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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTER ENDED MARCH 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 000-24549
TELEBANC FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3759196
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
--------------------------------------------------
(Address of principal executive office) (Zip code)
(703) 247-3700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of May 14, 1999.
$.01 par value of common stock 16,620,352
------------------------------ ----------
(class) (outstanding)
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<PAGE>
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1.
Consolidated Statements of Financial Condition - March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income -- Three months ended
March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity - Three months ended March
31, 1999 and 1998 6
Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 18
Part II - Other Information
- ---------------------------
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits 18
(b) Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 19,218 $ 26,282
Trading securities 18,929 29,584
Investment securities available for sale 219,223 220,358
Mortgage-backed securities available for sale 1,123,460 1,012,163
Loans receivable held for sale 103,857 117,928
Loans receivable, net 1,047,137 786,926
Other assets 88,985 90,100
------------ ------------
Total assets $ 2,620,809 $ 2,283,341
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Retail deposits $ 1,341,480 $ 1,142,385
Brokered callable certificates of deposit 67,116 67,085
Advances from the Federal Home Loan Bank of Atlanta 410,500 472,500
Securities sold under agreements to repurchase and other borrowings 602,913 404,435
Subordinated debt, net 29,917 29,855
Other liabilities 14,628 18,261
------------ ------------
Total liabilities 2,466,554 2,134,521
------------ ------------
Company-Obligated Mandatorily Redeemable Preferred Capital Securities of
Subsidiary Trust Holding Soley Junior Subordinated Debentures of the Company 35,402 35,385
Stockholders' equity:
Common stock, $0.01 par value, 29,500,000 shares authorized; 12,537,880 and
12,388,242 issued and outstanding at March 31, 1999 and December 31, 1998 126 123
Additional paid-in capital 105,750 103,194
Unearned ESOP shares (2,549) (2,578)
Retained earnings 12,067 10,819
Unrealized gain on securities available for sale, net of tax 3,459 1,877
------------ ------------
Total stockholders' equity 118,853 113,435
------------ ------------
Total liabilities and stockholders' equity $ 2,620,809 $ 2,283,341
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans $ 19,111 $ 10,365
Mortgage-backed and related securities 18,305 5,074
Investment securities 3,391 1,701
Trading securities 207 636
Other 678 295
-------- --------
Total interest income 41,692 18,071
Interest expense:
Retail deposits 17,158 8,055
Brokered callable certificates of deposit 1,098 374
Advances from the Federal Home Loan Bank of Atlanta 5,745 2,718
Repurchase agreements and other borrowings 7,477 2,451
Subordinated debt 884 879
-------- --------
Total interest expense 32,362 14,477
-------- --------
Net interest income 9,330 3,594
Provision for loan losses 490 250
-------- --------
Net interest income after provision for loan losses 8,840 3,344
-------- --------
Non-interest income:
Gain on sale of available-for-sale securities 1,021 891
Gain on sale of loans 1,833 121
Gain on trading securities 143 62
Gain on equity investment 148 526
Fees, service charges and other 530 347
-------- --------
Total non-interest income 3,675 1,947
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits 2,537 1,950
Advertising and marketing 2,459 629
Other 3,389 1,310
-------- --------
Total selling, general and administrative expenses 8,385 3,889
Other non-interest expenses:
Net operating costs of real estate acquired through foreclosure (40) 82
Amortization of goodwill and other intangibles 609 233
-------- --------
Total other non-interest expenses 569 315
-------- --------
Total non-interest expenses 8,954 4,204
-------- --------
</TABLE>
(continued)
4
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)
(In Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- -------
<S> <C> <C>
Income before income tax expense 3,561 1,087
Income tax expense 1,283 475
Minority interest in subsidiary 561 176
------- -------
Income before cumulative effect of accounting change 1,717 436
Cumulative effect of accounting change, net of tax 469 --
------- -------
Net income 1,248 436
Preferred stock dividends -- 162
------- -------
Net income available to common stockholders $ 1,248 $ 274
======= =======
Other comprehensive income, net of tax:
Unrealized holding gain on securities arising during the period 2,215 814
Less: reclassification adjustment for gains included in net income (633) (552)
------- -------
Other comprehensive income, net of tax 1,582 262
------- -------
Comprehensive income $ 2,830 $ 536
======= =======
Earnings per share:
Basic:
Income before cumulative effect of accounting change $ 0.14 $ 0.06
Cumulative effect of accounting change, net of tax (0.04) --
------- -------
Net income $ 0.10 $ 0.06
======= =======
Diluted:
Income before cumulative effect of accounting change $ 0.12 $ 0.05
Cumulative effect of accounting change, net of tax (0.03) --
------- -------
Net income $ 0.09 $ 0.05
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Unrealized
Gains on
Additional Unearned Available-
Preferred Common Paid-in ESOP Retained for-Sale
Stock Stock Capital Shares Earnings Securities Total
--------- ------ ---------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options -- -- 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
========= ========= ========= ========= ========= ========= =========
Balances at December 31, 1998 $ -- $ 123 $ 103,194 $ (2,578) $ 10,819 $ 1,877 $ 113,435
Net income for the three months ended March
31, 1999 -- -- -- -- 1,248 -- 1,248
Exercise of warrants and stock options,
including related tax benefit -- 3 2,501 -- -- -- 2,504
Release of unearned ESOP shares -- -- 55 29 -- -- 84
Unrealized gain on available-for-sale
securities, net of tax effect
-- -- -- -- -- 1,582 1,582
--------- --------- --------- --------- --------- --------- ---------
Balances at March 31, 1999 $ -- $ 126 $ 105,750 $ (2,549) $ 12,067 $ 3,459 $ 118,853
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 27,467 $ (4,776)
--------- ---------
Cash flows from investing activities:
Net increase in loans held to maturity (259,481) (26,002)
Interest received on loans extended to Employee Stock Ownership Plan 29 --
Equity investment in subsidiaries (1,022) (724)
Purchases of available-for-sale securities (279,795) (143,899)
Proceeds from sales of available-for-sale securities 82,251 151,543
Proceeds from maturities of and principal payments on available-for-sale
securities 85,561 18,419
Net purchases of premises and equipment (914) (226)
Proceeds from sale of foreclosed real estate 1,159 494
--------- ---------
Net cash used in investing activities (372,212) (395)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 199,126 80,619
Advances from the Federal Home Loan Bank of Atlanta 691,010 87,500
Payments on advances from the Federal Home Loan Bank of Atlanta (753,010) (97,500)
Net increase (decrease) in securities sold under agreements to repurchase 198,478 (125,939)
Net increase in other borrowed funds 79 52
Proceeds from the issuance of common stock 2,559 180
Dividends paid on Trust Preferred securities (561) (176)
Dividends paid on common and preferred stock
-- (162)
--------- ---------
Net cash provided by (used in) financing activities 337,681 (55,426)
--------- ---------
Net decrease in cash and cash equivalents (7,064) (60,597)
Cash and cash equivalents at beginning of period 26,282 92,156
--------- ---------
Cash and cash equivalents at end of period $ 19,218 $ 31,559
========= =========
Supplemental information:
Interest paid on deposits and borrowed funds $ 29,308 $ 13,692
Income taxes paid 60 242
Gross unrealized gain on available-for-sale securities 2,552 465
Tax effect of gain on available-for-sale securities 970 203
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NOTE 1. BASIS OF PRESENTATION
TeleBanc Financial Corporation ("TeleBanc" or the "Company") is a savings
and loan holding company organized under the laws of Delaware in 1994. The
primary business of the Company is the activities conducted by TeleBank (the
"Bank" or "Telebank") and TeleBanc Capital Markets, Inc. ("TCM"). The Bank, the
leading and largest online bank, is a federally chartered savings bank that
provides deposit accounts insured by the Federal Deposit Insurance Corporation
to customers nationwide. TCM is a funds manager and registered broker-dealer.
TeleBanc Capital Trust I ("TCT I") and TeleBanc Capital Trust II ("TCT II") are
business trusts formed for the purpose of issuing capital securities and
investing the proceeds in junior subordinated debentures issued by the Company.
The Bank, through its wholly owned subsidiary TeleBanc Servicing Corporation
("TSC"), owns 100% of TeleBanc Insurance Services, Inc. ("TBIS"), which was
formed in May 1998 to offer co-branded insurance products. TSC also owns 50% of
AGT PRA, LLC ("AGT PRA"). The primary business of AGT PRA is its two-thirds
investment in Portfolio Recovery Associates, LLC ("PRA"), which acquires and
collects delinquent consumer debt obligations for its own portfolio.
The financial statements as of March 31, 1999 and for the three months
ended March 31, 1999 and 1998 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,
1999 and the results of consolidated operations for the three months ended March
31, 1999 and 1998. The results of consolidated operations for the three months
ended March 31, 1999 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, 1998, included in the Company's Annual Report to
Stockholders for 1998, should be read in conjunction with these statements.
Effective June 22, 1998, the Board of Directors of the Company approved the
distribution of a 100% stock dividend on its outstanding common stock, par value
$0.01 (the "Common Stock"). The effect of the stock dividend has been
retroactively applied in the consolidated financial statements for all periods
presented.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs to comply with Statement of Position 98-5, Reporting on the Cost
of Start-up Activities ("SOP 98-5"), issued by the American Institute of
Certified Public Accountants in 1998. SOP 98-5 requires that start-up activities
be expensed as incurred rather than capitalized. Therefore, as of January 1,
1999, the Company expensed all previously capitalized start-up costs, reporting
the expense as a cumulative effect of accounting change in the Consolidated
Statement of Operations and Comprehensive Income.
8
<PAGE>
TELEBANC FINANCIAL CORPORATION
NOTE 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. Options and warrants are deemed to be dilutive if the
average market price of the related Common Stock for the period exceeds the
exercise price.
In February 1997, the Company issued 29,900 shares of 4% Cumulative
Preferred Stock (the "Preferred Stock"), par value $0.01, which was convertible
to 2,399,479 shares of the Company's Common Stock. For purposes of the diluted
earnings per share calculation, the Company assumed that all outstanding shares
of Preferred Stock had converted to Common Stock as of the beginning of the
respective periods. In July 1998, the Preferred Stock converted to Common Stock
and, therefore, was no longer outstanding as of March 31, 1999.
The Company's year to date weighted average number of common shares
outstanding was 12,324,997 at March 31, 1999 and 4,467,610 at March 31, 1998.
For the diluted earnings per share computation, weighted average shares
outstanding also includes potentially dilutive securities.
EPS CALCULATION
<TABLE>
<CAPTION>
Income Shares Per Share Amount
------ ------ ----------------
---------------------------------------------------------------------
For the Quarter Ended March 31, 1999
---------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share
Income before cumulative effect of
accounting change $ 1,717,000 12,324,997 $ 0.14
Cumulative effect of accounting
change, net of tax (469,000) (0.04)
----------------- -------------
Net income $ 1,248,000 $ 0.10
================= =============
Options issued to management 1,468,247
Warrants 728,258
----------
Diluted earnings per share
Income before cumulative effect of
accounting change $ 1,717,000 14,521,502 $ 0.12
==========
Cumulative effect of accounting
change, net of tax (469,000) (0.03)
----------------- -------------
Net income $ 1,248,000 $ 0.09
================= =============
</TABLE>
9
<PAGE>
TELEBANC FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Income Shares Per Share Amount
---------------------------------------------------------------------
For the Quarter Ended March 31, 1998
---------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 436,000
Less: preferred stock dividends 162,000
-----------------
Basic earnings per share
Income available to common shareholders $ 274,000 4,467,610 $ 0.06
======================
Options issued to management -- 666,360
Warrants -- 623,012
Convertible preferred stock -- --
---------------------------------------------
Diluted earnings per share $ 274,000 5,756,982 $ 0.05 (a)
=====================================================================
</TABLE>
(a) The impact of the convertible preferred stock is antidilutive for the three
months ended March 31, 1998.
NOTE 3. TRUST PREFERRED SECURITIES
In June 1997, the Company formed TCT 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 $10.0 million in a private placement. TCT I is a business trust
formed for the purpose of issuing capital securities and investing the proceeds
in junior subordinated debentures issued by the Company. These junior
subordinated debentures, which are the sole assets of TCT I, have a principal
amount of $10.0 million and bear interest at an annual rate of 11.0%. The junior
subordinated debentures mature in 2027.
In July 1998, the Company formed TCT II, a business trust formed solely for
the purpose of issuing capital securities. TCT II sold, at par, 1,100,000 shares
of Beneficial Unsecured Securities, Series A, with a liquidation amount of $25
per share, for a total of $27.5 million and invested the net proceeds in the
Company's 9.0% Junior Subordinated Deferrable Interest Debentures, Series A.
These Junior Subordinated Deferrable Interest Debentures, Series A, which are
the sole assets of TCT II, have a principal amount of $27.5 million and mature
in 2028.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). The statement establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at fair value. SFAS 133
requires that changes in the derivative instrument's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative instrument's gains and
losses to offset related results on the hedged item in the income statement and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting treatment. SFAS 133
is effective for fiscal years beginning after June 15, 1999, although a company
may implement the statement as of the beginning
10
<PAGE>
TELEBANC FINANCIAL CORPORATION
of any fiscal quarter after issuance, that is, fiscal quarters beginning June
16, 1998 and after. SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 and, at the Company's election, before January
1, 1998. The Company plans to adopt SFAS 133 as of January 1, 2000 but has not
yet quantified the impact of adopting SFAS 133 on its financial statements.
However, the statement could increase volatility in earnings and other
comprehensive income.
NOTE 4. SUBSEQUENT EVENTS
In April 1999, the Company sold 3,970,000 shares of its Common Stock to the
public, raising aggregate net proceeds of $396.2 million. The Company plans to
use $18.3 million of proceeds to redeem $17.3 million face amount of
subordinated debt after May 1, 1999, including a 5.75% premium. This debt bears
interest at 11.5% and matures on May 1, 2004. The Company will use $13.7 million
of proceeds to redeem $13.7 million face amount of subordinated debt bearing
interest at 9.5% and maturing on March 31, 2004. The Company intends to use
approximately $282.2 million of the proceeds to invest as additional capital of
Telebank. The remainder of the proceeds will be used for general corporate
purposes, which include funding the Company's continued growth and augmenting
working capital.
In April 1999, the Company announced a two-for-one split of its Common
Stock, subject to shareholder approval of an increase in the number of shares
outstanding. If this increase is approved, shares resulting from the split will
be issued on June 8, 1999 to shareholders of record as of May 28, 1999.
In May 1999, the Company completed the purchase of the building that houses
its current main headquarters in Arlington, Virginia, for $10.2 million.
NOTE 5. COMMITMENTS AND CONTINGENT LIABILITIES
As of March 31, 1999, we had commitments to purchase $59.4 million in
loans. Also, certificates of deposit that are scheduled to mature in less than
one year as of March 31, 1999 totaled $722.3 million. In the normal course of
business, we make various commitments to extend credit and incur contingent
liabilities that are not reflected in the balance sheets.
11
<PAGE>
TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999
This Quarterly Report on Form 10-Q contains forward-looking statements and
information relating to TeleBanc and its subsidiaries. The words "believe",
"expect", "may", "will", "should", "project", "contemplate", "anticipate",
"forecast", "intend" or similar terminology are intended to identify
forward-looking statements. These statements are based on the beliefs of
management as well as assumptions made using information currently available to
management. Because these statements reflect the current views of management
concerning future events, they involve risks, uncertainties and assumptions.
Therefore, actual results may differ significantly from the results discussed in
the forward-looking statements. Certain factors that may cause such a difference
include interest rate fluctuations, our ability to create brand awareness, our
ability to grow through the introduction of new products and services and our
ability to attain year 2000 compliance and to ensure year 2000 compliance from
the third parties with whom we do business.
This discussion and analysis includes descriptions of material changes that
have affected our consolidated financial condition and consolidated results of
operations during the periods included in our financial statements.
FINANCIAL CONDITION (MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998)
Total assets increased $300.0 million to $2.6 billion at March 31, 1999
from $2.3 billion at December 31, 1998, a 13.0% increase. Loans receivable, net
accounted for the majority of this rise, increasing $213.1 million from $786.9
million at December 31, 1998 to $1.0 billion at March 31, 1999, an increase of
27.1%, as we continued to build our core assets during the quarter.
Available-for-sale mortgage-backed securities also increased, rising $100.0
million, or 10.0%, from $1.0 billion at December 31, 1998 to $1.1 billion at
March 31, 1999. At the same time, our portfolio of trading mortgage-backed
securities decreased $10.7 million, or 36.1%, to $18.9 million at March 31, 1999
from $29.6 million at December 31, 1998.
We funded this overall asset growth through additional retail deposits and
other borrowings. Specifically, retail deposits grew $200.0 million, or 18.2%,
to $1.3 billion at March 31, 1999 from $1.1 billion at December 31, 1998. This
rise corresponds to net retail customer account growth of 7,111, bringing the
number of retail deposit accounts to 57,946 at March 31, 1999, up from 50,835 at
the end of 1998. Federal Home Loan Bank advances and other borrowings increased
$123.1 million, or 14.0%, from $876.9 million at December 31, 1998 to $1.0
billion at March 31, 1999.
Stockholders' equity increased $5.5 million from $113.4 million at December
31, 1998 to $118.9 million at March 31, 1999. The increase reflects net income
of $1.2 million--net of the cumulative effect of an accounting change of
$469,000--proceeds of $2.6 million from the exercise of options and warrants,
and unrealized gains on available-for-sale securities of $1.6 million.
12
<PAGE>
TELEBANC FINANCIAL CORPORATION
The following table presents consolidated average balance sheet data,
income and expenses and related interest yields and rates for the quarters ended
March 31, 1999 and 1998. The table also presents information for the periods
indicated with respect to net interest margin, an indicator of an institution's
profitability. Another indicator of profitability is net interest spread, which
is the difference between the weighted average yield earned on interest-earning
assets and weighted average rate paid on interest-bearing liabilities. Average
annualized yield includes the incremental tax benefit of tax exempt income.
<TABLE>
<CAPTION>
Quarter Ended March 31, 1999 Quarter Ended March 31, 1998
-------------------------------------- -----------------------------------------
Interest Average Interest Average
(In thousands) Average Income/ Annualized Average Income/ Annualized
(unaudited) Balance Expense Yield/Cost Balance Expense Yield/Cost
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $1,005,016 $ 19,111 7.61% $ 545,827 $ 10,358 7.59%
Interest-bearing deposits 21,824 223 4.14 6,410 92 5.72
Mortgage-backed and related
securities available for sale 1,122,206 18,305 6.52 271,001 5,074 7.49
Investment securities available
for sale 220,985 3,391 6.34 109,270 1,736 6.35
Investment in FHLB stock 24,622 455 7.50 9,400 168 7.25
Trading securities 11,118 207 7.45 29,672 549 7.41
---------- ---------- ---------- ----------
Total interest-earning assets $2,405,771 $ 41,692 6.93% $ 971,580 $ 17,977 7.40%
Non-interest-earning assets 88,343 27,382
---------- ----------
Total assets $ 2,494,114 $ 998,962
=========== ==========
Interest-bearing liabilities:
Retail deposits $ 1,223,657 $ 17,158 5.69% $ 540,093 $ 8,062 6.02%
Brokered callable certificates of
deposit 67,078 1,098 6.64 22,720 374
6.67
FHLB advances 437,033 5,745 5.26 177,055 2,718
6.14
Other borrowings 563,052 7,477 5.31 163,059 2,385
5.85
Subordinated debt, net 29,877 884 11.83 29,944 880 11.75
---------- ---------- ---------- ----------
Total interest-bearing
liabilities $ 2,320,697 $ 32,362 5.66% $ 932,871 $ 14,419 6.23%
Non-interest-bearing liabilities 59,029 23,591
---------- ----------
Total liabilities 2,379,726 956,462
Stockholders' equity 114,388 42,500
---------- ----------
Total liabilities and
stockholders' equity $ 2,494,114 $ 998,962
=========== ==========
Excess of interest-earning assets
over interest-bearing
liabilities/net interest income$ 85,074 $ 9,330 $ 38,709 $ 3,558
=========== ========== ========== ==========
Net interest spread 1.27% 1.17%
=========== ===========
Net interest margin (net yield on
interest-earning assets) 1.55% 1.47%
=========== ===========
Ratio of interest-earning assets
to interest-bearing liabilities 103.67% 104.15%
=========== ===========
</TABLE>
13
<PAGE>
TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net Income. Net income for the three months ended March 31, 1999 increased
$764,000 to $1.2 million, net of a $469,000 cumulative effect of accounting
change, from $436,000 for the quarter ended March 31, 1998, an increase of
175.2%. Net income for the three months ended March 31, 1999 consisted primarily
of $9.3 million of net interest income and $3.7 million of non-interest income
reduced by $490,000 in provision for loans losses, $9.0 million in non-interest
expenses and $1.3 million in income tax expense. Net income for the three months
ended March 31, 1998 consisted primarily of $3.6 million of net interest income
and $1.9 million in non-interest income reduced by $250,000 in provision for
loan losses, $4.2 million in non-interest expenses and $475,000 in income tax
expense. Our return on average assets and return on average equity for the
quarter ended March 31, 1999 were 0.20% and 4.36%, respectively.
Net Interest Income. Net interest income totaled $9.3 million and $3.6
million for the three months ended March 31, 1999 and 1998, reflecting an
annualized net interest margin of 1.55% and 1.47%, respectively. This increase
in net interest income is related to the increase in net interest margin as well
as higher volume, as we increased our interest-earning assets significantly
during 1998 and early 1999. During the first quarter of 1999, average
interest-earning assets, consisting primarily of loans receivable, net, and
mortgage-backed and related securities, totaled $2.4 billion and yielded 6.93%,
as compared to $971.6 million, reflecting a yield of 7.40%, for the same period
in 1998. Average interest-bearing liabilities for the quarters ending March 31,
1999 and 1998 were $2.3 billion and $932.9 million, costing 5.66% in the first
quarter of 1999 as compared to 6.23% during the same period in 1998. The decline
in the yield on interest-earning assets and the decline in the cost of
interest-bearing liabilities resulted from changes in overall market conditions
during the latter part of 1998 and the first quarter of 1999.
Provision for Loan Losses. The provision for loan losses reflects
management's intent to provide prudent reserves for potential losses on loans
held or acquired during the quarter. We recorded a loan loss provision of
$490,000 for the first quarter of 1999, in accordance with our policy of
providing adequate reserves for inherent losses in the portfolio. Net
charge-offs during the quarter totaled $30,000, which represents an annualized
level of 1 basis point of average loan balances for the quarter. As of March 31,
1999, our total loan loss allowance was $5.2 million, or 0.45% of total loans
outstanding. The total loan loss allowance at March 31, 1998 was $3.8 million,
which was 0.68% of total loans outstanding. Total general loan loss allowance as
a percentage of total non-performing assets was 60.3% as of March 31, 1999 and
29.2% as of March 31, 1998.
14
<PAGE>
TELEBANC FINANCIAL CORPORATION
Non-interest Income. Non-interest income increased $1.8 million, or 94.7%,
from $1.9 million for the three months ended March 31, 1998 to $3.7 million for
the three months ended March 31, 1999, primarily due to higher income from the
sale of available-for-sale securities and sales and prepayments of held-for-sale
loans. For the three months ended March 31, 1999, we reported gains of $1.0
million from the sale of mortgage-backed and investment securities, $1.8 million
from sales and prepayments of loans held for sale, $143,000 from net realized
and unrealized gains on our trading portfolio, $148,000 from our equity-method
investment in PRA, and $530,000 in loan servicing charges and other fees.
Non-interest income for the first quarter of 1998 consisted of gains of $891,000
from the sale of mortgage-backed and investment securities, gains of $121,000 on
sales and prepayments of loans held for sale, $62,000 of net gains on our
trading portfolio, $526,000 from equity investments, and $347,000 in loan
servicing charges and other fees.
Non-interest Expenses. We incurred substantially higher non-interest
expenses for the three-month period ended March 31, 1999, recording $9.0
million, a $4.8 million, or 114.3%, increase from $4.2 million for the same
period in 1998. The majority of this increase resulted from higher marketing
costs, as we continued our strategy of increasing marketing expenses associated
with brand building that seeks to establish the Telebank name as synonymous with
the premier national provider of high-value banking products through the
internet. Specifically, advertising and marketing costs rose $1.9 million, or
297.5%, from $629,000 for the three months ended March 31, 1998 to $2.5 million
for the first quarter of 1999. Additionally, compensation costs increased
$500,000, or 25.0%, from $2.0 million for the first quarter of 1998 to $2.5
million for the same quarter in 1999 due to additional personnel. Amortization
of goodwill and other intangibles increased $376,000, or 161.4%, due to the
amortization of goodwill obtained in our acquisition of Direct Financial
Corporation in August 1998. Annualized selling, general and administrative
expenses totaled 1.28% of total ending assets as of March 31, 1999 and 1.48% of
total ending assets as of March 31, 1998.
Income Tax Expense. Income tax expense for the quarter ended March 31, 1999
totaled $1.3 million, yielding an effective tax rate of 36.1%, compared to
$475,000 and an effective tax rate of 43.7% for the three months ended March 31,
1998. The higher earnings we experienced in the first quarter of 1999 lessened
the impact of non-deductible expenses and lowered our effective tax rate.
15
<PAGE>
TELEBANC FINANCIAL CORPORATION
LIQUIDITY
Liquidity represents our 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 our ongoing obligations. We meet our liquidity needs primarily
through financing activities, such as 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.
Telebank is required to maintain minimum levels of liquid assets as defined
by the regulations of the Office of Thrift Supervision, or OTS. This
requirement, which may vary at the discretion of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The minimum required ratio is 4.0%. At March 31, 1999,
the Bank's liquidity ratio was 5.13%.
In April 1999, we raised capital through an equity offering, in which we
sold 3,970,000 shares of common stock to the public, raising aggregate net
proceeds of $396.2 million. We intend to use a portion of the net proceeds of
this offering to redeem $31.0 million face amount of subordinated debt after May
1, 1999, and approximately $282.2 million will be invested as additional capital
of Telebank. We plan to use the remainder of the proceeds to augment working
capital and to fund continued growth.
CAPITAL RESOURCES
At March 31, 1999, 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.
The following table sets forth Telebank's regulatory capital levels at
March 31, 1999 in relation to the regulatory requirements in effect at that
date. The information below is based upon our understanding of the regulations
and interpretations currently in effect and may be subject to change.
<TABLE>
<CAPTION>
Required to be Well
Required for Capital Capitalized under Prompt
Adequacy Corrective Action Provisions
Actual Purposes
Amount Ratio Amount Ratio Amount Ratio
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Core Capital (to adjusted tangible
assets) $ 134,935 5.3% $ 102,585 greater than 4.0% $ 128,232 greater than 5.0%
Tangible Capital (to adjusted
tangible assets) $ 134,935 5.3% $ 38,470 greater than 1.5% N/A N/A
Tier I Capital (to risk-weighted
assets) $ 134,935 12.4% N/A N/A $ 65,075 greater than 6.0%
Total Capital (to risk-weighted
assets) $ 139,704 12.9% $ 86,767 greater than 8.0% $ 108,459 greater than 10.0%
</TABLE>
16
<PAGE>
TELEBANC FINANCIAL CORPORATION
YEAR 2000 ISSUES
In 1997, we began year 2000 planning, following the five steps recommended
by the Federal Financial Institutions Examination Council. We have completed
phases focused on awareness and assessment and continue to update the results of
these phases for new information received. Currently, the renovation phase,
which consists of implementing changes and monitoring vendor renovation, and the
validation phase, which consists of testing renovated systems, are underway. We
are monitoring vendors for software updates and final compliance certification
statements and have received certifications from all of our vendors. Some
vendors, however, have continued to update their products to correct year 2000
issues even after certifying that they are year 2000 compliant, indicating that
these certifications may not be final. As a result, following the receipt of the
final certification statements relating to those systems identified as mission
critical in the assessment phase, we internally validate such certifications
through testing. To date, we have identified no significant year 2000 issues
through our testing of mission critical systems. Our mission critical systems
include the deposit processing system, general ledger system and internet
banking applications. We are substantially complete with renovation, validation
and implementation of all mission critical systems. As of May 12, 1999, we have
completed 100% of our remediation efforts and 80% of the testing of our mission
critical systems.
Our steady growth over the past several years has required that we
continually upgrade our systems; we do not anticipate that we will incur
material costs related to our year 2000 remediation efforts. We have analyzed
the impact of year 2000 issues on our non-information technology systems such as
embedded chips necessary for proper operation of mechanical systems and have
concluded that these issues do not present a significant risk to our operations.
Few upgrades have been accelerated due to the year 2000 issue. To date, we
have spent approximately $25,000 on upgrades related to our year 2000
remediation efforts, with an additional $75,000 expected to be spent on
compliance efforts before the year 2000. In May 1999, we hired an outside
consulting firm to provide an additional hardware test environment that will aid
us in the continuation of our testing of mission critical systems.
The majority of our loans are serviced by a large company that uses the
same system as several of the largest loan servicers in the United States and
that is expected to be year 2000 compliant. We are currently monitoring the
servicer's year 2000 plan and testing. However, approximately 38% of our loans
are serviced by smaller loan servicers whose systems may not be year 2000
compliant. If these systems were to fail, principal and interest payments on the
loans serviced by these servicers could be delayed, and we would lose interest
income that we would normally earn on these funds. We have developed a
contingency plan to address this loan servicing issue specifically. Under the
contingency plan, we notified these servicers that if we did not receive
confirmation of compliance by March 31, 1999, we would begin transferring
servicing of these loans to servicers who are known to be year 2000 complaint.
While most of these small servicers appear to be year 2000 compliant, we are
contacting a small number of these servicers to discuss transferring their loan
portfolios to larger servicers. We hope to complete such transfers by June 30,
1999.
17
<PAGE>
TELEBANC FINANCIAL CORPORATION
Based upon current information, we do not anticipate costs associated with
the year 2000 issue to have a material financial impact. There may, however, be
interruptions or other limitations of financial and operating systems'
functionality and we may incur additional costs to avoid such interruptions or
limitations. Our expectations about future costs associated with the year 2000
issue are subject to uncertainties that could cause actual results to have a
greater financial impact than currently anticipated. Factors that could
influence the amount and timing of future costs include:
o our success in identifying systems and programs that contain two-digit
year codes;
o the nature and amount of programming required to upgrade or replace
each of the affected programs;
o the rate and magnitude of related labor and consulting costs; and
o our success in addressing the year 2000 issues with third-parties with
which we do business.
MARKET RISK
We manage interest rate risk through the use of financial derivatives such
as interest rate cap, swap, floor and futures agreements. We use these
instruments to ensure that the market value of equity and net interest income
are protected from the impact of changes in interest rates. We have experienced
no material changes in market risk during the first three months of 1999.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No information to report.
18
<PAGE>
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TeleBanc Financial Corporation
(Registrant)
Date: May 14, 1999 By: /s/ Mitchell H. Caplan
---------------- -----------------------------------------------------
Mitchell H. Caplan
President and Chief Executive Officer
Date: May 14, 1999 By: /s/ Aileen Lopez Pugh
---------------- -----------------------------------------------------
Aileen Lopez Pugh
Executive Vice President and Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000920986
<NAME> Telebanc
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Mar-31-1999
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35,402
0
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<LOANS-NON> 7,384
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</TABLE>
