TELEBANC FINANCIAL CORPORATION
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER ENDED JUNE 30, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 33-76930
TELEBANC FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3759196
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
(Address of principal executive office) (Zip code)
(703) 247-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months ( or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of August 1, 1997.
$.01 par value of common stock 2,211,961
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Consolidated Statements of Financial Condition -June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations - Three and six months ended June 30, 1997 and
1996 4
Consolidated Statements of Changes in Stockholders' Equity - Six months ended June 30,
1997 and 1996 6
Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Part II -- Other Information
- ----------------------------
Item 4, Submission of Matters to a vote of Security Holders 21
Item 6, Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
Assets: 1997 1996
----- ----
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 13,252 $ 3,259
Investment securities available for sale 71,277 78,826
Mortgage-backed securities available for sale and trading 231,313 184,743
Loans receivable, net 260,301 185,757
Loans receivable held for sale 174,623 166,064
Other assets 53,948 29,316
------ ------
Total assets $ 804,714 $ 647,965
======= =======
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 437,811 $ 390,486
Advances from the Federal Home Loan Bank of Atlanta 145,000 144,800
Securities sold under agreements to repurchase 122,661 57,581
Subordinated debt 29,500 16,586
Other liabilities 15,402 13,854
------ ------
Total liabilities 750,374 623,307
------- -------
Corporation-Obligated Mandatory Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Corporation 10,000 --
Commitments and contingencies -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value,
500,000 shares authorized
Series A, 18,850 issued and outstanding -- --
Series B, 4,050 issued and outstanding -- --
Series C, 7,000 issued and outstanding -- --
Common stock, $0.01 par value, 3,500,000 shares authorized; 2,211,961 and
2,049,500 issued and outstanding 22 20
Additional paid-in capital 31,190 14,637
Retained earnings, substantially restricted 9,754 7,905
Unrealized gain on securities available for sale, net of deferred tax 3,374 2,096
----- -----
Total stockholders' equity 44,340 24,658
------ ------
Total liabilities & stockholders' equity $ 804,714 $ 647,965
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans and other loans $ 8,315 $ 5,663 $ 15,872 $ 11,082
Mortgage-backed and related securities 5,126 4,593 8,931 9,418
Investment securities 1,538 1,096 2,982 1,971
Other 296 12 327 24
--- -- --- --
Total interest income 15,275 11,364 28,112 22,495
------ ------ ------ ------
Interest expense:
Deposits 6,332 4,915 12,037 9,783
Advances from the Federal Home Loan Bank of Atlanta 2,183 1,613 4,256 3,078
Reverse repurchase agreements 2,472 1,402 3,929 2,908
Subordinated debt 878 519 1,521 1,037
--- --- ----- -----
Total interest expense 11,865 8,449 21,743 16,806
------ ----- ------ ------
Net interest income 3,410 2,915 6,369 5,689
Provision for loan losses 308 200 551 619
--- --- --- ---
Net interest income after provision for loan losses 3,102 2,715 5,818 5,070
----- ----- ----- -----
Non-interest income:
Gain (loss) on sale of securities 1,158 (160) 1,419 82
Gain on sale of loans 283 316 410 316
Loss on investment net of fees, service charges and other (198) 135 22 498
----- --- -- ---
Total non-interest income 1,243 291 1,851 896
----- --- ----- ---
(continued)
</TABLE>
4
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 1,200 864 2,378 1,788
Other 1,050 885 1,770 1,639
----- --- ----- -----
Total general and administrative expenses 2,250 1,749 4,148 3,427
----- ----- ----- -----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure 56 40 131 47
Amortization of goodwill and other intangibles 146 41 279 336
--- -- --- ---
Total other non-interest expenses 202 81 410 383
--- -- --- ---
Total non-interest expenses 2,452 1,830 4,558 3,810
----- ----- ----- -----
Income before income tax expense and minority 1,893 1,176 3,111 2,156
interest
Income tax expense 617 417 973 748
Minority interest in subsidiary (67) -- (67) --
---- -- ---- --
Net income $ 1,209 $ 759 $ 2,071 $ 1,408
===== === ===== =====
Preferred stock dividends 162 -- 222 --
--- -- --- --
Net income after preferred stock dividends $ 1,047 $ 759 $ 1,849 $ 1,408
===== === ===== =====
Net income per common share:
Primary $ 0.35 $ 0.35 $ 0.71 $ 0.65
Fully diluted 0.35 0.35 0.70 0.65
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ADDITIONAL ON AVAILABLE
PREFERRED COMMON PAID-IN RETAINED FOR SALE
STOCK STOCK CAPITAL EARNINGS SECURITIES TOTAL
----- ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ $ 20 $ 14,637 $ 5,352 $ 1,556 $ 21,565
--
Net income for the six months ended
June 30, 1996 -- -- -- 1,408 -- 1,408
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- -- 7 7
-- -- -- -- - -
Balances at June 30, 1996 $ -- $ 20 $ 14,637 $ 6,760 $ 1,563 $ 22,980
== ====== ===== ===== ======
Balances at December 31, 1996 $ -- $ 20 $ 14,637 $ 7,905 $ 2,096 $ 24,658
Net income for the six months ended -- -- -- 2,071 -- 2,138
June 30, 1997
Minority interest in subsidiary -- -- -- (67) -- (67)
Stock issued -- 2 1,272 -- -- 1,274
Issuance of 4% cumulative Preferred
Stock, Series A -- -- 9,634 -- -- 9,634
Issuance of 4% cumulative Preferred
Stock, Series B -- -- 2,070 -- -- 2,070
Issuance of 4% cumulative Preferred
Stock, Series C -- -- 3,577 -- -- 3,577
Dividends on 4% cumulative Preferred
Stock -- -- -- (222) -- (222)
Unrealized Gain on Available for Sale
Securities, net of tax effect
-- -- -- -- 1,278 1,278
-- -- -- -- ----- -----
Balances at June 30, 1997 $ -- $ 22 $ 31,190 $ 9,754 $ 3,374 $ 44,340
== == ====== ===== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Net cash (used in) provided by operating activities $ (24,430) $ 36,075
-------- ------
Cash flows from investing activities:
Net increase in loans (105,691) (90,377)
Equity investments in subsidiaries (1,183) (925)
Purchases of available-for-sale securities (202,950) (180,363)
Proceeds from sale of available-for-sale securities 82,361 86,204
Proceeds from maturities of and principal payment on
available-for-sale securities 121,306 114,296
Net purchases of premises and equipment (149) (139)
Proceeds from sale of foreclosed real estate 924 219
--- ---
Net cash used in investing activities (105,382) (71,085)
--------- --------
(continued)
</TABLE>
7
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from financing activities:
Net increase in non-interest bearing demands, savings, and
NOW deposit accounts 35,288 29,966
Increase in advances from FHLB 181,000 85,000
Payments on advances from FHLB (180,800) (70,000)
Net decrease (increase) in securities sold under agreements to repurchase
65,080 (13,961)
Net increase in other borrowed funds 12,914 45
Issuance of trust preferred stock 10,000 --
Issuance of common stock and 4% preferred stock 16,555 --
Dividends paid on common and preferred stock (222) --
----- --
Net cash provided by financing activities 139,815 31,050
------- ------
Net increase (decrease) in cash and cash equivalents 9,993 (3,960)
Cash and cash equivalents at beginning of period 3,259 8,965
----- -----
Cash and cash equivalents at end of period $ 13,252 $ 5,005
====== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 15,214 $ 7,986
Income taxes paid 853 768
Transfers from loans to real estate acquired through foreclosures 607 354
Gross unrealized gain on securities available for sale 2,111 11
Tax effect of gain on available for sale securities 833 4
See accompanying notes to consolidated financial statements.
</TABLE>
8
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX ENDED JUNE 30, 1997 AND 1996
NOTE 1. BASIS OF PRESENTATION
TeleBanc Financial Corporation, (the "Company") was incorporated on
January 26, 1994 and in March, 1994 became the direct savings and loan holding
company parent of TeleBank (the "Bank"), formerly known as Metropolitan Bank for
Savings, F.S.B. The primary business of the Company is the business of the Bank,
the Bank's subsidiaries and TeleBanc Capital Markets, Inc. ("TCM"), a registered
investment advisor, funds manager and broker dealer. The Bank is a federally
chartered savings bank, deposit accounts in which are insured to applicable
limits by the Federal Deposit Insurance Corporation ("FDIC"). The consolidated
financial statements include accounts of TeleBanc Financial Corporation and its
wholly-owned subsidiaries, the Bank and TCM.
The financial statements as of June 30, 1997 and for the three and six
months ended June 30, 1997 and 1996 are unaudited, but in the opinion of
management, contain all adjustments, consisting solely of normal recurring
entries, necessary to present fairly the consolidated financial condition as of
June 30, 1997 and the results of consolidated operations for the three and six
months ended June 30, 1997 and 1996. The results of consolidated operations for
the three and six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the entire year. The Notes to Consolidated
Financial Statements for the year ended December 31, 1996, included in the
Company's Annual Report to Stockholders for 1996, should be read in conjunction
with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
NOTE 2. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
129"), effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock. The impact
on the Company has been calculated below:
9
<PAGE>
TELEBANC FINANCIAL CORPORATION
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ -----------------------------
Per share amounts 1997 1996 1997 1996
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Primary EPS as reported $ 0.35 $ 0.35 $ 0.71 $ 0.63
Effect of SFAS 128 0.12 0.02 0.15 0.06
---- ---- ---- ----
Pro forma basic EPS $ 0.47 $ 0.37 $ 0.86 $ 0.69
==== ==== ==== ====
Fully diluted EPS as reported $ 0.35 $ 0.35 $ 0.70 $ 0.62
Effect of SFAS 128 (0.06) (0.07) (0.10) (0.08)
------ ------ ------ ------
Pro Forma diluted EPS $ 0.29 $ 0.28 $ 0.60 $ 0.54
==== ==== ==== ====
</TABLE>
Basic earnings per common share, as required by SFAS 128, is computed
by dividing adjusted net income by the total of the weighted average number of
common shares outstanding during the respective periods. The year to date
weighted average number of common shares outstanding was 2,159,612 and 2,049,500
for the Company at June 30, 1997 and 1996, respectively. Weighted average shares
outstanding also include common stock equivalents which consist of outstanding
stock options and warrants, if such options or warrants are dilutive.
Pro Forma EPS Calculation
<TABLE>
<CAPTION>
Income Shares Per Share Amount
------ ------ ----------------
For the Quarter Ended June 30, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income $ 759,000 2,049,500 $ 0.37
=========================
Options issued to management -- 279,142
Warrants -- 338,928
----------------------- ---------------------
Diluted earnings per share $ 759,000 2,667,570 $ 0.28
======================= ===================== =========================
<CAPTION>
For the Quarter Ended June 30, 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 1,209,000
less: Preferred Stock Dividends (162,000)
-----------------------
Basic earnings per share
Income available to common shareholders
$ 1,047,000 2,211,961 $ 0.47
=======================
Options issued to management -- 481,047
Warrants -- 319,620
Convertible preferred stock 162,000 1,144,148
----------------------- -----------------------
Diluted earnings per share $ 1,209,000 4,156,776 $ 0.29
======================= ======================= =======================
</TABLE>
10
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTE 3. RECENT EVENTS
On February 28, 1997, the Company sold $29.9 million of units in the
form of 4% convertible preferred stock, 9.5% senior subordinated notes and
warrants, and purchased substantially all of the assets of Arbor Capital
Partners, Inc. ("Arbor"), a registered investment advisor, funds manager and
broker-dealer. MET Holdings, TeleBanc's majority shareholder, owned a majority
of Arbor. In connection with this sale, the Company incurred approximately $1.7
million of expenses, of which, approximately $725,000 is attributed to the
senior subordinated notes and will be amortized through March 31, 2004.
The $29.9 million in units were sold to investment partnerships managed
by Conning & Co., CIBC Wood Gundy Argosy Merchant Fund 2, LLC, The Progressive
Corporation and The Northwestern Mutual Life Insurance Company. Upon the unit
sale, representatives from the Conning partnerships and the CIBC Merchant Fund
were appointed to the Company's Board. The units consist of $13.7 million in
9.5% senior subordinated notes with 198,088 detachable warrants, $16.2 million
in 4.0% convertible preferred stock, and rights to 205,563 contingent warrants.
The senior subordinated notes are due on March 31, 2004 and stipulate increases
over time in interest rates subsequent to March 31, 2002 from 9.5% up to 15.25%.
The warrants are exercisable at $9.50 with an expiration date of February 28,
2005. The preferred stock consists of Series A Voting Convertible Preferred
Stock, Series B Nonvoting Convertible Preferred Stock and Series C Nonvoting
Convertible Preferred Stock and is convertible to 1,199,743 shares of common
stock. Series A and Series B shares may be converted at any time into fully-paid
and non-assessable shares of Voting Common Stock. Series C shares may be
converted at any time to Series A or Series B shares or at any time into
fully-paid and non-assessable nonvoting common stock. The contingent warrants
may be exercised upon a change of control or at any time after February 29, 2002
("Exercise Event"). If the Company's annual internal rate of return is less than
25% at the time of an Exercise Event, unit holders may exercise the contingent
warrants for $0.01 until an internal rate of return of 25% is reached.
Also in connection with the sale of units, the Arbor asset acquisition
was structured as a tax free issuance of 162,461 shares of TeleBanc common stock
and a $500,000 cash payment for the Arbor assets. An independent appraisal
valued the assets to be acquired from Arbor at $3.1 million. Consistent with
TeleBanc's charter, the number of shares issued to Arbor as consideration was
limited to 5% of total market value of outstanding TeleBanc stock at the time of
acquisition.
In June 1997, the Company formed TeleBanc Capital Trust I, which in
turn sold, at par, 10,000 shares of trust preferred securities, Series A,
liquidation amount of $1,000, for a total of $10,000,000 in a private placement.
TeleBanc Capital Trust I is a business trust formed for the purpose of issuing
capital securities, and investing the proceeds in junior subordinated debentures
issued by the company. The trust preferred securities mature in 2027 and have an
annual dividend rate of 11.0% payable semi-annually, beginning in December 1997.
The net proceeds will be used, for general corporate purposes, including to fund
Bank operations and the creation and expansion of its financial service and
product operations.
11
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTE 4. COMMITMENTS AND CONTINGENT LIABILITIES
In managing the Company's interest-rate risk, the Company utilizes
financial derivatives in the normal course of business. These products consist
primarily of interest rate cap and swap agreements. Financial derivatives are
employed to assist in the management and/or reduction of interest rate risk for
the Company and can effectively alter the interest sensitivity of segments of
the balance sheet for specified periods of time.
The Company accounts for interest rate swap agreements and cap
agreements as hedges of debt issuances, deposit balances and investment in loan
portfolio to which such agreements have been specifically designated. Cash
remittances due or received pursuant to these agreements are reported as
adjustments to interest expense on an accrual basis. Any premiums paid in
conjunction with these interest rate swap and interest rate cap agreements are
amortized as additional interest expense on a straight-line basis over the term
of these agreements. Any gain or loss upon early termination of these
instruments would be deferred and amortized as an adjustment to interest expense
over the term of the applicable interest rate agreement.
12
<PAGE>
TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
This discussion and analysis includes descriptions of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (JUNE 30, 1997 COMPARED TO DECEMBER 31, 1996)
The Company's total assets increased by $156.8 million or 24.2% from
$648.0 million at December 31, 1996 to $804.8 million at June 30, 1997. The
increase in total assets primarily reflects increases in loans receivable, net
and loans held for sale of $83.1 million, or 23.6% and mortgage-backed
securities available for sale of $46.6 million, or 25.2%. The increase in loans
receivable includes purchases of primarily adjustable rate loans. In February,
1997, the Company raised $28.2 million of net proceeds from the sale of units
consisting of debt and equity securities and in June 1997, the Company raised
$10.0 million in Trust Preferred securities (see Note 1 to Consolidated
Financial Statements for the three and six months ended June 30, 1997 and 1996).
The Company continues to invest the net proceeds as additional equity capital of
the Bank. The increase in asset size reflects management's initial efforts to
leverage the proceeds raised from the sale of units and capital securities. The
Company intends to continue to leverage such proceeds, as well as capital raised
from earnings, for additional growth for the foreseeable future.
The Company funded its asset growth with a mix of securities sold under
agreements to repurchase ("reverse repos"), Federal Home Loan Bank advances and
deposits. Total deposits increased by $47.3 million, or 12.1% from $390.5
million at December 31, 1996 to $437.8 million at June 30, 1997. The average
term for the new time deposits gathered in the three months ended June 30, 1997
was approximately 37.5 months with an average percentage yield of 6.28%. The
Company has continued to focus on building core deposit accounts. Money market
checking and savings accounts increased 33.9% from $109.8 million at December
31, 1996 to $147.1 million at June 30, 1997. Federal Home Loan Bank Advances
remained relatively stable. As of June 30, 1997, the weighted average interest
rate and weighted average maturity for Federal Home Loan Bank Advances was 5.75%
and 574 days, respectively. Securities sold under agreements to repurchase,
increased by $65.1 million or 113.0% from $57.6 million at December 31, 1996 to
$122.7 million at June 30, 1997 largely as a result of management's intention to
fund high growth after the capital raising and to replace these borrowings with
the core deposits over the year. As of June 30, 1997, the weighted average
interest rate and weighted average maturity for securities sold under agreements
to repurchase was 5.77% and 143 days, respectively. As of June 30, 1997,
subordinated debt, net of original issue discount was $29.5 million, which
includes the 9.5% senior subordinated debt raised in February, 1997 and the
11.5% subordinated debt raised in the second quarter of 1994. As noted in recent
events, In June 1997, the Company formed TeleBanc Capital Trust I, which in turn
sold shares of trust preferred securities, Series A, for a total of $10,000,000
in a private placement. The trust preferred securities have an annual dividend
rate of 11.0% payable semi-annually, beginning in December 1997.
13
<PAGE>
TELEBANC FINANCIAL CORPORATION
Stockholders' equity increased $19.7 million, from $24.7 million at
December 31, 1996 to $44.3 million at June 30, 1997. The increase was due to the
$15.3 million issuance of 4% convertible preferred stock, $1.3 million stock
issuance in exchange for Arbor's assets, $2.1 million in net income for the six
months ended June 30, 1997, $67,000 loss in minority interest in subsidiary and
an unrealized gain on securities available for sale, net of deferred taxes, of
$1.3 million, which pursuant to SFAS 115 affects the Company's stockholders'
equity but does not impact the statement of operations all of which was
partially offset by $222,000 of preferred stock dividends.
14
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense
and related interest yields and rates for the quarters ended June 30, 1997 and
1996 are shown below. The table also presents information for the periods
indicated with respect to the difference between the weighted average yield
earned on interest-earning assets and weighted average rate paid on
interest-bearing liabilities, or "interest rate spread," which saving
institutions have traditionally used as an indicator of profitability. Another
indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets and interest-bearing liabilities.
When interest-earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate interest income.
<TABLE>
<CAPTION>
Quarter ended June 30, 1997 Quarter ended June 30, 1996
----------------------------------- ------------------------------------
Interest Average Interest Average
(Dollars in thousands) Average Income/ Annualized Average Income/ Annualized
unaudited Balance Expense Yield/Cost Balance Expense Yield/Cost
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 421,820 $ 8,322 7.89% $ 257,484 $ 5,575 8.66%
Mortgage-backed and related
securities -- -- -- -- -- --
Investment securities 6,360 114 7.22 8,627 234 10.89
Mortgage-backed and related
securities available for sale 264,732 5,126 7.74 235,085 4,659 7.93
Investment securities
available for sale (a) 80,836 1,286 6.37 53,114 913 6.88
Federal funds sold 1,874 25 5.36 973 12 5.06
Investment in FHLB 8,160 148 7.25 6,174 111 7.21
Trading account 6,672 271 16.30 -- -- --
--------- ---------- ------- --------- ---------- -------
Total interest-earning assets 790,454 15,292 7.74% 561,457 11,504 8.20%
Non-interest-earning assets 34,977 30,756
------ ------
Total assets $ 825,431 $ 592,213
======= =======
Interest-bearing liabilities:
Savings deposits $ 140,354 $ 1,863 5.32% $ 98,618 1,178 4.81%
Time deposits 300,346 4,712 6.29 234,605 3,736 6.41
FHLB advances 154,863 2,379 6.08 116,973 1,738 5.88
Other borrowings 155,181 2,276 5.80 88,919 1,278 5.68
Subordinated debt, net 29,463 879 11.92 17,250 519 12.03
------ ---------- ------- --------- ---------- -------
Total interest-bearing
liabilities 780,207 12,109 6.19% 556,365 8,449 6.07%
Non-interest-bearing liabilities 3,786 15,302
----- ------
Total liabilities 783,993 571,667
Stockholders' equity 41,438 20,546
------ ------
Total liabilities and
stockholders' equity $ 825,431 $ 592,213
======= =======
Excess of interest-earning assets
over interest-bearing
liabilities/net interest $ 10,247 $ 3,183 1.55% $ 5,092 $ 3,055 2.13%
====== ========== ======= ========= ========== =======
income/interest rate spread
Net yield on interest earning assets 1.61% 2.18%
===== ======
Ratio of interest-earning assets
to interest-bearing liabilities 101.31% 100.92%
======= =======
</TABLE>
(a) Interest income and average yields on municipal bonds are presented on a
tax equivalent basis.
15
<PAGE>
TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Income. Net income for the three and six months ended June 30, 1997
was $1.2 million and $2.1 million, compared to $759,000 and $1.4 million for the
three and six months ended June 30, 1996, respectively. Net income for the three
months ended June 30, 1997 consisted primarily of $3.4 million of net interest
income and non-interest income of $1.2 on the sale of securities and on the sale
of loans offset by $308,000 in provision for loan losses, $2.3 million of
general and administrative expenses and $617,000 in income tax expense. Net
income for the three months ended June 30, 1996 consisted primarily of $2.9
million in net interest income and non-interest income gains of $316,000 on the
sale of loans and $109,000 for loan fees and service charges, reduced by
$200,000 in provision for loan and losses and $1.7 million in general and
administrative expenses. Net income for the six months ended June 30, 1997
consisted of $6.4 of net interest income and $1.9 million of non-interest income
offset by $551,000 of provision for loan losses, $4.6 million of non-interest
expenses and $973,000 in income tax expense. Net income for the six months ended
June 30, 1996 consisted of net interest income of $5.7 million and non-interest
income of $896,000 offset by $619,000 of provision for loan and $3.8 million of
non-interest expense.
Net Interest Income. Net interest income was $3.4 million and $2.9
million for the three months ended June 30, 1997 and 1996, respectively,
reflecting an annualized interest rate spread of 1.55% and 2.13% for the three
months ended June 30, 1997 and 1996, respectively. In the quarter ending June
30, 1997, total interest earning assets, consisting primarily of loans
receivable, net and mortgage-backed and related securities, yielded 7.74% as
compared to 8.20% for the same period in 1996. Average interest-earning assets
were $790.5 million and $561.5 million for the quarters ending June 30, 1997 and
1996, respectively. Average interest bearing liabilities were $780.2 million and
$556.4 million for the quarters ending June 30, 1997 and 1996, respectively.
Interest-bearing liabilities cost 6.19% in the second quarter of 1997 as
compared 6.07% in the same period in 1996. Net interest income was $6.4 million
and $5.7 million for the six months ended June 30, 1997 and 1996, respectively.
For the three and six month periods of 1997, the Company experienced a decline
in annualized interest rate spread compared to the same period in 1996. The
decline reflects a 46 basis point decrease in the yield of interest earning
assets and an increase of 12 basis points on interest bearing liabilities for
the first half of 1997. The decline in yield reflects the Company's investment
in agency securities. Subsequent to capital raising efforts, the Company
invested in low risk securities to leverage proceeds quickly. Over time, the
Company intends to change the asset mix to reflect increased investment in the
Company's core assets, loans receivable. Average interest bearing liabilities
were $719.2 million and $547.8 million for the six months ended June 30, 1997
and 1996, respectively. In the six months ended June 30, 1996, total interest
earning assets, consisting primarily of loans receivable, net and
mortgage-backed and related securities, yielded 7.74% and 8.20% for the six
months ended June 30, 1997 and 1996, respectively. Average interest-earning
assets were $790.5 million and $555.6 million for the six months ended June 30,
1997 and 1996, respectively. Interest-bearing liabilities cost 6.19% in the
first six months of 1997 as compared 6.07% in the same period in 1996.
16
<PAGE>
TELEBANC FINANCIAL CORPORATION
Provision for Loan Losses. Total provision for loan losses increased
$108,000 or 54.0% from $200,000 for the three months ending June 30, 1996 to
$308,000 for the three months ending June 30, 1997. The provision for loan and
losses reflects management's intent to provide prudent reserves for potential
loan losses and for loan acquisitions made during the quarter. During the
quarter ended June 30, 1996, the Company provided additional reserves for
single-family loans. The Company had recoveries of $54,000 and charge-offs of
$174,000 on three one to four family mortgage loans. During the second quarter
of 1997, the Company provided additional general reserves for loan acquisitions
of $34.6. Total provision for loan and losses decreased $68,000 or 11.0% from
$619,000 for the six months ended June 30, 1996 to $551,000 for the six months
ended June 30, 1997. The provision for the first six months of 1997 was
attributable to an increase in reserves for several single-family loans and for
reserves on approximately $76.7 million in loan acquisitions. For the same
period in 1996, the Company provided reserves for several single-family loans
and for loan acquisitions in accordance with the Company's loan loss reserve
policy. The total loan loss allowance at June 30, 1997 was $3.2 million which
was 0.7% of total loans outstanding. The total loan loss allowance at June 30,
1996 was $2.7 million which was 0.9% of total loans outstanding. Total loss
allowance as a percentage of total non-performing assets was 29.7% and 17.8% as
of June 30, 1997 and 1996, respectively.
Non-Interest Income. Total non-interest income increased by $952,000,
or 327.1%, from $291,000 for the three months ended June 30, 1996 to $1.2
million for the three months ended June 30, 1997. During the second quarter of
1997, the Company securitized coop loans held for sale resulting in a $639,000
trading gain. The Company classified the resulting security in its trading
portfolio. In addition, the Company recognized $452,000 on the sale of
securities, $283,000 on loan sales and $138,000 on loan fees. During the second
quarter, the Company accrued a $500,000 operating loss on its equity investment
in AGT Mortgage Services, LLC ("AGT"). AGT serviced performing and
non-performing loans for a fee. Given lower than anticipated non-performing loan
levels, AGT did not achieve adequate economies of scale to generate sufficient
revenue. Accordingly, management decided to cease operations of AGT on July 31,
1997. Total non-interest income increased by $955,000, or 106.6%, from $896,000
for the six months ended June 30, 1996 to $1.9 million for the six months ended
June 30, 1997. During the first six months of 1997, the Company reported
non-interest income of $728,000 in trading income attributed to the
aforementioned coop securitization, $690,000 on the sale of mortgage-backed
securities and investments held for liquidity purposes, $410,000 on the sale of
loans, $333,000 in loan fees and $286,000 in TeleBanc Capital Markets commission
income offset by a $500,000 loss on its equity investment in AGT. Non- interest
income for 1996 reflects primarily $498,000 in fees and purchase mortgage
servicing income, $316,000 on the sale of loans and $82,000 on the sale of
liquid securities.
Non-Interest Expenses. Non-interest expenses for the three and six
months ended June 30, 1997 were $2.5 million and $4.6 million, compared to $1.8
million and $3.8 million for the three and six months ended June 30, 1996,
respectively. Total non-interest expenses increased by $622,000 for the three
months ended June 30, 1997 as compared to the same quarter in 1996, which is
largely due to a $501,000 increase in general and administrative expenses
attributable to
17
<PAGE>
TELEBANC FINANCIAL CORPORATION
the addition of the TeleBanc Capital Market expenses, a $110,000 increase in the
compensation bonus accrual for other than TeleBanc Capital Markets and an
overall increase in compensation levels. Total non-interest expenses increased
$748,000 from $3.8 million for the six months ended June 30, 1996 to $4.6
million for the same period in 1997. The increase is primarily the result of a
$721,000 increase in general and administrative expenses. The increase in
general and administrative expense for the six months ended June 30, 1997 is
almost entirely a result of increases in compensation, increases in personnel,
and an accrual for bonuses. Overall deposit growth has precipitated the need for
additional personnel to handle the increased volume of sales, distribution, and
back office operations. In addition, 1997 reflects TeleBanc Capital Markets
expenses. General and administrative expenses as a percentage of total assets
was 1.12% and 1.03% for the quarter and year ending June 30, 1997.
Income Tax Expense. The effective tax rate for the quarter ended June
30, 1997 was 32.6% compared to 35.5% for the quarter ended June 30, 1996. The
income tax expense for the quarter ended June 30, 1997 was $617,000 compared to
$417,000 for the quarter ended June 30, 1996. The effective tax rate declined
slightly in the second quarter of 1997 as a result of an increase in non-taxable
transactions such as the coop securitization. The effective tax rate for the six
months ended June 30, 1997 was 31.3% compared to 34.7% for the six months ended
June 30, 1996.
LIQUIDITY
Liquidity is the ability of the Company to generate cash flows
sufficient to fund operations and to meet present and future financial
obligations to borrowers and depositors in a timely manner. Cash flows from
(used) in operating activities, consisting primarily of interest received less
interest paid on deposits and borrowings, were $(24.3) million and $36.1 million
for the six months ended June 30, 1997 and 1996, respectively. Net cash flow
used in investing activities (primarily purchases of mortgage-backed and related
securities and mortgage loans, offset by principal payments on loans and
mortgage-backed and related securities and proceeds from sale or maturity of
investment securities) was $105.4million and $71.1 million for the six months
ended June 30, 1997 and 1996, respectively. The increase in cash flows related
to investing activities for the six months ended June 30, 1997 reflects a
significant increase in the amount of mortgage-backed securities, mortgage loans
and investment securities purchased. Net financing activities (primarily net
activity in deposits and borrowings) were $139.8 million and $31.1 million for
the six months ended June 30, 1997 and 1996, respectively. The increase in net
cash provided by financing activities for the six months ended June 30, 1997 is
primarily the result of increased growth in 1997 as compared to the same period
in 1996. The total net increase (decrease) in cash and cash equivalents was
$10.0 million and $4.0 million for the six months ended June 30, 1997 and 1996,
respectively.
The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, and proceeds from
sales and maturities of mortgage-backed and related securities and investment
securities. Investment maturities, and scheduled amortization of loans and
mortgage-backed securities are generally a predictable source of funds.
18
<PAGE>
TELEBANC FINANCIAL CORPORATION
Deposit flows and mortgage prepayments are greatly influenced by the general
level of interest rates, economic conditions, and competition. The Company also
accesses FHLB advances, utilizes securities sold under agreements to repurchase
and subordinated debt.
The Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement, which may vary at the
discretion of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The minimum
required ratio is 5.0%. At June 30, 1997, the Company's average liquidity ratio
was 6.18%.
In the second quarter of 1994, the Company completed its initial public
offering, raising an aggregate of $21.9 million through the issuance of common
stock and subordinated notes with warrants. Upon completion of this offering,
the Company invested $15 million of the proceeds as capital of the Bank. In
February , 1997, the Company raised an additional $29.9 million in aggregate
through the issuance of 4.0% cumulative preferred stock and 9.5% senior
subordinated notes with warrants. Upon completion of this offering, the Company
invested $10 million of the proceeds as capital of the Bank. The subordinated
debt represents a stable, although relatively expensive, source of funds. In
addition, the Company formed TeleBanc Capital Trust I, which in turn sold shares
of trust preferred securities, Series A, for a total of $10,000,000 in a private
placement. The annual expense to service the total subordinated debt and the
trust preferred securities is $3.3 million and $1.1 million, respectively.
Annual dividends on the 4% preferred stock is $648,000.
Subject to regulatory approval, the Bank will dividend $3.9 million to
the Company to service the debt and preferred stock. There are various
regulatory limitations on the extent to which federally chartered savings
institutions may pay dividends. Also, savings institution subsidiaries of
holding companies generally are required to provide their OTS Regional Director
with no less than 30 days notice of any proposed declaration on the
institution's stock. Under terms of the indentures pursuant to which the
subordinated notes were issued, the Company presently is required to maintain,
on an unconsolidated basis, liquid assets in an amount equal to or greater than
$3.3 million, which represents 100% of the aggregate interest expenses for one
year on the subordinated debt.
The Company's most liquid assets are cash and cash equivalents, which
include investments in liquid short-term investments and federal funds sold with
maturities of nine months or less. The levels of these assets are dependent upon
the Company's operating, financing, and investing activities during any given
period. Cash equivalents totaled $13.3 million and $3.3 million as of June 30,
1997 and December 31, 1996, respectively. As of June 30, 1997, the Company had
commitments to purchase $48.4 million in loans. Also, certificates of deposit
which are scheduled to mature in less than one year as of June 30, 1997 totaled
$41.5 million.
In the normal course of business, the Company makes various commitments
to extend credit and incurs contingent liabilities which are not reflected in
the balance sheets.
19
<PAGE>
TELEBANC FINANCIAL CORPORATION
CAPITAL RESOURCES
Capital ratios at June 30, 1997 exceeded each of the three OTS capital
requirements on a fully phased-in basis. The following table sets forth the
actual and required minimum levels of regulatory capital for the Company under
applicable OTS regulations as of June 30, 1997:
ACTUAL PERCENT REQUIRED PERCENT EXCESS
------ ------- -------- ------- ------
(DOLLARS IN THOUSANDS)
Core $46,022 5.84% $23,643 3.00% $22,379
Tangible 46,010 5.84 11,821 1.50 34,189
Risk-based 48,887 12.59 31,056 8.00 17,831
20
<PAGE>
TELEBANC FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to Security Holders
On May 7, 1997 the Company held its 1997 Annual Meeting of Shareholders
(the "Annual Meeting"). At the Annual Meeting, David R. DeCamp, Mark Rollinson
and Michael A. Smilow were elected to the Board of Directors for three-year
terms ending in 2000. The Directors continuing in office were Mitchell H. Caplan
and David Smilow whose terms expire in 1998 and Arlen W. Gelbard, Dean C. Kehler
and Steven F. Piaker whose terms expire in 1999. The shareholders also voted at
the Annual Meeting to amend the certificate of incorporation to increase the
number of authorized shares of common stock and to authorize the issuance of
nonvoting common stock, to amend the certificate of incorporation to revise two
anti-takeover provisions, to adopt the 1997 Stock Option Plan and to ratify the
Board's appointment of Arthur Andersen LLP as the independent auditors of
Company for the fiscal year ending December 31, 1997.
The votes cast at the Annual Meeting were as follows:
Election of David R. DeCamp FOR - 2,886,817
AGAINST - 0
WITHHELD -81,504
Election of Mark Rollinson FOR - 2,886,817
AGAINST - 0
WITHHELD - 81,504
Election of Michael A. Smilow FOR - 2,886,817
AGAINST - 0
WITHHELD - 81,504
Amend Article 4 of the Certificate of
Incorporation to increase the authorized
number of Common Shares from 3,500,000 to
8,500,000 and to to authorize Nonvoting
Common Stock FOR - 2,886,817
AGAINST - 0
WITHHELD - 81,504
Amend Article 8 of the Certificate of Incorporation FOR - 2,426,022
AGAINST - 0
WITHHELD - 542,299
21
<PAGE>
TELEBANC FINANCIAL CORPORATION
Amend Article 11 of the Certificate of
Incorporation FOR - 2,426,022
AGAINST - 0
WITHHELD - 542,299
Adopt the 1997 Stock Option Plan FOR - 2,423,927
AGAINST - 0
WITHHELD - 544,394
Ratification of Appointment
of Arthur Andersen LLP: FOR - 2,888,817
AGAINST - 0
WITHHELD - 81,504
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
No information to report.
22
<PAGE>
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleBanc Financial Corporation
(Registrant)
Date: August 14, 1997 By: /s/ Mitchell H. Caplan
--------------------- ---------------------------------
Mitchell H. Caplan
President
Date: August 14, 1997 By: /s/ Aileen Lopez Pugh
--------------------- ---------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
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