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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 4 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number: 33-76930
TELEBANC FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified
in its charter)
Delaware 13-3759196
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(State or other jurisdiction of (IRS Employer
incorporation organization) Identification No.)
1111 North Highland Street
Arlington, Virginia 22201
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(Address of principal executive office) (Zip Code)
(703) 247-3700
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(Registrant's telephone number, including area code)
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This fourth amendment to the Annual Report of TeleBanc Financial
Corporation (the "Company") on Form 10-K/A is being filed to reflect the
amendment and restatement of the following items in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 31,
1998: Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operation; Item 10, Directors and Executive Officers of the Company;
and Item 14(c), Exhibits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company has adopted a branchless banking strategy through which it
offers financial products and services to customers nationwide using
alternative delivery platforms, including telephone, Internet, ATMs, facsimile
and mail. Prior to its acquisition by members of present management in 1989,
the Company operated as a traditional community savings bank. In 1989,
management changed the Company's growth strategy using direct marketing to
offer high value financial products and services, which generally offer higher
interest rates or lower fees than those offered by traditional financial
institutions.
The Company 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 its loans
and other interest-earning assets, and the rates of interest paid on its
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 Company's asset acquisition strategy is to purchase pools of mortgages
secured by one- to four-family residences and mortgage-related securities. The
Company does not currently originate loans. The Company 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 Company 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 Company 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, TeleBanc 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 Company 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 Company, and thus presents the opportunity for the
Company 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 Company 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 Company 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 Company also
intends to offer its customers a co-branded credit card.
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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
Company's loans held for sale portfolio, loan fees on the Company'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 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
Company'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 Company 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 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 Company'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 Company's portfolio, and the Company'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 Company 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%,
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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 Company recognized $1.2 million of non-interest
income as gain on trading securities during 1997. In addition, the Company
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 11.0%. 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 Company 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 Company'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 $12.3 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 Company'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 Company 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
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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 $756,000 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
$924,000 decrease in investment securities available for sale and a $628,000
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 Company'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 Company'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 $1.16 for 1996.
QUARTERLY RESULTS
The following table sets forth certain selected unaudited quarterly
financial data of the Company for each of the eight quarters in the period ended
March 31, 1998. The consolidated financial data presented below have been
prepared on a basis consistent with the Company'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 Company's audited Consolidated Financial
Statements and the Notes thereto
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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
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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 AMOUNTS)
<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
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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.... $ 0.37 $ (0.03) $ 0.59 $ 0.38 $ 0.48 $ 0.33 $ 0.48 $ 0.12
Diluted earnings per
share..................... 0.36 (0.03) 0.52 0.30 0.44 0.30 0.40 0.10
</TABLE>
The Company'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 Company's
growth strategy, the performance of the Company's loan portfolio and other
interest-earning assets, retention and growth of deposits, and other factors.
The Company anticipates that its operating expenses, principally marketing and
compensation expenses, will increase significantly for the foreseeable future.
If the Company's net interest income in any quarter does not increase
correspondingly, the Company's results of operations for that quarter would be
materially adversely affected. Accordingly, the Company 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 Company'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 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
$60.7 million of loans sold in 1997. During 1996, the Company recorded whole
loan purchases of $183.1 million, offset in part by $50.2 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 Company 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
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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 Company'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 Company'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 Company 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 Company (the "9.5% Subordinated Debentures")
issued in February 1997, and the 11.5% Subordinated Debentures of the Company
(the "11.5% Subordinated Debentures" and, together with the 9.5% Subordinated
Debentures, the "Subordinated Debentures") issued by the Company in the second
quarter of 1994, totaled $29.6 million. In June 1997, the Company 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 Company, $4.6 million in net
income, and an unrealized gain on securities available for sale of $642,000, net
of taxes, in 1997, which increased the Company's stockholders' equity, but did
not impact the Company's results of operations.
LIQUIDITY
Liquidity represents the Company'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 Company 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 Company 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
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 Company 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. At March 31, 1998, the average
account balance at TeleBank was $24,000, and the average customer maintained 1.8
accounts with TeleBank, which the Company believes are relatively high
statistics compared to the customer and account base at most traditional
depository institutions. 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
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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
------------ -------- -------- ---------
(Dollars 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 Company also relies upon borrowed funds to provide liquidity. The
Company'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 Company had outstanding approximately $31.0
million face amount of 11.5% Subordinated Debentures and 9.5% Subordinated
Debentures. In addition, at the same date, the Company also had outstanding
$10.0 million face amount of the TCT I Junior Subordinated Debentures and $16.2
million of Preferred Stock. The Company's aggregate annual interest expense on
the Subordinated Debentures and the TCT I Junior Subordinated Debentures is $4.4
million and the annual dividend payment on the cumulative preferred stock is
$648,000. Subject to the approval of the OTS and compliance with federal
regulations, TeleBank pays a dividend to the Company 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 9.5% Subordinated Debentures, the Company presently is
required to maintain, on an unconsolidated basis, liquid assets in an amount
equal to or greater than $3.3 million, which represents 100% of the aggregate
interest expense for one year on both the 1994 Subordinated Debentures and the
TCT I Junior Subordinated Debentures. The Company 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.
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The following table sets forth TeleBank's regulatory capital levels at
March 31, 1998 in relation to the regulatory requirements in effect at that
date. The information below is based upon the Company'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>
RATE/VOLUME TABLE
The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volume of the related
interest-earning asset or interest-bearing liability category by the prior
year's rate) and 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.
9
<PAGE> 10
<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
(In thousands) ------- -------- -------- ------- ------- ------- ------- ------ -------
(UNAUDITED)
<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.
10
<PAGE> 11
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.
11
<PAGE> 12
<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
-------- --------- ---------- -------- --------- ---------- ----------- -----------
(Dollars 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
---------- ------------
(Dollars 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.
12
<PAGE> 13
As a result of the Company's strategy of offering high value savings and
investment products through alternative distribution channels, the Company's
interest rate spread is lower than that of traditional depository institutions.
The Company's interest rate spread was 1.84%, 1.49%, and 1.17% for 1996, 1996,
and the three month period ended March 31, 1998, respectively. The Company'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 Company 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 Company employs an interest rate risk management process that allows
risk-taking within well-defined limits. The Company 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 Company seeks to maintain relatively
consistent net interest spreads and mitigate much of the interest rate risk
associated with such assets and liabilities.
The Company's policy seeks to reduce the variability of the market value of
its equity in a variety of interest rate environments. The Company uses the
concept of fair value of equity (FVE), which represents the net fair value of
the Company'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 Company seeks to maximize net interest
income, while limiting changes in the FVE within changing interest rate
environments to prescribed levels deemed acceptable by the Company. The Company
utilizes sensitivity analysis to evaluate the rate and extent of changes to its
FVE in various market environments.
The Company 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 Company's
Board of Directors prohibits the use of the aforementioned financial instruments
for speculative purposes.
The Company 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.
13
<PAGE> 14
The following table sets forth an interest rate sensitivity analysis for
the Company 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)% 2.3% (12.5)% 4.4%
</TABLE>
- ---------------
(1) The hedge effected cumulative gap to total assets includes the effect of
hedging instruments on the Company'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 since certain assets and
liabilities may not move proportionately as interest rates change. Based on the
Company's projected March 31, 1998 simulation analysis, and excluding TeleBank's
trading portfolio, the Company estimates that a hypothetical instantaneous 100
basis point rise in rates would cause FVE to decrease by 0.50%.
14
<PAGE> 15
IMPACT OF INFLATION AND CHANGING PRICES
The impact of inflation on the Company is different from the impact on an
industrial company because substantially all of the assets and liabilities of
the Company 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 Company'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 Company. However, the actual effect of inflation
on the net interest income of the Company would depend on the extent to which
the Company 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 Company's results of operations for the past three years has been
minimal.
YEAR 2000 ISSUES
The Company 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 Company by outside vendors and a client server
core processing system which are run on in-house computer networks. In 1997, the
Company initiated a review and assessment of all hardware and software to
confirm that it will function properly in the year 2000. The Company'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 Company may
incur additional expenses during the next two years to confirm Year 2000
compliance and to remedy problems, if any, the Company does not anticipate that
such expenditures will be material or that Year 2000 compliance will otherwise
have a material effect on the Company's financial condition or results of
operations. See "Risk Factors -- Year 2000 Compliance."
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 Company 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 Company does not
anticipate any material financial impact from the implementation of SFAS Nos.
130 and 131.
15
<PAGE> 16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists the current directors, executive officers and
certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Smilow....................... 36 Chairman of the Board of Directors
Mitchell H. Caplan.................... 40 Vice Chairman of the Board of
Directors, Chief Executive Officer and
President
Aileen Lopez Pugh..................... 30 Executive Vice President, Chief
Financial Officer
Laurence Greenberg.................... 36 Executive Vice President, Chief
Marketing Officer
Michael Opshal........................ 35 Executive Vice President, Chief Credit
Officer
Sang-Hee Yi........................... 34 Executive Vice President, Chief
Operating Officer
David R. DeCamp....................... 38 Director
Arlen W. Gelbard...................... 40 Director
Dean C. Kehler........................ 41 Director
Steven F. Piaker...................... 35 Director
Mark Rollinson........................ 61 Director
</TABLE>
David A. Smilow has served as the Chairman of the Board of Directors since
March 1994 and as Chief Executive Officer of the Company from March 1994 to
April 1998. He has also served as the Chairman of the Board of Directors of
TeleBank since January 1994 and as Chief Risk Management Officer of TeleBank
since February 1996. Prior to January 1994, Mr. Smilow served as President of
TeleBank. Mr. Smilow also serves as President of TCM. Mr. Smilow is the
brother-in-law of Mr. Opsahl.
Mitchell H. Caplan has served as the Vice Chairman of the Board of
Directors and President of the Company since January 1994 and has served as
Chief Executive Officer of the Company since April 1998. Mr. Caplan has also
served as Vice Chairman, President and Chief Executive Officer of TeleBank since
January 1994. Mr. Caplan also serves as Vice President of TCM. From 1990 until
December 1993, Mr. Caplan was a member of the law firms of Danziger & Caplan and
Zuckerman & Gore, where he represented and advised private and public commercial
institutions.
Aileen Lopez Pugh has served as Executive Vice President, Chief Financial
Officer and Treasurer of the Company and TeleBank since August 1994. Prior to
joining management of the Company and TeleBank, Ms. Pugh served as a director
from April 1993 to August 1994. From December 1993 to May 1994, she served as a
consultant to MET Holdings in connection with the organization of the Company
and its initial public offering.
Laurence Greenberg has served as Executive Vice President and Chief
Marketing Officer of the Company and TeleBank since 1995 where he is responsible
for developing and implementing the Company's marketing strategy and overseeing
the call center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice President of Marketing. Prior to joining
management of the Company and TeleBank, Mr. Greenberg served as consultant to
TeleBank between April and September 1994. From 1993 to April 1994, Mr.
Greenberg was a Senior Associate at T.H. Land Research Group, Inc., a marketing
research company serving direct marketing companies. From 1989 to 1993, Mr.
Greenberg was a Marketing Manager for specialty publications with Capital
Cities/ABC, Inc.
16
<PAGE> 17
Michael Opsahl has served as Executive Vice President and Chief Credit
Officer since 1990, responsible for the development of the loan acquisition
process, including the acquisition and pricing of loans and the swapping of
purchased loan pools for mortgage-backed securities. Prior to joining the
Company, Mr. Opsahl served as a trading assistant at the Federal Home Loan
Mortgage Corporation. Mr. Opsahl is the brother-in-law of Mr. Smilow.
Sang-Hee Yi has served as Executive Vice President and Chief Operating
Officer since April 1996, responsible for operations and regulatory compliance.
Prior to serving in her current position, Ms. Yi served as the compliance
officer of the Company. From 1986 to April 1994, she was a federal thrift
regulator at the OTS.
David R. DeCamp has served as a director of the Company since its formation
in March 1994 and as a director of TeleBank since July 1992. Mr. DeCamp is a
Senior Vice President of Grubb & Ellis, a commercial real estate broker. From
1988 to 1996, Mr. DeCamp was a commercial real estate broker with Cassidy &
Pinkard, Inc. Mr. DeCamp is the Chairman of the Audit and Compliance Committees
of the Company and TeleBank, respectively.
Arlen W. Gelbard has served as a director of the Company and TeleBank since
April 1996. Mr. Gelbard is a member of the law firm of Hofheimer Gartlir &
Gross, LLP, New York, New York where he specializes in transactional real
estate, lending, leasing, foreclosures and workouts since 1982. Mr. Gelbard is
the Chairman of the Compensation Committee of each of the Company and TeleBank.
On June 30, 1998, Mr. Gelbard will join the Company as its General Counsel and
resign his position as a director of the Company.
Dean C. Kehler has served as a director of the Company and TeleBank since
March 1997. Mr. Kehler has been a Managing Director of CIBC Wood Gundy
Securities, a subsidiary of CIBC World Markets, and co-head of the High Yield
Group since August 1995. From February 1990 to August 1995, Mr. Kehler was a
founding partner and Managing Director of The Argosy Group, L.P., which was
acquired by CIBC Wood Gundy Securities in August 1995.
Steven F. Piaker has served as a director of the Company and TeleBank since
March 1997. Since January 1997, Mr. Piaker has been a Senior Vice President of
Conning & Company, a provider of asset management, private equity capital,
corporate finance services and research to the insurance and financial services
industries, which he joined in 1994. From September 1992 to June 1994, Mr.
Piaker served as a Senior Vice President of Conseco, Inc. where he was involved
in company-sponsored leveraged buyouts and private placements in the insurance
industry.
Mark Rollinson has served as a director of the Company since its formation
in March 1994 and as a director of TeleBank since 1992. He has been a
self-employed attorney in Leesburg, Virginia, for the past ten years.
Messrs. Kelleher and Piaker were elected to the Board of Directors of the
Company pursuant to a provision in the Certificate of Designation of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (the
"Certificate of Designation").
17
<PAGE> 18
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(c)
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<S> <C>
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference herein to Exhibit 3.1
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 the Registrant's Current Report on Form
8-K, dated March 17, 1997)
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of Warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.8 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
10.3 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.4 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.5 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.6 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.7 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.8 Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Company, as debenture trustee (incorporated
by reference herein to the Registrant's Registration
Statement on Form S-4, dated December 8, 1997, File No.
333-40399)
10.9 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
11 Statement regarding calculation of net income per share
21* Subsidiaries of the Registrant
Exhibit 99.1 Report of Independent Accountants
</TABLE>
- ---------------
* Filed previously.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TELEBANC FINANCIAL CORPORATION
/s/ Aileen Lopez Pugh
---------------------
Aileen Lopez Pugh
Executive Vice President, Chief Financial Officer
May 15, 1998
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference herein to Exhibit 3.1
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399
3.1(b) Certificate of Designations (incorporated by reference
herein to Exhibit 3 the Registrant's Current Report on Form
8-K, dated March 17, 1997)
3.2 Bylaws of the Registrant (incorporated by reference herein
to Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996, dated March 31,
1997)
4.1 Specimen certificate evidencing shares of Common Stock of
the Registrant (incorporated by reference herein to Exhibit
4.1 to the Registrant's Registration Statement on Form S-1,
dated March 25, 1994, File No. 33-76930)
4.2 Form of Warrant for the purchase of shares of Common Stock,
issued in connection with the Unit Purchase Agreement, dated
February 19, 1997, among the Registrant and the Purchasers
identified therein (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K,
dated March 17, 1997)
4.3 Form of warrant for the purchase of shares of Common Stock,
issued in connection with the units of warrants and
subordinated debt sold in the Registrant's initial public
offering (incorporated by reference herein to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1, dated
March 25, 1994, File No. 33-76930)
4.5 Form of Certificate of Exchange Junior Subordinated
Debentures (incorporated by reference herein to Exhibit 4.3
to the Registrant's Form 10-K/A for the year ended December
31, 1997, dated April 2, 1998)
4.6 Amended and Restated Declaration of Trust of TeleBanc
Capital Trust I, dated June 9, 1997 (incorporated by
reference herein to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.7 Form of Exchange Capital Security Certificate (incorporated
by reference herein to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-4, dated December 8, 1997,
File No. 333-40399)
4.8 Exchange Guarantee Agreement by the Registrant for the
benefit of the holders of Exchange Capital Securities
(incorporated herein by reference to Exhibit 4.7 to the
Registrant's Registration Statement on Form S-4, dated
December 8, 1997, File No. 333-40399)
10.1 1994 Stock Option Plan (incorporated by reference herein to
Exhibit 10.1 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
10.2 1997 Stock Option Plan (incorporated by reference herein to
Exhibit D to the Registrant's definitive proxy materials
which were filed as Exhibit 99.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996,
dated March 31, 1997)
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
10.3 Registration Rights Agreement, dated June 5, 1997, among the
Registrant, TeleBanc Capital Trust I and the Initial
Purchaser (incorporated by reference herein to Exhibit 4.8
to the Registrant's Registration Statement on Form S-4,
dated December 8, 1997, File No. 333-40399)
10.4 Unit Purchase Agreement, dated February 19, 1997, among the
Registrant and the Purchasers identified therein
(incorporated by reference herein to Exhibit 10.1 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.5 Amended and Restated Acquisition Agreement, dated February
19, 1997, among the Registrant, Arbor Capital Partners,
Inc., MET Holdings, Inc., and William M. Daugherty
(incorporated by reference herein to Exhibit 10.2 to the
Registrant's Current Report on 8-K, dated March 17, 1997)
10.6 Liquidated Damages Agreement, dated June 9, 1997, by and
among the Registrant, TeleBanc Capital Trust I, and the
Initial Purchaser (incorporated by reference herein to
Exhibit 4.9 to the Registrant's Registration Statement on
Form S-4, dated December 8, 1997, File No. 333-40399)
10.7 Tax Allocation Agreement, dated April 7, 1994, between
TeleBank and Registrant (incorporated by reference herein to
Exhibit 10.3 to Amendment No. 1 to the Registrant's
Registration Statement on Form S-1, dated May 3, 1994, File
No. 33-76930)
10.8 Indenture dated June 9, 1997, between the Registrant and
Wilmington Trust Company, as debenture trustee (incorporated
by reference herein to the Registrant's Registration
Statement on Form S-4, dated December 8, 1997, File No.
333-40399)
10.9 Form of Indenture between the Registrant and Wilmington
Trust Company as Trustee (incorporated by reference herein
to Exhibit 4.3 to the Registrant's Registration Statement on
Form S-1, dated March 25, 1994, File No. 33-76930)
11* Statement regarding calculation of net income per share
21* Subsidiaries of the Registrant
</TABLE>
- ---------------
* To be filed by Amendment.
<PAGE> 1
TELEBANC FINANCIAL CORPORATION
EXHIBIT 11
SCHEDULE OF COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
March 31, ------------------------
1998 1997 1996 1995
-------- ---- ---- ----
BASIC
-----
<S> <C> <C> <C> <C>
Net income for basic earnings per common
share 274 $ 3,671 $ 2,552 $ 2,720
Weighted average number of common shares
outstanding during the year 2,234 2,191 2,050 2,050
Basic earnings per common share 0.12 $ 1.68 $ 1.24 1.32
DILUTED
-------
Net income for diluted earnings per share 274 $ 4,217 $ 2,552 $ 2,720
Weighted average number of shares used in
calculating diluted earnings per share 2,878 3,706 2,203 2,052
Diluted earnings per common share 0.10 $ 1.15 $ 1.16 1.32
</TABLE>
<PAGE> 1
EX-99.1
EXHIBIT 99.1
Report of Independent Public Accountants
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of TeleBanc
Financial Corporation (a Delaware Corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income (as
revised see Note 24), 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits 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
February 20, 1998 (except with respect to the matter
discussed in Note 24, as to which
the date is May 11, 1998)
