<PAGE> 1
$27,500,000
TELEBANC CAPITAL TRUST II
BLUS(SM)
9.0% BENEFICIAL UNSECURED SECURITIES, SERIES A
(LIQUIDATION AMOUNT $25 PER CAPITAL SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[TELEBANC FINANCIAL CORPORATION LOGO]
The 9.0% Beneficial Unsecured Securities, Series A (the "Series A Capital
Securities"), offered hereby (the "Offering") represent beneficial ownership
interests in TeleBanc Capital Trust II, a statutory business trust created under
the laws of the State of Delaware (the "Issuer"). TeleBanc Financial
Corporation, a Delaware corporation (the "Corporation"), will be the owner of
all of the beneficial ownership interests represented by common securities of
the Issuer (the "Series A Common Securities" and, collectively with the Series A
Capital Securities, the "Series A Securities"). Wilmington Trust Company is the
Property Trustee of the Issuer, as well as the Delaware Trustee, the Debenture
Trustee and the Guarantee Trustee. The Issuer exists for the sole purpose of
issuing the Series A Securities and the Series A Common Securities and investing
the proceeds thereof in approximately $28.4 million of 9.0% Junior Subordinated
Deferrable Interest Debentures, Series A (the "Series A Subordinated
Debentures"), to be issued by the Corporation. The Series A Subordinated
Debentures will mature on July 31, 2028. The Series A Capital Securities will
have a preference under certain circumstances with respect to cash distributions
and amounts payable on liquidation or redemption over the Series A Common
Securities. See "Description of Series A Capital Securities -- Subordination of
Series A Common Securities."
Simultaneously with the Offering, the Corporation is offering to the public
(the "Common Stock Offering") 4,500,000 shares of common stock, par value $.01
per share (the "Common Stock") (and an additional 675,000 shares of Common Stock
if the over-allotment option is exercised in full by the underwriters of the
Common Stock Offering). The Common Stock and the Series A Capital Securities are
being offered in separate offerings. However, the Corporation does not intend to
complete the Offering unless the Common Stock Offering is consummated.
Continued on next page
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 HEREOF FOR CERTAIN INFORMATION RELEVANT
TO AN INVESTMENT IN THE SERIES A CAPITAL SECURITIES.
------------------------
THESE SECURITIES ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL
AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
INITIAL PUBLIC UNDERWRITING PROCEEDS TO THE
OFFERING PRICE(1) COMMISSIONS(2) ISSUER(1)(3)(4)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Series A Capital Security....................... $25.00 (3) $25.00
Total............................................... $27,500,000 (3) $27,500,000
=======================================================================================================================
</TABLE>
(1) Plus accrued Distributions, if any, from July 31, 1998 to the date of
delivery.
(2) The Issuer and the Corporation have each agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Series A Capital
Securities will be invested in the Series A Subordinated Debentures, the
Corporation has agreed to pay to the Underwriters as compensation for their
arranging the investment therein of such proceeds $0.9375 per Series A
Capital Security (or $1,031,250 in the aggregate). See "Underwriting."
(4) Expenses of the offering, which are payable by the Corporation, are
estimated to be $145,000.
BLUS(SM) is a service mark of Canadian Imperial Bank of Commerce.
------------------------
The Series A Capital Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the Series A Capital Securities will be ready for delivery in book-entry
form only through the facilities of The Depository Trust Corporation in New
York, New York, on or about July 31, 1998, against payment therefor in
immediately available funds.
------------------------
CIBC OPPENHEIMER
LEGG MASON WOOD WALKER
INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
The date of this Prospectus is July 28, 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A CAPITAL
SECURITIES, INCLUDING SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF A
PENALTY BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
(cover page continued)
Holders of the Series A Capital Securities will be entitled to receive
cumulative cash distributions accruing from the date of original issuance and
payable quarterly in arrears on the last day of March, June, September and
December of each year, commencing September 30, 1998, at the annual rate of 9.0%
on the Liquidation Amount (as defined herein) of $25.00 per Series A Capital
Security ("Distributions"). Subject to certain exceptions, as described herein,
the Corporation has the right to defer payment of interest on the Series A
Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarterly periods with respect to each deferral period
(each, an "Extension Period"), provided that no Extension Period may extend
beyond the Stated Maturity (as defined herein) of the Series A Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all interest then accrued and unpaid (together with interest thereon at the rate
of 9.0% per annum, compounded quarterly, to the extent permitted by applicable
law), the Corporation may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Series A Subordinated
Debentures are so deferred, Distributions on the Series A Capital Securities
will also be deferred and the Corporation will not be permitted, subject to
certain exceptions described herein, to declare or pay any cash distributions
with respect to the Corporation's capital stock or debt securities that rank
pari passu with or junior to the Series A Subordinated Debentures. During an
Extension Period, interest on the Series A Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Series A
Capital Securities are entitled will accumulate) at the rate of 9.0% per annum,
compounded quarterly from the relevant payment date for such interest, and
holders of Series A Capital Securities will be required to accrue interest
income for United States federal income tax purposes. See "Description of Series
A Subordinated Debentures -- Option to Defer Interest Payments" and "Certain
Federal Income Tax Consequences -- Interest Income and Original Issue Discount."
The Series A Subordinated Debentures are unsecured and subordinated to all
Senior Debt (as defined herein). The Series A Subordinated Debentures will rank
pari passu, and payments thereon will be made pro rata, with the $10 million
outstanding 11.00% Junior Subordinated Deferrable Interest Debentures, Series A
(the "Existing Junior Subordinated Debentures") of the Corporation, which were
issued on June 9, 1997 and mature on June 1, 2027. The Existing Junior
Subordinated Debentures were issued to TeleBanc Capital Trust I ("TCT I"), an
entity in which the Corporation owns all of the outstanding common securities
and which is a financing vehicle of the Corporation that issued $10 million of
11.00% Capital Securities, Series A (the "Existing Capital Securities") in a
private placement completed in June, 1997. The relationships between the Series
A Subordinated Debentures and the Existing Junior Subordinated Debentures, and
the Series A Capital Securities and the Existing Capital Securities are
described under "Description of Series A Capital Securities" and "Description of
Series A Subordinated Debentures." Substantially all of the Corporation's other
existing indebtedness constitutes Senior Debt. Because the Corporation is a
holding company, the right of the Corporation to participate in any distribution
of assets of any subsidiary, including TeleBank, a federally chartered savings
bank ("TeleBank"), upon such subsidiary's liquidation or reorganization or
otherwise, is subject to the prior claims of creditors of that subsidiary,
except to the extent that the Corporation may itself be recognized as a creditor
of that subsidiary. Accordingly, the Series A Subordinated Debentures (and
therefore the Series A Capital Securities) will be effectively subordinated to
all existing and future liabilities of the Corporation's subsidiaries, and
holders thereof should only look to the assets of the Corporation for payments
on the Series A Subordinated Debentures. See "Description of Series A
Subordinated Debentures -- Subordination."
The Corporation has, through the Series A Guarantee, the Series A Trust
Agreement, the Series A Subordinated Debentures and the Indenture (each as
defined herein), taken together, fully, irrevocably and
2
<PAGE> 3
unconditionally guaranteed all of the Issuer's obligations under the Series A
Capital Securities. See "Relationship Among the Series A Capital Securities, the
Series A Subordinated Debentures and the Series A Guarantee -- Full and
Unconditional Guarantee." The Series A Guarantee of the Corporation (the "Series
A Guarantee") guarantees the payment of Distributions and payments on
liquidation of the Issuer or redemption of the Series A Capital Securities, but
only in each case to the extent of funds held by the Issuer, as described
herein. See "Description of Series A Guarantee." If the Corporation does not
make interest payments on the Series A Subordinated Debentures held by the
Issuer, the Issuer will have insufficient funds to pay Distributions on the
Series A Capital Securities. The Series A Guarantee does not cover payment of
Distributions when the Issuer has insufficient funds to pay such Distributions.
In such event, a holder of Series A Capital Securities may institute a legal
proceeding directly against the Corporation pursuant to the terms of the
Indenture to enforce payment of amounts equal to such Distributions to such
holder. See "Description of Series A Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Series A Capital Securities." The obligations of
the Corporation under the Series A Guarantee are subordinate and junior in right
of payment to all Senior Debt of the Corporation.
The Series A Capital Securities are subject to mandatory redemption, in
whole but not in part, upon repayment of the Series A Subordinated Debentures at
their Stated Maturity. Subject to the Corporation having received prior
regulatory approval to do so if then required under applicable capital
guidelines or policies, the Series A Subordinated Debentures are redeemable
prior to their Stated Maturity at the option of the Corporation (i) on or after
July 31, 2003, in whole at any time or in part from time to time, or (ii) at any
time in certain circumstances as described under "Description of Series A
Subordinated Debentures -- Conditional Right to Redeem upon a Tax Event or
Capital Treatment Event," in whole (but not in part), within 90 days following
the occurrence of a Tax Event or Capital Treatment Event (both as defined
herein). See "Description of Series A Capital Securities -- Redemption or
Exchange" and "Description of Series A Subordinated Debentures -- Redemption."
The Corporation will have the right at any time to terminate the Issuer,
subject to the Corporation having received prior regulatory approval to do so if
then required under applicable capital guidelines or policies. See "Description
of Series A Capital Securities -- Redemption or Exchange." In the event of
termination of the Issuer, after satisfaction of liabilities to creditors of the
Issuer as required by applicable law, the holders of the Series A Capital
Securities will be entitled to receive $25.00 per Series A Capital Security (the
"Liquidation Amount") plus accumulated and unpaid Distributions thereon to the
date of payment, which may be in the form of a distribution of such amount in
Series A Subordinated Debentures in exchange therefor, subject to certain
exceptions. See "Description of Series A Capital Securities -- Liquidation
Distribution Upon Termination."
The Series A Capital Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Corporation ("DTC")
or its nominee. Beneficial interests in the Series A Capital Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants ("Participants"). Except as described
herein, Series A Capital Securities in certificated form will not be issued in
exchange for the global certificates. See "Description of Series A Capital
Securities -- Registration of Series A Capital Securities."
------------------------
As used herein, (i) the "Indenture" means the Junior Subordinated
Indenture, dated as of July 31, 1998, as amended and supplemented from time to
time, between the Corporation and Wilmington Trust Company, as trustee (the
"Debenture Trustee") relating to the issuance of the Series A Subordinated
Debentures by the Corporation, and (ii) the "Series A Trust Agreement" means the
Amended and Restated Trust Agreement among the Corporation, as Depositor (as
defined therein), Wilmington Trust Company, as Property Trustee (the "Property
Trustee"), Wilmington Trust Company, as Delaware Trustee (the "Delaware
Trustee"), the Administrative Trustees named therein (collectively with the
Property Trustee and the Delaware Trustee, the "Issuer Trustees") and the
holders of the Series A Capital Securities and the Series A Common Securities.
3
<PAGE> 4
AVAILABLE INFORMATION
The Corporation is subject to certain information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, upon
commencement of the Offering, in accordance therewith, will file reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp Center,
14th Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 02549. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov. In
addition, such reports, proxy statements and other information concerning the
Corporation can be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street N.W., Washington, D.C. 20006.
The Corporation and the Issuer have filed with the Commission a
Registration Statement on Form S-2 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Corporation and the securities offered hereby, reference is made
to the Registration Statement and the exhibits and the financial statements,
notes and schedules filed as a part thereof or incorporated by reference
therein, which may be inspected at the public reference facilities of the
Commission at the addresses set forth above or through the Commission's home
page on the Internet. Statements made in this Prospectus concerning the contents
of any documents referred to herein are not necessarily complete, and in each
instance are qualified in all respects by reference to the copy of such document
filed as an exhibit to the Registration Statement.
No separate financial statements of the Issuer have been included herein.
The Corporation and the Issuer do not consider that such financial statements
would be material to holders of the Series A Capital Securities because the
Issuer is a newly formed special purpose entity, has no operating history or
independent operations and is not engaged in and does not propose to engage in
any activity other than holding as trust assets the Series A Subordinated
Debentures of the Corporation and issuing the Series A Securities. See "TeleBanc
Capital Trust II," "Description of Series A Capital Securities," "Description of
Series A Subordinated Debentures" and "Description of Series A Guarantee." In
addition, the Corporation does not expect that the Issuer will be subject to the
reporting or information requirements under the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Corporation with the Commission are
incorporated by reference herein: Annual Report on Form 10-K for the year ended
December 31, 1997, as amended on April 2, 1998, April 30, 1998, May 14, 1998,
May 15, 1998 and June 3, 1998; and Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, as filed on May 15, 1998; and the Current Report on Form
8-K, as filed on January 29, 1998.
Each document or report filed by the Corporation pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of any offering of securities made by this Prospectus shall be
deemed to be incorporated by reference into this Prospectus and to be a part of
this Prospectus from the date of filing of such document. Any statement
contained herein, or in a document all or a portion of which is incorporated or
deemed to be incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
4
<PAGE> 5
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
The Corporation will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference herein (other
than exhibits not specifically incorporated by reference into the texts of such
documents). Requests for such documents should be directed to: TeleBanc
Financial Corporation, 1111 North Highland Street, Arlington, VA 22201-2807,
Attention: Chief Financial Officer, telephone number (703)-247-3700.
5
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. The information presented in
this Prospectus regarding the capital securities of the Corporation reflects a
100% stock dividend declared and paid by the Corporation on June 22, 1998 to
holders of record of the Common Stock of the Corporation as of June 11, 1998.
TELEBANC FINANCIAL CORPORATION
TeleBanc Financial Corporation ("TeleBanc Financial" or the "Corporation")
was organized under the laws of the State of Delaware in January 1994 as a
savings and loan holding company. TeleBanc Financial operates its business
principally through two wholly owned subsidiaries, TeleBank, a federally
chartered savings bank, and TeleBanc Capital Markets, Inc. ("TCM"). TeleBank
offers savings and investment products insured up to applicable limits by the
Federal Deposit Insurance Corporation (the "FDIC"), and TCM is a registered
broker-dealer and investment advisor, specializing in mortgage-backed securities
and mortgage loans, that manages the portfolios of TeleBanc Financial and
TeleBank. In addition, TeleBanc Servicing Corporation ("TSC"), a wholly owned
subsidiary of TeleBank, has invested in a joint venture engaged in the
acquisition and collection of delinquent consumer loans for its own portfolio.
The Corporation has formed another wholly owned subsidiary, TeleBanc Insurance
Services, Inc., through which it intends to offer co-branded insurance products.
Unless the context indicates otherwise, references herein to the Corporation
include TeleBanc Financial and all of its subsidiaries, references to TeleBanc
Financial refer to TeleBanc Financial Corporation, the holding company, and
references to TeleBank refer to TeleBank.
The Corporation is a leading national provider of high value savings,
investment and other financial products and services. The Corporation utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, automated
teller machines ("ATMs"), facsimile and mail. The Corporation's broad selection
of high value savings and investment products generally have higher interest
rates or carry lower fees than similar products offered by traditional,
branch-based financial institutions. The Corporation also emphasizes high
quality customer service and provides customers with "anywhere, anytime"
convenience for accessing its financial products and services. The Corporation
intends to broaden its financial products and services to include in 1998
annuities, residential mortgage loans, credit cards and mutual funds. At March
31, 1998, the Corporation had more than 22,000 customer accounts, $560.6 million
in retail deposits and $1.0 billion in assets.
The Corporation's executive offices are located at 1111 North Highland
Street, Arlington, VA, 22201, telephone (703) 247-3700.
TELEBANC CAPITAL TRUST II
The Issuer is a statutory business trust formed under Delaware law pursuant
to (i) the Declaration of Trust, dated as of May 22, 1998, by and among the
Corporation, as sponsor, (the "Sponsor"), Wilmington Trust Company, as Delaware
Trustee and the three individual Administrative Trustees named therein, and (ii)
the filing of a Certificate of Trust with the Delaware Secretary of State on May
22, 1998. The Issuer's business and affairs are conducted by the Issuer
Trustees: the Property Trustee, the Delaware Trustee, and the three individual
Administrative Trustees who are employees or officers of or affiliated with the
Corporation. The Issuer exists for the exclusive purposes of (i) issuing and
selling the Series A Capital Securities and the Series A Common Securities, (ii)
using the proceeds from the sale of the Series A Capital Securities and the
Series A Common Securities to acquire the Series A Subordinated Debentures
issued by the Corporation and (iii) engaging in only those other activities
necessary or incidental thereto (such as registering the transfer of the Series
A Capital Securities and the Series A Common Securities). Accordingly, the
Series A Subordinated Debentures will be the sole assets of the Issuer, and
payments under the Series A Subordinated Debentures will be the sole revenue of
the Issuer. All of the Series A Common Securities will be owned by the
Corporation.
6
<PAGE> 7
THE OFFERING
Securities Offered............ 1,100,000 Series A Capital Securities, having a
Liquidation Amount of $25.00 per Series A
Capital Security and representing individual
beneficial ownership interests in the assets of
the Issuer, which will consist solely of the
Series A Subordinated Debentures.
Offering Price................ $25.00 per Series A Capital Security plus
accumulated Distributions, if any, from July
31, 1998.
Distributions................. The Distributions payable on each Series A
Capital Security will be fixed at a rate per
annum of 9.0% of the Liquidation Amount of
$25.00 per Series A Capital Security, will be
cumulative, will accrue from the date of
issuance of the Series A Capital Securities,
and will be payable quarterly in arrears on the
last day of March, June, September and December
of each year, commencing on September 30, 1998
(subject to possible deferral as described
below) and on the Stated Maturity Date. The
amount of each Distribution due with respect to
the Series A Capital Securities will include
amounts accrued through the date the
Distribution payment is due. See "Description
of Series A Capital Securities --
Distributions."
Right to Defer Interest....... Distributions on Series A Capital Securities
will be deferred for the duration of any
Extension Period elected by the Corporation
with respect to the payment of interest on the
Series A Subordinated Debentures. No Extension
Period will exceed 20 consecutive quarterly
periods, end on a date other than an Interest
Payment Date (as defined herein) or extend
beyond the Stated Maturity Date. See
"Description of Series A Subordinated
Debentures -- Option to Defer Interest
Payments" and "Certain Federal Income Tax
Consequences -- Interest Income and Original
Issue Discount."
Ranking....................... The Series A Capital Securities will rank pari
passu, and payments thereon will be made pro
rata, with the Series A Common Securities,
except as described under "Description of
Series A Capital Securities -- Subordination of
Series A Common Securities." The Series A
Subordinated Debentures will rank pari passu
with the Existing Junior Subordinated
Debentures and all other junior subordinated
debentures to be issued by the Corporation with
substantially similar subordination terms and
which have been or may be issued and sold to
any other trust, or a trustee of such trust,
partnership or other entity affiliated with the
Corporation that is a financing vehicle of the
Corporation (a "financing entity") established
or to be established by the Corporation and
will be unsecured and subordinate and junior in
right of payment to the extent and in the
manner set forth in the Indenture to all Senior
Debt (as defined herein) of the Corporation.
See "Description of Series A Subordinated
Debentures." The Series A Guarantee will rank
pari passu with the guarantee by the
Corporation of the obligations of TCT I under
the Existing Capital Securities and with all
other guarantees issued or to be issued by the
Corporation with respect to capital securities
issued or to be issued by a financing entity
and will constitute an unsecured obligation of
the Corpora-
7
<PAGE> 8
tion and will rank subordinate and junior in
right of payment to the extent and in the
manner set forth in the Series A Guarantee to
all Senior Debt of the Corporation. See
"Description of Series A Guarantee." In
addition, because the Corporation is a holding
company, the Series A Subordinated Debentures
and the Series A Guarantee will be effectively
subordinated to all existing and future
liabilities of the Corporation's subsidiaries,
including the deposit liabilities of TeleBank.
See "Description of Series A Subordinated
Debentures."
Redemption.................... The Series A Capital Securities will be subject
to mandatory redemption, (i) in whole but not
in part, on the Stated Maturity Date upon
repayment of the Series A Subordinated
Debentures, (ii) in whole but not in part, at
any time prior to July 31, 2003,
contemporaneously with the optional prepayment
of the Series A Subordinated Debentures by the
Corporation upon the occurrence and
continuation of a Tax Event or Capital
Treatment Event and (iii) in whole or in part,
on or after July 31, 2003, contemporaneously
with the optional prepayment by the Corporation
of the Series A Subordinated Debentures. See
"Description of Series A Capital
Securities -- Redemption or Exchange."
Guarantee..................... Payment of Distributions out of moneys held by
the Issuer, and payments on liquidation of the
Issuer or the redemption of the Series A
Capital Securities, are guaranteed by the
Corporation to the extent the Issuer has funds
available therefor. If the Corporation does not
make principal or interest payments on the
Series A Subordinated Debentures, the Issuer
will not have sufficient funds to make
Distributions on the Series A Capital
Securities, in which event the Series A
Guarantee shall not apply to such Distributions
until the Issuer has sufficient funds available
therefor. The Corporation's obligations under
the Series A Guarantee, taken together with its
obligations under the Series A Subordinated
Debentures and the Indenture, including its
obligations to pay all costs, expenses and
liabilities of the Issuer (other than with
respect to the Series A Capital Securities),
constitutes a full and unconditional guarantee
of all of the Issuer's obligations under the
Series A Capital Securities. See "Description
of Series A Guarantee" and "Relationship Among
the Series A Capital Securities, the Series A
Subordinated Debentures and the Series A
Guarantee." The obligations of the Corporation
under the Series A Guarantee are subordinate
and junior in right of payment to all Senior
Debt of the Corporation. See "Risk
Factors -- Risk Factors Relating to the Series
A Capital Securities -- Ranking of Subordinated
Obligations Under the Series A Guarantee and
the Series A Subordinated Debentures" and
"Description of Series A Guarantee."
Liquidation of the Issuer..... In the event of the liquidation of the Issuer,
after satisfaction of the claims of creditors
of the Issuer, if any, as provided by
applicable law, the holders of the Series A
Capital Securities will be entitled to receive
a liquidation preference of $25.00 per Series A
Capital Security plus accumulated and unpaid
Distributions thereon to the date of payment,
which may be in the form of a distribution of
such amount in Series A Subordinated Debentures
as described above.
8
<PAGE> 9
If such liquidation distribution can be paid
only in part because the Issuer has
insufficient assets available to pay in full
the aggregate liquidation distribution, then
the amounts payable directly by the Issuer on
the Series A Capital Securities shall be paid
on a pro rata basis. The holder of the Series A
Common Securities will be entitled to receive
distributions upon any such liquidation pro
rata with the holders of the Series A Capital
Securities, except that if a Debenture Event of
Default (as defined herein) has occurred and is
continuing, the Series A Capital Securities
shall have a priority over the Series A Common
Securities. See "Description of Series A
Capital Securities -- Liquidation Distribution
Upon Termination."
Use of Proceeds............... The proceeds to the Issuer from the sale of the
Series A Capital Securities will be invested by
the Issuer in the Series A Subordinated
Debentures. The Corporation intends to use the
net proceeds from the sale of the Series A
Subordinated Debentures to fund the continued
growth of the Corporation including its
national direct marketing initiatives, and for
working capital and general corporate purposes.
See "Use of Proceeds."
Limited Voting Rights......... The holders of the Series A Capital Securities
will have no voting rights except in limited
circumstances. See "Description of Series A
Capital Securities -- Voting Rights; Amendment
of Series A Trust Agreement."
ERISA Considerations.......... For a discussion of certain restrictions on
purchases, see "Certain ERISA Considerations."
Risk Factors.................. For a discussion of considerations relevant to
an investment in the Series A Capital
Securities, see "Risk Factors."
9
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA OF TELEBANC FINANCIAL CORPORATION
(In thousands, except per share amounts and other operating data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- ---------------------------------------
PRO FORMA ACTUAL ACTUAL PRO FORMA
1995 1996 1997 1997(1) 1997 1998 1998(1)
--------- --------- --------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income.................. $40,511 $45,800 $59,301 $82,609 $12,837 $18,071 $23,599
Interest expense................. 31,946 34,815 46,063 64,494 9,878 14,477 19,045
--------- --------- --------- ------- --------- --------- ----------
Net interest income.............. 8,565 10,985 13,238 18,115 2,959 3,594 4,554
Non-interest income.............. 3,777 2,756 4,093 7,248 618 1,947 2,175
Non-interest expense............. 6,240 9,075 10,142 14,864 2,105 4,204 5,212
Net income available to common
stockholders................... 2,720 2,552 3,671 5,874 814 274 311
Earnings per share:
Basic........................ $0.66 $0.62 $0.84 $1.34 $0.19 $0.06 $0.07
Diluted...................... 0.66 0.58 0.57 0.89 0.15 0.05 0.05
Weighted average shares:
Basic........................ 4,099 4,099 4,383 4,393 4,212 4,468 4,478
Diluted...................... 4,104 4,406 7,411 7,421 5,790 5,757 5,767
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
-------------------------------- -------------------------
1995 1996 1997 ACTUAL PRO FORMA(1)
-------- -------- ---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets............................................... $553,943 $647,965 $1,100,352 $1,048,153 $1,373,847
Loans receivable and mortgage-backed securities............ 482,877 536,564 859,907 817,209 1,024,812
Investment securities...................................... 40,058 78,826 91,237 123,963 161,477
Retail deposits............................................ 306,500 390,486 522,221 560,554 849,285
Brokered callable certificates of deposit.................. -- -- -- 42,286 42,286
Borrowings(2).............................................. 225,878 232,821 522,735 389,247 426,110
Trust preferred securities(3).............................. -- -- 9,572 9,526 9,526
Total stockholders' equity................................. 21,565 24,658 45,824 46,540 46,640
OTHER OPERATING DATA(4):
Number of accounts......................................... 12,919 16,506 21,817 22,916 37,916
Customers with two or more accounts........................ 28% 31% 30% 31% (5)
Accounts referred by or cross-sold to existing customers... 25% 27% 38% 50% (5)
</TABLE>
- ---------------
(1) The Pro Forma Statement of Operations Data and Pro Forma Statement of
Financial Condition Data of the Corporation give pro forma effect to the MET
Holdings Transaction, which is described herein under "Capitalization," and
the DFC Acquisition, which is described under "Recent Developments." The Pro
Forma Statement of Operations data of the Corporation gives pro forma effect
to the above-mentioned transactions as if they had occurred on January 1,
1997 for the year ended December 31, 1997, and on January 1, 1998 for the
three months ended March 31, 1998. The Pro Forma Statement of Financial
Condition Data of the Corporation gives effect to the above-mentioned
transactions as if they had occurred on March 31, 1998. See "Selected Pro
Forma Condensed Consolidated Statement of Financial Condition and Statement
of Operations of TeleBanc Financial Corporation."
(2) Consists of advances from the Federal Home Loan Bank ("FHLB") of Atlanta,
securities sold under agreements to repurchase, subordinated debt, net and
other liabilities.
(3) Consists of 10,000 shares of Corporation-Obligated Mandatorily Redeemable
Capital Securities of TCT I, which was formed to issue such securities and
invest the net proceeds in the Existing Junior Subordinated Debentures. See
Note 12 to Consolidated Financial Statements.
(4) The Other Operating Data has been derived from the Corporation's records.
Account data for Direct Financial Corporation is approximate.
(5) Data giving pro forma effect to the DFC Acquisition is not available as of
the date of this Prospectus.
10
<PAGE> 11
TELEBANC CAPITAL TRUST II
TeleBanc Capital Trust II is a statutory business trust created under
Delaware law pursuant to (i) the Declaration of Trust, dated as of May 22, 1998,
by and among the Corporation, as Sponsor, Wilmington Trust Company, as Delaware
Trustee, and the three individual Administrative Trustees named therein, and
(ii) the filing of a Certificate of Trust with the Delaware Secretary of State
on May 22, 1998. The Series A Trust Agreement will be qualified as an indenture
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
The Issuer exists for the exclusive purposes of (i) issuing and selling the
Series A Securities, (ii) using the proceeds from the sale of Series A
Securities to acquire Series A Subordinated Debentures issued by the Corporation
and (iii) engaging in only those other activities necessary or incidental
thereto (such as registering the transfer of the Series A Capital Securities).
Accordingly, the Series A Subordinated Debentures will be the sole assets of the
Issuer, and payments under the Series A Subordinated Debentures will be the sole
revenue of the Issuer.
All of the Series A Common Securities will be owned by the Corporation. The
Series A Common Securities will rank pari passu, and payments will be made
thereon pro rata, with the Series A Capital Securities, except that upon the
occurrence and continuance of an event of default under the Series A Trust
Agreement resulting from an event of default under the Indenture, the rights of
the Corporation as holder of the Series A Common Securities to payment in
respect of Distributions and payments upon liquidation, redemption or otherwise
will be subordinated to the rights of the holders of the Series A Capital
Securities. See "Description of Series A Capital Securities -- Subordination of
Series A Common Securities." The Corporation will acquire Series A Common
Securities in an aggregate Liquidation Amount at least equal to 3% of the total
capital of the Issuer.
The Issuer has a term of 55 years, but may terminate earlier as provided in
the Series A Trust Agreement. The Issuer's business and affairs are conducted by
the Issuer Trustees: Wilmington Trust Company, as Property Trustee and as
Delaware Trustee, and the individual Administrative Trustees who are employees
or officers of or affiliated with the Corporation. Wilmington Trust Company, as
Property Trustee, will act as sole trustee under the Series A Trust Agreement
for purposes of compliance with the Trust Indenture Act. Wilmington Trust
Company will also act as trustee under the Series A Guarantee and the Indenture.
See "Description of Series A Guarantee" and "Description of Series A
Subordinated Debentures." The holder of the Series A Common Securities of the
Issuer, or the holders of a majority in Liquidation Amount of the Series A
Capital Securities if an event of default under the Series A Trust Agreement has
occurred and is continuing, will be entitled to appoint, remove or replace the
Property Trustee and/or the Delaware Trustee. In no event will the holders of
the Series A Capital Securities have the right to vote to appoint, remove or
replace the Administrative Trustees; such voting rights are vested exclusively
in the holder of the Series A Common Securities. The Corporation will pay all
fees and expenses related to the Issuer and the offering of the Series A Capital
Securities and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of the Issuer. The Corporation does not expect that the Issuer will
be subject to the reporting or information requirements under the Exchange Act.
The principal executive offices of the Issuer are c/o TeleBanc Financial
Corporation, 1111 North Highland Street, Arlington, Virginia 22201.
11
<PAGE> 12
RISK FACTORS
Prospective purchasers of the Series A Capital Securities should carefully
review the information contained elsewhere in this Prospectus and should
particularly consider the following matters. In addition, because holders of
Series A Capital Securities may receive Series A Subordinated Debentures in
exchange therefor upon liquidation of the Issuer, prospective purchasers of
Series A Capital Securities are also making an investment decision with regard
to the Series A Subordinated Debentures and should carefully review all the
information regarding the Series A Subordinated Debentures contained herein.
RISK FACTORS RELATING TO THE SERIES A CAPITAL SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE SERIES A GUARANTEE AND
THE SERIES A SUBORDINATED DEBENTURES
The obligations of the Corporation under the Series A Guarantee issued by
the Corporation for the benefit of the holders of Series A Capital Securities
and under the Series A Subordinated Debentures are unsecured and rank
subordinate and junior in right of payment to all Senior Debt of the
Corporation. Substantially all of the Corporation's existing indebtedness, other
than the Existing Junior Subordinated Debentures, constitutes Senior Debt. The
Series A Guarantee will rank pari passu with the guarantee by the Corporation of
the obligations of TCT I under the Existing Capital Securities, and the Series A
Subordinated Debentures will rank pari passu with the Existing Junior
Subordinated Debentures.
Because the Corporation is a holding company, the right of the Corporation
to participate in any distribution of the assets of any subsidiary, including
TeleBank, upon such subsidiary's liquidation or reorganization or otherwise, is
subject to the prior claims of creditors of that subsidiary, except to the
extent that the Corporation may itself be recognized as a creditor of that
subsidiary. There are various legal limitations on the extent to which certain
of the Corporation's subsidiaries may extend credit, pay dividends or otherwise
supply funds to, or engage in transactions with, the Corporation or certain of
its other subsidiaries. Accordingly, the Series A Subordinated Debentures and
the Series A Guarantee will be effectively subordinated to all existing and
future liabilities of the Corporation's subsidiaries, and holders of Series A
Subordinated Debentures and beneficiaries of the Series A Guarantee should look
only to the assets of the Corporation for payments on the Series A Subordinated
Debentures or under the Series A Guarantee, as the case may be. See "TeleBanc
Financial Corporation." None of the Indenture, the Series A Guarantee or the
Series A Trust Agreement places any limitation on the amount of secured or
unsecured debt, including Senior Debt, that may be incurred by the Corporation.
See "Description of Series A Guarantee -- Status of the Guarantee" and
"Description of Series A Subordinated Debentures -- Subordination." The
Corporation expects from time to time that it will incur additional indebtedness
constituting Senior Debt and that its subsidiaries will incur additional
liabilities.
The ability of the Issuer to pay amounts due on the Series A Capital
Securities is solely dependent upon the Corporation's making payments on the
Series A Subordinated Debentures as and when required. See "Risk Factors
Relating to the Corporation -- Limited Sources of Funds; Payment of Fixed
Obligations."
OPTION TO DEFER INTEREST PAYMENT; TAX CONSEQUENCES; MARKET PRICE CONSEQUENCES
So long as no Debenture Event of Default has occurred and is continuing,
the Corporation has the right under the Indenture to defer payment of interest
on the Series A Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Series A Subordinated Debentures. As a consequence of any such
deferral, quarterly Distributions on the Series A Capital Securities by the
Issuer also will be deferred (and the amount of Distributions to which holders
of the Series A Capital Securities are entitled will accumulate additional
Distributions thereon at the rate of 9.0% per annum, compounded quarterly from
the relevant payment date for such Distributions) during any such Extension
Period. During any such Extension Period, the Corporation may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any
12
<PAGE> 13
of the Corporation's capital stock, (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Corporation (including other series of Junior Subordinated Debentures) that rank
pari passu with or junior in interest to the Series A Subordinated Debentures or
(iii) make any guarantee payments with respect to any guarantee by the
Corporation of the debt securities of any subsidiary of the Corporation if such
guarantee ranks pari passu with or junior in interest to the Series A
Subordinated Debentures (other than (a) dividends or distributions in capital
stock of the Corporation, (b) any declaration of a dividend in connection with
the implementation of a stockholders' rights plan or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Series A
Guarantee, (d) purchases of Common Stock related to the issuance of Common Stock
or rights under any of the Corporation's benefit plans for its directors,
officers or employees, related to the issuance of Common Stock or rights under a
dividend reinvestment and stock purchase plan, or related to the issuance of
Common Stock (or securities convertible into or exchangeable for Common Stock)
as consideration in an acquisition transaction that was entered into prior to
the commencement of such Extension Period and (e) guarantee payments with
respect to the guarantee by the Corporation of the Existing Capital Securities
to the extent such payments are made pari passu with payments with respect to
the Series A Guarantee). Prior to the termination of any such Extension Period,
the Corporation may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Series A Subordinated Debentures. Upon the
termination of any Extension Period and the payment of all interest then accrued
and unpaid (together with interest thereon at the rate of 9.0% per annum,
compounded quarterly from the interest payment date for such interest, to the
extent permitted by applicable law), the Corporation may elect to begin a new
Extension Period subject to the above requirements. There is no limitation on
the number of times that the Corporation may elect to begin an Extension Period.
See "Description of Series A Capital Securities -- Distributions" and
"Description of Series A Subordinated Debentures -- Option to Defer Interest
Payments."
Should an Extension Period occur, a holder of Series A Capital Securities
will be required to accrue income (in the form of original issue discount) in
respect of its pro rata share of the Series A Subordinated Debentures held by
the Issuer for United States federal income tax purposes. As a result, a holder
of Series A Capital Securities will be required to include such income in gross
income for United States federal income tax purposes in advance of the receipt
of cash attributable to such income, and will not receive the cash related to
such income from the Issuer if the holder disposes of the Series A Capital
Securities prior to the record date for the payment of Distributions. See
"Certain Federal Income Tax Consequences -- Interest Income and Original Issue
Discount" and "-- Sales or Redemption of Series A Capital Securities."
The Corporation has no current intention of exercising its right to defer
payments of interest on the Series A Subordinated Debentures. However, should
the Corporation elect to exercise such right in the future, the market price of
the Series A Capital Securities is likely to be adversely affected. A holder
that disposes of its Series A Capital Securities during an Extension Period,
therefore, might not receive the same return on its investment as a holder that
continues to hold its Series A Capital Securities.
REDEMPTION UPON TAX EVENT OR CAPITAL TREATMENT EVENT
Upon the occurrence and continuation of a Tax Event or Capital Treatment
Event (whether occurring before or after July 31, 2003), the Corporation has the
right if certain conditions are met, to redeem the Series A Subordinated
Debentures in whole (but not in part) within 90 days following the occurrence of
such Tax Event or Capital Treatment Event and thereby cause a mandatory
redemption of the Series A Capital Securities. The exercise of such right is
subject to the Corporation's having received any regulatory approvals to do so
if then required under applicable capital guidelines or policies. See
"Description of Series A Subordinated Debentures -- Conditional Right to Redeem
upon a Tax Event or Capital Treatment Event" and "Description of Series A
Capital Securities -- Redemption or Exchange."
A "Tax Event" means the receipt by the Issuer of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced proposed change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting
13
<PAGE> 14
or applying such laws or regulations, which amendment or change is effective or
which proposed change, pronouncement or decision is announced on or after the
date of issuance of the Series A Capital Securities under the Series A Trust
Agreement, there is more than an insubstantial risk that (i) the Issuer is, or
will be within 90 days of the date of such opinion, subject to United States
federal income tax with respect to income received or accrued on the Series A
Subordinated Debentures, (ii) interest payable by the Corporation on the Series
A Subordinated Debentures is not, or within 90 days of the date of such opinion,
will not be, deductible by the Corporation, in whole or in part, for United
States federal income tax purposes or (iii) the Issuer is, or will be within 90
days of the date of the opinion, subject to more than a de minimis amount of
other taxes, duties or other governmental charges. With respect to Series A
Subordinated Debentures which are no longer held by the Issuer or another
issuer, "Tax Event" means the receipt by the Corporation of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to, or change (including any announced proposed change) in, the laws
(or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which proposed change, pronouncement or decision is announced on or after the
date of issuance of the Series A Subordinated Debentures under the Indenture,
there is more than an insubstantial risk that interest payable by the
Corporation on the Series A Subordinated Debentures is not, or within 90 days of
the date of such opinion will not be, deductible by the Corporation, in whole or
in part, for United States federal income tax purposes (each of the
circumstances referred to in clauses (i), (ii) and (iii) of the preceding
sentence and the circumstances referred to in this sentence being referred to
herein as an "Adverse Tax Consequence").
Recently, the Internal Revenue Service ("IRS") asserted that the interest
payable on a security with terms that are similar to the terms of the Series A
Subordinated Debentures (but with a longer maturity than the Series A
Subordinated Debentures) was not deductible for United States federal income tax
purposes. The taxpayer in that case has filed a petition in the United States
Tax Court challenging the IRS's position on this matter. If this matter is in
fact litigated and the Tax Court were to sustain the IRS's position on this
matter, such judicial decision could constitute a Tax Event which could result
in an early mandatory redemption of the Series A Capital Securities.
A "Capital Treatment Event" means that the Corporation shall have received
an opinion of independent bank regulatory counsel experienced in such matters to
the effect that the Series A Capital Securities, as a result of (a) any
amendment to or change (including any announced prospective change) in the laws
(or any regulations thereunder) of the United States or any rules, guidelines or
policies of the appropriate regulatory authorities or (b) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of the original
issuance of the Series A Capital Securities, do not constitute, or within 90
days of the date thereof, will not constitute Tier 1 capital or its then
equivalent applied as if the Corporation or its successor were a bank holding
company under The Bank Holding Company Act of 1956, as amended; provided,
however, that the distribution of the Series A Subordinated Debentures in
connection with the liquidation of the Issuer by the Corporation shall not in
and of itself constitute a Capital Treatment Event unless such liquidation shall
have occurred in connection with a Tax Event.
EXCHANGE OF SERIES A CAPITAL SECURITIES FOR SERIES A SUBORDINATED DEBENTURES
The Corporation will have the right at any time to terminate the Issuer
and, after satisfaction of liabilities to creditors of the Issuer as required by
applicable law, cause the Series A Subordinated Debentures to be distributed to
the holders of the Series A Capital Securities in exchange therefor upon
liquidation of the Issuer. The exercise of such right is subject to the
Corporation having received prior regulatory approval if then required under
applicable capital guidelines or policies. See "Description of Series A Capital
Securities -- Liquidation Distribution Upon Termination" and "Description of
Series A Capital Securities -- Redemption or Exchange."
Under current United States federal income tax law and interpretations and
assuming, as expected, the Issuer is classified as a grantor trust for such
purposes, a distribution of the Series A Subordinated Debentures
14
<PAGE> 15
upon a liquidation of the Issuer should not be a taxable event to holders of the
Series A Capital Securities. However, if a Tax Event were to occur which would
cause the Issuer to be subject to United States federal income tax with respect
to income received or accrued on the Series A Subordinated Debentures, a
distribution of the Series A Subordinated Debentures by the Issuer could be a
taxable event to the Issuer and the holders of the Series A Capital Securities.
See "Certain Federal Income Tax Consequences -- Distribution of Series A
Subordinated Debentures to Holders of Series A Capital Securities."
MARKET PRICES
There can be no assurance as to the market prices for Series A Capital
Securities or Series A Subordinated Debentures that may be distributed in
exchange for Series A Capital Securities upon liquidation of the Issuer.
Accordingly, the Series A Capital Securities that an investor may purchase,
whether pursuant to the offer made hereby or in the secondary market, or the
Series A Subordinated Debentures that a holder of Series A Capital Securities
may receive upon liquidation of the Issuer, may trade at a discount to the price
that the investor paid to purchase the Series A Capital Securities offered
hereby. As a result of the existence of the Corporation's right to defer
interest payments, the market price of the Series A Capital Securities (which
represent beneficial ownership interests in the Issuer) may be more volatile
than the market prices of other securities that are not subject to such optional
deferrals. See "Description of Series A Capital Securities" and "Description of
Series A Subordinated Debentures."
RIGHTS UNDER THE SERIES A GUARANTEE
The Series A Guarantee guarantees to the holders of the Series A Capital
Securities the following payments, to the extent not paid by the Issuer: (i) any
accumulated and unpaid Distributions required to be paid on the Series A Capital
Securities, to the extent that the Issuer has funds on hand available therefor
at such time, (ii) the redemption price with respect to any Series A Capital
Securities called for redemption, to the extent that the Issuer has funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of the Issuer (unless the Series A
Subordinated Debentures are distributed to holders of the Series A Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Issuer has funds on hand available therefor at such time, and (b) the amount
of assets of the Issuer remaining available for distribution to holders of the
Series A Capital Securities after payment of creditors of the Issuer as required
by applicable law. The Series A Guarantee will be qualified as an indenture
under the Trust Indenture Act. Wilmington Trust Company will act as Guarantee
Trustee under the Series A Guarantee for the purpose of compliance with the
Trust Indenture Act and will hold the Series A Guarantee for the benefit of the
holders of the Series A Capital Securities. Wilmington Trust Company will also
act as Debenture Trustee for the Series A Subordinated Debentures, as Property
Trustee under the Indenture and as Delaware Trustee under the Series A Trust
Agreement.
The Series A Guarantee is subordinate as described under "-- Ranking of
Subordinated Obligations Under the Series A Guarantee and the Series A
Subordinated Debentures."
The holders of not less than a majority in aggregate Liquidation Amount of
the Series A Capital Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Series A Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Series A Guarantee.
Any holder of the Series A Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Series A
Guarantee without first instituting a legal proceeding against the Issuer, the
Guarantee Trustee or any other person or entity. If the Corporation were to
default on its obligation to pay amounts payable under the Series A Subordinated
Debentures, the Issuer would lack funds for the payment of Distributions or
amounts payable on redemption of the Series A Capital Securities or otherwise,
and, in such event, holders of the Series A Capital Securities would not be able
to rely upon the Series A Guarantee for payment of such amounts. Instead, if an
event of default under the Indenture shall have occurred and be continuing and
such event is attributable to the failure of the Corporation to pay interest on
or principal of the Series A Subordinated Debentures on the applicable payment
date, then a holder of Series A Capital Securities may
15
<PAGE> 16
institute a legal proceeding directly against the Corporation pursuant to the
terms of the Indenture for enforcement of payment to such holder of the
principal of or interest on such Series A Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Series A
Capital Securities of such holder (a "Direct Action"). In connection with such
Direct Action, the Corporation will have a right of set-off under the Indenture
to the extent of any payment made by the Corporation to such holder of Series A
Capital Securities in the Direct Action. Except as described herein, holders of
Series A Capital Securities will not be able to exercise directly any other
remedy available to the holders of the Series A Subordinated Debentures or
assert directly any other rights in respect of the Series A Subordinated
Debentures. The exercise by the Corporation of its right, as described herein,
to defer the payment of interest on the Series A Subordinated Debentures, does
not constitute a Debenture Event of Default. See "Description of Series A
Subordinated Debentures -- Enforcement of Certain Rights by Holders of Series A
Capital Securities" and "-- Debenture Events of Default" and "Description of
Series A Guarantee." The Series A Trust Agreement provides that each holder of
Series A Capital Securities by acceptance thereof agrees to the provisions of
the Series A Guarantee and the Indenture.
LIMITED VOTING RIGHTS
Holders of Series A Capital Securities generally will have limited voting
rights relating only to the modification of the Series A Capital Securities and
the Series A Guarantee and the exercise of the Issuer's rights as holder of
Series A Subordinated Debentures. The Series A Trust Agreement provides that
holders of Series A Capital Securities will not be entitled to vote to appoint,
remove or replace the Property Trustee, the Delaware Trustee or any
Administrative Trustee, and that such voting rights are vested exclusively in
the holder of the Series A Common Securities except, with respect to the
Property Trustee and the Delaware Trustee, upon the occurrence of certain events
described herein. The Property Trustee, the Administrative Trustees and the
Corporation may amend the Series A Trust Agreement without the consent of
holders of Series A Capital Securities to ensure that the Issuer will not be
classified for United States federal income tax purposes as an association or
publicly traded partnership subject to taxation as a corporation unless such
action materially and adversely affects the interests of such holders. See
"Description of Series A Capital Securities -- Removal of Issuer Trustees" and
"-- Voting Rights; Amendment of Series A Trust Agreement."
TRADING CHARACTERISTICS
The Series A Capital Securities will be a new issue of securities for which
there currently is no market. The Series A Capital Securities have been approved
for quotation on the Nasdaq National Market under the symbol "TBFCP," subject to
notice of issuance. Further, although the Underwriters have indicated to the
Corporation and the Issuer that they intend to make a market in the Series A
Capital Securities, they are not obligated to do so and may discontinue any such
market-making activities at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Series A Capital Securities.
The Series A Capital Securities may trade at prices that do not fully
reflect the value of accrued and unpaid interest with respect to the underlying
Series A Subordinated Debentures. See "Certain Federal Income Tax
Consequences -- Interest Income and Original Issue Discount" and "-- Sales or
Redemption of Series A Capital Securities" for a discussion of the United States
federal income tax consequences that may result from a taxable disposition of
the Series A Capital Securities.
RISK FACTORS RELATING TO THE CORPORATION
LIMITED SOURCES OF FUNDS; PAYMENT OF FIXED OBLIGATIONS
The Corporation relies on cash dividends from TeleBank to make payments on
certain obligations, including payments on the Series A Subordinated Debentures
(which are the primary source of funds for the payment of the Series A Capital
Securities). TeleBank is subject to substantial regulatory restrictions on its
ability to pay dividends on its common stock.
16
<PAGE> 17
Office of Thrift Supervision ("OTS") regulations prohibit thrift
institutions, such as TeleBank, from making "capital distributions" (defined to
include a cash distribution or a stock redemption, but to exclude dividends in
the form of additional capital stock) unless the institution is at least
"adequately capitalized." Currently, an institution is considered "adequately
capitalized" for this purpose if it has a core capital ratio of at least 4.0%, a
Tier 1 capital ratio of at least 4.0%, and a total capital ratio of at least
8.0%. At March 31, 1998, TeleBank's tangible, core Tier 1 and total capital
ratios of 5.5%, 5.5%, 11.0% and 11.6%, respectively, met the ratios established
for "well capitalized" institutions and, thus, exceeded the ratios established
for "adequately capitalized" institutions.
Under current OTS capital distribution regulations, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay dividends without prior OTS approval equal to the higher of (i) 100% of
net income to date over the calendar year and 50% of surplus capital existing at
the beginning of the calendar year or (ii) 75% of its net income over the most
recent four-quarter period. The OTS could require prior approval if it were to
determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution. As of March 31, 1998, approximately $11.0
million was available for payment of dividends by TeleBank to the Corporation
under applicable restrictions without regulatory approval. There can be no
assurance that such amounts can or will be paid as dividends. The Corporation's
aggregate annual interest payment on its subordinated debentures and the
Existing Junior Subordinated Debentures is $4.4 million. In addition, under the
terms of the indentures for certain of its subordinated debentures and the
Existing Junior Subordinated Debentures, the Corporation presently is required
to maintain, on an unconsolidated basis, liquid assets in an amount equal to or
greater than $3.3 million. Any restrictions on TeleBank's payment of dividends
could adversely affect the Corporation's ability to make payments on the Series
A Subordinated Debentures, and thus on the Issuer's ability to make payments on
the Series A Capital Securities. See "Business -- Government
Regulation -- Sources of Funds for Cash Dividends" and Note 12 to Consolidated
Financial Statements of TeleBanc Financial Corporation.
INTEREST RATE RISK
The results of operations of the Corporation substantially depend upon the
level of the Corporation's net interest income, which is the difference between
interest income from interest-earning assets (such as loans and mortgage-backed
securities) and interest expense on interest-bearing liabilities (such as
deposits and borrowings). Interest rates are highly sensitive to many factors
beyond the Corporation's control, including governmental monetary policies,
domestic and international economic and political conditions and other factors.
If interest rate fluctuations cause TeleBank's cost of funds to increase faster
than the yield on the interest-bearing assets of TeleBank, its net interest
income will be reduced.
The market value of most of the Corporation's financial assets also is
sensitive to fluctuations in market interest rates. Fixed-rate investments,
mortgage-backed and related securities and mortgage loans generally decline in
value as interest rates rise. Based on TeleBank's March 31, 1998 simulation
analysis, the Corporation estimates that a hypothetical instantaneous 100 basis
point rise in rates would cause the fair value of stockholders' equity the
("FVE") to decrease by 8.6%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LEGISLATIVE CONSIDERATIONS
Congress has been considering legislation in various forms which could
require a federally chartered savings bank, such as TeleBank, to convert its
charter to a national or state bank charter. If legislation is adopted that
requires TeleBank to convert its charter, TeleBanc Financial would become a bank
holding company subject to additional regulation, including restrictions on its
activities and the imposition of regulatory capital requirements. In the absence
of appropriate "grandfather" provisions, such legislation could have an adverse
effect on TeleBank and the Corporation. The Corporation is unable to predict
whether, and in
17
<PAGE> 18
what form, any such legislation is likely to be passed and what effect such
legislation might have on the Corporation or TeleBank. See
"Business -- Government Regulation -- Thrift Charter Legislation."
GOVERNMENT REGULATION
The Corporation is subject to federal regulatory oversight by the OTS as a
savings and loan holding company. TeleBank is subject to extensive regulation by
the OTS as its primary federal regulator and also by the FDIC and the Board of
Governors of the Federal Reserve Board (the "Federal Reserve Board"). Future
legislation or regulations may be adopted which could have an adverse effect on
the Corporation or TeleBank. In addition, TeleBank's non-traditional operating
plan may subject it to increased regulatory scrutiny.
TeleBank is subject to minimum capital and leverage requirements prescribed
by federal statute and OTS regulations. At March 31, 1998, TeleBank's regulatory
tangible, core, tier 1 and total capital ratios were 5.5%, 5.5%, 11.0% and
11.6%, respectively. TeleBank's capital ratios exceeded the requirements under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") as well as the standards established for "well capitalized"
institutions under the prompt corrective action regulations issued pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). If
TeleBank were to fail to meet its regulatory capital requirements it would be
subject to additional restrictions and would be required by statute to file a
capital restoration plan with the OTS setting forth, among other things, the
steps TeleBank would take to become "adequately capitalized." The OTS could
choose not to accept the plan unless the Corporation guaranteed TeleBank's
compliance with the plan in writing. Finally, if TeleBank were to become
"critically undercapitalized" (which is defined to include institutions that
still have a positive net worth) it would be subject to the appointment of a
receiver or conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions, the
Corporation's ability to raise new capital and the Corporation's ability and
willingness to make additional capital contributions to TeleBank. As a result,
although TeleBank's regulatory capital ratios at March 31, 1998 met the ratios
established for "well capitalized" institutions, there can be no assurance that
TeleBank will be able to maintain capital levels that meet the standards for
classification as "well capitalized" under the prompt corrective action
standards.
DEVELOPMENT OF BRAND AWARENESS
The Corporation believes that the importance of brand recognition will
increase as more companies engage in commerce over the Internet and through
other nontraditional commercial means. The Corporation's success in introducing
new financial products and services through alternative delivery channels will
depend in part upon the Corporation's ability to increase brand awareness of the
name "TeleBank." There can be no assurance that the Corporation will be able to
develop effectively an association between the brand name "TeleBank" and the
financial products and services it provides, or that, if successful, such
association will have a material favorable effect on the Corporation's business,
financial condition and results of operations. The Corporation anticipates that
its efforts to develop and, if developed, maintain brand awareness will increase
marketing and related costs significantly. These significant additional expenses
could have a material adverse effect on the Corporation's business, financial
condition and results of operations. The Corporation currently does not own a
federal registration for the servicemark "TeleBank." If the Corporation is
successful in developing a branded identity for "TeleBank" and a competitor were
to challenge successfully the Corporation's ability to use the name TeleBank, it
could have a material adverse effect on the Corporation's business, financial
condition and results of operation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
The Corporation believes that the principal competitive factors in the
financial services industry in which it operates are price (e.g., interest rates
paid on savings products and fees associated with investment products), service,
convenience and product quality. Although the Corporation believes its operating
strategy enables it to offer competitive financial products on a nationwide
basis, there can be no assurance that the
18
<PAGE> 19
Corporation will be able to differentiate its products from the products of its
competitors in the financial services industry.
The financial services industry, which is highly competitive and dynamic,
has recently undergone, and continues to undergo, a major consolidation of
participants. Competing providers of direct-marketed savings and investment
products include Net.B@nk and other Internet-based financial institutions.
Additionally, more traditional, branch-based financial services companies may be
able to adopt business strategies similar to those of the Corporation with
relative ease, and there are few barriers to market entry. Many of the financial
institutions and other Companies with which the Corporation currently competes
or may compete in the future have significantly greater capital and management
resources than does the Corporation. Increased competition could have a material
adverse affect on the Corporation's business, financial condition and results of
operations. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Corporation's success may depend upon the continued service of the
Corporation's senior management, including David A. Smilow, Chairman of the
Board of Directors, Mitchell H. Caplan, Vice Chairman of the Board of Directors,
Chief Executive Officer and President, Aileen Lopez Pugh, Executive Vice
President and Chief Financial Officer and Laurence Greenberg, Executive Vice
President and Chief Marketing Officer. The loss of service of any key personnel,
or the inability to attract additional qualified personnel, could have an
adverse effect on the Corporation's business, financial condition and results of
operations.
SYSTEMS FAILURE AND SECURITY RISKS
The computer systems and network infrastructure used by TeleBank and the
Corporation may be vulnerable to unforeseen problems. TeleBank's operations are
dependent upon the ability of TeleBank to protect its computer equipment against
damage from fire, power loss, telecommunications failure or a similar
catastrophic event. Any damage or failure that causes an interruption in
TeleBank's operations could have a material adverse effect on the Corporation's
business, financial condition and results of operations. TeleBank also must
protect its computer systems and network infrastructure from physical break-ins,
security breaches and other disruptive problems caused by the Internet or other
users. Such computer break-ins and power disruptions could jeopardize the
security of information stored in and transmitted through such computer systems
and network infrastructure, which may result in significant liability to
TeleBank and the Corporation and would likely adversely affect the Corporation's
ability to retain or attract customers. The Corporation employs security
systems, including firewalls and password encryption, designed to minimize the
risk of security breaches, and relies on an outside third party service provider
for back-up Internet services and facilities. The Corporation also maintains
insurance designed to compensate the Corporation in the event of any accident,
system failure or breach of security. In addition, depositors' funds are insured
by the FDIC to a maximum of $100,000 per depositor. Although the Corporation
intends to continue to implement security technology and establish operational
procedures to prevent break-ins, damage and failures, there can be no assurance
that these security measures will be successful. A failure of such security
measures could have a material adverse effect on the Corporation's business,
financial condition and results of operations.
19
<PAGE> 20
TELEBANC FINANCIAL CORPORATION
The Corporation is a leading national provider of high value savings,
investment and other financial products and services. The Corporation utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, ATMs, facsimile
and mail. The Corporation's broad selection of high value savings and investment
products generally have higher interest rates or carry lower fees than similar
products offered by traditional, branch-based financial institutions. The
Corporation also emphasizes high quality customer service and provides customers
with "anywhere, anytime" convenience for accessing its financial products and
services. The Corporation intends to broaden its financial products and services
to include in 1998 annuities, residential mortgage loans, credit cards and
mutual funds. At March 31, 1998, the Corporation had more than 22,000 customer
accounts, $560.6 million in retail deposits and $1.0 billion in assets.
The financial services industry is the fifth largest in the United States.
In 1997, deposits held in U.S. financial institutions totaled more than $4.0
trillion and the total assets held by such institutions was more than $6.0
trillion. The financial services industry is experiencing rapid change,
characterized by the demand for electronic delivery channels for products and
services, the emergence of nationwide, full-service financial institutions and
growing price competition. Increasingly, customers are seeking higher value
products, as well as access to financial services and products through
electronic delivery channels, such as the Internet, telephones, ATMs and
facsimile. The use of such electronic media has grown through the development of
network technologies, the increased use of personal computers in the home and
workplace and faster and less expensive Internet access. According to an April
1998 report by the U.S. Department of Commerce (the "Commerce Report"),
businesses will trade as much as $300 billion annually over the Internet during
the next five years. Although Internet banking is still relatively new, the
Commerce Report estimated that approximately 4.5 million households were banking
online in 1997, and that number is expected to increase to 10 to 16 million
households by the year 2000.
To meet changing customer demands, the Corporation has developed a low cost
operating strategy designed to reach potential customers through alternative
delivery channels and to build brand awareness of "TeleBank." As part of this
strategy, through a variety of advertising and promotional media, including
print, the Internet, radio advertising and public relations, the Corporation
targets customers in all 50 states who seek higher rates, convenience and
service. The Corporation also has implemented an affinity marketing program,
through which it directly markets its savings and investment products to members
of the participating organizations. Currently, TeleBank has affinity programs
with 10 organizations having an aggregate of more than one million members
nationwide. The Corporation also intends to broaden its financial product and
service offerings by forming strategic alliances with other financial service
providers to develop and market co-branded products. For example, the
Corporation has entered into agreements with, among others, USG Annuity & Life
Company and Jackson National Life Insurance Company to offer co-branded
annuities through the Corporation's licensed insurance subsidiary. The
Corporation has entered into agreements with E-Loan, an Internet-based mortgage
loan broker, to offer residential mortgage loans and with E-Trade to make
available electronic brokerage services and related financial products.
RECENT DEVELOPMENT
Consistent with the Corporation's direct marketing operating strategy, the
Corporation has signed an agreement to acquire Direct Financial Corporation
("DFC"), a regional savings and loan holding company, and its wholly owned
subsidiary, Premium Bank F.S.B., a federal savings bank ("Premium Bank"), in a
merger transaction for approximately $21.4 million in cash and the repayment by
the Corporation of approximately $6.0 million in subordinated debt and other
liabilities (the "DFC Acquisition"). DFC employs a direct marketing strategy
similar to that of the Corporation. At December 31, 1997, DFC reported total
assets of $326.1 million, total deposits of 273.9 million, total stockholders'
equity of $12.3 million and approximately 15,000 customer accounts. The DFC
Acquisition is expected to be completed in the summer of 1998, subject to the
satisfaction of certain customary conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
20
<PAGE> 21
USE OF PROCEEDS
All of the proceeds from the sale of the Series A Capital Securities will
be invested by the Issuer in Series A Subordinated Debentures. The Corporation
intends that the proceeds from the sale of the Series A Subordinated Debentures
will be used to fund the continued growth of the Corporation, including its
national direct marketing initiatives, and for working capital and general
corporate purposes.
Simultaneously with the Offering, the Corporation is offering to the public
pursuant to the Common Stock Offering 4,500,000 shares of Common Stock (and an
additional 675,000 shares of Common Stock if the over-allotment option is
exercised in full by the underwriters of the Common Stock Offering). The
Corporation intends to use the net proceeds from the Common Stock Offering,
estimated to be $60.1 million ($69.2 million if the underwriters' over-allotment
option is exercised in full), assuming a price to the public for the Common
Stock of $14.50 per share, to fund the continued growth of the Corporation,
including its national direct marketing initiatives, and for working capital and
general corporate purposes. The Series A Capital Securities and the Common Stock
are being sold in separate offerings. However, the Corporation does not intend
to complete the Offering unless the Common Stock Offering is completed.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the Corporation's consolidated ratios of
earnings to fixed charges and ratios of earnings to combined fixed charges and
preferred stock dividend requirements for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ---------------------------------
ENDED MARCH 31, 1998 1997 1996 1995 1994 1993
-------------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Earnings to Fixed Charges:
Excluding Interest on Deposits....... 1.06x 1.38x 1.30x 1.29x 1.09x 1.50x
Including Interest on Deposits....... 1.03x 1.17x 1.11x 1.14x 1.04x 1.17x
Earnings to Fixed Charges and
Preferred Dividends:
Excluding Interest on Deposits....... 1.02x 1.33x 1.30x 1.29x 1.09x 1.50x
Including Interest on Deposits....... 1.01x 1.15x 1.11x 1.14x 1.04x 1.17x
</TABLE>
For purposes of computing the ratios of earnings to fixed charges and of
earnings to combined fixed charges and the pretax amount of preferred stock
dividend requirements, earnings represent net income from continuing operations
plus total taxes based on income and fixed charges and less undistributed
earnings of subsidiaries. Fixed charges, excluding interest on deposits,
consists of interest expense (other than on deposits) and capitalized interest.
Fixed charges, including interest on deposits, consists of all interest expense
and capitalized interest.
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer will be treated as a
subsidiary of the Corporation and, accordingly, the accounts of the Issuer will
be included in the Consolidated Financial Statements of the Corporation. The
Series A Capital Securities will be presented as part of a separate line item in
the consolidated balance sheets of the Corporation under the caption
"Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Corporation," and
appropriate disclosures about the Series A Capital Securities, the Series A
Guarantee and the Series A Subordinated Debentures will be included in the Notes
to the Consolidated Financial Statements. For financial reporting purposes, the
Corporation will record Distributions payable on the Series A Capital Securities
as minority interest in the Consolidated Statements of Operations.
The Corporation has agreed that future financial reports of the Corporation
will: (i) present the Series A Capital Securities issued by the Corporation on
the Corporation's balance sheet as a separate line item entitled
21
<PAGE> 22
"Corporation -- Obligated Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the
Corporation;" (ii) include in a footnote to the financial statements disclosure
that the sole assets of the Issuer are the Series A Subordinated Debentures
(specifying the principal amount, interest rate and maturity date of Series A
Subordinated Debentures held); and (iii) include, in an audited footnote to the
financial statements, disclosure that (a) the Issuer is wholly owned, (b) the
sole assets of the Issuer are the Series A Subordinated Debentures (specifying
the principal amount, interest rate and maturity date of the Series A
Subordinated Debentures held), and (c) the obligations of the Corporation under
the Series A Subordinated Debentures, the Indenture, the Series A Trust
Agreement and the Series A Guarantee, in the aggregate, constitute a full and
unconditional guarantee by the Corporation of the Issuer's obligations under the
Series A Capital Securities issued by the Issuer.
22
<PAGE> 23
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Corporation at March 31, 1998 (i) on an actual basis, (ii) on a pro forma
basis to reflect the consummation of (a) the Corporation's acquisition of
substantially all of the assets and assumption of substantially all of the
liabilities of MET Holdings, Inc. ("MET Holdings") in exchange for the issuance
of 2,876,162 shares of Common Stock (the "MET Holdings Transaction") which was
completed on April 30, 1998 and (b) the DFC Acquisition, and (iii) on a pro
forma, as adjusted basis to give effect to (a) the consummation of the offering
of the Series A Capital Securities and the investment of the net proceeds
therefrom in the Series A Subordinated Debentures, (b) the sale of the
Corporation's Common Stock in the Common Stock Offering and the investment of
the net proceeds therefrom, (c) the issuance of 2,399,486 shares of Common Stock
upon the conversion (the "Preferred Stock Conversion") of 18,850 outstanding
shares of Series A Voting Convertible Preferred Stock, par value $.01 per share
(the "Series A Preferred Stock"), 4,050 outstanding shares of Series B Nonvoting
Convertible Preferred Stock, par value $.01 per share (the "Series B Preferred
Stock"), and 7,000 shares of Series C Nonvoting Convertible Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock" and, collectively with the
Series A Preferred Stock and the Series B Preferred Stock, the "Preferred
Stock") upon completion of the Common Stock Offering, and (d) the issuance of
119,974 shares of Common Stock as a dividend on the Preferred Stock immediately
prior to completion of the Common Stock Offering. See "Use of Proceeds," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The information set forth in the table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto of
TeleBanc Financial Corporation included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Subordinated debt, net.................................... $29,672 $29,672 $ 29,672
Trust preferred securities (1)............................ 9,526 9,526 35,850
Stockholders' equity (2):
Preferred Stock, $.01 par value, 500,000 shares
authorized:
Series A Voting Convertible Preferred Stock, 18,850
issued and outstanding actual and pro forma, no
shares issued and outstanding pro forma, as
adjusted............................................. 9,634 -- --
Series B Nonvoting Convertible Preferred Stock, 4,050
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................. 2,070 -- --
Series C Nonvoting Convertible Preferred Stock, 7,000
issued and outstanding actual and pro forma, no
shares issued and outstanding, pro forma, as
adjusted............................................. 3,577 -- --
Common Stock, $.01 par value, 29,500,000 shares
authorized, 4,484,988 and 7,014,448 shares issued and
outstanding actual and pro forma, respectively;
11,514,448 shares issued and outstanding, pro forma, as
adjusted................................................ 44 70 115
Additional paid-in capital................................ 16,387 33,482 93,517
Retained earnings......................................... 11,828 10,088 10,088
Net unrealized gain on securities available for sale, net
of tax.................................................. 3,000 3,000 3,000
------- ------- --------
Total stockholders' equity (3)....................... 46,540 46,640 106,720
------- ------- --------
Total capitalization............................ $85,738 $85,838 $172,242
======= ======= ========
</TABLE>
- ---------------
(1) Consists of 10,000 shares of Company-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. See Note 12 to Consolidated
Financial Statements of TeleBanc Financial Corporation.
(2) Does not include 1,086,176 shares of Common Stock issuable upon the exercise
of outstanding warrants or 1,645,196 shares of Common Stock reserved for
issuance upon exercise of outstanding options granted to directors,
executive officers and key employees under the Company's 1994 Stock Option
Plan and 1997 Stock Option Plan.
(3) If the over-allotment option granted to the Underwriters of the Common Stock
Offering is exercised in full, total stockholders' equity, pro forma, as
adjusted, of the Corporation at March 31, 1998 would be $115.8 million.
23
<PAGE> 24
SELECTED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION AND STATEMENT OF OPERATIONS
OF TELEBANC FINANCIAL CORPORATION
The unaudited Pro Forma Condensed Consolidated Statement of Financial
Condition and Statement of Operations of the Corporation are presented to give
pro forma effect to (i) the MET Holdings Transaction and (ii) the DFC
Acquisition. The DFC Acquisition is expected to be completed in the summer of
1998, subject to the satisfaction of certain customary conditions. The pro forma
financial information has been prepared using the historical Consolidated
Financial Statements of the Corporation. The Pro Forma Condensed Consolidated
Statement of Financial Condition gives effect to the transactions described
above as if they had occurred as of March 31, 1998. The Pro Forma Condensed
Consolidated Statement of Operations gives pro forma effect to the above
transactions as if they had occurred on January 1, 1997 for the year ended
December 31, 1997, and on January 1, 1998 for the three months ended March 31,
1998.
The pro forma consolidated financial data of the Corporation have been
derived from and should be read in conjunction with the Consolidated Financial
Statements of the Corporation and the Notes thereto included elsewhere in this
Prospectus. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the financial position that would have
occurred had the transactions described above been effected on the dates assumed
nor is the pro forma financial information intended to be indicative of the
Corporation's future financial position or results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
MET HOLDINGS
AND DFC
CORPORATION COMBINED PRO FORMA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) HISTORICAL HISTORICAL(A) ADJUSTMENT PRO FORMA
- ----------------------------------------- ----------- ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income.......................... $59,301 $23,308 $ -- $82,609
Interest expense......................... 46,063 18,431 -- 64,494
------- ------- ----- -------
Net interest income................... 13,238 4,877 -- 18,115
Provision for loan losses................ 921 456 -- 1,377
Non-interest income...................... 4,093 3,155 -- 7,248
Non-interest expense:
Selling, general and administrative
expenses............................ 9,042 4,212 -- 13,254
Other non-interest expense............ 1,100 -- 510(b) 1,610
------- ------- ----- -------
Income before income tax, minority
interest and preferred dividend......... 6,268 3,364 (510) 9,122
Income tax expense....................... 1,657 471 -- 2,128
Minority interest........................ 394 -- -- 394
------- ------- ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend...................... $ 4,217 $ 2,893 $(510) $ 6,600
======= ======= ===== =======
Preferred dividend....................... 546 180 -- 726
Net income available to common
stockholders............................ $ 3,671 $ 2,713 $(510) $ 5,874
======= ======= ===== =======
Earnings per share:
Basic................................. $ 0.84 $ 1.34
Diluted............................... $ 0.57 $ 0.89
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------
MET HOLDINGS
AND DFC
CORPORATION COMBINED PRO FORMA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) HISTORICAL HISTORICAL(A) ADJUSTMENT PRO FORMA
- ----------------------------------------- ----------- ------------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income.......................... $18,071 $5,528 $ -- $23,599
Interest expense......................... 14,477 4,568 -- 19,045
------- ------ ----- -------
Net interest income................... 3,594 960 -- 4,554
Provision for loan losses................ 250 130 -- 380
Non-interest income...................... 1,947 228 -- 2,175
Non-interest expense:
Selling, general and administrative
expenses............................ 3,889 880 -- 4,769
Other non-interest expense............ 315 -- 128(b) 443
------- ------ ----- -------
Income before income tax, minority
interest and preferred dividend......... 1,087 178 (128) 1,137
Income tax expense....................... 475 13 -- 488
Minority interest........................ 176 -- -- 176
------- ------ ----- -------
Net income from continuing operations
before nonrecurring charges directly
attributable to the transaction and
preferred dividend...................... $ 436 $ 165 $(128) $ 473
======= ====== ===== =======
Preferred dividend....................... 162 -- -- 162
Net income available to common
stockholders............................ $ 274 $ 165 $(128) $ 311
======= ====== ===== =======
Earnings per share:
Basic................................. $ 0.06 $ 0.07
Diluted............................... $ 0.05(c) $ 0.05
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------------------------------
MET HOLDINGS
TELEBANC AND DFC
FINANCIAL COMBINED PRO FORMA
HISTORICAL HISTORICAL(D) ADJUSTMENT PRO FORMA
----------- ------------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA(d):
Assets:
Cash and cash equivalents................................ $ 31,559 $ 6,471 $ (8,566)(e) $ 29,464
Loans receivable, net.................................... 557,057 182,079 -- 739,136
Mortgage-backed securities............................... 260,152 25,524 -- 285,676
Investment securities.................................... 123,963 33,914 3,600(f) 161,477
Other assets............................................. 75,422 94,154 (11,482)(g) 158,094
---------- -------- -------- ----------
Total assets............................................. $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
Liabilities:
Retail deposits.......................................... $ 560,554 $288,731 $ -- $ 849,285
Brokered callable certificates of deposit................ 42,286 -- -- 42,286
Advances from the FHLB................................... 190,000 10,500 -- 200,500
Reverse repurchase agreements and other borrowings....... 153,970 2,495 19,000(h) 175,465
Other liabilities........................................ 45,277 8,925 (4,057)(i) 50,145
---------- -------- -------- ----------
Total liabilities........................................ 992,087 310,651 14,943 1,317,681
Trust preferred securities(k)............................... 9,526 -- -- 9,526
Total stockholders' equity.................................. 46,540 31,491 (31,391)(j) 46,640
---------- -------- -------- ----------
Total liabilities and stockholders' equity............... $1,048,153 $342,142 $(16,448) $1,373,847
========== ======== ======== ==========
</TABLE>
- ---------------
(a) Reflects the combined statement of operations of MET Holdings and DFC for
the year ended December 31, 1997 and the three months ended March 31, 1998.
24
<PAGE> 25
(b) Reflects the amortization of goodwill for the year ended December 31, 1997
and the three months ended March 31, 1998 ($510 and $128, respectively)
recognized in conjunction with the DFC Acquisition.
(c) The impact of the convertible Preferred Stock is antidilutive for the three
months ended March 31, 1998. The Preferred Stock will convert to Common
Stock in the Preferred Stock Conversion. See "Capitalization." Basic
earnings per share in future periods will be reduced as a result of the
issuance of 2,399,486 shares of Common Stock in the Preferred Stock
Conversion and 119,974 shares of Common Stock issuable as a dividend on the
Preferred Stock upon consummation of the Common Stock Offering.
(d) Reflects the combined statements of financial condition of MET Holdings and
DFC as of March 31, 1998.
(e) Reflects the cash amount paid by TeleBanc Financial to acquire DFC
($21,400), plus the amount paid for expenses related to the MET Holdings
Transaction and the elimination of intercompany deposits ($1,109) and the
amount used to payoff the outstanding subordinated debentures of DFC
($5,057), net of the proceeds received through borrowings ($19,000).
(f) Reflects the mark-to-market adjustment recognized in conjunction with the
acquisition of AFS Investment Securities, a wholly owned subsidiary of DFC
which will be acquired by the Corporation in the DFC Acquisition ($3,600).
(g) Reflects the elimination of MET Holdings' equity interest in TeleBanc
Financial ($19,169), net of a mark-to-market adjustment for MET Holdings'
equity investment in an unrelated entity ($31). These adjustments also
include goodwill to be recognized in conjunction with the DFC Acquisition
($7,656).
(h) Reflects additional reverse repurchase agreements entered into in connection
with the DFC Acquisition ($19,000).
(i) Reflects the payoff of outstanding subordinated debentures of DFC ($5,057)
in connection with the DFC Acquisition, net of additional liabilities
incurred in connection with the DFC Acquisition.
(j) Reflects (i) the acquisition by the Corporation of DFC's assets and
liabilities and the assets (including 2,866,162 shares of Common Stock
owned by MET Holdings) and liabilities of MET Holdings and (ii) the
issuance of 2,876,162 shares of Common Stock to MET Holdings. The DFC
Acquisition and the MET Holdings Transaction are accounted for as a
purchase in which the assets and liabilities of DFC and MET Holdings will
be recorded at fair value on the Consolidated Financial Statements of the
Corporation.
(k) Consists of 10,000 shares of Corporation-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. See "Description of
Securities" and Note 12 to Consolidated Financial Statements of TeleBanc
Financial Corporation.
25
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF TELEBANC FINANCIAL CORPORATION
The following table presents selected statement of operations data and
statement of financial condition data of the Corporation on a consolidated basis
for each of the five years in the period ended December 31, 1997, and for the
three months ended March 31, 1997 and 1998. The selected historical consolidated
financial data presented below for each of the years in the period ended
December 31, 1997, are derived from the audited Consolidated Financial
Statements of the Corporation. Such data should be read in conjunction with the
Consolidated Financial Statements of the Corporation and the Notes thereto
included elsewhere in this Prospectus. The selected unaudited consolidated
financial data for the three months ended March 31, 1998 presented below are
based on the unaudited Consolidated Financial Statements of the Corporation for
the period ended and as of March 31, 1998, which are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income................................. $16,667 $22,208 $40,511 $45,800 $59,301 $12,837 $18,071
Interest expense................................ 11,828 17,513 31,946 34,815 46,063 9,878 14,477
------- ------- ------- ------- ------- ------- -------
Net interest income......................... 4,839 4,695 8,565 10,985 13,238 2,959 3,594
Provision for loan losses....................... 211 492 1,722 919 921 243 250
Non-interest income............................. 1,157 175 3,777 2,756 4,093 618 1,947
Non-interest expenses:
Selling, general and administrative
expenses.................................. 2,997 3,503 5,561 8,375 9,042 1,897 3,889
Other non-interest expenses................. 739 153 679 700 1,100 208 315
------- ------- ------- ------- ------- ------- -------
Income before income tax, cumulative effect of
change in accounting principle and minority
interest...................................... 2,049 722 4,380 3,747 6,268 1,229 1,087
Income tax expense.............................. 842 182 1,660 1,195 1,657 355 475
Cumulative effect of change in accounting
principle..................................... 170 -- -- -- -- -- --
Minority interest............................... -- -- -- -- 394 -- 176
Preferred stock dividend (1).................... -- -- -- -- 546 60 162
------- ------- ------- ------- ------- ------- -------
Net income available to common stockholders
(1)........................................... $ 1,377 $ 540 $ 2,720 $ 2,552 $ 3,671 $ 814 $ 274
======= ======= ======= ======= ======= ======= =======
Earnings per share: (1)
Basic....................................... $ 0.53 $ 0.16 $ 0.66 $ 0.62 $ 0.84 $ 0.19 $ 0.06
Diluted..................................... $ 0.53 $ 0.16 $ 0.66 $ 0.58 $ 0.57 $ 0.15 $ 0.05
Weighted average shares:
Basic....................................... 2,599 3,498 4,099 4,099 4,383 4,212 4,468
Diluted..................................... 2,599 3,498 4,104 4,406 7,411 5,790 5,757
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------- -----------
(Dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.................................... $220,301 $427,292 $553,943 $647,965 $1,100,352 $1,048,153
Loans receivable, net........................... 100,859 154,742 248,492 351,821 540,704 557,057
Mortgage-backed securities (2).................. 80,782 236,464 234,385 184,743 319,203 260,152
Investment securities (2)....................... 18,110 12,444 40,058 78,826 91,237 123,963
Retail savings and certificates of deposit...... 113,132 212,411 306,500 390,486 522,221 560,554
Advances from the FHLB.......................... 61,000 96,000 105,500 144,800 200,000 190,000
Securities sold under agreements to
repurchase.................................... 29,642 79,613 93,905 57,581 279,909 153,970
Trust preferred securities (3).................. -- -- -- -- 9,572 9,526
Total stockholders' equity...................... 12,378 17,028 21,565 24,658 45,824 46,540
OTHER FINANCIAL AND OPERATING DATA:
Return on average total assets.................. 0.61% 0.17% 0.53% 0.61%(4) 0.45% 0.11%
Return on average stockholders' equity.......... 11.79% 3.17% 14.10% 16.50%(4) 9.17% 2.58%
SG&A expenses to total assets................... 1.36% 0.82% 1.00% 1.03%(4) 0.82% 1.48%
Number of deposit accounts...................... 2,932 8,564 12,919 16,506 21,817 22,916
CAPITAL RATIOS OF TELEBANK:
Core............................................ 5.39% 6.27% 5.31% 5.08% 5.06% 5.48%
Tangible........................................ 5.38 6.35 5.36 5.07 5.06 5.48
Total capital................................... 14.75 15.96 11.74 10.41 11.91 11.60
</TABLE>
- ---------------
(1) In connection with the Preferred Stock Conversion, the Corporation will
record, immediately prior to the consummation of the Common Stock Offering,
a nonrecurring, noncash charge related to the additional Preferred Stock
dividend payable in Common Stock, based on the fair market value of the
Common Stock at the time such dividend is paid, estimated to be
approximately $1.7 million. The charge will reduce net income available to
common stockholders by the same amount and earnings per share in the third
quarter of 1998.
(2) Includes available-for-sale, held-to-maturity, held-for-sale, and trading.
(3) Consists of 10,000 shares of Corporation-Obligated Mandatorily Redeemable
Capital Securities of a subsidiary trust, TCT I. TCT I is a business trust
formed for the purpose of issuing capital securities and investing the
proceeds in the Existing Junior Subordinated Debentures issued by the
Corporation. See "Description of Series A Capital Securities" and Note 12 to
Consolidated Financial Statements of TeleBanc Financial Corporation.
(4) Excludes one-time pre-tax charge of $1.7 million ($1.1 million after tax) to
recapitalize the Savings Association Insurance Fund ("SAIF"). Giving effect
to the charge, return on average total assets, return on average
stockholders' equity, and selling, general and administrative expenses to
total assets for 1996 were 0.42%, 11.4% and 1.29%, respectively.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Corporation utilizes a branchless banking strategy through which it
offers financial products and services to customers nationwide using alternative
delivery platforms, including the telephone, the Internet, ATMs, facsimile and
mail. Prior to its acquisition by members of present management in 1989, the
Corporation operated as a traditional community savings bank. In 1989,
management changed the Corporation's growth strategy using direct marketing to
offer, through electronic delivery channels, high value financial products and
services, which generally offer higher interest rates or lower fees than those
offered by traditional financial institutions.
The Corporation primarily generates revenue in the form of net interest
income and, to a lesser degree, non-interest income which includes fees and
commissions for services and gains on the sale of assets. Net interest income is
the "spread" or difference between the rates of interest earned on loans and
other interest-earning assets, and the rates of interest 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 may
materially affect net interest income.
The Corporation's asset acquisition strategy is to purchase pools of
mortgages secured by one-to-four family residences and mortgage-related
securities. The Corporation does not currently originate loans. The Corporation
believes that by purchasing a seasoned and geographically diverse loan
portfolio, it reduces expenses related to loan origination, and is able to
actively manage credit quality risk.
TeleBank manages its interest rate risk by analyzing the maturities and
repricing of its deposits and other sources of funding, and seeking to match the
maturities of these instruments with the maturities of the assets in its loan
portfolio. In an effort to manage interest rate exposure, TeleBank uses various
hedging techniques such as interest rate swaps, caps, swaptions, floors, collars
and financial options. TeleBank actively monitors its interest rate sensitivity
in a variety of interest rate environments.
The Corporation plans to build the "TeleBank" franchise identity based on
its high value savings and investment and other financial products, superior
customer service and anywhere, anytime convenience. The Corporation believes
that associating its brand name with its services and delivery channels will
enable it to capture the growing market of customers who are increasingly
relying on alternative channels for the delivery of their financial services. In
pursuing this strategy, the Corporation plans to increase significantly its
marketing expenditures for the foreseeable future to implement a targeted,
national advertising campaign and marketing initiative.
DFC ACQUISITION
Consistent with its operating strategy, the Corporation has signed an
agreement to acquire DFC, a thrift holding company and its federally chartered
savings bank subsidiary, Premium Bank, in a transaction expected to be
consummated in the summer of 1998. TeleBanc Financial is acquiring DFC because
DFC has employed a direct marketing strategy similar to that of the Corporation,
and thus presents the opportunity for the Corporation to acquire the deposits
and customers of a financial institution without acquiring significant
infrastructure. DFC currently operates from a single branch in New Jersey
located approximately 30 miles outside of Philadelphia, Pennsylvania, and its
customer and deposit base is concentrated in the mid-Atlantic region of the
United States. The Corporation does not intend to retain any significant portion
of DFC's employees and intends to close DFC's single branch location. DFC also
originates residential mortgage loans, although the Corporation intends to
discontinue mortgage loan origination upon its acquisition of DFC. DFC also
offers credit cards to its customers through a relationship with First Data
Resources and Card Management Services. During 1998, in reliance upon DFC's
existing credit card relationships, the Corporation also intends to offer its
customers a co-branded credit card.
27
<PAGE> 28
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997.
Total interest income increased by $5.3 million to $18.1 million for the
three months ended March 31, 1998 from $12.8 million for the three months ended
March 31, 1997, an increase of 41.4%. Total interest expense increased $4.6
million to $14.5 million for the three months ended March 31, 1998 from $9.9
million for the three months ended March 31, 1997, an increase of 46.6%.
Non-interest income increased by $1.3 million to $1.9 million for the three
months ended March 31, 1998 from $618,000 for the three months ended March 31,
1997, an increase of 215%, primarily as a result of increased income from the
Corporation's loans held-for-sale portfolio, loan fees on the Corporation's loan
portfolio, and sales of liquid securities. Non-interest expenses increased $2.1
million to $4.2 million for the three months ended March 31, 1998, compared to
$2.1 million for the three months ended March 31, 1997, an increase of 99.7%,
primarily attributable to marketing and operating expenses directly associated
with TeleBank brand building and customer acquisition campaigns. Net income for
the three months ended March 31, 1998 decreased $438,000 to $436,000, compared
to $874,000 for the three months ended March 31, 1997, a decrease of 50%.
With the anticipated consummation of the DFC Acquisition and a
corresponding increase in assets of approximately $320 million, management
maintained assets at relatively stable levels in the first quarter of 1998. As
of March 31, 1998, assets totaled $1.0 billion, a $52.2 million decline, from
the $1.1 billion level as of December 31, 1997. Cash and cash equivalents
declined by $60.6 million to $31.6 million at March 31, 1998, from $92.2 million
at December 31, 1997, a decrease of 65.7%. Trading securities, investment
securities available for sale and mortgage-backed securities available for sale
decreased by $5.4 million to $426.2 million at March 31, 1998 from $431.6
million at December 31, 1997. Loans receivable, net increased $27.1 million to
$418.7 million at March 31, 1998 from $391.6 million at December 31, 1997, an
increase of 6.9%. Loans receivable held for sale decreased $10.7 million to
$138.4 million at March 31, 1998 from $149.1 million at December 31, 1997. While
the Corporation's corresponding liability levels also remained stable, deposits
increased $38.3 million, or 7.3%, to $560.5 million at March 31, 1998 from
$522.2 million at December 31, 1997 and retail customer accounts grew 4.6% from
the prior quarter to approximately 22,000 at March 31, 1998. In the first
quarter of 1998, the Corporation also sold brokered callable certificates of
deposit, which totaled $42.3 million at March 31, 1998. FHLB advances and other
borrowings declined by $133.5 million to $389.2 million at March 31, 1998 from
$522.7 million at December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
Interest Income. Total interest income increased by $13.5 million to $59.3
million for the year ended December 31, 1997 from $45.8 million for the year
ended December 31, 1996, an increase of 29.5%. This increase is due primarily to
the $11.6 million increase in interest income on mortgages and other loans, an
increase of 50.4% in 1997, principally due to a significant increase in the
average loan balance during the period. Interest income on mortgage-backed and
related securities decreased slightly to $17.6 million at December 31, 1997 from
$18.0 million at December 31, 1996 largely as a result of a decline in the
yield.
Interest Expense. Total interest expense increased by $11.3 million to
$46.1 million for the year ended December 31, 1997 from $34.8 million for the
year ended December 31, 1996, an increase of 32.5%. The increase is attributable
to both an increase in interest-bearing liabilities and a slight increase in the
average interest rate paid.
Loan Loss Provision. The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio, and reflects
management's judgment as to the reserve necessary to absorb loan losses based
upon the Corporation's assessment of a number of factors, including its
delinquent loan trends and historical loss experience, current and anticipated
economic conditions, the mix of loans in the Corporation's portfolio, and the
Corporation's internal credit review process. The provision for loan losses
remained substantially unchanged at $921,000 for the year ended December 31,
1997, compared to $919,000 for the year ended December 31, 1996, despite a
significant increase in the loan portfolio primarily because the Corporation
historically has experienced a low level of net charge-offs due in part to its
focus on residential mortgage assets. The ratio of net charge-offs to net
average loans outstanding during 1997 was 0.06%,
28
<PAGE> 29
compared to 0.10% during 1996. Total loan loss allowance as a percentage of
total non-performing loans was 31.0% as of December 31, 1997, compared to 26.3%
as of December 31, 1996.
Non-interest Income. Total non-interest income increased by $1.3 million
to $4.1 million for the year ended December 31, 1997, from $2.8 million for the
year ended December 31, 1996, an increase of 46.4%. Non-interest income
increased primarily because the Corporation recognized $1.2 million of
non-interest income as gain on trading securities during 1997. In addition, the
Corporation recognized an $864,000 decline in equity investment primarily
attributable to the write-off of the equity investment by TeleBank in AGT
Mortgage Services, LLC, which had provided loan servicing services for a fee and
ceased operations in July 1997.
Non-interest Expenses. Total non-interest expenses, principally selling,
general and administrative expenses, increased $1.1 million to $10.1 million for
the year ended December 31, 1997, from $9.1 million for the year ended December
31, 1996, an increase of 11.8%. Selling, general and administrative expenses
increased $600,000 to $9.0 million during 1997 from $8.4 million during 1996, an
increase of 7.1%, primarily as a result of a $1.2 million increase in
compensation and employee benefits in 1997. During 1996, the Corporation
incurred a one-time $1.7 million assessment to recapitalize the SAIF. See
"Business -- Government Regulation." Other general and administrative expenses
increased $1.1 million, principally as a result of increased marketing expenses
to support a growing deposit base and the building of brand identity.
Other non-interest expenses increased $1.1 million to $4.1 million during
the year December 31, 1997 from $3.0 million during the year ended December 31,
1996, an increase of 36.7%, primarily as a result of increased advertising
expenses, increased office occupancy costs and an increased amortization of
purchased mortgage servicing rights.
Income Tax Expense. Income tax expense for the year ended December 31,
1997 was $1.7 million, compared with $1.2 million for the year ended December
31, 1996. The Corporation's effective tax rate for 1997 was 26.4%, compared to
31.9% for 1996. The effective tax rate decreased largely as a result of an
increase during 1997 in interest earned on municipal bonds, which generally were
tax-exempt.
Net Income. Net income for the year ended December 31, 1997 increased $1.1
million to $3.7 million from $2.6 million for the year ended December 31, 1996,
an increase of 42.3%. 1997 net income consisted primarily of $13.2 million in
net interest income, $3.3 million in net gain on the sale of trading securities,
principally loans held for sale, and mortgage-backed and investment securities,
which was offset by $10.1 million in non-interest expenses, $921,000 in
provision for loan losses, and $1.7 million in income tax expense. The
Corporation's return on average assets and return on average equity for the year
ended December 31, 1997 were 0.45% and 9.17%, respectively.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Interest Income. Total interest income increased by $5.3 million to $45.8
million for the year ended December 31, 1996 from $40.5 million for the year
ended December 31, 1995, an increase of 13.1%. The increase is due primarily to
a $5.4 million increase in interest income on mortgages and other loans, an
increase of 30.5% in 1996, principally due to a $77.3 million increase in the
average loan balance during the period. Interest income on mortgage-backed
securities held-to-maturity and available-for-sale decreased to $18.0 million at
December 31, 1996 from $20.2 million at December 31, 1995 largely as a result of
a decline in average balances.
Interest Expense. Total interest expense increased by $2.9 million to
$34.8 million for the year ended December 31, 1996 from $31.9 million for the
year ended December 31, 1995, an increase of 9.1%. The increase is attributable
to an increase in interest-bearing liabilities, offset in part by a decline in
interest cost.
Loan Loss Provision. The provision for loan losses declined to $919,000
for the year ended December 31, 1996, compared to $1.7 million for the year
ended December 31, 1995, despite a significant increase in the size of the loan
portfolio, primarily because the Corporation experienced a low level of actual
net charge-offs due in part to its focus on residential mortgage assets. The
total loan loss allowance as of December 31, 1996 was $3.0 million from $2.3
million at December 31, 1995, which were 0.80% and 0.90% of total loans
29
<PAGE> 30
outstanding at such dates, respectively. Total loan loss allowance as a
percentage of total non-performing loans was 26.3% as of December 31, 1996,
compared to 43.4% as of December 31, 1995.
Non-interest Income. Total non-interest income declined by $1.0 million to
$2.8 million for the year ended December 31, 1996, from $3.8 million for the
year ended December 31, 1995, a decrease of 26.3%. Fees, service charges and
other income increased by $814,000 in 1996, in large part as a result of fees
collected on $2.8 million in purchased mortgage servicing rights, and gain on
loans held for sale increased by $642,000 in 1996, which were primarily offset
by an $870,000 decrease in mortgage-backed securities available for sale, a
$984,000 decrease in investment securities available for sale and a $624,000
decrease in trading account income.
Non-interest Expenses. Total non-interest expenses increased $2.9 million
to $9.1 million for the year ended December 31, 1996 from $6.2 million for the
year ended December 31, 1995, an increase of 46.8%. Selling, general and
administrative expenses increased $2.8 million to $8.4 million for the year
ended December 31, 1996 from $5.6 million for the year ended December 31, 1995,
an increase of 50%, primarily because of the $1.7 million one-time SAIF
assessment incurred in 1996. See "Business -- Government Regulation." In
addition, compensation and employee expenses increased by $660,000 as a result
of adding employees and higher performance-based bonuses, the TeleBank federal
deposit insurance premium increased by $483,000, and administrative expenses
generally increased as a result of an increased deposit base.
Other non-interest expenses increased slightly because of an increase in
amortization of purchased mortgage servicing rights, offset by a decline in real
estate owned expense.
Income Tax Expense. Income tax expense for the year ended December 31,
1996 was $1.2 million, compared with $1.7 million for the year ended December
31, 1995. The Corporation's effective tax rate for the year ended December 31,
1996 was 31.9%, compared to 37.9% for the year ended December 31, 1995.
Net Income. Net income for the year ended December 31, 1996 decreased
$168,000 to $2.6 million from $2.7 million for the year ended December 31, 1995,
a decrease of 6.2%. Net income for the year ended December 31, 1996 included the
one-time $1.7 million SAIF assessment. Excluding the one-time assessment, 1996
net income would have been $3.6 million. Net income consisted primarily of $11.0
million in net interest income and $1.8 million in net gain on the sale of
trading securities, principally loans held for sale and mortgage-backed and
investment securities, which was offset by $9.1 million in non-interest
expenses, $919,000 in provision for loan losses, and $1.2 million in income tax
expense. The Corporation's return on average assets and return on average equity
for the year ended December 31, 1996 were 0.42% and 11.46%, respectively.
Earnings per share, on a fully diluted basis, were $0.58 for 1996.
30
<PAGE> 31
QUARTERLY RESULTS
The following table sets forth certain selected unaudited quarterly
financial data of the Corporation for each of the eight quarters in the two-year
period ended March 31, 1998. The consolidated financial data presented below
have been prepared on a basis consistent with the Corporation's audited
Consolidated Financial Statements included elsewhere in this Prospectus and, in
the opinion of management, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of such information. This
information should be read in conjunction with the Corporation's audited
Consolidated Financial Statements and the Notes thereto and the unaudited
quarterly Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- --------- -------- --------- -------- ---------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income............. $11,364 $11,871 $11,433 $12,837 $15,275 $14,821 $16,368 $18,071
Interest expense............ 8,449 9,034 8,975 9,878 11,865 11,548 12,772 14,477
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... 2,915 2,837 2,458 2,959 3,410 3,273 3,596 3,594
Provision for loan losses... 200 125 175 243 308 120 250 250
Non-interest income......... 291 540 1,320 607 1,244 1,084 1,158 1,947
SG&A........................ 1,749 3,287 1,660 1,897 2,251 2,078 2,816 3,889
Other non-interest operating
expenses.................. 81 247 71 208 202 260 430 315
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes
and minority interest..... 1,176 (282) 1,872 1,218 1,893 1,899 1,258 1,087
Income tax expense.......... 417 (220) 667 355 618 709 (25) 475
Minority interest in
subsidiary................ -- -- -- -- 67 285 42 176
------- ------- ------- ------- ------- ------- ------- -------
Net income.................. 759 (62) 1,205 863 1,208 905 1,241 436
Preferred stock dividends... -- -- -- 60 162 162 162 162
Net income available to
common stockholders....... $ 759 $ (62) $ 1,205 $ 803 $ 1,046 $ 743 $ 1,079 $ 274
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.... $ 0.19 $ (0.02) $ 0.30 $ 0.19 $ 0.24 $ 0.16 $ 0.24 $ 0.06
Diluted earnings per
share..................... 0.18 (0.02) 0.26 0.15 0.16 0.11 0.16 0.05
</TABLE>
In connection with the Preferred Stock Conversion, the Corporation will
record, immediately prior to the consummation of the Common Stock Offering, a
nonrecurring, noncash charge related to the additional Preferred Stock dividend
payable in Common Stock, based on the fair market value of the Common Stock at
the time such dividend is paid, estimated to be approximately $1.7 million. The
charge will reduce net income available to common stockholders by the same
amount and earnings per share in the third quarter of 1998.
The Corporation's quarterly results of operations may be subject to
significant fluctuations due to several factors, including interest rate
fluctuations, economic factors, the level of marketing expenditures to implement
the Corporation's growth strategy, the performance of the Corporation's loan
portfolio and other interest-earning assets, retention and growth of deposits,
and other factors. The Corporation anticipates that its operating expenses,
principally marketing and compensation expenses, will increase significantly for
the foreseeable future. If the Corporation's net interest income in any quarter
does not increase correspondingly, the Corporation's results of operations for
that quarter would be materially adversely affected. Accordingly, the
Corporation does not believe that quarter-to-quarter comparisons of the results
of operations are meaningful and the results of operations in any particular
quarter should not be relied upon as necessarily indicative of future
performance.
FINANCIAL CONDITION
The Corporation's total assets increased by $452.0 million to $1.1 billion
at December 31, 1997 from $648.0 million at December 31, 1996, an increase of
69.8%. The growth in total assets is primarily the result of
31
<PAGE> 32
a $188.9 million increase in loans receivable and a $134.5 million increase in
mortgage-backed securities. The primary sources of funds for this growth in
assets were deposits and borrowings.
Loans receivable, net and loans receivable held for sale, increased $188.9
million to $540.7 million at December 31, 1997 from $351.8 million at December
31, 1996, an increase of 53.7%. The increase reflects whole loan purchases of
$342.9 million, offset in part by $95.1 million of principal repayments and
$58.9 million of loans sold in 1997. During 1996, the Corporation recorded whole
loan purchases of $181.0 million, offset in part by $50.6 million of principal
repayments and $27.1 million of loans sold. In mid-1996, as part of a change in
its loan investment strategy, the Corporation reclassified certain loans as
"loans held-for-sale." Loans held-for-sale generally are susceptible to sale
after restructuring or credit enhancement and are recorded at the lower of cost
or market.
Mortgage-backed securities available-for-sale increased $134.5 million to
$319.2 million at December 31, 1997 from $184.7 million at December 31, 1996, an
increase of 72.8%. Investment securities available-for-sale increased $12.4
million to $91.2 million at December 31, 1997 from $78.8 million at December 31,
1996, an increase of 15.7%. These securities are held for liquidity purposes and
the increases in these categories of assets is consistent with the overall
growth of the Corporation's assets in 1997.
Deposits increased $131.7 million to $522.2 million at December 31, 1997
from $390.5 million at December 31, 1996, an increase of 33.7%, largely as a
result of the Corporation's continued targeted marketing efforts to attract
money market accounts and CDs. During the year ended December 31, 1997,
approximately $25.9 million of interest was credited to deposit accounts and
deposits exceeded withdrawals by $105.8 million, resulting in the net overall
increase in deposits. During 1997, the Corporation completed a systems
conversion to an integrated platform for marketing, deposit operations, and
accounting and finance, to support future growth and the introduction of new
products and services.
FHLB advances increased $55.2 million to $200.0 million at December 31,
1997, from $144.8 million at December 31, 1996, an increase of 38.1%. Other
borrowings, composed of securities sold under agreements to repurchase,
increased $222.3 million to $279.9 million at December 31, 1997 from $57.6
million at December 31, 1996, an increase of 385.9%. At December 31, 1997,
subordinated debt, net of original issue discount, consisting of the 9.5% Senior
Subordinated Debentures of the Corporation (the "9.5% Subordinated Debentures")
issued in February 1997, and the 11.5% Subordinated Debentures of the
Corporation (the "11.5% Subordinated Debentures" and, together with the 9.5%
Subordinated Debentures, the "Subordinated Debentures") issued by the
Corporation in the second quarter of 1994 totaled $29.6 million. In June 1997,
the Corporation formed TCT I for the purpose of offering and selling in a
private placement an aggregate of $10.0 million in shares of capital securities,
Series A, which have an annual dividend rate of 11.0% payable semi-annually,
beginning in December 1997.
Stockholders' equity increased $21.1 million to $45.8 million at December
31, 1997 from $24.7 million at December 31, 1996. The increase is the result of
the receipt of $15.3 million in proceeds from the issuance of the Preferred
Stock in February 1997, the receipt of $1.5 million from the issuance of 162,461
shares of Common Stock in February 1997 in exchange for the assets of Arbor
Capital Partners Inc., a former affiliate of the Corporation, $4.2 million in
net income, and an unrealized gain on securities available for sale of $642,000,
net of taxes, in 1997, which increased the Corporation's stockholders' equity,
but did not affect the Corporation's results of operations.
LIQUIDITY
Liquidity represents the Corporation's ability to raise funds to support
asset growth, fund operations and meet obligations, including deposit
withdrawals, maturing liabilities, and other payment obligations, to maintain
reserve requirements and to otherwise meet its ongoing obligations. During the
past three years, the Corporation has met its liquidity needs primarily through
financing activities, consisting principally of increases in core deposit
accounts, maturing short-term investments, loans and repayments of investment
securities, and to a lesser extent, sales of loans or securities. The
Corporation believes that it will be able to renew or replace its funding
sources at then existing market rates, which may be higher or lower than current
rates. Pursuant to applicable OTS regulations, TeleBank is required to maintain
an average liquidity ratio of
32
<PAGE> 33
5.0% of certain borrowings and its deposits, which requirement it fully met
during 1997 and 1996. Effective November 24, 1997, this requirement has been
lowered to 4.0%. See "Business -- Government Regulation -- Liquidity
Requirements."
The Corporation seeks to maintain a stable funding source for future
periods in part by attracting core deposit accounts, which are accounts that
tend to be relatively stable even in a changing interest rate environment.
Typically, accounts that maintain a relatively high balance and time deposit
accounts provide a relatively stable source of funding. Retail deposits
increased $38.3 million to $560.5 million, an increase of 7.3% during the three
months ended March 31, 1998. Retail customer accounts increased 4.6% from the
prior quarter to approximately 22,000 accounts at March 31, 1998. Savings
deposits increased $11.7 million to $123.6 million during the year ended
December 31, 1997, an increase of 10.5%. CDs increased $120.0 million to $398.6
million during the year ended December 31, 1997, an increase of 43.1%.
The following table shows the changes in deposits for each of the periods
indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------- MARCH 31,
1995 1996 1997 1998
------------ -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $212,411 $306,500 $390,486 $522,221
Deposits in excess of withdrawals................. 76,866 62,629 105,777 30,278
Interest credited on deposits..................... 17,223 21,357 25,958 8,055
-------- -------- -------- --------
Balance at end of period.......................... $306,500 $390,486 $522,221 $560,554
======== ======== ======== ========
</TABLE>
The Corporation also relies upon borrowed funds to provide liquidity. The
Corporation's total borrowings increased $277.5 million to $ 479.9 million at
December 31, 1997, an increase of 137.1%. Advances from the FHLB increased $55.2
million to $200.0 million during 1997, an increase of 38.1%. Securities sold
under agreements to repurchase increased $222.3 million to $279.9 million at
December 31, 1997, an increase of 386.1%. At December 31, 1997, TeleBank had
approximately $154.0 million in additional borrowing capacity.
At December 31, 1997, the Corporation had outstanding approximately $31.0
million face amount of Subordinated Debentures. In addition, at the same date,
the Corporation also had outstanding $10.0 million face amount of the Existing
Junior Subordinated Debentures and $16.2 million of Preferred Stock. The
Corporation's aggregate annual interest expense on the Subordinated Debentures
and the Existing Junior Subordinated Debentures is $4.4 million and the annual
dividend payment on the Preferred Stock is $648,000. Subject to the approval of
the OTS and compliance with federal regulations, TeleBank pays a dividend to the
Corporation semi annually in an amount equal to the aggregate debt service and
dividend obligations. Under the terms of the indenture pursuant to which the
11.5% Subordinated Debentures were issued and the terms of the Existing
Subordinated Debentures, the Corporation 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 expense for one
year on both the 11.5% Subordinated Debentures and the Existing Junior
Subordinated Debentures. The Corporation had $48.6 million in liquid assets at
December 31, 1997.
CAPITAL
At March 31, 1998, TeleBank was in compliance with all of its regulatory
capital requirements and its capital ratios exceeded the ratios for "well
capitalized" institutions under OTS regulations.
33
<PAGE> 34
The following table sets forth TeleBank's regulatory capital levels in
relation to the regulatory requirements in effect at the dates specified in the
table. The information below is based upon the Corporation's understanding of
the regulations and interpretations currently in effect and may be subject to
change.
<TABLE>
<CAPTION>
REQUIRED TO BE WELL
REQUIRED FOR CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
--------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands) ------- ----- --------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible
assets)............................ $31,726 5.08 >$24,999 > 4.0 >$31,248 > 5.0
Tangible Capital (to tangible
assets)............................ 31,711 5.07 > 9,374 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 31,726 9.69 N/A N/A > 19,654 > 6.0
Total Capital (to risk weighted
assets)............................ 34,104 10.41% > 26,205 > 8.0% > 32,756 > 10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible
assets)............................ $52,617 5.06 >$41,606 > 4.0 >$52,008 > 5.0
Tangible Capital (to tangible
assets)............................ 52,608 5.06 > 15,602 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 52,617 11.25 N/A N/A > 28,057 > 6.0
Total Capital (to risk weighted
assets)............................ 55,701 11.91% > 37,409 > 8.0% > 46,761 > 10.0%
As of March 31, 1998 (Unaudited):
Core Capital (to adjusted tangible
assets)............................ $54,533 5.48 >$39,783 > 4.0 >$49,728 > 5.0
Tangible Capital (to tangible
assets)............................ 54,526 5.48 > 14,918 > 1.5 N/A N/A
Tier I Capital (to risk weighted
assets)............................ 54,533 11.00 N/A N/A > 29,844 > 6.0
Total Capital (to risk weighted
assets)............................ 57,859 11.60% > 39,792 > 8.0% > 49,739 > 10.0%
</TABLE>
34
<PAGE> 35
RATE/VOLUME TABLE
The following table allocates the period-to-period changes in the
Corporation'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 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.
<TABLE>
<CAPTION>
1996 VS. 1995 1997 VS. 1996 MARCH 31, 1998 VS. MARCH 31, 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- --------------------------- ----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------- -------- -------- ------- ------- ------- ------- ------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net(1)................. $ 6,333 $ (968) $ 5,365 $12,732 $(1,092) $11,640 $3,060 $(267) $2,793
Mortgage-backed and
related securities..... (9,307) (9,307) (18,614) -- -- -- -- -- --
Investment
securities(2).......... 16 (134) (118) 220 (27) 193 44 (26) 18
Mortgage-backed and
related securities
available-for-sale..... 16,404 (45) 16,359 373 (682) (309) 1,440 (171) 1,269
Investment securities
available-for-sale(3)... 2,194 (305) 1,889 809 8 817 476 31 507
Federal funds sold....... 2 (8) (6) 54 2 56 (10) 4 (6)
Trading account.......... 17 (185) (168) 562 562 1,124 275 274 549
------- -------- -------- ------- ------- ------- ------ ----- ------
Total
interest-earning
assets............. $15,659 $(10,952) $ 4,707 $14,750 $(1,229) $13,521 $5,285 $(155) $5,130
------- -------- -------- ------- ------- ------- ------ ----- ------
Interest-bearing liabilities:
Savings deposits......... $ 2,803 $ (100) $ 2,703 $ 1,111 $ 454 $ 1,565 $ 43 $ 18 $ 61
Time deposits............ 2,208 (596) 1,612 3,315 (279) 3,036 2,567 10 2,577
FHLB advances............ 972 (292) 680 2,400 796 3,196 384 71 455
Other borrowings......... (1,778) (446) (2,224) 2,838 (466) 2,372 1,073 46 1,119
Subordinated debt........ -- 112 112 1,207 (128) 1,079 257 (20) 237
------- -------- -------- ------- ------- ------- ------ ----- ------
Total
interest-bearing
liabilities........ 4,205 (1,322) 2,883 10,871 377 11,248 4,324 125 4,449
------- -------- -------- ------- ------- ------- ------ ----- ------
Change in net interest
income..................... $11,454 $ (9,630) $ 1,824 $ 3,879 $(1,606) $ 2,273 $ 961 $(280) $ 681
======= ======== ======== ======= ======= ======= ====== ===== ======
</TABLE>
- ---------------
(1) Includes mortgage and other loans.
(2) Includes interest-bearing deposits, repurchase agreements, investment
securities held-to-maturity, and FHLB stock.
(3) Interest income and average yields on municipal bonds, included in
investment securities, are presented on a tax equivalent basis.
35
<PAGE> 36
YIELD TABLE
The following table presents certain consolidated balance sheet data,
income and expense and related interest yields and rates at December 31, 1997,
and for each of the preceding three years and for the three months ended March
31, 1998, as set forth 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 is traditionally
used as an indication of the profitability of a savings institution. 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.
36
<PAGE> 37
<TABLE>
<CAPTION>
MARCH 31,
1996 1997 MARCH 31, 1998
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE 1998 AVERAGE
BALANCE INC./EXP. YIELD/COST BALANCE INC./EXP. YIELD/COST BALANCE BALANCE
-------- --------- ---------- -------- --------- ---------- ----------- -----------
(In thousands)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $279,038 $23,089 8.28% $441,819 $34,729 7.86% $ 557,057 $545,827
Mortgage-backed &
related
securities......... -- -- -- -- -- -- -- --
Investment
securities......... 12,841 871 6.79 16,203 1,064 6.48 38,874 14,859
Mortgage-backed &
related securities,
available for
sale............... 221,656 17,955 8.10 226,064 17,646 7.81 260,152 271,001
Investment
securities,
available for
sale............... 61,169 3,959 6.47 73,649 4,776 6.49 123,963 109,270
Federal funds sold... 842 44 5.22 1,844 100 5.37 -- 951
Trading account...... -- -- -- 12,581 1,124 8.81 42,129 29,672
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
earning
assets......... $575,546 $45,918 7.98% $772,160 $59,439 7.70% $1,022,175 $971,580
Non-interest earning
assets................. 26,929 41,465 25,978 27,382
-------- -------- ---------- --------
Total assets..... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Interest-bearing
liabilities:
Savings deposits..... $ 99,346 $ 4,815 4.85% $120,901 $ 6,380 5.28% $ 123,435 $123,391
Time deposits........ 258,870 16,542 6.39 311,740 19,578 6.28 437,119 416,702
Brokered callable
certificates of
deposit............ -- -- -- -- -- -- 42,286 22,720
FHLB advances........ 120,678 6,689 5.54 160,681 9,885 6.07 190,000 177,055
Other borrowings..... 68,154 4,569 6.70 117,515 6,941 5.83 153,970 163,059
Subordinated debt,
net................ 17,250 2,200 12.75 27,434 3,279 11.95 29,672 29,944
-------- ------- ------ -------- ------- ------ ---------- --------
Total interest-
bearing
liabilities.... $564,298 $34,815 6.14% $738,271 $46,063 6.21% $ 976,482 $932,871
-------- ------- ------ -------- ------- ------ ---------- --------
Non-interest-bearing
liabilities............ 15,900 25,719 15,605 23,591
-------- -------- ---------- --------
Total
liabilities.... $580,198 $763,990 $ 992,087 $956,462
Trust preferred
securities..... -- 9,597 9,526 --
Total
stockholders'
equity......... 22,277 40,038 46,540 42,500
-------- -------- ---------- --------
Total liabilities and
stockholders' equity... $602,475 $813,625 $1,048,153 $998,962
======== ======== ========== ========
Excess of
interest-earning assets
over interest-bearing
liabilities/net
interest income........ $ 11,248 $11,103 $ 33,889 $13,376 $ 45,693 $ 38,709
======== ======= ======== ======= ========== ========
Net interest spread..... 1.84% 1.49%
====== ======
Net interest
margin(1).............. 1.94% 1.73%
====== ======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 101.99% 104.59%
====== ======
<CAPTION>
INTEREST AVERAGE
INC./EXP. YIELD/COST
--------- ----------
(In thousands)
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest-earning assets:
Loans receivable,
net................ $10,358 7.59%
Mortgage-backed &
related
securities......... -- --
Investment
securities......... 246 6.68
Mortgage-backed &
related securities,
available for
sale............... 5,074 7.49
Investment
securities,
available for
sale............... 1,736 6.35
Federal funds sold... 14 5.82
Trading account...... 549 7.41
------- ------
Total interest-
earning
assets......... $17,977 7.40%
Non-interest earning
assets.................
Total assets.....
Interest-bearing
liabilities:
Savings deposits..... $ 1,629 5.36%
Time deposits........ 6,433 6.26
Brokered callable
certificates of
deposit............ 374 6.67
FHLB advances........ 2,718 6.14
Other borrowings..... 2,385 5.85
Subordinated debt,
net................ 880 11.75
------- ------
Total interest-
bearing
liabilities.... $14,419 6.23%
------- ------
Non-interest-bearing
liabilities............
Total
liabilities....
Trust preferred
securities.....
Total
stockholders'
equity.........
Total liabilities and
stockholders' equity...
Excess of
interest-earning assets
over interest-bearing
liabilities/net
interest income........ $ 3,558
=======
Net interest spread..... 1.17%
======
Net interest
margin(1).............. 1.47%
======
Ratio of
interest-earning assets
to interest-bearing
liabilities............ 104.15%
======
</TABLE>
- ---------------
(1) Net interest margin is the ratio of annualized net interest income to
average interest-earning assets.
37
<PAGE> 38
As a result of the Corporation's strategy of offering high value savings
and investment products through alternative distribution channels, the
Corporation's interest rate spread is lower than that of traditional depository
institutions. The Corporation's interest rate spread was 1.84%, 1.49%, and 1.17%
for 1996, 1997, and the three months ended March 31, 1998, respectively. The
Corporation's net interest margin on interest-earning assets for such periods
was 1.94%, 1.73%, and 1.47%, respectively.
INTEREST RATE SENSITIVITY MANAGEMENT
The Corporation actively monitors its net interest rate sensitivity
position. Effective interest rate sensitivity management seeks to ensure that
net interest income and the market value of equity are protected from the impact
of changes in interest rates.
The Corporation employs an interest rate risk management process that
allows risk-taking within well-defined limits. The Corporation has implemented a
risk measurement guideline employing "market value of equity" and "gap"
methodologies and other measures. By actively managing the maturities of its
interest-sensitive assets and liabilities, the Corporation seeks to maintain
relatively consistent net interest spreads and mitigate much of the interest
rate risk associated with such assets and liabilities.
The Corporation's policy seeks to reduce the variability of the market
value of its equity in a variety of interest rate environments. The Corporation
uses the concept of fair value of equity (FVE), which represents the net fair
value of the Corporation's financial assets and liabilities, including
off-balance sheet hedges, and monitors the sensitivity of changes in its FVE
with respect to various interest rate environments. The Corporation seeks to
maximize net interest income, while limiting changes in the FVE within changing
interest rate environments to prescribed levels deemed acceptable by the
Corporation. The Corporation utilizes sensitivity analysis to evaluate the rate
and extent of changes to its FVE in various market environments.
The Corporation utilizes interest rate swaps, caps, swaptions, floors,
collars, financial options and other mortgage derivative products to reduce the
variability of FVE and its overall interest rate risk exposure. The Board of
Directors of TeleBanc Financial and TeleBank prohibit the use of the
aforementioned financial instruments for speculative purposes.
The Corporation also monitors 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.
38
<PAGE> 39
The following table sets forth an interest rate sensitivity analysis for
the Corporation at March 31, 1998.
<TABLE>
<CAPTION>
REPRICING REPRICING REPRICING
BALANCE AT WITHIN WITHIN WITHIN REPRICING
MARCH 31, PERCENT 0-3 4-12 1-5 MORE THAN
1998 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
---------- -------- ----------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net...... $ 557,057 54.50% $ 67,409 $ 176,729 $ 226,467 $ 86,452
Mortgage-backed securities,
available-for-sale and
trading.................. 302,281 29.57 61,891 81,073 83,260 76,057
Investment securities
available for sale,
interest-bearing accounts
and FHLB stock........... 162,837 15.93 72,892 371 46,192 43,382
---------- ------ ----------- --------- --------- --------
Total interest-earning
assets................... 1,022,175 100.00% 202,192 258,173 355,919 205,891
======
Non-interest-earning assets:... 25,978
----------
Total assets............... $1,048,153
==========
Interest-bearing liabilities:
Savings deposits........... $ 123,435 12.64% $ 123,435 $ -- $ -- $ --
Time deposits.............. 479,405 49.09 31,241 158,061 287,413 2,690
FHLB advances.............. 190,000 19.46 180,000 10,000 -- --
Other borrowings........... 153,970 15.77 153,970 -- -- --
Subordinated debt.......... 29,672 3.04 -- -- 29,672 --
---------- ------ ----------- --------- --------- --------
Total interest-bearing
liabilities.............. 976,482 100.00% 488,646 168,061 317,085 2,690
======
Non-interest-bearing
liabilities.................. 15,605
----------
Total liabilities.......... 992,087
Total trust preferred...... 9,526
Stockholders' equity........... 46,540
----------
Total liabilities and
stockholders' equity......... $1,048,153
==========
Periodic repricing difference
(periodic gap)............... $ (286,454) $ 90,112 $ 38,834 $203,201
Cumulative repricing difference
(cumulative gap)............. $ (286,454) $(196,342) $(157,508) $ 45,693
Cumulative gap to total
assets....................... (27.3)% (18.7)% (15.0)% 4.4%
Cumulative gap to total assets
hedge affected(1)............ (6.5)% 2.1% (12.6)% 4.4%
</TABLE>
- ---------------
(1) The hedge effected cumulative gap to total assets includes the effect of
hedging instruments on the Corporation's gap at March 31, 1998. 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 the market's estimate of the likelihood the cap strike will be
met or exceeded. The estimated net cash flows are used in the gap
calculations.
Shortcomings are inherent in gap analysis because certain assets and
liabilities may not move proportionately as interest rates change. Based on
TeleBank's projected March 31, 1998 simulation analysis, the Corporation
estimates that a hypothetical instantaneous 100 basis point rise in rates would
cause TeleBank's FVE to decrease by 8.6%.
39
<PAGE> 40
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Corporation is different from the impact on
an industrial company because substantially all of the assets and liabilities of
the Corporation are monetary in nature and interest rates and inflation rates do
not always move in concert. 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 Corporation's ability to manage
interest rate sensitivity and, by such management, reduce the inflationary
impact upon performance. The most direct impact of an extended period of
inflation would be to increase interest rates and to place upward pressure on
the operating expenses of the Corporation. However, the actual effect of
inflation on the net interest income of the Corporation would depend on the
extent to which the Corporation was able to maintain a spread between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, which would depend to a significant extent on its
asset-liability sensitivity. 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. The effect of inflation on the Corporation's results of operations
for the past three years has been minimal.
YEAR 2000 ISSUES
The Corporation utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems include various
software packages licensed to the Corporation by outside vendors and a client
server core processing system both of which are run on in-house computer
networks. In 1997, the Corporation initiated a review and assessment of all
hardware and software to confirm that it will function properly in the year
2000. The Corporation's core processing software vendor and the majority of the
vendors which have been contacted have indicated that their hardware and/or
software are Year 2000 compliant. Testing will be performed for compliance.
Although the Corporation may incur additional expenses during the next two years
to confirm Year 2000 compliance and to remedy problems, if any, the Corporation
does not anticipate that such expenditures will be material or that Year 2000
compliance will otherwise have a material effect on the Corporation's financial
condition or results of operations.
CHANGES IN ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" were issued in June 1997. SFAS 130 requires
that certain financial activity typically disclosed in stockholders' equity be
reported in the financial statements as an adjustment to net income in
determining comprehensive income. SFAS 131 requires the reporting of selected
segmented information in quarterly and annual reports. The Corporation
implemented SFAS No. 130 effective for the first quarter of 1998 and will
implement SFAS No. 131 effective for the year ending December 31, 1998. The
Corporation does not anticipate any material financial impact from the
implementation of SFAS Nos. 130 and 131.
40
<PAGE> 41
BUSINESS
OVERVIEW
The Corporation is a leading national provider of high value savings,
investment and other financial products and services. The Corporation utilizes a
branchless banking strategy to offer financial products and services to
customers nationwide and to maintain its low cost structure through the use of
alternative delivery channels, such as telephones, the Internet, ATMs, facsimile
and mail. The Corporation's broad selection of high value savings and investment
products generally have higher interest rates or carry lower fees than similar
products offered by traditional, branch-based financial institutions. The
Corporation also emphasizes high quality customer service and provides customers
with "anywhere, anytime" convenience for accessing its financial products and
services. The Corporation intends to broaden its financial products and services
to include in 1998 annuities, residential mortgage loans, credit cards and
mutual funds. At March 31, 1998, the Corporation had more than 22,000 customer
accounts, $560.6 million in retail deposits and $1.0 billion in assets.
INDUSTRY BACKGROUND
Financial Services
The financial services industry, including depository institutions (such as
banks and savings and loan associations), securities brokerage firms, mutual
fund companies, insurance companies and other financial institutions, is the
fifth largest industry in the United States. In 1997, deposits held in financial
institutions in the United States totaled more than $4.0 trillion and the total
assets of such institutions was more than $6.0 trillion, according to the fourth
quarter FDIC Quarterly Banking Profile. Financial institutions earn revenues
principally in the forms of interest income earned on assets and fees or
commissions. In 1997, according to the FDIC Quarterly Banking Profile,
depository institutions recognized more than $203 billion in revenues in the
form of net interest income alone.
The financial services industry is currently experiencing rapid market
change, which is characterized by the demand for alternative delivery channels
for products and services, the emergence of nationwide full-service financial
institutions and growing price competition. Increasingly, customers are seeking
higher value products that offer higher returns or lower fees, as well as access
to financial products and services through anywhere, anytime technology-based
delivery channels, such as the Internet, telephones, ATMs and facsimile. To
compete effectively for customer savings and investment dollars in this
environment, financial institutions have attempted to diversify product lines
and increase access to prospective customers through both the geographic
expansion of traditional branch and office networks and the use of alternative
delivery channels. As a result, customers increasingly are exposed to a wider
selection of products and services that can satisfy their financial demands.
Electronic Commerce
Over the past 30 years, the use of electronic media, such as electronic
data interchanges, private telephone networks, credit cards, ATMs and electronic
bill payment systems, to facilitate commercial functions has become routine.
Over the last several years, the development of network technologies, the growth
of personal computers in the home and workplace and faster and cheaper Internet
access have converged to establish the necessary infrastructure to support
broad-based electronic commerce. The growth of the Internet, in particular, is
evidenced in the significant increase in the number of domain names in recent
years. According to the Commerce Report, from July 1993 to July 1997, the number
of domain names increased from 26,000 to 1,301,000. The Commerce Report also
estimates that traffic on the Internet is doubling every 100 days.
The increasing functionality, accessibility and overall usage of the
Internet has made it an attractive channel for electronic commerce. According to
the Commerce Report, analysts predict that businesses will trade as much as $300
billion annually over the Internet during the next five years. Currently within
the financial services industry, Internet banking is relatively new and the
market for such services is relatively undeveloped. According to the April 1998
Online Banking Report, only 163 banks in the United States permitted customers
to review balances, transfer funds and pay bills on the financial institutions'
web sites.
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Like the rapid proliferation of ATMs in recent years, the growth of online
banking as the newest medium through which banks can offer their customers
remote access to their accounts is significant. According to the Commerce
Report, approximately 4.5 million households were banking online in 1997, and
that number is expected to increase to 10 to 16 million households by the year
2000.
THE CORPORATION'S SOLUTION
The Corporation's branchless banking strategy permits the Corporation to
offer high value financial services and products to customers nationwide and to
maintain a low cost structure through the use of alternative delivery channels,
such as the telephone, the Internet, ATMs, facsimile and mail. The Corporation
also emphasizes customer service by attentive and knowledgeable employees and
convenience for customers in accessing its financial product offerings. The
Corporation intends to use these low-cost, scaleable alternative delivery
channels to continue to increase its core deposit base and to market and sell
other financial and investment products, including insurance products,
residential mortgage loans, credit cards and mutual funds.
The Corporation's solution offers the following benefits to customers:
Broad Selection of High Value Financial Products. The Corporation believes
that its use of alternative delivery channels permits it to operate nationally,
but with a lower cost structure than many traditional depository institutions.
Such a low cost structure allows the Corporation to offer a broad selection of
"high value" savings and investment products, which have higher interest rates
and lower fees than traditional, branch-based financial institutions. Building
on its low-cost alternative delivery channels, the Corporation intends to expand
its product offerings to include credit cards and, through strategic alliances
with third party providers, annuities, residential mortgage loans and mutual
funds.
High Quality Service. The Corporation also capitalizes on its low cost
structure by prioritizing and investing in its customer service. Recognizing
that superior customer service is critical for attracting and retaining
customers, the Corporation uses its highly trained, primarily college-educated
customer service representatives, known as "TeleBankers," both to sell savings
and investment products and to serve existing customers from the Corporation's
call center. TeleBankers can access electronically data relating to the customer
accounts and information about additional product requests, which the
Corporation believes promotes better customer service and offers substantial
cross-marketing opportunities. Based on data generated by the Corporation's
automatic call distributor system, during June 1997 the average time that an
existing or prospective customer waited to speak with a TeleBanker on the
telephone was approximately 16 seconds. In contrast to many of its competitors,
the Corporation offers free ATM transactions through the Cirrus network and free
Internet banking to customers.
Convenience. The Corporation emphasizes anywhere, anytime convenience to
existing and prospective customers by offering several different media through
which a customer can consummate his or her financial transactions or otherwise
communicate with the Corporation. The Corporation believes that its alternative
delivery channels permit customers to choose the most convenient method and time
to transact business. For example, customers may open a new account, invest in a
financial product or service or conduct an electronic financial transaction by
telephone (1-800-TELEBANK), through the Internet via the Corporation's Web site
at www.telebankonline.com, by facsimile or by mail. The Corporation's customer
service call center operates from 8:00 a.m. to 12:00 a.m. EST/EDT Monday through
Friday, and from 8:00 a.m. to 6:00 p.m. EST/EDT on Saturdays. Customers also can
access TeleBank's computer-operated voice response system 24 hours a day, seven
days per week.
THE CORPORATION'S STRATEGY
The Corporation's objective is to be the premier national provider of high
value savings, investment and other financial products, without the overhead and
operating cost infrastructure of traditional financial institutions. To achieve
this objective, the Corporation has adopted a growth strategy that includes the
following key elements:
Increase TeleBank Brand Visibility Nationally. The Corporation seeks to
build the "TeleBank" franchise identity based on its high value savings and
investment products, superior customer service and anywhere, anytime
convenience. The Corporation believes that building the TeleBank brand will
increase
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customer conversion and retention rates, customer referrals, the number of
accounts per customer and customer receptivity to new products. In pursuing this
strategy, the Corporation plans to increase significantly its marketing
expenditures for the foreseeable future to implement a targeted, national
advertising campaign and marketing initiative.
Expand Customer Base. The Corporation seeks to attract new customers to
expand its stable customer and core deposit base by further leveraging its
scaleable alternative delivery channels. The Corporation intends to continue to
employ targeted marketing techniques designed to attract more profitable
customers, rather than adopting the geographically-based marketing approach
often used by traditional financial institutions. In addition, the Corporation
intends to attract new customers by establishing additional affinity
relationships through strategic alliances. The Corporation currently has
affinity relationships with 10 organizations with more than one million members
in the aggregate. Such organizations include the National Association of
Realtors and the National Council of Senior Citizens. Additionally, while the
Corporation does not anticipate many such opportunities, it may pursue selective
acquisitions of complementary financial institutions.
Broaden Product Lines and Increase Cross-Marketing Initiatives. The
Corporation intends to leverage further its national distribution platforms
through expanded product offerings and increased cross-marketing efforts. The
Corporation monitors customer inquiries about additional financial products and
services and seeks to provide new product offerings based, in part, on customer
requests. The Corporation intends to broaden its savings and financial and
investment products by the end of 1998 to offer credit cards and, through
strategic alliances, fixed-rate and variable annuities, residential mortgage
loans and mutual funds. The Corporation currently has contractual arrangements
with several non-affiliated insurance companies, including USG Annuity & Life
Company and Jackson National Life Insurance Company, through which the
Corporation intends to offer fixed-rate annuities commencing in 1998, subject to
required regulatory approvals and other contingencies. The Corporation also
intends to offer residential mortgage loans through E-Loan.
Outsource Non-Core Operations. To maintain its relatively low operating
costs and to capitalize on the technical capabilities of selected vendors, the
Corporation intends to continue to outsource specific non-core operations and
systems. The Corporation currently outsources check processing, check imaging,
statement rendering, Internet processing and home page hosting. The Corporation
generally determines whether to outsource a particular service or operations
based on anticipated cost savings to the Corporation, while continuing to
provide high quality service to its customers. Companies to which the
Corporation outsources services or operations include M&I Data Services, Inc.
and Security First Technologies.
Maintain Conservative Asset Strategy. The Corporation intends to continue
its conservative asset investment strategy of purchasing and managing pools of
one-to-four family residential mortgage loans and investment-grade
mortgage-backed securities. The Corporation does not currently originate
residential mortgage or other loans. Management believes that purchasing assets,
including residential mortgage loans and mortgage-backed securities, lowers its
loan investment costs and permits the Corporation to manage the geographic
diversification of its loan portfolio, in an effort to reduce its exposure to
regional economic downturns.
MARKETING
The Corporation has developed a multiple channel, consumer-oriented direct
marketing model designed to reach potential customers and build brand awareness
nationally. Based upon demographics and current regional banking conditions, the
Corporation targets key consumer markets through a variety of advertising and
promotional media, including print advertising in national periodicals, local
newspapers and specialty publications; Internet advertising; national radio
advertising predominately on talk/news stations; direct mail campaigns; public
relations; and affinity marketing programs. To fund its marketing activities,
the Corporation increased its marketing budget to $1.8 million in 1997 from
$930,000 in 1996 and has substantially increased its marketing budget for 1998.
In addition to its national advertising, the Corporation undertakes more
concentrated advertising campaigns on a regional basis, utilizing print, radio
and billboards to build further brand awareness and target less rate-sensitive
consumers. As these regional campaigns penetrate each market, management plans
to combine them into a unified, national campaign. As part of these efforts, the
Corporation intends to establish,
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on a test basis, low-cost, small regional business development offices to
coordinate marketing activities and asset acquisition activities in a geographic
region. The Corporation currently has a small regional business development
office in Los Angeles. Management believes that such offices will increase
customer response rates and sales of products to new and existing customers in
the regions in which such offices are located, while maintaining the
Corporation's low-cost operating structure.
Customer Incentive Programs
In addition to the Corporation's traditional advertising methods, the
Corporation employs the following programs designed to leverage its existing
account base to sell additional products and services and attract new customers.
Refer-A-Saver. In 1995, TeleBank introduced its Refer-a-Saver program,
pursuant to which it pays cash to existing customers who refer new customers to
TeleBank. This program, which lowers the marketing cost associated with each new
customer by approximately two-thirds, is responsible for nearly 10% of all new
customers.
Preferred Saver. As an incentive to maintain multiple accounts with
TeleBank, TeleBank offers lower minimum balances and higher rates on select
products for customers with multiple accounts through its Preferred Saver
program. Currently, approximately 30% of TeleBank's customers are enrolled in
this program. Multiple account holders are more profitable for TeleBank because
they marketing expense per dollar deposited by such customers is lower than that
for new accounts, the cost of funds per depositor is lower and customer loyalty
and franchise value.
Affinity Programs
The Corporation's affinity marketing efforts are designed to reach targeted
groups of consumers with the endorsement of their membership organization. In
1996, TeleBank started its PartnersPlus Affinity program by contracting with
professional and other organizations to promote the Corporation's savings and
investment products. The Corporation believes that such programs increase
customer conversion rates as a result of the association's third party
endorsement. Currently, TeleBank has affinity programs with 10 organizations,
with a total of more than one million members, and is currently exploring
possible affinity programs with several additional organizations comprising more
than five million members. The current PartnersPlus Affinity program
participants include the National Association of Realtors, the Association of
Women's Health, Obstetric and Neonatal Nurses and the National Council of Senior
Citizens.
STRATEGIC ALLIANCES
The Corporation continually seeks to complement current value-based product
selection by forming strategic alliances with established third party financial
service providers to develop and market new products and services. In addition,
the Corporation gains new distribution channels by offering its own product line
through consumer networks of its alliance participants. For example, the
Corporation has established strategic alliances with USG Annuity & Life Company
and Jackson National Life Insurance Company to provide annuities through
TeleBanc Insurance and with E-Loan to provide residential mortgage loans. The
Corporation has also entered into a strategic alliance with E'Trade through
which the Company and E'Trade intend to co-market each other's financial
products and services to new or existing customers. The Corporation's marketing
strategy also includes joint marketing initiatives that highlight the
Corporation's alternative delivery platform. For instance, the Corporation
believes that an alliance with a Web search engine to offer the Corporation's
products and services to targeted groups of customers through the search
engine's home page would be an effective platform through which to market the
Corporation's products and services, as well as its alternative delivery
platforms. By expanding its product line and its Internet and services
accessibility, the Corporation seeks to leverage its existing customer base to
cross-sell these new products, thereby capturing such benefits as lower customer
acquisition costs and higher profit margins.
GOVERNMENT REGULATION
General. TeleBanc Financial, as a savings and loan holding company, and
TeleBank, as a federally chartered savings bank, are subject to extensive
regulation, supervision and examination by the OTS as their
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primary federal regulator. TeleBank also is subject to regulation, supervision
and examination by the FDIC and as to certain matters by the Federal Reserve
Board. See the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 3 of the Notes to the Consolidated Financial
Statements of the Corporation as to the effect of certain laws, rules and
regulations on the operations of the Corporation and TeleBank. Set forth below
is a description of certain key aspects of these regulatory requirements and of
certain recent regulatory developments.
Thrift Charter Legislation. In September 1996, legislation (the "1996
Legislation") was enacted to address the undercapitalization of the SAIF, of
which TeleBank 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. TeleBank 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,
TeleBank's deposit insurance premiums to the SAIF were reduced as of September
30, 1996. TeleBank expects that its future deposit insurance premiums will
continue to be lower than the premiums it paid prior to the SAIF
recapitalization.
The 1996 Legislation requires the merger of the Bank Insurance Fund and the
SAIF into a single deposit insurance fund on January 1, 1999, but only if the
thrift charter is eliminated by that date. Congress has been considering various
forms of financial modernization legislation some of which would have required a
federally chartered savings bank, such as TeleBank, to convert its charter to a
national or state bank charter. However, the House of Representatives passed a
financial modernization bill on May 13, 1998, that would not require TeleBank to
convert its charter. Nevertheless, if legislation ultimately were to be enacted
that required TeleBank to convert its charter, the Corporation would become a
bank holding company subject to Federal Reserve Board regulation.
In the absence of appropriate "grandfather" provisions, such legislation
could have an adverse effect on TeleBank and the Corporation. Such legislation
could, for example, subject the Corporation to regulatory capital requirements
for the first time and place limitations on the type of business activities it
can conduct, although the Corporation's current activities would remain
permissible under the legislation considered by the United States Congress to
date. The Corporation is unable to predict whether, and in what form, any such
legislation is likely to be enacted and the effect such legislation might have
on the Corporation and TeleBank.
Regulatory Capital Levels of TeleBank. As a federal savings bank, TeleBank
is subject to minimum capital requirements prescribed by federal statute and OTS
regulations. At March 31, 1998, TeleBank's tangible, core, tier 1 risk-based and
total risk-based regulatory capital ratios were 5.5%, 5.5%, 11.0%, and 11.6%,
respectively. TeleBank's capital ratios exceeded the requirements under FIRREA
as well as the standards established for "well capitalized" institutions under
the prompt corrective action regulations established pursuant to FDICIA.
FDICIA requires OTS to take "prompt corrective action" with respect to
savings associations that do not meet minimum capital requirements. The OTS's
prompt corrective action regulation establishes five capital categories for
thrift institutions: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. The OTS has the
discretion under the prompt corrective action regulation to reclassify an
institution from one category to the next lower category, for example, from
"well capitalized" to "adequately capitalized," if, after notice and an
opportunity for a hearing, the OTS determines that the institution is in an
unsafe or unsound condition or has received and has not corrected a less than
satisfactory examination rating for asset quality, management, earnings or
liquidity.
The OTS has indefinitely delayed implementation of an interest rate risk
component of its risk-based capital regulation pending the testing of an OTS
appeals process. Under that component, an institution that would experience a
change in "portfolio equity" in an amount in excess of 2.0% of the institution's
assets as a result of a 200 basis point increase or decrease in the general
level of interest rates would be required to maintain additional amounts of
risk-based capital based on the lowest interest rate exposure at the end of the
three previous quarters. At March 31, 1998, TeleBank would not have been
required to maintain additional amounts of risk-based capital had the interest
rate risk component of the capital regulations been in effect.
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If TeleBank were to become "undercapitalized" under the prompt corrective
action regulations, it would be required by statute to file a capital
restoration plan with the OTS setting forth, among other things, the steps
TeleBank would take to become "adequately capitalized." The OTS could refuse to
accept the plan unless TeleBanc Financial guaranteed in writing TeleBank's
compliance with the plan. The aggregate liability of TeleBanc Financial under
such a commitment would be limited to the lesser of (i) an amount equal to 5.0%
of TeleBank's total assets at the time that TeleBank became "undercapitalized"
and (ii) the amount necessary to bring TeleBank into compliance with all
applicable capital standards as of the time that TeleBank fails to comply with
its capital plan. If TeleBanc Financial refused to provide the guarantee,
TeleBank would be subject to the more restrictive supervisory actions applicable
to "significantly undercapitalized" institutions. Moreover, if TeleBank were to
become "critically undercapitalized" (which is defined to include institutions
that still have a positive net worth) it would be subject to the appointment of
a receiver or conservator.
TeleBank's ability to maintain or increase its capital levels in future
periods will be subject, among other things, to general economic conditions. As
a result, although TeleBank's regulatory capital ratios at March 31, 1998 met
the ratios established for "well capitalized" institutions, there can be no
assurance that TeleBank will be able to maintain levels of capital sufficient to
continue to meet the standards for classification as "well capitalized" under
the prompt corrective action standards.
Qualified Thrift Lender Requirement. For TeleBank to exercise the powers
granted to federally chartered savings institutions and maintain full access to
FHLB advances, it must constitute a qualified thrift lender ("QTL"). A savings
association will constitute a QTL if its qualified thrift investments continue
to equal or exceed 65% of its portfolio assets on a monthly average basis in
nine out of every 12 months. At March 31, 1998, TeleBank's qualified thrift
investments constituted 85.75% of portfolio assets, and TeleBank has been in
compliance with this requirement for at least nine out of the prior 12 months.
Qualified thrift investments generally consist of various housing related
loans and investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), small business loans, credit card and educational loans, and shares
of stock issued by any FHLB, the Federal Home Loan Mortgage Corporation or the
Federal National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% of
the savings association's aggregate portfolio assets: (i) 50% of the dollar
amount of residential mortgage loans originated and sold within 90 days of
origination; (ii) investments in securities of a service corporation that
derives at least 80% of its income from residential housing finance; (iii) 200%
of loans and investments made to acquire, develop or construct starter homes or
homes in credit needy areas (subject to certain conditions); (iv) 200% of loans
for the purchase or construction of churches, schools, community service
facilities, nursing homes and hospitals in credit needy areas; and (v) consumer
loans (other than credit card and education loans). For purposes of the QTL
test, the term "portfolio assets" means the savings association's total assets
minus goodwill and other intangible assets, the value of property used by the
savings association to conduct its business, and liquid assets held by the
savings association in an amount up to 20% of its total assets.
A savings association that fails to constitute a QTL must limit its future
investments and activities (including branch development and payments of
dividends) to those permitted for both savings associations and national banks.
Additionally, any such savings association will be ineligible to receive further
FHLB advances and, beginning three years after the loss of QTL status, will be
required to repay outstanding FHLB advances and dispose of, or discontinue, any
pre-existing investment or activities not permitted for both savings
associations and national banks. Finally, within one year of the loss of QTL
status, the holding company of a savings association must register as a bank
holding company and will be subject to all statutes applicable to bank holding
companies, including capital requirements. While the restrictions on the
investments and activities of TeleBank and the Corporation that would be imposed
if TeleBank were to fail the QTL test should not have a material adverse effect
on the Corporation or TeleBank based on their current operations, the loss of
FHLB advances could adversely affect TeleBank's liquidity.
Restrictions on Brokered Deposits. A depository institution that is not
"well capitalized" under OTS prompt correction action regulations is prohibited
from accepting or renewing deposits through a deposit broker or offering rates
of interest on insured deposits that are "significantly higher than the
prevailing rates of
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interest on deposits offered by other insured depository institutions in such
depository institution's normal market area" unless a waiver is received from
the FDIC. Institutions that receive a waiver from FDIC are nevertheless subject
to limits on the rates of interest they may pay on such deposits. In January
1998, TeleBank began to use brokers to acquire CDs that contain call features.
At March 31, 1998, TeleBank had approximately $42.3 million in deposits obtained
through such brokers in the form of callable CDs. If TeleBank failed to remain
well capitalized under the prompt corrective action regulations, it would no
longer be permitted to sell callable CDs through a broker, and the regulatory
restrictions on deposit interest rates could adversely affect TeleBank's
operations in light of TeleBank's strategy of offering premium yield deposits.
Community Reinvestment Act. As an FDIC-insured savings association,
TeleBank is subject to the Community Reinvestment Act of 1977 ("CRA"), under
which it has a continuing and affirmative obligation to help meet the credit
needs of its local communities, including low- and moderate-income neighborhoods
(i.e., its assessment area). In addition, the OTS is required under the CRA to
take into account TeleBank's CRA record in determining whether to approve
various applications. As a result of TeleBank's non-traditional operating plan,
specifically its nationwide operations and its lack of direct lending
activities, there is considerable uncertainty as to how to evaluate TeleBank's
CRA performance. Currently, TeleBank has designated Arlington County, Virginia
as its "assessment area" and is evaluated on the basis of its acquisition of
residential mortgage loans secured by property located in this area. Based on an
OTS examination dated as of February 18, 1997, TeleBank was rated "satisfactory"
for CRA purposes. TeleBank has requested that OTS designate it a "wholesale"
institution under recent revisions to CRA regulations. Such a designation would
provide the OTS with greater flexibility in reviewing TeleBank's CRA record,
including permitting TeleBank to define a broader assessment area and giving
greater emphasis to services provided by TeleBank to low- and moderate-income
areas.
Sources of Funds for Cash Dividends. The Corporation has traditionally
invested substantially all of its available liquid assets in TeleBank. The
liquidity and ability of the Corporation to pay dividends to its stockholders is
primarily derived from, and dependent on, the ability of TeleBank to pay
dividends to the Corporation. In general, TeleBank pays dividends to the
Corporation only to the extent that funds are needed to cover operating
expenses, to service the debt of the Corporation and to pay dividends to
preferred stockholders. In addition, TeleBank's ability to pay dividends on its
common stock is subject to certain restrictions. The Corporation does not
currently intend to contribute all of the net proceeds of the Offering to
TeleBank. Any restrictions on TeleBank's payment of dividends could adversely
affect the Corporation's ability of the Corporation to make payments on its debt
and pay dividends on any outstanding preferred stock.
The OTS prompt corrective action regulation prohibits thrift institutions,
such as TeleBank, from making "capital distributions" (defined to include a cash
distribution or a stock redemption, but excluding dividends in the form of
additional shares of capital stock) unless the institution is at least
"adequately capitalized." Currently, an institution is considered "adequately
capitalized" for this purpose if it has a leverage (or core capital) ratio of at
least 4.0%, a tier 1 risk-based capital ratio of at least 4.0%, and a total
risk-based capital ratio of at least 8.0%. At March 31, 1998, TeleBank's
leverage, tier 1 risk-based and total risk-based capital ratios of 5.5%, 11.0%,
and 11.6%, respectively, met the ratios established for "well capitalized"
institutions and, thus, exceeded the ratios established for "adequately
capitalized" institutions.
Under the current OTS capital distribution regulation, as long as TeleBank
meets the OTS capital requirements before and after the payment of dividends, it
may pay out dividends without prior OTS approval equal to the higher of (i) 100%
of net income to date over the calendar year and 50% of surplus capital existing
at the beginning of the calendar year or (ii) 75% of its net income over the
most recent four-quarter period. The OTS could require prior approval if it were
to determine that TeleBank was "in need of more than normal supervision." In
addition, the OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds, and must be given
30 days' advance notice of all capital distributions, during which time it may
object to any proposed distribution.
Recently proposed revisions to the OTS capital distribution regulation
would conform the definition of "capital distribution" to the definition used in
the OTS prompt corrective action regulation. Under the proposal, TeleBank would
continue to be required to provide a notice to the OTS 30 days prior to the
declaration of a dividend. The proposal would not impose a quantitative
limitation on the amount of
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permissible capital distributions, but the OTS could disapprove a capital
distribution if the institution would not be at least adequately capitalized
under the OTS prompt correction action regulation following the distribution, if
the distribution raised safety or soundness concerns, or if the distribution
violated a prohibition contained in any statute, regulation, or agreement
between the institution and the OTS, or a condition imposed on the institution
by the OTS. The OTS would consider the amount of the distribution when
determining whether it raised safety or soundness concerns.
Interest on Deposits. Various proposals have been introduced in the
Congress to permit the payment of interest on required reserve balances, and to
permit savings institutions and other regulated financial institutions to pay
interest on business demand accounts. While this legislation appears to have
strong support from many constituencies, the Corporation is unable to predict
whether such legislation will be enacted.
Other Regulatory Proposals. During 1997 and 1998, the OTS continued its
comprehensive review of its regulations to eliminate duplicative, unduly
burdensome and unnecessary regulations. The OTS revised or has proposed revising
regulations addressing electronic banking operations, deposit accounts,
application processing and management of interest rate risk, investment
securities and derivatives activities. The proposal on electronic banking
operations would expand the services that TeleBank can provide electronically by
permitting savings institutions to engage in any activity through electronic
means that they may conduct through more traditional delivery mechanisms,
including opening new deposit accounts and the establishment of loan accounts.
The proposal also would allow savings institutions to market and sell electronic
capacities and by-products to third parties if the capacities and by-products
are acquired or developed in good faith as part of providing financial services.
Liquidity Requirements. Recently adopted revisions to the OTS liquidity
requirements lowered the minimum liquidity requirement for a federal savings
institution from 5% to 4%, but made clear that an institution must maintain
sufficient liquidity to ensure its safe and sound operation. The revisions also
added certain mortgage-related securities and residential mortgage loans to the
types of assets that can be used to meet liquidity requirements, and provided
alternatives for measuring compliance with the requirements.
ATM Surcharge Legislation. Various proposals have been introduced in
Congress to restrict or prohibit an operator of an ATM from requiring
non-customers to pay surcharges to use that operator's ATM. The Corporation is
unable to predict at this time whether such legislation will be enacted.
EMPLOYEES
At June 30, 1998, the Corporation had 72 full-time employees, and 12
part-time employees. Management considers its relations with its employees to be
excellent. The Corporation's employees are not represented by any collective
bargaining group. The Issuer has no employees.
PROPERTIES
The Corporation leases its principal office located at 1111 North Highland
Street, Arlington, Virginia. The Corporation leases approximately 19,000 square
feet in that location. The lease expires in 2005. Beginning in March 1998, the
Corporation leased approximately 1,500 square feet of office space in Los
Angeles, California as a small business development office. The Corporation
believes that its facilities are adequate for its current operations. The Issuer
neither leases nor owns any real property.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or
the Issuer is a party or to which any of their respective property is subject.
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DESCRIPTION OF SERIES A CAPITAL SECURITIES
This summary of certain terms and provisions of the Series A Capital
Securities, which describes the material provisions thereof, does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the Series A Trust Agreement, including the definitions therein of certain
terms, and the Trust Indenture Act, to each of which reference is hereby made.
Wherever particular defined terms of the Series A Trust Agreement (as amended or
supplemented from time to time) are referred to herein, such defined terms are
incorporated herein by reference. The form of the Series A Trust Agreement has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part.
GENERAL
The Series A Capital Securities of the Issuer will rank pari passu, and
payments will be made thereon pro rata, with the Series A Common Securities of
the Issuer except as described under "-- Subordination of Series A Common
Securities." Legal title to the Series A Subordinated Debentures will be held by
the Property Trustee in trust for the benefit of the holders of the Series A
Securities. The Series A Guarantee executed by the Corporation for the benefit
of the holders of the Series A Capital Securities will be a guarantee on a
subordinated basis with respect to the Series A Capital Securities but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Series A Capital Securities when the Issuer does not have
funds on hand available to make such payments. See "Description of Series A
Guarantee."
DISTRIBUTIONS
The Series A Capital Securities represent beneficial ownership interests in
the Issuer, and Distributions on the Series A Capital Securities will be
cumulative, will accumulate from the date of original issuance and will be
payable at the annual rate of 9.0% on the stated Liquidation Amount of $25.00,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year (each, a "Distribution Date"), to the holders of the Series A
Capital Securities on the relevant record dates. The record dates for the Series
A Capital Securities will be, for so long as the Series A Capital Securities
remain in book-entry form, one Business Day (as defined below) prior to the
relevant Distribution Date and, in the event the Series A Capital Securities are
not in book-entry form, the 15th day of the month in which the relevant
Distribution Date occurs. Distributions will accumulate from the date of
original issuance. The first Distribution Date for the Series A Capital
Securities will be September 30, 1998. The period beginning on and including the
date of original issuance and ending on but excluding the first Distribution
Date and each successive period beginning on and including a Distribution Date
and ending on but excluding the next succeeding Distribution Date is herein
called a "Distribution Period." The amount of Distributions payable for any
Distribution Period will be computed on the basis of a 360-day year of twelve
30-day months. In the event that any Distribution Date would otherwise fall on a
day that is not a Business Day, such Distribution Date shall be postponed to the
next day that is a Business Day (without any additional Distributions or other
payment in respect of such delay) unless it would thereby fall in the next
calendar year, in which event the Distribution Date shall be brought forward to
the immediately preceding Business Day. A "Business Day" shall mean any day
other than a Saturday or a Sunday, or a day on which banking institutions in New
York, New York, Wilmington, Delaware or Arlington, Virginia are authorized or
required by law or executive order to remain closed or a day on which the
principal corporate trust office of the Property Trustee is closed for business.
So long as no Debenture Event of Default occurred and is continuing, the
Corporation has the right under the Indenture to defer payment of interest on
the Series A Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Series A Subordinated Debentures. As a consequence of any such
deferral of interest payments by the Corporation, quarterly Distributions on the
Series A Capital Securities by the Issuer will also be deferred during any such
Extension Period. Distributions to which holders of the Series A Capital
Securities are entitled will accumulate additional Distributions thereon at the
rate of 9.0% per annum, compounded quarterly from the relevant payment date for
such Distributions. The term "Distributions" as used herein shall include any
such additional
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Distributions. During any such Extension Period, the Corporation may not (i)
declare or pay any dividends or distributions on, or redeem, purchase, acquire
or make a liquidation payment with respect to, any of the Corporation's capital
stock, (ii) make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Corporation (including
other series of Junior Subordinated Debentures) that rank pari passu with or
junior in interest to the Series A Subordinated Debentures or (iii) make any
guarantee payments with respect to any guarantee by the Corporation of the debt
securities of any subsidiary of the Corporation if such guarantee ranks pari
passu with or junior in interest to the Series A Subordinated Debentures (other
than (a) dividends or distributions in capital stock of the Corporation, (b) any
declaration of a dividend in connection with the implementation of a
shareholders' rights plan or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Series A Guarantee, (d) purchases of
Common Stock related to the issuance of Common Stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees, related to
the issuance of Common Stock or rights under a dividend reinvestment and stock
purchase plan, or related to the issuance of Common Stock (or securities
convertible into or exchangeable for Common Stock) as consideration in an
acquisition transaction that was entered into prior to the commencement of such
Extension Period and (e) guarantee payments with respect to the guarantee by the
Corporation of the Existing Capital Securities to the extent such payments are
made pari passu with payments with respect to the Series A Guarantee). Prior to
the termination of any such Extension Period, the Corporation may further defer
the payment of interest on the Series A Subordinated Debentures, provided that
no Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Series A Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of 9.0% per
annum, compounded quarterly, to the extent permitted by applicable law), the
Corporation may elect to begin a new Extension Period. There is no limitation on
the number of times that the Corporation may elect to begin an Extension Period.
See "Description of Series A Subordinated Debentures -- Option to Defer Interest
Payments" and "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
The revenue of the Issuer available for distribution to holders of Series A
Capital Securities will be limited to payments under the Series A Subordinated
Debentures in which the Issuer will invest the proceeds from the issuance and
sale of its Series A Securities. See "Description of Series A Subordinated
Debentures." If the Corporation does not make interest payments on the Series A
Subordinated Debentures, the Property Trustee will not have funds available to
pay Distributions on the Series A Capital Securities. The payment of
Distributions (if and to the extent the Issuer has funds legally available for
the payment of such Distributions and cash sufficient to make such payments) is
guaranteed by the Corporation on the basis set forth herein under "Description
of Series A Guarantee."
The Corporation has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Series A
Subordinated Debentures.
REDEMPTION OR EXCHANGE
Mandatory Redemption. Upon the repayment or redemption, in whole or in
part, of the Series A Subordinated Debentures, whether at Stated Maturity or
upon earlier redemption as provided in the Indenture, the proceeds from such
repayment or redemption shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Series A Capital Securities, upon not less
than 30 nor more than 60 days notice prior to the date fixed for redemption, at
a redemption price, with respect to the Series A Capital Securities (the
"Redemption Price"), equal to the aggregate Liquidation Amount of such Series A
Capital Securities, plus accumulated and unpaid Distributions thereon to the
date of redemption (the "Redemption Date"). See "Description of Series A
Subordinated Debentures -- Redemption." If less than all of the Series A
Subordinated Debentures are to be repaid or redeemed on a Redemption Date, then
the proceeds from such repayment or redemption shall be allocated to the
redemption pro rata of the Series A Capital Securities and the Series A Common
Securities.
The Corporation has the right to redeem the Series A Subordinated
Debentures (i) on or after July 31, 2003, in whole at any time or in part from
time to time, or (ii) at any time, in certain circumstances as
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described under "Description of Series A Subordinated Debentures -- Conditional
Right to Redeem upon a Tax Event or Capital Treatment Event," in whole (but not
in part) within 90 days following the occurrence of a Tax Event or Capital
Treatment Event. A redemption of the Series A Subordinated Debentures would
cause a mandatory redemption of the Series A Securities.
Distribution of Series A Subordinated Debentures to Holders. The
Corporation will have the right at any time to terminate the Issuer and, after
satisfaction of liabilities to creditors of the Issuer as required by applicable
law, to cause the Series A Subordinated Debentures to be distributed to the
holders of the Series A Capital Securities in exchange therefor upon liquidation
of the Issuer. Such right is subject to the Corporation's having received any
regulatory approval then required under applicable capital guidelines or
policies.
Under current United States federal income tax law and interpretations and
assuming, as expected, the Issuer is treated as a grantor trust, a distribution
of Series A Subordinated Debentures in exchange for the Series A Capital
Securities should not be a taxable event to holders of the Series A Capital
Securities. Should there be a change in law, a change in legal interpretation, a
Tax Event or other circumstances, however, the distribution could be a taxable
event to holders of the Series A Capital Securities. See "Certain Federal Income
Tax Consequences -- Distribution of Series A Subordinated Debentures to Holders
of Series A Capital Securities." If the Corporation elects neither to redeem the
Series A Subordinated Debentures prior to maturity nor to liquidate the Issuer
and distribute the Series A Subordinated Debentures to holders of the Series A
Capital Securities in exchange therefor, the Series A Capital Securities will
remain outstanding until the Stated Maturity of the Series A Subordinated
Debentures.
If the Corporation elects to liquidate the Issuer and thereby causes the
Series A Subordinated Debentures to be distributed to holders of the Series A
Capital Securities in exchange therefor upon liquidation of the Issuer, the
Corporation shall continue to have the right to redeem the Series A Subordinated
Debentures in certain circumstances upon the occurrence of a Tax Event or
Capital Treatment Event, as described under "Description of Series A
Subordinated Debentures -- Conditional Right to Redeem Upon a Tax Event or
Capital Treatment Event."
After the liquidation date fixed for any distribution of the Series A
Subordinated Debentures for the Series A Capital Securities, (i) the Series A
Capital Securities will no longer be deemed to be outstanding, (ii) the
depository or its nominee, as the record holder of the Series A Capital
Securities, will receive a registered global certificate or certificates
representing the Series A Subordinated Debentures to be delivered upon such
distribution and (iii) any certificates representing the Series A Capital
Securities not held by DTC or its nominee will be deemed to represent the Series
A Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of the Series A Capital Securities, and bearing accrued and
unpaid interest in an amount equal to the accrued and unpaid Distributions on
the Series A Capital Securities until such certificates are presented to the
Administrative Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Series A Capital
Securities or the Series A Subordinated Debentures that may be distributed in
exchange for the Series A Capital Securities if a dissolution and liquidation of
the Issuer were to occur. Accordingly, the Series A Capital Securities that an
investor may purchase, or the Series A Subordinated Debentures that the investor
may receive on dissolution and liquidation of the Issuer, may trade at a
discount to the price that the investor paid to purchase the Series A Capital
Securities offered hereby.
Tax Event or Capital Treatment Event Redemption. If a Tax Event or Capital
Treatment Event in respect of the Series A Securities shall occur and be
continuing, the Corporation has the right to redeem the Series A Subordinated
Debentures in whole (but not in part) and thereby cause a mandatory redemption
of the Series A Securities in whole (but not in part) at the Redemption Price
within 90 days following the occurrence of such Tax Event or Capital Treatment
Event. In the event a Tax Event or Capital Treatment Event in respect of the
Series A Securities has occurred and is continuing and the Corporation does not
elect to redeem the Series A Subordinated Debentures and thereby cause a
mandatory redemption of the Series A Securities or to terminate the Issuer and
cause the Series A Subordinated Debentures to be distributed to
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holders of the Series A Securities in exchange therefor upon liquidation of the
Issuer as described above, such Series A Capital Securities will remain
outstanding.
Recently, the Internal Revenue Service ("IRS") asserted that the interest
payable on a security with terms that are similar to the terms of the Series A
Subordinated Debentures (but with a longer maturity than the Series A
Subordinated Debentures) was not deductible for United States federal income tax
purposes. The taxpayer in that case has filed a petition in the United States
Tax Court challenging the IRS's position on this matter. If this matter is in
fact litigated and the Tax Court were to sustain the IRS's position on this
matter, such judicial decision could constitute a Tax Event which could result
in an early mandatory redemption of the Series A Capital Securities.
"Like Amount" means (i) with respect to a redemption of the Series A
Capital Securities, the Series A Capital Securities having a Liquidation Amount
equal to that portion of the principal amount of the Series A Subordinated
Debentures to be contemporaneously redeemed in accordance with the Indenture,
the proceeds of which will be used to pay the Redemption Price of such Series A
Capital Securities, and (ii) with respect to a distribution of the Series A
Subordinated Debentures to holders of the Series A Capital Securities in
exchange therefor in connection with a dissolution or liquidation of the Issuer,
the Series A Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Series A Capital Securities of the holder.
The amount payable on the Series A Capital Securities in the event of any
liquidation of the Issuer is $25.00 per Series A Capital Security plus
accumulated and unpaid Distributions, which amount may be paid in the form of a
distribution of a Like Amount of Series A Subordinated Debentures.
"Tax Event" with respect to the Issuer means the receipt by the Issuer of
an opinion of counsel experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced proposed change)
in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
which proposed change, pronouncement or decision is announced on or after the
date of issuance of the Series A Capital Securities under the Series A Trust
Agreement, there is more than an insubstantial risk that (i) the Issuer is, or
will be within 90 days of the date of such opinion, subject to United States
federal income tax with respect to income received or accrued on the Series A
Subordinated Debentures, (ii) interest payable by the Corporation on the Series
A Subordinated Debentures is not, or within 90 days of the date of such opinion,
will not be, deductible by the Corporation, in whole or in part, for United
States federal income tax purposes, or (iii) the Issuer is, or will be within 90
days of the date of such opinion, subject to more than a de minimis amount of
other taxes, duties or other governmental charges.
A "Capital Treatment Event" means that the Corporation shall have received
an opinion of independent bank regulatory counsel experienced in such matters to
the effect that the Series A Capital Securities, as a result of (a) any
amendment to or change (including any announced prospective change) in the laws
(or any regulations thereunder) of the United States or any rules, guidelines or
policies of the appropriate regulatory authorities or (b) any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of the original
issuance of the Series A Capital Securities, do not constitute, or within 90
days of the date thereof, will not constitute Tier 1 capital or its then
equivalent applied as if the Corporation or its successor were a bank holding
company under The Bank Holding Company Act of 1956, as amended; provided,
however, that the distribution of the Series A Subordinated Debentures in
connection with the liquidation of the Issuer by the Corporation shall not in
and of itself constitute a Capital Treatment Event unless such liquidation shall
have occurred in connection with a Tax Event.
REDEMPTION PROCEDURES
Series A Capital Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Series A Subordinated Debentures. Redemptions
of the Series A Capital Securities shall be made and the Redemption Price shall
be
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payable on each Redemption Date only to the extent that the Issuer has funds on
hand available for the payment of such Redemption Price. See also
"-- Subordination of Series A Common Securities."
If the Issuer gives notice of redemption in respect of the Series A Capital
Securities, then, by 12:00 noon, New York City time, on the Redemption Date, to
the extent funds are available, the Property Trustee will deposit irrevocably
with DTC funds sufficient to pay the Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of such Series A Capital Securities. See "Book-Entry Issuance." If the
Series A Capital Securities are no longer in book-entry form, the Property
Trustee, to the extent funds are available, will irrevocably deposit with the
paying agent (the "Paying Agent") for the Series A Capital Securities funds
sufficient to pay the Redemption Price and will give such Paying Agent
irrevocable instructions and authority to pay the Redemption Price to the
holders thereof upon surrender of their certificates evidencing the Series A
Capital Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for the Series A Capital Securities called for
redemption shall be payable to the holders of Series A Capital Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of Series A Capital Securities
so called for redemption will cease, except the right of the holders of Series A
Capital Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Series A Capital Securities will cease to be
outstanding. In the event that payment of the Redemption Price in respect of
Series A Capital Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer or by the Corporation pursuant to the
Series A Guarantee as described under "Description of Series A Guarantee,"
Distributions on the Series A Capital Securities will continue to accrue at the
then applicable rate, from the Redemption Date originally established by the
Issuer for the Series A Capital Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Series A Capital Securities by tender, in
the open market or by private agreement.
Payment of the Redemption Price on Series A Capital Securities and any
distribution of Series A Subordinated Debentures to holders of Series A Capital
Securities shall be made to the applicable record holders thereof as they appear
on the register for Series A Capital Securities on the relevant record date,
which shall be one Business Day prior to the relevant Redemption Date or
liquidation date, as applicable; provided, however, that in the event that
Series A Capital Securities are not in book-entry form, the relevant record date
for Series A Capital Securities shall be a date at least 15 days prior to the
Redemption Date or liquidation date, as applicable.
If less than all of the Series A Capital Securities and Series A Common
Securities issued by the Issuer are to be redeemed on a Redemption Date, then
the aggregate Liquidation Amount of Series A Capital Securities and Series A
Common Securities to be redeemed shall be allocated pro rata to the Series A
Capital Securities and the Series A Common Securities based upon the relative
Liquidation Amounts of such classes. The particular Series A Capital Securities
to be redeemed shall be selected on a pro rata basis not more than 60 days prior
to the Redemption Date by the Property Trustee from the outstanding Series A
Capital Securities not previously called for redemption, by such method as the
Property Trustee shall deem fair and appropriate. The Property Trustee shall
promptly notify the trust registrar in writing of the Series A Capital
Securities selected for redemption.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Series A Capital Securities
to be redeemed at its registered address.
SUBORDINATION OF SERIES A COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Series A
Capital Securities and Series A Common Securities, as applicable, shall be made
pro rata based on the Liquidation Amount of such Series A Capital Securities and
Series A Common Securities; provided, however, that if on any Distribution Date
or
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Redemption Date a Debenture Event of Default (as hereinafter defined) shall have
occurred and be continuing, no payment of any Distribution on, or Redemption
Price of, any of the Series A Common Securities, and no other payment on account
of the redemption, liquidation or other acquisition of such Series A Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions on all of the outstanding Series A Capital Securities for
all Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price, the full amount of such Redemption Price on all
of the outstanding Series A Capital Securities then called for redemption, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of, the Series A Capital Securities then due and payable.
In the case of any Event of Default (as hereinafter defined) under the
Series A Trust Agreement resulting from a Debenture Event of Default, the
Corporation as holder of such Series A Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Series A Trust Agreement until the effect of all such Events of Default with
respect to such Series A Capital Securities have been cured, waived or otherwise
eliminated. Until all Events of Default under the Series A Trust Agreement with
respect to the Series A Capital Securities have been so cured, waived or
otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of Series A Capital Securities and not on behalf of the Corporation as
holder of the Series A Common Securities, and only the holders of Series A
Capital Securities will have the right to direct the Property Trustee to act on
their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
Pursuant to the Series A Trust Agreement, the Issuer shall automatically
terminate upon expiration of its term and shall terminate on the first to occur
of: (i) certain events of bankruptcy, dissolution or liquidation of the
Corporation; (ii) the distribution of a Like Amount of the Series A Subordinated
Debentures to the holders of Series A Capital Securities, if the Corporation, as
Depositor, has given written direction to the Property Trustee to terminate the
Issuer (subject to the Corporation having received prior approval of the
regulatory authorities, if required); (iii) redemption of all Series A Capital
Securities as described under "-- Redemption or Exchange"; and (iv) the entry of
an order for the dissolution of the Issuer by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
above, the Issuer shall be liquidated by the Administrative Trustees and the
Property Trustee as expeditiously as such Issuer Trustees determine to be
possible by distributing, after satisfaction of liabilities to creditors of the
Issuer as provided by applicable law, to the holders of Series A Capital
Securities in exchange therefor a Like Amount of the Series A Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Issuer available for distribution to holders, after
satisfaction of liabilities to creditors of such Issuer as provided by
applicable law, an amount equal to, in the case of holders of Series A Capital
Securities, the aggregate Liquidation Amount plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Issuer has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Issuer on the Series A Capital Securities shall be paid on a pro rata basis. The
holder of the Series A Common Securities will be entitled to receive
distributions upon any such liquidation pro rata with the holders of Series A
Capital Securities, except that if a Debenture Event of Default has occurred and
is continuing, the Series A Capital Securities shall have a priority over the
Series A Common Securities.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default under the Indenture (see
"Description of Series A Subordinated Debentures -- Debenture Events of
Default") constitutes an "Event of Default" under the Series A Trust Agreement.
The Series A Trust Agreement provides that within ten Business Days after
the Property Trustee has actual knowledge of the occurrence of any Event of
Default, the Property Trustee shall transmit notice of such
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Event of Default to the holders of Series A Capital Securities, the
Administrative Trustees and the Corporation, as Depositor, unless such Event of
Default shall have been cured or waived. The Corporation, as Depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Series A Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Series
A Capital Securities shall have a preference over the Series A Common Securities
as described above. See "-- Subordination of Series A Common Securities" and
"-- Liquidation Distribution Upon Termination." The existence of an Event of
Default does not entitle the holders of Series A Capital Securities to
accelerate the maturity thereof.
REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
the Property Trustee and the Delaware Trustee may be removed at any time by the
holder of the Series A Common Securities. If a Debenture Event of Default has
occurred and is continuing, the Property Trustee and the Delaware Trustee may be
removed at such time by the holders of a majority in Liquidation Amount of the
outstanding Series A Capital Securities. The Series A Trust Agreement provides
that in no event will the holders of the Series A Capital Securities have the
right to vote to appoint, remove or replace the Administrative Trustees, which
voting rights are vested exclusively in the Corporation as the holder of the
Series A Common Securities. No resignation or removal of the Property Trustee or
the Delaware Trustee and no appointment of a successor trustee shall be
effective until the acceptance of appointment by the successor trustee in
accordance with the provisions of the Series A Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or from time to time, for the purpose of meeting the legal requirements of
the Trust Indenture Act or of any jurisdiction in which any part of the Trust
Property may at the time be located, the Corporation, as the holder of the
Series A Common Securities, and the Administrative Trustees shall have the power
to appoint one or more persons either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such property, in either case with such powers as may be
provided in the instrument of appointment, and to vest in such person or persons
in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Series A Trust Agreement. In case a
Debenture Event of Default has occurred and is continuing, the Property Trustee
alone shall have power to make such appointment.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee shall be a party, or any
Person succeeding to all or substantially all the corporate trust business of
such Trustee, shall be the successor of such Trustee under the Series A Trust
Agreement, provided such Person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE ISSUER
The Issuer may not merge with or into, consolidate, amalgamate or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below or as otherwise described in the Series A Trust Agreement. The
Issuer may, at the request of the Corporation, with the consent of the
Administrative Trustees and without the consent of the holders of the Series A
Capital Securities, merge with or into, consolidate, amalgamate, or be replaced
by, or convey, transfer or lease its properties and assets substantially as an
entirety to, a trust organized as such under the laws of any State; provided,
that (i) such successor entity either (a) expressly assumes all of the
obligations of the Issuer with respect to the Series A Capital Securities or (b)
substitutes for the Series A Capital Securities
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other securities having substantially the same terms as the Series A Capital
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Series A Capital Securities in priority with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) the
Corporation expressly appoints a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Series A
Subordinated Debentures, (iii) the Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or other organization on which the Series A Capital
Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Series A
Capital Securities (including any Successor Securities) in any material respect,
(v) such successor entity has a purpose substantially identical to that of the
Issuer, (vi) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Corporation has received an opinion from
independent counsel to the Issuer experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Series A Capital Securities (including any Successor Securities)
in any material respect, and (b) following such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, neither the Issuer nor
such successor entity will be required to register as an investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and (vii) the Corporation or any permitted successor or assignee owns all
of the common securities of such successor entity and guarantees the obligations
of such successor entity under the Successor Securities at least to the extent
provided by the Series A Guarantee. Notwithstanding the foregoing, an Issuer
shall not, except with the consent of holders of 100% in Liquidation Amount of
the Series A Capital Securities, consolidate, amalgamate, merge with or into, or
be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Issuer or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF SERIES A TRUST AGREEMENT
Except as provided below and under "Description of Series A
Guarantee -- Amendments and Assignments" and as otherwise required by law and
the Series A Trust Agreement, the holders of the Series A Capital Securities
will have no voting rights.
The Series A Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Series A Capital Securities (i) to cure any
ambiguity, correct or supplement any provisions in such Trust Agreement that may
be inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Series A Trust Agreement,
which shall not be inconsistent with the other provisions of the Series A Trust
Agreement, or (ii) to modify, eliminate or add to any provisions of such Series
A Trust Agreement to such extent as shall be necessary to ensure that the Issuer
will be classified for United States federal income tax purposes as a grantor
trust at all times that any Series A Capital Securities are outstanding or to
ensure that the Issuer will not be required to register as an "investment
company" under the Investment Company Act; provided, however, that in the case
of either clause (i) or clause (ii), such action shall not adversely affect in
any material respect the interests of any holder of Series A Capital Securities,
and any such amendments of the Series A Trust Agreement shall become effective
when notice thereof is given to the holders of Series A Capital Securities. The
Series A Trust Agreement may be amended by the Issuer Trustees and the
Corporation with (i) the consent of holders representing not less than a
majority (based upon Liquidation Amounts) of the outstanding Series A Capital
Securities, and (ii) receipt by the Issuer Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Issuer Trustees in accordance with such amendment will not affect the Issuer's
status as a grantor trust for United States federal income tax purposes or the
Issuer's exemption from status as an "investment company" under the Investment
Company Act, provided that without the consent of each holder of Series A
Capital Securities, the Series A Trust Agreement may not be amended to (i)
change the amount or timing of any Distribution on the Series A Capital
Securities or otherwise adversely affect the amount of any Distribution required
to be
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made in respect of the Series A Capital Securities as of a specified date or
(ii) restrict the right of a holder of Series A Capital Securities to institute
suit for the enforcement of any such payment on or after such date.
So long as Series A Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
such Series A Subordinated Debentures, (ii) waive any past default that is
waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Series A Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or Series A Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of a majority in aggregate Liquidation Amount of all outstanding Series A
Capital Securities; provided, however, that where a consent under the Indenture
would require the consent of each holder of Series A Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of each holder of the Series A Capital Securities. The Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Series A Capital Securities except by subsequent vote of
the holders of the Series A Capital Securities. The Property Trustee shall
notify each holder of Series A Capital Securities of any notice of default it
receives with respect to the Series A Subordinated Debentures. In addition to
obtaining the foregoing approvals of the holders of the Series A Capital
Securities, prior to taking any of the foregoing actions, the Issuer Trustees
shall obtain an opinion of counsel experienced in such matters to the effect
that such action would not cause the Issuer to be classified as other than a
grantor trust for United States federal income tax purposes.
Any required approval of holders of Series A Capital Securities may be
given at a meeting of holders of Series A Capital Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of Series A Capital Securities are entitled to
vote, or of any matter upon which action by written consent of such holders is
to be taken, to be given to each holder of record of Series A Capital Securities
in the manner set forth in the Series A Trust Agreement.
No vote or consent of the holders of Series A Capital Securities will be
required for the Issuer to redeem and cancel the Series A Capital Securities in
accordance with the Series A Trust Agreement.
Notwithstanding that holders of Series A Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Series A Capital Securities that are owned by the Corporation, the Issuer
Trustees or any affiliate of the Corporation or any Issuer Trustees, shall, for
purposes of such vote or consent, be treated as if they were not outstanding.
REGISTRATION OF SERIES A CAPITAL SECURITIES
The Series A Capital Securities will be represented by global certificates
registered in the name of DTC or its nominee. Beneficial interests in the Series
A Capital Securities will be shown on, and transfers thereof will be effected
only through, records maintained by Participants. Except as described below,
Series A Capital Securities in certificated form will not be issued in exchange
for the global certificates. See "Book-Entry Issuance."
Upon the issuance of a Series A global capital security, and the deposit of
such Series A global capital security with DTC, DTC will credit, on its
book-entry registration and transfer system, the respective aggregate
Liquidation Amounts of the individual Series A Capital Securities represented by
such Series A global capital security to the accounts of Participants, which may
include Euroclear and Cedel. Such accounts shall be designated by the dealers,
underwriters or agents with respect to Series A Capital Securities. Ownership of
beneficial interests in the Series A global capital security will be limited to
Participants or persons that may hold interests through Participants including
Euroclear and Cedel. Ownership of beneficial interests in the Series A global
capital security will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC (with respect to interests of
Participants) and the records of Participants (with respect to interests of
persons who hold through Participants). The laws of some states require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such
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limits and such laws may impair the ability to transfer beneficial interests in
the Series A global capital security.
So long as DTC is the registered owner of the Series A global capital
security, DTC will be considered the sole owner or holder of the Series A
Capital Securities represented by such Series A global capital security for all
purposes under the Series A Trust Agreement governing the Series A Capital
Securities. Except as provided below, owners of beneficial interests in the
Series A global capital security will not be entitled to have any of the
individual Series A Capital Securities registered in their names, will not
receive or be entitled to receive physical delivery of any such Series A Capital
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Series A Trust Agreement.
A Series A global capital security shall be exchangeable for Series A
Capital Securities registered in the names of persons other than DTC or its
nominee only if (i) DTC notifies the Issuer that it is unwilling or unable to
continue as a depository for such Series A global capital security and no
successor depository shall have been appointed, or if at any time DTC ceases to
be a clearing agency registered under the Exchange Act at a time when DTC is
required to be so registered to act as such depository, (ii) the Issuer in its
sole discretion determines that such global security shall be so exchangeable or
(iii) there shall have occurred and be continuing a Debenture Event of Default
with respect to the Series A Subordinated Debentures. Any global security that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
definitive certificates registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
from its Participants with respect to ownership of beneficial interests in such
Series A global capital security. In the event that Series A Capital Securities
are issued in definitive form, such Series A Capital Securities will be in
denominations of $25 and integral multiples thereof and may be transferred or
exchanged at the offices described below.
Payments on and any distributions of Series A Subordinated Debentures in
exchange for Series A Capital Securities represented by a Series A global
capital security will be made to DTC, as the depository for the Series A Capital
Securities. In the event Series A Capital Securities are issued in certificated
form, the Liquidation Amount and Distributions will be payable, the transfer of
the Series A Capital Securities will be registrable, Series A Subordinated
Debentures will be distributed in exchange for Series A Capital Securities
following a termination of the Issuer, and Series A Capital Securities will be
exchangeable for Series A Capital Securities of other denominations of a like
aggregate Liquidation Amount, at the principal corporate trust office of the
Property Trustee in Wilmington, Delaware, or at the offices of any paying agent
or transfer agent appointed by the Administrative Trustees, provided that
payment of any Distribution may be made at the option of the Administrative
Trustees by check mailed to the address of the persons entitled thereto or by
wire transfer. None of the Corporation, the Property Trustee, any Paying Agent,
or the securities registrar for the Series A Capital Securities will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Series A
global capital securities representing the Series A Capital Securities or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests. In addition, if the Series A Capital Securities are issued
in certificated form, the record dates for payment of Distributions will be the
15th day of the month in which the relevant Distribution payment is scheduled to
be paid. For a description of DTC and the terms of the depository arrangements
relating to payments, transfers, voting rights, redemptions and other notices
and other matters, see "Book-Entry Issuance."
The Corporation expects that DTC, upon receipt of any payment of
Liquidation Amount, Redemption Price, premium or Distributions in respect of the
Series A global capital security representing any of the Series A Capital
Securities, immediately will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interest in the aggregate
Liquidation Amount of the Series A global capital security for the Series A
Capital Securities as shown on the records of DTC. The Corporation also expects
that payments by Participants to owners of beneficial interests in the Series A
global capital security held through such Participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name." Such payments will be the responsibility of such Participants.
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PAYMENT AND PAYING AGENCY
Payments in respect of the Series A Capital Securities shall be made to
DTC, which shall credit the relevant accounts at the Depository on the
applicable Distribution Dates or, if the Series A Capital Securities are not
held by DTC, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the Register. The Paying
Agent shall initially be the Property Trustee and any co-paying agent chosen by
the Property Trustee and acceptable to the Administrative Trustees and the
Corporation. The Paying Agent shall be permitted to resign as Paying Agent upon
30 days' written notice to the Property Trustee and the Corporation. In the
event that the Property Trustee shall no longer be the Paying Agent, the
Administrative Trustees shall appoint a successor (which shall be a bank or
trust company acceptable to the Administrative Trustees and the Corporation) to
act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Series A Capital Securities.
Registration of transfers of Series A Capital Securities will be effected
without charge by or on behalf of the Issuer, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Issuer will not be required to register or cause to be
registered the transfer of Series A Capital Securities after Series A Capital
Securities have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Series A Trust Agreement and, after such Event of Default, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Property Trustee is under no obligation to exercise any of the powers vested in
it by the Series A Trust Agreement at the request of any holder of Series A
Capital Securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that might be incurred thereby. If no Event of Default
has occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the
Series A Trust Agreement or is unsure of the application of any provision of the
Series A Trust Agreement and the matter is not one on which holders of Series A
Capital Securities are entitled under the Series A Trust Agreement to vote, then
the Property Trustee shall take such action as is directed by the Corporation
and if not so directed, shall take such action as it deems advisable and in the
best interests of the holders of the Series A Capital Securities and will have
no liability except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Issuer in such a way that the Issuer will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as other than a grantor trust for United
States federal income tax purposes and so that the Series A Subordinated
Debentures will be treated as indebtedness of the Corporation for United States
federal income tax purposes. In this connection, the Corporation and the
Administrative Trustees are authorized to take any action, not inconsistent with
applicable law, the Certificate of Trust of the Issuer or the Series A Trust
Agreement, that the Corporation and the Administrative Trustees determine in
their discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of the
Series A Capital Securities.
The Series A Trust Agreement provides that holders of the Series A Capital
Securities have no preemptive or similar rights.
The Issuer may not borrow money or issue debt or mortgage or pledge any of
its assets.
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DESCRIPTION OF SERIES A SUBORDINATED DEBENTURES
This summary of certain terms and provisions of the Series A Subordinated
Debentures set forth below, which describes the material provisions thereof,
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the Indenture, and the Trust Indenture Act, to each of which
reference is hereby made. The Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. Wilmington Trust
Company will act as indenture trustee ("Debenture Trustee") under the Indenture.
The Indenture is qualified under the Trust Indenture Act. Whenever particular
defined terms of the Indenture (as supplemented or amended from time to time)
are referred to herein, such defined terms are incorporated herein by reference.
Concurrently with the issuance of the Series A Capital Securities, the
Issuer will invest the proceeds thereof, together with the consideration paid by
the Corporation for the Series A Common Securities, in the Series A Subordinated
Debentures issued by the Corporation. The Series A Subordinated Debentures will
bear interest at the annual rate of 9.0% of the principal amount thereof,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year (each, an "Interest Payment Date"), commencing September 30, 1998,
and at maturity to the person in whose name each Series A Subordinated Debenture
is registered at the close of business on the record date next preceding such
Interest Payment Date. The period beginning on and including the date of
original issuance of the Series A Subordinated Debentures and ending on but
excluding the first Interest Payment Date and each successive period beginning
on and including an Interest Payment Date and ending on but excluding the next
succeeding Interest Payment Date is herein called an "Interest Period." It is
anticipated that, until the liquidation, if any, of the Issuer, each Series A
Subordinated Debenture will be held by the Property Trustee in trust for the
benefit of the holders of the Series A Capital Securities. The amount of
interest payable for any Interest Period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any Interest Payment
Date would otherwise fall on a day that is not a Business Day, such Interest
Payment Date shall be postponed to the next day that is a Business Day (without
any interest or other payment in respect of any such delay) unless it would
thereby fall in the next calendar year, in which event the Interest Payment Date
shall be brought forward to the immediately preceding Business Day. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate of 9.0% per annum, compounded quarterly from the relevant Interest
Payment Date. The term "interest" as used herein shall include quarterly
interest payments and interest on quarterly interest payments not paid on the
applicable Interest Payment Date, as applicable. Notwithstanding anything to the
contrary set forth above, if the maturity date falls on a day that is not a
Business Day, the payment of principal and interest will be paid on the next
succeeding Business Day, with the same force and effect as if made on such
maturity date and no interest on such payments will accrue from and after the
maturity date.
The Series A Subordinated Debentures will be issued as a series of junior
subordinated deferrable interest debentures under the Indenture.
The Series A Subordinated Debentures will mature on July 31, 2028 (the
"Stated Maturity").
The Series A Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior Debt of the Corporation.
See "-- Subordination." Substantially all of the Corporation's existing
indebtedness constitutes Senior Debt. Because the Corporation is a holding
company, the right of the Corporation to participate in any distribution of
assets of any subsidiary, including TeleBank, upon such subsidiary's liquidation
or reorganization or otherwise, is subject to the prior claims of creditors of
that subsidiary, except to the extent that the Corporation may itself be
recognized as a creditor of that subsidiary. Accordingly, the Series A
Subordinated Debentures and the Series A Guarantee will be effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries, and holders of Series A Subordinated Debentures and beneficiaries
of the Series A Guarantee should look only to the assets of the Corporation for
payments on the Series A Subordinated Debentures or under the Series A
Guarantee. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of the Corporation, including Senior Debt, whether
under the Indenture, any other existing indenture or any other indenture that
the Corporation may enter into in the future or otherwise. See
"-- Subordination."
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OPTION TO DEFER INTEREST PAYMENTS
So long as no Debenture Event of Default has occurred and is continuing,
the Corporation has the right under the Indenture at any time or from time to
time during the term of the Series A Subordinated Debentures to defer payment of
interest on the Series A Subordinated Debentures for a period not exceeding 20
consecutive quarterly periods with respect to each Extension Period, provided
that no Extension Period may extend beyond the Stated Maturity of the Series A
Subordinated Debentures. At the end of such Extension Period, the Corporation
must pay all interest then accrued and unpaid on the Series A Subordinated
Debentures (together with interest on such unpaid interest at the rate of 9.0%
per annum, compounded quarterly from the relevant Interest Payment Date, to the
extent permitted by applicable law). During an Extension Period, interest will
accrue and holders of Series A Subordinated Debentures (or holders of Series A
Capital Securities while such series is outstanding) will be required to accrue
interest income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, the Corporation may not, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Corporation's capital stock,
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including other
series of Junior Subordinated Debentures) that rank pari passu with or junior in
interest to the Series A Subordinated Debentures or (iii) make any guarantee
payments with respect to any guarantee by the Corporation of the debt securities
of any subsidiary of the Corporation if such guarantee ranks pari passu with or
junior in interest to the Series A Subordinated Debentures (other than (a)
dividends or distributions in capital stock of the Corporation, (b) any
declaration of a dividend in connection with the implementation of a
shareholders' rights plan, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Series A Guarantee, (d) purchases of
Common Stock related to the issuance of Common Stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees, related to
the issuance of Common Stock or rights under a dividend reinvestment and stock
purchase plan, or related to the issuance of Common Stock (or securities
convertible into or exchangeable for Common Stock) as consideration in an
acquisition transaction that was entered into prior to the commencement of such
Extension Period and (e) guarantee payments with respect to the guarantee by the
Corporation of the Existing Capital Securities to the extent such payments are
made pari passu with payments with respect to the Series A Guarantee). Prior to
the termination of any such Extension Period, the Corporation may further defer
the payment of interest on the Series A Subordinated Debentures, provided that
no Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Series A Subordinated Debentures. Upon the
termination of any such Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of 9.0% per
annum, compounded quarterly, to the extent permitted by applicable law), the
Corporation may elect to begin a new Extension Period subject to the above
requirements. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Corporation must give the Property Trustee, the
Administrative Trustees and the Debenture Trustee notice of its election to
begin such Extension Period at least one Business Day prior to the earlier of
(i) the date Distributions on the Series A Capital Securities would have been
payable except for the election to begin such Extension Period, (ii) the date
the Administrative Trustees are required to give notice to the New York Stock
Exchange, the Nasdaq National Market or other applicable stock exchange or
automated quotation system on which the Series A Capital Securities may then be
listed or quoted or to holders of Series A Subordinated Debentures of the record
date for such Distributions or (iii) the date such Distributions are payable,
but in any event not less than one Business Day prior to such record date. The
Debenture Trustee shall give notice of the Corporation's election to begin a new
Extension Period to the holders of the Series A Subordinated Debentures. There
is no limitation on the number of times that the Corporation may elect to begin
an Extension Period.
TRUST COSTS AND EXPENSES
In the Indenture, the Corporation, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Series A Capital
Securities) and all costs and expenses of the Issuer (including costs
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and expenses relating to the organization of the Issuer, the fees and expenses
of the Issuer Trustees and the costs and expenses relating to the operation of
the Issuer) and to pay any and all taxes and all costs and expenses with respect
thereto (other than United States withholding taxes) to which the Issuer might
become subject.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on Series A Subordinated
Debentures (other than any Series A Subordinated Debentures represented by
global certificates) will be made at the office of the Debenture Trustee in
Wilmington, Delaware or at the office of such paying agent or paying agents as
the Corporation may designate from time to time, except that at the option of
the Corporation payment of any interest may be made (i) by check mailed to the
address of the person entitled thereto as such address shall appear in the
securities register, except in the case of global certificates or (ii) by
transfer to an account maintained by the person entitled thereto as specified in
the securities register, provided that proper transfer instructions have been
received by the Record Date. Payment of any interest on Series A Subordinated
Debentures will be made to the person in whose name such Series A Subordinated
Debentures are registered at the close of business on the Record Date for such
interest, except in the case of defaulted interest. The Corporation may at any
time designate additional paying agents or rescind the designation of any paying
agent; however, the Corporation will at all times be required to maintain a
paying agent in each place of payment for the Series A Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on any Series A Subordinated Debenture and remaining unclaimed for two
years after such principal or interest has become due and payable shall, at the
request of the Corporation, be repaid to the Corporation and the holder of such
Series A Subordinated Debenture shall thereafter look, as a general unsecured
creditor, only to the Corporation for payment thereof.
REDEMPTION
Subject to the Corporation's having received any regulatory approval then
required, the Series A Subordinated Debentures are redeemable prior to maturity
at the option of the Corporation (i) on or after July 31, 2003, in whole at any
time or in part from time to time or (ii) at any time, in certain circumstances
as described under "-- Conditional Right to Redeem upon a Tax Event or Capital
Treatment Event," in whole (but not in part) within 90 days following the
occurrence of a Tax Event or Capital Treatment Event. The proceeds of any such
redemption will be used by the Issuer to redeem the Series A Capital Securities.
The redemption price with respect to the Series A Subordinated Debentures
shall be equal to 100% of the principal amount of the Series A Subordinated
Debentures so redeemed plus accrued and unpaid interest thereon to the date of
redemption.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Series A Subordinated
Debentures to be redeemed at its registered address. Unless the Corporation
defaults in payment of the redemption price, on and after the redemption date,
interest will cease to accrue on such Series A Subordinated Debentures or
portions thereof called for redemption.
DISTRIBUTION OF SERIES A SUBORDINATED DEBENTURES
As described under "Description of Series A Capital
Securities -- Redemption or Exchange," under certain circumstances involving the
termination of the Issuer, Series A Subordinated Debentures may be distributed
to the holders of the Series A Capital Securities in exchange therefor upon
liquidation of the Issuer after satisfaction of liabilities to creditors of the
Issuer as provided by applicable law. If distributed to holders of Series A
Capital Securities, the Series A Subordinated Debentures initially will be
issued in the form of one or more global securities and DTC, or any successor
depository for the Series A Capital Securities, will act as depository for the
Series A Subordinated Debentures. It is anticipated that the depository
arrangements for the Series A Subordinated Debentures would be substantially
identical to those in effect for the Series A Capital Securities. See
"Description of Series A Capital Securities -- Registration of Series A Capital
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Securities" and "Book-Entry Issuance." If Series A Subordinated Debentures are
distributed to the holders of Series A Capital Securities in exchange therefor
upon the liquidation of the Issuer, the Corporation will use its best efforts to
list the Series A Subordinated Debentures on the Nasdaq National Market or such
other stock exchanges or automated quotation systems, if any, on which the
Series A Capital Securities are then listed or quoted. There can be no assurance
as to the market price of any Series A Subordinated Debentures that may be
distributed to the holders of Series A Capital Securities.
CONDITIONAL RIGHT TO REDEEM UPON A TAX EVENT OR CAPITAL TREATMENT EVENT
If a Tax Event or a Capital Treatment Event occurs and either (i) in the
opinion of counsel to the Corporation experienced in such matters, there would
in all cases, after effecting the termination of the Issuer and the distribution
of the Series A Subordinated Debentures to the holders of the Series A Capital
Securities in exchange therefor upon liquidation of the Issuer, be more than an
insubstantial risk that an Adverse Tax Consequence (as defined in "Risk
Factors -- Risk Factors Relating to the Series A Capital Securities --
Redemption Upon Tax Event or Capital Treatment Event") would continue to exist,
(ii) in the reasonable determination of the Corporation, after effecting the
termination of the Issuer and the distribution of the Series A Subordinated
Debentures to the holders of the Series A Capital Securities in exchange
therefor upon liquidation of the Issuer, be more than an insubstantial risk that
the Corporation or its successor would not be entitled to treat an amount equal
to the Liquidation Amount of the Series A Capital Securities as Tier 1 capital
or its then equivalent applied as if the Corporation or its successor were a
bank holding company under the Bank Holding Company Act of 1956, as amended or
(iii) the Series A Subordinated Debentures are not held by the Issuer, then the
Corporation shall have the right to redeem the Series A Subordinated Debentures,
in whole but not in part, at any time within 90 days following the occurrence of
a Tax Event or Capital Treatment Event at a redemption price equal to 100% of
the principal amount thereof plus accrued and unpaid interest thereon to the
date of redemption. See "Description of Series A Capital
Securities -- Redemption or Exchange" and "-- Liquidation Distribution upon
Termination."
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Series A Subordinated
Debentures to be redeemed at its registered address. Unless the Corporation
defaults in payment of the redemption price, on and after the redemption date,
interest will cease to accrue on such Series A Subordinated Debentures or
portions thereof called for redemption.
REGISTRATION OF SERIES A SUBORDINATED DEBENTURES
The Series A Subordinated Debentures will be registered in the name of the
Issuer. In the event that the Series A Subordinated Debentures are distributed
to holders of Series A Capital Securities, it is anticipated that the depository
and other arrangements for the Series A Subordinated Debentures will be
substantially identical to those in effect for the Series A Capital Securities,
as applicable. See "Description of Series A Capital Securities -- Registration
of Series A Capital Securities."
RESTRICTIONS ON CERTAIN PAYMENTS
The Corporation will also covenant, as to the Series A Subordinated
Debentures, that it will not, (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Corporation's capital stock, (ii) make any payment of principal,
interest or premium, if any, on or repay or repurchase or redeem any debt
securities of the Corporation (including other series of Junior Subordinated
Debentures) that rank pari passu with or junior in interest to the Series A
Subordinated Debentures or (iii) make any guarantee payments with respect to any
guarantee by the Corporation of the debt securities of any subsidiary of the
Corporation if such guarantee ranks pari passu with or junior in interest to the
Series A Subordinated Debentures (other than (a) dividends or distributions in
capital stock of the Corporation, (b) any declaration of a dividend in
connection with the implementation of a shareholders' rights plan, or the
redemption or repurchase of any such rights pursuant thereto, (c) payments under
the Series A Guarantee with respect to the Series A Capital Securities, (d)
purchases of Common Stock related to the issuance of Common Stock or rights
under any of the Corporation's benefit plans for its directors, officers or
employees, related to the issuance of Common Stock or rights under a dividend
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reinvestment and stock purchase plan, or related to the issuance of Common Stock
(or securities convertible into or exchangeable for Common Stock) as
consideration in an acquisition transaction that was entered into prior to the
commencement of any of the events described in (i), (ii), and (iii) below and
(e) guarantee payments with respect to the guarantee by the Corporation of the
Existing Capital Securities to the extent such payments are made pari passu with
payments with respect to the Series A Guarantee) if at such time (i) there shall
have occurred any event of which the Corporation has actual knowledge (a) that
with the giving of notice or the lapse of time, or both, would constitute a
Debenture Event of Default with respect to the Series A Subordinated Debentures
of such series and (b) in respect of which the Corporation shall not have taken
reasonable steps to cure, (ii) if such Series A Subordinated Debentures are held
by the Issuer of the Series A Capital Securities, the Corporation shall be in
default with respect to its payment of any obligations under the Guarantee
relating to such Series A Capital Securities or (iii) the Corporation shall have
given notice of its election of an Extension Period as provided in the Indenture
with respect to the Series A Subordinated Debentures of such series and shall
not have rescinded such notice, or such Extension Period, or any extension
thereof, shall be continuing.
MODIFICATION OF INDENTURE
From time to time the Corporation and the Debenture Trustee may, without
the consent of the holders of the Series A Subordinated Debentures, amend, waive
or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies (provided that any such
action does not materially adversely affect the interests of the holders of the
Series A Subordinated Debentures or the holders of the Series A Capital
Securities so long as they remain outstanding) and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Corporation and the Debenture Trustee, with
the consent of the holders of not less than a majority in principal amount of
the outstanding Series A Subordinated Debentures affected, to modify the
Indenture in a manner adversely affecting the rights of the holders of the
Series A Subordinated Debentures in any material respect; provided, that no such
modification may, without the consent of the holder of each outstanding Series A
Subordinated Debenture so affected, (i) change the Stated Maturity of the Series
A Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon or (ii) reduce the
percentage of principal amount of Series A Subordinated Debentures of any
series, the holders of which are required to consent to any such modification of
the Indenture, provided further that, in the case of Series A Subordinated
Debentures, so long as any Series A Capital Securities remain outstanding, (a)
no such modification may be made that adversely affects the holders of such
Series A Capital Securities in any material respect, and no termination of the
Indenture may occur, and no waiver of any event of default or compliance with
any covenant under the Indenture may be effective, without the prior consent of
the holders of at least a majority of the aggregate Liquidation Amount of all
outstanding Series A Capital Securities affected unless and until the principal
of the Series A Subordinated Debentures and all accrued and unpaid interest
thereon have been paid in full and certain other conditions have been satisfied,
and (b) where a consent under the Indenture would require the consent of each
holder of Series A Subordinated Debentures, no such consent shall be given by
the Property Trustee without the prior consent of each holder of Series A
Capital Securities.
In addition, the Corporation and the Debenture Trustee may execute, without
the consent of any holder of the Series A Subordinated Debentures, any
supplemental Indenture for the purpose of creating any new series of junior
subordinated debentures.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Series A Subordinated Debentures that has occurred
and is continuing constitutes a "Debenture Event of Default" with respect to the
Series A Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Series A
Subordinated Debentures when due (subject to the deferral of any interest
payment in the case of an Extension Period); or
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(ii) failure to pay any principal or premium, if any, on the Series A
Subordinated Debentures when due whether at maturity or upon redemption; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Indenture for 90 days after written notice
to the Corporation from the Debenture Trustee or the holders of at least
25% in aggregate outstanding principal amount of the Series A Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Corporation.
The holders of a majority in aggregate outstanding principal amount of
Series A Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Debenture
Trustee. The Debenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of Series A Subordinated Debentures may declare the
principal due and payable immediately upon a Debenture Event of Default; should
the Debenture Trustee or such holders of such Series A Subordinated Debentures
fail to make such declaration, the holders of at least 25% in aggregate
Liquidation Amount of the Series A Capital Securities shall have such right. The
holders of a majority in aggregate outstanding principal amount of Series A
Subordinated Debentures may annul such declaration, and if such holders of the
Series A Subordinated Debentures fail to annul such declaration and waive such
default, the holders of a majority in aggregate Liquidation Amount of the Series
A Capital Securities affected shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Series A Subordinated Debentures affected thereby may, on behalf of the holders
of all Series A Subordinated Debentures, waive any default, except a default in
the payment of principal or interest (unless such default has been cured and a
sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Series A Subordinated Debenture. Should the holders of Series A Subordinated
Debentures fail to waive such default, the holders of a majority in aggregate
Liquidation Amount of the Series A Capital Securities affected shall have such
right. The Corporation is required to file annually with the Debenture Trustee a
certificate as to whether or not the Corporation is in compliance with all the
conditions and covenants applicable to it under the Indenture.
In case a Debenture Event of Default shall occur and be continuing as to
the Series A Subordinated Debentures, the Property Trustee will have the right
to declare the principal of and the interest on the Series A Subordinated
Debentures, and any other amounts payable under the Indenture, to be forthwith
due and payable and to enforce its other rights as a creditor with respect to
the Series A Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF SERIES A CAPITAL SECURITIES
If a Debenture Event of Default with respect to the Series A Subordinated
Debentures has occurred and is continuing and such event is attributable to the
failure of the Corporation to pay interest or principal on such Series A
Subordinated Debentures on the date such interest or principal is due and
payable, a holder of Series A Capital Securities may institute a Direct Action
against the Corporation for enforcement of payment to such holder of the
principal of or interest on the Series A Subordinated Debentures having a
principal amount equal to the aggregate Liquidation Amount of the Series A
Capital Securities of such holder. The Corporation may not amend the Indenture
to remove the foregoing right to bring a Direct Action without the prior written
consent of the holders of all of the Series A Capital Securities outstanding. If
the right to bring a Direct Action is removed, the Issuer may become subject to
the reporting obligations under the Exchange Act. The Corporation shall have the
right under the Indenture to set-off any payment made to such holder of Series A
Capital Securities by the Corporation in connection with a Direct Action.
The holders of the Series A Capital Securities will not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Series A Subordinated Debentures unless there
shall have been an Event of Default under the Series A Trust Agreement. See
"Description of Series A Capital Securities -- Events of Default; Notice."
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CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Corporation shall not consolidate with or
merge into any other Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, and no Person shall
consolidate with or merge into the Corporation or convey, transfer or lease its
properties and assets substantially as an entirety to the Corporation, unless
(i) in case the Corporation consolidates with or merges into another Person or
conveys or transfers its properties and assets substantially as an entirety to
any Person, the successor Person is organized under the laws of the United
States or any state or the District of Columbia, and such successor Person
expressly assumes the Corporation's obligations on the Series A Subordinated
Debentures issued under the Indenture; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; (iii) such transaction is not prohibited under the
Series A Trust Agreement and Series A Guarantee and does not give rise to any
breach or violation of the Series A Trust Agreement or Series A Guarantee, and
(iv) certain other conditions as prescribed by the Indenture are met.
The general provisions of the Indenture do not afford holders of the Series
A Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving the Corporation that may adversely affect holders of the
Series A Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Series A
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and the Corporation deposits or causes
to be deposited with the Debenture Trustee funds, in trust, for the purpose and
in an amount in the currency or currencies in which the Series A Subordinated
Debentures are payable sufficient to pay and discharge the entire indebtedness
on the Series A Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation, for the principal and interest to the date
of the deposit or to the Stated Maturity, as the case may be, then the Indenture
will cease to be of further effect (except as to the Corporation's obligations
to pay all other sums due pursuant to the Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Corporation
will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Corporation has covenanted and agreed that the Series
A Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior Debt to the extent provided in the Indenture.
Upon any payment or distribution of assets of the Corporation upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Debt will first
be entitled to receive payment in full of principal of (and premium, if any) and
interest, if any, on such Senior Debt before the holders of Series A
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of (and premium, if any) or interest, if any, on the
Series A Subordinated Debentures; provided, however, that holders of Senior Debt
shall not be entitled to receive payment of any such amounts to the extent that
such holders would be required by the subordination provisions of such Senior
Debt to pay such amounts over to the obligees on trade accounts payable or other
liabilities arising in the ordinary course of the Corporation's business.
In the event of the acceleration of the maturity of Series A Subordinated
Debentures, the holders of all Senior Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration thereof) before the
holders of Series A Subordinated Debentures will be entitled to receive or
retain any payment in respect of the principal of (or premium, if any) or
interest, if any, on the Series A Subordinated Debentures; provided, however,
that holders
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of Senior Debt shall not be entitled to receive payment of any such amounts to
the extent that such holders would be required by the subordination provisions
of such Senior Debt to pay such amounts over to the obligees on trade accounts
payable or other liabilities arising in the ordinary course of the Corporation's
business.
No payments on account of principal or interest in respect of the Series A
Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior Debt or an event of
default with respect to any Senior Debt resulting in the acceleration of the
maturity thereof, or if any judicial proceeding shall be pending with respect to
any such default.
"Debt" means with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; (vi) every
obligation of such Person for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; and (vii) every obligation of the type referred to in clauses (i)
through (vi) of another Person and all dividends of another Person the payment
of which, in either case, such Person has guaranteed or is responsible or liable
for, directly or indirectly, as obligor or otherwise.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Corporation whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of the Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Series A Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Series A Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include
(i) any Debt of the Corporation which when incurred and without respect to any
election under Section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Corporation, (ii) any Debt of the
Corporation to any of its subsidiaries, (iii) Debt to any employee of the
Corporation, (iv) Debt which by its terms is subordinated to trade accounts
payable or accrued liabilities arising in the ordinary course of business to the
extent that payments made to the holders of such Debt by the holders of the
Series A Subordinated Debentures as a result of the subordination provisions of
the Indenture would be greater than such payments otherwise would have been as a
result of any obligation of such holders of such Debt to pay amounts over to the
obligees on such trade accounts payable or accrued liabilities arising in the
ordinary course of business as a result of subordination provisions to which
such Debt is subject, and (v) any other debt securities issued pursuant to the
Indenture.
The Indenture places no limitation on the amount of Senior Debt that may be
incurred by the Corporation. The Corporation expects from time to time to incur
additional indebtedness and other obligations constituting Senior Debt.
GOVERNING LAW
The Indenture is, and the Series A Subordinated Debentures will be,
governed by and construed in accordance with the laws of the State of New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Series A Subordinated Debentures, unless offered
reasonable indemnity by such holder against the
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costs, expenses and liabilities which might be incurred thereby. The Debenture
Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
BOOK-ENTRY ISSUANCE
DTC will act as securities depository for all of the Series A Capital
Securities. The Series A Capital Securities will be issued only as fully
registered securities registered in the name of Cede & Co. (DTC's nominee). One
or more fully registered global certificates will be issued for the Series A
Capital Securities of the Issuer, representing in the aggregate the total number
of the Series A Capital Securities, and will be deposited with the Property
Trustee as custodian for DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its Participants deposit with DTC. DTC also facilitates
the settlement among Participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. "Direct Participants" include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its Direct Participants and by
the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Commission.
Purchases of Series A Capital Securities within the DTC system must be made
by or through Direct Participants, which will receive a credit for the Series A
Capital Securities on DTC's records. The ownership interest of each actual
purchaser of each Series A Capital Security ("Beneficial Owner") is in turn to
be recorded on the Direct and Indirect Participants' records, including
Euroclear and Cedel. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmations providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners purchased Series A Capital Securities. Transfers of
ownership interests in the Series A Capital Securities are to be accomplished by
entries made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Series A Capital Securities, except in the event that use of the
book-entry system for the Series A Capital Securities is discontinued.
Transfers between Participants will be effected in accordance with DTC's
procedures and will be settled in same-day funds. Transfers between participants
in Euroclear and Cedel will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Cross-market transfers between Participants, on the one hand, and Euroclear
participants or Cedel participants, on the other hand, will be effected in DTC
in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case may
be, by its respective depository; however, such cross-market transactions will
require delivery of instructions to Euroclear or Cedel, as the case may be, by
the counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depository to take action
to effect final settlement on its behalf by delivering or receiving interests in
the Series A Capital Securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Series A Capital Security from a
Participant in DTC will be credited, and any such crediting will
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be reported to the relevant Euroclear participant or Cedel participant, during
the securities settlement processing day (which must be a business day for
Euroclear and Cedel, as the case may be) immediately following the DTC
settlement date. Cash received in Euroclear or Cedel as a result of sales of
interests in a Series A Capital Security by or through a Euroclear or Cedel
participant to a Participant in DTC will be received with value on the DTC
settlement date but will be available in the relevant Euroclear or Cedel cash
account only as of the business day for Euroclear or Cedel following the DTC
settlement date.
DTC has no knowledge of the actual Beneficial Owners of the Series A
Capital Securities; DTC's records reflect only the identity of the Direct
Participants to whose accounts such Series A Capital Securities are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to Cede & Co. as the registered holder of
the Series A Capital Securities. If less than all of the Series A Capital
Securities are being redeemed, DTC's current practice is to determine by lot the
amount of the interest of each Direct Participant to be redeemed.
Although voting with respect to the Series A Capital Securities is limited
to the holders of record of the Series A Capital Securities, in those instances
in which a vote is required, neither DTC nor Cede & Co. will itself consent or
vote with respect to the Series A Capital Securities. Under its usual
procedures, DTC would mail an omnibus proxy (the "Omnibus Proxy") to the
relevant Trustee as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts such Series A Capital Securities are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Distribution payments on the Series A Capital Securities, to the extent
funds legally available therefor have been received by the relevant Trustee,
will be made by such Trustee to DTC. DTC's practice is to credit Direct
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participant and not of DTC, the
relevant Trustee, the Issuer thereof or the Corporation, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of Distributions to DTC are the responsibility of the relevant Trustee
(to the extent such Trustee has actually received such amounts for
distribution), disbursement of such payments to Direct Participants is the
responsibility of DTC, and disbursement of such payments to the Beneficial
Owners is the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to any of the Series A Capital Securities at any time by giving
reasonable notice to the relevant Trustee and the Corporation. In the event that
a successor securities depository is not obtained, definitive Series A Capital
Security certificates representing such Series A Capital Securities are required
to be printed and delivered. The Corporation, at its option, may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). After a Debenture Event of Default, the holders of a
majority in Liquidation Amount of Series A Capital Securities may determine to
discontinue the system of book-entry transfers through DTC. In any such event,
definitive certificates for such Series A Capital Securities will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Issuer and the Corporation believe to be
accurate, but the Issuer and the Corporation assume no responsibility for the
accuracy thereof. Neither the Issuer nor the Corporation has any responsibility
for the performance by DTC or its Participants of their respective obligations
as described herein or under the rules and procedures governing their respective
operations.
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DESCRIPTION OF SERIES A GUARANTEE
The Series A Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Issuer of the Series A Capital Securities
for the benefit of the holders from time to time of Series A Capital Securities.
Wilmington Trust Company will act as Guarantee Trustee under the Series A
Guarantee for the purposes of compliance with the Trust Indenture Act and the
Series A Guarantee will be qualified as an indenture under the Trust Indenture
Act. This summary of certain provisions of the Guarantee, which summarizes the
material terms thereof, does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the Series A
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act, to each of which reference is hereby made. The form of the Series
A Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. Reference in this summary to Series A Capital
Securities means the Series A Capital Securities to which the Series A Guarantee
relates. The Guarantee Trustee will hold the Series A Guarantee for the benefit
of the holders of the Series A Securities.
GENERAL
The Series A Guarantee guarantees to the holders of the Series A Capital
Securities the following payments (the "Guarantee Payments") to the extent not
paid by the Issuer: (i) any accumulated and unpaid Distributions required to be
paid on the Series A Capital Securities, to the extent that the Issuer has funds
on hand available therefor at such time, (ii) the redemption price with respect
to any Series A Capital Securities called for redemption, to the extent that the
Issuer has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding up or liquidation of the Issuer
(unless the Series A Subordinated Debentures are distributed to holders of the
Series A Capital Securities), the lesser of (a) the aggregate of the Liquidation
Amount and all accumulated and unpaid Distributions to the date of payment, to
the extent that the Issuer has funds on hand available therefor at such time,
and (b) the amount of assets of the Issuer remaining available for distribution
to holders of the Series A Capital Securities after payment of creditors of the
Issuer as required by applicable law.
The holders of not less than a majority in aggregate Liquidation Amount of
the Series A Capital Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Series A Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Series A Guarantee.
Any holder of the Series A Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Series A
Guarantee without first instituting a legal proceeding against the Issuer, the
Guarantee Trustee or any other person or entity. If the Corporation were to
default on its obligation to pay amounts payable under the Series A Subordinated
Debentures, the Issuer would lack funds for the payment of Distributions or
amounts payable on redemption of the Series A Capital Securities or otherwise,
and, in such event, holders of the Series A Capital Securities would not be able
to rely upon the Guarantee for payment of such amounts. Instead, if a Debenture
Event of Default shall have occurred and be continuing and such event is
attributable to the failure of the Corporation to pay interest on or principal
of the Series A Subordinated Debentures on the applicable payment date, then a
holder of Series A Capital Securities may institute a Direct Action against the
Corporation pursuant to the terms of the Indenture for enforcement of payment to
such holder of the principal of or interest on such Series A Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Series A Capital Securities of such holder. In connection with such
Direct Action, the Corporation will have a right of set-off under the Indenture
to the extent of any payment made by the Corporation to such holder of Series A
Capital Securities in the Direct Action. Except as described herein, holders of
Series A Capital Securities will not be able to exercise directly any other
remedy available to the holders of the Series A Subordinated Debentures or
assert directly any other rights in respect of the Series A Subordinated
Debentures. The Series A Trust Agreement provides that each holder of Series A
Securities by acceptance thereof agrees to the provisions of the Series A
Guarantee and the Indenture.
If the Corporation does not make interest payments on the Series A
Subordinated Debentures held by the Issuer, the Issuer will not be able to pay
Distributions on the Series A Capital Securities and will not have funds legally
available therefor. The Series A Guarantee will rank subordinate and junior in
right of payment
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to all Senior Debt of the Corporation. See "-- Status of the Guarantee." Because
the Corporation is a holding company, the right of the Corporation to
participate in any distribution of assets of any subsidiary, upon such
subsidiary's liquidation or reorganization or otherwise, is subject to the prior
claims of creditors of that subsidiary, except to the extent the Corporation may
itself be recognized as a creditor of that subsidiary. Accordingly, the
Corporation's obligations under the Series A Guarantee will be effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries, and claimants should look only to the assets of the Corporation
for payments thereunder. The Series A Guarantee does not limit the incurrence or
issuance of other secured or unsecured debt of the Corporation, including Senior
Debt, whether under the Indenture, any other existing indenture or any other
indenture that the Corporation may enter into in the future or otherwise.
The Corporation has, through the Series A Guarantee, the Series A Trust
Agreement, the Series A Subordinated Debentures and the Indenture, taken
together, fully, irrevocably and unconditionally guaranteed all of the Issuer's
obligations under the Series A Capital Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the Issuer's obligations under the Series A Capital Securities. See
"Relationship Among the Series A Capital Securities, the Series A Subordinated
Debentures and the Series A Guarantee."
STATUS OF THE GUARANTEE
The Series A Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Debt of the Corporation in the same manner as the Series A Subordinated
Debentures.
The Series A Guarantee will rank pari passu with all other guarantees
issued by the Corporation, including the guarantee issued in connection with the
Existing Capital Securities. The Series A Guarantee will constitute a guarantee
of payment and not of collection (i.e. the guaranteed party may institute a
legal proceeding directly against the guarantor to enforce its rights under the
Series A Guarantee without first instituting a legal proceeding against any
other person or entity). The Series A Guarantee will be held for the benefit of
the holders of the Series A Capital Securities. The Series A Guarantee will not
be discharged except by payment of the guarantee payments in full to the extent
not paid by the Issuer or upon distribution to the holders of the Series A
Capital Securities of the Series A Subordinated Debentures. The Series A
Guarantee places no limitation on the amount of additional Senior Debt that may
be incurred by the Corporation. The Corporation expects from time to time to
incur additional indebtedness constituting Senior Debt.
AMENDMENTS AND ASSIGNMENTS
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Series A Capital Securities (in which case no vote
will be required), the Series A Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of such outstanding Series A Capital Securities. The manner of obtaining
any such approval will be as set forth under "Description of Series A Capital
Securities -- Voting Rights; Amendment of Series A Trust Agreement." All
guarantees and agreements contained in the Series A Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Corporation
and shall inure to the benefit of the holders of the Series A Capital Securities
then outstanding.
EVENTS OF DEFAULT
An event of default under the Series A Guarantee will occur upon the
failure of the Corporation to perform any of its payment or other obligations
thereunder; provided, however, that except with respect to a payment default,
the Corporation shall have received notice of default and shall not have cured
such default within 60 days after receipt of such notice. The holders of not
less than a majority in aggregate Liquidation Amount of the Series A Capital
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee in respect of the
Series A Guarantee or to direct the exercise of any trust or power conferred
upon the Guarantee Trustee under the Series A Guarantee.
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Any holder of Series A Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Series A
Guarantee without first instituting a legal proceeding against the Issuer, the
Guarantee Trustee or any other person or entity.
The Corporation, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of
a default by the Corporation in performance of the Series A Guarantee,
undertakes to perform only such duties as are specifically set forth in the
Series A Guarantee and, after default with respect to the Series A Guarantee,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Guarantee Trustee is under no obligation to exercise any of the
powers vested in it by the Series A Guarantee at the request of any holder of
Series A Capital Securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Series A Guarantee will terminate and be of no further force and effect
upon full payment of the Redemption Price of the Series A Capital Securities,
upon full payment of the amounts payable upon liquidation of the Issuer or upon
distribution of Series A Subordinated Debentures to the holders of the Series A
Capital Securities in exchange therefor. The Series A Guarantee will continue to
be effective or will be reinstated, as the case may be, if at any time any
holder of the Series A Capital Securities must restore payment of any sums paid
under such Series A Capital Securities or the Series A Guarantee.
GOVERNING LAW
The Series A Guarantee will be governed by and construed in accordance with
the laws of the State of New York.
RELATIONSHIP AMONG THE SERIES A CAPITAL SECURITIES,
THE SERIES A SUBORDINATED DEBENTURES
AND THE SERIES A GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Series A Capital
Securities (to the extent the Issuer has funds legally available for the payment
of such Distributions and other amounts) are irrevocably guaranteed by the
Corporation as and to the extent set forth under "Description of Series A
Guarantee." Taken together, the Corporation's obligations under the Series A
Subordinated Debentures, the Indenture, the Series A Trust Agreement and the
Series A Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Series A Capital Securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Issuer's obligations under the Series A Capital Securities. If and to the extent
that the Corporation does not make payments on the Series A Subordinated
Debentures, the Issuer will not pay Distributions or other amounts due on the
Series A Capital Securities. The Series A Guarantee does not cover payment of
Distributions when the Issuer does not have sufficient funds to pay such
Distributions. In such event, the remedy of a holder of Series A Capital
Securities is to institute a legal proceeding directly against the Corporation
pursuant to the terms of the Indenture for enforcement of payment of amounts
equal to such Distributions to such holder. The obligation of the
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Corporation under the Series A Guarantee is subordinate and junior in right of
payment to all Senior Debt of the Corporation.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Series A Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Series A Capital Securities,
primarily because (i) the aggregate principal amount of the Series A
Subordinated Debentures will be equal to the sum of the aggregate stated
Liquidation Amount of the Series A Capital Securities and Series A Common
Securities; (ii) the interest rate and interest and other payment dates on
Series A Subordinated Debentures will match the Distribution rate and
Distribution and other payment dates for the Series A Capital Securities; (iii)
the Corporation shall pay for any and all costs, expenses and liabilities of the
Issuer except the Issuer's obligations to holders of the Series A Capital
Securities under the Series A Capital Securities; and (iv) the Series A Trust
Agreement further provides that the Issuer will not engage in any activity that
is not consistent with the limited purposes of such Issuer.
Notwithstanding anything to the contrary in the Indenture, the Corporation
has the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Corporation has theretofore made, or is concurrently
on the date of such payment making, a payment under the Series A Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF SERIES A CAPITAL SECURITIES
A holder of any Series A Capital Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Series A
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, the Issuer or any other person or entity.
A default or event of default under any Senior Debt of the Corporation
would not constitute a default or Event of Default. However, in the event of
payment defaults under, or acceleration of, Senior Debt of the Corporation, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Series A Subordinated Debentures until such Senior Debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on Series A Subordinated Debentures would
constitute a Debenture Event of Default.
LIMITED PURPOSE OF ISSUER
The Series A Capital Securities evidence a beneficial interest in the
Issuer, and the Issuer exists for the sole purpose of issuing the Series A
Capital Securities and Series A Common Securities and investing the proceeds
thereof in Series A Subordinated Debentures. A principal difference between the
rights of a holder of Series A Capital Securities and a holder of Series A
Subordinated Debentures is that a holder of Series A Subordinated Debentures is
entitled to receive from the Corporation the principal amount of and interest
accrued on Series A Subordinated Debentures held, while a holder of Series A
Capital Securities is entitled to receive Distributions from such Issuer (or
from the Corporation under the Series A Guarantee) if and to the extent such
Issuer has funds legally available for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding up or liquidation of
the Issuer involving the liquidation of the Series A Subordinated Debentures,
after satisfaction of liabilities to creditors of the Issuer as required by
applicable law, the holders of the Series A Capital Securities will be entitled
to receive, out of the assets held by such Issuer, the Liquidation Distribution
in cash. See "Description of the Series A Capital Securities -- Liquidation
Distribution Upon Termination." Upon any voluntary or involuntary liquidation or
bankruptcy of the Corporation, the Property Trustee, as holder of the Series A
Subordinated Debentures, would be a subordinated creditor of the Corporation,
subordinated in right of payment to all Senior Debt as set forth in the
Indenture, but entitled to receive payment in full of principal and interest
before any stockholders of the Corporation receive payments or distributions.
Because the Corporation is the guarantor under the Series A Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Issuer (other than
the
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Issuer's obligations to the holders of the Series A Capital Securities), the
positions of a holder of Series A Capital Securities and a holder of the Series
A Subordinated Debentures relative to other creditors and to stockholders of the
Corporation in the event of liquidation or bankruptcy of the Corporation are
expected to be substantially the same.
DESCRIPTION OF COMMON STOCK OFFERING
Simultaneously with the Offering, the Corporation is offering for sale to
the public, pursuant to the Common Stock Offering, 4,100,000 shares of Common
Stock (and an additional 615,000 shares of Common Stock if the over-allotment
option is exercised in full by the underwriters of the Common Stock Offering).
The Corporation does not intend to complete the Offering unless the Common Stock
Offering is consummated.
Upon completion of the Common Stock Offering, the Corporation will have
11,114,448 shares of Common Stock issued and outstanding.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
In the opinion of Shaw Pittman Potts & Trowbridge, special tax counsel to
the Corporation and the Issuer ("Tax Counsel"), the following summary accurately
describes the material United States federal income tax consequences that may be
relevant to the purchase, ownership and disposition of Series A Capital
Securities. Unless otherwise stated, this summary deals only with Series A
Capital Securities held as capital assets by United States Persons (defined
below) who purchase the Series A Capital Securities upon original issuance at
their original offering price. As used herein, a "United States Person" means a
person that is (i) an individual citizen or resident of the United States, (ii)
a corporation organized under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, (iv) any trust if a
court within the United States is able to exercise primary supervision over the
administration of such trust and one or more United States Persons have the
authority to control all substantial decisions of such trust or (v) a
partnership to the extent the interests therein are owned by any of the persons
described in clauses (i), (ii), (iii) or (iv) above. The tax treatment of a
holder may vary depending on his, her or its particular situation. This summary
does not address all the tax consequences that may be relevant to a particular
holder or to holders who may be subject to special tax treatment, such as banks,
real estate investment trusts, regulated investment companies, insurance
companies, dealers in securities or currencies, tax-exempt investors, or foreign
investors. In addition, this summary does not include any description of any
alternative minimum tax consequences or the tax laws of any state, local or
foreign government that may be applicable to a holder of Series A Capital
Securities. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), the Treasury regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Tax Counsel are not binding on the Internal
Revenue Service ("IRS") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the IRS with
respect to the transactions described herein. Accordingly, there can be no
assurance that the IRS will not challenge the opinions expressed herein or that
a court would not sustain such a challenge. Nevertheless, Tax Counsel has
advised that it is of the view that, if challenged, the opinions expressed
herein would be sustained by a court with jurisdiction in a properly presented
case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE SERIES A
CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER UNITED STATES FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS. FOR A
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DISCUSSION OF THE POSSIBLE REDEMPTION OF THE SERIES A CAPITAL SECURITIES UPON
THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE "DESCRIPTION OF THE SERIES A CAPITAL
SECURITIES -- REDEMPTION OR EXCHANGE."
CLASSIFICATION OF THE ISSUER
In connection with the issuance of the Series A Capital Securities, Tax
Counsel is of the opinion that, under current law and assuming compliance with
the terms of the Series A Trust Agreement, and based on certain facts and
assumptions contained in such opinion, the Issuer will be classified as a
grantor trust and not as an association taxable as a corporation for United
States federal income tax purposes. As a result, each beneficial owner of Series
A Capital Securities (a "Securityholder") will be treated as owning an undivided
beneficial interest in the Series A Subordinated Debentures. Accordingly, each
Securityholder will be required to include in its gross income its pro rata
share of the interest income or original issue discount that is paid or accrued
on the Series A Subordinated Debentures. See "-- Interest Income and Original
Issue Discount."
CLASSIFICATION OF THE SERIES A SUBORDINATED DEBENTURES
The Corporation, the Issuer and the holders of the Series A Capital
Securities (by acceptance of a beneficial interest in a Series A Capital
Security) will agree to treat the Series A Subordinated Debentures as
indebtedness for all United States tax purposes. In connection with the issuance
of the Series A Subordinated Debentures, Tax Counsel is of the opinion that,
under current law, and based on certain representations, facts and assumptions
set forth in such opinion, the Series A Subordinated Debentures will be
classified as indebtedness for United States federal income tax purposes. No
assurance can be given, however, that the IRS will not challenge such position
or, if challenged, that such a challenge will not be successful. The remainder
of this discussion assumes that the Series A Subordinated Debentures will be
treated as indebtedness of the Corporation for United States federal income tax
purposes.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Under applicable Treasury regulations, the Series A Subordinated Debentures
will not be considered to have been issued with "original issue discount"
("OID") within the meaning of Section 1273(a) of the Code. Accordingly, except
as set forth below, stated interest on the Series A Subordinated Debentures
generally will be included in income by a Securityholder at the time such
interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
If, however, the Corporation exercises its right to defer payments of
interest on the Series A Subordinated Debentures, the Series A Subordinated
Debentures will become OID instruments at such time and all Securityholders will
be required to accrue the stated interest on the Series A Subordinated
Debentures on a daily basis during the Extension Period, even though the
Corporation will not pay such interest until the end of the Extension Period,
and even though some Securityholders may use the cash method of tax accounting.
Moreover, thereafter the Series A Subordinated Debentures will be taxed as OID
instruments for as long as they remain outstanding. Thus, even after the end of
the Extension Period, all Securityholders would be required to continue to
include the stated interest on the Series A Subordinated Debentures in income on
a daily economic accrual basis, regardless of their method of tax accounting and
in advance of receipt of the cash attributable to such interest income. Under
the OID economic accrual rules, a Securityholder would accrue an amount of
interest income each year that approximates the stated interest payments called
for under the terms of the Series A Subordinated Debentures, and actual cash
payments of interest on the Series A Subordinated Debentures would not be
reported separately as taxable income. Any amount of OID included in a
Securityholder's gross income (whether or not during an Extension Period) will
increase such Securityholder's tax basis in its Series A Capital Securities, and
the amount of Distributions received by a Securityholder with respect to such
Series A Capital Securities will reduce the tax basis of such Series A Capital
Securities.
The Treasury regulations described above have not yet been addressed in any
rulings or other interpretations by the IRS, and it is possible that the IRS
could take a contrary position. If the IRS were to
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assert successfully that the stated interest on the Series A Subordinated
Debentures was OID regardless of whether the Corporation exercises its right to
defer payments of interest on such debentures, all Securityholders would be
required to include such stated interest in income on a daily economic accrual
basis as described above.
Corporate Securityholders will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Series A
Capital Securities.
DISTRIBUTION OF SERIES A SUBORDINATED DEBENTURES TO HOLDERS OF SERIES A CAPITAL
SECURITIES
Under current law, a distribution by the Issuer of the Series A
Subordinated Debentures as described under the caption "Description of the
Series A Capital Securities -- Redemption or Exchange" will be non-taxable and
will result in the Securityholder receiving directly its pro rata share of the
Series A Subordinated Debentures previously held indirectly through the Issuer,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Series A Capital Securities
before such distribution. If, however, the liquidation of the Issuer were to
occur because the Issuer is subject to United States federal income tax with
respect to income accrued or received on the Series A Subordinated Debentures as
a result of a Tax Event or otherwise, the distribution of Series A Subordinated
Debentures to Securityholders by the Issuer could be a taxable event to the
Issuer and each Securityholder, and a Securityholder would recognize gain or
loss as if the Securityholder had exchanged its Series A Capital Securities for
the Series A Subordinated Debentures it received upon the liquidation of the
Issuer. A Securityholder will accrue interest in respect of Series A
Subordinated Debentures received from the Issuer in the manner described above
under "-- Interest Income and Original Issue Discount."
SALES OR REDEMPTION OF SERIES A CAPITAL SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Series A
Capital Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized by the Securityholder on the sale or
redemption of the Series A Capital Securities (except to the extent that such
amount realized is characterized as a payment in respect of accrued but unpaid
interest on such Securityholder's allocable share of the Series A Subordinated
Debentures that such Securityholder had not included in income previously) and
the Securityholder's adjusted tax basis in the Series A Capital Securities sold
or redeemed. Such gain or loss generally will be taxable as long-term capital
gain or loss if the Securityholder held the Series A Capital Securities that it
sold or redeemed for more than one year. Capital gains of individuals derived
with respect to capital assets held for more than one year are eligible for
reduced rates of taxation depending upon the holding period of such capital
assets. Securityholders should consult their own tax advisors regarding capital
gains rates applicable to them. Subject to certain limited exceptions, capital
losses cannot be applied to offset ordinary income for federal income tax
purposes.
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any
Securityholder that is not a United States Person. As discussed above, the
Series A Capital Securities will be treated as evidence of an indirect
beneficial ownership interest in the Series A Subordinated Debentures. See
"-- Classification of the Issuer." Thus, under present United States federal
income tax law, and subject to the discussion below concerning backup
withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Issuer (or the Corporation) or
any paying agent of principal or interest (which for purposes of this
discussion includes any OID) on the Series A Capital Securities (or the
Series A Subordinated Debentures) to a Non-United States Holder, provided
(i) that such Non-United States Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Corporation entitled to vote within the meaning of section 871(h)(3)
of the Code and the regulations thereunder, (ii) such Non-United States
Holder is not a controlled foreign corporation that is related to the
Corporation through stock ownership, (iii) such Non-United States Holder is
not a bank whose
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receipt of interest on the Series A Subordinated Debentures is described in
section 881(c)(3)(A) of the Code and (iv) such Non-United States Holder
satisfies the statement requirement (described generally below) set forth
in section 871(h) and section 881(c) of the Code and the regulations
thereunder; and
(b) no withholding of United States federal income tax will be
required with respect to any gain realized by a Non-United States Holder
upon the sale or other disposition of the Series A Capital Securities (or
the Series A Subordinated Debentures).
To satisfy the requirement referred to in (a)(iv) above, the Non-United
States Holder, or a financial institution holding the Series A Capital
Securities on behalf of such owner, must provide, in accordance with specified
procedures, to the Issuer or its paying agent, a statement to the effect that
the Non-United States Holder is not a United States Person. Currently, these
requirements will be met if (1) the Non-United States Holder provides his name
and address, and certifies, under penalties of perjury, that it is not a United
States Person (which certification may be made on an IRS Form W-8 (or successor
form)) or (2) a financial institution holding the Series A Capital Securities on
behalf of the Non-United States Holder certifies, under penalties of perjury,
that such statement has been received by it and furnishes the Issuer or the
paying agent with a copy thereof. Under recently finalized Treasury regulations
(the "Final Regulations"), the statement requirement referred to in (a)(iv)
above may also be satisfied with other documentary evidence for interest paid
after December 31, 1999 with respect to an offshore account or through certain
foreign intermediaries.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of interest made
to such Non-United States Holder will be subject to a 30% United States federal
withholding tax unless the Beneficial Owner provides the Issuer or its paying
agent, as the case may be, with a properly executed (1) IRS Form 1001 (or a
successor form) claiming an exemption from, or a reduction of, such withholding
tax under the benefit of a tax treaty or (2) IRS Form 4224 (or a successor form)
stating that interest paid on the Series A Capital Securities (or the Series A
Subordinated Debentures) is not subject to such withholding tax because it is
effectively connected with the Beneficial Owner's conduct of a trade or business
in the United States. Under the Final Regulations, Non-United States Holders
generally will be required to provide an IRS Form W-8 in lieu of an IRS Form
1001 or an IRS Form 4224, although alternative documentation may be applicable
in certain situations and certain forms and statements in effect on certain
dates during the transition period described in Notice 98-16, I.R.B. 1998-15
(March 27, 1998), may expire and become ineffective, thus requiring the filing
of new replacement certificates or statements.
If a Non-United States Holder is engaged in a trade or business in the
United States and interest on the Series A Capital Securities (or the Series A
Subordinated Debentures) is effectively connected with the conduct of such trade
or business, the Non-United States Holder, although exempt from the withholding
tax discussed above, will be subject to United States federal income tax on such
interest on a net income basis in the same manner as if it were a United States
Person. In addition, if such Non-United States Holder is a foreign corporation,
it may be subject to a branch profits tax equal to 30% of its effectively
connected earnings and profits for the taxable year, subject to adjustments. For
this purpose, such interest income would be included in such foreign
corporation's earnings and profits. Under the Final Regulations, Non-United
States Holders will generally be required to provide IRS Form W-8 in lieu of IRS
Form 1001 and IRS Form 4224, although alternative documentation may be
applicable in certain situations and certain forms and statements in effect on
certain dates during the transition period described in Notice 98-16 may expire
and become ineffective, thus requiring the filing of new replacement
certificates or statements.
Any gain realized upon the sale or other disposition of the Series A
Capital Securities (or the Series A Subordinated Debentures) generally will not
be subject to United States federal income tax unless (i) such gain is
effectively connected with a United States trade or business of the Non-United
States Holder, (ii) in the case of a Non-United States Holder who is an
individual, such individual is present in the United States for 183 days or more
in the taxable year of such sale, exchange or retirement, and certain other
conditions are met, or (iii) in the case of any gain representing accrued
interest on the Series A Subordinated Debentures, the "portfolio interest"
requirements described above are not satisfied.
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HOLDERS SHOULD CONSULT NOTICE 98-16 AND THEIR OWN TAX ADVISORS ABOUT THE
NEW RULES CONCERNING WITHHOLDING ON NON-UNITED STATES HOLDERS AND THE RELATED
TRANSITION RULES.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of interest, including OID, accrued on the Series A Capital
Securities held of record by United States Persons (other than corporations and
other exempt Securityholders), if any, will be reported to the IRS. "Backup"
withholding at a rate of 31% will apply to payments of interest to non-exempt
United States Persons unless the Securityholder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
Regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
Payment of the proceeds from the disposition of Series A Capital Securities
to or through the United States office of a broker is subject to information
reporting and backup withholding unless the holder or beneficial owner
establishes an exemption from information reporting and backup withholding.
Non-United States Holders are generally exempt from the information and
backup withholding rules but may be required to comply with certain
certification and identification requirements to prove their exemption.
Any amounts withheld from a Securityholder under the backup withholding
rules will be allowed as a refund or a credit against such Securityholder's
United States federal income tax liability, provided the required information is
furnished to the IRS.
It is anticipated that income on the Series A Capital Securities will be
reported to holders on Form 1099 and mailed to holders of the Series A Capital
Securities by January 31 following each calendar year.
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Series A Capital Securities. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(33) of ERISA) and foreign plans (as described in Section 4(b)(4) of ERISA) are
not subject to the requirements of ERISA or Section 4975 of the Code; however,
governmental plans may be subject to similar provisions under applicable state
laws.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Issuer would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the Issuer
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Issuer would not be deemed to be "plan assets" of investing Plans
if, at all times, less than 25% of the value of each class of equity
78
<PAGE> 79
interests in the Issuer were held by Plans, other employee benefit plans not
subject to ERISA or Section 4975 of the Code (such as governmental, church and
foreign plans), and entities holding assets deemed to be "plan assets" of any
Plan (collectively, "Benefit Plan Investors"), or if the Series A Capital
Securities were "publicly-offered securities" for purposes of the Plan Assets
Regulation. No assurance can be given that the Series A Capital Securities held
by Benefit Plan Investors will be less than 25% of the total value of such
Series A Capital Securities at the completion of the Offering or thereafter, and
no monitoring or other measures will be taken with respect to the satisfaction
of the conditions to this exception. In addition, no assurance can be given that
the Series A Capital Securities would be considered to be "publicly-offered
securities" under the Plan Assets Regulation. All of the Series A Common
Securities will be purchased and initially held by the Corporation.
Certain transactions involving the Issuer could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Series A Capital Securities were acquired
with "plan assets" of such Plan and the assets of the Issuer were deemed to be
"plan assets" of Plans investing in the Issuer. For example, if the Corporation
were a Party in Interest with respect to a Plan (either directly or by reason of
its ownership of TeleBank or other subsidiaries), extensions of credit between
the Corporation and the Issuer (as represented by the Series A Subordinated
Debentures and the Series A Guarantee) would likely be prohibited by Section
406(a)(1)(B) of ERISA and Section 4975(c)(1)(B) of the Code, unless exemptive
relief were available under an applicable administrative exemption (see below).
In addition, if the Corporation were considered to be a fiduciary with respect
to the Issuer as a result of certain powers it holds (such as the powers to
remove and replace the Property Trustee and the Administrative Trustees), it is
possible that the optional redemption or acceleration of the Series A
Subordinated Debentures would be considered to be prohibited transactions under
Section 406(b) of ERISA and Section 4975(c)(1)(E) of the Code. IN AN ATTEMPT TO
AVOID SUCH PROHIBITED TRANSACTIONS, EACH INVESTING PLAN, BY PURCHASING SERIES A
CAPITAL SECURITIES, WILL BE DEEMED TO HAVE DIRECTED THE ISSUER TO INVEST IN THE
SERIES A SUBORDINATED DEBENTURES AND TO HAVE APPOINTED THE PROPERTY TRUSTEE.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect prohibited
transactions that may arise from the purchase or holding of the Series A Capital
Securities. Those class exemptions are PTCE 96-23 (for certain transactions
determined by in-house asset managers), PTCE 95-60 (for certain transactions
involving insurance company general accounts), PTCE 91-38 (for certain
transactions involving bank collective investment funds), PTCE 90-1 (for certain
transactions involving insurance company separate accounts), and PTCE 84-14 (for
certain transactions determined by independent qualified asset managers).
Because the Series A Capital Securities may be deemed to be equity
interests in the Issuer for purposes of applying ERISA and Section 4975 of the
Code, the Series A Capital Securities may not be purchased or held by any Plan,
any entity whose underlying assets include "plan assets" by reason of any Plan's
investment in the entity (a "Plan Asset Entity") or any person investing "plan
assets" of any Plan, unless such purchaser or holder is exempt from any
prohibited transactions because of the relief provided under PTCE 96-23, 95-60,
91-38, 90-1 or 84-14 or another applicable exemption. Any purchaser or holder of
the Series A Capital Securities or any interest therein will be deemed to have
represented by its purchase and holding thereof that it either (a) is not a Plan
or a Plan Asset Entity and is not purchasing such securities on behalf of or
with "plan assets" of any Plan or (b) is exempt from any prohibited transactions
because of the relief provided under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption with respect to such purchase or holding. If a
purchaser or holder of the Series A Capital Securities that is a Plan or a Plan
Asset Entity elects to rely on an exemption other than PTCE 96-23, 95-60, 91-38,
90-1 or 84-14, the Corporation and the Issuer may require a satisfactory opinion
of counsel or other evidence with respect to the availability of such exemption
for such purchase and holding.
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES THAT MAY BE IMPOSED
UPON PERSONS INVOLVED IN NON-EXEMPT PROHIBITED TRANSACTIONS, IT IS PARTICULARLY
IMPORTANT THAT FIDUCIARIES OR OTHER PERSONS CONSIDERING PURCHASING THE SERIES A
CAPITAL SECURITIES ON BEHALF OF OR WITH "PLAN ASSETS" OF ANY PLAN CONSULT WITH
THEIR COUNSEL REGARDING THE POTENTIAL CONSEQUENCES IF THE ASSETS OF THE ISSUER
WERE DEEMED TO BE "PLAN ASSETS" AND THE AVAILABILITY OF EXEMPTIVE RELIEF UNDER
PTCE 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANY OTHER APPLICABLE EXEMPTION.
79
<PAGE> 80
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated July 27, 1998 (the "Underwriting Agreement"), the Corporation and the
Issuer have agreed that the Issuer will sell to each of the Underwriters named
below, and each of such Underwriters has severally agreed to purchase from the
Issuer, the respective number of Series A Capital Securities set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER OF
SERIES A CAPITAL SECURITIES
---------------------------
<S> <C>
CIBC Oppenheimer Corp....................................... 605,000
Legg Mason Wood Walker, Incorporated........................ 385,000
BancAmerica Robertson Stephens.............................. 110,000
---------
Total.................................................. 1,100,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Series A Capital
Securities if any are taken.
The Underwriters propose initially to offer the Series A Capital Securities
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain securities dealers at
such price less a concession not in excess of $0.15 per Series A Capital
Security. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $0.10 per Series A Capital Security to certain brokers and
dealers. After the Series A Capital Securities are released for sale to the
public, the initial public offering price and other selling terms may from time
to time be varied by the Underwriters. No Underwriter will execute any
transaction in a discretionary account without prior approval of the customer.
Immediately prior to the Offering, CIBC World Markets, an affiliate of CIBC
Oppenheimer, will beneficially own, through an indirect subsidiary, 589,840
shares of Common Stock, 1997 Warrants to acquire 92,750 shares of Common Stock
and Contingent Warrants to acquire 96,250 shares of Common Stock.
In view of the fact that the proceeds from the sale of the Series A Capital
Securities will be used to purchase the Series A Subordinated Debentures issued
by the Corporation, the Underwriting Agreement provides that the Corporation
will pay as Underwriters' compensation for the Underwriters' arranging the
investment in such Series A Subordinated Debentures of such proceeds an amount
of $.9375 per Series A Capital Security for the accounts of the several
Underwriters.
The Corporation and the Issuer have agreed that, for a period of 180 days
from the date of this Prospectus, they will not offer, sell, contract to sell or
otherwise dispose of, any other beneficial interests in the assets of the
Issuer, or any preferred securities or any other securities of the Issuer or the
Corporation which are substantially similar to the Series A Capital Securities,
including any guarantee of such securities, or any securities convertible into
or exchangeable for or representing the right to receive preferred securities or
any such substantially similar securities of either the Issuer or the
Corporation, without the prior written consent of CIBC Oppenheimer Corp. as
representative for the Underwriters, except for the Series A Capital Securities
offered in connection with this Offering.
Prior to the Offering, there has been no public market for the Series A
Capital Securities. Although the Underwriters have indicated to the Corporation
and the Issuer that they intend to make a market in the Series A Capital
Securities, they are not obligated to do so and may discontinue any such
market-making activities at any time without notice. No assurance can be given
as to the liquidity of the trading markets for the Series A Capital Securities.
The Corporation and the Issuer have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
It is expected that delivery of the Series A Capital Securities will be
made against payment therefor on or about July 31, 1998, as agreed upon by the
Corporation, the Issuer and the Underwriters in accordance with Rule 15c6-1
under the Exchange Act.
80
<PAGE> 81
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment services to the
Corporation and its affiliates, for which such Underwriters or their affiliates
have received or will receive customary fees and commissions.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Series A Capital
Securities. Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M under the Exchange Act, pursuant to
which such persons may bid for or purchase Series A Capital Securities for the
purpose of stabilizing the market price for Series A Capital Securities. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Series A Capital Securities in connection with the
Offering than they are committed to purchase from the Issuer, and in such case
may purchase Series A Capital Securities in the open market following completion
of the Offering to cover all or a portion of the Series A Capital Securities. In
addition, CIBC Oppenheimer Corp., on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters, whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
Series A Capital Securities that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Series A Capital Securities at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued at
any time.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Series A
Capital Securities, the enforceability of the Series A Trust Agreement and the
formation of the Issuer will be passed upon by Morris, James, Hitchens &
Williams, special Delaware counsel to the Corporation and the Issuer. The
validity of the Series A Guarantee and the Series A Subordinated Debentures will
be passed upon for the Corporation by Shaw Pittman Potts & Trowbridge and for
the Underwriters by Simpson Thacher & Bartlett. Shaw Pittman Potts & Trowbridge
and Simpson Thacher & Bartlett will rely on the opinion of Morris, James,
Hitchens & Williams as to certain matters of Delaware law. Shaw Pittman Potts &
Trowbridge will rely on the opinion of Simpson Thacher & Bartlett as to matters
of New York law. Certain matters relating to United States federal income tax
considerations described in this Prospectus will be passed upon for the
Corporation by Shaw Pittman Potts & Trowbridge.
EXPERTS
The Consolidated Financial Statements of the Corporation as of December 31,
1996 and 1997 and for each of the three years in the period ending December 31,
1997 included in this Prospectus and Registration Statement to the extent
indicated in their report have been audited by Arthur Andersen LLP, independent
certified public accountants, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
81
<PAGE> 82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Condition -- As of
December 31, 1996 and 1997................................ F-3
Consolidated Statements of Operations -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the Years Ended December 31, 1995, 1996 and
1997...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of TeleBanc Financial Corporation (a Delaware Corporation) and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years ended December 31, 1997. 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 provide 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Vienna, VA
June 22, 1998
F-2
<PAGE> 84
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 3,259 $ 92,156
Trading securities.......................................... -- 21,110
Investment securities available-for-sale.................... 78,826 91,237
Mortgage-backed securities available-for-sale............... 184,743 319,203
Loans receivable held for sale.............................. 166,064 149,086
Loans receivable, net....................................... 185,757 391,618
Other assets................................................ 29,316 35,942
-------- ----------
Total assets........................................... $647,965 $1,100,352
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.................................................... $390,486 $ 522,221
Advances from the Federal Home Loan Bank of Atlanta......... 144,800 200,000
Securities sold under agreements to repurchase.............. 57,581 279,909
Subordinated debt, net...................................... 16,586 29,614
Other liabilities........................................... 13,854 13,212
-------- ----------
Total liabilities...................................... 623,307 1,044,956
Corporation--Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation................ -- 9,572
Commitments and contingencies............................... -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ -- 9,634
Series B, 4,050 issued and outstanding................. -- 2,070
Series C, 7,000 issued and outstanding................. -- 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
4,099,000 and 4,458,322 issued and outstanding at December
31, 1996 and 1997 40 44
Additional paid-in capital.................................. 14,637 16,205
Retained earnings........................................... 7,885 11,556
Unrealized gain on securities available-for-sale, net of
tax....................................................... 2,096 2,738
-------- ----------
Total stockholders' equity............................. 24,658 45,824
-------- ----------
Total liabilities and stockholders' equity............. $647,965 $1,100,352
======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 85
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans.................................................. $17,726 $23,089 $34,729
Mortgage-backed and related securities................. 20,205 17,955 17,646
Investment securities.................................. 2,347 4,690 5,702
Trading securities..................................... -- -- 1,124
Other.................................................. 233 66 100
------- ------- -------
Total interest income............................. 40,511 45,800 59,301
Interest expense:
Deposits............................................... 17,033 21,357 25,958
Advances from the Federal Home Loan Bank of Atlanta.... 5,985 6,689 9,885
Repurchase agreements.................................. 6,839 4,569 6,941
Subordinated debt...................................... 2,089 2,200 3,279
------- ------- -------
Total interest expense............................ 31,946 34,815 46,063
------- ------- -------
Net interest income............................... 8,565 10,985 13,238
Provision for loan losses.............................. 1,722 919 921
------- ------- -------
Net interest income after provision for loan
losses.......................................... 6,843 10,066 12,317
------- ------- -------
Non-interest income:
Gain on sale of available-for-sale securities.......... 3,412 935 982
Gain on sale of loans.................................. 232 874 1,148
Gain on trading securities............................. -- -- 1,204
Fees, service charges, and other....................... 133 947 759
------- ------- -------
Total non-interest income......................... 3,777 2,756 4,093
Non-interest expenses:
General and administrative expenses:
Compensation and employee benefits................ 3,030 3,690 4,909
SAIF assessment................................... -- 1,671 --
Other............................................. 2,531 3,014 4,133
------- ------- -------
Total general and administrative expenses......... 5,561 8,375 9,042
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure.......................................... 430 238 278
Amortization of goodwill and other intangibles......... 249 462 822
------- ------- -------
Total other non-interest expenses...................... 679 700 1,100
------- ------- -------
Total non-interest expenses............................ 6,240 9,075 10,142
------- ------- -------
Income before income tax expense and minority
interest........................................ 4,380 3,747 6,268
Income tax expense................................ 1,660 1,195 1,657
Minority interest in subsidiary................... -- -- 394
------- ------- -------
Net income........................................ 2,720 2,552 4,217
Preferred stock dividends......................... -- -- 546
------- ------- -------
Net income available to common stockholders....... $ 2,720 $ 2,552 $ 3,671
======= ======= =======
Earnings per share:
Basic.................................................. $ 0.66 $ 0.62 $ 0.84
Diluted................................................ $ 0.66 $ 0.58 $ 0.57
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 86
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
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, 1994..... $ -- $40 $14,637 $ 2,613 $ (262) $17,028
Net income........................ -- -- -- 2,720 -- 2,720
Unrealized gain on
available-for-sale securities,
net of tax effect............... -- -- -- -- 1,817 1,817
------- --- ------- ------- ------ -------
Balances at December 31, 1995..... -- 40 14,637 5,333 1,555 21,565
Net income........................ -- -- -- 2,552 -- 2,552
Unrealized gain on
available-for-sale securities,
net of tax effect............... -- -- -- -- 541 541
------- --- ------- ------- ------ -------
Balances at December 31, 1996..... -- 40 14,637 7,885 2,096 24,658
Net income........................ -- -- -- 4,217 -- 4,217
Common stock issued............... -- 4 1,568 -- -- 1,572
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................. -- -- -- (546) -- (546)
Unrealized gain on
available-for-sale securities,
net of tax effect............... -- -- -- -- 642 642
------- --- ------- ------- ------ -------
Balances at December 31, 1997..... $15,281 $44 $16,205 $11,556 $2,738 $45,824
======= === ======= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 87
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Minority interest....................................... -- -- 394
Equity in losses of subsidiaries........................ -- 274 1,129
Depreciation, amortization and discount accretion....... (2,153) (1,516) (1,038)
Provision for loan losses............................... 1,722 919 921
Provision for losses on foreclosed real estate.......... 213 78 19
Other gains and losses, net............................. (153) (1,011) (1,624)
Deferred income tax provision........................... (559) (224) (445)
Proceeds from sales of loans held-for-sale.............. -- 27,865 60,145
Purchases of loans held-for-sale........................ -- (91,943) (72,804)
Net realized gains on available-for-sale securities,
loans held-for-sale and trading....................... (3,412) (935) (2,613)
Purchases of trading assets............................. -- -- (100,630)
Proceeds from sale of trading assets.................... -- -- 80,990
Increase in accrued interest receivable................. (4,954) (2,220) (1,492)
Increase in accrued expenses and other liabilities...... 2,693 3,730 345
Increase in other assets................................ (80) (2,433) (3,373)
Interest credited to deposits........................... 17,033 21,361 25,958
--------- --------- ---------
Net cash (used in) provided by operating activities......... 13,070 (43,503) (9,901)
--------- --------- ---------
Cash flows from investing activities:
Net increase in loans................................... (98,439) (90,717) (269,036)
Equity investments in subsidiaries...................... -- (2,359) (1,736)
Purchases of available-for-sale securities.............. (122,785) (356,882) (395,675)
Proceeds from sale of available-for-sale securities..... 71,084 220,293 144,718
Proceeds from maturities of and principal payments on
available-for-sale securities......................... 39,646 201,547 197,036
Net sales (purchases) of premises and equipment......... (537) (842) 110
Proceeds from sale of foreclosed real estate............ -- 1,156 1,563
--------- --------- ---------
Net cash used in investing activities....................... (111,031) (27,804) (323,020)
--------- --------- ---------
Cash flows from financing activities:
Net increase in non-interest bearing demand, savings and
NOW deposit accounts.................................. 77,056 62,625 105,777
Increase in advances from FHLB.......................... 59,000 273,500 322,000
Payments on advances from FHLB.......................... (49,500) (234,200) (266,800)
Net increase (decrease) in securities sold under
agreements to repurchase.............................. 14,292 (36,324) 222,328
Net increase in other borrowed funds.................... -- -- 13,028
Issuance of trust preferred stock, net.................. -- -- 9,572
Increase in common stock and additional
paid-in-capital....................................... -- -- 16,853
Interest paid to minority interest in subsidiary........ -- -- (394)
Dividends paid on common and preferred stock............ -- -- (546)
--------- --------- ---------
Net cash provided by financing activities................... 100,848 65,601 421,818
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 2,887 (5,706) 88,897
Cash and cash equivalents at beginning of period............ 6,078 8,965 3,259
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 8,965 $ 3,259 $ 92,156
========= ========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 29,852 $ 32,660 $ 45,440
Income taxes paid........................................... 950 972 2,473
Gross unrealized gain (loss) on marketable securities
available-for-sale........................................ 2,926 795 873
Tax effect of gain (loss) on available-for-sale
securities................................................ 1,109 254 231
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
TeleBanc Financial Corporation ("TeleBanc" or the "Corporation") is a
savings and loan holding company organized under the laws of Delaware in 1994.
The primary business of the Corporation is the activities conducted by TeleBank
(the "Bank"), formerly known as Metropolitan Bank for Savings, F.S.B., TeleBanc
Capital Markets, Inc. ("TCM"), formerly known as Arbor Capital Partners, Inc.
("Arbor"), and TeleBanc Capital Trust I ("TCT"). The Bank is a federally
chartered savings bank, which provides deposit accounts insured by the Federal
Deposit Insurance Corporation ("FDIC") to customers nationwide. TCM is a
registered investment advisor, funds manager, and broker-dealer. TCT is a
business trust formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by the
Corporation.
The Bank, through its wholly-owned subsidiary TeleBanc Servicing
Corporation ("TSC"), funded 50% of the capital commitment for two new entities,
AGT Mortgage Services, LLC ("AGT") and AGT PRA, LLC ("AGT PRA"). AGT services
performing loans and administers workouts for troubled or defaulted loans for a
fee. Management ceased operation of AGT on July 31, 1997. 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. The net equity investment in AGT PRA at December 31, 1997 is $2.1
million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TeleBank, TCM, TCT, and TSC, a wholly owned subsidiary of the Bank. All
significant intercompany transactions and balances are eliminated in
consolidation. The investment in AGT PRA is accounted for under the equity
method.
STOCK DIVIDEND
On June 22, 1998, the Corporation's shareholders approved the distribution
of a 100% stock dividend on its outstanding Common Stock. The effect of the
stock dividend has been retroactively applied in the Consolidated Financial
Statements for all periods presented.
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, trading
securities, and the valuation of real estate acquired in connection with
foreclosures and mortgage servicing rights.
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.
F-7
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Corporation generally classifies its debt and marketable equity
securities in one of three categories: held-to-maturity, trading, or
available-for-sale. In December 1995, the Corporation reclassified the existing
held-to-maturity investment and mortgage-backed securities portfolios as
available-for-sale.
Trading securities are bought and held principally for the purpose of
selling 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 Corporation had $21.1 million classified as
trading securities at December 31, 1997. No securities were classified as
trading securities at December 31, 1996. For the period ending December 31,
1997, the Corporation recognized $564,000 in realized gains from the sale of
trading assets and $640,000 in unrealized appreciation of trading assets. 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 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. 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 Corporation and intended for sale in the
secondary market are carried at lower of cost or estimated market value in the
aggregate. The market value of these mortgage loans is determined by obtaining
market quotes for loans with similar characteristics.
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 Corporation'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 ASSETS
Nonperforming assets consist of loans for which interest is no longer being
accrued, loans which have been restructured in order to increase the 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
F-8
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on nonaccrual loans is recognized as interest income or applied to principal
when it is doubtful that full payment will be collected.
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
recognized as part of the loss or gain upon sale and not amortized or accreted,
respectively.
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 income 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
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 Corporation in the management
of its interest-rate risk. The Corporation 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.
In order to be eligible for hedge accounting treatment, high correlation must be
probable at the inception of the hedge and must be maintained throughout the
hedge period. Once high correlation ceases, any gain or loss on the hedge, up to
the time high correlation ceased, should be recognized to the extent the results
of the hedging instrument were not offset by the effects of interest rate
changes on the hedged item. Upon the sale or disposition of the hedged item, the
hedging instrument should be marked-to-market with changes recorded in the
income statement.
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.
F-9
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets. The Bank services the loans underlying
these servicing rights. The cost of the loan servicing rights is amortized in
proportion to, and over the period of, the estimated net servicing income. For
the period ending December 31, 1997, amortization expense of loan servicing
rights was $547,000. 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, 1997,
the amortized cost and fair value of the loan servicing rights were $3.3 million
and $3.4 million, respectively. No valuation allowance was recognized at
December 31, 1997.
Effective January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS 125"), as amended by
Statement of Financial Accounting Standards No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125--An Amendment of FASB
Statement No. 125 ("SFAS 127"). The implementation of SFAS 125 did not have a
material impact on the company's final position.
COMMITMENTS AND CONTINGENT LIABILITIES
In managing the Corporation's interest-rate risk, the Corporation 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 Corporation and can effectively alter the interest sensitivity of segments
of the balance sheet for specified periods of time.
The Corporation 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.
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1996 financial statements have
been made to conform to the 1997 presentation.
3. CAPITAL REQUIREMENTS
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
F-10
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets. Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject. As of December 31, 1996
and 1997, 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:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ -------- ------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Core Capital (to adjusted tangible
assets)........................ $31,726 5.08% >$24,999 >4.0% >$31,248 >5.0%
Tangible Capital (to tangible
assets)........................ $31,711 5.07% >$ 9,374 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $31,726 9.69% N/A N/A >$19,654 >6.0%
Total Capital (to risk weighted
assets)........................ $34,104 10.41% >$26,205 >8.0% >$32,756 >10.0%
As of December 31, 1997:
Core Capital (to adjusted tangible
assets)........................ $52,617 5.06% >$41,606 >4.0% >$52,008 >5.0%
Tangible Capital (to tangible
assets)........................ $52,608 5.06% >$15,602 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)........................ $52,617 11.25% N/A N/A >$28,057 >6.0%
Total Capital (to risk weighted
assets)........................ $55,701 11.91% >$37,409 >8.0% >$46,761 >10.0%
</TABLE>
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.
F-11
<PAGE> 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT SECURITIES
The cost basis and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1997, by contractual maturity, are
shown below:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<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
======= ====== ==== =======
1997:
Due within one year:
Agency notes........................... $ 539 $ -- $ -- $ 539
Other investments...................... 323 1 -- 324
Due within one to five years:
Municipal bonds........................ 565 12 -- 577
Other investments...................... 25,038 16 -- 25,054
Certificate of deposit................. 499 -- -- 499
Due within five to ten years:
Corporate debt......................... 7,433 242 -- 7,675
Municipal bonds........................ 3,562 130 -- 3,692
Other investments...................... 175 -- -- 175
Due after ten years:
Agency notes........................... 21,608 398 (40) 21,966
Equities............................... 15,038 436 (50) 15,424
Corporate debt......................... 11,103 797 -- 11,900
Municipal bonds........................ 3,200 212 -- 3,412
------- ------ ---- -------
$89,083 $2,244 $(90) $91,237
======= ====== ==== =======
</TABLE>
The proceeds from sale and 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. The proceeds from sale and 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 and gross realized gains and losses on investment securities
available-for-sale that were sold in 1997 were $25.9 million, $423,000, and
$34,000, respectively.
F-12
<PAGE> 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Corporation 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
Corporation'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 1997, by contractual maturity, are shown as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======== ====== ======= ========
1997:
Due within one year:
Agencies............................... $ 939 $ -- $ -- $ 939
Due within one to five years:
Agencies............................... 627 2 (6) 623
Private issuer......................... 2,643 -- (22) 2,621
Due within five to ten years:
Private issuer......................... 5,982 39 -- 6,021
Due after ten years:
Agencies............................... 23,907 124 (27) 24,004
Private Issuer......................... 143,889 2,971 (1,443) 145,417
Collateralized mortgage obligations.... 139,663 536 (621) 139,578
-------- ------ ------- --------
$317,650 $3,672 $(2,119) $319,203
======== ====== ======= ========
</TABLE>
The Corporation pledged $61.4 million and $104.1 million of private issuer
mortgage-backed securities as collateral for repurchase agreements at December
31, 1996 and 1997, respectively. The proceeds from sale and 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.
The proceeds from sale and 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. The proceeds from sale and gross realized gains and losses
on mortgage-backed securities available-for-sale that were sold in 1997 were
$112.4 million, $845,000 and $253,000, respectively.
F-13
<PAGE> 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one-to-four family residences.............. $359,563 $547,734
Secured by commercial real estate..................... 4,017 3,009
Secured by mixed-use property......................... 1,180 856
Secured by five or more dwelling units................ 1,516 1,447
Secured by land....................................... 781 378
-------- --------
367,057 553,424
Less:
Net deferred loan origination fees.................... (42) (34)
Unamortized discounts, net............................ (13,750) (9,938)
-------- --------
Total first mortgage loans................................. 353,265 543,452
Other loans:
Home equity and second mortgage loans................. 1,208 541
Other................................................. 305 305
-------- --------
354,778 544,298
Less: allowance for loan losses............................ (2,957) (3,594)
-------- --------
Net loans receivable............................. $351,821 $540,704
======== ========
</TABLE>
The mortgage loans are located primarily in California, New York, and
Virginia according to the following percentages 15.1%, 13.3%, and 7.4%,
respectively. As of December 31, 1997, the mortgage loan portfolio consisted of
variable rate loans of $335.2 million, or 62%, and fixed rate loans of $205.5
million, or 38%. The weighted average maturity of mortgage loans secured by one
to four family residences is 266 months as of December 31, 1997.
The unpaid principal balance of mortgage loans owned by the Corporation but
serviced by other companies was $203.9 million and $301.5 million at December
31, 1996 and 1997, respectively.
Loans past due 90 days or more, and therefore on non-accrual status at
December 31, 1996 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
First mortgage loans:
Secured by one-to-four family residences............... $ 8,979 $10,802
Secured by commercial real estate...................... 1,217 635
Home equity and second mortgage loans....................... 54 --
------- -------
Total............................................. $10,250 $11,437
======= =======
</TABLE>
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all nonperforming loans had been performing during
1995, 1996, and 1997, the Bank would have recorded $365,000, $789,000 and
$739,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1997.
F-14
<PAGE> 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the allowance for loan losses for the years ended December 31,
1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of the year.................... $ 989 $2,311 $2,957
Provision for loan losses......................... 1,722 919 921
Charge-offs, net.................................. (400) (273) (284)
------ ------ ------
Balance, end of year.............................. $2,311 $2,957 $3,594
====== ====== ======
</TABLE>
According to Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan, ("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 Corporation 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 1997:
<TABLE>
<CAPTION>
AMOUNT OF
TOTAL RECORDED
RECORDED INVESTMENT
INVESTMENT IN AMOUNT OF NET OF
IMPAIRED SPECIFIC SPECIFIC
DESCRIPTION OF LOANS LOANS RESERVES RESERVES
-------------------- ------------- --------- ----------
(IN THOUSANDS)
<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 -- 184
------- ------ ------
Total...................................... $ 435 $ 8 $ 427
======= ====== ======
1997:
Impaired loans:
Commercial real estate.......................... $ 635 $ 248 $ 387
One-to-four family.............................. 10,802 1,760 9,042
------- ------ ------
Total...................................... $11,437 $2,008 $9,429
======= ====== ======
Restructured loans:
Commercial real estate.......................... $ 248 $ -- $ 248
One-to-four family.............................. 177 -- 177
------- ------ ------
Total...................................... $ 425 $ -- $ 425
======= ====== ======
</TABLE>
The average recorded investment in impaired loans, with identified losses,
as of December 31, 1995, 1996 and 1997 was $2.0 million, $2.2 million and $2.3
million, respectively. The related amount of interest income the Corporation
would recognize as additional interest income for the years ended December 31,
1995, 1996
F-15
<PAGE> 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1997 was $365,000, $789,000, and $739,000, respectively. The Corporation'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 Corporation's method for non-accrual loans,
interest received on impaired loans is recognized as interest income or applied
to principal when it is doubtful that full payment will be collected.
7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1996 and December
31, 1997 was $1.2 million and $681,000, respectively. Activity in the allowance
for real estate losses for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 92 $ 213 $ 65
Provision for real estate losses............................ 256 77 19
Charge-offs................................................. (135) (225) (84)
----- ----- ----
Balance, end of year........................................ $ 213 $ 65 $ --
===== ===== ====
</TABLE>
8. LOANS SERVICED FOR OTHERS
Mortgage loans serviced by the Bank for others are not included in the
accompanying consolidated statements of financial condition because the related
loans are not owned by the Corporation or any of its subsidiaries. The unpaid
principal balances of these loans at December 31, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation................. $ 2,843 $ 2,140
Federal National Mortgage Association.................. 11,548 28,417
------- -------
Subtotal............................................... $14,391 $30,557
Mortgage loan portfolio serviced for:
Other investors........................................ 31,465 27,125
------- -------
Total............................................. $45,856 $57,682
======= =======
</TABLE>
Custodial escrow balances held in connection with the foregoing loans
serviced were approximately $84,000 and $120,000 at December 31, 1996 and 1997,
respectively.
Included in other assets is purchased mortgage servicing rights of $2.8
million and $3.3 million as of December 31, 1996 and 1997, respectively.
9. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
phone, the mail, and walk-in 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 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
F-16
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deposit liabilities assumed, plus the amount of the deposit liabilities (less
certain renewals) multiplied by 0.25 percent. Deposits at December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
DECEMBER 31, AMOUNT PERCENT
------------- ------------------- -------------
1996 1997 1996 1997 1996 1997
----- ----- -------- -------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts, non
interest-bearing.................... --% --% $ 309 $ 761 --% 0.2%
Money market.......................... 5.10 5.26 109,835 122,185 28.1 23.4
Passbook savings...................... 3.00 3.00 1,758 665 0.5 0.1
Certificates of deposit............... 6.28 6.24 278,584 398,610 71.4 76.3
---- ---- -------- -------- ----- -----
Total....................... $390,486 $522,221 100.0% 100.0%
======== ======== ===== =====
</TABLE>
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT 1996 1997
------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
0- 1.99%................................................... $ 5,235 $ 5
2- 3.99%................................................... 148 --
4- 5.99%................................................... 210,481 231,048
6- 7.99%................................................... 170,056 289,046
8- 9.99%................................................... 1,709 696
10-11.99%................................................... 790 --
-------- --------
Total............................................. $388,419 $520,795
======== ========
</TABLE>
At December 31, 1997, scheduled maturities of certificates of deposit and
money market accounts are as follows:
<TABLE>
<CAPTION>
LESS THAN 1-2 2-3 3-4 4-5 5+
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0- 1.99%............ $ 5 $ -- $ -- $ -- $ -- $ -- $ 5
2- 3.99%............ -- -- -- -- -- -- --
4- 5.99%............ 209,547 17,708 2,217 1,126 362 88 231,048
6- 7.99%............ 37,687 124,905 97,079 13,550 9,849 5,976 289,046
8- 9.99%............ 578 -- 82 -- 36 -- 696
10-11.99%............ -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------ --------
$247,817 $142,613 $99,378 $14,676 $10,247 $6,064 $520,795
======== ======== ======= ======= ======= ====== ========
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $45.1 million and $47.5 million at December 31,
1996 and 1997, respectively.
F-17
<PAGE> 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense on deposits for the years ended December 31, 1995, 1996,
and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Money market............................................. $ 2,036 $ 4,740 $ 6,353
Passbook savings......................................... 78 59 27
Certificates of deposit.................................. 14,919 16,558 19,578
------- ------- -------
Total.......................................... $17,033 $21,357 $25,958
======= ======= =======
</TABLE>
Accrued interest payable on deposits at December 31, 1996 and 1997 was
$667,000 and $728,000, respectively.
10. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1997
were as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
1996 RATE 1997 RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996.......................................... $ -- 5.52% $ -- --%
1997.......................................... 64,800 5.56 -- --
1998.......................................... 41,000 5.53 71,000 5.61
1999.......................................... 39,000 5.60 129,000 5.69
-------- ---- -------- ----
Total............................... $144,800 5.56% $200,000 5.66%
======== ==== ======== ====
</TABLE>
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 1997, 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 1997,
the Corporation 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 $259.9 million at December
31, 1996 and 1997, respectively.
The Corporation 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.
F-18
<PAGE> 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average balance during the year.................... $68,920 $117,431
Weighted average interest rate during the year.............. 5.77% 5.76%
Maximum month-end balance during the year................... $97,416 $279,909
Balance at year-end......................................... $57,581 $279,909
Private issuer mortgage-backed securities underlying the
agreements as of the end of the year:
Carrying value, including accrued interest............. $61,418 $295,556
Estimated market value................................. $61,426 $295,500
</TABLE>
The securities sold under the repurchase agreements at December 31, 1997
are due in less than one year. The Corporation enters into sales of securities
under agreements to repurchase the same securities. Repurchase agreements are
collateralized by fixed and variable rate mortgage-backed securities or
investment grade securities. 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 repurchase agreements. If the counterparty in a
repurchase agreement was to fail, the Corporation may incur an accounting loss
for the excess collateral posted with the counterparty. As of December 31, 1997,
Lehman Brothers Inc. represents the only counterparty with which the
Corporation's amount at risk exceeded 10% of the Corporation's stockholders'
equity. The amount of risk at December 31, 1997 with Lehman Brothers Inc. was
$5.1 million with a weighted average maturity of 47 days.
12. SUBORDINATED DEBT
In May and June 1994, the Corporation 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 40 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 Corporation 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 Corporation under certain circumstances to incur
additional indebtedness, limits cash dividends and other capital distributions
by the Corporation, requires the maintenance of a reserve equal to 100% of the
Corporation's annual interest expense on all indebtedness, restricts disposition
of the Bank or its assets, and limits transactions with affiliates. The annual
interest expense to service the subordinated debt is $2.0 million.
The total value of the 690,000 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 $3.828.
On February 28, 1997, the Corporation sold $29.9 million of units in the
form of 4% convertible preferred stock and 9.5% senior subordinated notes and
warrants to investment partnerships managed by Conning & Co., CIBC Wood Gundy
Argosy Merchant Fund 2, LLC, General American Life Insurance Corporation, PC
Investment Company, and The Northwestern Mutual Life Insurance Corporation. Upon
the
F-19
<PAGE> 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sale of the units, representatives from the Conning partnerships and the CIBC
Merchant Fund were appointed to the Corporation's Board. The units consist of
$13.7 million in 9.5% senior subordinated notes with 396,176 detachable
warrants, $16.2 million in 4.0% convertible preferred stock, and rights to
411,126 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 $4.75 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
2,399,486 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
aforementioned preferred stock has no liquidation preferences. The contingent
warrants may be exercised upon a change of control or at any time after February
19, 2002 ("Exercise Event"). If the Corporation'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. The annual interest expense to service the senior subordinated notes is
$1.3 million and the annual dividend requirement on the preferred stock is
$648,000.
In June 1997, the Corporation 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 Corporation. The trust preferred securities mature in 2027 and
have an annual dividend rate of 11.0%, or $1.1 million, 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.
13. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"),
effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock.
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. Diluted earnings per
common share for the years ended December 31, 1995, 1996, and 1997 were
determined on the assumptions that the dilutive options and warrants were
exercised upon issuance. The options and warrants are deemed to be dilutive if
(a) the average market price of the related common stock for a period exceeds
the exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant agreement and
the resulting discount is sufficient to establish an effective exercise price
below the market price of the common stock obtainable upon exercise. The
Corporation's year to date weighted average number of common shares outstanding
was 4,099,000 at December 31, 1995 and 1996 and 4,382,910 at December 31, 1997.
For diluted earnings per share computation, weighted average shares outstanding
also include potentially dilutive securities.
F-20
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
FOR THE YEAR ENDED DECEMBER
31, 1995
---------------------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,720 4,099 $0.66
=====
Options issued to management................................ -- 5
------ -----
Diluted earnings per share.................................. $2,720 4,104 $0.66
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
---------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.................................................. $2,552 4,099 $0.62
=====
Options issued to management................................ -- 182
Warrants.................................................... -- 125
------ -----
Diluted earnings per share.................................. $2,552 4,406 $0.58
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
---------------------------
<S> <C> <C> <C>
Net income.................................................. $4,217
Less: preferred stock dividends............................. (546)
------
Basic earnings per share
Income available to common shareholders..................... $3,671 4,383 $0.84
=====
Options issued to management................................ -- 510
Warrants.................................................... -- 501
Convertible preferred stock................................. 546 2,017
------ -----
Diluted earnings per share.................................. $4,217 7,411 $0.57
====== ===== =====
</TABLE>
14. INCOME TAXES
Income tax expense for the years ended December 31, 1995, 1996, and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current: Federal........................................... $2,038 $1,194 $1,881
State............................................. 181 225 221
------ ------ ------
2,219 1,419 2,102
Deferred: Federal........................................... (474) (78) (398)
State............................................. (85) (146) (47)
------ ------ ------
(559) (224) (445)
Total: Federal........................................... 1,564 1,116 1,483
State............................................. 96 79 174
------ ------ ------
$1,660 $1,195 $1,657
====== ====== ======
</TABLE>
F-21
<PAGE> 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the
Corporation's effective income tax rate for the years ended December 31, 1995,
1996, and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
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................................................... (7.0) (3.6) (5.8)
Other....................................................... 6.7 (2.7) (6.0)
---- ---- ----
37.9% 31.9% 26.4%
==== ==== ====
</TABLE>
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 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Acquired Loan Servicing Rights......................... $ (12) $ --
Purchase Accounting Premium............................ (40) (75)
Depreciation........................................... (17) (44)
Tax Reserve in Excess of Base Year..................... (93) (134)
Tax Effect of Securities Available-for-sale Adjustment
to Fair Value (notes 4 and 5)......................... (1,030) (722)
FHLB Stock Dividends................................... (168) (129)
Other.................................................. (52) (89)
------- -------
Total............................................. (1,412) (1,193)
Deferred Tax Assets:
General Reserves & Real Estate Owned Losses............ 819 1,293
Other.................................................. 20 80
------- -------
Total............................................. 839 1,373
------- -------
Net Deferred Tax Asset (Liability).......................... $ (573) $ 180
======= =======
</TABLE>
The Corporation has a tax bad debt base year reserve of $264,000 for which
income taxes have not been provided. Certain distributions or transactions may
cause the Bank to recapture its tax bad debt base year reserve, resulting in
taxes of $100,000. 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.
15. FINANCIAL INSTRUMENTS
The Corporation is party to a variety of interest rate caps and swaps to
manage interest rate exposure. In general, the Corporation 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.
F-22
<PAGE> 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate exchange agreements for the years ended December 31, 1996 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Weighted average fixed rate payments........................ 5.97% 6.15%
Weighted average original term.............................. 5.0 yrs 4.6 yrs
Weighted average variable rate obligation................... 5.62% 5.81%
Notional amount............................................. $130,000 $205,000
</TABLE>
The Corporation enters into interest rate cap agreements to hedge
outstanding FHLB advances and repurchase agreements. Under the terms of the
interest rate cap agreements, the Corporation 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):
<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
CAP STRIKE RATE DATE BALANCE DATE
--------------- ------------- -------- -------------
<S> <C> <C> <C>
4%....................................... July 1992 $10,000 July 1999
6%....................................... October 1996 $20,000 October 1999
7%....................................... January 1997 $10,000 January 2002
7%....................................... January 1995 $10,000 July 1998
7.5%....................................... July 1997 $25,000 July 1999
8%....................................... July 1997 $25,000 July 2000
8%....................................... June 1997 $25,000 June 2000
9%....................................... December 1994 $14,000 December 1998
10%....................................... April 1995 $10,000 January 2002
</TABLE>
The counterparties to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers, Merrill Lynch, NationsBank, Nomura, Salomon Brothers, and UBS.
As of December 31, 1997, the associated credit risk with the aforementioned
counterparties are $332,000, $104,000, $117,000, $66,000, $30,000, $132,000, and
$605,000, respectively. The credit risk is attributable to the unamortized cap
premium and any amounts due from the counterparty as of December 31,1997. The
total amortization expense for premiums on interest rate caps was $213,000,
$638,000, and $777,000 for the years ended December 31, 1995, 1996, and 1997,
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 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.
F-23
<PAGE> 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
SUBORDINATED 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 Corporation to terminate the agreement as
determined from market quotes.
The fair value of financial instruments as of December 31, 1996 and 1997 is
as follows:
<TABLE>
<CAPTION>
1996 1996 1997 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents...................... $ 3,259 $ 3,259 $ 92,156 $ 92,156
Investment securities available-for-sale....... 78,826 78,826 91,237 91,237
Mortgage-backed securities
available-for-sale........................... 184,743 184,743 319,203 319,203
Loans receivable............................... 351,821 365,401 540,704 562,270
Trading........................................ -- -- 21,110 21,110
Liabilities:
Deposits....................................... $390,486 $393,820 $522,221 $524,022
Advances from the FHLB Atlanta................. 144,800 144,800 200,000 200,000
Securities sold under agreements to
repurchase................................... 57,581 57,581 279,909 279,909
Subordinated debt, net......................... 16,586 16,625 29,614 30,953
Trust preferred................................ -- -- 9,572 10,000
Off-balance sheet instruments.................. -- 1,684 -- (1,342)
Commitments to purchase loans.................. -- -- -- --
</TABLE>
F-24
<PAGE> 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. DISTRIBUTIONS
The Bank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1997,
approximately $10.6 million of retained earnings were available for dividend
declaration.
18. EMPLOYEE STOCK OWNERSHIP PLAN
The Corporation sponsors an Employee Stock Ownership Plan ("ESOP"). All
full-time employees of the Corporation who meet limited qualifications
participate in the ESOP. Under the ESOP, the Corporation 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 1997, the Corporation
carried a $305,000 note receivable from the ESOP which was collateralized by the
Corporation's common stock. The ESOP owned 135,200 shares of the Corporation's
stock with approximately 64,000 and 78,000 shares vested at December 31, 1996
and 1997, respectively. The Corporation's contribution to the ESOP, which is
reflected in compensation expense, was $210,000, $224,000 and $247,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
19. STOCK BASED COMPENSATION
In 1996, officers and employees were issued 161,000 options to purchase
161,000 shares of TeleBanc common stock at prices ranging from $3.875 to
$4.4375. In 1997, the Corporation authorized and issued 698,402 options to
directors, officers and employees to purchase 698,402 shares of TeleBanc common
stock at prices ranging from $1.33 to $6.75. As of December 31, 1996 and 1997,
360,876 and 598,248 of the shares, respectively, were vested at exercise prices
ranging from $1.33 to $6.25. The maximum term for the outstanding options is 10
years. As of December 31, 1997, the total number of authorized options is
1,802,862. The options' exercise price was the market value of the stock at the
date of issuance.
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................. 484 $3.32 542 $3.26 704 $ 3.45
Granted.......................................... 64 2.75 162 4.09 698 6.26
Exercised........................................ -- -- -- -- 34 3.26
Forfeited........................................ 6 3.07 -- -- 38 5.70
Outstanding at end of year....................... 542 3.26 704 3.45 1,330 4.86
Options exercisable at year-end.................. 220 3.28 360 3.35 598 4.03
Weighted avg. fair value of options granted...... 0.91 1.31 1.75
</TABLE>
F-25
<PAGE> 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about fixed options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING (000'S)
----------------------------------------------- OPTIONS EXERCISABLE (000'S)
WEIGHTED AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Less than $2.50........ 48 9.2 $1.33 10 $1.33
$2.50 - $3.74.......... 510 6.5 $3.275 404 $3.285
$3.75 - $4.99.......... 148 8.3 $4.105 60 $4.105
$5.00 - $6.24.......... -- -- -- -- --
$6.25 - $7.49.......... 624 9.2 $6.615 124 $6.615
----- ---
Less than
$2.50 - $7.49........ 1,330 8.0 $4.86 598 $4.03
===== ===
</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 6.00%, 5.25%, and 5.08% for
1995, 1996, and 1997, respectively; expected life of 10 years for all options
granted in 1995, 1996, and 1997; expected volatility of 16%, 23%, and 25% for
1995, 1996, and 1997, respectively.
The Corporation 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 Corporation's net income and net
income per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported....................................... $2,720 $2,552 $3,671
Pro forma......................................... $2,684 $2,409 $2,629
Basic earnings per share:
As reported....................................... $ 0.66 $ 0.62 $ 0.84
Pro forma......................................... $ 0.66 $ 0.59 $ 0.60
Diluted earnings per share:
As reported....................................... $ 0.66 $ 0.58 $ 0.57
Pro forma......................................... $ 0.66 $ 0.55 $ 0.43
</TABLE>
20. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Corporation has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Corporation are as follows:
At December 31, 1997, the Corporation was obligated under an operating
lease for office space with an original term of ten years. Net rent expense
under operating leases was approximately $127,000, $142,000, and $238,000 for
the years ended December 31, 1995, 1996, and 1997, respectively.
F-26
<PAGE> 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The projected minimum rental payments under the terms of the lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998..................................................... $ 190,000
1999..................................................... 165,000
2000..................................................... 166,000
2001..................................................... 167,000
2002..................................................... 168,000
2003 and thereafter...................................... 267,000
----------
$1,123,000
==========
</TABLE>
As of December 31, 1997, the Corporation had commitments to purchase $24.0
million of mortgage loans.
The Corporation self-insures for a portion of health insurance expenses
paid by the Corporation as a benefit to its employees. At December 31, 1996 and
1997, there was no reserve needed for incurred but not reported claims under
this insurance arrangement.
21. SUBSEQUENT EVENTS
In the first quarter of 1998, TeleBanc signed a definitive merger agreement
(the "DFC Acquisition") to acquire Direct Financial Corporation ("DFC"). DFC is
the parent holding company of Premium Bank, a federal savings bank headquartered
in New Jersey. At December 31, 1997, DFC reported total assets of $326.1
million, loans receivable, net of $187.2 million, total deposits of $273.9
million and total stockholders' equity of $12.3 million. TeleBanc will pay $12
for each share of Direct Financial common stock or common stock equivalent. The
transaction is valued at approximately $26.4 million. The DFC Acquisition is
expected to be consummated in the summer of 1998, subject to regulatory
approvals.
Also in January 1998, TeleBanc announced that it had signed a definitive
acquisition agreement whereby MET Holdings will sell substantially all of its
assets, including approximately 2,866,162 shares of TeleBanc Common Stock owned
by MET Holdings, and assign substantially all of its liabilities, to TeleBanc.
Immediately following consummation of the acquisition, MET Holdings will
dissolve and distribute its remaining assets and liabilities to its
stockholders, assuming such dissolution is approved by the requisite number of
stockholders of MET Holdings and TeleBanc.
F-27
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash................................................... $ 159 $ 5,401
Investment securities available-for-sale............... 4,132 4,186
Mortgage-backed securities available-for-sale.......... 14,086 26,219
Loans receivable, net.................................. 305 566
Loan receivable held for sale.......................... -- 6,367
Trading................................................ -- 14,011
Equity in net assets of subsidiary..................... 34,130 58,976
Deferred charges....................................... 940 1,460
Other assets........................................... 1,099 4,806
------- --------
Total assets...................................... $54,851 $121,992
======= ========
Liabilities and Stockholders' Equity
Liabilities:
Subordinated debt...................................... $16,586 $ 39,614
Securities sold under agreements to repurchase......... 12,831 33,555
Accrued interest payable............................... 357 1,037
Taxes payable and other liabilities.................... 419 1,962
------- --------
Total liabilities................................. 30,193 76,168
------- --------
Stockholders' Equity
Preferred Stock........................................ -- 15,281
Common Stock........................................... 40 44
Additional Paid-in-Capital............................. 14,637 16,205
Retained earnings...................................... 7,885 11,556
Unrealized gain/loss on securities
available-for-sale.................................... 2,096 2,738
------- --------
Total stockholders' equity........................ 24,658 45,824
------- --------
Total liabilities and stockholders' equity........ $54,851 $121,992
======= ========
</TABLE>
F-28
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Interest income............................................. $ 429 $ 531 $ 2,683
Interest expense............................................ 2,111 2,163 4,352
------- ------- -------
Net interest loss........................................... (1,682) (1,632) (1,669)
Non interest income......................................... 92 133 13
Total general and administrative expenses................... 1,046 1,393 1,288
Non interest expenses....................................... 126 127 195
------- ------- -------
Net loss before equity in net income of subsidiary and
income taxes.............................................. (2,762) (3,019) (3,139)
Equity in net income of subsidiary.......................... 4,434 6,716 5,668
Income taxes................................................ (1,048) 1,145 (1,688)
Preferred stock dividend.................................... -- -- 546
------- ------- -------
Net income.................................................. $ 2,720 $ 2,552 $ 3,671
======= ======= =======
</TABLE>
F-29
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income............................................. $ 2,720 $ 2,552 $ 4,217
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries....... (4,434) (4,426) (5,668)
Purchases of loans held for sale....................... -- -- (6,367)
Net increase in trading securities..................... -- -- (14,011)
(Increase) decrease in other assets.................... 38 (686) (4,227)
Increase in accrued expenses and other liabilities..... 122 267 2,223
-------- --------- --------
Net cash provided by operating activities................... (1,554) (2,293) (23,833)
-------- --------- --------
Cash flows from investing activities:
Net (increase) decrease in loan to Employee Stock
Ownership Plan....................................... 60 (65) --
Net increase in loans.................................. -- -- (261)
Net (increase) decrease in equity investments.......... 2,089 2,074 (19,178)
Purchases of available-for-sale securities............. (20,771) (100,574) (92,862)
Proceeds from sale of available-for-sale securities.... 5,170 11,103 80,159
Proceeds from maturities of and principal payment on
available-for-sale securities........................ 14,619 76,910 1,158
Net sales (purchases) of premises and equipment........ (21) (37) --
-------- --------- --------
Net cash (used in) provided by investing activities......... 1,146 (10,589) (30,984)
-------- --------- --------
Cash flows from financing activities:
Net increase in securities sold under agreements to
repurchase........................................... -- 12,831 20,724
Increase in subordinated debt.......................... -- -- 23,028
Increase in common stock and additional
paid-in-capital...................................... -- -- 16,853
Dividends paid on common and preferred stock........... -- -- (546)
-------- --------- --------
Net cash provided by financing activities................... -- 12,831 60,059
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ (408) (51) 5,242
-------- --------- --------
Cash and cash equivalents at beginning of period............ 618 210 159
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 210 $ 159 $ 5,401
======== ========= ========
</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 $992,000 to TeleBanc for subordinated
interest expense payments for the years ended December 31, 1996 and 1997,
respectively.
F-30
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1997
and 1996 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<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 operating 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
======= ======= ======= =======
Basic earnings per share................................ $ 0.16 $ 0.19 $ (0.02) $ 0.30
Diluted earnings per share.............................. $ 0.16 $ 0.18 $ (0.02) $ 0.26
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income......................................... $12,837 $15,275 $14,821 $16,368
Interest expense........................................ 9,878 11,865 11,548 12,772
------- ------- ------- -------
Net interest income................................ 2,959 3,410 3,273 3,596
Provision for loan and lease losses..................... 243 308 120 250
Non-interest income..................................... 607 1,244 1,084 1,158
General and administrative expenses..................... 1,897 2,251 2,078 2,816
Other non-interest operating expenses................... 208 202 260 430
------- ------- ------- -------
Income before income taxes and minority interest... 1,218 1,893 1,899 1,258
Income tax expense...................................... 355 618 709 (25)
Minority interest in subsidiary......................... -- 67 285 42
Net income.............................................. 863 1,208 905 1,241
Preferred stock dividends............................... 60 162 162 162
------- ------- ------- -------
Net income after preferred stock dividends......... $ 803 $ 1,046 $ 743 $ 1,079
======= ======= ======= =======
Basic earnings per share................................ $ 0.19 $ 0.24 $ 0.16 $ 0.24
Diluted earnings per share.............................. $ 0.15 $ 0.16 $ 0.11 $ 0.16
</TABLE>
F-31
<PAGE> 113
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Financial Condition -- As of
December 31, 1997 and March 31, 1998...................... F-33
Consolidated Statements of Operations -- For the Three
Months Ended March 31, 1997 and 1998...................... F-34
Consolidated Statements of Changes in Stockholders'
Equity -- For the Three Months Ended March 31, 1997 and
1998...................................................... F-35
Consolidated Statements of Cash Flows -- For the Three
Months Ended March 31, 1997 and 1998...................... F-36
Notes to Consolidated Financial Statements -- For the Three
Months Ended March 31, 1997 and 1998...................... F-37
</TABLE>
F-32
<PAGE> 114
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 92,156 $ 31,559
Trading securities.......................................... 21,110 42,129
Investment securities available-for-sale.................... 91,237 123,963
Mortgage-backed securities available-for-sale............... 319,203 260,152
Loans receivable, net....................................... 391,618 418,676
Loans receivable held-for-sale.............................. 149,086 138,381
Other assets................................................ 35,942 33,293
---------- ----------
Total assets........................................... $1,100,352 $1,048,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Retail deposits............................................. $ 522,221 $ 560,554
Brokered callable certificates of deposit................... -- 42,286
Advances from the Federal Home Loan Bank of Atlanta......... 200,000 190,000
Securities sold under agreements to repurchase.............. 279,909 153,970
Subordinated debt, net...................................... 29,614 29,672
Other liabilities........................................... 13,212 15,605
---------- ----------
Total liabilities...................................... 1,044,956 992,087
---------- ----------
Corporation-Obligated Mandatorily Redeemable Capital
Securities of
Subsidiary Trust Holding Soley Junior Subordinated
Debentures of the
Corporation............................................... 9,572 9,526
Stockholders' Equity:
4% Cumulative preferred stock, $0.01 par value, 500,000
shares authorized
Series A, 18,850 issued and outstanding................ 9,634 9,634
Series B, 4,050 issued and outstanding................. 2,070 2,070
Series C, 7,000 issued and outstanding................. 3,577 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
4,484,988 and 4,458,322 issued and outstanding at March
31, 1998 and December 31, 1997............................ 44 44
Additional paid-in-capital.................................. 16,205 16,385
Retained earnings........................................... 11,556 11,830
Accumulated other comprehensive income, net of tax.......... 2,738 3,000
---------- ----------
Total stockholders' equity............................. 45,824 46,540
---------- ----------
Total liabilities and stockholders' equity............. $1,100,352 $1,048,153
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 115
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Interest income:
Loans................................................... $ 7,557 $10,365
Mortgage-backed and related securities.................. 3,805 5,074
Investment securities................................... 1,444 1,786
Trading securities...................................... -- 636
Other................................................... 31 210
------- -------
Total interest income.............................. 12,837 18,071
------- -------
Interest expense:
Retail deposits......................................... 5,705 8,055
Brokered callable certificates of deposit............... -- 374
Advances from the Federal Home Loan Bank of Atlanta..... 2,073 2,718
Repurchase agreements................................... 1,457 2,451
Subordinated debt....................................... 643 879
------- -------
Total interest expense............................. 9,878 14,477
------- -------
Net interest income................................ 2,959 3,594
Provision for loan losses............................... 243 250
------- -------
Net interest income after provision for loan
losses........................................... 2,716 3,344
------- -------
Non-interest income:
Gain on sale of securities.............................. 238 891
Gain on sale of loans................................... 127 121
Gain on trading securities.............................. 23 62
Gain (loss) on equity investment........................ (109) 526
Fees, service charges, and other........................ 339 347
------- -------
Total non-interest income.......................... 618 1,947
------- -------
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits................. 1,176 1,950
Other.............................................. 721 1,939
------- -------
Total selling, general and administrative
expenses......................................... 1,897 3,889
------- -------
Other non-interest expenses:
Net operating costs of real estate acquired through
foreclosure............................................ 74 82
Amortization of goodwill and other intangibles.......... 134 233
------- -------
Total other non-interest expenses....................... 208 315
------- -------
Total non-interest expenses............................. 2,105 4,204
------- -------
Income before income tax expense................... 1,229 1,087
Income tax expense................................. 355 475
Minority interest in subsidiary.................... -- 176
------- -------
Net income......................................... $ 874 $ 436
======= =======
Preferred stock dividends.......................... 60 162
------- -------
Net income available to common stockholders........ $ 814 $ 274
======= =======
Other comprehensive income, before tax:
Unrealized holding gain (loss) on securities arising
during the period...................................... (1,017) 814
Less: reclassification adjustment for gains included in
net income............................................. (238) (891)
------- -------
Other comprehensive income, before tax...................... (1,255) (77)
Income tax expense related to reclassification adjustment
for gains on sale of securities........................... 90 339
------- -------
Other comprehensive income, net of tax...................... (1,165) 262
------- -------
Comprehensive income........................................ $ (351) $ 536
======= =======
Earnings per share:
Basic................................................... $ 0.19 $ 0.06
Diluted................................................. $ 0.15 $ 0.05
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 116
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED COMMON PAID-IN RETAINED INCOME (LOSS),
STOCK STOCK CAPITAL EARNINGS NET OF TAX TOTAL
--------- ------ ---------- -------- -------------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996..... $ -- $40 $14,637 $ 7,885 $ 2,096 $24,658
Net income for the three months
ended March 31, 1997............ -- -- -- 874 -- 874
Stock issued...................... -- 4 1,270 -- -- 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........ $15,281 $44 $15,907 $ 8,699 $ 931 $40,862
======= === ======= ======= ======= =======
Balances at December 31, 1997..... $15,281 $44 $16,205 $11,556 $ 2,738 $45,824
Net income for the three months
ended March 31, 1998............ -- -- -- 436 -- 436
Stock issued...................... -- -- 180 -- -- 180
Dividends on 4% Cumulative
Preferred Stock................. -- -- -- (162) -- (162)
Unrealized gain on available for
sale securities, net of tax
effect.......................... -- -- -- -- 262 262
------- --- ------- ------- ------- -------
Balances at March 31, 1998........ $15,281 $44 $16,385 $11,830 $ 3,000 $46,540
======= === ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-35
<PAGE> 117
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net cash (used by) provided by operating activities......... $ 4,650 $ (4,776)
--------- ---------
Cash flows from investing activities:
Net increase in loans.................................. (84,134) (26,002)
Purchases of available-for-sale securities............. (124,251) (143,899)
Proceeds from sale of available-for-sale securities.... 10,640 151,543
Proceeds from maturities of and principal payments on
available-for-sale securities......................... 70,321 18,419
Proceeds from sale of foreclosed real estate........... 259 494
Equity investment in subsidiaries...................... (700) (724)
Net purchases of premises and equipment................ (277) (226)
--------- ---------
Net cash used in investing activities....................... $(128,142) $ (395)
--------- ---------
Cash flows from financing activities:
Net increase in deposits............................... 4,517 80,619
Net increase in subordinated debt...................... 12,858 --
Increase in advances from Federal Home Loan Bank of
Atlanta............................................... 107,000 87,500
Payment on advances from Federal Home Loan Bank of
Atlanta............................................... (86,800) (97,500)
Net increase in borrowed funds......................... -- 52
Net (decrease) increase in securities sold under
agreements to repurchase.............................. 74,685 (125,939)
Increase in common stock, preferred stock, and
additional paid-in-capital............................ 16,555 180
Interest paid to minority interest in subsidiary....... -- (176)
Dividends paid on common and preferred stock........... (60) (162)
--------- ---------
Net cash (used in) provided by financing activities......... $ 128,755 $ (55,426)
--------- ---------
Net (decrease) increase in cash and cash equivalents........ 5,263 (60,597)
Cash and cash equivalents at beginning of period............ 3,259 92,156
--------- ---------
Cash and cash equivalents at end of period.................. $ 8,522 $ 31,559
========= =========
Supplemental information:
Interest paid on deposits and borrowed funds................ $ 8,647 $ 13,692
Income taxes paid........................................... 260 242
Gross unrealized gain (loss) on securities
available-for-sale........................................ (1,638) 465
Tax effect of gain (loss) on available-for-sale
securities................................................ $ (473) $ 203
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The Corporation operates its business principally through two wholly owned
subsidiaries, TeleBank, a federally chartered savings bank ("TeleBank"), and
TeleBanc Capital Markets, Inc. ("TCM"). TeleBank offers savings and investment
products insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC"), and TCM is a registered broker-dealer and investment
advisor specializing in one-to-four family mortgage loans and mortgage-backed
securities. TCM manages the portfolios of TeleBanc Financial and TeleBank. The
Corporation also owns all of the beneficial interests represented by common
securities in a Delaware trust, TeleBanc Capital Trust I ("TCT I"), which was
formed solely for the purpose of issuing capital securities. In 1997, TCT I
issued $10.0 million 11.0% Capital Securities, Series A and invested the net
proceeds in the Corporation's 11.0% Junior Subordinated Deferrable Interest
Debentures, Series A (the "TCT I Junior Subordinated Debentures"). TeleBank,
through its wholly owned subsidiary TeleBanc Servicing Corporation ("TSC"), owns
50% of 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. The
accompanying consolidated financial statements include the accounts of TeleBank,
TCM, TCT, and TSC, a wholly owned subsidiary of the bank. All significant
intercompany transactions and balances are eliminated in consolidation. The
investment, $2.9 million, in AGT PRA is accounted for under the equity method.
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and 1997 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,
1998 and the results of consolidated operations for the three months ended March
31, 1998 and 1997. The results of consolidated operations for the three months
ended March 31, 1998 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, 1997, included in the Corporation's Annual Report to
Stockholders for 1997, should be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Effective January 1, 1998, PRA changed its method of accounting from the
cost recovery method to the installment method, resulting in income of $547,000.
This change is not expected to have a material effect on the full year's results
of operations.
2. EARNINGS PER SHARE
Basic earnings per common share, as required by Statement of Financial
Accounting Standards No. 128, is computed by dividing adjusted net income by the
total of the weighted average number of common shares outstanding during the
respective periods. Diluted earnings per common share for the quarters ended
March 31, 1998 and 1997 were determined on the assumptions that the dilutive
options and warrants were exercised upon issuance. The options and warrants are
deemed to be dilutive if (a) the average market price of the related common
stock for a period exceeds the exercise price or (b) the security to be tendered
is selling at a price below that at which it may be tendered under the option or
warrant agreement and the resulting discount is sufficient to establish an
effective exercise price below the market price of the common stock obtainable
upon exercise. The Corporation's quarter to date weighted average number of
common shares outstanding was 4,467,610 at March 31, 1998 and 4,212,176 at March
31, 1997. For diluted earnings per share computation, weighted average shares
outstanding also include potentially dilutive securities.
F-37
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EPS CALCULATION
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- --------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Net income.............................................. $ 813,755 4,212,176 $0.19
=====
Options issued to management............................ -- 380,102
Warrants................................................ -- 362,016
Convertible preferred stock............................. 60,287 835,776
--------- ---------
Diluted earnings per share.............................. $ 874,042 5,790,070 $0.15
========= ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
<S> <C> <C> <C>
Net income.............................................. $ 436,408
Less: preferred stock dividends......................... (161,965)
---------
Basic earnings per share
Income available to common shareholders................. $ 274,443 4,467,610 $0.06
=====
Options issued to management............................ -- 666,360
Warrants................................................ -- 623,012
Convertible preferred stock............................. -- --
--------- ---------
Diluted earnings per share.............................. $ 274,443 5,756,982 $0.05
========= ========= =====
</TABLE>
3. RECENT EVENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), effective for fiscal years beginning after December 15, 1997. This
statement requires that certain financial activity typically disclosed in
stockholders' equity be reported in the financial statements as an adjustment to
net income in determining comprehensive income. The Corporation adopted SFAS 130
effective January 1, 1998. As a result, comprehensive income for the periods
ending March 31, 1998 and 1997 are reported in the Consolidated Statement of
Operations.
Consistent with its operating strategy, the Corporation has signed an
agreement to acquire DFC, a thrift holding company and its federally chartered
savings bank subsidiary, Premium Bank, in a transaction expected to be
consummated in the summer of 1998, subject to regulatory approval. TeleBanc
Financial is acquiring DFC because DFC has employed a direct marketing strategy
similar to that of the Corporation, and thus presents the opportunity for the
Corporation to acquire the deposits and customers of a financial institution
without acquiring significant infrastructure. DFC currently operates from a
single branch in New Jersey located outside of Philadelphia, Pennsylvania, and
its customer and deposit base is concentrated in the Mid-Atlantic region of the
United States. The Corporation does intend to retain a significantly scaled down
portion of DFC's employees and intends to close DFC's single branch location.
The Corporation may open a regional business development office in the location
of the former DFC branch. DFC also originates residential mortgage loans,
although the Corporation intends to discontinue mortgage loan origination upon
its acquisition of DFC. DFC also offers credit cards to its customers through a
relationship with First Data Resources and Card Management Services. In 1998, in
reliance upon DFC's existing credit card relationships, the Corporation also
intends to offer its customers co-branded credit cards.
At March 31, 1998, DFC reported total assets of $320.3 million, loans
receivable, net of $181.2 million, total deposits of $288.7 million and total
stockholders' equity of $12.3 million. TeleBanc will pay approxi-
F-38
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
mately $21.4 million in the transaction, and will assume approximately $6
million in liabilities which the Corporation intends to repay at the time the
transaction is consummated.
In April 1998, the shareholders of TeleBanc and MET Holdings ("MET") voted
to approve and adopt the Amended and Restated Acquisition Agreement, dated as of
March 17, 1998. Subsequently, TeleBanc completed the acquisition of MET whereby
MET sold substantially all of its assets, including 2,866,162 shares of TeleBanc
common stock owned by MET, and assigned substantially all of its liabilities to
TeleBanc in exchange for 2,876,162 shares of TeleBanc common stock.
F-39
<PAGE> 121
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION, THE ISSUER
OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY SALE MADE
HEREUNDER AND THEREUNDER, SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THE INFORMATION HEREIN OR THEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
CORPORATION OR THE ISSUER SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus............................... 1
Available Information.................... 4
Incorporation of Certain Documents by
Reference.............................. 4
Summary.................................. 6
Summary Consolidated Financial Data...... 10
TeleBanc Capital Trust II................ 11
Risk Factors............................. 12
TeleBanc Financial Corporation........... 20
Recent Development....................... 20
Use of Proceeds.......................... 21
Consolidated Ratios of Earnings to Fixed
Charges................................ 21
Accounting Treatment..................... 21
Capitalization........................... 23
Selected Pro Forma Condensed Consolidated
Statement of Financial Condition and
Statement of Operations................ 24
Selected Consolidated Financial Data..... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 27
Business................................. 41
Description of Series A Capital
Securities............................. 49
Description of Series A Subordinated
Debentures............................. 60
Book-Entry Issuance...................... 68
Description of Series A Guarantee........ 70
Relationship Among the Series A Capital
Securities, the Series A Subordinated
Debentures and the Series A
Guarantee.............................. 72
Description of Common Stock Offering..... 74
Certain Federal Income Tax Consequences.. 74
Certain ERISA Considerations............. 78
Underwriting............................. 80
Validity of Securities................... 81
Experts.................................. 81
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
TELEBANC CAPITAL
TRUST II
$27,500,000
9.0% BENEFICIAL UNSECURED
SECURITIES, SERIES A
(Liquidation Amount $25
per Capital Security)
fully and unconditionally guaranteed,
as described herein, by
[TELEBANC FINANCIAL CORPORATION LOGO]
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PROSPECTUS
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CIBC OPPENHEIMER
LEGG MASON WOOD WALKER
INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
JULY 28, 1998
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