SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 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
incorporation or organization) Identification No.)
1111 NORTH HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 247-3700.
Securities registered pursuant to Section 12(b) of the Act:
(Not applicable)
Securities registered pursuant to Section 12(g) of the Act:
(Not applicable)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Based upon the closing price of the registrant's common stock as of
March 20, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $10.4 million.*
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date is:
Class: Common Stock, par value $.01 per share.
Outstanding at March 20, 1997: 2,211,961 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
PART I AND II:
Annual report to shareholders for the fiscal year ended December 31,
1996.
PART III:
Portions of the definitive proxy statement for the 1996 Annual Meeting
of Shareholders.
* Solely for purposes of this calculation, all executive officers and
directors of the registrant, Employee Stock Ownership Plan and all
shareholders reporting beneficial ownership of more than 5% of the
registrant's common stock are considered to be affiliates. This reference
to affiliate status is not necessarily a conclusive determination for other
purposes.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
TeleBanc Financial Corporation (the "Company" or "TeleBanc"), with
headquarters in Arlington, Virginia, had total assets of $647.9 million at the
end of 1996. The primary business of TeleBanc is that of TeleBank (the "Bank")
formerly known as Metropolitan Bank for Savings, F.S.B., whose deposit accounts
are insured by the Savings Association Insurance Fund ("SAIF") of the Federal
Deposit Insurance Corporation ("FDIC"). The Company was organized by its then
majority stockholder, MET Holdings Corporation ("MET Holdings"), to become, in
March 1994, the parent savings and loan holding company for the Bank. All
references to the Company include the business of the Bank. Financial and other
data as of and for all periods prior to March 1994 represent the consolidated
data of the Bank only.
The Company's revenues are derived principally from interest income on
loans, mortgage-backed and related securities, and interest and dividends on
investment securities and interest-bearing deposits. The Company's principal
expenses are interest expense on deposits and borrowings and operating expenses,
such as compensation and employee benefits. The Company's revenues also may be
offset by losses on hedging transactions and other trading account losses as
part of the Company's asset/liability management strategies. Funds for these
activities are provided by deposits, borrowings, principal repayments on
outstanding loans and mortgage-backed and related securities, and sales of
investment securities held for trading. At December 31, 1996, 81.44% of the
Company's total assets were comprised of one- to four-family mortgage loans and
mortgage-backed and related securities.
During the second quarter of 1996, the Bank through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC") funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and workouts for troubled or defaulted loans for a fee. The
Bank also provided in the second quarter of 1996, 50% of the capital commitment
for an additional 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.
On February 28, 1997, the Company consummated the sale of $29.9 million
of units in the form of convertible preferred stock, senior subordinated notes
and warrants and the purchase of the assets of Arbor Capital Partners,
Inc.("Arbor"), a registered investment advisor, funds manager and broker-dealer.
MET Holdings, TeleBanc's majority shareholder, owns a majority of Arbor.
The $29.9 million in units were sold to investment partnerships managed
by Conning & Company, General American Life Insurance Company, CIBC WG Argosy
Merchant Fund 2, LLC, The Progressive Corporation, and The Northwestern Mutual
Life Insurance Company. Representatives from the Conning partnerships and the
CIBC Merchant Fund will serve on the 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.
Also as part of 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.
1
<PAGE>
MARKET AREA AND COMPETITION
From its office in Arlington, Virginia, the Company has a customer base
in all 50 states and the District of Columbia. As a result of the Company's
direct marketing strategy for deposits and reliance upon the secondary market to
purchase mortgage loans and mortgage-backed and related securities, the Company
competes on a nationwide basis for deposits and investments in residential
mortgage products. Generally, the Company faces substantial competition for
deposits from thrifts, commercial banks, credit unions, and other institutions
providing retail investment opportunities. The ability of the Company to attract
and retain deposits depends on its ability to provide an investment opportunity
meeting the requirements of investors as to rate of return, liquidity, risk and
other factors, as well as on the perception of depositors as to the convenience
and quality of its services. Competition in residential mortgage investing comes
primarily from commercial banks, thrift institutions, and purchasers of mortgage
products in the secondary market. The Company competes for residential mortgage
investments principally on the basis of bid price and for loans on the basis of
interest rate, fees it charges, and loan types offered.
LENDING ACTIVITIES
GENERAL. The Company's lending activities consist primarily of the
purchases of whole loans and mortgage-backed and related securities rather than
the production and origination of loans, which entails greater overhead
expenses, commonly found in a traditional thrift or community bank.
LOAN PORTFOLIO COMPOSITION. The Company's net loans receivable totaled
$351.8 million at December 31, 1996, or 54.3% of total assets at that date. At
December 31, 1996, $359.6 million, or 97.6% of the total loan portfolio,
consisted of one- to four-family residential mortgage loans. Prior to 1990, the
Company originated a limited number of loans for the purchase or construction of
multifamily and commercial real estate. However, in the three years ended
December 31, 1996, as part of the Company's general operating strategy, and to
risks associated with multifamily and commercial real estate lending and
prevailing economic conditions, the Company has substantially reduced its
originations and purchases of such loans. At December 31, 1996, multifamily and
commercial and mixed use real estate loans amounted to $6.7 million, or 1.8%, of
the Company's total loan portfolio. The Company's loan portfolio also includes
lease financing at December 31, 1993 and 1992. These loans represent lease
financing assumed by the Company in 1991 upon the default of a commercial loan
to an automobile leasing company which was 33% owned by the Bank's subsidiary,
ARLO Service Corporation ("ARLO"). Currently, the Company originates consumer
loans to a very limited extent, and only as an accommodation to deposit and loan
customers. Such loans, which consist primarily of home equity lines of credit
and loans secured by savings deposits, amounted to $1.5 million, or 0.4% of the
Company's total loan portfolio at December 31, 1996.
2
<PAGE>
The following table sets forth information concerning the Company's
loan portfolio in dollar amounts and in percentages, by type of loan.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 % 1995 % 1994 %
--------- ------- -------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate............................ $ 142,211 38.59% $105,750 39.91% $ 67,449 42.54%
One- to four-family adjustable-rate....................... 217,352 58.97 148,928 56.20 79,701 50.27
Multifamily............................................... 1,516 0.41 1,286 0.49 1,114 0.70
Commercial real estate.................................... 4,017 1.09 4,553 1.72 4,385 2.77
Mixed use real estate..................................... 1,180 0.32 1,792 0.68 1,953 1.23
Land...................................................... 781 0.21 384 0.14 387 0.24
Construction.............................................. -- -- -- -- -- --
--------- ------- -------- ------ --------- -------
Total real estate loans................................... 367,057 99.59 262,693 99.14 154,989 97.75
--------- ------- -------- ------ --------- -------
Consumer and other loans:
Lease financing........................................... -- -- -- -- -- --
Home equity lines of credit and second mortgage loans..... 1,208 0.33 2,202 0.83 3,395 2.14
Other (1)................................................. 305 0.08 79 0.03 168 0.11
--------- ------- -------- ------ --------- -------
Total consumer and other loans............................ 1,513 0.41 2,281 0.86 3,563 2.25
--------- ------- -------- ------ --------- -------
Total loans............................................... $ 368,570 100.00% $264,974 100.00% $ 158,552 100.00%
========= ======= ======== ====== ========= =======
Deduct:
Non accrual/cost recovery ................................ (182) -- --
--
Deferred loan fees........................................ (42) (42) (50)
Deferred discounts on loans............................... (13,750) (14,129) (2,835)
Allowance for loan losses................................. (2,957) (2,311) (925)
------------- --------- --------
Total........................................................ (16,749) (16,482) (3,810)
------------- --------- --------
Loans receivable, net........................................ $ 351,821 $248,492 $154,742
============= ========= ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1993 % 1992 %
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate............................ $ 44,450 43.06% $ 40,659 41.88%
One- to four-family adjustable-rate....................... 50,708 49.14 47,529 48.97
Multifamily............................................... 932 0.90 945 0.97
Commercial real estate.................................... 5,912 5.73 5,937 6.12
Mixed use real estate..................................... -- -- -- --
Land...................................................... 16 0.02 46 0.05
Construction.............................................. -- -- 190 0.20
--------- ------ --------- ------
Total real estate loans................................... 102,018 98.85 95,306 98.19
--------- ------ --------- ------
Consumer and other loans:
Lease financing........................................... 17 0.02 121 0.12
Home equity lines of credit and second mortgage loans..... 1,007 0.98 1,396 1.44
Other (1)................................................. 151 0.15 242 0.25
--------- ------ --------- ------
Total consumer and other loans............................ 1,175 1.15 1,759 1.81
--------- ------ --------- ------
Total loans............................................... $ 103,193 100.00% $ 97,065 100.00%
========= ====== ========= ======
Deduct:
Non accrual/cost recovery ................................ -- --
--
Deferred loan fees........................................ (68) (96)
Deferred discounts on loans............................... (1,431) (2,705)
Allowance for loan losses................................. (835) (659)
--------- --------
Total........................................................ (2,334) (3,460)
--------- --------
Loans receivable, net........................................ $ 100,859 $93,605
========= =======
</TABLE>
(1) Includes primarily loans secured by deposit accounts in the Bank, and to a
lesser extent, unsecured consumer credit.
<PAGE>
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1996 regarding the dollar amount of loans maturing
in the Company's portfolio, including scheduled repayments of principal, based
on contractual terms to maturity. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due within
one year. The table below does not include any estimate of prepayments, which
may significantly shorten the average life of a loan and may cause the Company's
actual repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
DUE IN ONE DUE IN ONE DUE AFTER
YEAR OR LESS TO FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family fixed-rate........... $ 1,746 $ 2,285 $ 138,180 $ 142,211
One- to four-family adjustable-rate...... 615 1,769 214,968 217,352
Multifamily.............................. -- 1,152 364 1,516
Mixed use................................ -- 349 831 1,180
Commercial real estate................... 359 1,022 2,636 4,017
Land..................................... -- 400 381 781
Consumer and other loans:
Home equity lines of credit and
second mortgage loans.................. -- 251 957 1,208
Other ................................... -- 305 -- 305
Total.................................. $ 2,720 $ 7,533 $ 358,317 $ 368,570
========= ========= ========== ===========
</TABLE>
The following table sets forth as of December 31, 1996 the dollar
amount of the loans maturing subsequent to December 31, 1997 allocated between
those with fixed interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family........................................ $140,465 $ 216,737 $ 357,202
Multifamily................................................ 1,180 336 1,516
Mixed use.................................................. 1,180 -- 1,180
Commercial real estate..................................... 280 3,378 3,658
Land....................................................... 400 381 781
Consumer and other loans:
Home equity lines of credit and second
mortgage loans........................................... 592 616 1,208
Other...................................................... 305 -- 305
---------- ---------- -----------
Total.................................................... $ 144,402 $ 221,448 $ 365,850
=========== =========== ===========
</TABLE>
Scheduled contractual principal repayments of loans may not reflect the
actual life of such assets. The average life of loans may be substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Company the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the property. The average life of mortgage loans tends to
increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, decreases when
rates on existing mortgage loans are substantially higher than current mortgage
loan market rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. Consistent with the Company's
strategy of minimizing operating expenses, the Company emphasizes the purchase
of loans rather than direct
<PAGE>
originations. The Company purchased $183.1 million, $145.9 million, $85.4
million, $33.4 million, and $21.1 million of loans during the years ended
December 31, 1996, 1995, 1994, 1993, and 1992, respectively. The Company's
mortgage loan originations totaled $462,000, $2.7 million, $4.3 million, $1.8
million and $4.3 million in the years ended December 31, 1996, 1995, 1994, 1993,
and 1992 respectively.
Approximately 55.3% of the loans in the Company's portfolio are
serviced by other lenders other than AGT for which the Company pays a fee
ranging from a minimum of 25 basis points of the principal balance of the loan
per annum to a maximum of $12 per month per loan. The institutions servicing
loans for the Company, among other things, collect and remit loan payments,
maintain escrow accounts, inspect properties and administer foreclosures when
necessary.
The Company sells whole loans to institutional investors and,
accordingly, is a Federal National Mortgage Association ("FNMA") seller/servicer
and a Federal Home Loan Mortgage Corporation ("FHLMC") servicer. The bulk of
loans sold has consisted of long-term, fixed-rate mortgage loans sold to FNMA.
The Company generally sells such loans with servicing retained.
The following table shows loan origination, purchase, sale and
repayment activity of the Company during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total loans receivable at beginning of period.............................. $ 248,492 $ 154,742 $ 100,859
Loans purchased:
Real estate loans:
One- to four-family variable rate....................................... 128,171 98,065 41,684
One- to four-family fixed rate.......................................... 53,915 47,845 40,155
Multi-Family ........................................................... 1,000 -- --
Mixed-used.............................................................. -- -- 1,953
Commercial real estate.................................................. -- -- 109
Consumer and other loans................................................ -- -- 1,797
----------- ----------- -----------
Total loans purchased................................................. 183,086 145,910 85,698
Loans originated:
Real estate loans:
One- to four-family variable rate....................................... -- -- 1,764
One- to four-family fixed rate.......................................... 25 80 1,267
Commercial real estate.................................................. -- -- 1,148
Land ................................................................... 400 -- --
Home equity lines of credit and second mortgage loans...................... 37 2,644 75
----------- ----------- -----------
Total loans originated................................................ 462 2,724 4,254
----------- ----------- -----------
Total loans purchased and originated.................................. 183,548 148,634 89,952
Loans sold................................................................. 18,829 6,192 --
Loans securitized.......................................................... 8,275 2,794 --
Loan repayments............................................................ 50,221 32,755 34,343
----------- ----------- -----------
Total loans sold, securitized, and repaid............................... 77,325 41,741 34,343
Net change - TBFC ESOP Note Receivable .................................... 65 -- --
Net change in deferred discounts and loan fees............................. 379 11,286 1,386
Net transfers to REO ...................................................... 1,513 471 250
Net provision for loan losses.............................................. 646 1,386 90
Cost Recovery/Contra Assets ............................................... 41 -- --
Other loan debits/HELOC advances .......................................... 250 -- --
----------- ----------- -----------
Increase (decrease) in total loans receivable.............................. 103,329 93,750 53,883
----------- ----------- -----------
Net loans receivable at end of period...................................... $ 351,821 $ 248,492 $ 154,742
=========== =========== ===========
</TABLE>
The Company's loan purchases during 1996 increased $37.2 million from
fiscal year 1995 as the Company continued to expand the Bank's operations.
During fiscal 1996 and 1995 the Company's loan purchases involved purchases of
whole loans in the secondary market, principally
<PAGE>
from private investors. The Company's loan purchases during fiscal year 1996
included purchases of 35 pools with approximately 1,253 loans and minimal loan
originations consistent with the Company's operating strategy. The Company's
loan purchases during fiscal year 1995 included purchases of 26 pools with
approximately 1,200 loans and minimal loan originations consistent with the
Company's operating strategy. The Company's loan purchases during 1994 increased
$52.0 million from fiscal year 1993 as the Company invested the proceeds from
the initial public offering and expanded the Bank's operations.
ONE-TO-FOUR FAMILY RESIDENTIAL LENDING. The Company originates both
fixed- and adjustable-rate one- to four-family mortgage loans in accordance with
FNMA and FHLMC underwriting guidelines for terms up to 30 years. In 1996, the
Company originated $25,000 of loans secured by one- to four-family residential
properties, excluding home equity lines of credit. The Company will make one- to
four-family mortgage loans with up to a 95% loan-to-value ratio if private
mortgage insurance is obtained on the portion of the principal amount in excess
of 80% of the appraised value.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LENDING. Since 1990, the Company
has not actively pursued multifamily and commercial real estate lending or loans
secured by undeveloped land, and has substantially reduced originations of such
loans. As of December 31, 1996, multifamily, mixed use, commercial real estate
and land loans amounted to $7.5 million, or 2.03% of the Company's total loan
portfolio.
CONSUMER AND OTHER LENDING. The Company does not emphasize consumer or
other loans, but from time to time, originates such loans as an accommodation to
its customers or purchases such loans as part of larger loan packages. Such
lending primarily includes home equity lines of credit and loans secured by
savings deposits. During 1996, the Company originated $37,000 in consumer loans
and $305,000 in other loans. At December 31, 1996, consumer and other loans
totaled $305,000, or 0.08% of the Company's total loan portfolio. At December
31, 1996, total outstanding home equity lines of credit and second mortgage
loans amounted to $1.2 million, or 0.33% of the Company's total loan portfolio.
CRA LENDING ACTIVITIES. The Bank participates in various community
development programs in an effort to meet its responsibilities under the CRA. In
connection with the organization of TeleBanc in 1994, the Bank agreed with the
Office of Thrift Supervision ("OTS") to make a minimum investment of $250,000 in
a local community development corporation for the purpose of financing low and
moderate income housing. In 1995, the OTS lifted the aforementioned requirement
and the Bank has now committed to invest up to $500,000 in an investment tax
credit fund that qualifies for CRA purposes.
In 1995, the federal financial regulatory agencies promulgated a final
rule revising the regulations that implement the CRA. The revised regulations
outline special evaluations for wholesale institutions. The Bank believes that
it meets the definition of a wholesale institution and that it serves the credit
needs of the entire nation. The Bank will submit a request to the OTS to be
designated as a wholesale institution in 1997.
<PAGE>
MORTGAGE-BACKED AND RELATED SECURITIES, AND SECONDARY MARKET ACTIVITIES
The Company maintains a significant portion of mortgage-backed
securities, primarily in the form of privately insured mortgage pass-through
securities, as well as Government National Mortgage Association ("GNMA"), FNMA,
and FHLMC participation certificates, and securities issued by other nonagency
organizations. GNMA certificates are guaranteed as to principal and interest by
the full faith and credit of the United States, while FNMA and FHLMC
certificates are each guaranteed by their respective agencies. Mortgage-backed
securities generally entitle the Company to receive a pro rata portion of the
cash flows from an identified pool of mortgages. The Company has also invested
in collateralized mortgage obligations ("CMOs") which are securities issued by
special purpose entities generally collateralized by pools of mortgage-backed
securities. The cash flows from such pools are segmented and paid in accordance
with a predetermined priority to various classes of securities issued by the
entity. The Company's CMOs are senior tranches collateralized by federal agency
securities or whole loans. The primary issuers of the Company's CMOs at December
31, 1996 include Residential Mortgage Acceptance Corp. and Federal Deposit
Insurance Corporation.......In the fourth quarter of 1995, the Company
reclassified the entire held-to-maturity mortgage-backed security portfolio to
available-for-sale. The following table sets forth the activity in the Company's
mortgage-backed securities held-to-maturity portfolio during the periods
indicated.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage-backed and related securities at beginning
of period (not including available for sale)............... $ 221,005 $ 77,387
Purchases:
Pass-through securities............................. 55,110 129,462
CMOs..................................................... 5,235 --
FNMA..................................................... -- 5,767
GNMA..................................................... -- 19,243
FHLMC.................................................... -- 18,823
Acquired in exchange for loans............................. (10,465) --
Sales (1).................................................. (18,813) (896)
Repayments................................................. (39,155) (28,781)
Transfer to held for sale.................................. (212,917) --
--------- ----------
Mortgage-backed and related securities at
end of period (not including available for sale)............. $ -- $ 221,005
========== ===========
</TABLE>
The following table sets forth the activity in the Company's
mortgage-back securities available for sale portfolio during the period
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage-backed and related securities at beginning
of period ................................................. $ 234,835 $ 15,459
Purchases:
Pass-through securities............................... 109,600 13,183
CMOs..................................................... 30,053 --
FNMA..................................................... 12,102 2,634
GNMA..................................................... 30,687 --
FHLMC.................................................... 14,194 12,810
Transfer from held to maturity............................. -- 212,917
Sales (1).................................................. (185,703) (15,755)
Repayments................................................. (61,805) (6,024)
Transfer to trading........................................ -- (1,650)
Provision for losses on securities............................ (22) --
Mark to market ............................................... 826 811
FASB 122 servicing ........................................... (24) --
------------ -----------
Mortgage-backed and related securities at
end of period ............................................... $ 184,743 $ 234,835
============ ===========
</TABLE>
- ------------------------
(1) Includes mortgage-backed securities on which call options have been
exercised.
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, and current yields for the Company's portfolio of mortgage-backed
securities at December 31, 1996:
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTALS
BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED
DUE YIELD DUE YIELD DUE YIELD DUE YIELD
--------- ------ -------- ----- --------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Private issuer $ 4,116 7.01% $ 8,337 9.10% $134,157 8.81% $146,610 8.78%
Collateralized mortgage obligations -- -- 368 6.26 25,358 7.55 25,726 7.56
Agencies -- -- -- -- 12,407 8.11 12,407 8.11
--------- ------ -------- ----- --------- ------ -------- ------
$ 4,116 7.01% $ 8,705 8.98% $171,922 8.57% $184,743 8.56%
========= ===== ======== ===== ======== ====== ======== =====
</TABLE>
<PAGE>
In May 1996, the Company formed AGT, a 50% owned subsidiary which
services loans for both the Bank and third parties. The Company entered into a
loan servicing agreement with AGT on May 1, 1996 whereby AGT is paid a fee of $8
to $100 per loan per month depending upon the type of loan and whether it is
performing or non-performing. AGT also receives a fee in its capacity as Master
Servicer for the Company's subserviced portfolio and is reimbursed for any
direct collection expenses including attorney fees, repair costs, etc. During
the eight months ended December 31, 1996, the Company paid AGT a total of
$297,029 in servicing fees and reimbursed the subsidiary for $215,326 in direct
collection expenses.
Most of the loans sold by the Company are sold on a servicing retained
basis. Servicing includes collecting and remitting loan payments, holding escrow
funds for the payment of real estate taxes, contacting delinquent mortgagors, in
some cases advancing to the investor interest when the mortgage is delinquent,
supervising foreclosures in the event of unremedied defaults and generally
administering the loans. Under loan servicing contracts, the Company receives
servicing fees that are withheld from the monthly payments made to investors.
The Company's aggregate loan servicing fees amounted to $790,000, $126,000, and
$61,000 in 1996, 1995, and 1994, respectively.
The following table sets forth information regarding the Company's loan
servicing portfolio at the dates shown.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
----------- ---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans owned and serviced by
the Company....................... $ 164,745 44.7% $ 161,625 61.0% $ 57,491 36.3%
Loans owned by the Company
and serviced by others............ 203,853 55.3 103,349 39.0 101,061 63.7
----------- -------- ----------- ------ ------- ------
Total loans owned by the
Company......................... $ 368,598 100.0% $ 264,974 100.0% $ 158,552 100.0%
=========== ======= =========== ====== =========== ======
Loans serviced for others............ $ 45,856 $ 18,196 $ 9,513
</TABLE>
NON-PERFORMING, DELINQUENT AND OTHER PROBLEM ASSETS
GENERAL. It is management's policy to monitor continually its loan
portfolio to anticipate and address potential and actual delinquencies.
Valuations are periodically performed by management and an allowance for losses
on REO is established by a charge to operations if the fair value of the
property has changed.
NONPERFORMING/UNDERPERFORMING ASSETS. Nonperforming and underperforming
assets consist of loans on which interest is no longer accrued, loans which have
been restructured in order to allow the borrower the ability to maintain control
of the collateral, real estate acquired by foreclosure, real estate upon which
deeds in lieu of foreclosure have been accepted and real estate owned which has
been classified as in-substance foreclosure. Restructured loans and real estate
owned have been written down to estimated fair value, based upon estimates of
cash flow expected from the underlying collateral and appropriately discounted.
<PAGE>
The following table sets forth information with respect the Company's
non-accrual loans, REO and In Substance Foreclosures ("ISF"), and troubled debt
restructuring ("TDRs") at the dates indicated. As of December 31, 1993, the
Company no longer classifies ISF loans as REO, which resulted in a decrease in
REO of $2.2 million at that date as compared to prior periods.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family................ $ 8,979 $ 4,526 $ 1,296 $ 1,570 $ 3,074
Commercial real estate............. 1,217 261 702 902 866
Land............................... -- -- -- -- --
Construction....................... -- -- -- -- --
Home equity lines of credit and
second mortgage loans.............. 54 136 41 47 --
Other................................ -- -- 27 35 120
----------- ----------- ----------- ----------- -----------
Total................................... $ 10,250 $ 4,923 $ 2,066 $ 2,554 $ 4,060
=========== =========== =========== =========== ===========
Accruing loans which are contractu-
ally past due 90 days or more:
Real estate loans:
One- to four-family................ $ -- $ 230 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Total................................... $ -- $ 230 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Total of non-accrual and 90 days
past due loans......................... $ 10,250 $ 5,153 $ 2,066 $ 2,554 $ 4,060
=========== =========== =========== =========== ===========
REO:
One- to four-family.................. $ 1,300 $ 421 $ 98 $ 194 $ 417
Commercial real estate............... -- -- 206 665 529
Land................................. -- 582 581 582 582
----------- ----------- ----------- ----------- -----------
1,300 1,003 885 1,441 1,528
Loss allowance for REO............... (65) (213) (92) (221) (162)
------------ ------------ ----------- ----------- -----------
Total REO, net..................... 1,235 790 793 1,220 1,366
----------- ----------- ----------- ----------- -----------
Total non-performing assets, net........ $ 11,485 $ 5,943 $ 2,859 3,774 $ 5,426
=========== =========== =========== =========== ===========
Total non-performing assets, net,
as a percentage of total assets...... 1.83% 1.07% 0.7% 1.7% 2.4%
============ =========== ============ =========== ===========
Total loss allowance as a percentage
of total non-performing assets,
gross................................ 26.3% 39.53% 34.45% 26.43% 14.69%
============ =========== =========== =========== ===========
TDRs .................................. $ 435 $ 365 $ 688 $ 413 $ 454
============ =========== =========== =========== ===========
</TABLE>
During 1996, non-performing assets increased by $5.5 million or 93.3%.
This increase is attributed to the acquisition of $8.2 million of one-to-four
family mortgage loans that were either non-performing or in bankruptcy at the
time of purchase. The Company acquired these loans at a discount of $1.53
million or 18.6% in order to offset the potential risk. As of December 31, 1996,
assets that were either non-performing or in bankruptcy at the time of purchase
accounted for $2.8 million or 24.7% of total non-performing loans. The remainder
of the growth in non-performing assets is attributed to the overall growth in
the Company's loan portfolio during the year. The Company also uses a stringent
policy for non-accrual loans whereby these loans remain in non-accrual status
until all arrears have been paid and the borrower has demonstrated the ability
to make timely payments. In addition, non-performing loans that were originated
prior to the Bank's acquisition by MET Holdings totaled $1.5 million or 12.9% of
total non-performing assets as of December 31, 1996.
During the years ended December 31, 1996, 1995, 1994, and 1993,
interest income of approximately $789,000, $365,000, $113,000, and $46,000,
respectively, would have been recorded on non-accruing loans had they been
performing in accordance with their terms. No interest on non-accruing loans was
included in income during the years ended December 31, 1996, 1995, 1994,
<PAGE>
and 1993. TDRs are loans to which the Company has granted certain concessions in
light of the borrower's financial difficulty. The objective of the Company in
granting these concessions, through a modification of terms, is to maximize the
recovery of its investment. This modification of terms may include reduction in
stated rate, extension of maturity at a more favorable rate, and/or reduction of
accrued interest. TDRs with concessions totaled approximately $ 435,000,
$365,000, $688,000 and $413,000 at December 31, 1996, 1995, 1994 and 1993,
respectively. TDRs continue to be closely monitored by the Company due to their
inherent risk characteristics. Interest income recorded on TDRs in 1996, 1995,
1994 and 1993 was approximately $28,000, $45,000, $9,000 and $50,000,
respectively.
Loans which are not classified as non-accrual, past due 90 days or more
or TDRs, but where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of the borrowers to
comply with present loan repayment terms and may result in disclosure as
non-accrual, past due 90 days or more or TDRs are considered potential problem
loans. At December 31, 1996, loans still accruing interest, but identified by
management as potential problem loans aggregated $2.4 million. The majority of
these loans, identified as "special mention" loans, includes a $2.1 million pool
of single family, non-performing, performing in accordance with a bankruptcy
plan.
ALLOWANCE FOR LOAN LOSSES. In originating and purchasing loans, the
Company recognizes that credit losses will be experienced and that the risk of
loss will vary with, among other things, the type of loan, the creditworthiness
of the borrower over the term of the loan, general economic conditions, and in
the case of a secured loan, the quality of the security for the loan. It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Company's and the industry's historical loan loss
experience, evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. The Company increases its allowance
for loan losses by charging provisions for possible loan losses against the
Company's income.
The Company's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses in the loan portfolio that have
not been identified but can be expected to occur. General allowances are
established by management and approved by the Board of Directors. These
allowances are reviewed monthly based on an assessment of risk in the Company's
loan portfolio as a whole taking into consideration the composition and quality
of the portfolio, delinquency trends, current charge-off and loss experience,
the state of the real estate market and general economic conditions. Additional
provisions for losses on loans may be made in order to bring the allowance to a
level deemed adequate. Additionally, the Company's internal audit consultants
have established an independent internal loan review program which is followed
by bank personnel.
In general, the Company adds provisions to its allowance for loan
losses in amounts equal to 0.20% of on-to-four family mortgages, 0.50% for home
equity lines of credit and second trusts, 1.0% of multifamily and mixed use real
estate loans and 2.0% of commercial and land loans. During 1996, the Company
recorded a $624,000 net increase in the allowance for loan losses in relation to
the $103.4 million increase in the loan portfolio. Of this increase in the
allowance for loan losses, 84.4% of the amount related to the general valuation
allowance ("GVA").
During 1996, the Company purchased $53.2 million of one-to-four family
mortgage loans which had additional credit enhancement available to offset any
potential losses. Two pools of loans totaling $33.5 million had a credit reserve
equal to 2.3% of the unpaid principal balance at the time of purchase available
to offset any losses. One pool totaling $11.7 million has an indemnification
whereby the seller must repurchase any loan that becomes more than four payments
past due at any time during the life of the loan. The final pool of loans
totaling $8.0 million had a credit reserve equal to approximately 10% of the
unpaid principal balance at the time of acquisition. Since the available credit
enhancement associated with these loans exceeds the expected potential losses,
no additional reserves were recorded for them during the year.
<PAGE>
Information regarding movements in the provision for loan losses during
the five year period ending December 31, 1996 is incorporated herein by
reference to the section titled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Earnings Performance --
Provision for Loan and Security Losses" included in this Form 10-K.
The following table sets forth at December 31, 1996 the aggregate
carrying value of the Company's assets classified as substandard, doubtful,
loss, and special mention according to type.
<TABLE>
<CAPTION>
TOTAL SPECIAL
SUBSTANDARD DOUBTFUL LOSS CLASSIFIED MENTION
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans:
One- to four-family.................. $ 8,979 $ -- $ 439 $ 9,418 $ 2,138
Commercial real estate............... 1,217 -- 135 1,352 251
Land................................. -- -- -- -- --
Home equity lines of credit and
second mortgage.................... 54 -- 5 59 --
----------- -------- ---------- ----------- ---------
Total loans............................. $ 10,250 $ -- $ 579 $ 10,829 $ 2,389
=========== ======== ========== =========== ==========
REO:
One- to four-family.................. $ 1,235 $ -- $ 65 $ 1,300 $ --
----------- -------- ---------- ----------- ---------
Total REO............................... 1,235 -- 65 1,300 --
----------- -------- ---------- ----------- ---------
Total................................... $ 11,485 $ -- $ 644 $ 12,129 $ 2,389
=========== ======== ========== =========== ==========
</TABLE>
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS, and other state and federal regulators.
Although the Company believes it has established its existing allowances for
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Company's loan portfolio, will
not request the Company to increase its allowance for losses, thereby negatively
affecting the Company's financial condition and earnings.
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any other category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------------ ------------------------- -------------------------- -------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- -------------- --------- ------------- ---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family..... $ 2,529 97.55% $ 1,939 96.11% $ 603 92.81% $ 468 92.20%
Multifamily............. 15 0.41 13 0.49 11 0.70 9 0.90
Commercial real estate.. 373 1.09 281 1.72 273 2.77 329 5.73
Mixed use............... 12 0.32 18 0.68 -- 1.23 -- --
Land.................... 8 0.21 8 0.14 8 0.24 1 0.02
Construction............ -- -- -- -- -- -- -- --
Lease financing........... -- -- -- -- -- -- 3 0.02
Home equity lines of
credit and second
mortgage loans.......... 20 0.42 28 0.83 16 2.14 5 0.98
Other consumer............ -- -- 24 0.03 14 0.11 20 0.15
--------- ------- --------- -------- -------- ------- --------- -------
Total allowance for
loan losses............. $ 2,957 100.00% $ 2,311 100.00% $ 925 100.00% $ 835 100.00%
========= ======== ========= ======== ======== ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1992
----------------------------
PERCENT OF
LOANS IN EACH
CATEGORY TO
AMOUNT TOTAL LOANS
--------- ----------------
<S> <C> <C>
Real estate loans:
One- to four-family..... $ 404 90.85%
Multifamily............. 8 0.97
Commercial real estate.. 214 6.12
Mixed use............... -- --
Land.................... 2 0.05
Construction............ -- 0.20
Lease financing........... 18 0.12
Home equity lines of
credit and second
mortgage loans.......... 12 1.44
Other consumer............ 1 0.25
--------- --------
Total allowance for
loan losses............. $ 659 100.00%
========= ========
</TABLE>
<PAGE>
Included in the above amounts are specific reserves totaling $579,000,
$392,000, $201,000, $240,000, and $260,000, at December 31, 1996, 1995, 1994,
1993, and 1992, respectively, related to loans classified as loss.
REO. REO is initially recorded at estimated fair value less selling
costs. Fair value is defined as the estimated amount in cash or cash-equivalent
value of other consideration that a real estate parcel would yield in a current
sale between a willing buyer and a willing seller. Subsequent to foreclosure,
REO is periodically evaluated by management and an allowance for loss is
established if the estimated fair value of the property, less estimated costs to
sell, declines.
As of December 31, 1996, all of the Company's REO consisted of
one-to-four family real estate.
INVESTMENT SECURITIES
The following table sets forth the cost basis and fair value of the
Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995 1994
------------------------- ----------------------- -------------------------
COST FAIR COST FAIR COST FAIR
BASIS VALUE BASIS VALUE BASIS VALUE
------- ------- ------- ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Held to maturity:
Corporate debt................. $ -- $ -- $ -- $ -- $ 1,896 $ 1,901
Margin Account ................. 18 18 -- -- -- --
Other investments.............. 1 1 -- -- -- --
Available for sale:
Municipal bonds................ 7,325 7,507 12,360 12,712 10,460 9,722
Corporate debt................. 22,525 23,569 22,850 23,987 823 826
Obligations of U.S.
government agencies.......... 31,139 31,272 3,359 3,359 -- --
Certificate of Deposits ....... 499 499 -- -- -- --
------- ------- ------- ------- ------- ---------
Subtotal............................ 61,505 62,866 38,569 40,058 13,179 12,449
Securities purchased under
agreements to resell........... 1,730 1,730 -- -- 1,181 1,181
Equity securities:
Stock in FHLB Atlanta.......... 7,300 7,300 5,275 5,275 4,900 4,900
Stock in FHLMC ................ 5,000 4,988 -- -- -- --
Stock in FNMA ................. 8,000 8,232 -- -- -- --
Other Corporate Stock ......... 1,011 1,011 -- -- -- --
--------- --------- --------- -------- -------- ---------
Total.......................... $ 84,546 $ 86,127 $ 43,844 $ 45,333 $ 19,260 $ 18,530
========= ========= ========= ======== ======== =========
</TABLE>
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, and current yields for the Company's investment portfolio of debt
securities at December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
------------------- ------------------- --------------------- -----------------
BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED BALANCE WEIGHTED
DUE YIELD DUE YIELD DUE YIELD DUE YIELD
------------------ -------- --------- --------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal bonds (a) $ -- -- $ 568 7.42% $ 3,587 7.60% $ 3,351 11.30%
Corporate debt -- -- 1,990 7.17 7,497 6.95 14,083 7.34
Certificates of Deposit -- -- 499 6.92 -- -- -- --
Obligations of U.S. Government Agencies -- -- 989 7.17 -- -- 30,283 6.09
Securities purchased under agreements to resell 1,748 6.19 -- -- -- -- -- --
Equities -- -- -- -- -- -- 14,231 7.31
--------- --------- ------ --------- --------- ------- -------- --------
$ 1,748 6.19% $ 4,046 7.17% $ 11,084 7.16% $61,948 6.94%
========= ======== ======= ========= ========= ======= ======= ========
</TABLE>
TOTALS
----------------------
BALANCE WEIGHTED
DUE YIELD
-------- --------
(DOLLARS IN THOUSANDS)
Municipal bonds (a) $ 7,506 6.01%
Corporate debt 23,570 7.20
Certificates of Deposit 499 6.92
Obligations of U.S. Government Agencies 31,272 6.12
Securities purchased under agreements to resell 1,748 6.25
Equities 14,231 7.55
-------- --------
$ 78,826 6.70%
======== ========
(a) Yields on tax exempt obligations are computed on a tax equivalent basis.
<PAGE>
Deposits and Other Sources of Funds
In 1996, the Bank introduced an Automatic Teller Machine Card ("ATM") associated
with its money market accounts.
Deposits in the Bank as of December 31, 1996 were represented by the
various programs described below:
<TABLE>
<CAPTION>
PERCENT
OF TOTAL
TERM CATEGORY BALANCE DEPOSITS
---- -------- ------- --------
(In thousands)
<S> <C> <C> <C>
None Checking Accounts $ 309 0.08%
None Money Market Accounts 109,835 28.13%
None Passbook Accounts 1,758 0.45%
Certificates of Deposit
3-month Fixed-Term, Fixed-Rate 1,210 0.31%
6-month Fixed-Term, Fixed-Rate 6,408 1.64%
12-month Fixed-Term, Fixed-Rate 39,402 10.09%
18-month Fixed-Term, Fixed-Rate 7,181 1.84%
2-year Fixed-Term, Fixed-Rate 41,443 10.61%
30-month Fixed-Term, Fixed-Rate 46,294 11.86%
3-year Fixed-Term, Fixed-Rate 20,985 5.37%
4-year Fixed-Term, Fixed-Rate 717 0.18%
5-year Fixed-Term, Fixed-Rate 107,289 27.48%
7-year Fixed-Term, Fixed-Rate 4,658 1.19%
10-year Fixed-Term, Fixed-Rate 2,997 0.77%
----------- -----
Total $ 390,486 100.00%
=========== =======
</TABLE>
<PAGE>
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Company between the dates
indicated:
<TABLE>
<CAPTION>
BALANCE BALANCE
AT PERCENTAGE AT PERCENTAGE
DECEMBER 31, OF INCREASE DECEMBER 31, OF INCREASE
ACCOUNTS 1996 DEPOSIT (DECREASE) 1995 DEPOSITS (DECREASE)
-------- ---- ------- ---------- ---- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook.............................. $ 1,758 .45% $ (262) $ 2,020 0.66% $ (680)
Money market.......................... 109,835 28.13 34,103 75,732 24.71 65,342
Checking.............................. 309 .08 (1,439) 1,748 0.57 1,449
Certificates of deposit............... 278,584 71.34 51,584 227,000 74.06 27,978
------- ----- ------ --------- -------- ---------
Total............................ $ 390,486 100.00% $ 83,986 $306,500 100.00% $ 94,089
======= ====== ====== ======== ====== =========
</TABLE>
BALANCE
AT PERCENTAGE
DECEMBER 31, OF
ACCOUNTS 1994 DEPOSITS
-------- ---- --------
(Dollars in thousands)
Passbook.............................. $ 2,700 1.27%
Money market.......................... 10,390 4.89
Checking.............................. 299 0.14
Certificates of deposit............... 199,022 93.70
--------- -------
Total............................ $ 212,411 100.00%
========= ======
<PAGE>
The following table sets forth certificates of deposit and money market
accounts in the Company classified by rates at the dates indicated.
AT DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS)
0 - 1.99%..................... $ 5,235 $ -- $ --
2 - 3.99%..................... 148 -- 1,844
4 - 5.99%..................... 210,481 141,750 65,533
6 - 7.99%..................... 170,056 158,375 106,915
8 - 9.99%..................... 1,709 1,817 22,549
10 - 11.99%................... 790 790 2,181
----------- ----------- -----------
388,419 $ 302,732 $ 199,022
=========== =========== ===========
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 1996.
CERTIFICATES
OF DEPOSIT
(IN THOUSANDS)
Three months or less........................................ $ 2,144
Three through six months.................................... 6,901
Six through twelve months................................... 4,791
Over twelve months.......................................... 12,366
----------
Total....................................................... $ 26,202
==========
BORROWINGS
Although deposits are the Company's primary source of funds, the Company
also utilizes borrowings from the FHLB of Atlanta and securities sold under
agreements to repurchase as alternative funding sources As a member of the FHLB
System, which, among other things, functions in a reserve credit capacity for
savings institutions, the Company is required to own capital stock in the FHLB
of Atlanta and is authorized to apply for advances on the security of such stock
and certain of its home mortgages and other assets (principally securities which
are obligations of, or guaranteed by, the United States of America) provided
certain creditworthiness standards have been met. See "Regulation."
As of December 31, 1996 the Company had outstanding advances of $144.8
million from the FHLB of Atlanta at interest rates ranging from 5.33% to 6.95%
and at a weighted average rate of 5.94%.
<PAGE>
The Company also borrows funds by entering into sales of securities
under agreements to repurchase the same securities with nationally recognized
investment banking firms. The securities are held in custody by the investment
banking firms with which the Company enters into the repurchase agreement.
Reverse repurchase agreements are treated as borrowings by the Company and are
secured by designated fixed and variable rate securities. The proceeds of these
transactions are used to meet cash flow or asset/liability matching needs of the
Company. The following table sets forth certain information regarding reverse
repurchase agreements for the dates indicated:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Weighted average balance during the year...................... $ 68,920 $ 97,692 $ 45,759
Weighted average interest rate during the year................ 5.77% 6.29% 4.92%
Maximum month-end balance during the year..................... $ 97,416 $ 119,507 $ 79,613
Mortgage-backed securities underlying
the agreements as of the end of the year:
Carrying value, including accrued interest................. 22,856 103,590 93,608
Estimated market value........................................ 22,804 103,891 89,224
Agencies
Carrying value, including accrued interest................. 38,562 10,499 30,794
Estimated market value..................................... 38,621 10,594 29,441
</TABLE>
<PAGE>
The following table sets forth information regarding the weighted
average interest rates and the highest and average month end balances of the
Company's borrowings.
<TABLE>
<CAPTION>
AT OR AT OR
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------------------------------------- -------------------------------------------------------
WEIGHTED MAXIMUM WEIGHTED AVERAGE WEIGHTED MAXIMUM WEIGHTED AVERAGE
ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED
CATEGORY BALANCE RATE MONTH-END BALANCE AVERAGE RATE BALANCE RATE MONTH-END BALANCE AVERAGE RATE
- -------- -------- -------- --------- --------- ------------ -------- -------- --------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advances from the FHLB
of Atlanta...........$144,800 5.94% $154,500 $120,633 5.91% $ 105,500 5.87% $ 106,800 $104,110 6.06%
Securities sold under
agreement to
repurchase $ 57,581 5.69% $ 97,416 68,920 5.77% $ 93,905 6.06% $ 119,507 $ 97,692 6.29%
</TABLE>
AT OR
FOR THE YEAR ENDED
DECEMBER 31, 1994
-------------------------------------------------------
WEIGHTED MAXIMUM WEIGHTED AVERAGE
ENDING AVERAGE AMOUNT AT AVERAGE WEIGHTED
CATEGORY BALANCE RATE MONTH-END BALANCE AVERAGE RATE
- -------- ------- -------- ---------- --------- ------------
Advances from the FHLB
of Atlanta........... $96,000 5.36% $ 112,000 $82,358 4.64%
Securities sold under
agreement to
repurchase $79,613 5.81% $ 79,613 $45,759 4.92%
<PAGE>
PROPERTIES
During 1996, the Bank operated from the Company's headquarters located
at 1111 North Highland Street, Arlington, Virginia 22201 and from an office that
it subleases from Arbor Capital Partners, Inc., a subsidiary of MET Holdings
("Arbor Capital"), in New York for approximately $58,000 per year.
SUBSIDIARIES
During the second quarter of 1996, the Bank through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC") funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and workouts for troubled or defaulted loans for a fee. The
Bank also provided in the second quarter of 1996, 50% of the capital commitment
for an additional 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.
EMPLOYEES
At December 31, 1996, the Company had approximately 40 full-time
employees. Management considers its relations with its employees to be
excellent. The Bank's employees are not represented by any collective bargaining
group.
REGULATION
GENERAL
The Company, as a savings and loan holding company, and the Bank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator. The
Bank also is subject to regulation, supervision and examination by the Federal
Deposit Insurance Corporation (the "FDIC") and as to certain matters by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
See "Management's Discussion and Analysis" and "Notes to Consolidated Financial
Statements" as to the impact of certain laws, rules and regulations on the
operations of the Company and the Bank. Set forth below is a description of
certain recent regulatory developments.
In September 1996, legislation (the "1996 legislation") was enacted to
address the undercapitalization of the SAIF, of which the Bank is a member. As a
result of the 1996 legislation, the FDIC imposed a one-time special assessment
of 0.657% on deposits insured by the SAIF as of March 31, 1995. The Bank
incurred a one-time charge of $1.7 million (before taxes) to pay for the special
assessment based upon its level of SAIF deposits as of March 31, 1995. After the
SAIF was deemed to be recapitalized, the Bank's deposit insurance premiums to
the SAIF were reduced as of September 30, 1996. The Bank expects that its future
deposit insurance premiums will continue to be lower than the premiums it paid
prior to the recapitalization.
The 1996 legislation also contemplates the merger of the SAIF with the
Bank Insurance Fund (the "BIF"), which generally insures deposits in national
and state-chartered banks. The combined deposit insurance fund, which will be
formed no earlier than January 1, 1999, will insure deposits at all FDIC insured
depository institutions. As a condition to the combined insurance fund, however,
no insured depository institution can be chartered as a savings association. The
Secretary of the Treasury is required to report to the Congress no later than
March 31, 1997 with respect to the development of a common charter for all
insured depository institutions. If legislation with respect to the development
of a common charter is enacted, the Bank may be required to convert its federal
<PAGE>
charter to either a new federal type of bank charter or state depository
institution charter. Future legislation also may result in the Company becoming
g regulated as a bank holding company by the Federal Reserve Board rather than a
savings and loan holding company regulated by the OTS. Regulation by the Federal
Reserve Board could subject the Company to capital requirements that are not
currently applicable to the Company as a holding company under OTS regulation
and may result in 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. The Company and the Bank are unable to
predict whether such legislation will be enacted.
The 1996 legislation also contained several provision that could impact
operations of the Bank, including augmenting the Bank's commercial lending
authority by 10% of assets, provided that any loans in excess of 10% are used
for small business loans. Furthermore, the qualified thrift lender test that the
Bank must comply with was liberalized to provide that small business, credit
card and student loans can be included without any limit, and that the Bank can
qualify as a qualified thrift lender by meeting either the test set forth in the
Home Owners' Loan Act or under the definition of a domestic building and loan
association as defined under the Internal Revenue Code of 1086, as amended (the
"IRC").
Separate legislation was enacted in 1996, and is effective for tax
years beginning after December 31, 1995, repealing the thrift bad debt
provisions of Section 593 of the IRC under which qualified savings institutions
calculated their bad debt deduction for federal income tax purposes. As a
result, the Bank will no longer be able to use the "reserve method" for
computing its bad debt deduction and will be allowed to deduct only those bad
debts actually incurred during the taxable year. The bad debt provisions of this
legislation also require thrifts to recapture and pay tax on bad debt reserves
accumulated since 1987 over a six year period, beginning with a thrift's first
taxable year beginning after December 31, 1995. This recapture is suspended for
up to two years, however, if the thrift meets a residential loan origination
test. The legislation exempted from recapture $(264,000) in pre-1988 bad debt
deductions taken by the Bank and will defer up to two years the recapture of an
additional $549,000, subject to the Bank's compliance with the new home mortgage
residential loan origination test.
During 1996, the OTS continued its comprehensive review of its
regulations to eliminate duplicative, unduly burdensome and unnecessary
regulations concerning lending and investments, corporate governance,
subsidiaries and equity investments, conflicts of interest and usurpation of
corporate opportunity. The OTS's revised lending and investments regulation
generally imposes general safety and soundness standards, and also provides that
commercial loans made by a service corporation of a savings association will be
exempted from an institution's overall 10% limit on commercial loans. Such
regulations now allow an institution to use its own cost-of-funds index in
structuring adjustable rate mortgages, and eliminate percentage of assets
limitations on credit card lending.
The OTS's revised subsidiaries and equity investment regulation
consolidated all OTS regulations that apply to various types of subsidiaries of
federal associations and updates the list of pre-approved service corporation
activities with additional activities that the OTS has deemed to be reasonable
related to the activities of federal savings institutions. The revised corporate
governance regulation is intended to prove greater flexibility with respect to
corporate governance of federal savings institutions, such as the Bank.
The OTS also converted its policy statement on conflicts of interest to
a regulation that is intended to be based upon common law principles of "duty of
loyalty" and "duty of care." The new conflicts regulation provides that
directors, officers, employees, person having the power to control the
management or policies of savings associations, and other persons who owe
fiduciary duties to savings associations, and other persons who owe fiduciary
duties to savings institutions will be prohibited from advance their own
personal or business interests, or those of others, at the expense of the
institutions they serve, The "appearance of a conflict of interest" standard was
removed from the scope of the revised rule. The OTS also clarified that "persons
having the power to control
<PAGE>
management or policies of savings associations" includes holding companies such
as the Company. The OTS corporate opportunity regulations and policy statements
also were eliminated and replaced with a standard similar to common law
standards governing usurpation of corporate opportunity. Significantly under the
revised regulation, transfers of a line of business within a holding company
structure will not be deemed to be a usurpation of corporate opportunity if an
institution receives fair market consideration for a line of business
transferred to its holding company or its affiliates. In such transactions, the
OTS will generally defer to decisions made by a holding company, subject to
compliance with Sections 23A or 23B of the Federal Reserve Act and general
safety and soundness principles.
ITEM 2. PROPERTIES
Reference is made to the information set forth under the caption
"Properties" under Item 1. Business of this Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of TeleBanc stockholders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information as to the principal market on which the Company's common
stock is traded, the Company's dividend policy and the high and low bid
quotations or sales prices, as applicable, for each calendar quarter since the
Company's initial public offering is incorporated herein by reference to the
section titled "Company Information" in the 1996 Annual Report to Stockholders.
The approximate number of holders of record of the Company's common stock at
December 31, 1996 was less than 200.
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the five years ended December
31, 1996 included in the section titled "Selected Financial Data" in the 1996
Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the section so titled in the 1996 Annual Report to
Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Certain of the information required by this Item is incorporated by
reference to the sections titled "Consolidated Statements of Financial
Condition," "Consolidated Statements of Operations," "Consolidated Statements of
Stockholders' Equity," "Consolidated Statements of Cash Flows" and
<PAGE>
"Notes to Consolidated Financial Statements" in the 1996 Annual Report to
Stockholders. The independent auditors' report of Arthur Andersen LLP with
respect to the Company's consolidated statements of financial condition at
December 31, 1996 and 1995 and the consolidated statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
1996 and 1995 is filed as Exhibit 99 and is incorporated herein by reference.
The independent auditors' report of KPMG Peat Marwick LLP with respect to the
Company's consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1994 is filed as Exhibit 99 and
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9 is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G of the Form 10-K, such information
shall be filed as an amendment no later than 120 days from December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G of the Form 10-K, such
information shall be filed as an amendment no later than 120 days from December
31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of registrant and
its subsidiary and report of independent auditors are included in Item 8 hereof.
Report of Independent Auditors.
Consolidated Statements of Financial Condition - December 31, 1996 and
1995.
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994.
<PAGE>
Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) The following exhibits are either filed with this Report or are
incorporated herein by reference:
3.1(a) Amended and Restated Certificate of Incorporation of the Company.*
3.1(b) Certificate of Designation***
3.2 Bylaws of the Company.
4.1 Specimen certificate of shares of Common Stock.**
10.1 1994 Stock Option Plan.**
10.2 Tax Allocation Agreement, dated April 7, 1994, between the Bank and
the Company.*
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among the
Company and the Purchasers identified therein. ***
10.4 Amended and Restated Acquisition Agreement, dated as of February 19,
1997, among the Company, Arbor Capital Partners, Inc., MET Holdings,
Inc., and William M. Daugherty. ***
11 Statement regarding computation of per share earnings.
13 1996 Annual Report to Stockholders, portions of which have been
incorporated by reference into this Form 10-K.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP and KPMG Peat Marwick LLP.
(b) The Registrant did not file any Current Reports on Form 8-K during
the fourth quarter of its fiscal year ended December 31, 1996.
(c) Exhibits to this Form 10-K are attached.
(d) Not applicable.
99.1 Independent Auditor's report of Arthur Andersen LLP.
99.2 Independent Auditor's report of KPMG Peat Marwick.
- ------------------
* Incorporated by reference to pre-effective Amendment No. 1 to the
Company's registration statement on Form S-1 (File No. 33-76930) filed
with the SEC on May 3, 1994.
** Incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.
*** Incorporated by reference from the Company's Current Report on Form
8-K, as filed with the SEC on March 17, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 as of the 30th day of
March, 1996.
TELEBANC FINANCIAL CORPORATION
Registrant
By: /s/ Mitchell H. Caplan
--------------------------
Mitchell H. Caplan
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 30, 1996.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ David A. Smilow Chairman of the Board & CEO
- ----------------------------- (principal executive officer)
David A. Smilow
/s/ Mitchell H. Caplan President, Vice Chairman
- ----------------------------- and Director
Mitchell H. Caplan
/s/ Aileen Lopez Pugh Executive Vice President and
- ----------------------------- Chief Financial Officer/Treasurer
Aileen Lopez Pugh (principal financial and accounting officer)
/s/ David DeCamp Director
- -----------------------------
David DeCamp
/s/ Arlen W. Gelbard Director
- -----------------------------
Arlen W. Gelbard
/s/ Dean C. Kehler Director
- -----------------------------
Dean C. Kehler
/s/ Steven F. Piaker Director
- -----------------------------
Steven F. Piaker
/s/ Mark Rollinson Director
- -----------------------------
Mark Rollinson
</TABLE>
<PAGE>
INDEX TO FINANCIALS
Report of Independent Auditors.
Consolidated Statements of Financial Condition - December 31, 1996 and
1995.
Consolidated Statements of Operations - Years Ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE
----------- ------- -------------
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation of the Company.*
3.1(b) Certificate of Designation***
3.2 Bylaws of the Company.
4.1 Specimen certificate of shares of Common Stock.**
10.1 1994 Stock Option Plan.**
10.2 Tax Allocation Agreement, dated April 7, 1994, between the Bank and
the Company.*
10.3 Unit Purchase Agreement, dated as of February 19, 1997, among the
Company and the Purchasers identified therein. ***
10.4 Amended and Restated Acquisition Agreement, dated as of February 19,
1997, among the Company, Arbor Capital Partners, Inc., MET Holdings,
Inc., and William M. Daugherty. ***
11 Statement regarding computation of per share earnings.
13 1996 Annual Report to Stockholders, portions of which have been
incorporated by reference into this Form 10-K.
21 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP and KPMG Peat Marwick LLP.
(b) The Registrant did not file any Current Reports on Form 8-K during
the fourth quarter of its fiscal year ended December 31, 1996.
(c) Exhibits to this Form 10-K are attached.
(d) Not applicable.
99.1 Independent Auditor's report of Arthur Andersen LLP.
99.2 Independent Auditor's report of KPMG Peat Marwick.
- ------------------
* Incorporated by reference to pre-effective Amendment No. 1 to the
Company's registration statement on Form S-1 (File No. 33-76930) filed
with the SEC on May 3, 1994.
** Incorporated by reference to the Company's registration statement on
Form S-1 (File No. 33-76930) filed with the SEC on March 25, 1994.
*** Incorporated by reference from the Company's Current Report on Form
8-K, as filed with the SEC on March 17, 1997.
</TABLE>
BYLAWS
OF
TELEBANC FINANCIAL CORPORATION
1. OFFICES.
1.1. REGISTERED OFFICE.
The initial registered office of the Corporation shall be in
Wilmington, Delaware, and the initial registered agent in charge thereof shall
be Corporation Service Company.
1.2. OTHER OFFICES.
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors may from
time to time determine or as may be necessary or useful in connection with the
business of the Corporation.
2. MEETINGS OF STOCKHOLDERS.
2.1. PLACE OF MEETINGS.
All meetings of the stockholders shall be held at such place as may
be fixed from time to time by the Board of Directors, the Chairman of the Board,
or the President and stated in the notice of meeting or in a duly executed
waiver of notice thereof.
2.2. ANNUAL MEETINGS.
The Corporation shall hold annual meetings of stockholders on the
first Wednesday in May at 11 a.m. or at such other date and time as shall be
designated from time to time by the Board of Directors, the Chairman of the
Board or the President at which stockholders shall elect directors and transact
such other business as may properly be brought before the meeting.
2.3. SPECIAL MEETINGS.
Special meetings of the stockholders for any purpose, unless
otherwise prescribed by statute, may be called only as provided in the
Corporation's Certificate of Incorporation, as amended from time to time (the
"Certificate of Incorporation"). Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
<PAGE>
2.4. NOTICE OF MEETINGS.
Notice of any meeting of stockholders, stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given to each stockholder entitled to vote at such meeting not less
than 10 days nor more than 60 days before the date of the meeting (except to the
extent that such notice is waived or is not required as provided in the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law")). Such notice shall be given in accordance with, and shall be deemed
effective as set forth in, Section 222 (or any successor section) of the
Delaware General Corporation Law.
2.5. WAIVERS OF NOTICE.
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice (a) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (b) of consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the stockholder objects to considering the matter at
the beginning of the meeting.
2.6. BUSINESS AT ANNUAL MEETING.
At an annual meeting of the stockholders, only such business shall
be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors or (c) otherwise properly brought
before the meeting by a stockholder.
For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary. To be timely, a stockholder's notice must be received at the
principal executive offices of the Corporation no later than the date designated
for receipt of stockholders' proposals in a prior public disclosure made by the
Corporation. If there has been no such prior public disclosure, then to be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the annual meeting; provided, however, that in the
event that less than 70 days' notice of the date of the annual meeting is given
to stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so
<PAGE>
received not later than the close of business on the 10th day following the day
on which such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, (d) any material
interest of the stockholder in such business and (e) the same information
required by clauses (b), (c) and (d) above with respect to any other stockholder
that, to the knowledge of the stockholder proposing such business, supports such
proposal. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 2.6. The Chairman of the Board shall, if the facts
warrant, determine and declare to the annual meeting that a matter of business
was not properly brought before the meeting in accordance with the provisions of
this Section 2.6, and if the Chairman of the Board should so determine, the
Chairman of the Board shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
2.7. LIST OF STOCKHOLDERS.
After the record date for a meeting of stockholders has been fixed,
at least 10 days before such meeting, the officer who has charge of the stock
ledger of the Corporation shall make a list of all stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place in the city where the meeting is
to be held, which place is to be specified in the notice of the meeting, or at
the place where the meeting is to be held. Such list also shall, for the
duration of the meeting, be produced and kept open to the examination of any
stockholder who is present at the time and place of the meeting.
2.8. STOCK LEDGER.
The stock ledger of the Corporation shall be the only evidence as
to who are the stockholders entitled to examine the list required by Section 2.7
above or to vote in person or by proxy at any meeting of stockholders.
<PAGE>
2.9. QUORUM AT MEETINGS.
Stockholders may take action on a matter at a meeting only if a
quorum exists with respect to that matter. Except as otherwise provided by
statute or by the Certificate of Incorporation, the holders of a majority of the
stock issued and outstanding and entitled to vote at the meeting, and who are
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business. Once a share is
represented for any purpose at a meeting (other than solely to object (a) to
holding the meeting or transacting business at the meeting or (b) to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice), it is deemed present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting.
The holders of a majority of the voting shares represented at a meeting, whether
or not a quorum is present, may adjourn such meeting from time to time. At such
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.
2.10. VOTING AND PROXIES.
Unless otherwise provided in the Delaware General Corporation Law
or in the Certificate of Incorporation, and subject to the other provisions of
these Bylaws, each stockholder shall be entitled to one vote on each matter, in
person or by proxy, for each share of the Corporation's capital stock that has
voting power and that is held by such stockholder and such number of votes,
including multiple or fractional votes, as may be provided by resolution of the
Board of Directors for each share of serial preferred stock entitled to vote
thereat held by such stockholder. Proxies solicited on behalf of the Board of
Directors shall be voted as directed by the stockholder or, in the absence of
such direction, as determined by a majority of the Board of Directors. No proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed appointment of proxy shall be
irrevocable if the appointment form states that it is irrevocable and if, and
only as long as, it is coupled with an interest sufficient in law to support an
irrevocable power.
2.11. REQUIRED VOTE.
If a quorum exists, any matter brought before any meeting of
stockholders (other than the election of directors) shall be decided by the
affirmative vote of the majority of the votes cast on the matter, unless the
Certificate of Incorporation or the Delaware General Corporation Law or these
Bylaws requires a greater number
<PAGE>
of affirmative votes (in which case such different requirement shall apply).
Directors shall be elected by a plurality of the votes cast by the shares
entitled to vote in the election (provided a quorum exists), and the election of
directors need not be by written ballot. The Board of Directors, in its
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
2.12. ACTION WITHOUT A MEETING.
Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders, and may not be effected by any consent in writing by such
stockholders, unless such written consent is unanimous, and the writing or
writings are delivered to the Corporation for inclusion in the Minute Book of
the Corporation.
2.13. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS.
If shares or other securities having voting power stand of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the secretary of the Corporation is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their acts with respect
to voting shall have the following effect: (a) if only one votes, his or her act
binds all; (b) if more than one vote, the act of the majority so voting binds
all; (c) if more than one vote, but the vote is evenly split on any particular
matter, each fraction may vote the securities in question proportionally, or any
person voting the shares, or a beneficiary, if any, may apply to the Court of
Chancery of the State of Delaware or such other court as may have jurisdiction
to appoint an additional person to act with the persons so voting the shares,
which shall then be voted as determined by a majority of such persons and the
person appointed by the Court. If the instrument so filed shows that any such
tenancy is held in unequal interests, a majority or even-split for the purposes
of this Section 2.13 shall be a majority or even-split in interest.
2.14. VOTING OF SHARES BY CERTAIN HOLDERS.
Shares standing in the name of another corporation may be voted by
any officer, agent or proxy as the bylaws of such corporation may prescribe, or
in the absence of such provision, as the board of directors of such corporation
may determine. Shares held by an administrator, executor, guardian or
conservator may be voted by him or her, but no trustee shall be entitled to vote
shares held by such trustee without a transfer of such shares into his or her
name. Shares standing in the name of a receiver may be voted by such receiver,
and shares held
<PAGE>
by or under the control of a receiver may be voted by such receiver without the
transfer into his or her name if authority so to do is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation
such stockholder has expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his or her proxy, may represent such stock and vote
thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
2.15. INSPECTORS OF ELECTION.
In advance of any meeting of stockholders, the Chairman of the Board
or the President shall appoint one or more inspectors of election and any
substitute inspectors to act at the meeting or any adjournment thereof. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his or her ability. The
inspectors shall determine the number of shares of stock outstanding and the
voting power of each, the shares of stock represented at the meeting, the
existence of a quorum, the validity and effect of proxies and ballots, and shall
receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, certify their determination of the number of
shares represented at the meeting, and their count of all votes and ballots, and
do such acts as are proper to conduct the election or vote with fairness to all
stockholders. The inspectors may appoint and retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. On
request of the person presiding at the meeting, the inspectors shall make a
report in writing of any challenge, question or matter determined by them and
execute a certificate of any fact found by them.
3. DIRECTORS.
3.1. POWERS.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, which may exercise all such
powers of the Corporation and do all such lawful acts and things, subject to any
limitation set
<PAGE>
forth in the Certificate of Incorporation, these Bylaws or agreements among
stockholders which are otherwise lawful.
3.2. NUMBER AND ELECTION.
The number of directors which shall constitute the whole board
shall not be fewer than six nor more than nine. Within the limits above
specified, the number of directors shall be determined by resolution of the
Board of Directors. Directors shall be elected only by stockholders at annual
meetings of stockholders, other than the initial board of directors and except
as provided in Section 3.3 hereof in the case of vacancies and newly created
directorships. Each director elected shall hold office for the term for which
such director is elected and until such director's successor is elected and
qualified or until such director's earlier resignation or removal.
3.3. VACANCIES.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors shall be filled, for the
unexpired term, by the concurring vote of a majority of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified or until such director's earlier
death, resignation or removal.
3.4. CLASSES; TERMS OF OFFICE.
Unless otherwise provided in the Certificate of Incorporation, the
Board of Directors shall divide the directors into three classes; and, when the
number of directors is changed, shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall affect the term of
any director then in office. At each annual meeting of stockholders, directors
elected to succeed those whose terms are expiring shall be elected for a term of
office expiring at the annual meeting of stockholders held in the third year
following their election and until their respective successors are elected and
qualified, or until such director's earlier death, resignation or removal.
3.5. NOMINATION OF DIRECTORS.
Nominations of persons for election to the Board of Directors may
be made by the Board of Directors, or by any stockholder of the Corporation
entitled to vote for the election of directors at the annual meeting who
complies with the notice procedures set forth in this Section 3.5. Nominations
by stockholders shall be made pursuant to timely notice in writing to the
Secretary. To be timely, a stockholder's
<PAGE>
notice shall be received at the principal executive offices of the Corporation
no later than the date designated for receipt of stockholders' proposals in a
prior public disclosure made by the Corporation. If there has been no such prior
public disclosure, then to be timely, a stockholder's nomination must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the annual
meeting; provided, however, that in the event that less than 70 days' notice of
the date of the meeting is given to stockholders or prior public disclosure of
the date of the meeting is made, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made. Such stockholder's notice shall set forth (a) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including
without limitation such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the stockholder giving notice (i) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such nomination, and (ii) the
class and number of shares of the Corporation which are beneficially owned by
the stockholder. At the request of the Board of Directors, any person nominated
by the Board of Directors for election as a director shall furnish to the
Secretary that information required to be set forth in a stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 3.5. The Chairman of the Board shall,
if the facts warrant, determine and declare to the annual meeting that a
nomination was not made in accordance with the provisions of this Section 3.5,
and if the Chairman of the Board should so determine, the Chairman of the Board
shall so declare to the meeting and the defective nomination shall be
disregarded.
3.6. MEETINGS.
(a) REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board of Directors.
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(b) SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, President or any two directors on one day's notice to
each director, either personally or by telephone, express delivery service (so
that the scheduled delivery date of the notice is at least one day in advance of
the meeting), telegram or facsimile transmission, and on five days' notice by
mail (effective upon deposit of such notice in the mail). The notice need not
describe the purpose of a special meeting.
(c) TELEPHONE MEETINGS.
Members of the Board of Directors may participate in a meeting of
the Board of Directors by means of conference telephone or similar
communications equipment by means of which all participating directors can
simultaneously hear each other during the meeting. A director participating in a
meeting by this means is deemed to be present in person at the meeting.
(d) ACTION WITHOUT MEETING.
Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting if all members of the Board of
Directors consent thereto in writing, and the writing or writings are delivered
to the Corporation for inclusion in the Minute Book of the Corporation.
(e) WAIVER OF NOTICE OF MEETING; PRESUMPTION OF
ASSENT.
A director may waive any notice required by statute, the
Certificate of Incorporation or these Bylaws before or after the date and time
stated in the notice. Except as set forth below, the waiver must be in writing,
signed by the director entitled to the notice, and delivered to the Corporation
for inclusion in the Minute Book of the Corporation. Notwithstanding the
foregoing, a director's attendance at or participation in a meeting waives any
required notice to the director of the meeting unless the director at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to action taken at the
meeting. A director who is present at a meeting is presumed to have assented to
any action taken unless such director enters a dissent or abstention in the
minutes of the meeting or files a written dissent to such action no later than
five days after such director receives a copy of the minutes of the meeting,
provided that the right to dissent shall not apply to a director who votes in
favor of such action.
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(f) QUORUM AND VOTE AT MEETINGS.
At all meetings of the Board of Directors, a quorum of the Board of
Directors consists of a majority of the total number of directors prescribed
pursuant to Section 3.2 hereof (or, if no number is prescribed, the number in
office immediately before the meeting begins). The vote of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation or by these Bylaws. In the
absence of a quorum for any meeting of the Board of Directors, a majority of the
directors present thereat may adjourn such meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.7. COMPENSATION OF DIRECTORS.
The Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their reasonable expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a reasonable fixed sum for actual attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.8. INTERESTED DIRECTORS.
No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or her or their votes are counted for such
purpose if: (a) the material facts as to his or her or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (b) the material facts as to his or her or their
relationship or interest and as to the contract or transaction are disclosed to
or are known by the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (c) the contract or transaction is fair as to the Corporation as of the time
it is authorized, approved or ratified by the board of directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a
<PAGE>
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction.
3.9. RESIGNATION.
Any director may resign at any time by sending a written notice of
such resignation to the Chairman of the Board or the President of the
Corporation. Unless otherwise specified therein such resignation shall take
effect upon receipt thereof by the Chairman of the Board or the President. More
than three consecutive absences from regular meetings of the Board of Directors,
unless excused by resolution of the Board of Directors, shall automatically
constitute a resignation, effective when such resignation is accepted by the
Board of Directors.
4. COMMITTEES.
4.1. CREATION OF COMMITTEES.
The Board of Directors may by resolution create one or more
committees and appoint members of the Board of Directors to serve on them. Each
committee may have one or more members, who serve at the pleasure of the Board
of Directors. The Board of Directors shall establish an Audit Committee and a
Stock Option Committee, composed in each case only of directors who are not
employees of the Corporation or any subsidiary thereof. The creation of a
committee and appointment of members to it shall be approved by a majority of
all the directors in office when the action is taken, whether or not a quorum.
The designation of any committee pursuant to this Article 4 and the delegation
of authority thereto shall not operate to relieve the Board of Directors, or any
director, of any responsibility imposed by law or regulation. The same rules
that govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors apply to committees and
their members as well.
4.3. EXECUTIVE COMMITTEE.
The Board of Directors may by resolution designate the chief
executive officer and two or more other directors to constitute an Executive
Committee. The chairman of the Executive Committee shall be designated by the
Board of Directors. The Executive Committee may fix its own rules of procedure
which shall not be inconsistent with these Bylaws. It shall keep regular minutes
of its proceedings and report the same to the full Board of Directors for its
information at the meeting thereof held next after the proceedings shall have
taken place. Subject to Section 4.4 below, each member of the Executive
Committee shall hold office until the next annual regular meeting of the Board
of Directors following his or her designation and until his or her successor is
designated as a member of the Executive Committee.
<PAGE>
4.2. EXECUTIVE COMMITTEE AUTHORITY.
The Executive Committee, when the Board of Directors is not in
session, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it, except to the extent, if any, that such powers and authority
shall be limited by the resolution appointing the Executive Committee; and
except also that the Executive Committee shall not have the power or authority
of the Board of Directors with reference to amending the Certificate of
Incorporation; adopting an agreement of merger or consolidation; recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets; recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution; amending the
Bylaws of the Corporation; filling a vacancy or creating a new directorship; or
approving a transaction in which any member of the such committee, directly or
indirectly, has any material beneficial interest; and unless the resolution or
Bylaws expressly so provide, the Executive Committee shall not have the power or
authority to declare a dividend or to authorize the issuance of stock or
securities convertible into or exercisable for stock.
4.4. RESIGNATION AND REMOVAL.
Any member of the Executive Committee may be removed at any
time with or without cause by resolution adopted by a majority of the full Board
of Directors. Any member of the Executive Committee may resign from the
Executive Committee at any time by giving written notice to the Chairman of the
Board or the President of the Corporation. Unless otherwise specified therein,
such resignation shall take effect upon receipt. The acceptance of such
resignation shall not be necessary to make it effective.
5. OFFICERS.
5.1. POSITIONS.
The officers of the Corporation shall be a Chairman of the Board, a
President, and a Secretary, and such other officers as the Board of Directors
(or an officer authorized by the Board of Directors) from time to time may
appoint, including one or more Vice Chairmen, Executive Vice Presidents, Vice
Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer
shall exercise such powers and perform such duties as shall be set forth below
and such other powers and duties as from time to time may be specified by the
Board of Directors or by any officer(s) authorized by the Board of Directors to
prescribe the duties of such other officers. Any number of offices may be held
by the same person.
<PAGE>
5.2. POWERS.
(a) Each officer shall have, in addition to the duties and powers
set forth herein, such duties and powers as are commonly incident to such
officer's office and such additional duties and powers as the Board of Directors
may from time to time authorize.
(b) Powers of attorney, proxies, waivers of notice of meetings,
consents and other instruments relating to securities or partnership interests
owned by the Corporation may be executed in the name of and on behalf of the
Corporation by the Chairman of the Board, the President or any Vice President,
and any such officer may, in the name of and on behalf of the Corporation, take
all such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders of any corporation in which the
Corporation may own securities, or at any meeting of any partnership in which
the Corporation owns an interest at any such meeting, shall possess and may
exercise any and all rights and powers incident to the ownership of such
securities or partnership interest and which, as the owner thereof, the
Corporation might have possessed and exercised, if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
5.3. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall (when present) preside at all
meetings of the Board of Directors and stockholders, and shall ensure that all
orders and resolutions of the Board of Directors and stockholders are carried
into effect. The Chairman of the Board may execute bonds, mortgages and other
contracts, under the seal of the Corporation, if required, except where required
or permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
5.4. PRESIDENT.
The President of the Corporation shall be the chief executive
officer, unless the Board of Directors designates the Chairman of the Board as
the chief executive officer. The President shall have overall responsibility and
authority for management of the operations of the Corporation, subject to the
authority of the Board of Directors and the Chairman of the Board. The President
may execute bonds, mortgages and other contracts, under the seal of the
Corporation, if required, except where required or permitted by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation.
<PAGE>
5.5. VICE PRESIDENT.
Any Vice President shall have such duties and powers as shall be
set forth in these Bylaws or as shall be designated from time to time by the
Board of Directors or by the Chairman of the Board or President. In the absence
of the President or in the event of the President's inability or refusal to act,
the Vice President (or in the event there be more than one Vice President, the
Vice Presidents in the order designated, or in the absence of any designation,
then in the order of their election) shall perform the duties of the President,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. Any Vice President may execute bonds,
mortgages and other documents under the seal of the Corporation, except where
required or permitted by law to be otherwise executed and except where the
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
5.5. SECRETARY.
The Secretary shall have responsibility for preparation of minutes
of meetings of the Board of Directors and of the stockholders and for
authenticating records of the Corporation. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors. The Secretary or an Assistant Secretary also may attest all
instruments signed by any other officer of the Corporation.
5.6. ASSISTANT SECRETARY.
The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Secretary or in the event of the
Secretary's inability or refusal to act, perform the duties and exercise the
powers of the Secretary.
5.7. TREASURER.
The Treasurer shall have responsibility for the custody of the
corporate funds and securities and shall see to it that full and accurate
accounts of receipts and disbursements are kept in books belonging to the
Corporation. The Treasurer shall render to the Chairman of the Board, the
President, the Vice President, and the Board of Directors, upon request, an
account of all financial transactions and of the financial condition of the
Corporation.
<PAGE>
5.8. ASSISTANT TREASURER.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer.
5.9. TERM OF OFFICE.
The officers of the Corporation shall hold office until their
successors are chosen and qualified or until their death, earlier resignation or
removal. Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors. Any officer may resign at any time upon written
notice to the Corporation. Any officer elected or appointed by the Board of
Directors may be removed at any time, with or without cause, by the affirmative
vote of a majority of the Board of Directors. Any officer may be removed by the
Board of Directors whenever in its judgment the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
6. CAPITAL STOCK.
6.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES.
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors may provide by resolution that some or all
of any or all classes or series of the Corporation's stock shall be
uncertificated shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates, and upon request every holder
of uncertificated shares, shall be entitled to have a certificate (representing
the number of shares registered in certificate form) signed in the name of the
Corporation by the Chairman of the Board, the President, or any Vice President,
and by the Treasurer, Secretary or any Assistant Treasurer or Assistant
Secretary. Any or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar whose signature or facsimile
signature appears on a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue.
<PAGE>
6.2. LOST CERTIFICATES.
The Chairman of the Board, the President, or any Vice President may
direct a new certificate of stock to be issued in place of any certificate
theretofore issued by the Corporation and alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
that the certificate of stock has been lost, stolen or destroyed. When
authorizing such issuance of a new certificate, such officer may, as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as such officer shall require and/or to give
the Corporation a bond, in such sum as such officer may direct as indemnity
against any claim that may be made against the Corporation on account of the
certificate alleged to have been lost, stolen or destroyed or on account of the
issuance of such new certificate or uncertificated shares.
6.3. RECORD DATE.
(a) ACTIONS BY STOCKHOLDERS.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders (or to take any
other action), the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors and shall not be less than 10 nor more than 60
days before the meeting or action requiring a determination of stockholders.
In order that the Corporation may determine the stockholders
entitled to consent to corporate action without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and shall not be more than 10 days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors.
A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting, unless the Board of Directors fixes a new record date.
If no record date is fixed by the Board of Directors, the record
date shall be at the close of business on the day next preceding the day on
which notice is given, or if notice is not required or is waived, at the close
of business on the day next preceding the day on which the meeting is held or
such other action is taken, except that (if no record date is established by the
Board of Directors) the record date for determining stockholders entitled to
consent to corporate action without a meeting is the first date on which a
stockholder delivers a signed written consent to the Corporation for inclusion
in the Minute Book of the Corporation.
<PAGE>
(b) PAYMENTS.
In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
(c) STOCKHOLDERS OF RECORD.
The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
to receive notifications, to vote as such owner, and to exercise all the rights
and powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by law.
7. INSURANCE.
The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Corporation (or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
against liability asserted against or incurred by such person in such capacity
or arising from such person's status as such (whether or not the Corporation
would have the power to indemnify such person against the same liability).
8. INDEMNIFICATION.
8.1. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS
OTHER THAN THOSE BY OR IN RIGHT OF THE
CORPORATION.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, and any appeal therein, whether civil,
criminal, administrative, arbitrative, or investigative (other than an action by
or in right of the Corporation)
<PAGE>
by reason of the fact that such person is or was a director, officer, trustee,
employee, or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, trustee, employee, or agent of another
corporation, association, partnership, joint venture, trust, employee benefit
plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, and any
appeal therein, if such person acted in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such conduct was unlawful. The termination of
any action, suit or proceeding, and any appeal therein, by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that such conduct
was unlawful.
8.2. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS
BY OR IN THE RIGHT OF THE CORPORATION.
(a) The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director, officer, trustee, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee or agent of another corporation, association, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner which such person reasonably believed to be
in or not opposed to the best interests of the Corporation. No such
indemnification shall be made against expenses in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation or against amounts paid in settlement unless and only to the extent
that there is a determination (as set forth in Section 8.3 hereof) that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses or
amounts paid in settlement.
8.3. AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article 8 shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of
<PAGE>
the director, officer, employee or agent is proper in the circumstances because
such person or persons have met the applicable standard of conduct set forth in
Sections 8.1 and 8.2 hereof and, if applicable, is fairly and reasonably
entitled to indemnity as set forth in Section 8.2, as the case may be. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by a majority of the stockholders entitled to vote
generally in the election of directors. To the extent, however, that a director,
officer, trustee, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith, without the necessity of
authorization in the specific case. No director, officer, trustee, employee or
agent of the Corporation shall be entitled to indemnification in connection with
any action, suit or proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the entire Board of
Directors.
8.4. GOOD FAITH DEFINED.
For purposes of any determination under Section 8.3 hereof, a
person shall be deemed to have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe his or her conduct was unlawful, if his or her
action is based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him or her by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 8.4 shall mean
any other corporation or any association, partnership, joint venture, trust or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, trustee, employee or agent. The provisions
of this Section 8.4 shall not be deemed to be exclusive or to limit in any way
the circumstances in which a person may be deemed to have met the applicable
standards of conduct set forth in Sections 8.1 or 8.2 hereof, as the case may
be.
8.5. INDEMNIFICATION BY A COURT.
Notwithstanding any contrary determination in the specific case
under Section 8.3, and notwithstanding the absence of any determination
thereunder, any
<PAGE>
director, officer, trustee, employee or agent may apply to any court of
competent jurisdiction in the State of Delaware for indemnification to the
extent otherwise permissible under Sections 8.1 and 8.2 above. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he or she has met the applicable standards of
conduct set forth in Sections 8.1 and 8.2 above, as the case may be. Notice of
any application for indemnification pursuant to this Section 8.5 shall be given
to the Corporation promptly upon the filing of such application. Notwithstanding
any of the foregoing, unless otherwise required by law, no director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire Board of Directors.
8.6. ADVANCEMENT OF EXPENSES.
The Corporation may advance expenses (including attorneys' fees)
incurred by a director, officer, employee or agent in advance of the final
disposition of such action, suit or proceeding upon the receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that such person is not entitled to indemnification
from the Corporation as authorized in this Article 8.
8.7. CONTRACT, NON-EXCLUSIVITY AND SURVIVAL OF INDEMNIFICATION.
The indemnification provided by this Article 8 shall be deemed to
be a contract between the Corporation and each director, officer, employee and
agent who serves in such capacity at any time while this Article 8 is in effect,
and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought
based in whole or in part upon any such state of facts. Further, the
indemnification and advancement of expenses provided by this Article 8 shall not
be deemed exclusive of any other rights to which those seeking indemnification
and advancement of expenses may be entitled under any certificate of
incorporation, bylaw, agreement, contract, vote of stockholders or disinterested
directors or pursuant to the direction (howsoever embodied) of any court of
competent jurisdiction or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that, subject to the limitation in Section
8.3 hereof concerning voluntary initiation of actions, suits or proceedings,
indemnification of the persons specified in Sections 8.1 and 8.2 hereof shall be
made to the fullest extent permitted by law. The provisions of this Article 8
shall not be deemed to preclude the indemnification of any person who is not
specified in Sections 8.1 or 8.2 of this Article 8 but whom the Corporation has
the power or obligation to indemnify under the provisions of the law of the
State of Delaware. The
<PAGE>
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article 8 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, trustee,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
8.8. MEANING OF "CORPORATION" FOR PURPOSES OF ARTICLE 8.
For purposes of this Article 8, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, association, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article 8 with respect to the resulting or surviving corporation as he or she
would have with respect to such constituent corporation if its separate
existence had continued.
9. NOTICES.
9.1. NOTICES.
Whenever written notice is required by law, the Certificate of
Incorporation or these Bylaws to be given to any director, member of a committee
or stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at his or her address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Written notice may also be given personally or by telegram, telex
or telecopy.
9.2. WAIVERS OF NOTICE.
Whenever any notice is required by law, the Certificate of
Incorporation or these bylaws to be given to any director, member of a committee
or stockholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting with the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders,
<PAGE>
directors, or members of a committee of directors need be specified in any other
waiver of notice unless so required by the Certificate of Incorporation or these
Bylaws.
10. GENERAL PROVISIONS.
10.1. INSPECTION OF BOOKS AND RECORDS.
Any stockholder, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records, and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent shall be the person who seeks the
right to inspection, the demand under oath shall be accompanied by a power of
attorney or such other writing which authorizes the attorney or other agent to
so act on behalf of the stockholder. The demand under oath shall be directed to
the Corporation at its registered office or at its principal place of business.
10.2. DIVIDENDS.
The Board of Directors may declare dividends upon the capital stock
of the Corporation, subject to the provisions of the Certificate of
Incorporation and the laws of the State of Delaware, and such dividends may be
paid in cash, in property, or in shares of capital stock of the Corporation.
Subject to the Delaware General Corporation Law, such dividends may be paid
either out of surplus, out of the net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
10.3. RESERVES.
The Board of Directors may set apart, out of the funds of the
Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
10.4. EXECUTION OF INSTRUMENTS.
All checks, drafts or other orders for the payment of money, and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board of Directors may from time to time
designate.
<PAGE>
10.5. FISCAL YEAR.
The fiscal year of the Corporation shall begin on January 1 and end
on December 31.
10.6. SEAL.
The corporate seal shall be in such form as the Board of Directors
shall approve. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
11. AMENDMENTS TO BYLAWS.
The Board of Directors may from time to time adopt, amend and
repeal these Bylaws. Such action by the Board of Directors shall require the
affirmative vote of at least a majority of the directors then in office. If
stockholders are entitled to vote with respect thereto to amend or repeal Bylaws
adopted by the Board of Directors as may be provided in the Certificate of
Incorporation or by law, then the affirmative vote of 66-2/3% of the total
number of votes of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the amendment or repeal of
Bylaws by the stockholders of the Corporation. Any amendments to Sections 3.2,
3.4 and 3.5 of the Corporation's Bylaws shall require the affirmative vote of
the stockholders set forth in the preceding sentence.
* * * * *
The foregoing Bylaws were adopted by the Board of Directors on
March 23, 1994.
/s/ David Smilow
---------------------------
Chairman of the Board
Attested:
/s/ Elizabeth Felix
- -------------------
Secretary
These Bylaws reflect amendments adopted in February 1997
TELEBANC FINANCIAL CORPORATION
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
---- ----
PRIMARY
<S> <C> <C>
Net income for primary income per common share $ 2,600 $ 2,720
Weighted average number of common shares outstanding
during the year 2,049,500 2,049,500
Add common equivalent shares 264,864 219
----------- -----------
Weighted average number of shares used in calculating
primary income per share 2,316,616 2,049,719
Primary income per common share $ 1.12 $ 1.33
FULLY DILUTED
Net income for fully diluted net income per share $ 2,552 $ 2,720
Weighted average number of shares used in calculating
of primary income per share 2,314,364 2,049,719
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock options included
in primary calculation above (264,864) (219)
Shares issuable upon exercise of stock options based on
year-end market price 290,954 19,097
----------- -----------
Weighted average number of shares used in calculating
fully diluted income per share 2,340,454 2,068,597
Fully diluted income per common share $ 1.09 $ 1.31
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") was organized
by its majority stockholder, MET Holdings Corporation, to become, in March 1994,
the parent savings and loan holding company for TeleBank ("the Bank"), a
federally chartered savings bank. All references to the Company include the
business of the Bank. Financial and other data as of and for all periods prior
to March 1994 represent the consolidated data of the Bank only. Prior to March
1996, the Bank was formerly known as Metropolitan Bank for Savings, F.S.B.
During the second quarter of 1994, TeleBanc completed its initial public
offering, raising $4.6 million through the sale of common stock and an
additional $17.3 million through the issuance of subordinated notes with
warrants. Since completion of the offering, the Company has emphasized growth of
the Bank through careful leveraging of the proceeds. At December 31, 1996,
TeleBanc reported total assets of $648.0 million, total deposits of $390.5
million, and stockholders' equity of $24.7 million, compared to $553.9 million,
$306.5 million, and $21.6 million, respectively, at December 31, 1995.
Since 1989, the Bank has been developing an operating strategy that seeks
to minimize general and administrative expenses through more efficient deposit
gathering, borrowing, and asset generation. From its headquarters in Arlington,
Virginia, the Company attracts primarily low transaction deposit accounts such
as certificates of deposit and money market accounts by advertising and
conducting public relation campaigns in select markets. Unlike traditional
financial institutions, the Company pursues a "branchless" marketing strategy
and thus interacts with its customers primarily through the Company's toll free
telephone number and mail. Company representatives utilize a sophisticated
computer software system to market and process deposits, build a customer
database for future products and provide quality service. Other funding sources
for the Company include borrowings from the Federal Home Loan Bank of Atlanta
("FHLB"), securities sold under agreements to repurchase, and subordinated debt.
The Company's asset acquisition strategy is focused on investing in
one-to-four unit, single-family mortgages and mortgage backed securities
purchased in the secondary market rather than to originate loans. The Company
seeks to manage interest rate risk through matching the maturities of its
deposit solicitations and borrowings as compared with its asset purchases and
the use of certain hedging techniques in order to operate profitably in various
interest rate environments.
On February 28, 1997, the Company consummated the sale of $29.9 million of
units in the form of convertible preferred stock, senior subordinated notes and
warrants and the purchase of the assets of Arbor Capital Partners, Inc.
("Arbor"), a registered investment advisor, funds manager and broker-dealer. MET
Holdings, TeleBanc's majority shareholder, owns a majority of Arbor.
The $29.9 million in units were sold to investment partnerships managed by
Conning & Company, CIBC WG Argosy Merchant Fund 2, LLC, the Progressive
Corporation, and The Northwestern Mutual Life Insurance Company. Representatives
from the Conning partnerships and the CIBC Merchant Fund will serve on the
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.
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 is limited to 5%
of total market value of outstanding TeleBanc stock at the time of acquisition.
The following financial review presents management's analysis of the
consolidated financial condition and results of operations of TeleBanc, and
should be read together with the consolidated financial statements and
accompanying notes.
INTEREST RATE SENSITIVITY MANAGEMENT
The Company actively monitors the sensitivity of its assets and liabilities
to various interest rate environments due to repricing in future time periods.
Effective interest rate sensitivity management seeks to ensure that net interest
income is protected from the impact of changes in interest rates.
The Company's strategies are intended to stabilize the Company's net
interest rate spread under a variety of changes in interest rates. In an effort
to manage growth effectively, the Company undertook a slow, yet steady path to
leverage the initial
<PAGE>
public offering proceeds and invest in interest-earning assets. It is
management's intent to leverage the $29.9 million private placement proceeds and
invest in interest-earning assets in a path similar to that of the initial
public offering. This growth was funded by raising deposits and incurring debt,
including FHLB advances and securities sold under agreements to repurchase
("reverse repos"). The Company's deposit gathering strategy tends to rely on
higher yielding money market accounts and certificates of deposit accumulated
through the Bank's branchless banking telephone and mail operations, rather than
relying on higher overhead products such as extensive branch networks and
transaction accounts (i.e., checking accounts). Similarly, the Company tends to
invest its funds in assets purchased in the secondary market rather than
incurring overhead for extensive loan origination operations. As a result, the
Company's interest rate spread may be lower than that of traditional financial
institutions. By seeking to match closely the maturities of its
interest-sensitive assets and liabilities, the Company believes it can maintain
relatively consistent interest rate spreads and mitigate much of the interest
rate risk associated with such assets and liabilities.
The Company utilizes hedging techniques to reduce its overall interest rate
risk exposure over a one-to-seven year period. Management's hedging practices
are directed towards the following risks: interest rate sensitivity gap between
the amount of interest-earning assets and the amount of interest-bearing
liabilities, loan prepayments and premature withdrawal of deposits. A policy
adopted by the Company's Board of Directors prohibits management from
speculative purchases or sales of futures, options, stripped mortgage-backed
securities and other mortgage derivative products.
Interest rate swaps, caps, floors, collars and financial options are used
to manage interest rate exposure by hedging certain assets and liabilities, and
are not used for speculative purposes. The Company's interest rate spread was
1.84%, 1.72%, and 1.51% for 1996, 1995 and 1994, respectively. The Company's
yield on interest-earning assets for such periods was 1.94%, 1.88% and 1.62%,
respectively. Since the initial public offering in May 1994, the Company has
steadily grown both assets and liabilities, with average interest earning assets
growing from $206.9 million for the quarter ended March 31, 1994 to $575.5
million for the year ended December 31, 1996, and average interest bearing
liabilities growing from $206.1 million to $564.3 million over the same period.
The Company's ongoing strategy is to maintain a relatively stable interest rate
margin and interest rate spread.
The Company matches its assets and liabilities by examining the extent to
which such assets and liabilities are "interest rate sensitive" and by
monitoring interest rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a specific period if it will mature or reprice
within that period. The interest rate sensitivity gap is defined as the
difference between the amount of interest-earning assets maturing or repricing
within a specific time period and the amount of interest-bearing liabilities
maturing or repricing within the same time period. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities, and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income; conversely, during a period
of falling interest rates, a negative gap would result in an increase in net
interest income and a positive gap would adversely affect net interest income.
The Company's current asset-liability management strategy is to maintain an
evenly matched one-to-five year gap giving effect to hedging, but depending on
market conditions and related circumstances, a positive or negative one-to-five
year gap of up to 20% may be acceptable. Giving effect to the Company's hedging
activities, the Company's one-year gap at December 31, 1996 is (0.16)%. The
Company's hedge-effected one-to-five year gap at such date is (11.59)%.
The following assumptions were used by management in order to prepare the
Company's gap table set forth on the next page. Non-amortizing investment
securities are shown in the period in which they contractually mature.
Investment securities which contain embedded options such as puts or calls are
shown in the period in which that security is currently expected to be put or
called or to mature. The table assumes that fully-indexed, adjustable-rate,
residential mortgage loans and mortgage-backed securities prepay at an annual
rate between 10% and 15%, based on estimated future prepayment rates for
comparable market benchmark securities and the Company's prepayment history. The
table also assumes that fixed rate, current-coupon residential loans prepay at
an annual rate of between 10% and 15%. The above assumptions were adjusted up or
down on a pool by pool basis to model the effects of product type, coupon rate,
rate adjustment frequency, lifetime cap, net coupon reset margin, and periodic
rate caps upon prevailing annual prepayment rates. Time deposits are shown in
the period in which they contractually mature, and savings deposits are shown to
reprice immediately. The interest rate sensitivity of the Company's assets and
liabilities could vary substantially if different assumptions were used or if
actual experience differs from the assumptions used.
Certain shortcomings are inherent in the method of analysis presented in
the gap table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in
<PAGE>
advance of changes in market interest rates, while interest rates on other types
of assets and liabilities may lag behind changes in market interest rates.
Certain assets, such as adjustable-rate mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In the event of a change in interest rates, prepayment rates would likely
deviate significantly from those assumed in calculating the table. The ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Management measures the efficiency of its asset/liability management
strategies by analyzing, on a quarterly basis, the Bank's theoretical Net
Portfolio Value (NPV) and the effect that changes in interest rates are expected
to have on NPV. The Board of Directors has established limits within which such
changes in NPV are expected to be maintained in the event of a change in
interest rates. Under proposed Office of Thrift Supervision ("OTS") regulations,
an institution's interest rate risk exposure is measured based upon a 200 basis
point parallel shift in market interest rates. A savings institution whose
measured interest rate risk exposure is greater than specified levels must
deduct an interest rate risk component from total capital for purpose of
determining regulatory risk-based capital levels. As of December 31, 1996, the
Bank would not have been required to deduct any interest rate risk component
from capital under the proposed OTS interest rate risk capital regulations.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
REPRICING REPRICING REPRICING
WITHIN WITHIN WITHIN REPRICING
BALANCE PERCENT 0-3 4-12 1-5 OVER
(Dollars in Thousands) DECEMBER 31, 1996 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $351,821 56.21% $ 17,339 $140,267 $133,274 $ 60,941
Investment securities
available for sale, interest
bearing accounts & FHLB stock 88,636 14.16 27,654 487 9,908 50,587
Mortgage-backed
securities available for sale 184,743 29.51 49,942 69,131 47,702 17,968
Federal funds sold 750 0.12 750 -- -- --
--------- -------------------------------------------------------------
Total interest-earning assets $625,950 100.00% $ 95,685 $209,885 $190,884 $ 129,496
Non-interest earning assets: 22,015 -------------------------------------------------------------
--------
Total assets $647,965
--------
Interest-bearing liabilities:
Savings deposits $111,843 18.35% $111,843 $ -- $ -- $ --
Time deposits 278,643 45.72 31,739 92,011 151,462 3,431
FHLB advances 144,800 23.76 134,800 10,000 -- --
Other borrowings 57,581 9.45 57,581 -- -- --
Subordinated debt 16,586 2.72 -- -- -- 16,586
--------- -------------------------------------------------------------
Total interest-bearing liabilities $609,453 100.00% $335,963 $102,011 $151,462 $ 20,017
Non-interest bearing liabilities 13,854 -------------------------------------------------------------
--------
Total liabilities $623,307
Stockholders' equity 24,658
Total liabilities and --------
stockholders equity $647,965
Periodic repricing difference
(periodic gap) $ (240,278) $ 107,874 $ 39,422 $ 109,479
Cumulative repricing difference
(cumulative gap) $ (240,278) $ (132,404) $ (92,982) $ 16,497
Cumulative gap to total assets (37.08)% (20.43)% (14.35)% 2.55%
Cumulative gap to total assets
hedge effected (a) (11.40)% (0.16)% (11.59)% 2.55%
--------------------------------------------------------------------------
</TABLE>
(a) The hedge effected cumulative gap to total assets reflects the effect of
hedging instruments on the Company's gap at December 31, 1996. For purposes
of determining the effect of such hedging instruments, interest rate swap
agreements are treated as part of the hedged liability, hence, the cash
flows from the swap and the hedged asset or liability are netted and the
resulting cash flows are used in the gap calculation. Interest rate cap
agreements also are treated as part of the hedged asset or liability and
weighted by market's estimate of the likelihood the cap strike will be met
or exceeded. The net cash flows are used in the gap calculations.
<PAGE>
FINANCIAL CONDITION
The Company's total assets increased by $94.1 million or 17.0% from $553.9
million at December 31, 1995 to $648.0 million at December 31, 1996. The
increase in assets during 1996 primarily reflects continued leveraging of the
Bank's capital. At December 31, 1993, the Bank had stockholders' equity of $12.4
million. Following the Company's initial public offering in May 1994, the
Company increased the Bank's equity by $15.0 million, thereby supporting a
31-month period of growing the Bank from $220.3 million in assets to $648.0
million in assets as of December 31, 1996. Growth in assets is attributable to
increases in mortgage-backed securities and loans receivable. The primary
sources of funds for this growth in assets were deposits and borrowings.
Loans receivable, net and loans receivable held for sale increased $103.3
million or 41.6%, from $248.5 million at December 31, 1995 to $351.8 million at
December 31, 1996. The increase reflects whole loan purchases of $182.0 million
offset by $51.2 million of principal repayments and $27.0 million of loans sold
in 1996. In the second quarter of 1996, the Company reevaluated its loan
investment strategy. The Company determined that the probable sale of loans,
subsequent to a restructuring or credit enhancement, would add value to the
portfolio. Pursuant to this strategy, the Company created a loans held for sale
category with a one-time transfer of loans from the investment portfolio that
have characteristics that make them susceptible to sale after restructuring,
credit enhancement, or other 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.
Mortgage-backed securities, available-for-sale, decreased $49.6 million, or
21.2%, from $234.4 million at December 31, 1995 to $184.7 million at December
31, 1996. Investment securities, available for sale, increased $38.7 million, or
96.5%, from $40.1 million at December 31, 1995 to $78.8 million at December 31,
1996. These securities are held for liquidity purposes and increased along with
the growth of assets of the Bank in 1996.
Deposits increased $84.0 million, or 27.4%, from $306.5 million at December
31, 1995 to $390.5 million at December 31, 1996, largely as a result of the
Company's marketing efforts to attract money market and certificate of deposit
accounts, as well as the purchase of deposits from a failed institution. During
fiscal year 1996, approximately $21.4 million of interest was credited to the
accounts while deposits exceeded withdrawals by $62.6 million, resulting in a
net change of $84.0 million. During 1996, significant emphasis was also placed
upon raising deposits as a source of funds for asset growth.
FHLB advances increased $39.3 million, or 37.3%, from $105.5 million at
December 31, 1995 to $144.8 million at December 31, 1996. Other borrowings,
composed of securities sold under agreements to repurchase, decreased $36.3
million, or 38.7%, from $93.9 million at December 31, 1995 to $57.6 million at
December 31, 1996. This slight increase in net borrowings reflects the Company's
effort to focus funding efforts on deposits yet maintain additional funds at low
interest rates in order to support asset growth.
Stockholders' equity increased $3.1 million to $24.7 million at December
31, 1996 from $21.6 million at December 31, 1995. The increase reflects $2.6
million in net income and an unrealized gain for the year on securities
available for sale of $541,000, net of taxes, which increases the Company's
stockholders' equity, but does not impact the statement of operations.
The consolidated average balance sheets, along with income and expense and
related interest yields and rates at December 31, 1996 and for each of the
preceding three fiscal years are shown on the following page. 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 savings institutions have traditionally used as an indicator of
profitability. Another indicator of an institution's profitability is its "net
yield on interest-earning assets," which is its net interest income divided by
the average balance of interest-earning assets. Net interest income is affected
by the interest rate spread and by the relative amounts of interest earning
assets and interest-bearing liabilities. When interest-earning assets equal or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. As discussed above, the Company's operating
strategy tends to result in lower spreads and margins than other comparable
financial institutions, but the Company believes lower net interest income is
mitigated by savings in general and administrative expenses.
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1996 1995
Balance Average Interest Average Average Interest Average
(Dollars in thousands) December 31, 1996 Balance Inc./Exp. Yield/Cost Balance Inc./Exp. Yield/Cost
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(a) $351,821 $279,038 $23,089 8.28% $201,737 $17,726 8.80%
Mortgage-backed &
related securities -- -- -- -- 233,728 18,614 7.96
Investment securities (b)(c) 9,810 12,841 871 6.79 13,627 990 7.27
Mortgage-backed &
related securities, AFS 184,743 221,656 17,955 8.10 19,138 1,597 8.35
Investment securities, AFS 78,826 61,169 3,959 6.47 25,516 2,071 8.12
Federal funds sold 750 842 44 5.22 810 49 6.05
Trading account -- -- -- -- 1,932 166 8.59
-------- ---------------------------- ----------------------------
Total-interest earning assets $625,950 $575,546 $45,918 7.98% $496,488 $41,213 8.31%
Non-interest earning assets 22,015 26,929 15,388
-------- ---------------------------- ----------------------------
Total assets $647,965 $602,475 $511,876
-------- ---------------------------- ----------------------------
Interest-bearing liabilities:
Savings deposits $111,843 $ 99,346 $ 4,815 4.85% $ 41,387 $ 2,111 5.10%
Time deposits 278,643 258,870 16,542 6.39 223,745 14,930 6.67
FHLB advances 144,800 120,678 6,689 5.54 104,142 6,571 6.31
Other borrowings 57,581 68,154 4,569 6.70 97,906 6,230 6.36
Subordinated debt, net 16,586 17,250 2,200 12.75 17,250 2,089 12.11
-------- ---------------------------- ----------------------------
Total interest-bearing liabilities $609,453 $564,298 $34,815 6.14% $484,430 $31,931 6.59%
Non-interest-bearing liabilities 13,854 15,900 8,150
-------- ---------------------------- ----------------------------
Total liabilities $623,307 $580,198 $492,580
Stockholders' equity 24,658 22,277 19,296
-------- ---------------------------- ----------------------------
Total liabilities and stockholders'
equity $647,965 $602,475 $511,876
-------- ---------------------------- ----------------------------
Excess of interest-earning assets
over interest-bearing liabilities/
net interest income/interest rate
spread $ 16,497 $ 11,248 $11,136 1.84% $ 12,058 $ 9,313 1.72%
Net yield on interest earning assets 1.94% 1.88%
Ratio of interest-earning assets
to interest-bearing liabilities 101.99% 102.49%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- ------------------------------------------------------------------------
1994
Average Interest Average
(Dollars in thousands) Balance Inc./Exp. Yield/Cost
- ------------------------------------------------------------------------
Interest-earning assets:
Loans receivable, net(a) $127,805 $10,813 8.46%
Mortgage-backed &
related securities 136,304 9,328 6.84
Investment securities (b)(c) 14,627 801 5.48
Mortgage-backed &
related securities, AFS 8,934 645 7.22
Investment securities, AFS 13,705 771 5.63
Federal funds sold 2,092 83 3.97
Trading account -- -- --
-------------------------------
Total-interest earning assets $303,467 $22,441 7.39%
Non-interest earning assets 18,794
-------------------------------
Total assets $322,261
-------------------------------
Interest-bearing liabilities:
Savings deposits $ 17,587 $ 518 2.95%
Time deposits 140,485 9,209 6.56
FHLB advances 82,533 4,278 5.18
Other borrowings 47,715 2,281 4.78
Subordinated debt, net 9,555 1,227 12.84
-------------------------------
Total interest-bearing liabilities $297,875 $17,513 5.88%
Non-interest-bearing liabilities 7,401
-------------------------------
Total liabilities $305,276
Stockholders' equity 16,985
-------------------------------
Total liabilities and stockholders'
equity $322,261
-------------------------------
Excess of interest-earning assets
over interest-bearing liabilities/
net interest income/interest rate
spread $ 5,592 $ 4,928 1.51%
Net yield on interest earning assets 1.62%
Ratio of interest-earning assets
to interest-bearing liabilities 101.88%
- ----------------------------------------------------------------------
- ---------
(a) Includes mortgages held for sale and investments.
(b) Includes interest-bearing deposits, repurchase agreements, investment
securities held to maturity, and FHLB stock.
(c) Interest income and average yields on municipal bonds are presented on a
tax equivalent basis.
LIQUIDITY MANAGEMENT AND FUNDING
Liquidity is a company's ability to maintain sufficient cash flows to fund
operations and meet existing and future obligations, including maturing
liabilities, loan commitments, and depositors' withdrawals. The asset portion of
the balance sheet provides liquidity through short-term investments and
maturities and repayments of loans and investment securities. Other sources of
asset liquidity include sales of loans or securities.
Liquidity is provided through the Company's ability to attract and maintain
sufficient deposits and to access available funding markets. Federal regulations
require that the Bank maintain an average of 5.00% liquidity ratio in relation
to certain borrowings and the deposit base. The Bank exceeded the requirement
throughout 1996 and 1995.
The Company continues to enhance the core deposit base through its
branchless marketing strategy that targets individual savers who deposit an
average of $23,000. Management is developing new deposit products responsive to
our customers needs and cross marketing these services, which should provide
stable funding sources in future periods. In 1995, the Company introduced
callable CDs, money market accounts, and the Refer a Saver(TM) Program. The
callable CDs are redeemable at the option of the Company any time after the
second anniversary of the date of deposit, which allows management to hedge
against prepayment risk. The Refer a Saver(TM) Program rewards current CD
account holders with cash for each new customer referred to the Company.
<PAGE>
The following table shows the changes in deposits for each of the prior
periods:
YEARS ENDED DECEMBER 31,
----------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------- ---- ---- ----
Balance at beginning of period $306,500 $212,411 $113,132
Deposits in excess of (less than)
withdrawals 62,629 76,866 91,806
Interest credited on deposits 21,357 17,223 7,473
----------------------------------
Balance at end of period $390,486 $306,500 $212,411
==================================
Management believes that liquidity of bank deposits coupled with FDIC
insurance will continue to encourage depositors to maintain significant portions
of their funds in insured depository accounts. Management also believes that a
high level of service and convenience coupled with a growing acceptance of
electronic and branchless banking will allow the Company to compete efficiently
and effectively against other FDIC insured banks and other non-bank financial
institutuions. Largely as a result of management's marketing efforts in 1996,
the Company experienced an increase in money market account balances, which cost
less than the cost of FHLB advances, other borrowings, and certificates of
deposit accounts. Total deposits increased $84.0 million, or 27.4%, during 1996.
Savings deposits increased $32.4 million, or 40.8%, and certificate of deposit
accounts increased $51.6 million, or 22.7% during 1996.
The Company also relies upon borrowed funds to provide a source of
liquidity at attractive interest rates. Total borrowings increased $3.0 million,
or 1.5%, during 1996. Advances from the FHLB increased $39.3 million, or 37.3%,
during the period largely as a result of attractive interest rates and due to
the various products offered by the FHLB to member institutions. Advances are
collateralized by specific liens on mortgage loans in accordance with an
"Advances, Specific Collateral Pledge and Security Agreement", which requires
the Company to maintain qualified collateral equal to 120 to 160 percent of the
Company's advances. Accordingly, the Company increased single-family residential
mortgage loan collateral to the FHLB to $186.1 million during the year.
Additional borrowings from the FHLB are contingent upon the Company providing
the appropriate collateral. Repurchase agreements decreased $36.3 million, or
38.7%, during 1996. Principally, mortgage-backed securities are pledged as
collateral for the repurchase agreements. As of December 31, 1996, the Bank had
approximately $100.0 million in additional borrowing capacity.
In the second quarter of 1994, TeleBanc 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
very stable, although relatively expensive, source of funds. Upon completion of
the offering, the Company invested $15.0 million of the proceeds as capital of
the Bank. At December 31, 1996, subordinated debt, net was $16.6 million. The
annual expense to service the debt is $2.2 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' advance 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
expense for one year on the subordinated debt. The Company had $2.9 million in
liquid assets at December 31, 1996.
CAPITAL ADEQUACY
The Company's stockholders' equity at December 31, 1996, was $24.7 million.
This represents a $3.1 million, or 14.4%, increase from the prior year. The
increase reflects $2.6 million in net income and an unrealized gain for the year
on securities available-for-sale of $541,000, net of taxes, which pursuant to
SFAS 115 increases the Company's stockholders' equity, but does not impact the
statement of operation. See Note 2 of the Consolidated Financial Statements.
The Bank meets all current and fully phased-in capital requirements as
adjusted for the changes which are effective to the computation of risk-based
capital and core capital at December 31, 1996.
The required and actual amounts and ratios of capital pertaining to the
Bank as of December 31, 1996 are set forth as follows
<TABLE>
<CAPTION>
(dollars in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
----------------- ----------------------------------------- ------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk
weighted assets) $34,104 10.41% greater than $ 26,205 greater than 8.0% greater than $32,756 greater than 10.0%
Tier 1 Capital (to risk
weighted assets) $31,726 9.69% greater than $ 13,102 greater than 4.0% greater than $19,654 greater than 6.0%
Tier 1 Capital (to
average assets) $31,726 5.08% greater than $ 24,999 greater than 4.0% greater than $31,248 greater than 5.0%
Tangible $31,711 5.07% greater than $ 9,374 greater than 1.5% N/A --
As of December 31, 1995:
Total Capital (to risk
weighted assets) $30,680 11.74% greater than $ 20,899 greater than 8.0% greater than $26,264 greater than 10.0%
Tier 1 Capital (to risk
weighted assets) $28,944 11.08% greater than $ 10,450 greater than 4.0% greater than $15,674 greater than 6.0%
Tier 1 Capital (to
average assets) $28,944 5.31% greater than $ 21,798 greater than 4.0% greater than $27,261 greater than 5.0%
Tangible $29,201 5.36% greater than $ 8,178 greater than 1.5% greater than N/A --
</TABLE>
<PAGE>
EARNINGS PERFORMANCE
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 , 1995 AND
1994
NET INCOME. Net income for fiscal year 1996 was $2.6 million compared to $2.7
million for fiscal year 1995. Net income for 1996 includes the effect of a
one-time $1.7 million, before tax, assessment to recapitalize the Savings
Association Insurance Fund ("SAIF"). Without such assessment, net income would
have been $3.6 million. Net income for the year ended December 31, 1996
consisted primarily of $11.0 million in net interest income, $1.8 million in net
gains on the sale of loans held for sale and mortgage-backed and investment
securities offset by $9.1 million in non-interest expenses, $919,000 in
provision for loan losses and $1.2 million in income tax expenses. For fiscal
year 1996, the Company's return on average assets and return on average equity
was 0.42% and 11.46%, respectively. Based on 2,316,616 weighted average shares
of common stock issued and outstanding as well as common stock equivalents
earnings per share was $1.12.
Net income increased by $2.2 million, or 407.4%, from $540,000 in fiscal
year 1994, to $2.7 million in fiscal year 1995. Net income for the year ended
December 31, 1995 consisted primarily of $8.6 million in net interest income,
$1.6 million in gains on the sale of mortgage-backed securities available for
sale, $1.1 million in gains on the sale of investment securities available for
sale and $677,000 in profit on trading activities offset by $6.2 million in
total non-interest expenses, $1.7 million in provision for loan losses and $1.7
million in income taxes. The Company's return on average assets and return on
average equity was 0.53% and 14.10%, respectively. Based on 2,068,597 weighted
average shares of common stock issued and outstanding as well as common stock
equivalents, earnings per share was $1.33.
NET INTEREST INCOME. Net interest income is the principal source of a financial
institution's income stream and represents the spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and borrowed funds. Fluctuations in interest rates as well as volume and
composition changes in interest-earning assets and interest-bearing liabilities
materially affect net interest income.
Net interest income increased by $2.4 million, or 27.9%, from $8.6 million
to $11.0 million for the years ended December 31, 1995 and 1996, respectively.
Interest rate spreads increased from 1.72% to 1.84% for the years ended December
31, 1995 and 1996, respectively. The improvement in spreads reflects a 45 basis
point decline in the costs of interest-bearing liabilities offset by a 33 basis
point decline in the yield of interest-earning assets. Average interest-earning
assets were $575.5 million for 1996 compared to $496.5 million for 1995.
Net interest income increased $3.9 million, or 82.4%, from $4.7 million to
$8.6 million for the years ended December 31, 1994 and 1995, respectively.
Interest rate spreads increased to 1.72% from 1.51% for the years ended December
31, 1995 and 1994, respectively. The improvement in spreads reflects the
repricing of adjustable interest-bearing assets and the slight improvement in
the ratio of interest-earning assets to interest-bearing liabilities to 102.49%
in 1995 from 101.88% in 1994. Average interest-earning assets were $496.5
million for 1995 compared to $303.5 million for 1994.
The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate) and changes due to changes in rate (changes in rate multiplied by
prior year's volume). Changes due to changes in rate-volume (change in rate
multiplied by changes in volume) have been allocated proportionately between
changes in volume and changes in rate.
<PAGE>
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
(Dollars in thousands) VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------- ------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (a) $ 6,333 $ (968) $ 5,365 $ 6,491 $ 452 $ 6,943
Mortgage-backed and related securities (9,307) (9,307) (18,614) 7,555 1,730 9,285
Investment securities (b) (c) 16 (134) (118) (50) 239 189
Mortgage-backed and related securities
available for sale 16,404 (45) 16,359 837 115 952
Investment securities available for sale (c) 2,194 (305) 1,889 859 441 1,300
Federal funds sold 2 (8) (6) (257) 224 (33)
Trading account 17 (185) (168) 167 -- 167
------------------------------- ---------------------------------
Total interest-earning assets $ 15,659 $(10,952) $ 4,707 $ 15,602 $ 3,201 $ 18,803
Interest-bearing liabilities:
Savings deposits $ 2,803 $ (100) $ 2,703 $ 1,034 $ 559 $ 1,593
Time deposits 2,208 (596) 1,612 5,553 168 5,721
FHLB advances 972 (292) 680 1,253 1,040 2,293
Other borrowings (1,778) (446) (2,224) 3,004 946 3,950
Subordinated debt -- 112 112 928 (66) 862
------------------------------- ---------------------------------
Total interest-bearing liabilities 4,205 (1,322) 2,883 11,772 2,647 14,419
------------------------------- ---------------------------------
Change in net interest income $11,454 $ (9,630) $ 1,824 $ 3,830 $ 554 $ 4,384
=============================== =================================
</TABLE>
- ----------
(a) Includes mortgage and other loans.
(b) Includes interest-bearing deposits, repurchase agreements, investment
securities held to maturity, and FHLB stock.
(c) Interest income and average yields on municipal bonds, included in
investment securities, are presented on a tax equivalent basis.
INTEREST INCOME. Total interest income increased $5.3 million, or 13.1%, from
$40.5 million for the year ended December 31, 1995 to $45.8 million for the year
ended December 31, 1996. Interest income on mortgage and other loans increased
$5.4 million or 30.5%. The increase is largely attributed to the $77.3 million
increase in average loan balance. Interest income on mortgage-backed securities
held-to-maturity and available-for-sale decreased by $2.2 million, or 10.9%,
from $20.2 million at December 31, 1995 to $18.0 million at December 31, 1996
largely as a result of a $31.2 million decline in average mortgage backed
securities held-to-maturity and available-for-sale.
Total interest income increased $18.3 million, or 82.4%, from $22.2 million
for the year ended December 31, 1994 to $40.5 million for the year ended
December 31, 1995. Interest income on mortgage and other loans increased $6.9
million or 63.9%. The increase is primarily attributable to an increase in the
average balance of the loans receivable portfolio from $127.8 million for the
year ended December 31, 1994 to $201.7 million for the year ended December 31,
1995 as well as a slight increase in the average yield on the loans receivable
portfolio from 8.46% for the year ended December 31, 1994 to 8.80% for the year
ended December 31, 1995. Similarly, interest income on mortgage-backed and
related securities, including those available for sale, increased by $10.2
million, or 102.0%, from $10.0 million for the year ended December 31, 1994 to
$20.2 million for the year ended December 31, 1995 resulting primarily from an
$107.6 million increase in the average balance and a 113 basis point increase in
the average yield of such securities.
INTEREST EXPENSE. Total interest expense increased by $2.9 million, or 9.1%,
from $31.9 million for the year ended December 31, 1995 to $34.8 million for the
year ended December 31, 1996. The increase is attributable to a $79.9 million
increase in interest bearing liabilities offset by a 47 basis point decline in
interest costs.
<PAGE>
Total interest expense increased by $14.4 million, or 82.3%, from $17.5 million
for the year ended December 31, 1994 to $31.9 million for the year ended
December 31, 1995 as the Company funded its growth with both deposits and
borrowings. The increase in total interest expense was primarily attributable to
a $186.6 million increase in interest bearing liabilities. The increase in total
interest expense reflects a $7.3 million increase and a $6.3 million decrease in
expenses relating to deposits and other borrowings, respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses is the annual cost of
providing an allowance or reserve for anticipated future losses on the loan
portfolio. The allowance reflects management's judgment as to the level
considered appropriate to absorb such losses based upon a review of factors
including delinquent loan trends, historical loss experience, economic
conditions, loan portfolio mix and the Company's internal credit review process.
Total provisions for loan losses decreased by $800,000, or 47.1% from $1.7
million for the year ended December 31, 1995 to $919,000 for the year ended
December 31, 1996. The decrease in loan loss provisions is attributable to the
Company's acquisition of several pools of credit enhanced mortgage loans which
have correspondingly lower anticipated losses as compared to the product
purchased in 1995. The net loan portfolio at December 31, 1996 includes four
pools of credit enhanced one-to-four family mortgage loans, totaling $53.2
million. Two of these pools, totaling $33.5 million, have a credit reserve from
the seller equal to 2.3% of the unpaid principal balance at the time of purchase
available to offset any losses. One pool, totaling $11.7 million, has an
indemnification whereby the seller must repurchase any loan that becomes more
than four payments past due at any time during the life of the loan. The final
pool of loans, totaling $8.0 million, has a credit reserve from the seller equal
to approximately 10.0% of the unpaid principal balance at the time of
acquisition. Since the available credit enhancement associated with these loans
exceeds the expected potential losses, the provision for loan losses declined
during 1996.
Management considers many factors in determining the required levels of
loan loss reserves, including a detailed analysis of specific loans in the
portfolio, known and inherent risk in the portfolio, estimated value of the
underlying collateral, assessment of general trends in the real estate market,
and current and prospective economic and regulatory conditions. The total loan
loss allowance at December 31, 1996 and 1995 was $3.0 million and $2.3 million,
respectively, which was 0.8% and 0.9%, respectively, of total loans outstanding.
Total loan loss allowance as a percentage of total non-performing assets was
26.3% at December 31, 1996 as compared to 43.4% at December 31, 1995. Management
believes the allowance for loan losses is adequate at December 31, 1996 to cover
potential losses.
Total provisions for loan losses increased $1.2 million, or 243.9%, from
$492,000 for the year ended December 31, 1994 to $1.7 million for the year ended
December 31, 1995. The increase in the provision for loan losses reflects
management's intent to provide prudent reserves for potential loan losses and
for loan acquisitions made during periods of high growth. During the year
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,311 $ 989 $ 835 $ 659 $ 531
Loans charged off, net of recoveries:
Real estate loans:
One-to four family (273) - (338) (19) (172)
Commercial real estate - - - - (235)
Land - - - (1) (178)
Construction - - - - (13)
Consumer and other:
Lease financing - - - - (303)
Other - (400) (15) -
----------------------------------------------------------------------
Total charge-offs (273) (400) (338) (35) (901)
Provision for possible loan losses 919 1,722 492 211 972
Allowance acquired through purchase - - - - 57
----------------------------------------------------------------------
Balance at end of period $2,957 $2,311 $ 989 $ 835 $ 659
----------------------------------------------------------------------
Ratio of net charge-offs to net average
loans outstanding during the period .10% .14% .24% .03% .88%
</TABLE>
<PAGE>
ended December 31, 1995, the Company provided specific reserves for several
single family homes. In addition, the Company provided general reserves on loan
acquisitions of $145.9 million in accordance with the Company's loan loss
reserve policy. The total loan loss allowance at December 31, 1995 and 1994 was
$2.3 million and $989,000 respectively which was 0.9% and 0.6%, respectively of
total loans outstanding. Total loss allowance as a percentage of total
non-performing assets was 46.9% at December 31, 1995 as compared to 44.8% at
December 31, 1994.
NON-INTEREST INCOME. Total non-interest income declined by $1.0 million, or
26.3%, from $3.8 million for fiscal year 1995 to $2.8 million for fiscal year
1996. Loan fees and service charges increased $756,000 due to fees collected on
$2.8 million in purchased mortgage servicing rights. As a result of the newly
created loans held for sale category, the Company recognized non-interest income
on the prepayments of loans held for sale. In the prior year, this income would
have been recognized as interest income. Gains on loans held for sale increased
$642,000. Gains on sales of mortgage-backed securities and investments totaled
$935,000.
Total non-interest income increased by $3.6 million from $175,000 for the
year ended December 31, 1994 to $3.7 million for the year ended December 31,
1995. In order to take advantage of favorable market conditions, the Company
sold six mortgage backed and investment securities held for liquidity purposes,
for a $1.4 million gain in 1995. In addition, the Company realized a $2.0
million gain on the sale of two mortgage-backed securities with underlying
collateral of one-to-four family dwellings largely as a result of management's
ability to analyze, purchase, repackage and sell the undervalued securities.
With the significant growth in loan and deposit balances, loan fees and service
charges as well as other non-interest income increased to $228,000 offset by a
$100,000 loss recorded in connection with the kiting of a deposit. The Company
also recognized a $232,000 gain on the sale of a loan.
NON-INTEREST EXPENSES. Total non-interest expenses increased $2.9 million, or
46.8%, from $6.2 million for fiscal year 1995 to $9.1 million for fiscal year
1996. Non-interest expenses are composed of general and administrative expenses
and other non-interest expenses. General and administrative expenses increased
$2.8 million, or 50.0%, from $5.6 million for the year ended December 31, 1995
to $8.4 million for the year ended December 31, 1996. The increase is primarily
attributed to the effect of a one-time $1.7 million assessment to recapitalize
the SAIF, a $660,000 increase in compensation, employee benefits and $483,000 in
federal insurance premiums and overall administrative costs for a higher deposit
base. As in previous years, it is the Company's compensation policy to pay a
combination of salary and incentive based compensation consisting of bonuses
tied to the overall Company's performance and individual performances consistent
with the improved performance of the Company net of SAIF assessment, bonuses
increased to $1.1 million for 1996 from $775,000 for 1995. Bonuses were $1.1
million and $745,000 for the year ended December 31, 1996 and 1995,
respectively. General and administrative expenses net of bonuses and the SAIF
assessment as a percentage of total assets was 0.86% and 0.87% for the years
ended December 31, 1996 and 1995, respectively. General and administrative
expenses net of the SAIF assessment as a percentage of total assets was 1.03%
and 1.00% for the years ended December 31, 1996 and 1995, respectively. Other
non-interest expense increased $21,000, or 3.1%, from $679,000 at December 31,
1995 to $700,000 at December 31, 1996. The slight increase is attributable to a
$213,000 increase in amortization of purchased mortgage servicing rights offset
by a $192,000 decline in real estate owned expenses.
Total non-interest expenses increased $2.6 million, or 70.7%, from $3.6
million for the year ended December 31, 1994 to $6.2 million for the year ended
December 31, 1995. General and administrative expenses increased $2.1 million,
or 58.7%, from $3.5 million for the year ended December 31, 1994 to $5.6 million
for
<PAGE>
the year ended December 31, 1995. This increase reflects increased expenses for
professional services and other general and administrative expenses related to
the significant growth in loan and deposit balances as well as a $762,000
increase in compensation and employee benefits, a $189,000 increase in federal
insurance premiums due to a higher deposit base and a $40,000 increase in office
occupancy. The Company incurred $300,000 for a marketing campaign which
management believes will ultimately enhance franchise value. General and
administrative expenses net of bonuses as a percentage of total assets was 0.87%
and 0.78% for the years ended December 31, 1995 and 1994, respectively. General
and administrative expenses as a percentage of assets was 1.00% and 0.82% for
the years ended December 31, 1995 and 1994, respectively. Other non-interest
expenses increased by $526,000, or 343.8%, from $153,000 for the year ended
December 31, 1994 to $679,000 for the year ended December 31, 1995. The increase
was primarily due to a $210,000 loss on the sale of a one-to-four family
property sold in conjunction with the unwinding of an unrated mortgage security
and $122,000 amortization of purchased mortgage servicing rights.
INCOME TAX EXPENSE. Income tax expense is computed upon, and generally varies
proportionally with, earnings before income tax expense adjusted for non-taxable
income and non-deductible expense.
The effective tax rate for the year ended December 31, 1996 was 31.9%
compared to 37.9% for 1995. The income tax expense for the year ended December
31, 1996 was $1.2 million as compared with $1.7 million for the year ended
December 31, 1995. The effective tax rate decreased largely as a result of a
decline in general loan provisions which are non-deductible for federal income
tax purposes.
The effective tax rate for 1995 was 37.9% as compared to 25.2% for 1994.
The income tax expense for the year ended December 31, 1995 was $1.7 million, as
compared with $182,000 for the year ended December 31, 1994. The Company's
effective tax rate exceeded the statutory federal income tax rate of 34% due
primarily to the non-deductibility for federal income tax purposes of goodwill
amortization and state taxes.
IMPACT OF INFLATION AND CHANGING PRICES
Since interest rates and inflation rates do not always move in concert, the
effect of inflation on financial institutions may not necessarily be the same as
on other businesses. A bank's asset and liability structure differs
significantly from that of industrial companies in that virtually all assets and
liabilities are of a monetary nature. Management believes that the impact of
inflation on financial results depends upon the Company's ability to manage
interest rate sensitivity and, by such management, reduce the inflationary
impact upon performance. Interest rates do not necessarily move in the same
direction, or in the same magnitude, as the prices of other goods and services.
As discussed above, management seeks to manage the relationship between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It also establishes
criteria for the recognition of either a servicing asset or servicing liability
for servicing contracts to service financial assets. This standard is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company believes the adoption of the new standard, effective
January 1, 1997, did not have a material impact on its financial position or
results of operations.
In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS 125" which amends the previously issued SFAS
No. 125 and deferred implementation of the standards enumerated in SFAS No. 125
for repurchase agreements and dollar rolls, securities lending and similar
transactions to transfers of financial assets that occur after December 31,
1997.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,259 $ 8,965
Investment securities available-for-sale 78,826 40,058
Mortgage-backed securities available-for-sale 184,743 234,385
Loans receivable, net 185,757 248,492
Loans receivable held for sale 166,064 --
Other assets 29,316 22,043
----------------------------
Total assets 647,965 553,943
----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 390,486 306,500
Advances from the Federal Home Loan Bank of Atlanta 144,800 105,500
Securities sold under agreements to repurchase 57,581 93,905
Subordinated debt, net of original issue discount 16,586 16,496
Other liabilities 13,854 9,977
----------------------------
Total liabilities 623,307 532,378
----------------------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 3,500,000 shares authorized;
2,049,500 issued and outstanding at December 31,1996 and 1995 20 20
Additional paid-in capital 14,637 14,637
Retained earnings 7,905 5,353
Unrealized gain (loss) on securities available for sale, net of tax 2,096 1,555
----------------------------
Total stockholders' equity 24,658 21,565
----------------------------
Total liabilities and stockholders' equity $647,965 $553,943
----------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Mortgage loans and other loans $23,089 $ 17,726 $10,813
Mortgage-backed and related securities 17,955 20,205 9,973
Investment securities 4,690 2,347 1,290
Other 66 233 132
-------------------------------------
Total interest income 45,800 40,511 22,208
-------------------------------------
Interest expense:
Deposits 21,357 17,033 9,727
Advances from the Federal Home Loan Bank of Atlanta 6,689 5,985 4,278
Reverse repurchase agreements 4,569 6,839 2,281
Subordinated debt 2,200 2,089 1,227
-------------------------------------
Total interest expense 34,815 31,946 17,513
-------------------------------------
Net interest income 10,985 8,565 4,695
Provision for loan losses 919 1,722 492
-------------------------------------
Net interest income after provision for loan losses 10,066 6,843 4,203
-------------------------------------
Non-interest income:
Gain on sale of securities 935 3,412 118
Gain on sale of loans 874 232 --
Fees, service charges, and other 947 133 57
-------------------------------------
Total non-interest income 2,756 3,777 175
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 3,690 3,030 1,807
SAIF assessment 1,671 -- --
Other 3,014 2,531 1,696
-------------------------------------
Total general and administrative expenses 8,375 5,561 3,503
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure 238 430 (13)
Amortization of goodwill and other intangibles 462 249 166
-------------------------------------
Total other non-interest expenses 700 679 153
-------------------------------------
Total non-interest expenses 9,075 6,240 3,656
-------------------------------------
Income before income tax expense 3,747 4,380 722
Income tax expense 1,195 1,660 182
-------------------------------------
Net income $ 2,552 $ 2,720 $ 540
-------------------------------------
Earning per share
Primary $ 1.12 $ 1.33 $ 0.31
-------------------------------------
Fully diluted $ 1.09 $ 1.33 $ 0.31
-------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON AVAILABLE-
PREFERRED COMMON PAID-IN RETAINED FOR-SALE
(Dollars in thousands) STOCK STOCK CAPITAL EARNINGS SECURITIES TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 3 $10 $ 9,488 $2,591 $ 286 $12,378
Dividends Paid ($0.38/share) -- -- -- (498) -- (498)
Stock conversion (3) 3 -- -- -- --
Sale of 750,000 shares
of common stock -- 7 5,149 -- -- 5,156
Net Income for the year ended
December 31, 1994 -- -- -- 540 -- 540
Unrealized Loss on Available-for-
Sale securities, net of tax effect -- -- -- -- (548) (548)
-----------------------------------------------------------------------------
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 year ended
December 31, 1996 -- -- -- 2,552 -- 2,552
Unrealized Gain on Available-for-
Sale securities, net of tax effect -- -- -- -- 541 541
-----------------------------------------------------------------------------
Balances at December 31, 1996 $-- $20 $14,637 $7,905 $2,096 $24,658
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,552 $ 2,720 $ 540
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries 274 -- --
Provision for loan losses 919 1,722 492
Provision for losses on foreclosed real estate 78 213 22
Other gains and losses, net (1,011) (153) (95)
Proceeds from sales of loans held for sale 27,865 -- --
Originations and purchases of loans held for sale (91,943) -- --
Net realized gains on available-for-sale securities and
loans held for sale (935) (3,412) (145)
Increase in accrued interest receivable (2,220) (4,954) (2,919)
Increase in other assets (2,433) (80) (3,621)
Interest credited to deposits 21,361 17,033 7,473
Increase in accrued expenses and other liabilities 4,636 2,134 1,960
Depreciation and amortization (1,516) (2,153) (770)
Deferred income taxes (1,130) -- --
---------------------------------------------------
Net cash (used in) provided by operating activities (43,503) 13,070 2,937
---------------------------------------------------
Cash flows from investing activities:
Net increase in loans (90,717) (98,439) (27,722)
Equity investments in subsidiaries (2,359) -- --
Purchases of available-for-sale securities (356,882) (122,785) (184,678)
Proceeds from sale of available-for-sale securities 220,293 71,084 7,977
Proceeds from maturities of and principal payment
on available-for-sale securities 201,547 39,646 --
Net purchases of premises and equipment (842) (537) (279)
Net expenditures on foreclosed real estate --
Proceeds from sale of foreclosed real estate 1,156 -- 750
---------------------------------------------------
Net cash used in investing activities (27,804) (111,031) (203,952)
---------------------------------------------------
Cash flows from financing activities:
Net increase in non-interest bearing demands, savings,
and NOW deposit accounts 62,625 77,056 91,806
Increase in advances from FHLB 273,500 59,000 207,000
Payments on advances from FHLB (234,200) (49,500) (172,000)
Net increase in securities sold under agreements to repurchase (36,324) 14,292 49,971
Net increase in other borrowed funds -- -- 16,390
Increase in common stock and additional paid in capital -- -- 5,157
Dividends paid on common and preferred stock -- -- (498)
---------------------------------------------------
Net cash provided by financing activities 65,601 100,848 197,826
===================================================
Net increase (decrease) in cash and cash equivalents (5,706) 2,887 (3,189)
Cash and cash equivalents at beginning of period 8,965 6,078 9,267
---------------------------------------------------
Cash and cash equivalents at end of period $ 3,259 $ 8,965 $ 6,078
===================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental information:
Interest paid on deposits and borrowed funds $32,660 $29,852 $15,728
Income taxes paid 972 950 239
Gross unrealized gain (loss) on marketable securities
available-for-sale 3,512 2,590 (889)
Tax effect of gain (loss) on available-for-sale securities 1,416 1,036 (341)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") is a savings
and loan holding company organized under the laws of Delaware in 1994. The
primary business of the Company is the activities conducted by TeleBank (the
"Bank"), formerly known as Metropolitan Bank for Savings, F.S.B. The Bank is a
federally chartered savings bank, which provides deposit accounts insured by the
Federal Deposit Insurance Corporation ("FDIC") to customers nationwide.
During the second quarter of 1996, the Bank, through its wholly owned
subsidiary TeleBanc Servicing Corporation ("TSC"), funded 50% of the capital
commitment for a new entity, AGT Mortgage Services, LLC ("AGT"). AGT services
performing loans and administers workouts for troubled or defaulted loans for a
fee.
The Bank also provided, in the second quarter of 1996, 50% of the capital
commitment for an additional 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TeleBank and TSC, a wholly owned subsidiary. All significant intercompany
transactions and balances are eliminated in consolidation. In March, 1994,
TeleBanc became the direct savings and loan holding company parent of the Bank.
Accordingly, all financial data as of and for periods subsequent to March, 1994
represent the consolidated financial data of TeleBanc.
The Bank's total investment for the period ended December 31, 1996 through
TSC in AGT was $500,000. As of December 31, 1996 the Bank's equity investment in
AGT was $428,000 and total assets of AGT were $2.0 million. The investment in
AGT through TSC is accounted for under the equity method.
The Bank's total investment for the period ended December, 1996 through TSC
in AGT PRA was $1.9 million. As of December 31, 1996 the Bank's equity
investment in AGT PRA was $1.6 million and total assets of AGT PRA were $2.0
million. The investment in AGT PRA is accounted for under the equity method.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates for which a change
is reasonably possible in the near-term relate to the determination of the
allowance for loan losses, the fair value of investments and mortgage-backed
securities available-for-sale, loan receivables held for sale, and the valuation
of real estate acquired in connection with foreclosures.
In addition, the regulatory agencies which supervise the financial services
industry periodically review the Bank's allowance for losses on loans. This
review, which is an integral part of their examination process, may result in
additions to the allowance for loan losses based on judgments with regard to
available information provided at the time of their examinations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are composed of interest-bearing deposits,
certificates of deposit, funds due from banks, and federal funds sold with
original maturities of three months or less.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company generally classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale. On
December 15, 1995, the Company reclassified the entire held-to-maturity
investment and mortgage-backed securities portfolios as available-for-sale.
Held-to-maturity securities are those securities that the Company has the
ability and intent to hold until maturity. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts. Trading securities are bought and held principally for
the purpose of selling
<PAGE>
them in the near term. Securities purchased for trading are carried at market
value with the corresponding unrealized gains and losses being recognized by
credits or charges to income. The Company had no assets classified as trading
securities at December 31, 1996 and 1995. All other securities not included in
held-to-maturity or trading are classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses on available-for-sale securities, net of the related tax effects, are
reported as a separate component of stockholders' equity until realized.
A decline in market value of any held-to-maturity or available-for-sale
asset below its cost, that is deemed other than temporary, is charged to
earnings, resulting in the establishment of a new cost basis for the asset.
Transfers of securities into the available-for-sale category are recorded at
fair value at the date of the transfer. Any unrealized gain or loss at the date
of transfer is recognized as a separate component of stockholders' equity, net
of tax effect.
Premiums and discounts on securities are amortized or accreted over the
life of the related held-to-maturity security as an adjustment to yield using
the effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale and trading are included in earnings and are derived using
the specific identification method for determining the cost of the security
sold.
LOANS HELD FOR SALE
Mortgages acquired by the Company and intended for sale in the secondary
market are carried at lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by a charge
to income. The market value of these mortgage loans is determined by obtaining
market quotes for loans with similar characteristics. As of December 31, 1996,
no valuation allowance was recognized.
LOANS RECEIVABLE
Loans receivable consists of mortgages that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off and are
carried at amortized cost adjusted for charge-offs, the allowance for loan
losses, any deferred fees or costs on purchased or originated loans, and
unamortized premiums or discounts on purchased loans.
The loan portfolio is reviewed by the Company's management to set
provisions for estimated losses on loans which are charged to earnings in the
current period. In this review, particular attention is paid to delinquent loans
and loans in the process of foreclosure. The allowance and provision for loan
losses are based on several factors, including continuing examinations and
appraisals of the loan portfolio by management, examinations by supervisory
authorities, continuing reviews of problem loans and overall portfolio quality,
analytical reviews of loan loss experience in relation to outstanding loans, and
management's judgment with respect to economic conditions and its impact on the
loan portfolio.
NONPERFORMING/UNDERPERFORMING ASSETS
Nonperforming/underperforming assets consist of loans for which interest is
no longer being accrued, loans which have been restructured in order to afford
the Company a better opportunity to collect amounts due on the loan, real estate
acquired through foreclosure and real estate upon which deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not collected on
nonaccrual loans is reversed against current income when a loan is placed on
nonaccrual status. Accretion of deferred fees is discontinued for nonaccrual
loans. All loans past due ninety days, as well as other loans considered
uncollectible, are placed on non-accrual status. Interest received on nonaccrual
loans is recognized as interest income or, when it is doubtful that full payment
will be collected, interest received is applied to principal. Loans delinquent
more than ninety days are considered impaired by management and accounted for in
accordance with SFAS No.114.
DEPOSITS ACQUISITIONS
On May 2, 1996, TeleBanc entered into an agreement to assume certain
deposit liabilities with First Commonwealth Savings Bank FSB ("First
Commonwealth"), First Commonwealth Financial Corp., and John York, Jr. Pursuant
to this agreement, TeleBanc assumed certain brokered and telephone solicited
deposit accounts of First Commonwealth, which deposits had a current balance of
approximately $53.1 million as of April 30, 1996. In the deposit assumption,
First Commonwealth paid TeleBanc the amount of the deposit liabilities assumed,
plus the amount of the deposit liabilities (less certain renewals) multiplied by
0.25 percent.
LOAN AND COMMITMENT FEES, DISCOUNTS AND PREMIUMS
Loan fees and certain direct loan origination costs are deferred and the
net fee or cost is recognized into interest income using the interest method
over the contractual life of the loans. Premiums and discounts on loans
receivable are amortized or accreted, respectively, into income using the
interest method over the remaining period to contractual maturity and adjusted
for anticipated prepayments. Premiums and discounts on loans held for sale are
not amortized or accreted, respectively. The premium or discount is recognized
as part of the loss or gain upon sale.
<PAGE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE
Real estate properties acquired through foreclosure and held for sale are
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate method of valuation. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Valuations are periodically performed by management and an allowance for
losses is established through a charge to operations if the carrying value of a
property exceeds its estimated fair value less selling costs.
DEFERRED FINANCING COSTS
Deferred financing costs related to the issuance of the subordinated notes
in May and June 1994 have been capitalized and are being amortized using the
interest method over the life of the subordinated notes.
INCOME TAXES
Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
FINANCIAL INSTRUMENTS
Interest rate swaps and caps are used by the Company in the management of
its interest-rate risk. The Company is generally exposed to rising interest
rates because of the nature of the repricing of rate-sensitive assets as
compared with rate-sensitive liabilities. The objective of these financial
instruments is to match estimated repricing periods of rate-sensitive assets and
liabilities to reduce interest rate exposure. These instruments are used only to
hedge specific assets and liabilities, and are not used for speculative
purposes.
The net interest received or paid on these contracts is treated as an
adjustment to the interest expense related to the hedged obligations in the
period in which such amounts are due. Premiums and fees associated with interest
rate caps are amortized to interest expense on a straight-line basis over the
lives of the contracts.
OTHER ASSETS
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets.
AGT services the loans underlying these servicing rights. The cost of the
loan servicing rights is amortized in proportion to, and over the period of,
estimated net servicing income. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. For
purposes of measuring impairment, the rights are stratified based on mortgage
product types. The amount of impairment recognized is the amount by which the
capitalized mortgage servicing rights exceed their fair value in aggregate. As
of December 31, 1996, no valuation allowance was recognized.
EARNINGS PER SHARE
Earnings per share is computed by dividing adjusted net income by the total
of the weighted average number of common and preferred shares outstanding during
the respective period. The Company utilizes the modified treasury stock method
to calculate the weighted average number of common share equivalents, as the
exercise of all warrants and options potentially exercisable could result in a
greater than 20% increase in the number of shares outstanding. The calculation
requires that total proceeds from the exercise of warrants and options are
applied first to the repurchase of outstanding common shares up to a 20% limit
and second to the reduction of existing short-term or long-term debt and the
purchase of securities or commercial paper. The weighted average number of
common share equivalents outstanding in the calculation of primary earnings per
share was 2,316,616, 2,068,597, and 1,748,934 in 1996, 1995 and 1994,
respectively, after giving retroactive effect to a 100 for 1 stock split
consummated in March, 1994. The fully diluted earnings per share includes all
potentially dilutive shares such as employee stock option plan shares, warrants
and options. In addition, for purposes of determining fully diluted earnings per
share, purchases of common stock made from proceeds of the exercise of options
were assumed to have been made at the higher year-end price.
<PAGE>
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1994 financial statements have
been made to conform to the 1996 presentation.
NEW ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. It also establishes
criteria for the recognition of either a servicing asset or servicing liability
for servicing contracts to service financial assets. This standard is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. The Company believes the adoption of the new standard, effective
January 1, 1997, did not have a material impact on its financial position or
results of operations.
In December 1996, the FASB issued SFAS No. 127 -"Deferral of the Effective
Date of Certain Provisions of SFAS No. 125", which amends the previously issued
SFAS No. 125 and deferred implementation of the standards enumerated in SFAS No.
125 for repurchase agreements, dollar rolls, securities lending, and similar
transactions to transfers of financial assets that occur after December 31,
1997.
3. CAPITAL REQUIREMENTS AND SUPERVISORY AGREEMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table
below ($ in thousands):
<TABLE>
<CAPTION>
For Capital
Adequacy
Actual Purposes:
------ ---------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk
weighted assets) $34,104 10.41% greater than $26,205 greater than 8.0%
Tier I Capital (to risk
weighted assets) $31,726 9.69% greater than $13,102 greater than 4.0%
Tier I Capital (to
average assets) $31,726 5.08% greater than $24,999 greater than 4.0%
Tangible $31,711 5.07% greater than $ 9,374 greater than 1.5%
As of December 31, 1995:
Total Capital (to risk
weighted Assets) $30,680 11.74% greater than $20,899 greater than 8.0%
Tier I Capital (to risk
weighted assets) $28,944 11.08% greater than $10,450 greater than 4.0%
Tier 1 Capital (to average
total assets) $28,944 5.31% greater than $21,798 greater than 4.0%
Tangible $29,201 5.36% greater than $ 8,178 greater than 1.5%
</TABLE>
<PAGE>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
------------------
Amount Ratio
------ -----
As of December 31, 1996:
Total Capital (to risk
weighted assets) greater than $32,756 greater than 10.0%
Tier I Capital (to risk
weighted assets) greater than $19,654 greater than 6.0%
Tier I Capital (to
average assets) greater than $31,248 greater than 5.0%
Tangible N/A --
As of December 31, 1995:
Total Capital (to risk
weighted Assets) greater than $26,264 greater than 10.0%
Tier I Capital (to risk
weighted assets) greater than $15,674 greater than 6.0%
Tier 1 Capital (to average
total assets) greater than $27,261 greater than 5.0%
Tangible N/A --
On August 8, 1996, the OTS terminated the May 1993 Supervisory Agreement
with TeleBank subsequent to the completion of a full scope safety and soundness
examination of the Bank.
<PAGE>
4. Investment Securities
The cost basis and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1995, by contractual maturity, are
shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---- ----- ------ -----------
<S> <C> <C> <C> <C>
1996:
Due within one year:
Repurchase Agreement $ 1,730 $ -- $ -- $ 1,730
Margin Account 18 -- -- 18
Due within one to five years:
Corporate Debt 2,000 -- (10) 1,990
Agency Notes 988 1 -- 989
Municipal Bonds 565 3 -- 568
Certificate of Deposit 499 -- -- 499
Due within five to ten years:
Corporate Debt 7,436 61 -- 7,497
Municipal Bonds 3,560 27 -- 3,587
Due after ten years:
Agency Notes 30,151 132 -- 30,283
Equities 14,011 220 -- 14,231
Corporate Debt 13,089 994 -- 14,083
Municipal Bonds 3,200 151 -- 3,351
-------- ------- -------- --------
$77,247 $ 1,589 $ (10) $ 78,826
======== ======= ======== ========
1995:
Due within one year:
Agency Notes $ 3,359 $ -- $ -- $ 3,359
Due within one to five years:
Municipal Bonds 2,946 15 -- 2,961
Due within five to ten years:
Corporate Debt 6,162 79 -- 6,241
Municipal Bonds 5,942 74 -- 6,016
Due after ten years:
Corporate Debt 16,688 1,058 -- 17,746
Municipal Bonds 3,472 263 -- 3,735
-------- ------- -------- --------
$ 38,569 $ 1,489 $ -- $ 40,058
======== ======= ======== ========
</TABLE>
The proceeds from sale, gross realized gains and losses on investment
securities available for sale that were sold in 1996 were $25.1 million,
$311,000 and $153,000, respectively. The proceeds from sale, gross realized
gains and losses on investment securities available for sale that were sold in
1995 were $24.1 million, $1.1 million, and $52,000, respectively.
5. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by the issuers
of the securities. The Company has also invested in collateralized mortgage
obligations ("CMOs") which are securities issued by special purpose entities
generally collateralized by pools of mortgage-backed securities. The Company's
CMOs are senior tranches collateralized by federal agency securities or whole
loans. The fair value of mortgage-backed and related securities fluctuate
according to current interest rate conditions and prepayments. Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other
information.
The amortized cost basis and estimated fair values of mortgage-backed
securities available-for-sale at December 31, 1996 and 1995, by contractual
maturity, are shown as follows (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
1996:
Due within one to five years:
Private issuer $ 4,172 $ -- $ (56) $ 4,116
Due within five to ten years:
Private issuer 8,262 75 -- 8,337
Collateralized mortgage
obligations 371 -- (3) 368
Due after ten years:
Private issuer 132,791 1,367 -- 134,158
Collateralized mortgage
obligations 24,896 461 -- 25,357
Agency certificates 12,310 97 -- 12,407
$ 182,802 $ 2,000 $ (59) $ 184,743
1995:
Due within one to five years:
Private issuer $ 2,546 $ -- $ (15) $ 2,531
Agency certificates 9,594 62 -- 9,656
Due within five to ten years:
Private issuer 5,993 -- (111) 5,882
Agency certificates 3,085 -- (6) 3,079
Due after ten years:
Private issuer 181,481 260 -- 181,741
Agency certificates 22,252 686 -- 22,938
Collaterlized mortgage
obligations 8,325 233 -- 8,558
$ 233,276 $ 1,241 $ (132) $ 234,385
At December 31, 1996 and 1995, $61.4 million and $108.5 million
respectively, of private issuer mortgage-backed securities were pledged as
collateral for reverse repurchase agreements.
The proceeds from sale, gross realized gains and losses on mortgage-backed
securities available for sale that were sold in 1996 were $185.2 million, $1.4
million and $707,000, respectively. The proceeds from sale and, gross realized
gains and losses on mortgage-backed securities available for sale that were sold
in 1995 were $39.7 million, $1.6 million and $3,000, respectively.
<PAGE>
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 are summarized as follows
(in thousands):
1996 1995
--------- ---------
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 359,563 $ 254,678
Secured by commercial real estate 4,017 4,553
Secured by mixed-use property 1,180 1,792
Secured by five or more dwelling units 1,516 1,286
Secured by land 781 384
367,057 $ 262,693
Less:
Net deferred loan origination fees (42) (42)
Unamortized discounts, net (13,750) (14,129)
Total first mortgage loans 353,265 248,522
Other loans:
Home equity and second mortgage loans 1,208 2,202
Other 305 79
354,778 250,803
Less: allowance for loan losses (2,957) (2,311)
Net loans receivable $ 351,821 $ 248,492
The mortgage loans are located primarily in New York, California and New
Jersey according to the following percentages 29.2%, 13.9%, and 9.9%,
respectively.
Mortgage loans for which the company owns the servicing rights are serviced
by AGT for a fee. The unpaid principal balance of mortgage loans owned by the
Company but serviced by companies other than AGT was $203,852,788 and
$103,349,000 at December 31, 1996 and 1995, respectively.
Loans past due ninety days or more, and therefore on non-accrual status at
December 31, 1996 and 1995, are summarized as follows (in thousands):
1996 1995
---- ----
First mortgage loans:
Secured by one-to-four family residences $ 8,979 $ 4,526
Secured by commercial real estate 1,217 261
Home equity and second mortgage loans 54 136
Total $10,250 $ 4,923
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all nonperforming loans had been performing during
1996, 1995 and 1994, the Bank would have recorded $789,000, $365,000, and
$113,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1995.
Activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, beginning of the year $ 2,311 $ 989 $ 835
Provision for loan losses 919 1,722 492
Charge-offs, net (273) (400) (338)
Balance, end of year $ 2,957 $ 2,311 $ 989
According to SFAS No. 114, a loan is considered impaired when, based upon
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The term "all amounts due" includes both the contractual interest and
principal payments of a loan as scheduled in the loan agreement. The Company has
determined that once a loan becomes 90 or more days past due, collection of all
amounts due is no longer probable and is therefore considered impaired. The
amount of impairment is measured based upon the fair value of the underlying
collateral and is reflected through the creation of a valuation allowance.
The table below presents impaired loans as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
AMOUNT
TOTAL AMOUNT OF OF RECORDED
RECORDED INVESTMENT SPECIFIC INVESTMENT NET OF
DESCRIPTION OF LOANS IN IMPAIRED LOANS RESERVES SPECIFIC RESERVES
- -------------------- ----------------- -------- -----------------
<S> <C> <C> <C>
1996:
Impaired loans:
Commercial real estate $ 1,217 $ 318 $ 899
One-to-four family 9,033 1,492 7,541
Total $ 10,250 $ 1,810 $ 8,440
Restructured loans:
Commercial real estate $ 251 $ 8 $ 243
One-to-four family 184 0 184
Total $ 435 $ 8 $ 427
1995:
Impaired loans:
Commercial real estate $ 261 $ 222 $ 39
One-to four family 4,662 1,070 3,592
Total $ 4,923 $ 1,292 $ 3,631
Restructured loans:
Commercial real estate $ 255 $ 38 $ 217
One-to-four family 110 26 84
Total $ 365 $ 64 $ 301
</TABLE>
<PAGE>
The average recorded investment in impaired loans for the year ended
December 31, 1996 and 1995 was $2.5 million and $1.8 million, respectively. The
related amount of interest income the Company would recognize as additional
interest income for the years ended December 31, 1996, 1995 and 1994 was
$789,000, $365,000 and $113,000, respectively. The Company's charge-off policy
for impaired loans is consistent with its charge-off policy for other loans;
impaired loans are charged-off when, in the opinion of management, all principal
and interest due on the impaired loan will not be fully collected. Consistent
with the Company's method for non-accrual loans, interest received on impaired
loans is recognized as interest income, or when it is doubtful that full payment
will be collected, interest received is applied to principle.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1996 was $1.3
million, less the allowance for loan losses of $65,000, resulting in a net
balance of $1.2 million. The real estate acquired through foreclosure at
December 31, 1995 was $1.0 million, less the allowance for loan losses of
$213,000, resulting in a net balance of $787,000.
Activity in the allowance for real estate losses for the years ended
December 31, 1996, 1995, and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, beginning of year $ 213 $ 92 $ 221
Provision for real estate losses 77 256 22
Charge-offs (225) (135) (151)
Balance, end of year $ 65 $ 213 $ 92
8. LOANS SERVICED FOR OTHERS
Mortgage loans serviced by AGT for others are not included in the
accompanying consolidated statements of financial condition because the related
loans are not owned by the Company or any of its subsidiaries. The unpaid
principal balances of these loans at December 31, 1996 and 1995 are summarized
as follows (in thousands):
1996 1995
---- ----
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation $ 2,843 $ 3,574
Federal National Mortgage Association 11,548 5,307
Subtotal $14,391 8,881
Mortgage loan portfolio serviced for:
Other investors 31,465 9,315
Total $45,856 $18,196
Custodial escrow balances held in connection with the fore-going loans
serviced were approximately $84,422 and $168,000 at December 31, 1996 and 1995,
respectively.
In August 1995, the Bank purchased a loan secured by mortgage servicing
rights that were owned by an affiliate for $2.5 million. The loan was paid off
in October 1995 in conjunction with the Bank's purchase of the underlying
servicing rights for $3.3 million. Purchased mortgage servicing rights of $2.8
million and $3.3 million as of December 31, 1996 and 1995, respectively are
included in other assets.
9. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
phone, the mail, and walk-ins at its headquarters. On May 2, 1996, TeleBanc
entered into an agreement to assume certain deposit liabilities with First
Commonwealth Savings Bank FSB ("First Commonwealth"), First Commonwealth
Financial Corp., and John York, Jr. Pursuant to this agreement, TeleBanc assumed
certain brokered and telephone solicited deposits accounts of First
Commonwealth, which deposits had a current balance of approximately $53.1
million as of April 30, 1996. In the deposit assumption, First Commonwealth paid
TeleBanc the amount of the deposit liabilities assumed, plus the amount of the
deposit liabilities (less certain renewals) multiplied by 0.25 percent. Deposits
at December 31, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE AT
DECEMBER 31 AMOUNT PERCENT
---------------- ------------------ --------------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Demand accounts,
non interest-
bearing --% --% $ 309 $ 2,020 --% 0.7%
Money market 5.10 5.23 109,835 75,732 28.1 24.7
Passbook savings 3.00 3.00 1,758 1,748 0.5 0.6
Certificates of
Deposit 6.28 6.53 278,584 227,000 71.4 74.0
---------------------------------------------
Total $390,486 $306,500 100.0% 100.0%
---------------------------------------------
</TABLE>
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1996 and 1995 are as follows (in thousands):
Amount 1996 1995
------ ---- ----
0 - 1.99% $ 5,235 $ --
2 - 3.99% 148 --
4 - 5.99% 210,481 141,750
6 - 7.99% 170,056 158,375
8 - 9.99% 1,709 1,817
10 - 11.99% 790 790
Total $ 388,419 $ 302,732
<PAGE>
At December 31, 1996, scheduled maturities of certificates of deposit and
money market accounts are as follows (in thousands):
<TABLE>
<CAPTION>
LESS THAN
ONE YEAR 1-2 2-3 3-4 4-5 5+
YEARS YEARS YEARS YEARS YEARS YEARS TOTAL
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 1.99% $ 5,235 $ -- $ -- $ -- $ -- $ -- $ 5,235
2 - 3.99% 148 -- -- -- -- -- 148
4 - 5.99% 158,566 36,344 13,459 910 1,161 41 210,481
6 - 7.99% 64,828 22,325 54,864 12,002 12,626 3,411 170,056
8 - 9.99% 1,058 543 -- 75 -- 33 1,709
10 - 11.99% 790 -- -- -- -- -- 790
$ 230,625 $ 59,212 $ 68,323 $ 12,987 $ 13,787 $ 3,485 $ 388,419
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $45.1 million and $20.0 million at December 31,
1996 and 1995, respectively.
Interest expense on deposits for the years ended December 31, 1996, 1995,
and 1994 is summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Money market $ 4,740 $ 2,036 $ 417
Passbook savings 59 78 92
Certificates of deposit 16,558 14,919 9,218
Total $ 21,357 $ 17,033 $ 9,727
Accrued interest payable on deposits at December 31, 1996 and 1995 was
$667,000 and $452,000, respectively.
10. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1995
were as follows (dollars in thousands):
WEIGHTED WEIGHTED
AVERAGE AVERAGE
MATURITY 1996 INTEREST RATE 1995 INTEREST RATE
- -------- ---- ------------- ---- -------------
1996 $ -- 5.52% $ 51,000 5.52%
1997 64,800 5.56 29,500 5.72
1998 41,000 5.53 -- --
1999 39,000 5.60 25,000 5.59
Total $ 144,800 5.56% $ 105,500 5.59%
All advances, except for $2.0 million which matured in November of 1996,
are floating rate advances and adjust quarterly or semi-annually to the London
InterBank Offering Rate ("LIBOR") rate. In 1996 and 1995, the advances were
collateralized by a specific lien on mortgage loans in accordance with an
"Advances, Specific Collateral Pledge and Security Agreement" with the FHLB of
Atlanta, executed September 10, 1980. Under this agreement, the Bank is required
to maintain qualified collateral equal to 120 to 160 percent of the Bank's FHLB
advances, depending on the collateral type. As of December 31, 1996 and 1995,
the Company secured these advances with an assignment of specific mortgage loan
collateral from its loan and mortgage-backed security portfolio. These
one-to-four family whole first mortgage loans and securities pledged as
collateral totaled approximately $186.1 million and $140.2 million at December
31, 1996 and 1995, respectively.
The Company is required to be a member of the FHLB System and to maintain
an investment in the stock of the FHLB of Atlanta at least equal to the greater
of 1 percent of the unpaid principal balance of its residential mortgage loans
or 1 percent of 30 percent of its total assets or 1/20th of its outstanding
advances from the FHLB.
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
reverse repurchase agreements is summarized as follows (dollars in thousands):
1996 1995
---- ----
Weighted average balance during the year $ 68,920 $ 97,692
Weighted average interest rate during the year 5.77% 6.29%
Maximum month-end balance during the year $ 97,416 $119,507
Balance at year-end $ 57,581 $ 93,905
Securities underlying the agreements
as of the end of the year:
Carrying value, including accrued interest $ 61,418 $103,590
Estimated market value $ 61,426 $103,891
The securities sold under the reverse repurchase agreements at December 31,
1996 are due in less than one year. The Company enters into sales of securities
under agreements to repurchase the
<PAGE>
same securities. Reverse repurchase agreements are collateralized by fixed and
variable rate mortgage-backed securities or investment grade securities. Reverse
repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the balance sheet.
The dollar amount of securities underlying the agreement remains in the asset
accounts. The securities underlying the agreements are physical and book entry
securities and the brokers retain possession of the securities collateralizing
the reverse repurchase agreements. If the counterparty in a reverse repurchase
agreement were to fail, the Company might incur an accounting loss for the
excess collateral posted with the counterparty. As of December 31, 1996, the
Company's amount at risk did not exceed 10% of the Company's stockholders'
equity with any one counterparty.
12. SUBORDINATED DEBT
In May and June 1994, the Company issued 15,000 units of subordinated debt
at a price of $15.0 million and 2,250 units at a price of $2.3 million,
respectively. The units each consist of $1,000 of 11.5% subordinated notes due
in 2004 and 20 detachable warrants to purchase one share each of TeleBanc common
stock. The notes may not be redeemed prior to May 1, 1999. The notes are
redeemable at the option of the Company after May 1, 1999, at an initial
redemption price of 105.75% of the principal amount plus accrued interest with
the redemption price declining to 104.60%, 103.45%, 102.30%, and 101.15%
annually each year thereafter. Interest is payable semi-annually on May 1 and
November 1, commencing November 1, 1994. The indenture, among other things,
restricts the ability of the Company under certain circumstances to incur
additional indebtedness, limits cash dividends and other capital distributions
by the Company, requires the maintenance of a reserve initially equal to 150% of
the Company's annual interest expense on all indebtedness, restricts disposition
of the Bank or its assets and limits transactions with affiliates.
The total value of the 345,000 warrants was $948,750 which resulted in an
original issue discount on the subordinated debt in the amount of $899,289. The
original issue discount is amortized on a level yield basis over the life of the
debt. The warrants became transferable on November 27, 1994 and are exercisable
on or after May, 27, 1995. The exercise price of each warrant is $7.65625.
13. PENSION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). All
full-time employees of the Company who meet limited qualifications participate
in the ESOP. Under the ESOP, the Company contributes cash to a separate trust
fund maintained exclusively for the benefit of those employees who have become
participants. Participants will have shares of TeleBanc common stock, valued at
market value, allocated to their personal plan accounts based on a uniform
percentage of wages. At December 31, 1996 and 1995, the Company carried a
$305,000 and $240,000, respectively, note receivable from the ESOP which was
collateralized by the Company's common stock. The ESOP owned 67,600 shares of
the Company's stock with approximately 32,000 and 18,000 shares vested at
December 31, 1996 and 1995, respectively. The Company's contribution to the
ESOP, which is reflected in compensation expense, was $224,000, $210,000 and
$104,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
14. INCOME TAXES
Income tax expense for the years ended December 31, 1996, 1995, and 1994 is
summarized as follows (in thousands):
1996 1995 1994
---- ---- ----
Current: Federal $1,194 $2,038 $ 224
State 225 181 59
1,419 2,219 283
Deferred: Federal (78) (474) (86)
State (146) (85) (15)
(224) (559) (101)
Total: Federal 1,116 1,564 138
State 79 96 44
Total $1,195 $1,660 $ 182
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1996, 1995, and 1994
is as follows:
1996 1995 1994
---- ---- ----
Federal income tax at
statutory rate 34.0% 34.0% 34.0%
State taxes, net of
federal benefit 4.2 4.2 4.2
Municipal bond interest,
net of disallowed
interest expense (3.6) (7.0) (18.0)
Other (2.7) 6.7 5.0
Total 31.9% 37.9% 25.2%
<PAGE>
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax versus financial reporting purposes. The sources
of these temporary differences and the related tax effects for the years ended
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
Deferred Tax Liabilities:
Acquired Loan Servicing Rights $ (12) $ (15)
Purchase Accounting Premium
- Land & Building (37) (37)
Purchase Accounting Premium
on Investments (3) (3)
Depreciation (17) (15)
Tax Reserve in Excess of Base Year (93) (93)
Prepaid Expenses (52) (25)
FHLB Stock Dividends (168) (168)
Total (382) $(356)
Deferred Tax Assets:
Purchase Accounting Discount
on Loan Portfolio 6 4
General Reserves & Real Estate
Owned Losses 819 674
Deferred Loan Fees 14 16
Total 839 694
Net Deferred Tax Asset 457 338
Tax Effect of Securities
Available-for-sale
adjustment to Fair Value
(notes 4 and 5) (1,030) (832)
Adjusted Net Deferred Tax Liability $(573) $(494)
The Company carries an accumulated tax bad debt reserve of $643,000 with
the U.S. Internal Revenue Service for which income taxes have not been provided.
If the Bank were to convert from its thrift charter, the Bank would pay taxes of
approximately $100,000 on this bad debt reserve. In addition, the Bank has
entered into a tax sharing agreement with TeleBanc under which it is allocated
its share of income tax expense or benefit based on its portion of consolidated
income or loss. The net deferred tax liability is recorded in other liabilities
on the balance sheet.
15. FINANCIAL INSTRUMENTS
The Company is party to a variety of interest rate caps and swaps to manage
interest rate exposure. In general, the Company enters into agreements to assume
fixed-rate interest payments in exchange for variable market-indexed interest
payments. The effect of these agreements is to lengthen short-term variable
liabilities into longer term fixed-rate liabilities or to shorten long-term
fixed rate assets into short-term variable rate assets. The net costs of these
agreements are charged to interest expense or interest income, depending on
whether the agreement is designated to hedge a liability or an asset.
Interest rate swap agreements for the years ended December 31, 1996 and
1995 are summarized as follows (dollars in thousands):
1996 1995
---- ----
Weighted average fixed rate payments 5.97% 5.93%
Weighted average original term 5.0 yrs 6.0 yrs
Weighted average variable rate obligation 5.62% 5.63%
Notional amount $130,000 $40,000
-------- --------
The Company enters into interest rate cap agreements to hedge outstanding
FHLB advances and reverse repurchase agreements. Under the terms of the interest
rate cap agreements, the Company generally would receive an amount equal to the
difference between 3 month LIBOR or 6 month LIBOR and the cap's strike rate,
multiplied by the notional amount. The interest rate cap agreements are
summarized as follows (dollars in thousands):
- --------------------------------------------------------------------------------
Effective Notional Maturity
Cap Strike Rate Date Balance Date
- --------------------------------------------------------------------------------
4% July 1992 $10,000 July 1999
5% July 1992 10,000 July 1997
6% October 1996 20,000 October 1999
7% January 1997 10,000 January 2002
7% January 1995 10,000 July 1998
7% July 1995 10,000 July 1997
8% January 1995 10,000 January 1997
9% December 1994 14,000 December 1998
9.5% April 1995 10,000 April 1997
10% April 1995 10,000 January 2002
10% January 1995 10,000 January 1997
The counterparties to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers, Salomon Brothers, and UBS and contain credit risk of $729,000,
$257,000, $165,000, and $855,000, respectively. The credit risk is attributable
to the unamortized cap premium and any amounts due from the counterparty as of
December 31,1996. The total amortization expense for premiums on interest rate
caps was $638,000, $213,000 and $292,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments, which is provided
below, is based on the requirements of Statement of Financial Accounting
Standards No. 107, Disclosure About Fair Value of Financial Instruments ("SFAS
No. 107") and does not
<PAGE>
represent the aggregate net fair value of the Bank. Much of the information used
to determine fair value is subjective and judgmental in nature, therefore, fair
value estimates, especially for less marketable securities, may vary. In
addition, the amounts actually realized or paid upon settlement or maturity
could be significantly different. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for which
it is reasonable to estimate that value:
CASH AND INTEREST-BEARING DEPOSITS - Fair value is estimated to be carrying
value.
FEDERAL FUNDS SOLD - Fair value is estimated to be carrying value.
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL - Fair value is estimated to be
carrying value.
INVESTMENT SECURITIES - Fair value is estimated by using quoted market prices
for most securities. For illiquid securities, market prices are estimated by
obtaining market price quotes on similar liquid securities and adjusting the
price to reflect differences between the two securities, such as credit risk,
liquidity, term coupon, payment characteristics, and other information.
MORTGAGE-BACKED AND RELATED SECURITIES - Fair value is estimated using quoted
market prices. For illiquid securities, market prices are estimated by obtaining
market price quotes on similar liquid securities and adjusting the price to
reflect differences between the two securities, such as credit risk, liquidity,
term coupon, payment characteristics, and other information.
LOANS RECEIVABLE - For certain residential mortgage loans, fair value is
estimated using quoted market prices for similar types of products. The fair
value of other certain types of loans is estimated using quoted market prices
for securities backed by similar loans.
The fair value for loans which could not be reasonably established using
the previous two methods was estimated by discounting future cash flows using
current rates for similar loans.
Management adjusts the discount rate to reflect the individual
characteristics of the loan, such as credit risk, coupon, term, payment
characteristics, and the liquidity of the secondary market for these types of
loans.
DEPOSITS - For passbook savings, checking and money market accounts, fair value
is estimated at carrying value. For fixed maturity certificates of deposit, fair
value is estimated by discounting future cash flows at the currently offered
rates for deposits of similar remaining maturities.
ADVANCES FROM THE FHLB OF ATLANTA - For adjustable rate advances, fair value is
estimated at carrying value. For fixed rate advances, fair value is estimated by
discounting future cash flows at the currently offered rates for fixed-rate
advances of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Fair value is estimated using
carrying value. The securities are repriced on a semiannual basis.
SUBORIDNATED DEBT - For subordinated debt, fair value is estimated using quoted
market prices.
OFF-BALANCE SHEET INSTRUMENTS - The fair value of interest rate exchange
agreements is the net cost to the Company to terminate the agreement as
determined from market quotes.
The fair value of financial instruments as of December 31, 1996 and 1995 is
as follows (in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1996 1996 1995 1995
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,259 $ 3,259 $ 8,965 $ 8,965
Investment securities
available-for-sale 78,826 78,826 40,058 40,058
Mortgage-backed securities
available-for-sale 184,743 184,743 234,210 234,210
Loans receivable 351,821 365,401 248,667 261,198
LIABILITIES:
Deposits 390,486 393,820 306,500 311,476
Advances from the
FHLB Atlanta 144,800 144,800 105,500 105,526
Securities sold under
agreements to repurchase 57,581 57,581 93,905 93,905
Subordinated debt, net 16,586 16,625 16,496 16,123
Off-balance sheet
financial instruments -- 1,684 -- 212
Commitments to
purchase loans -- 54,721 -- 24,738
</TABLE>
<PAGE>
17. DISTRIBUTIONS
The Company is subject to certain restrictions on the amount of dividends
it may declare without prior regulatory approval. At December 31, 1996,
approximately $6.4 million of retained earnings were available for dividend
declaration without prior regulatory approval.
18. STOCK BASED COMPENSATION
In 1996, directors, officers and employees were issued 80,500 options to
purchase 80,500 shares of TeleBanc common stock at prices ranging from $7.75 to
$8.875. In 1995, officers and employees were issued 32,000 options to purchase
32,000 shares of TeleBanc common stock at a price of $5.50. As of December 31,
1996 and 1995, 180,438 and 110,392, respectively, of the shares were vested at
exercise prices ranging from $5.50 to $8.875. The options' exercise price was
the market value of the stock at the date of issuance. No options have been
exercised or canceled.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
WEIGHTED AVG. WEIGHTED AVG.
OPTIONS SHARES EXERCISED PRICE SHARES EXERCISED PRICE
(000's) (000's)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 271 $6.51 242 $6.64
Granted 81 $8.17 32 $5.50
Exercised -- -- -- --
Forfeited -- -- 3 $6.13
Outstanding at end of year 352 $6.89 271 $6.51
Options exercisable at year-end 180 $6.69 110 $6.55
Weighted avg. fair value
of options granted $2.61 $1.81
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------------
RANGE OF NUMBER WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING EXERCISED PRICE EXERCISABLE EXERCISED PRICE
(000's) (000's)
- -----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$5.00 - $5.99 32 $5.50 13 $5.50
$6.00 - $6.99 114 $6.13 76 $6.13
$7.00 - $7.99 176 $7.30 85 $7.20
$8.00 - $8.99 30 $8.88 6 $8.88
$5.00 - $8.99 352 $6.89 180 $6.69
</TABLE>
As of December 31, 1996 the fixed options outstanding had a weighted
average remaining contractual life ranging from 7.4 years to 9.6 years. The
Company accounts for this plan under APB No. 25, under which no compensation
cost has been recognized. Had compensation cost for the plan been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
12/31/96 12/31/95
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations:
<S> <C> <C>
As reported $ 2,552 $ 2,720
Pro forma 2,342 2,662
Earnings per share:
As reported 1.12 1.33
Pro forma 1.03 1.30
Fully diluted earnings per share:
As reported 1.09 1.33
Pro forma 1.00 1.30
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Roll Geske option pricing model with the following weighted average
assumptions for grants; risk-free interest rates of 5.25 percent and 6.00
percent for 1996 and 1995, respectively; expected life of 10 years for all
options granted in 1996 and 1995; expected volatility of 23 percent and 16
percent for 1996 and 1995, respectively.
19. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:
At December 31, 1996, the Company was obligated under an operating lease
for office space with an original term of ten years. Net rent expense under
operating leases was approximately $142,000, $127,000, and $60,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
The projected minimum rental payments under the terms of the lease are as
follows:
YEARS ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
1997 $ 177,000
1998 165,000
1999 167,000
2000 169,000
2001 171,000
2002 and thereafter 701,000
$ 1,550,000
As of December 31, 1996, the Company had commitments to purchase $54.7
million of mortgage loans.
The Company self-insures for a portion of health insurance expenses paid by
the Company as a benefit to its employees. At December 31, 1996 and 1995, there
was no reserve needed for incurred but not reported claims under this insurance
arrangement.
20. SUBSEQUENT EVENTS
In February 1997, TeleBanc entered into definitive agreements to raise new
capital in the form of convertible preferred stock, senior subordinated notes
and warrants aggregating $29.9 million and to purchase the assets of Arbor
Capital Partners, Inc. ("Arbor"), a registered investment advisor, funds manager
and broker-dealer. MET Holdings, TeleBanc's majority shareholder, owns a
majority of Arbor.
The Board of Directors authorized the sale of $29.9 million in units to
investment partnerships managed by Conning & Company, CIBC WG Argosy Merchant
Fund 2, LLC, The Progressive Corporation and The Northwestern Mutual Life
Insurance Company. Representatives from the Conning partnerships and the CIBC
Merchant Fund will serve on the Board of Directors of the Company. 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 Company finalized this transaction on
February 28, 1997.
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,
24,201 options, and a $500,000 cash payment for the Arbor assets. An independent
appraisal valued the assets to be acquired from Arbor at $3.1 million.
Consistent with TeleBanc's charter, the number of shares issued to Arbor as
consideration is limited to 5% of total market value of outstanding TeleBanc
stock at the time of acquisition. The Company finalized the sale of the units
and the related Arbor asset acquisition on February 28, 1997.
21. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Statements of Financial Condition
($ in thousands)
December 31,
------------------
1996 1995
---- ----
ASSETS:
Cash $ 159 $ 210
Investment securities available-for-sale 4,132 4,685
Mortgage-backed securities available-for-sale 14,086 940
Investment securities held-to-maturity -- --
Loans receivable, net 305 240
Equity in net assets of subsidiary 34,130 31,164
Deferred charges 940 1,066
Other assets 1,099 265
Total assets $54,851 $38,570
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debt $16,586 $16,496
Securities sold under agreements to repurchase 12,831
Accrued interest payable 357 330
Taxes payable and other liabilities 419 179
Total liabilities $30,193 $17,005
STOCKHOLDERS' EQUITY
Preferred Stock $ -- $ --
Common Stock 20 20
Additional Paid in Capital 14,637 14,637
Retained earnings 7,904 5,352
Unrealized gain/loss on securities available-for-sale 2,097 1,556
Total stockholders' equity 24,658 21,565
Total liabilities and stockholders' equity $54,851 $38,570
STATEMENTS OF OPERATIONS
($ in thousands)
December 31,
------------------------------
1996 1995 1994
---- ---- ----
Interest income $ 531 $ 429 $ 177
Interest expense 2,163 2,111 1,227
Net interest loss (1,632) (1,682) (1,050)
Non interest income 133 92 1
Total general and
administrative expenses 1,393 1,046 320
Non interest expenses 127 126 74
Net loss before equity in
net income of subsidiary
and income taxes (3,019) (2,762) (1,443)
Equity in net income
of subsidiary 6,716 4,434 1,434
Income taxes 1,145 (1,048) (531)
Net Income $ 2,552 $ 2,720 $ 540
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year ended December 31,
-------------------------------------
(Dollars in thousands) 1996 1995 1994
- ---------------------- ---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,552 $ 2,720 $ 540
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings
of subsidiaries (4,426) (4,434) (1,433)
Net realized gains on securities (36) (92) --
(Increase) decrease in other assets (592) 162 (1,362)
Increase in accrued expenses
and other liabilities 267 122 387
Depreciation and amortization (58) (32) --
Net cash provided by operating activities (2,293) (1,554) (1,868)
-------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loan to
Employee Stock Ownership Plan (65) 60 (300)
Net (increase) decrease in equity
investment 2,074 2,089 (13,644)
Purchases of available-for-sale
securities (100,574) (20,771) (4,612)
Proceeds from sale of
available-for-sale securities 11,103 5,170 --
Proceeds from maturities of and
principal payment on
available-for-sale securities 76,910 14,619 --
Net purchases of premises and equipment (37) (21) (6)
Net cash (used in) provided by
investing activities (10,589) 1,146 (18,562)
-------------------------------------
Cash flows from financing activities:
Net increase in securities sold under
agreements to repurchase 12,831 -- --
Increase in subordinated debt -- -- 16,390
Increase in common stock and
additional paid in capital -- -- 5,156
Dividends paid on common and
preferred stock -- -- (498)
-------------------------------------
Net cash provided by (used in)
financing activities 12,831 -- 21,048
Net increase (decrease) in cash and
cash equivalents (51) (408) 618
-------------------------------------
Cash and cash equivalents at
beginning of period 210 618 0
Cash and cash equivalents at
end of period $ 159 $ 210 $ 618
=====================================
</TABLE>
TeleBanc Financial Corporation commenced activities on January 27, 1994,
the effective date of its formation as a holding company of the Bank. The Bank
paid dividends of $2.2 million and $2.1 million to TeleBanc for subordinated
interest expense payments for the years ended December 31, 1996 and 1995,
respectively.
22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1996
and 1995 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
(Dollars in thousands except per share data) 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 11,131 $ 11,364 $ 11,871 $11,433
Interest expense 8,357 8,449 9,034 8,975
---------------------------------------------------------------
Net interest income 2,774 2,915 2,837 2,458
Provision for loan and lease losses 419 200 125 175
Non-interest income 605 291 540 1,320
General and administrative
expenses 1,679 1,749 3,287 1,660
Other non-interest expenses 300 81 247 71
Income before income taxes 981 1,176 (282) 1,872
Income tax expense 332 417 (220) 667
---------------------------------------------------------------
Net income $ 649 $ 759 $ (62) $ 1,205
---------------------------------------------------------------
Net income per share $ 0.31 $ 0.35 $ (0.03) $ 0.51
===============================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
(Dollars in thousands except per share data) 1995 1995 1995 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 8,653 $10,414 $10,681 $10,763
Interest expense 7,155 8,151 8,215 8,425
---------------------------------------------------------------
Net interest income 1,498 2,263 2,466 2,338
Provision for loan and lease losses 309 353 502 558
Non-interest income 630 412 419 2,316
General and administrative
expenses 1,248 1,473 1,401 1,439
Other non-interest expenses 87 79 90 423
Income before income taxes 484 770 892 2,234
Income tax expense 164 264 343 889
---------------------------------------------------------------
Net income $ 320 $ 506 $ 549 $ 1,345
---------------------------------------------------------------
Net income per share $ 0.16 $ 0.25 $ 0.27 $ 0.65
===============================================================
</TABLE>
<PAGE>
Report of the Independent Public Accountants
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and Subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated statement of income of the company for the year
ended December 31, 1994 was audited by other auditors whose report dated
February 24, 1995 expressed an unqualified opinion on that statement.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeleBanc Financial
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, DC
February 14, 1997 (except with respect to the matters discussed in Note 20, as
to which the date is February 28, 1997)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BOARD OF DIRECTORS CORPORATE OFFICERS CORPORATE COMMON STOCK
INFORMATION
Mitchell H. Caplan David A. Smilow The Common Stock is
Vice Chairman & President Chairman & CEO TRANSFER AGENT currently traded
TeleBanc Financial AND REGISTRAR "over-the counter"under
Corporation Mitchell H. Caplan Fifth Third Trust & the symbol "TBFC." The
Vice Chairman & President Investment Division following table sets
David R. DeCamp Fifth Third Center forth the closing high
Senior Vice President Laurence P. Greenberg Cincinnati, OH 45263 and low bid prices for
Grubb & Ellis, Co. Executive Vice President (513) 579-5300 the Common Stock for
Marketing the periods indicated.
Arlen W. Gelbard, Esq. FORM 10-K
Partner Aileen Lopez Pugh A copy of the Company's Initial Offering: $6.125
Hofheimer, Gartlir & Gross Executive Vice President Form 10-K for Fiscal
Chief Financial 1996 as filed with the ---------------------------
Steven F. Piaker Officer/Treasurer Securities and Exchange 1995 HIGH LOW
Partner Commission will be ---------------------------
Conning & Company Sang-Hee Yi furnished upon written 1st Q 5.625 5.50
Executive Vice President request to: 2nd Q 6.00 5.00
Dean C. Kehler Chief Operating Officer 3rd Q 6.625 6.0625
Managing Director Aileen Lopez Pugh 4th Q 7.75 6.50
CIBC Wood Gundy Securities Michael H. Aneiro Director of Shareholder
Senior Vice President Relations ---------------------------
Mark Rollinson, Esq. Portfolio Management TeleBanc Financial 1996 HIGH LOW
Attorney Corporation ---------------------------
Catherine M. Gallahan 1111 N. Highland Street 1st Q 8.00 7.50
David A. Smilow Senior Vice President Arlington, Virginia 22201 2nd Q 9.75 8.00
Chairman & CEO Systems (703) 247-3700 3rd Q 10.00 8.875
TeleBanc Financial Corporation 4th Q 13.25 9.75
Michael T. Girouard SPECIAL COUNSEL
Michael A. Smilow Senior Vice President Hogan & Hartson L.L.P. No dividends were paid
Mortgage Finance Consultant Chief Investment Officer Columbia Square in 1995 and 1996. The
555 Thirteenth Street, NW closing per share bid
Steven D. Greenwood Washington, DC 20004-1109 price of the Common
Senior Vice President Stock on December 31,
Product Development INDEPENDENT AUDITORS 1996 was $13.25.
Arthur Andersen LLP
Emidio Morizio 8000 Towers Crescent Drive
Senior Vice President Vienna, VA 22182 ANNUAL MEETING
Operations
The Company's Annual
Michael R. Opsahl Meeting of shareholders
Senior Vice President will be held at 11:00
Chief Credit Officer am on Wednesday, May 7,
1997 at the Corporate
Jane H. Gelman offices of TeleBanc
Vice President Financial Corporation,
Chief Administrative 1111 N. Highland
Officer/Secretary Street, Arlington,
Virginia 22201.
Dennis E. Carlton
General Counsel
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TeleBanc Financial Corporation and subsidiaries
Selected Financial Data
Years ended December 31,
-----------------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income $ 45,800 $ 40,511 $ 22,208 $ 16,667 $ 19,425
Interest expense 34,815 31,946 17,513 11,828 13,896
Net interest income 10,985 8,565 4,695 4,839 5,529
Provision for loan and lease losses 919 1,722 492 211 972
Non-interest income 2,756 3,777 175 1,157 1,014
General and administrative expenses 8,375 5,561 3,503 2,997 2,393
Other non-interest operating expenses 700 679 153 739 1,234
Income before income taxes and cumulative
effect of change in accounting principle 3,747 4,380 722 2,049 1,944
Income tax expense 1,195 1,660 182 842 857
Cumulative effect of change in accounting principle -- -- -- 170 --
Net income $ 2,552 $ 2,720 $ 540 $ 1,377 $ 1,087
Earnings per share:
Primary $ 1.12 $ 1.33 $ 0.31 $ 1.06 $ 0.84
Fully diluted $ 1.09 $ 1.33 $ 0.31 $ 1.06 $ 0.84
At December 31,
Total assets $647,965 $553,943 $427,292 $220,301 $229,374
Loans receivable, net 351,821 248,667 154,742 100,859 93,605
Mortgage-backed securities (a) 184,743 234,210 236,464 80,782 87,164
Investment securities (a) 78,826 40,058 12,444 18,110 13,570
Deposits 390,486 306,500 212,411 113,132 130,100
Advances from the FHLB 144,800 105,500 96,000 61,000 53,750
Securities sold under agreements to repurchase 57,581 93,905 79,613 29,642 29,642
Total stockholders equity 24,658 21,565 17,028 12,378 10,715
Financial ratios
Return on average
Total assets 0.61% 0.53% 0.17% 0.61% 0.45%
Stockholders' equity 16.50% 14.10% 3.17% 11.79% 10.51%
Average stockholders' equity to average total assets 3.70% 3.77% 5.27% 5.20% 4.32%
Total general and administrative expenses to total assets (b) 1.03%(c) 1.00% 0.82% 1.36% 1.04%
Number of (b):
Deposit accounts 16,506 12,919 8,564 2,932 3,568
Full-time equivalent employees 39 30 29 18 17
Total assets per employee (b) $ 16,614 $ 18,465 $ 14,734 $ 12,239 $ 13,493
(a) Includes available for sale, held to maturity, and held for sale. (b) At end of period. (c) Excludes SAIF assessment.
</TABLE>
Exhibit 21
SUBSIDIARIES OF REGISTRANT
JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
TeleBank United States
TeleBanc Servicing Corporation United States
AGT Mortgage Services United States
AGT-PRA United States
Portfolio Recovery Associates United States
The Board of Directors and Stockholders
TeleBanc Financial Corporation:
We consent to incorporation by reference in the registration statement No.
F33-91786 on Form S-1 and on Form S-3 of TeleBanc Financial Corporation and
subsidiary of our report dated February 24, 1995, relating to the consolidated
statement of operations, changes in stockholders' equity, and cash flows for the
year ended December 31, 1994, which report is incorporated by reference in the
December 31, 1996 annual report on Form 10-K of TeleBanc Financial Corporation.
/s/ KPMG Peat Marwick
Washington, D.C.
March 26, 1997
<PAGE>
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 14, 1997 included in
TeleBanc Financial Corporation's Annual Report for the year ended December 31,
1996. It should be noted that we have not audited any financial statements of
the company subsequent to December 31, 1996 or performed any audit procedures
subsequent to the date of our report.
/s/ Arthur Andersen LLP
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and Subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TeleBanc Financial Corporation
and Subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, DC
February 14, 1997 (except with respect to the matters discussed in Note 20, as
to which the date is February 28, 1997)
The Board of Directors and Stockholders
TeleBanc Financial Corporation:
We have audited the accompanying consolidated statement of operations, changes
in stockholders' equity, and cash flows of TeleBanc Financial Corporation and
subsidiary for the year ended December 31, 1994. These consolidated financial
statements are the responsibility of TeleBanc Financial Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the results of TeleBanc Financial Corporation
and subsidiary's operations and their cash flows for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick
Washington, D.C.
February 24, 1995
