FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 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
incorporation or organization) Identification Number)
1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
(Address of principal executive office) (Zip code)
(703) 247-3700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months ( or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of April 28, 1997.
$.01 par value of common stock 2,211,961
(class) (outstanding)
<PAGE>
TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C>
Consolidated Statements of Financial Condition - March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations -- Three months ended March 31, 1997 and 1996 4
Consolidated Statements of Changes in Stockholders' Equity - Three months ended March
31, 1997 and 1996 6
Consolidated Statements of Cash Flows - Three months ended March 31, 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 5, Other Information 19
Item 6, Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets: 1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 8,522 $ 3,259
Investment securities available for sale 80,828 78,826
Mortgage-backed securities available for sale 242,114 184,743
Loans receivable, net 220,872 185,757
Loans receivable held for sale 197,471 166,064
Other assets 33,067 29,316
------ ------
Total assets $ 782,874 $ 647,965
======= =======
Liabilities and Stockholders' Equity:
Liabilities:
Deposits $ 400,700 $ 390,486
Advances from the Federal Home Loan Bank of Atlanta 165,000 144,800
Securities sold under agreements to repurchase 132,266 57,581
Subordinated debt 29,444 16,586
Other liabilities 14,602 13,854
------ ------
Total liabilities 742,012 623,307
------- -------
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 8,719 7,905
Unrealized gain on securities available for sale, net of deferred tax 931 2,096
- --- -----
Total stockholders' equity 40,862 24,658
------ ------
$ 782,874 $ 647,965
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Interest income:
Mortgage loans and other loans $ 7,557 $ 5,296
Mortgage-backed and related securities 3,805 4,948
Investment securities 1,444 875
Other 31 12
-- --
Total interest income 12,837 11,131
------ ------
Interest expense:
Deposits 5,705 4,868
Advances from the Federal Home Loan Bank of Atlanta 2,073 1,464
Reverse repurchase agreements 1,457 1,506
Subordinated debt 643 519
--- ---
Total interest expense 9,878 8,357
----- -----
Net interest income 2,959 2,774
Provision for loan losses 243 419
--- ---
Net interest income after provision for loan losses 2,716 2,355
----- -----
Non-interest income:
Gain on sale of securities 238 241
Gain on sale of loans 127 --
Fees, service charges, and other 253 364
--- ---
Total non-interest income 618 605
--- ---
(continued)
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1997 1996
<S> <C> <C>
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits 1,176 924
Other 721 755
--- ---
Total general and administrative expenses 1,897 1,679
----- -----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure 74 10
Amortization of goodwill and other tangibles 134 290
--- ---
Total other non-interest expenses 208 300
--- ---
Total non-interest expenses 2,105 1,979
----- -----
Income before income tax expense 1,229 981
Income tax expense 355 332
--- ---
Net income $ 874 $ 649
=== ===
Preferred stock dividends 60 --
-- --
Earnings available to Common Stockholders $ 814 $ 649
=== ===
Earnings per share:
Primary $ 0.36 $ 0.31
Fully diluted 0.36 0.31
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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> <C>
Balances at December 31, 1995 $ -- $ 20 $ 14,637 $ 5,353 $ 1,556 $ 21,565
Net income for the three months ended
March 31, 1996 -- -- -- 649 -- 649
Unrealized Gain on Available for Sale
Securities, net of tax effect -- -- -- -- 221 221
-- -- -- -- --- ---
Balances at March 31, 1996 $ -- $ 20 $ 14,637 $ 6,002 $ 1,776 $ 22,435
== == ====== ===== ===== ======
Balances at December 31, 1996 $ -- $ 20 $ 14,637 $ 7,905 $ 2,096 $ 24,658
Net income for the three months ended
March 31, 1997 -- -- -- 874 -- 874
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 -- -- -- (60) -- (60)
Unrealized Loss on Available for Sale
Securities, net of tax effect -- -- -- -- (1,165) (1,165)
-- -- -- -- ------- -------
Balances at March 31, 1997 $ -- $ 22 $ 31,190 $ 8,719 $ 931 $ 40,862
== == ====== ===== === ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 5,750 $ 7,139
----- -----
Cash flows from investing activities:
Mortgage loan originations -- (25)
Mortgage loans purchased (84,134) (22,331)
Proceeds from sale of mortgage loans held for sale -- 5,659
Principal payments on loans and mortgage-backed and
related securities 28,557 23,175
Purchases of mortgage-backed and related securities (75,163) (39,614)
Proceeds from sale of mortgage-backed securities available
for sale 6,581 5,793
Purchases of investment securities available for sale (49,088) (47,210)
Proceeds from sale or maturity of investment securities
available for sale 4,059 42,784
Principal repayments on investment securities
available for sale 41,764 --
Increase in stock of the Federal Home Loan Bank (1,100) --
Proceeds from sale of real estate acquired through
foreclosure 259 --
Investment in subsidiaries (700) --
Purchase of premises and equipment (277) (127)
----- -----
Net cash used in investing activities (129,242) (31,896)
--------- --------
</TABLE>
(continued)
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---- - ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in demand deposits and passbook
savings accounts $ 4,910 $ 17,133
Net (decrease) increase in certificates of deposit, net of
interest credited (393) 3,161
Net increase in subordinated debt 12,858 22
Increase in advances from Federal Home Loan Bank of Atlanta 107,000 --
Payment on advances from Federal Home Loan Bank of
Atlanta (86,800) --
Net increase (decrease) in securities sold under agreements
to repurchase 74,685 (1,397)
Increase in common stock and preferred stock 16,555 --
Dividends paid on common and preferred stock (60) --
---- --
Net cash provided by financing activities 128,755 18,919
------- ------
Net decrease in cash and cash equivalents 5,263 (5,838)
Cash and cash equivalents at beginning of period 3,259 8,965
----- -----
Cash and cash equivalents at end of period $ 8,522 $ 3,127
===== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 8,647 $ 3,988
Income taxes paid 260 37
Transfers from loans to real estate acquired through foreclosures 94 596
Gross unrealized gain (loss) on securities available for sale 2,327 368
Tax effect of gain (loss) on available for sale securities 1,392 (147)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE ENDED MARCH 31, 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 March 31, 1997 and for the three months
ended March 31, 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 March 31,
1997 and the results of consolidated operations for the three months ended March
31, 1997 and 1996. The results of consolidated operations for the three months
ended March 31, 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. EARNINGS PER 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:
<PAGE>
Pro Forma EPS Calculation
March 31,
-----------------------------------------------
PER SHARE AMOUNTS 1997 1996
------------------------ ----------------------
Primary EPS as reported $ 0.36 $ 0.31
Effect of SFAS 128 0.03 0.01
---- ----
Pro forma basic EPS $ 0.39 $ 0.32
==== ====
Fully diluted EPS as reported $ 0.36 $ 0.31
Effect of SFAS 128 (0.07) (0.06)
------ ------
Pro Forma diluted EPS $ 0.29 $ 0.25
==== ====
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 3,005,331 and 2,068,314
for the Company at March 31, 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.
<TABLE>
<CAPTION>
Pro Forma EPS Calculation
Income Shares Per Share Amount
For the Quarter Ended March 31, 1996
-----------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $ 649,000 2,049,500 $ 0.32
=========================
Options issued to management -- 253,954
Warrants -- 338,808
======================= =====================
DILUTED EARNINGS PER SHARE $ 649,000 2,642,262 $ 0.25
======================= ===================== =========================
<CAPTION>
For the Quarter Ended March 31, 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 874,000
less: Preferred Stock Dividends (60,000)
-----------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 814,000 2,106,088 $ 0.39
=======================
Options issued to management -- 290,975
Warrants -- 232,987
Convertible preferred stock 60,000 398,523
----------------------- -----------------------
DILUTED EARNINGS PER SHARE $ 874,000 3,028,573 $ 0.29
======================= ======================= =======================
</TABLE>
<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
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 on 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 asset 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.
<PAGE>
TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE THREE MONTHS ENDED MARCH 31, 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 (MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996)
The Company's total assets increased by $134.9 million or 20.8% from
$648.0 million at December 31, 1996 to $782.9 million at March 31, 1997. The
increase in total assets primarily reflects increases in loans receivable, net
and loans held for sale of $66.5 million, or 18.9% and mortgage-backed
securities available for sale of $57.4 million, or 31.1%. 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 (see Note 1 to Consolidated Financial
Statements for the three months ended March 31, 1997 and 1996). The Company
immediately invested $10 million of 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. 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 $10.2 million, or 2.6% from $390.5 million
at December 31, 1996 to $400.7 million at March 31, 1997. The average term for
the new time deposits gathered in the three months ended March 31, 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 21.6% from $109.8 million at December 31, 1996 to
$133.5 million at March 31, 1997. Federal Home Loan Bank Advances increased to
$165.0 million at March 31, 1997 from $144.8 million at December 31, 1996. As of
March 31, 1997, the weighted average interest rate and weighted average maturity
for Federal Home Loan Bank Advances was 5.95% and 470 days, respectively.
Securities sold under agreements to repurchase, increased by $74.7 million or
129.7% from $57.6 million at December 31, 1996 to $132.3 million at March 31,
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 March 31, 1997, the weighted average interest rate and weighted
average maturity for securities sold under agreements to repurchase was 5.66%
and 160 days, respectively. As of March 31, 1997, subordinated debt, net of
original issue discount was $29.4 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.
Stockholders' equity increased $16.2 million, from $24.7 million at
December 31, 1996 to $40.9 million at March 31, 1997. The increase was due to
the $15.3 million issuance of 4%
<PAGE>
TELEBANC FINANCIAL CORPORATION
convertible preferred stock, $1.3 million stock issuance in exchange for Arbor's
assets, $814,000 in net income for the three months ended March 31, 1997 and an
unrealized loss on securities available for sale, net of deferred taxes, of $1.2
million, which pursuant to SFAS 115 affects the Company's stockholders' equity
but does not impact the statement of operations.
The growth in total assets reflects the Company's efforts to invest and
leverage in a prudent manner the $28.2 million of net proceeds from the private
placement offering in February 1997. As the Company continues to leverage the
new capital, asset growth will be supported by increasing deposits, Federal Home
Loan Bank Advances and reverse repos.
<PAGE>
TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense
and related interest yields and rates for the quarters ended March 31, 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 March 31, 1997 Quarter ended March 31, 1996
----------------------------------- ------------------------------------
Average
Interest Average Interest Annualized
(Dollars in thousands) Average Income/ Annualized Average Income/
unaudited Balance Expense Yield/Cost Balance Expense Yield/Cost
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 383,990 $ 7,565 7.88% $ 243,227 $ 5,296 8.71%
Mortgage-backed and related
securities -- -- -- -- -- --
Investment securities 4,817 88 7.43 -- -- --
Mortgage-backed and related
securities available for sale 193,572 3,805 7.86 245,822 4,874 7.93
Investment securities available
for sale (a) 79,251 1,229 6.20 54,564 898 6.58
Federal funds sold 1,557 20 5.11 859 10 4.66
Investment in FHLB 7,840 140 7.25 5,275 153 11.60
Trading account -- -- -- -- -- --
--------- ---------- ------- --------- -- --
Total interest-earning assets $ 671,027 $ 12,847 7.66% $ 549,747 $ 11,231 8.17%
Non-interest-earning assets $ 33,414 $ 15,020
------ ------
Total assets $ 704,441 $ 564,767
======= =======
Interest-bearing liabilities:
Savings deposits $ 120,156 $ 1,568 5.29% $ 87,161 $ 1,001 4.57%
Time deposits 274,686 4,230 6.25 236,360 3,867 6.51
FHLB advances 151,919 2,263 5.96 105,500 1,584 5.88
Other borrowings 89,573 1,266 5.65 93,040 1,386 5.83
Subordinated debt, net 21,164 643 12.16 16,504 519 12.58
------ ---------- ------- ------ --- -------
Total interest-bearing
liabilities $ 657,497 $ 9,971 6.11% $ 538,565 $ 8,357 6.14%
Non-interest-bearing liabilities $ 15,463 $ 5,656
------ -----
Total liabilities $ 672,960 $ 544,221
Stockholders' equity $ 31,481 $ 20,546
------ ------
Total liabilities and
stockholders' equity $ 704,441 $ 564,767
======= =======
Excess of interest-earning assets
over interest-bearing
liabilities/net interest
income/interest rate spread $ 13,529 $ 2,876 1.55% $ 11,182 $ 2,874 2.03%
======
Net yield on interest earning
assets 1.71% 2.09%
===== =====
Ratio of interest-earning assets
to interest-bearing liabilities 102.06% 102.08%
======= =======
</TABLE>
(a) Interest income and average yields on municipal bonds are presented on a
tax equivalent basis.
<PAGE>
TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
NET INCOME. Net income for the three months ended March 31, 1997 was
$874,000 compared to $649,000 for the three months ended March 31, 1996. Net
income for the three months ended March 31, 1997 consisted primarily of $3.0
million of net interest income and $618,000 in non-interest income reduced by
$243,000 in provision for loan losses, $2.1 million in non-interest expenses and
$355,000 in income tax expense. Net income for the three months ended March 31,
1996 consisted primarily of $2.8 million in net interest income and $605,000 in
non-interest income reduced by $419,000 in provision for loan losses, $2.0
million in non-interest expenses and $332,000 in income tax expense. Net income
available to common shareholders was $814,000 net of stock dividends of $60,000
at March 31, 1997.
NET INTEREST INCOME. Net interest income was $3.0 million and $2.8
million for the three months ended March 31, 1997 and 1996, respectively,
reflecting an annualized interest rate spread of 1.55% and 2.03% for the three
months ended March 31, 1997 and 1996, respectively. In the quarter ending March
31, 1997, total interest earning assets, consisting primarily of loans
receivable, net and mortgage-backed and related securities, yielded 7.55% as
compared to 8.17% for the same period in 1996. The decline in yield is partially
comprised of the transfer of loans to the held for sale category. In June 1996,
the Bank made a one-time transfer of approximately $106.6 million from loans
receivable, net to loans held for sale. According to generally accepted
accounting principles, purchase discounts on mortgage loans held for sale are
recognized as non-interest income. In the first quarter of 1997, the Company
recognized $116,000 in discounts on prepayments on loans held for sale resulting
in a 12 basis point decline in the yield of loans receivable, net. Average
interest-earning assets were $671.0 million and $549.7 million for the quarters
ending March 31, 1997 and 1996, respectively. Average interest bearing
liabilities were $657.5 million and $538.6 million for the quarters ending March
31, 1997 and 1996, respectively. Total interest-bearing liabilities cost 6.11%
in the first quarter of 1997 as compared to 6.14% in the same period in 1996.
The decrease in the cost of interest-bearing liabilities reflects decreases in
the average interest rates paid on time deposits, other borrowings and
subordinated debt. The average interest rate related to the subordinated debt
declined as a result of the issuance of $16.2 million of 9.5% senior
subordinated debt in February 1997 as part of the sale of units. At March 31,
1997, the Company also has outstanding $17.3 million of 11.5% subordinated debt
issued in May 1994. Net yield on interest-earning assets for the quarter ending
March 31, 1997 decreased 38 basis points over the same quarter in 1996.
PROVISION FOR LOAN LOSSES. Total provision for loan losses decreased
$176,000 or 42.0% from $419,000 for the three months ending March 31, 1996 to
$243,000 for the three months ending March 31, 1997. Management intends to
provide prudent reserves for potential loan losses. In the first quarter of
1997, the Company provided $200,000 in general reserves for first quarter loan
acquisitions and charged off approximately $43,000 of mortgage loans. During the
quarter ended March 31, 1996, the Company provided additional general reserves
for loan acquisitions and charged off $19,000 on a one to four family mortgage
loan. The total loan loss
<PAGE>
TELEBANC FINANCIAL CORPORATION
allowance at March 31, 1997 and December 31, 1996 was $2.9 million and $2.6
million, respectively, which was 0.7% and 0.9%, respectively, of total loans
outstanding.
NON-INTEREST INCOME. The Company continues to report a relatively
stable level of non-interest income from the Company's loan held for sale
portfolio, loan fees on the total portfolio, and sales on liquid securities.
Total non-interest income remained stable with reported non-interest income of
$618,000 and $605,000 for the three months ended March 31, 1997 and 1996,
respectively. For the three months ended March 31, 1997, the Company reported
$238,000 on the sale of liquid bonds in the mortgage-backed security and
investment portfolio, $127,000 on prepayments of loans held for sale and
$253,000 in loan fees and service charges on the Bank's portfolio and on
purchase mortgage servicing rights fee income. Non-interest income for the first
quarter of 1996 consisted of a $241,000 net gain from the sale of a corporate
bond held for liquidity purposes and $364,000 on purchased mortgage servicing
rights fee income.
NON-INTEREST EXPENSES. Total non-interest expenses increased by
$126,000 from $2.0 million for the three months ended March 31, 1996 to $2.1
million for the three months ended March 31, 1997. The increase results from a
$218,000 increase in general and administrative expenses attributable to
compensation incentives of $360,000 offset by a decrease in personnel due to the
transfer of servicing from the Bank to a 50% owned subsidiary. Other general and
administrative expenses declined by $34,000 largely as a result of a $104,000
decline in Federal insurance premiums offset by an increase in administrative
expenses associated with a higher volume of deposit accounts and an increase in
marketing expenses. Other non-interest expenses decreased by $92,000 due to a
decline in prepayments and a corresponding decline in the amortization of
purchased mortgage servicing rights. It is the Company's compensation policy to
pay a combination of salary and highly incentivized additional compensation
consisting of bonuses based on the overall Company performance and individual
performance. Although total dollars for compensation increased, the annualized
general and administrative expenses net of bonuses as a percentage of assets for
the three months ended March 31, 1997 was 0.95%, a decline of 0.04% from 0.99%
for the same period in 1996. Annualized general and administrative expenses as a
percentage of assets for the three months ended March 31, 1997 and 1996 was
0.97% and 1.16%, respectively.
INCOME TAX EXPENSE. The effective tax rate for the quarter ended March
31, 1997 was 28.9% compared to 33.8% for the quarter ended March 31, 1995. The
income tax expense for the quarter ended March 31, 1997 was $355,000 compared to
$332,000 for the quarter ended March 31, 1996. The Company carried a deferred
tax payable of $298,000 on its Consolidated Statement of Financial Condition as
of March 31, 1997.
<PAGE>
TELEBANC FINANCIAL CORPORATION
LIQUIDITY
Liquidity is the ability of the Company to generate cash flows
sufficient to fund operations and to meet present and future financial
obligations to borrowers and depositors in a timely manner. Cash flows from
operating activities, consisting primarily of interest received less interest
paid on deposits and borrowings, were $5.1 million and $7.1 million for the
three months ended March 31, 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 $128.5 million and $31.9 million for the three months
ended March 31, 1997 and 1996, respectively. The increase in cash flows related
to investing activities for the three months ended March 31, 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 $128.8 million and $54.7 million for
the three months ended March 31, 1997 and 1996, respectively. The increase in
net cash provided by financing activities for the three months ended March 31,
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 $5.3 million and $(5.8)million for the three months ended March 31, 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. 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 March 31, 1997, the Company's liquidity ratio was
5.06%.
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. The
annual expense to service the total subordinated debt is $3.3 million. 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
<PAGE>
TELEBANC FINANCIAL CORPORATION
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 $8.5 million and $3.3 million as of March 31,
1997 and December 31, 1996, respectively. As of March 31, 1997, the Company had
commitments to purchase $25.2 million in loans. Also, certificates of deposit
which are scheduled to mature in less than one year as of March 31, 1997 totaled
$44.4 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.
CAPITAL RESOURCES
Capital ratios at March 31, 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 March 31, 1997:
<TABLE>
<CAPTION>
ACTUAL PERCENT REQUIRED PERCENT EXCESS
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Core $43,055 5.71% $22,640 3.00% $20,415
Tangible 43,042 5.70 11,320 1.50 31,722
Risk-based 45,673 12.09 30,211 8.00 15,462
</TABLE>
<PAGE>
TELEBANC FINANCIAL CORPORATION
PART II -- OTHER INFORMATION
Item 5. Other Information
No information to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on January 22, 1997
Form 8-K filed on March 13, 1997
<PAGE>
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleBanc Financial Corporation
(Registrant)
Date: May 15, 1997 By: /s/ Mitchell H. Caplan
--------------- -----------------------------------------
Mitchell H. Caplan
President
Date: May 15, 1997 By: /s/ Aileen Lopez Pugh
--------------- -----------------------------------------
Aileen Lopez Pugh
Executive Vice President
Chief Financial Officer/Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,501
<INT-BEARING-DEPOSITS> 3,400
<FED-FUNDS-SOLD> 1,620
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 322,942
<INVESTMENTS-CARRYING> 320,615
<INVESTMENTS-MARKET> 2,327
<LOANS> 420,980
<ALLOWANCE> 2,942
<TOTAL-ASSETS> 782,874
<DEPOSITS> 400,700
<SHORT-TERM> 297,266
<LIABILITIES-OTHER> 14,542
<LONG-TERM> 29,444
0
15,281
<COMMON> 33
<OTHER-SE> 25,548
<TOTAL-LIABILITIES-AND-EQUITY> 782,874
<INTEREST-LOAN> 7,557
<INTEREST-INVEST> 5,249
<INTEREST-OTHER> 31
<INTEREST-TOTAL> 12,837
<INTEREST-DEPOSIT> 5,705
<INTEREST-EXPENSE> 4,173
<INTEREST-INCOME-NET> 2,959
<LOAN-LOSSES> 243
<SECURITIES-GAINS> 238
<EXPENSE-OTHER> 1,725
<INCOME-PRETAX> 1,229
<INCOME-PRE-EXTRAORDINARY> 1,229
<EXTRAORDINARY> 0
<CHANGES> 355
<NET-INCOME> 874
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<YIELD-ACTUAL> 1.71
<LOANS-NON> 11,057
<LOANS-PAST> 3,478
<LOANS-TROUBLED> 433
<LOANS-PROBLEM> 12,137
<ALLOWANCE-OPEN> 2,760
<CHARGE-OFFS> 68
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 2,941
<ALLOWANCE-DOMESTIC> 2,941
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,421
</TABLE>
