,435
<INVESTMENTS-MARKET> 3,939
<LOANS> 498,697
<ALLOWANCE> 3,386
<TOTAL-ASSETS> 838,533
<DEPOSITS> 445,241
<SHORT-TERM> 292,408
<LIABILITIES-OTHER> 16,465
<LONG-TERM> 29,556
9,602
0
<COMMON> 22
<OTHER-SE> 45,239
<TOTAL-LIABILITIES-AND-EQUITY> 838,533
<INTEREST-LOAN> 8,855
<INTEREST-INVEST> 0
<INTEREST-OTHER> 5,965
<INTEREST-TOTAL> 14,820
<INTEREST-DEPOSIT> 6,649
<INTEREST-EXPENSE> 4,899
<INTEREST-INCOME-NET> 3,272
<LOAN-LOSSES> 120
<SECURITIES-GAINS> 1,084
<EXPENSE-OTHER> 2,337
<INCOME-PRETAX> 1,899
<INCOME-PRE-EXTRAORDINARY> 1,899
<EXTRAORDINARY> 0
<CHANGES> 1,157
<NET-INCOME> 742
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 4.68
<LOANS-NON> 11,071
<LOANS-PAST> 6,069
<LOANS-TROUBLED> 428
<LOANS-PROBLEM> 24,251
<ALLOWANCE-OPEN> 3,356
<CHARGE-OFFS> 155
<RECOVERIES> 125
<ALLOWANCE-CLOSE> 3,386
<ALLOWANCE-DOMESTIC> 2,876
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,876
</TABLE>
