<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1999
REGISTRATION NO. 333-72145
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
TELEBANC FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3759196
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
ARLEN W. GELBARD
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
TELEBANC FINANCIAL CORPORATION
1111 NORTH HIGHLAND STREET
ARLINGTON, VIRGINIA 22201
(703) 247-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
-------------------------
COPIES TO:
<TABLE>
<S> <C>
STUART G. STEIN ROBERT H. CRAFT, JR.
STEVEN A. MUSELES SULLIVAN & CROMWELL
HOGAN & HARTSON L.L.P. 1701 PENNSYLVANIA AVENUE, N.W.
555 THIRTEENTH STREET, N.W. WASHINGTON, D.C. 20006
WASHINGTON, D.C. 20004 (202) 956-7500
(202) 637-5600
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C>
PROPOSED
MAXIMUM
TITLE OF SHARES TO AGGREGATE AMOUNT OF
BE REGISTERED OFFERING PRICE REGISTRATION FEE(1)
Common stock, par value $.01 per share(2)................... $250,000,000 $69,500(3)
</TABLE>
(1) Determined pursuant to Rule 457(o) under the Securities Act.
(2) The shares of Common Stock are not being registered for the purpose of sales
outside the United States.
(3) $65,330 of this amount was paid with the filing of the Company's
registration statement on February 11, 1999.
-----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated March 19, 1999.
3,800,000 Shares
[TELEBANC LOGO]
Common Stock
----------------------
This is an offering of shares of common stock of TeleBanc Financial
Corporation. This prospectus relates to an offering of 3,040,000 shares in the
United States. In addition, 760,000 shares are being offered outside the United
States in an international offering.
Telebanc is offering 3,400,000 of the shares to be sold in the offering.
The selling stockholders identified in this prospectus are offering an
additional 400,000 shares.
Telebanc's common stock is traded on the Nasdaq National Market under the
symbol "TBFC". On March 17, 1999, the last reported sale price for the common
stock was $53.375 per share.
See "Risk Factors" beginning on page 3 to read about factors you should
consider before buying shares of the common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
----------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Telebanc...................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
The U.S. underwriters may, under certain circumstances, purchase up to an
additional 456,000 shares from Telebanc at the initial public offering price
less the underwriting discount. The international underwriters may similarly
purchase up to an additional 114,000 shares.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
----------------------
Prospectus dated , 1999.
<PAGE> 3
[Samples of our advertising, including billboards, magazine, newspaper and
internet ads, and a graphic displaying our web site. This selection contains
graphics and text depicting our high rate, low fee product offerings.]
[PAGE FOR COVER PAGE GRAPHICS]
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and our financial statements in this
prospectus. Telebanc is a savings and loan holding company that operates its
business principally through two wholly owned subsidiaries, TeleBank, a
federally chartered savings bank, and TeleBanc Capital Markets, Inc., a
registered broker-dealer.
TELEBANC FINANCIAL CORPORATION
We provide high value financial products and services primarily over the
internet. We offer a wide range of FDIC-insured and other banking products and
services with significantly higher rates and lower fees than traditional banks
with brick-and-mortar branches.
We have been providing branchless banking for ten years. With the advent of
the internet, we have positioned ourselves to exploit its low cost distribution,
increased functionality and broader reach. We believe that the low costs
associated with delivering our products and services over the internet provide
us with significant cost advantages over traditional banks that must support
branch networks.
Currently, approximately 60% of our customer contacts occur over the
internet. Using our secure, comprehensive and customer friendly web site,
individuals can open an account, transfer funds between accounts, view account
balances, pay bills and compare our premium rates to national averages.
Customers can deposit funds using direct deposit, wire or U.S. mail, and can
withdraw cash from over 430,000 automated teller machines on the Cirrus(R)
network worldwide. To support our products and services and build customer
loyalty, we seek to provide superior customer service through our 24-hour call
centers. We also offer a wide array of complementary products, including
residential mortgage loans and fixed annuities, through mutually beneficial
alliances with other companies that provide these products directly.
Our comprehensive marketing plan targets customers in all 50 states who
value the convenience and premium rates of our high value products. The four
main initiatives of our marketing plan are national advertising through print,
radio and online media, marketing alliances with popular web sites such as
Yahoo! and E-Loan, affinity partnerships with national organizations such as
Sam's Club and programs where our existing customers refer new customers to us.
As of December 31, 1998, we had approximately 50,000 customer accounts, $2.3
billion in total assets and $1.1 billion in retail deposits. During 1998, our
retail deposits and customer accounts grew 119% and 133%.
Our executive offices are located at 1111 North Highland Street, Arlington,
Virginia 22201, telephone (703) 247-3700. Telebank's web site address is
www.telebankonline.com.
1
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
The following information assumes that the
underwriters do not exercise the option granted
by Telebanc to purchase additional shares in the
offering. See "Underwriting". The amount of
shares to be outstanding after this offering
excludes 2,890,689 shares issuable upon exercise
of outstanding options and warrants.
Shares offered by Telebanc.... 3,400,000
Shares offered by the selling
stockholders................ 400,000
Shares to be outstanding after
the offering................ 15,961,635
Nasdaq National Market
symbol...................... TBFC
Use of proceeds............... To invest as
additional capital of Telebank to support
further growth, to redeem subordinated debt and
for general corporate purposes.
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net interest income........ $4,695 $8,565 $10,985 $13,238 $19,805
Non-interest income........ 175 3,777 2,756 4,093 7,564
Non-interest expenses...... 3,656 6,240 9,075 10,142 22,078
Net income................. 540 2,720 2,552 4,217 1,375
Preferred stock
dividends................ -- -- -- 546 2,112(1)
Net income (loss) available
to common
stockholders............. 540 2,720 2,552 3,671 (737)(1)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL
CONDITION DATA:
Total assets............... $427,292 $553,943 $647,965 $1,100,352 $2,283,341
Loans receivable,
mortgage-backed and
investment securities.... 403,650 522,935 615,390 972,254 2,166,959
Retail deposits............ 212,411 306,500 390,486 522,221 1,142,385
Borrowings................. 192,003 215,901 218,967 509,523 906,790
Total stockholders'
equity................... 17,028 21,565 24,658 45,824 113,435
OTHER:
Number of accounts......... 8,564 12,919 16,506 21,817 50,835
</TABLE>
- ---------------
(1) Includes a $1.7 million non-recurring, non-cash charge related to a special
preferred stock dividend paid in common stock, upon conversion of the
preferred stock. This amount is based on the fair market value of the common
stock at the time the dividend was paid.
2
<PAGE> 6
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In such case,
the trading price of our common stock could decline, and you may lose all or
part of the money you paid to buy our common stock.
INCREASED GENERAL AND
ADMINISTRATIVE EXPENSES, INCLUDING INCREASED MARKETING EXPENSES, MAY REDUCE OUR
PROFITABILITY
In 1998, we increased our marketing expenses in our effort to establish
Telebank as the premier national provider of high value banking products through
the internet. This resulted in a $4.0 million increase in advertising and
marketing expenses in 1998. In addition, as a result of our rapid growth,
compensation costs increased $2.9 million, or 59.2%, for the year ended December
31, 1998. We expect to continue to pursue an aggressive brand building and
growth strategy, and expect 1999 marketing expenditures to range from three to
six times 1998 marketing expenditures. These expenses may not be matched by
corresponding increases in revenue, which would result in a reduction in our
earnings. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of operations -- Year ended December 31, 1998
compared to year ended December 31, 1997 -- Non-interest expenses".
CHANGES IN INTEREST RATES
MAY REDUCE OUR PROFITABILITY
Our results of operations depend in large part upon the level of our net
interest income, that is, the difference between interest income from
interest-earning assets, such as loans and mortgage-backed securities, and
interest expense on interest-bearing liabilities, such as deposits and
borrowings. Many factors cause changes in interest rates, including governmental
monetary policies and domestic and international economic and political
conditions. If we are unsuccessful in managing the effects of changes in
interest rates, our financial condition and results of operations could suffer.
Changes in market interest rates could reduce the value of our financial
assets. Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decline in value as interest rates rise. We simulated
the effect as of December 31, 1998 that a hypothetical instantaneous 1.0% rise
in interest rates would have on our company. Based on this simulation analysis,
we estimated such an increase in interest rates would cause the fair value of
equity to decrease by 9.0%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Interest rate sensitivity
management".
OUR OPERATIONS ARE MORE SENSITIVE TO
PRICE AND TECHNOLOGY COMPETITION THAN
TRADITIONAL FINANCIAL SERVICES FIRMS
Because we rely on remote access tools such as the internet and telephone,
our customers may be more price sensitive and more willing to try new
technologies than customers of typical financial services firms, which rely on
branches and face-to-face customer service. Consequently, the following
competitive factors are of particular importance to our profitability:
- price competition for deposits and borrowings;
- introduction of new products by us and our competitors;
- changes in the mix of products and services we sell; and
- the level of use of the internet and on-line services.
IF OUR APPLICATION FOR THE SERVICEMARK IS CHALLENGED, WE MAY LOSE THE RIGHT TO
USE THE "TELEBANK" BRAND NAME
Our success in introducing new financial products and services through the
internet, telephone and automated teller machines and attracting new customers
will depend in part
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<PAGE> 7
upon our ability to increase awareness of the Telebank brand. We currently do
not own a federal registration for the servicemark "Telebank", although an
application is pending. If a competitor successfully challenges our ability to
use the name "Telebank", we could lose the right to use the "Telebank" brand
name and the benefits of the brand awareness we have developed.
OUR STRATEGY DEPENDS ON CUSTOMER ACCEPTANCE OF THE INTERNET
AND OTHER NON-TRADITIONAL
MEANS OF DELIVERING OUR PRODUCTS AND SERVICES
Since we rely on the internet, telephone and automated teller machines to
offer our financial products and services, our branchless banking strategy
differs from that of traditional financial institutions. Our future revenues and
profits will depend, in substantial part, upon customer acceptance of and demand
for these means of delivering financial products and services. The market for
financial products and services through the internet is new and evolving, and
the degree to which customers will use it for their financial transactions is
not yet fully determined. Our customer base will grow only if consumers who have
historically used traditional means of banking begin to use our electronic
services for this purpose.
RAPIDLY CHANGING TECHNOLOGIES MAY CAUSE US TO DELAY INTRODUCTION OF NEW
PRODUCTS, SERVICES AND ENHANCEMENTS, WHICH MAY RESULT IN A LOSS OF EXISTING
CUSTOMERS OR A FAILURE TO ATTRACT NEW CUSTOMERS
Our future success will depend on our ability to adapt to rapidly changing
technologies. We also will have to enhance existing products and services and
develop and introduce a variety of new products and services to address our
customers' changing demands. We may experience technological difficulties that
could delay or prevent the successful design, development, introduction or
marketing of our products and services. Material delays in introducing new
products and services and enhancements may cause customers to forego purchases
of our products and services and purchase those of our competitors.
SYSTEM NETWORKS COULD FAIL, WHICH COULD
ADVERSELY AFFECT OUR BUSINESS
Our computer systems and network infrastructure may be vulnerable to
unforeseen problems. Our operations depend on our ability to protect our
computer equipment against damage from fire and water, power loss,
telecommunications failure or a similar unexpected adverse event. Customers may
become dissatisfied by any system failure that interrupts our ability to provide
our services to them. Sustained or repeated system failures would reduce the
attractiveness of the services which we provide. Slower response time or system
failures may also result from straining the capacity of our software or hardware
due to an increase in the volume of services delivered through our servers. To
the extent that we do not effectively address any capacity constraints or system
failures, our customers could seek other providers of banking services.
OUR SECURITY COULD BE BREACHED, WHICH COULD DAMAGE OUR REPUTATION AND DETER
CUSTOMERS FROM USING OUR SERVICES
We must protect our computer systems and network from physical break-ins,
security breaches and other disruptive problems caused by the internet or other
users. Computer break-ins could jeopardize the security of information stored in
and transmitted through our computer systems and network, which would likely
adversely affect our ability to retain or attract customers, could damage our
reputation and could subject us to litigation. Although we intend to continue to
implement security technology and establish operational procedures to prevent
break-ins, damage and failures, these security measures may fail.
4
<PAGE> 8
WE OUTSOURCE MANY ESSENTIAL SERVICES TO THIRD-PARTY PROVIDERS WHO MAY TERMINATE
THEIR AGREEMENTS WITH US, RESULTING IN INTERRUPTIONS TO OUR OPERATIONS
We receive, and will continue to receive, essential technical and customer
service support from third-party providers. These third-party providers provide
check processing, check imaging, internet processing, internet software, home
page hosting and statement rendering services. We expect to use third-party
providers for additional services in the future. Our current agreements with
each of these service providers may be canceled without cause by either party
upon specified notice periods, and future agreements may contain similar
clauses. If one of our third-party service providers terminates its agreement
with us, we may not be able to enter into a new agreement on similar terms, and
our operations may be interrupted. If an interruption were to continue for a
significant period of time, we could lose customers to other providers.
COMPETITION WITH OTHER FINANCIAL
INSTITUTIONS MAY CAUSE US TO INCREASE
MARKETING EXPENSES, RESULTING IN
REDUCED PROFITABILITY
We face intense competition in the financial services industry from
providers of direct-marketed savings and investment products and other
internet-based financial institutions. Additionally, because there are few
barriers to market entry, traditional, branch-based and other financial services
companies may be able to adopt business strategies similar to ours with relative
ease. Many of the financial institutions with which we currently compete or may
compete in the future have significantly greater capital and management
resources, longer operating histories, greater brand recognition and larger
customer bases. Increased competition could cause us to increase marketing
expenses, resulting in reduced profitability. See "Business -- Competition".
IF OUR KEY MANAGEMENT PERSONNEL LEAVE
OUR COMPANY, OUR BUSINESS COULD BE
ADVERSELY AFFECTED
Our future success depends to a significant extent on the continued
services of our key senior management, including Mitchell H. Caplan, Vice
Chairman of the Board of Directors, Chief Executive Officer and President and
Laurence P. Greenberg, Executive Vice President and Chief Marketing Officer. We
have no employment agreements with these executives and do not maintain "key
person" life insurance policies. The loss of the services of either of these
individuals or other key employees would likely have a material adverse effect
on our business.
OUR EXISTING STOCKHOLDERS HAVE SIGNIFICANT CONTROL OF OUR MANAGEMENT AND
AFFAIRS, WHICH THEY COULD EXERCISE AGAINST
YOUR BEST INTERESTS
Upon completion of the offering, David A. Smilow, Chairman of the Board,
Mr. Caplan, our Employee Stock Ownership Plan, of which Messrs. Smilow and
Caplan are trustees, and our directors and executive officers as a group will
beneficially own 21.9% of our outstanding common stock. As a result, Messrs.
Smilow and Caplan and our directors and executive officers as a group can
exercise significant control over our management and affairs, including the
election of directors and the determination of all other matters requiring
stockholder approval. Collectively, they will have the power to block business
combinations under our certificate of incorporation and bylaws. Accordingly,
this concentration of ownership may have the effect of delaying or preventing a
change of control of our company that may be in your best interests. See
"Principal and Selling Stockholders".
In addition, provisions of our certificate of incorporation and our bylaws,
as well as federal banking and Delaware law, could make it more difficult for a
third party to acquire us, even if doing so would be
5
<PAGE> 9
beneficial to stockholders. These provisions include:
- a staggered board of directors;
- advance notice procedures for nomination of directors and for stockholder
proposals;
- limits on the ability of stockholders to call special meetings;
- super-majority board or stockholder approval for change of control; and
- limitations on control share acquisitions.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT
OUR STOCK PRICE AND OUR ABILITY TO
RAISE FUNDS IN NEW STOCK OFFERINGS
If our stockholders sell substantial amounts of common stock in the public
market following this offering, including shares issued upon the exercise of
outstanding options and warrants, the market price of our common stock could
fall. These sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of the offering, we will have 15,961,635 shares of
common stock outstanding, assuming no exercise of outstanding options or
warrants as of March 16, 1999. 4,961,264 of these shares constitute "restricted
securities" within the meaning of Rule 144 under the Securities Act of 1933 and
may be sold in compliance with Rule 144. Of these shares, 2,658,351 are subject
to the 180-day lock-up period described below.
As of the date of this prospectus, holders of 2,098,146 of these shares
have rights to require us to register their shares for sale with the SEC. By
exercising their registration rights and causing a large number of shares to be
sold in the public market, these stockholders may cause the market price of the
common stock to fall. In addition, if they demand to include their shares in one
of our registration statements, our ability to raise needed capital could be
adversely effected. Our company, our directors and officers and some of our
other stockholders who will beneficially own, collectively, approximately
3,938,705 shares of common stock after this offering, have agreed not to offer
or sell any shares of common stock for 180 days following the date of this
prospectus without prior written consent from the underwriters. We may, however,
issue shares of common stock pursuant to employee stock option plans, upon
conversion of outstanding securities or in connection with acquisitions,
business combinations or strategic investments.
As of March 16, 1999, there were outstanding options to purchase 2,109,513
shares of common stock and warrants to acquire 781,176 shares of common stock.
The common stock underlying these options and warrants will be eligible for sale
in the public market from time to time subject to vesting and other
requirements. The stock options and warrants generally have exercise prices
significantly below the current market price of our common stock. The possible
sale of a significant number of these shares may cause the market price of our
common stock to fall.
THE ABILITY OF OUR SUBSIDIARY, TELEBANK, TO PAY DIVIDENDS TO US IS RESTRICTED
We have never paid cash dividends on our common stock, and we do not intend
to pay cash dividends on our common stock for the foreseeable future. Our
ability to pay dividends to our stockholders is derived primarily from, and
dependent upon, our ability to receive dividends from our subsidiary, Telebank.
We historically have received dividends from Telebank only if funds are needed
to cover our operating expenses, to pay interest on our debt and to pay
dividends to any preferred stockholders. Telebank is subject to substantial
regulatory restrictions on its ability to pay dividends to us.
Under current Office of Thrift Supervision capital distribution
regulations, as long as Telebank meets the Office of Thrift Supervision capital
requirements before and after the payment of dividends, Telebank may pay
dividends to us without prior Office of Thrift Supervision approval in an amount
equal to its net income to date over the
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<PAGE> 10
calendar year, plus retained net income over the preceding two years.
In addition, the Office of Thrift Supervision has discretion to prohibit
any otherwise permitted capital distribution on general safety and soundness
grounds, and must be given 30 days' advance notice of all capital distributions,
during which time it may object to any proposed distribution. As of December 31,
1998, Telebank had approximately $21.7 million available for payment of
dividends under applicable restrictions without regulatory approval. There can
be no assurance that such amounts can or will be paid to us as dividends.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The failure to
correct any such programs or hardware could result in system failures or
miscalculations causing disruptions of our operations, including a temporary
inability to process transactions or engage in similar normal business
activities. For further information regarding our efforts to handle the year
2000 issue, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 readiness disclosure
statement".
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<PAGE> 11
USE OF PROCEEDS
We estimate our net proceeds from the sale of the 3,400,000 shares of
common stock we are offering to be $172.0 million at the initial public offering
price of $53.375 per share, after deducting the underwriting discount and
estimated offering expenses. If the underwriters exercise their over-allotment
option in full, then our net proceeds will be $201.0 million.
We will 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. We 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.
We intend to use approximately $115.0 million of the proceeds to invest as
additional capital of Telebank. We intend to use the balance of the proceeds,
approximately $25.0 million, for general corporate purposes, including
investments in strategic partnerships and future growth.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol TBFC since July 21, 1998. Prior to that time, the common stock was traded
in the over-the-counter market under the same symbol.
The following table sets forth, for the periods indicated, the range of
high and low closing sale prices per share of common stock, as reported in the
over-the-counter market through July 21, 1998 and on the Nasdaq National Market
after that date.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ---- ---
<S> <C> <C>
1997
First Quarter............................................... $ 8.500 $ 6.000
Second Quarter.............................................. 8.750 6.250
Third Quarter............................................... 9.500 7.750
Fourth Quarter.............................................. 9.375 8.500
1998
First Quarter............................................... $10.625 $ 8.500
Second Quarter.............................................. 14.000 9.000
Third Quarter (through July 21, 1998)....................... 19.750 13.000
Third Quarter (from July 22, 1998).......................... 24.750 12.375
Fourth Quarter.............................................. 35.625 8.125
1999
First Quarter (through March 17, 1999)...................... $53.375 $30.375
</TABLE>
On March 17, 1999, the last reported sale price of our common stock on the
Nasdaq National Market was $53.375 per share.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock and
we do not anticipate paying cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business.
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CAPITALIZATION
The following table sets forth our consolidated capitalization at December
31, 1998 on an actual basis and as adjusted to give effect to the sale of common
stock in this offering and the use of the net proceeds to redeem subordinated
debt, assuming that the underwriters do not exercise their over-allotment
option. See "Use of Proceeds". This table excludes 3,044,082 shares of common
stock issuable upon exercise of stock options and warrants, at a weighted
average exercise price of $7.02. You should read this information together with
the consolidated financial statements and notes beginning on page F-1.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(Dollars in thousands)
<S> <C> <C>
Subordinated debt, net...................................... $ 29,855 $ --
Corporation -- obligated manditorily redeemable capital
securities of subsidiary trust............................ 35,385 35,385
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.01 par value, 29,500,000 shares
authorized; 12,388,242 shares issued and outstanding,
actual; 15,788,242 shares issued and outstanding, as
adjusted............................................... 123 157
Additional paid-in capital.................................. 103,194 275,165
Unearned ESOP shares........................................ (2,578) (2,578)
Retained earnings........................................... 10,819 10,819
Unrealized gain on securities available for sale, net of
tax....................................................... 1,877 1,877
-------- --------
Total stockholders' equity............................. 113,435 285,440
-------- --------
Total capitalization................................. $178,675 $320,825
======== ========
</TABLE>
9
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents our selected statement of operations data and
statement of financial condition data on a consolidated basis for each of the
five years in the period ended December 31, 1998. The selected historical
consolidated financial data presented below for each of the years ended December
31, 1994 through 1998 are derived from our audited consolidated financial
statements and notes. You should read this data together with our consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................................. $ 22,208 $ 40,511 $ 45,800 $ 59,301 $ 100,110
Interest expense............................................ 17,513 31,946 34,815 46,063 80,305
-------- -------- -------- ---------- ----------
Net interest income......................................... $ 4,695 $ 8,565 $ 10,985 $ 13,238 $ 19,805
Provision for loan losses................................... 492 1,722 919 921 905
Non-interest income......................................... 175 3,777 2,756 4,093 7,564
Non-interest expenses:
Selling, general and administrative expenses.............. 3,503 5,561 8,375 9,042 19,819
Other non-interest expenses............................... 153 679 700 1,100 2,259
-------- -------- -------- ---------- ----------
Income before income tax expense and minority interest...... $ 722 $ 4,380 $ 3,747 $ 6,268 $ 4,386
Income tax expense.......................................... 182 1,660 1,195 1,657 1,649
Minority interest in subsidiary(1).......................... -- -- -- 394 1,362
-------- -------- -------- ---------- ----------
Net income.................................................. $ 540 $ 2,720 $ 2,552 $ 4,217 $ 1,375
Preferred stock dividends................................... -- -- -- 546 2,112(2)
-------- -------- -------- ---------- ----------
Net income (loss) available to common stockholders.......... $ 540 $ 2,720 $ 2,552 $ 3,671 $ (737)(2)
======== ======== ======== ========== ==========
Earnings per share:
Basic..................................................... $ 0.16 $ 0.66 $ 0.62 $ 0.84 $ (0.09)(2)
Diluted................................................... $ 0.16 $ 0.66 $ 0.58 $ 0.57 $ (0.09)(2)
Weighted average shares:
Basic..................................................... 3,498 4,099 4,099 4,383 7,840
Diluted................................................... 3,498 4,104 4,406 7,411 7,840
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets................................................ $427,292 $553,943 $647,965 $1,100,352 $2,283,341
Loans receivable, net....................................... 154,742 248,492 351,821 540,704 904,854
Mortgage-backed securities(3)............................... 236,464 234,385 184,743 340,313 1,041,747
Investment securities....................................... 12,444 40,058 78,826 91,237 220,358
Retail savings and certificates of deposit.................. 212,411 306,500 390,486 522,221 1,142,385
Advances from the FHLB...................................... 96,000 105,500 144,800 200,000 472,500
Securities sold under agreements to repurchase.............. 79,613 93,905 57,581 279,909 404,435
Trust preferred securities(4)............................... -- -- -- 9,572 35,385
Total stockholders' equity.................................. 17,028 21,565 24,658 45,824 113,435
OTHER FINANCIAL AND OPERATING DATA:
Return on average total assets.............................. 0.17% 0.53% 0.42%(5) 0.52% 0.10%
Return on average stockholders' equity...................... 3.17% 14.10% 11.46%(5) 10.53% 2.07%
Selling, general and administrative expenses to total
assets.................................................... 0.82% 1.00% 1.29%(5) 0.82% 0.87%
Number of deposit accounts.................................. 8,564 12,919 16,506 21,817 50,835
CAPITAL RATIOS OF TELEBANK:
Core........................................................ 6.27% 5.31% 5.08% 5.06% 5.57%
Tangible.................................................... 6.35% 5.36% 5.07% 5.06% 5.57%
Total capital............................................... 15.96% 11.74% 10.41% 11.91% 13.40%
</TABLE>
10
<PAGE> 14
- ---------------
(1) Minority interest reflects expense related to payments on trust preferred
securities issued by TeleBanc Capital Trust I and TeleBanc Capital Trust II.
TeleBanc Capital Trust I and TeleBanc Capital Trust II are business trusts
formed for the purpose of issuing trust preferred securities and investing
the proceeds in subordinated debentures issued by Telebanc.
(2) Pursuant to a conversion agreement dated May 15, 1998, 29,900 of our
outstanding shares of preferred stock converted to 2,399,479 shares of
common stock upon consummation of our July 1998 equity offering. In
addition, upon the conversion, we issued a special dividend in the amount of
119,975 shares of common stock to the holders of the preferred stock. In
connection with the special dividend, we recorded a $1.7 million
non-recurring, non-cash charge related to the additional preferred stock
dividend payable in common stock, based on the fair market value of the
common stock at the time the dividend was paid.
(3) Includes mortgage-backed securities available-for-sale and trading.
(4) Consists of trust preferred securities of TeleBanc Capital Trust I and
TeleBanc Capital Trust II. See Note 14 to the consolidated financial
statements.
(5) Includes one-time pre-tax charge of $1.7 million, $1.1 million after tax, to
recapitalize the Savings Association Insurance Fund. Without giving effect
to the charge, return on average assets, return on average stockholders'
equity, and selling, general and administrative expenses to total assets for
1996 were 0.61%, 16.50% and 1.03%.
11
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We provide high value financial products and services primarily over the
internet. By avoiding the costs of brick-and-mortar branches, we offer
significantly higher rates and lower fees on our FDIC-insured and other banking
products and services than traditional banks. Our branchless structure allows us
to deliver these services worldwide through the convenient anytime, anywhere
access of the internet, telephone and automated teller machines, or ATMs.
Our revenue consists of interest income and, to a lesser degree,
non-interest income, which includes income primarily from services and gains on
the sale of loans and securities. Our net interest income is the difference
between the rates of interest earned on our loans and other interest-earning
assets and the rates of interest paid on our deposits and borrowed funds. An
indicator of an institution's profitability is its net interest margin or net
yield on interest-earning assets, which is its annualized net interest income
divided by the average balance of interest-earning assets. 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.
Our asset acquisition strategy is to purchase pools of one- to four-family
first lien mortgages and mortgage-related securities. We do not currently
originate loans. We believe that by purchasing a seasoned and geographically
diverse mortgage loan portfolio, we reduce expenses related to loan acquisition
and are better able to actively manage our credit quality risk.
We actively monitor our 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. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures. In an effort to manage interest rate
exposure, we use various hedging techniques such as caps, floors, interest rate
swaps, futures and financial options.
In 1998, we implemented a strategy to build the "Telebank" brand name by
expanding the marketing of our high value financial products, superior customer
service and anytime, anywhere convenience. We believe that associating our brand
name with our services and delivery channels will enable us to attract a growing
number of customers who are increasingly relying on alternative channels for the
delivery of their financial services. In pursuing this strategy, we increased
our marketing expenditures significantly to implement a targeted, national
advertising campaign and marketing initiative. We plan to continue this strategy
to further strengthen the "Telebank" brand. See "-- Results of
operations -- Year ended December 31, 1998 compared to year ended December 31,
1997 -- Non-interest expenses".
DIRECT FINANCIAL CORPORATION ACQUISITION
On August 10, 1998, we acquired Direct Financial Corporation, the thrift
holding company of Premium Bank, F.S.B. This acquisition presented an
opportunity to acquire a financial services company employing a direct marketing
strategy similar to ours. Premium Bank operated from a single branch in New
Jersey, and its deposit base was concentrated in the mid-Atlantic region of the
United States. We are using Premium Bank's former office as a back-up call
center and operations center pending a final systems conversion of Premium Bank,
expected to be completed in March 1999. We paid approximately $22.3 million cash
in the transaction. At the time of the acquisition, Direct Financial Corporation
had $307.1 million in deposits and 19,263 accounts.
12
<PAGE> 16
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
INTEREST INCOME. Total interest income increased by $40.8 million, or
68.8%, to $100.1 million for the year ended December 31, 1998 from $59.3 million
for the year ended December 31, 1997. A portion of this increase was caused by a
$16.8 million increase in interest income from mortgage-backed and related
securities. This increase in income from mortgage-backed and related securities
is primarily volume-related, as we increased our securities portfolio
significantly in 1998 following the completion of our securities offerings and
the acquisition of Direct Financial Corporation. We also increased our mortgage
loan portfolio, which generated a $16.5 million, or 47.6%, increase in interest
income on mortgage loans to $51.2 million in 1998 from $34.7 million in 1997.
The increase in the portfolio of interest-earning assets was slightly offset as
a result of a decline in the yield on our interest-earning assets to 7.28%
during 1998 from 7.70% during 1997, primarily due to overall declines in market
interest rates during the year. Additionally, interest income from investment
securities available for sale increased by $4.2 million during 1998 reflecting
an $83.7 million increase in the average balance of such securities, slightly
offset by a 0.09% decrease in the yield.
INTEREST EXPENSE. Total interest expense increased by $34.2 million from
$46.1 million in 1997 to $80.3 million in 1998, an increase of 74.2%. This
increase is almost entirely volume-driven, as the average interest cost of
liabilities decreased during 1998. The significant increase in retail deposits
during 1998 caused interest expense on retail deposits to increase $19.0
million, or 73.4%, from $25.9 million in 1997 to $44.9 million in 1998. The cost
of our interest-bearing liabilities decreased from 6.21% in 1997 to 6.08% in
1998, due to declining interest rates during 1998. We saw the majority of this
decrease in our short-term borrowings, while the cost of our deposits declined
only two basis points from 6.00% to 5.98%. Also during 1998, we initiated a
brokered callable certificate of deposit program. The average balance of these
deposits was $54.5 million in 1998, and the average rate paid was 6.68%.
LOAN LOSS PROVISION. The provision for loan losses is the annual cost of
providing an allowance for estimated losses in the loan portfolio. The provision
reflects management's judgment as to the reserve necessary to absorb loan losses
based upon our assessment of a number of factors, including delinquent loan
trends and historical loss experience, current economic conditions, the mix of
loans in our portfolio, and our internal credit review process.
The provision is determined in part by applying a range of expected loss
ratios to the applicable type of loan. Expected loss ratios range between 0.2%
and 2.0% depending upon asset type, loan to value and current market and
economic conditions. The expected loss ratios are based on historical loss
experience adjusted upward to reflect industry loss experience for similar asset
types.
Also considered in the calculation of the loan loss provision is the
positive impact of loans acquired that have seller or third party credit
enhancements. Reserves are not provided for loans in which the credit
enhancements amount exceeds the amount of reserves that would otherwise be
required. As of December 31, 1998, $43.1 million of loans contained credit
enhancements which did not require additional reserves. In addition, we have
purchased certain loans with an expectation that all contractual payments of the
loans will not be collected. Discounts attributable to credit issues are tracked
separately, netted against the loan balance, and not included as a component of
the allowance for loan losses.
As a result of management's loan loss allowance process, the provision for
loan losses decreased slightly to $905,000 for the year ended December 31, 1998,
compared to $921,000 for the year ended December 31, 1997.
The primary factor impacting the amount of the 1998 loan loss provision was
the significant increase in the loan portfolio. Asset
13
<PAGE> 17
quality, as demonstrated by net charge-offs as a percentage of average loan
balances of 0.07% and 0.06% for 1998 and 1997, remained stable. Other factors
affecting the allowance and provision amounts, including the expected loss
ratios and the impact of credit enhancements and recourse arrangements, remained
relatively unchanged from 1997 to 1998 and did not significantly change the
amount of the loan loss provision. The total loan loss allowance at December 31,
1997 was $3.6 million, or 0.66% of total loans outstanding. Total loan loss
allowance as a percentage of total non-performing loans was 53.7% as of December
31, 1998, compared to 31.7% as of December 31, 1997.
NON-INTEREST INCOME. Total non-interest income increased by $3.5 million
to $7.6 million for the year ended December 31, 1998, from $4.1 million for the
year ended December 31, 1997, an increase of 85.4%. This increase in
non-interest income consisted primarily of $3.5 million of gains on sales of
mortgage-backed and investment securities during 1998, compared to gains of $1.0
million in 1997, as well as $2.1 million from gain on sale of loans held for
sale, compared to $1.1 million in 1997. The increase in the gain on sale of
loans in 1998 reflects the sale of primarily home equity loans. In 1998,
non-interest income totaled 7.0% of total revenue, compared to 6.5% in 1997.
Total revenue is comprised of total interest income and total non-interest
income.
NON-INTEREST EXPENSES. Total non-interest expenses increased substantially
during 1998 to $22.1 million, compared to $10.1 million in 1997, an increase of
$12.0 million, or 118.8%. In 1998, we implemented a strategy of increasing
marketing expenses associated with brand building that seeks to establish
Telebank as the premier national provider of high-value banking products. This
strategy resulted in the $4.0 million increase in advertising and marketing
expenses to $4.6 million in 1998 from $600,000 in 1997. For 1999, we anticipate
our marketing strategy will result in significantly greater increases in
marketing expenses. In addition, compensation costs increased $2.9 million, or
59.2%, from $4.9 million for the year ended December 31, 1997, to $7.8 million
for the year ended December 31, 1998, as a result of hiring additional
personnel.
Other non-interest expenses increased $1.2 million to $2.3 million during
the year ended December 31, 1998 from $1.1 million during the year ended
December 31, 1997, primarily as a result of the amortization of goodwill
resulting from the Direct Financial Corporation acquisition in August 1998.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
1998 was $1.6 million, compared with $1.7 million for the year ended December
31, 1997. Telebanc's effective tax rate for 1998 was 37.6%, compared to 26.4%
for 1997. The effective tax rate increased largely as a result of goodwill
acquired in the Direct Financial Corporation acquisition, since goodwill
amortization expense is not deductible for tax purposes.
NET INCOME. Net income for the year ended December 31, 1998 decreased $2.8
million to $1.4 million from $4.2 million for the year ended December 31, 1997,
a decrease of 66.7%. Net income in 1998 consisted primarily of $19.8 million in
net interest income and $7.6 million in non-interest income, which was offset by
$22.1 million in non-interest expenses, $905,000 in provision for loan losses,
and $1.6 million in income tax expense. Net income available to common
stockholders which decreased $4.4 million, or 118.9%, from 1997, to a loss of
$737,000 in 1998, includes a non-cash charge totaling $1.7 million, related to a
one-time dividend paid to the holders of our preferred stock in the form of
119,975 shares of common stock. We paid this dividend upon conversion of 29,900
outstanding shares of preferred stock to 2,399,479 shares of common stock. We
based the $1.7 million charge related to the special dividend on the fair market
value of the common stock on the date we paid the dividend.
Our net interest margin decreased from 1.73% in 1997 to 1.42% in 1998. This
decline reflects falling interest rates and increased competition for
high-yielding mortgage products.
14
<PAGE> 18
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 remained substantially
unchanged at $921,000 for the year ended December 31, 1997, compared to $919,000
for the year ended December 31, 1996. The ratio of net charge-offs to net
average loans outstanding during 1997 was 0.06%, compared to 0.10% during 1996.
Total loan loss allowance as a percentage of total non-performing loans was
31.7% as of December 31, 1997, compared to 27.7% 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 we recognized $1.2 million of non-interest income as
gain on trading securities during 1997. In addition, we recognized an $864,000
decline in equity investment primarily attributable to the write-off of the
equity investment by Telebank in AGT Mortgage Services, which had provided our
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 $1.0 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, we incurred a one-time
$1.7 million assessment to recapitalize the Savings Association Insurance Fund.
Other non-interest expenses increased $400,000 to $1.1 million during the
year ended December 31, 1997 from $700,000 during the year ended December 31,
1996, an increase of 57.1%, primarily as a result of 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. Our 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 $1.6
million to $4.2 million from $2.6 million for the year ended December 31, 1996,
an increase of 61.5%. Net income for 1997 consisted primarily of $13.2 million
in net interest income, $3.3 million in net gain on the sale of trading
securities, 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. Net income
available to common stockholders 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%.
15
<PAGE> 19
QUARTERLY RESULTS
The following table sets forth our selected unaudited quarterly financial
data for each of the eight quarters in the two-year period ended December 31,
1998. The consolidated financial data presented below have been prepared on a
basis consistent with our audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of this information. This
information should be read in conjunction with our consolidated financial
statements and notes beginning on page F-1. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Interest income............. $12,837 $15,275 $14,821 $16,368 $18,071 $18,581 $27,632 $35,826
Interest expense............ 9,878 11,865 11,548 12,772 14,477 15,276 21,979 28,573
------- ------- ------- ------- ------- ------- ------- -------
Net interest income..... $ 2,959 $ 3,410 $ 3,273 $ 3,596 $ 3,594 $ 3,305 $ 5,653 $ 7,253
Provision for loan losses... 243 308 120 250 250 75 300 280
Non-interest income......... 607 1,244 1,084 1,158 1,947 1,104 1,832 2,681
Selling, general and
administrative expenses... 1,897 2,251 2,078 2,816 3,889 3,441 5,666 6,823
Other non-interest operating
expenses.................. 208 202 260 430 315 487 586 871
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and minority
interest.............. $ 1,218 $ 1,893 $ 1,899 $ 1,258 $ 1,087 $ 406 $ 933 $ 1,960
Income tax expense.......... 355 618 709 (25) 475 51 389 734
Minority interest(1)........ -- 67 285 42 176 176 439 571
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 863 $ 1,208 $ 905 $ 1,241 $ 436 $ 179 $ 105 $ 655
Preferred stock
dividends............. 60 162 162 162 162 162 1,788(2) --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders.......... $ 803 $ 1,046 $ 743 $ 1,079 $ 274 $ 17 $(1,683)(2) $ 655
Other comprehensive
income(3)................. (1,165) 2,443 (24) (612) 262 (1,109) 8,579 (8,593)
------- ------- ------- ------- ------- ------- ------- -------
Comprehensive income........ $ (362) $ 3,489 $ 719 $ 467 $ 536 $(1,092) $ 6,896 $(7,938)
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.... $ 0.19 $ 0.24 $ 0.16 $ 0.24 $ 0.06 $ 0.00 $ (0.17)(2) $ 0.05
Diluted earnings per
share..................... 0.15 0.16 0.11 0.16 0.05 0.00 (0.17)(2) 0.05
</TABLE>
- ---------------
(1) Minority interest reflects expense related to payments on trust preferred
securities issued by TeleBanc Capital Trust I and TeleBanc Capital Trust II.
(2) Includes $1.7 million non-recurring, non-cash charge related to the
additional preferred stock dividend payable in common stock, based on the
fair market value of the common stock at the time such dividend was paid.
The charge reduced net income available to common stockholders by the same
amount and diluted earnings per share in the third quarter of 1998 by $0.18
per share.
(3) Other comprehensive income is comprised of unrealized gains and losses on
available-for-sale securities.
16
<PAGE> 20
During the second quarter of 1998, we focused on maintaining stable asset
levels and sufficient liquidity in anticipation of our acquisition of Direct
Financial Corporation in August 1998. As a result, our interest income and
selling, general and administrative expenses remained relatively steady, as
compared to the first quarter of 1998. In the third quarter of 1998, the
completion of our equity and trust preferred offerings and our acquisition of
Direct Financial Corporation resulted in a substantial increase in our asset
size.
Other comprehensive income represents unrealized gains and losses on
securities that we consider available for sale. We experienced wide swings in
other comprehensive income during the third and fourth quarters of 1998, due
primarily to increased volatility in the fixed-income market.
FINANCIAL CONDITION
Total assets increased by $1.2 billion to $2.3 billion at December 31, 1998
from $1.1 billion at December 31, 1997, an increase of 109.1%. The growth in
total assets is primarily the result of a $693.0 million increase in
mortgage-backed securities and a $364.1 million increase in loans receivable.
The primary sources of funds for this growth in assets were deposits, borrowings
and capital raised through our 1998 equity offering and trust preferred
offering.
Loans receivable, net and loans receivable held-for-sale, increased $364.1
million to $904.8 million at December 31, 1998 from $540.7 million at December
31, 1997, an increase of 67.3%. The increase reflects whole loan purchases of
$668.1 million, offset in part by $280.2 million of principal repayments and
$20.6 million of loans sold in 1998. During 1997, we recorded whole loan
purchases of $342.9 million, offset in part by $94.9 million of principal
repayments and $60.7 million of loans sold.
Mortgage-backed securities available-for-sale increased $693.0 million to
$1.0 billion at December 31, 1998 from $319.2 million at December 31, 1997, an
increase of 217.1%. Investment securities available-for-sale increased $129.2
million to $220.4 million at December 31, 1998 from $91.2 million at December
31, 1997, an increase of 141.7%. We hold these investment securities for
liquidity purposes, and the increases in these categories of assets are
consistent with the overall growth of our assets in 1998.
Retail deposits increased $620.2 million to $1.1 billion at December 31,
1998 from $522.2 million at December 31, 1997, an increase of 118.8%, largely as
a result of our continued targeted marketing efforts to attract new customers
and deposit accounts. During the year ended December 31, 1998, we credited
approximately $42.2 million of interest to retail deposit accounts, and deposits
exceeded withdrawals by $577.9 million, resulting in the net overall increase in
deposits.
Federal Home Loan Bank, or FHLB, advances increased $272.5 million to
$472.5 million at December 31, 1998, from $200.0 million at December 31, 1997,
an increase of 136.3%. Other borrowings, composed primarily of securities sold
under agreements to repurchase, increased $124.5 million to $404.4 million at
December 31, 1998 from $279.9 million at December 31, 1997, an increase of
44.5%. At December 31, 1998, subordinated debt, net of original issue discount,
consisting of the 9.5% senior subordinated debentures issued in February 1997
and the 11.5% subordinated debentures issued in the second quarter of 1994,
totaled $29.9 million. Additionally, we issued $67.1 million of callable
certificates of deposit during 1998 as relatively cost-effective borrowings with
hedging properties that improve our overall interest rate risk position.
In June 1997, we formed TeleBanc Capital Trust I, which sold an aggregate
of $10.0 million in shares of trust preferred securities, series A, with an
annual dividend rate of 11.0% payable semi-annually, beginning in December 1997,
callable beginning December 2007. In July 1998, we formed TeleBanc Capital Trust
II, which sold an aggregate of $27.5 million in shares of trust preferred
securities, series A, with an
17
<PAGE> 21
annual dividend rate of 9.0% payable quarterly, beginning in September 1998,
callable beginning September 2003.
Stockholders' equity increased $67.6 million to $113.4 million at December
31, 1998 from $45.8 million at December 31, 1997. The increase is primarily the
result of the receipt of approximately $70.0 million in net proceeds from the
issuance of common stock in July and August 1998. This increase was offset by
net income during 1998 of $1.4 million, less preferred stock dividends of $2.1
million. Additionally, our unrealized gain on securities available for sale
decreased to $1.9 million at December 31, 1998. Upon consummation of the July
1998 common stock offering, 29,900 outstanding shares of preferred stock
converted to 2,399,479 shares of common stock. In addition, upon the conversion,
we issued 119,975 shares of common stock as a special dividend to the holders of
the preferred stock. The dividend had a value of $1.7 million, based on the fair
market value of the common stock on the date the dividend was paid.
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 have historically met our
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. We believe that we will be able to renew or replace our funding
sources at then-existing market rates, which may be higher or lower than current
rates. Pursuant to applicable Office of Thrift Supervision, or OTS, regulations,
Telebank is required to maintain an average liquidity ratio of 4.0% of certain
borrowings and its deposits, which requirement it fully met during 1998. Prior
to November 24, 1997, this requirement was 5.0%, which Telebank fully met during
1996 and 1997.
In the third quarter of 1998, we raised capital through our common stock
offering, in which we sold 5,175,000 shares of common stock to the public at an
offering price of $14.50. We also raised $27.5 million in the third quarter of
1998 through TeleBanc Capital Trust II's sale of 1,100,000 shares of 9.0% trust
preferred securities, series A. We are using the net proceeds of both offerings
to fund continued growth.
We seek 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, time deposit
accounts and accounts that maintain a relatively high balance provide a
relatively stable source of funding. At December 31, 1998, our average retail
account balance was approximately $22,000, and our average customer maintained
1.7 accounts. Savings and transactional deposits increased $91.8 million to
$215.4 million during the year ended December 31, 1998, an increase of 74.3%.
Retail certificates of deposit increased $528.4 million to $927.0 million during
the year ended December 31, 1998, an increase of 132.6%. During 1998, we also
began to offer callable certificates of deposit, which totaled $67.1 million at
December 31, 1998.
We also rely on borrowed funds, such as FHLB advances and securities sold
under agreements to repurchase, to provide liquidity. Total borrowings increased
$397.0 million to $876.9 million at December 31, 1998, an increase of 82.7%. At
December 31, 1998, Telebank had approximately $667.3 million in additional
borrowing capacity.
At December 31, 1998, we had outstanding $31.0 million face amount of
subordinated debentures. In addition, at the same date, we also had outstanding
$37.5 million face amount of junior subordinated debentures held by our trust
preferred subsidiaries. Additionally, from January 1, 1998 through July 28,
1998, we had outstanding $15.3 million of preferred stock,
18
<PAGE> 22
which converted to 2,399,479 shares of common stock upon consummation of our
1998 common stock offering. We paid $373,000 in cash dividends on the preferred
stock during 1998. Our aggregate annual interest expense on the subordinated
debentures and junior subordinated debentures is $7.0 million.
Subject to the approval of the OTS and compliance with federal regulations,
Telebank pays a dividend to Telebanc semi-annually in an amount equal to the
aggregate debt service and dividend obligations. Under current OTS capital
distribution regulations, as long as Telebank meets the OTS capital requirements
before and after the payment of dividends, Telebank may pay dividends to us
without prior OTS approval in an amount equal to the net income to date over the
calendar year, plus retained net income over the preceding two years. In
addition, the OTS has discretion to prohibit any otherwise permitted capital
distribution on general safety and soundness grounds, and we must give 30 days'
advance notice to the OTS of all capital distributions, during which time it may
object to any proposed distribution. As of December 31, 1998, Telebank had
approximately $21.7 million available for payment of dividends under applicable
restrictions without regulatory approval. 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, Telebanc currently is required to maintain, on
an unconsolidated basis, liquid assets in an amount equal to or greater than
$7.0 million, which represents 100% of the aggregate interest expense for one
year on our outstanding subordinated debentures and junior subordinated
debentures. We had $10.0 million in liquid assets as of December 31, 1998.
CAPITAL
As of December 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.
The following table sets forth Telebank's regulatory capital levels as of
December 31, 1998 in relation to the regulatory requirements in effect at that
date. The information below reflects only the regulatory capital of Telebank and
does not give effect to additional available capital of its parent Telebanc. See
Note 4 to the consolidated financial statements.
<TABLE>
<CAPTION>
REQUIRED TO BE
REQUIRED FOR WELL
CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Core Capital................... $ 52,617 5.06% $41,606 4.0% $ 52,008 5.0%
Tangible Capital............... 52,608 5.06 15,602 1.5 N/A N/A
Tier I Capital................. 52,617 11.25 N/A N/A 28,057 6.0
Total Capital.................. 55,701 11.91 37,409 8.0 46,761 10.0
As of December 31, 1998:
Core Capital................... $122,871 5.57% $88,310 4.0% $110,388 5.0%
Tangible Capital............... 122,871 5.57 33,116 1.5 N/A N/A
Tier I Capital................. 122,871 12.95 N/A N/A 56,934 6.0
Total Capital.................. 127,179 13.40 75,913 8.0 94,891 10.0
</TABLE>
19
<PAGE> 23
RATE/VOLUME TABLE
The following table allocates the period-to-period changes in our various
categories of interest income and expense between changes due to (1) 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 (2) changes in rate, calculated by multiplying changes in rate
by the prior year's volume. Changes due to changes in rate-volume, which is
calculated as the change in rate multiplied by changes in volume, have been
allocated proportionately between changes in volume and changes in rate.
<TABLE>
<CAPTION>
1997 VS. 1996 1998 VS. 1997
--------------------------- ---------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net........ $12,732 $(1,092) $11,640 $17,102 $ (665) $16,437
Interest-bearing deposits.... 68 (29) 39 8 13 21
Mortgage-backed and related
securities available for
sale...................... 373 (682) (309) 18,433 (1,605) 16,828
Investment securities
available for sale........ 809 8 817 5,358 (62) 5,296
Federal funds sold........... 54 2 56 (84) 3 (81)
Investment in FHLB stock..... 153 1 154 247 18 265
Trading account.............. 1,124 -- 1,124 495 (142) 353
------- ------- ------- ------- ------- -------
Total
interest-earning
assets............. $15,313 $(1,792) $13,521 $41,559 $(2,440) $39,119
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Savings deposits............. $ 1,111 $ 454 $ 1,565 $ 1,784 $ (38) $ 1,746
Time deposits................ 3,315 (279) 3,036 17,666 (354) 17,312
Brokered callable
certificates of deposit... -- -- -- 3,638 -- 3,638
FHLB advances................ 2,400 796 3,196 3,475 (338) 3,137
Other borrowings............. 2,838 (466) 2,372 7,289 (81) 7,208
Subordinated debt............ 1,207 (128) 1,079 288 (41) 247
------- ------- ------- ------- ------- -------
Total
interest-bearing
liabilities........ $10,871 $ 377 $11,248 $34,140 $ (852) $33,288
------- ------- ------- ------- ------- -------
Change in net interest
income....................... $ 4,442 $(2,169) $ 2,273 $ 7,419 $(1,588) $ 5,831
======= ======= ======= ======= ======= =======
</TABLE>
20
<PAGE> 24
AVERAGE BALANCE TABLE
The following table presents consolidated average balance sheet data,
income and expense and related interest yields and rates for each of the three
years in the period ended December 31, 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 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. Interest
income includes the incremental tax benefit of tax exempt income.
<TABLE>
<CAPTION>
1996 1997
--------------------------------- ---------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
BALANCE INC./EXP. YIELD/COST BALANCE INC./EXP. YIELD/COST
-------- --------- ---------- -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................ $279,038 $23,089 8.28% $441,819 $34,729 7.86%
Interest-bearing deposits............ 6,612 420 6.24 7,865 459 5.84
Mortgage-backed and related
securities, available for sale..... 221,656 17,955 8.10 226,064 17,646 7.81
Investment securities, available for
sale............................... 61,169 3,959 6.47 73,649 4,776 6.49
Federal funds sold................... 842 44 5.22 1,844 100 5.37
Investment in FHLB stock............. 6,229 451 7.25 8,338 605 7.25
Trading account...................... -- -- -- 12,581 1,124 8.81
-------- ------- -------- -------
Total interest-earning
assets........................ $575,546 $45,918 7.98% $772,160 $59,439 7.70%
-------- ------- -------- -------
Non-interest earning assets........... 26,929 41,465
-------- --------
Total assets................... $602,475 $813,625
======== ========
Interest-bearing liabilities:
Retail deposits...................... $358,216 $21,357 5.96% $432,641 $25,958 6.00%
Brokered callable certificates of
deposit............................ -- -- -- -- -- --
FHLB advances........................ 120,678 6,689 5.54 160,681 9,885 6.07
Other borrowings..................... 68,154 4,569 6.70 117,515 6,941 5.83
Subordinated debt, net............... 17,250 2,200 12.75 27,434 3,279 11.95
-------- ------- -------- -------
Total interest-bearing
liabilities................... $564,298 $34,815 6.14% $738,271 $46,063 6.21%
-------- ------- -------- -------
Non-interest-bearing liabilities...... 15,900 25,719
-------- --------
Total liabilities.............. $580,198 $763,990
-------- --------
Trust preferred securities............ -- $ 9,597
Total stockholders' equity..... 22,277 40,038
-------- --------
Total liabilities and
stockholders' equity.......... $602,475 $813,625
======== ========
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income...................... $ 11,248 $11,103 $ 33,889 $13,376
======== ======= ======== =======
Net interest spread................... 1.84% 1.49%
====== ======
Net interest margin (net yield on
interest-earning assets)............. 1.94 1.73
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities......... 101.99 104.59
====== ======
<CAPTION>
1998
-----------------------------------
AVERAGE INTEREST AVERAGE
BALANCE INC./EXP. YIELD/COST
---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net................ $ 663,913 $51,166 7.71%
Interest-bearing deposits............ 7,993 480 5.92
Mortgage-backed and related
securities, available for sale..... 492,077 34,474 7.01
Investment securities, available for
sale............................... 157,381 10,072 6.40
Federal funds sold................... 346 19 5.53
Investment in FHLB stock............. 11,651 870 7.47
Trading account...................... 19,760 1,477 7.47
---------- -------
Total interest-earning
assets........................ $1,353,121 $98,558 7.28%
---------- -------
Non-interest earning assets........... 52,841
----------
Total assets................... $1,405,962
==========
Interest-bearing liabilities:
Retail deposits...................... $ 753,352 $45,016 5.98%
Brokered callable certificates of
deposit............................ 54,491 3,638 6.68
FHLB advances........................ 219,487 13,022 5.85
Other borrowings..................... 242,412 14,149 5.76
Subordinated debt, net............... 29,880 3,526 11.80
---------- -------
Total interest-bearing
liabilities................... $1,299,622 $79,351 6.08%
---------- -------
Non-interest-bearing liabilities...... 19,312
----------
Total liabilities.............. $1,318,934
----------
Trust preferred securities............ $ 20,599
Total stockholders' equity..... 66,429
----------
Total liabilities and
stockholders' equity.......... $1,405,962
==========
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income...................... $ 53,499 $19,207
========== =======
Net interest spread................... 1.20%
======
Net interest margin (net yield on
interest-earning assets)............. 1.42
======
Ratio of interest-earning assets to
interest-bearing liabilities......... 104.12
======
</TABLE>
21
<PAGE> 25
INTEREST RATE SENSITIVITY MANAGEMENT
We actively monitor our 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 risk management function is responsible for measuring,
monitoring and controlling market risk and communicating risk limits in
connection with our asset/liability management activities and trading.
Our strategies are intended to stabilize our net interest margin and its
exposure to market risk under a variety of changes in interest rates. By
actively managing the maturities of our interest-sensitive assets and
liabilities, we seek to maintain a relatively consistent net interest margin and
mitigate much of the interest rate risk associated with such assets and
liabilities.
Management uses a risk management process that allows risk-taking within
specific limits. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures.
The asset-liability committee establishes the policies and guidelines for
the management of our assets and liabilities. The committee's policy is directed
toward reducing the variability of the market value of our equity under a wide
range of interest rate environments. Fair value of equity represents the net
fair value of our financial assets and liabilities, including off-balance sheet
hedges. We monitor the sensitivity of changes in the fair value of equity with
respect to various interest rate environments and report regularly to the
asset/liability committee. Effective fair value management maximizes net
interest income while constraining the changes in the fair value of equity with
respect to changes in interest rates to acceptable levels. The model calculates
a benchmark fair value of equity for current market conditions.
We use sensitivity analysis to evaluate the rate and extent of changes to
our fair value of equity under various market environments. In preparing
simulation analyses, we break down the aggregate investment portfolio into
discrete product types that share similar properties, such as fixed or
adjustable rate, similar coupon and similar age. Under this analysis, we
calculate net present value of expected cashflows for interest sensitive assets
and liabilities under various interest rate scenarios. In conducting this
sensitivity analysis, the model considers all assets, liabilities and
off-balance sheet hedges, including whole loan mortgages, mortgage-backed
securities, mortgage derivatives, corporate bonds, and interest rate swaps,
caps, floors and options. The range of interest rate scenarios evaluated
encompasses significant changes to current market conditions. By this process,
we subject our interest rate sensitive assets and liabilities to substantial
market stress and evaluate the fair value of equity resulting from various
market scenarios. The asset-liability committee reviews the results of these
stress tests and establishes appropriate strategies to promote continued
compliance with established guidelines.
Management measures the efficiency of its asset/liability management
strategies by analyzing, on a quarterly basis, Telebank's theoretical fair value
of equity and the expected effect of changes in interest rates. The board of
directors establishes limits within which such changes in the fair value of
equity are to be maintained in the event of changes in interest rates.
We calculated a theoretical fair value of equity in response to a
hypothetical change in market interest risk. The model addresses the exposure to
Telebank of its market sensitive non-trading financial instruments. The model
excludes Telebank's trading portfolio, which, based on management's analysis,
has an immaterial impact on Telebank's fair value of equity. A hypothetical
instantaneous 1.0% rise in interest rates would cause the fair value of equity
to decrease by 9.0%.
Every method of market value sensitivity analysis contains inherent
limitations and express and implied assumptions that can affect the resulting
calculations. For example,
22
<PAGE> 26
each interest rate scenario reflects unique prepayment and repricing
assumptions. In addition, this analysis offers a static view of assets,
liabilities and hedges held as of December 31, 1998 and makes no assumptions
regarding transactions we might enter into in response to changing market
conditions.
Telebank's primary interest risk is the exposure to increasing interest
rates. We manage our exposure to increasing interest rates, principally changes
in three-month LIBOR associated with the cost of our deposits and advances from
the Federal Home Loan Bank of Atlanta, by entering into related interest rate
swap and cap agreements. These instruments contain principally the same terms
and notional balance as the related designated liabilities.
We employ various techniques to implement the asset/liability committee's
strategies directed toward managing the variability of the fair value of equity
by controlling the relative sensitivity of market value of interest-earning
assets and interest-bearing liabilities. The sensitivity of changes in market
value of assets and liabilities is affected by factors, including the level of
interest rates, market expectations regarding future interest rates, projected
related loan prepayments and the repricing characteristics of interest-bearing
liabilities. We use hedging techniques to reduce the variability of fair value
of equity and its overall interest rate risk exposure over a one- to seven-year
period.
We also monitor our assets and liabilities by examining the extent to which
such assets and liabilities are interest rate sensitive and by monitoring the
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. Our current asset-liability management strategy
is to maintain an evenly matched one- to five-year gap giving effect to hedging,
but depending on market conditions and related circumstances, a positive or
negative one- to five-year gap of up to 20% may be acceptable. Inclusive of our
hedging activities, our one-year gap at December 31, 1998 was (3.4)%. Our
hedge-affected one- to five-year gap at such date was (11.4)%.
We used the following assumptions to prepare our gap table at December 31,
1998. Non-amortizing investment securities are shown in the period in which they
contractually mature. Investment securities that contain embedded options such
as puts or calls are shown in the period in which that security is currently
expected to be put or called or to mature. The table assumes that fully indexed,
adjustable-rate, residential mortgage loans and mortgage-backed securities
prepay at an annual rate between 25% and 35%, based on estimated future
prepayment rates for comparable market benchmark securities and our prepayment
history. The table also assumes that fixed-rate, current-coupon residential
loans and mortgage-backed securities prepay at an annual rate of between 20% and
25%. The above assumptions were adjusted up or down on a pool-by-pool basis to
model the effects of product type, coupon rate, rate adjustment frequency,
lifetime cap, net coupon reset margin and periodic rate caps upon prevailing
annual prepayment rates. Time deposits are shown in the period in which they
contractually mature, and savings deposits are shown to reprice immediately. The
interest rate sensitivity of our assets and liabilities could vary substantially
if different assumptions were used or if actual experience differs from the
assumptions used.
23
<PAGE> 27
The following table sets forth our gap at December 31, 1998.
<TABLE>
<CAPTION>
REPRICING REPRICING REPRICING REPRICING
BALANCE AT WITHIN WITHIN WITHIN IN
DECEMBER 31, PERCENT 0-3 4-12 1-5 MORE THAN
1998 OF TOTAL MONTHS MONTHS YEARS 5 YEARS
------------ -------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net.......... $ 904,854 40.92% $ 154,771 $ 305,557 $ 337,540 $106,986
Mortgage-backed securities,
available for sale and
trading...................... 1,041,747 47.10 69,134 220,375 394,455 357,783
Investment securities available
for sale and FHLB stock...... 245,533 11.10 52,116 6,484 59,273 127,660
Federal funds sold and interest
bearing deposits............. 19,401 0.88 -- 1,940 17,461 --
---------- ------ --------- --------- --------- --------
Total interest-earning assets.... $2,211,535 100.00% $ 276,021 $ 534,356 $ 808,729 $592,429
---------- ====== ========= ========= ========= ========
Non-interest-earning assets:..... 71,806
----------
Total assets................... $2,283,341
==========
Interest-bearing liabilities:
Savings deposits............... $ 215,402 10.18% $ -- $ 21,540 $ 193,862 $ --
Time deposits.................. 994,068 46.97 43,306 526,935 351,882 71,945
FHLB advances.................. 472,500 22.33 332,500 134,000 6,000 --
Other borrowings............... 404,435 19.11 401,100 3,335 -- --
Subordinated debt.............. 29,855 1.41 -- 29,855 -- --
---------- ------ --------- --------- --------- --------
Total interest-bearing
liabilities.................. $2,116,260 100.00% $ 776,906 $ 715,665 $ 551,744 $ 71,945
---------- ====== ========= ========= ========= ========
Non-interest-bearing
liabilities.................... 18,261
----------
Total liabilities.............. $2,134,521
----------
Total trust preferred.......... 35,385
Stockholders' equity........... 113,435
----------
Total liabilities and
stockholders' equity......... $2,283,341
==========
Periodic gap..................... $(500,885) $(181,309) $ 256,985 $520,484
========= ========= ========= ========
Cumulative gap................... $(500,885) $(682,194) $(425,209) $ 95,275
========= ========= ========= ========
Cumulative gap to total assets... (21.9)% (29.9)% (18.6)% 4.2%
Cumulative gap to total assets
hedge affected................. 6.8% (3.4)% (11.4)% 4.2%
</TABLE>
24
<PAGE> 28
IMPACT OF INFLATION AND CHANGING PRICES
The impact inflation has on us is different from the impact on an
industrial company because substantially all of our assets and liabilities are
monetary in nature, and interest rates and inflation rates do not always move in
concert. We believe that the impact of inflation on financial results depends
upon our 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 our operating expenses. The actual effect of inflation on our
net interest income, however, would depend on the extent to which we were able
to maintain a spread between the average yield on our interest-earning assets
and the average cost of our interest-bearing liabilities, which would depend to
a significant extent on our asset-liability sensitivity. As discussed above, we
seek to manage the relationship between interest-sensitive assets and
liabilities to protect against wide interest rate fluctuations, including those
resulting from inflation. The effect of inflation on our results of operations
for the past three years has been minimal.
YEAR 2000 READINESS DISCLOSURE STATEMENT
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 plan to be substantially complete with renovation,
validation and implementation of all mission critical systems by the end of the
first quarter of 1999, and with all other systems to be tested by June 30, 1999.
As of March 12, 1999, we have completed 100% of our remediation efforts and 75%
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.
To date, we have not hired any outside consultants to address the year 2000
issue, and few upgrades have been accelerated due to the year 2000 issue. We
estimate that we have spent approximately $25,000 on upgrades related to our
year 2000 remediation efforts, with an additional $75,000 expected to be spent
before the year 2000.
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 this
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
25
<PAGE> 29
contingency plan, we have notified these servicers that if we have not received
confirmation of compliance by March 31, 1999, we will begin transferring
servicing of these loans to servicers who are known to be year 2000 compliant.
We hope to complete any such transfers that are necessary by June 30, 1999.
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:
- our success in identifying systems and programs that contain two-digit
year codes;
- the nature and amount of programming required to upgrade or replace each
of the affected programs;
- the rate and magnitude of related labor and consulting costs; and
- our success in addressing the year 2000 issues with third-parties with
which we do business.
CHANGES IN ACCOUNTING PRINCIPLES
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
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 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 our election, before January 1, 1998.
We plan to adopt SFAS 133 as of January 1, 2000 but have not yet quantified
the impact of adopting SFAS 133 on our financial statements. However, the
statement could increase volatility in earnings and other comprehensive income.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Cost of Start-up Activities
("SOP 98-5"), which is effective for fiscal years beginning after December 18,
1998. The statement requires that the cost of start-up activities be expensed as
incurred rather than capitalized, with initial application reported as the
cumulative effect of a change in accounting principle, as described in
Accounting Principles Board Opinion Number 20, Accounting Changes. As of
December 31, 1998, we carried on our books approximately $740,000 of capitalized
start-up costs, relating primarily to the establishment of TeleBanc Insurance
Services, Inc., or Telebanc Insurance. We intend to implement SOP 98-5 on
January 1, 1999, and, as a result, will recognize this amount, net of tax, as an
expense classified as the cumulative effect of a change in accounting principle.
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<PAGE> 30
BUSINESS
OVERVIEW
We provide high value financial products and services primarily over the
internet. Like traditional banks, we provide a wide range of FDIC-insured and
other banking products and services to consumers. Unlike traditional banks, we
deliver these products and services exclusively through the internet, telephone
and ATMs, thus avoiding the costs of brick-and-mortar branches. As a result, we
offer significantly higher rates and lower fees than traditional banks and
deliver these services worldwide through the convenient anytime, anywhere access
of the internet. To support our products and services and build customer
loyalty, we provide extensive customer service through our 24-hour call centers.
Using Telebank's secure, comprehensive and customer friendly web site
(www.telebankonline.com), individuals can open an account, transfer funds
between accounts, view account balances, pay bills and compare our premium rates
to national averages. Customers can deposit funds using direct deposit, wire or
U.S. mail, and can withdraw cash from any one of over 430,000 ATM machines on
the Cirrus(R) network worldwide. If customers desire to speak to a customer
service representative, they can call our integrated call center 24 hours a day.
Through our strategic alliances with companies who provide products that we do
not offer directly, customers can obtain a wide array of complementary products,
including residential mortgage loans and premium-yield fixed annuities.
To attract customers, we have a comprehensive marketing program which
consists of four main initiatives:
- - national advertising through print, radio, television and online media;
- - strategic alliances with popular web sites such as Yahoo! and E-Loan;
- - affinity partnerships with many national organizations such as our exclusive
agreement to promote FDIC-insured products to members of Sam's Club; and
- - customer referral and cross-sell programs.
Our national campaign targets customers in all 50 states and is the
cornerstone of our strategy to build Telebank into a national brand that stands
for high value financial products and services.
The following table describes some of our products and compares our rates
with the national average rates of similar products:
COMPARISON OF PRODUCT RATES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRODUCT RATES(1)
-----------------------------------------------
PRODUCT TELEBANK(2) NATIONAL AVERAGE(3) TELEBANK PRODUCT DESCRIPTION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking - 3.15% - 1.23% - Free checking/no account fees
- Premium yield NOW account
- Free unlimited online bill payment service
- Free unlimited check writing
- Free internet banking
- Free checks
- Free ATM and debit cards
- -------------------------------------------------------------------------------------------------------------------------
Money - 4.80% - 2.22% - Super premium yield
Market - No term restrictions
- No account fees
- -------------------------------------------------------------------------------------------------------------------------
CDs - 1 Year: 5.30% - 1 Year: 4.36% - Premium yield CDs
- 5 Years: 5.80% - 5 Years: 4.64%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Represents annual percentage yield on the account as of March 17, 1999.
(2) Account requires a $2,500 minimum balance.
(3) Source: Bank Rate Monitor.
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<PAGE> 31
Although commercial use of the internet is relatively new, we have been
providing branchless banking for ten years using the telephone. During that
time, we have developed considerable expertise in delivering financial products
and services successfully and reliably without using branches. With the advent
of the internet, we positioned ourselves to exploit the increased functionality
and broader reach it offers. For example, currently approximately 60% of our
contacts with consumers occurred over the internet.
Our deposits grew at a compound annual growth rate of 47% from 1993 to
1997. With the development and marketing of our internet banking system in 1998,
deposit growth accelerated to 60% in that year, before giving effect to our
acquisition of Direct Financial Corporation. Including that acquisition, our
deposits grew 119% from year-end 1997 to 1998. As of December 31, 1998, we had
over 50,000 accounts, $1.1 billion in retail deposits and $2.3 billion in
assets. The following chart shows our annual growth in total accounts and total
retail deposits since 1993.
[CHART-DATA POINTS AS FOLLOWS:]
<TABLE>
<CAPTION>
Deposits Number of Accounts
Year (Dollars in Millions) (In Thousands)
- ---- --------------------- ------------------
<S> <C> <C>
1993 $113 2.9
1994 $212 8.6
1995 $307 12.9
1996 $390 16.5
1997 $522 21.8
1998(1) $1,142 50.8
</TABLE>
(1) Includes 19,263 accounts and $307 million in retail
deposits from our acquisition of Direct Financial
Corporation in August 1998
Deposit compound
annual growth rate
(1993-1998): 59%
Account compound
annual growth rate
(1993-1998): 77%
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<PAGE> 32
THE INTERNET AND ONLINE FINANCIAL SERVICES
The internet has quickly become a global medium for worldwide
communication, instant access to information and electronic business
transactions. International Data Corporation estimates that at the end of 1998
there were over 62 million web users in the United States and over 142 million
worldwide, and projects that by the end of 2002 the number of web users will
increase to over 399 million worldwide.
For many businesses, the internet has created a new communications and
sales channel enabling large numbers of geographically dispersed organizations
and consumers to be reached quickly and cost-effectively. International Data
Corporation estimates that the number of consumers buying goods and services on
the internet will grow from 17.6 million in 1997 to 128.4 million in 2002, and
that the total value of goods and services purchased over the internet will
increase from approximately $16 billion in 1997 to approximately $734 billion by
2002.
Over the last few years, the internet has transformed the financial
services industry from one constrained by the geographic limitations of
brick-and-mortar branches to one that provides global access to financial
products and services, including online brokerage services, credit-cards,
insurance products and savings and investment products. According to Forester
Research, the number of online brokerage accounts in 1998 was 5.3 million and is
expected to grow to 14.4 million accounts with over $688 billion in assets in
2002. The online brokerage industry has been built predominantly by companies
that have moved quickly to exploit the internet to offer significantly lower
prices, reach national scale rapidly and establish brands that stand for better
value for the consumer.
We believe the transformation that has taken place among brokerage
companies as brokerage customers have moved online provides a preview of the
transformation that will take place among banks as banking customers move
online. According to Faulkner & Gray, the number of households forecast to bank
and pay bills online is expected to grow from 2.6 million in 1998 to over 15.0
million in 2002.
We believe that to compete with branchless banks, traditional banks need to
offer significantly higher rates of return online than are currently available
through their branches. This could draw customers away from their branches while
still requiring them to support their branch network. We believe this conflict
creates the opportunity for branchless banks to exploit the low cost structure
of the internet and introduce products and services designed to work in the
online world.
OUR STRATEGY
Our objective is to be the premier internet bank. To achieve this
objective, we have developed a growth strategy that includes four key elements:
- high value products and services;
- extensive national marketing campaign;
- selective outsourcing; and
- conservative asset acquisition program.
HIGH VALUE PRODUCTS AND SERVICES
We use the internet, telephone and ATMs to offer products and services with
higher rates and lower fees than traditional banks and the convenience of
24-hour access to accounts and customer service representatives. We develop some
of these products ourselves, such as FDIC-insured savings products. Others, such
as rate-competitive residential mortgage loans and fixed-rate annuities, are
provided by our alliance partners E-Loan and nationally recognized insurance
companies. We intend to expand our product offerings further through strategic
partnerships with other companies to include credit cards, online brokerage
services and insurance products.
EXTENSIVE NATIONAL MARKETING CAMPAIGN
We have created a national marketing campaign designed to acquire new
customers and build the "Telebank" brand as the premier provider of financial
services over the internet. We intend to distinguish our brand through our high
value savings and investment products, anytime, anywhere
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<PAGE> 33
convenience and quality customer service. We view the development of our brand
as key to our success because brand recognition should allow us to:
- become recognized as a leading provider of online financial services;
- lower customer acquisition costs;
- increase cross-selling opportunities and commission income; and
- increase our penetration among more profitable consumers.
Our marketing campaign uses national advertising, strategic alliances with
other companies, affinity partnerships and customer referral programs to build
brand recognition and expand our customer base. Since our national marketing
efforts began in 1998, our marketing surveys indicate a greater awareness of the
"Telebank" brand, and we have seen strong growth in the number of accounts.
SELECTIVE OUTSOURCING
To maintain our low operating costs, we carefully evaluate whether to build
specific operations and systems internally or outsource them to leading
technology vendors to capitalize on their technical capabilities and scalable
platforms. When determining whether to outsource a particular service or
operation, we analyze the following factors:
- potential cost and time savings of outsourcing a particular technology;
- competitive advantage inherent in developing a specific technology
in-house; and
- impact on our ability to maintain high quality customer service.
Currently, we outsource internet processing and home page hosting, check
processing, check imaging and statement rendering. We have outsourcing
relationships with, and use the products of, M&I Data Services, Inc., Security
First Technologies, Midwest Payment Systems and Exodus Communications, among
others.
We do not outsource systems and operations we consider central to achieving
our business objectives, including product offering, web site design, call
center management, marketing and asset acquisition.
CONSERVATIVE ASSET ACQUISITION PROGRAM
We intend to continue our conservative asset acquisition strategy of
purchasing and managing pools of one- to four-family residential, first lien
mortgage loans and investment-grade mortgage-backed securities. We do not
currently originate residential mortgage or other loans, but instead purchase
them in the secondary market. We believe that purchasing assets in the secondary
market, including first lien residential mortgage loans and mortgage-backed
securities, lowers our loan acquisition costs and allows us to better manage our
credit quality by purchasing a geographically diverse loan portfolio.
We determine the appropriate mix of whole loans versus mortgage-backed
securities based on market conditions. In periods of fast asset growth, we
purchase a greater percentage of mortgage-backed securities relative to whole
loans to increase assets rapidly while maintaining credit quality. As deposits
grow, we replace the mortgage-backed securities with higher yielding whole
loans.
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<PAGE> 34
PRODUCTS
We directly offer FDIC-insured deposit products that we produce internally,
as well as co-branded products that are developed with third-party strategic
partners. We also are currently developing and intend to offer additional
co-branded products in the future.
<TABLE>
<CAPTION>
DEPOSIT PRODUCTS
----------------
<S> <C>
Interest checking account................... Premium yield NOW account with unlimited
free check writing, free internet banking,
free unlimited online bill payment service
and free ATM/debit card
Money market account........................ Premium yield money market account with
immediate access to funds via checks and ATM
card
SmartSaver(SM) account...................... Super premium yield account without term
restrictions
Certificates of deposit..................... Guaranteed premium yields in terms ranging
from three months to five years
Callable certificates of deposit............ Super premium yield CDs, subject to
redemption after two years, with terms
ranging from seven to ten years
</TABLE>
<TABLE>
<CAPTION>
CO-BRANDED PRODUCTS
-------------------
<S> <C>
Fixed annuities............................. Line of premium yield flexible and single
premium fixed annuities offering a variety
of value-added features
Residential mortgage loans.................. Competitively priced selection of
residential mortgage loans
</TABLE>
<TABLE>
<CAPTION>
PRODUCTS UNDER DEVELOPMENT
--------------------------
<S> <C>
Variable rate annuities..................... Line of variable annuities with value-added
features, including low expense structure
and no surrender charges
Credit cards................................ Credit cards offering low rates, internet
statement presentation, tailored customer
benefits and ability to open accounts online
Online brokerage............................ Discount brokerage services, including
online trading and no load mutual fund
selection
Insurance products.......................... Selection of term life and auto insurance
with competitive pricing
</TABLE>
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<PAGE> 35
DEPOSIT PRODUCTS
We currently offer the following deposit products:
INTEREST CHECKING ACCOUNTS. Our interest checking account is designed for
customers who are seeking a premium yield checking account and additional
benefits, including unlimited personal check writing, free check printing, free
internet banking, free unlimited online bill payment and an ATM/debit card. As
of March 17, 1999, interest checking customers earned 3.15% annual percentage
yield, or APY, for balances of $2,500 to $9,999, 3.75% APY for balances of
$10,000 to $24,999 and 4.45% APY for balances of $25,000 or more.
MONEY MARKET AND SMARTSAVER(SM) ACCOUNTS. Our money market and
SmartSaver(SM) accounts are designed for consumers who are seeking premium and
super premium yields with immediate access to funds without term restrictions or
early withdrawal penalties. As of March 17, 1999, money market account customers
earned 4.80% APY for a minimum balance of $2,500, and SmartSaver(SM) account
customers earned 5.00% APY for a minimum balance of $2,500.
CERTIFICATES OF DEPOSIT. Our standard CDs are designed for consumers who
want a fixed premium yield for terms ranging from three months to five years.
For those consumers who seek an even higher premium yield CD, we offer seven- to
ten-year callable CDs, which are subject to redemption by us anytime after two
years. As of March 17, 1999, CD rates ranged from 5.05% APY for a three-month CD
to 6.25% APY for a ten-year callable CD.
CO-BRANDED PRODUCTS
We currently offer the following financial products through strategic
alliances with other companies that provide these products directly:
FIXED ANNUITY PRODUCTS. Our subsidiary, Telebanc Insurance, offers
co-branded insurance products to customers who are seeking fixed annuities with
value-added features. We have entered into agreements with nationally recognized
insurance companies, including USG Annuity & Life Company, Jackson National Life
Insurance Company and First Penn-Pacific Life Insurance Company, through which
we offer co-branded insurance products at commissions that are significantly
lower than the average commission charged by traditional insurance agencies.
Through Telebanc Insurance, we offer a selection of high value fixed annuity
products, with interest rates in the range of 0.5% to 1% above the interest
rates on full commission products. These products provide customers with
multiple-year guarantees, cumulative free withdrawals, introductory year bonus
rates and no surrender charges.
RESIDENTIAL MORTGAGE LOANS. We have entered into a strategic alliance with
E-Loan, an online mortgage broker, to offer co-branded, rate-competitive
residential mortgage loans to our customers, and to offer Telebank branded
products and services to E-Loan's customers. Currently we do not originate loans
directly. We receive referral fees for any customer acquired by E-Loan through
our web site. In turn, we pay referral fees to E-Loan for any customer acquired
through the E-Loan web site.
PRODUCTS UNDER DEVELOPMENT
We intend to offer the following co-branded products in the future through
strategic alliances with other companies that provide these products directly:
VARIABLE RATE ANNUITIES. We intend to offer a line of variable rate
annuities with value-added features, including a low expense structure and no
surrender charges.
CREDIT CARDS. Responding to customer requests and to expand affinity
relationships, we intend to offer credit cards to our customers and to members
of our affinity partners. We expect Telebank branded credit cards will feature
low rates, internet statement presentation, tailored customer benefits and the
ability to open accounts online.
ONLINE BROKERAGE. We intend to provide discounted online brokerage
services including access to mutual funds.
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<PAGE> 36
INSURANCE PRODUCTS. We are also exploring strategic alliances with select
companies to offer high value term life insurance and automobile insurance
products.
Based on our analysis of the feasibility and profitability of our
developing products and services, we may determine not to offer all or some of
these products and services, may significantly delay the time at which we
introduce them or may determine to withdraw them shortly after their
introduction based on our assessment of certain factors, including customer
acceptance and costs.
CUSTOMER SERVICE AND SUPPORT
High quality customer service is an essential element in attracting and
retaining customers. Customer service starts with convenient access. Through our
web site and the internet, customers can access their accounts 24 hours a day,
seven days a week. Customers may view balances, transfer funds, pay bills and,
if desired, send electronic communications to our support centers. It is our
policy to respond to customer e-mails within 24 hours.
Telephone support is an essential complement to our internet service.
Consequently, we have made considerable investment in our telephone support
services to provide 24-hour access to customer service representatives. We have
an in-house call center staffed by customer service representatives who are
specially trained to handle customer requests. We also have an overflow call
center for spikes in volume and a specialty call center for internet banking
support. We continually monitor all our call centers and, whenever possible,
direct sales-related calls to customer service representatives who are
responsible for our sales program. We believe that the combination of fast,
efficient internet service and knowledgeable, responsive 24-hour telephone
support has become one of our key competitive advantages.
Our in-house call center employs customer service representatives, known as
"Telebankers", who are primarily college-educated professionals trained to
satisfy customers' demands. If a customer would like to speak to someone
personally, he can call 1-800-TELEBANK to reach a Telebanker or contact us over
the internet, and one of our Telebankers will return his call. A Telebanker can
access data relating to the customer and his existing accounts. Telebankers also
have access to information about our other savings and investment products,
which permits them to cross-market.
Based on data we gathered through our automatic call distribution system,
during January 1999, the average customer call was personally answered by a
Telebanker within 29 seconds of receipt of the call, and incoming calls had a
rate of abandonment by customers before contact with a Telebanker of less than
3%.
We offer incentives to our Telebankers through a comprehensive compensation
package that rewards high quality customer service and builds long-term employee
loyalty. Telebankers are compensated through an annual salary and a monthly
performance bonus. We also offer an employee stock ownership plan in which every
full-time employee participates.
CUSTOMERS
We have customers in all 50 states, the District of Columbia and many
foreign countries. We believe that our products appeal to both long-term savers
and transaction-oriented savers. Our long-term savers tend to be older, more
financially aware customers and tend to be more concerned with high value
products. These customers invest predominantly in certificates of deposit,
savings accounts and money market checking accounts. By comparison, our
transaction-oriented savers tend to be younger customers seeking the convenience
of internet access. Many of these customers choose our interest checking and
money market checking accounts as an alternative to their brokerage accounts.
We believe that our customers are satisfied with our products and service.
For example, as of December 31, 1998, 32% of our customers had two or more
accounts and the average customer had 1.7 accounts. As of December 31, 1998, our
average retail
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<PAGE> 37
deposit account size was approximately $22,000.
MARKETING AND STRATEGIC ALLIANCES
We have developed a consumer-oriented, direct marketing strategy designed
to reach potential customers and build brand awareness nationally. Using
demographic information and analyzing current regional banking conditions, we
target key consumer markets through a variety of advertising and promotional
media. To expand our marketing activities, we plan to significantly increase our
marketing levels during 1999. Our current marketing strategy consists of our
national advertising campaign, strategic alliances, affinity partnerships, and
customer referral and cross-sell programs.
NATIONAL ADVERTISING CAMPAIGN
We target key consumer markets through a variety of advertising and
promotional media, including billboard advertising, as well as print advertising
in national periodicals, local newspapers and specialty publications. For the
past several years we have developed and implemented a national radio campaign
aimed at consumer segments most likely to be interested in our products. Our ads
are frequently heard on stations in major markets, including New York,
Philadelphia, San Francisco, Washington, DC and Los Angeles. We also place
advertisements on several leading internet web sites. Additionally, we intend to
expand our national advertising efforts by rolling out strategically placed
television advertisements.
We have developed a concentrated regional advertising campaign, originating
in the Los Angeles area that, over time, will scale up to a national campaign
with consumer reach from coast to coast. These regional campaigns will use all
of our advertising channels to penetrate prime consumer segments.
STRATEGIC ALLIANCES
We have strategic marketing agreements with several leading internet web
sites. On November 4, 1998, we announced a marketing relationship with Yahoo!.
Through this agreement, we have introduced a customer acquisition program with
tailored benefits for customers who open their accounts through Yahoo!,
including the reimbursement of third-party ATM surcharges. This agreement also
provides us with strategically placed advertising in Yahoo!'s banking and
finance pages. We have additional marketing agreements with Third Age Media, an
online community of older adults, and Chinese Cyber City, an online community of
Chinese-Americans. In addition, we have placed advertising strategically
throughout the internet on sites that reach our target audiences.
AFFINITY PARTNERSHIPS
Our affinity marketing program is designed to reach targeted groups of
consumers with the endorsement of their membership organization. Through our
affinity partnerships, we contract with professional and other organizations to
promote our savings and investment products. We believe our affinity
partnerships lower customer acquisition costs and increase customer conversion
rates. Currently, we have 14 affinity partnerships, including the following:
- Sam's Club;
- Chinese Cyber City;
- National Association of Realtors(R);
- National Council of Senior Citizens; and
- National Association for the Self-Employed.
CUSTOMER REFERRAL AND CROSS-SELL PROGRAMS
We have several customer incentive programs designed to encourage our
existing customers to refer new customers and to open additional accounts
themselves. In 1995, we introduced the Refer-a-Saver(SM) program, pursuant to
which we pay cash to existing customers who refer new customers to us. This
program significantly lowers our customer acquisition cost. Since introduction
in 1995, the Refer-a-Saver(SM) program has accounted for 5% of our account
growth. Additionally, as an incentive to maintain multiple accounts, we offer
lower minimum balances and higher rates on select products for customers with
multiple accounts through
34
<PAGE> 38
our Preferred Saver(SM) program. Currently, approximately 15% of our customers
are enrolled in the Preferred Saver(SM) program.
SECURITY
We have systems environments which are continuously monitored and managed
using early detection, intervention and access control to prevent unauthorized
entry and activity. We test our systems periodically using an outside security
firm. In addition, we have taken the following specific steps to ensure our
customer information is adequately protected:
ENCRYPTED DATA TRANSMISSIONS. All data transmitted and transacted on our
web hosting environment is encrypted to ensure that sensitive information cannot
be read or easily deciphered. This encryption is accomplished through Verisign's
Secure Socket Layer, or SSL. SSL protocol provides data privacy, integrity and
authentication in a point-to-point connection between a consumer's web browser
and our web server so that information, including the requested URL, submitted
form contents, user names and passwords, and any data sent back to the client,
are fully encrypted. This encryption technology is widely supported in browsers
including Netscape Navigator(TM) version 2.0 or higher and Microsoft's(R)
Internet Explorer version 3.0 and higher.
FIREWALLS. Security firewalls are in place to protect our web server,
internet banking platform and our internal network environment. Through the use
of Check Point hardware and software, we control access, authenticate users and
ensure the privacy and integrity of communications over untrusted public
networks.
ASSET ACQUISITION PROGRAM
Our asset acquisition strategy is focused on investing in mortgage-backed
securities purchased in the secondary market and one-to four-family first lien
residential mortgage loans.
MORTGAGED-BACKED SECURITIES
Our mortgage-backed securities portfolio consists primarily of privately
insured mortgage pass-through securities, Government National Mortgage
Association participation certificates, Fannie Mae participation certificates,
Freddie Mac participation certificates and other securities issued by other
non-agency organizations. As of December 31, 1998, over 91% of the face value of
our mortgage-backed securities portfolio was rated "AAA" by Standard & Poor's or
"Aaa" by Moody's Investment Services. As of December 31, 1998, mortgage-backed
securities represented 47.1% of our total earning assets.
MORTGAGE LOANS
As of December 31, 1998, more than 97.5% of our whole loan portfolio
consisted of first lien one- to four-family residential mortgage loans, an asset
class we consider the safest in terms of credit risk. We purchase loans from
various sources, including brokers, other banks, pension funds and other holders
of residential mortgages. As our portfolio has grown, we have developed a
national flow program to directly purchase loans from originators, thereby
increasing our spreads by eliminating intermediary fees. We purchase loans
nationwide, allowing for a steady supply of loans and improving credit quality
through a regionally diverse portfolio. As of December 31, 1998, mortgage loans
represented 41.2% of our total earning assets.
ASSET/LIABILITY MANAGEMENT
We actively monitor our 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. To this end, we have established an asset-liability committee
and implemented a risk measurement guideline employing market value of equity
and gap methodologies and other measures. To manage interest rate exposure, we
use various hedging techniques such as caps, floors, swaps, futures and
financial options.
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<PAGE> 39
COMPETITION
The financial services industry in the United States is highly competitive
and characterized by rapid change. We compete for deposits throughout the United
States with financial service providers, including savings and commercial banks,
credit unions, mutual fund companies and brokerage companies.
Because we purchase rather than originate residential mortgage loans and
mortgage-backed securities, our competitors for these investments are primarily
commercial banks, savings banks, mortgage brokers, pension funds, real estate
investment trusts and other financial service providers that purchase
mortgage-related products. We believe that the secondary market for residential
mortgage loans is large and relatively fluid, with pricing typically a function
of supply and demand and general market conditions. We compete principally on
the basis of bid price for these investments. We believe that we are able to
compete effectively for mortgage loans and mortgage-backed securities primarily
because of our relatively low cost infrastructure.
We believe that customers choose financial products and services primarily
on the basis of price, convenience and service. We also believe that we attract
and retain
customers primarily because we offer the following:
- - higher interest rates and lower fees than those offered by many of our
competitors;
- - convenient anytime, anywhere access to our products and services; and
- - quality customer service.
See "Risk Factors -- Competition with other financial institutions may
cause us to increase marketing expenses, resulting in reduced profitability".
GOVERNMENT REGULATION
Telebanc, as a savings and loan holding company, and Telebank, as a
federally chartered savings bank, are subject to extensive regulation,
supervision and examination by the OTS as their primary federal regulator.
Telebank also is subject to regulation, supervision and examination by the FDIC.
TeleBanc Capital Markets, Inc., or TCM, a wholly owned subsidiary of
Telebanc, is a registered broker-dealer under the Securities Exchange Act of
1934 and is regulated by the SEC.
Telebanc Insurance, a subsidiary of Telebanc, is required to be licensed in
each state where it sells insurance products and is subject to the regulatory
requirements of these states. Currently, Telebanc Insurance is licensed in six
states.
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<PAGE> 40
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table lists our current directors, executive officers and key
employees as of March 17, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David A. Smilow........................ 37 Chairman of the Board of Directors
Mitchell H. Caplan..................... 41 Vice Chairman of the Board of Directors, Chief
Executive Officer and President
Aileen Lopez Pugh...................... 31 Executive Vice President and Chief Financial Officer
Laurence P. Greenberg.................. 37 Executive Vice President and Chief Marketing Officer
Stephen G. Dervenis.................... 34 Executive Vice President of Telebanc and Chief
Executive Officer of TCM
Michael Opsahl......................... 36 Executive Vice President and Chief Credit Officer
Sang-Hee Yi............................ 35 Executive Vice President and Chief Operating Officer
Ross C. Atkinson....................... 31 Executive Vice President and Chief Information
Officer
Arlen W. Gelbard....................... 41 Executive Vice President and General Counsel
David R. DeCamp........................ 40 Director
Dean C. Kehler......................... 42 Director
Marcia Myerberg........................ 53 Director
Steven F. Piaker....................... 36 Director
Mark Rollinson......................... 63 Director
</TABLE>
DAVID A. SMILOW, a founder and Chairman of Telebanc, will continue to
reduce his operational role at Telebanc and, in 1999, is expected to focus
exclusively, in his capacity as non-executive chairman, on long term strategic
initiatives and asset liability management.
Mr. Smilow has served as the Chairman of the Board of Directors since March
1994 and as Chief Executive Officer of Telebanc 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 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 Telebanc since January 1994 and has served as Chief
Executive Officer of Telebanc 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 1985 until September
1990, Mr. Caplan was an associate of the law firm of Shearman & Sterling, where
he represented and advised private and public commercial institutions.
AILEEN LOPEZ PUGH has served as Executive Vice President and Chief
Financial Officer of Telebanc and Telebank since August 1994. Prior to joining
management, 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 Telebanc and its initial public offering.
Prior to 1993, Ms. Pugh was an auditor with KPMG Peat Marwick.
LAURENCE P. GREENBERG has served as Executive Vice President and Chief
Marketing Officer of Telebanc and Telebank since 1995. He is responsible for
developing and implementing our marketing strategy and overseeing the call
center and deposit operations functions. From October 1994 to 1995, Mr.
Greenberg served as Senior Vice
37
<PAGE> 41
President of Marketing. Prior to joining management, Mr. Greenberg served as a
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.
STEPHEN G. DERVENIS has served as Executive Vice President of Telebanc, as
well as Chief Executive Officer of TCM, since June 1998. From October 1997 to
June 1998, Mr. Dervenis served as Director of Amortizing and Emerging Assets
Securitization at Barclays Capital in New York. From April 1994 to September
1997, Mr. Dervenis served as a Managing Director of Furman Selz, and from
January 1993 to March 1994, as a Vice President at J.P. Morgan, both in New
York.
MICHAEL OPSAHL has served as Executive Vice President and Chief Credit
Officer of Telebanc, Telebank and TCM or their predecessors since 1990. He is
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 Telebanc, 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 of Telebanc and Telebank since April 1996. She is responsible for
operations and regulatory compliance. Prior to serving in her current position,
Ms. Yi served as the compliance officer of Telebanc. From 1986 to April 1994,
she was a federal thrift regulator at the Office of Thrift Supervision.
ROSS C. ATKINSON has served as Executive Vice President and Chief
Information Officer of Telebanc and Telebank since June 1998. He is responsible
for the strategic direction of all information processing, communication systems
and operations. From 1997 until June 1998, Mr. Atkinson served as a principal
consultant with Platinum Technology, Inc., a database systems and information
management software provider. From 1991 through 1996, Mr. Atkinson served as a
systems engineer for Electronic Data Systems.
ARLEN W. GELBARD has served as Executive Vice President and General Counsel
of Telebanc and Telebank since June 1998. From 1982 until June 1998, Mr. Gelbard
was a member of the law firm of Hofheimer Gartlir & Gross, LLP, New York, where
he specialized in transactional real estate, lending, leasing, foreclosures and
workouts. Prior to joining management of Telebanc, from April 1996 to June 1998,
Mr. Gelbard served as a director, as well as Chairman of the Compensation
Committees of Telebanc and Telebank.
DAVID R. DECAMP has served as a director of Telebanc 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
Telebanc and Telebank.
DEAN C. KEHLER has served as a director of Telebanc and Telebank since
March 1997. Mr. Kehler has been a Managing Director of CIBC Oppenheimer Corp., a
subsidiary of CIBC, 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 in August 1995.
He is also a director of Global Crossing Ltd. and Booth Creek Ski Group, Inc.
MARCIA MYERBERG has served as a director of Telebanc and Telebank since May
1998. Ms. Myerberg has been Chief Executive Officer of Myerberg & Company, L.P.,
an investment banking firm specializing in the mortgage-backed securities
markets, since February 1994. Prior to her current position, from March 1989 to
February 1994, Ms. Myerberg was a Senior Managing
38
<PAGE> 42
Director of The Bear Stearns Companies, Inc. From July 1985 to February 1989,
she was a Director of Salomon Brothers, Inc., and from November 1979 to June
1985 she was the Senior Vice President-Corporate Finance and Treasurer of
Federal Home Loan Mortgage Corporation.
STEVEN F. PIAKER has served as a director of Telebanc 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 Telebanc 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.
39
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 16, 1999, and as adjusted
to give effect to the sale of common stock offered by this prospectus by: (i)
each stockholder known by us to beneficially own 5% or more of our common stock,
(ii) each of our current directors and executive officers, (iii) all of our
directors and executive officers, as a group and (iv) all other selling
stockholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF
PRIOR TO THIS SHARES BENEFICIAL OWNERSHIP
OFFERING(1) BEING AFTER THIS OFFERING(1)
---------------------- SOLD IN ----------------------
NAME OF BENEFICIAL OWNER(2) NUMBER PERCENTAGE THIS OFFERING NUMBER PERCENTAGE
- --------------------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
David A. Smilow(3)..................... 1,655,350 12.75% 350,000 1,305,350 7.97%
Mitchell H. Caplan(4).................. 879,277 6.77 50,000 829,277 5.06
Aileen Lopez Pugh(5)................... 116,961 * -- 116,961 *
Laurence P. Greenberg(6)............... 87,907 * -- 87,907 *
Stephen G. Dervenis(7)................. 5,500 * -- 5,500 *
David R. DeCamp(8)..................... 19,000 * -- 19,000 *
Dean C. Kehler(9)...................... 686,590 5.42 -- 686,590 4.28
Marcia Myerberg........................ -- -- -- -- --
Steven F. Piaker(10)................... 4,000 * -- 4,000 *
Mark Rollinson(11)..................... 23,000 * -- 23,000 *
CIBC WG Argosy Merchant Fund 2
LLC(9)............................... 682,590 5.39 -- 682,590 4.25
Conning & Company(12).................. 772,589 6.11 -- 772,589 4.81
General American Mutual Holding
Company(13).......................... 967,614 7.63 -- 967,614 6.02
PC Investment Company(14).............. 867,866 6.84 -- 867,866 5.40
Telebanc Employee Stock Ownership
Plan(15)............................. 484,945 3.85 -- 484,945 3.03
Directors and executive officers, as a
group (10 individuals)(16)........... 3,477,585 25.34% 400,000 3,077,585 17.97%
</TABLE>
- ---------------
* Less than 1% of the shares of outstanding common stock.
(1) Applicable percentage of ownership is based on 12,561,635 shares of common
stock outstanding as of March 16, 1999, and 15,961,635 shares of common
stock outstanding upon completion of this offering. Beneficial ownership is
determined in accordance with the rules of the SEC. For each beneficial
owner, shares of common stock subject to options or conversion rights
exercisable within 60 days of the date of this prospectus are included as
outstanding for purposes of this table.
(2) Except as specifically noted in the footnotes below, the address of each of
the named stockholders is c/o TeleBanc Financial Corporation, 1111 North
Highland Street, Arlington, Virginia 22201.
(3) 1,153,954 of Mr. Smilow's shares are held by D. Aron LLC, a limited
liability company of which Mr. Smilow is the managing member, and 50,036
shares are held directly by Mr. Smilow. Includes 354,064 shares of common
stock issuable upon exercise of options
40
<PAGE> 44
and 64,200 shares issuable upon exercise of warrants exercisable within 60
days of the date of this prospectus and 33,096 shares of common stock held
by the ESOP and allocated to Mr. Smilow's account. Excludes 288,944 shares
held by D. Aron LLC over which Mr. Smilow does not have voting or
dispositive power and 385,999 shares of common stock and warrants to
acquire 50,000 shares of common stock held by the ESOP (excluding the
shares allocated to his account), of which Mr. Smilow is a trustee.
(4) Includes 380,730 shares of common stock issuable upon exercise of options
and 46,000 shares issuable upon exercise of warrants exercisable within 60
days of the date of this prospectus and 15,809 shares of common stock held
by the ESOP and allocated to Mr. Caplan's account. Excludes 403,286 shares
of common stock and warrants to acquire 50,000 shares of common stock held
by the ESOP (excluding the shares allocated to his account), of which Mr.
Caplan is a trustee. Mr. Caplan disclaims beneficial ownership of warrants
to acquire 23,000 shares of common stock listed above.
(5) Includes 88,000 shares of common stock issuable upon exercise of options
and 12,200 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus and 7,481 shares
of common stock held by the ESOP and allocated to Ms. Pugh's account.
(6) Includes 80,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus and 7,507 shares
of common stock held by the ESOP and allocated to Mr. Greenberg's account.
(7) Includes 5,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus.
(8) Includes 17,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus. Mr. DeCamp's
address is c/o Grubb & Ellis, 1717 Pennsylvania Avenue, N.W., Suite 250,
Washington, D.C. 20006.
(9) Mr. Kehler is the designated director for CIBC WG Argosy Merchant Fund 2
LLC ("CIBC Merchant Fund"), which, according to a Schedule 13G filed on
February 16, 1999, directly holds 589,840 shares of common stock and 92,750
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of the date of this prospectus. Mr. Kehler is a partner of
CIBC Merchant Fund and disclaims beneficial ownership of such shares. Mr.
Kehler's beneficial ownership interest includes 4,000 shares of common
stock issuable upon exercise of options exercisable within 60 days of the
date of this prospectus, which are not part of CIBC's holdings. Mr.
Kehler's address is c/o CIBC Oppenheimer, 425 Lexington Avenue, 3rd Floor,
New York, New York, 10017.
(10) Represents common stock issuable upon exercise of options exercisable
within 60 days of the date of this prospectus. Mr. Piaker is the designated
director for Conning & Company and serves as its Senior Vice President. Mr.
Piaker does not exercise voting or investment control over the shares held
by Conning & Company. Mr. Piaker's address is c/o Conning & Company, City
Place II, 185 Asylum Street, Hartford, Connecticut 06103.
(11) Includes 12,000 shares of common stock issuable upon exercise of options
exercisable within 60 days of the date of this prospectus. Mr. Rollinson's
address is P.O. Box 826, Leesburg, Virginia 22075.
(12) According to a Schedule 13G filed on February 16, 1999, Conning Insurance
Capital Limited Partnership III ("CICLP III") beneficially owns 671,975
shares of common stock. Conning Insurance Capital International Partners
III, L.P. ("CICIP III") beneficially owns 100,614 shares of common stock.
Telebanc understands that CICLP III and CICIP III collectively own 92,750
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of the date of this prospectus. Conning & Company controls
the
41
<PAGE> 45
general partner of each of these partnerships. The address of Conning &
Company is City Place II, 185 Asylum Street, Hartford, Connecticut 06103.
(13) According to a Schedule 13G filed on February 16, 1999, General American
Life Insurance Company ("General American"), an indirect subsidiary of
General American Mutual Holding Company directly holds 168,524 shares of
common stock and 26,500 shares of common stock issuable upon exercise of
warrants exercisable within 60 days of the date of this prospectus. General
American Mutual Holding Company indirectly controls Conning & Company and
may be deemed to beneficially own all of the shares held by Conning &
Company partnerships. Accordingly, the 772,590 shares held by Conning &
Company are also included in the table above. The address of General
American is 700 Market Street, St. Louis, Missouri 63101.
(14) PC Investment Company holds 749,940 shares of common stock and 117,926
shares of common stock issuable upon exercise of warrants exercisable
within 60 days of the date of this prospectus. The address of PC Investment
Company is 401 Theodore Freund Avenue, Rye, New York 10580.
(15) Includes 50,000 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus.
(16) Includes 944,794 shares of common stock issuable upon exercise of options
and 215,150 shares of common stock issuable upon exercise of warrants
exercisable within 60 days of the date of this prospectus. Excludes 355,202
shares of common stock, except for any shares allocable to the accounts of
Messrs. Smilow, Caplan and Greenberg and Ms. Pugh, and warrants to acquire
50,000 shares of common stock exercisable within 60 days of the date of
this prospectus held by the ESOP, of which Messrs. Smilow and Caplan act as
trustees.
42
<PAGE> 46
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file
with them, which means:
- incorporated documents are considered part of the prospectus;
- we can disclose important information to you by referring you to those
documents; and
- information that we file with the SEC will automatically update and
supersede this prospectus.
We incorporate by reference the documents listed below which were filed
with the SEC under the Securities Exchange Act of 1934:
- Annual Report on Form 10-K, as amended, for the year ended December 31,
1998; and
- The description of our common stock in the registration statement on Form
8-A filed on July 1, 1998.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of this prospectus but before the end of
the offering:
- Reports filed under Section 13(a) and (c) of the Exchange Act;
- Documents filed under Section 14 of the Exchange Act; and
- Reports filed under Section 15(d) of the Exchange Act.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the SEC. Our
SEC filings are also available over the internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for more information on the public reference room
and their copy charges.
You may request a copy of any filings referenced to above, excluding
exhibits, at no cost, by contacting Todd C. Mackay at the following address:
TeleBanc Financial Corporation
1111 North Highland Street
Arlington, Virginia 22201
(703) 247-3700
We have filed a registration statement on Form S-3 with the SEC covering
the offering. For further information about us and the offering, you should
refer to our registration statement and its exhibits. Since the prospectus may
not contain all the information that you may find important, you should review
the full text of the documents included or incorporated by reference in the
registration statement.
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing or incorporated by reference in
this prospectus is accurate as of the date on the front cover of this prospectus
only. Our business, financial condition, results of operations and prospects may
have changed since that date.
43
<PAGE> 47
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements and information
relating to Telebanc and its subsidiaries. The words "believes", "expects",
"may", "will", "should", "projects", "contemplates", "anticipates", "forecasts",
"intends" 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. The factors that may cause a difference include
those discussed in the Risk Factors section and the Management's Discussion and
Analysis of Financial Condition and Results of Operations section of this
prospectus. We undertake no obligation to update publicly any forward-looking
statement for any reason, even if new information becomes available.
VALIDITY OF THE SHARES
For purposes of this offering, Hogan & Hartson L.L.P., Washington, D.C.,
has given its opinion as to the validity of the shares offered by this
prospectus. The validity of these shares will be passed upon for the
underwriters by Sullivan & Cromwell, Washington, D.C.
EXPERTS
The consolidated financial statements as of December 31, 1996, 1997 and
1998 and for each of the three years in the period ending December 31, 1998
included in this prospectus and registration statement to the extent indicated
in their report have been audited by Arthur Andersen LLP, independent certified
public accountants, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
44
<PAGE> 48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Statement of Financial Condition -- As of
December 31, 1998 and 1997................................ F-3
Consolidated Statements of Operations and Comprehensive
Income -- For the Years Ended December 31, 1998, 1997 and
1996...................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the Years Ended December 31, 1998, 1997 and
1996...................................................... F-5
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of TeleBanc Financial Corporation (a Delaware Corporation) and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations and comprehensive income, stockholders' equity, and
cash flows for each of the three years ended December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
February 10, 1999
F-2
<PAGE> 50
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 26,282 $ 92,156
Trading securities.......................................... 29,584 21,110
Federal Home Loan Bank stock................................ 25,175 10,000
Investment securities available-for-sale.................... 220,358 91,237
Mortgage-backed securities available-for-sale............... 1,012,163 319,203
Loans receivable held for sale.............................. 117,928 149,086
Loans receivable, net....................................... 786,926 391,618
Other assets................................................ 64,925 25,942
---------- ----------
Total assets................................................ $2,283,341 $1,100,352
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Retail deposits............................................. $1,142,385 $ 522,221
Brokered callable certificates of deposit................... 67,085 --
Advances from the Federal Home Loan Bank of Atlanta......... 472,500 200,000
Securities sold under agreements to repurchase and other
borrowings................................................ 404,435 279,909
Subordinated debt, net...................................... 29,855 29,614
Other liabilities........................................... 18,261 13,212
---------- ----------
Total liabilities........................................... 2,134,521 1,044,956
Corporation-Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation................ 35,385 9,572
Commitments and contingencies............................... -- --
Stockholders' equity:
4% Cumulative Preferred Stock, $0.01 par value, 500,000
shares authorized
Series A, 0 and 18,850 issued and outstanding at December
31, 1998 and 1997...................................... -- 9,634
Series B, 0 and 4,050 issued and outstanding at December
31, 1998 and 1997...................................... -- 2,070
Series C, 0 and 7,000 issued and outstanding at December
31, 1998 and 1997...................................... -- 3,577
Common stock, $0.01 par value, 29,500,000 shares authorized;
12,388,242 and 4,458,322 issued and outstanding at
December 31, 1998 and 1997................................ 123 44
Additional paid-in capital.................................. 103,194 16,205
Unearned ESOP shares........................................ (2,578) --
Retained earnings........................................... 10,819 11,556
Unrealized gain on securities available for sale, net of
tax....................................................... 1,877 2,738
---------- ----------
Total stockholders' equity.................................. 113,435 45,824
---------- ----------
Total liabilities and stockholders' equity.................. $2,283,341 $1,100,352
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 51
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER
31,
----------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans..................................................... $ 51,197 $34,729 $23,089
Mortgage-backed and related securities.................... 34,474 17,646 17,955
Investment securities..................................... 9,951 5,702 4,690
Trading securities........................................ 2,861 1,124 --
Other..................................................... 1,627 100 66
-------- ------- -------
Total interest income............................... 100,110 59,301 45,800
Interest expense:
Retail deposits........................................... 44,913 25,958 21,357
Brokered callable certificates of deposit................. 3,638 -- --
Advances from the Federal Home Loan Bank of Atlanta....... 13,022 9,885 6,689
Repurchase agreements and other borrowings................ 15,204 6,941 4,569
Subordinated debt......................................... 3,528 3,279 2,200
-------- ------- -------
Total interest expense.............................. 80,305 46,063 34,815
-------- ------- -------
Net interest income................................. 19,805 13,238 10,985
Provision for loan losses................................... 905 921 919
-------- ------- -------
Net interest income after provision for loan
losses............................................ 18,900 12,317 10,066
-------- ------- -------
Non-interest income:
Gain on sale of available for sale securities............. 3,536 982 935
Gain on sale of loans..................................... 2,088 1,148 874
(Loss) gain on trading securities......................... (43) 1,204 --
Income (loss) on equity investments....................... 531 (1,138) (274)
Fees, service charges, and other.......................... 1,452 1,897 1,221
-------- ------- -------
Total non-interest income........................... 7,564 4,093 2,756
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits........................ 7,779 4,909 3,690
Advertising and marketing................................. 4,634 606 93
Special SAIF assessment................................... -- -- 1,671
Other..................................................... 7,406 3,527 2,921
-------- ------- -------
Total general and administrative expenses........... 19,819 9,042 8,375
Other non-interest expenses:
Net operating cost of real estate acquired through
foreclosure............................................. 336 278 238
Amortization of goodwill and other intangibles............ 1,923 822 462
-------- ------- -------
Total other non-interest expenses....................... 2,259 1,100 700
-------- ------- -------
Total non-interest expenses......................... 22,078 10,142 9,075
-------- ------- -------
Income before income tax expense and minority
interest.............................................. 4,386 6,268 3,747
Income tax expense.......................................... 1,649 1,657 1,195
Minority interest in subsidiary............................. 1,362 394 --
-------- ------- -------
Net income.......................................... $ 1,375 $ 4,217 $ 2,552
Preferred stock dividends................................... 2,112 546 --
-------- ------- -------
Net (loss) income available to common
stockholders...................................... $ (737) $ 3,671 $ 2,552
======== ======= =======
Other comprehensive income, before tax:
Unrealized holding gain on securities arising during the
period.................................................. 1,331 1,251 1,088
Less: reclassification adjustment for gains included in
net income.............................................. (3,536) (982) (882)
-------- ------- -------
Other comprehensive income, before tax.................. (2,205) 269 206
Income tax expense related to reclassification adjustment
for gains on sale of securities......................... 1,344 373 335
-------- ------- -------
Other comprehensive income, net of tax.................. (861) 642 541
-------- ------- -------
Comprehensive income.................................... $ (1,598) $ 4,313 $ 3,093
======== ======= =======
Earnings per share:
Basic..................................................... $ (0.09) $ 0.84 $ 0.62
Diluted................................................... $ (0.09) $ 0.57 $ 0.58
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES)
ON
ADDITIONAL AVAILABLE-
PREFERRED COMMON PAID-IN UNEARNED RETAINED FOR-SALE
STOCK STOCK CAPITAL ESOP SHARES EARNINGS SECURITIES TOTAL
--------- ------ ---------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995............ $ -- $ 40 $ 14,637 $ -- $ 5,333 $ 1,555 $ 21,565
Net income............................... -- -- -- -- 2,552 -- 2,552
Unrealized gain on available-for sale
securities, net of tax effect.......... -- -- -- -- -- 541 541
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1996............ -- 40 14,637 -- 7,885 2,096 24,658
Net income............................... -- -- -- -- 4,217 -- 4,217
Common stock issued...................... -- 4 1,568 -- -- -- 1,572
Issuance of 4% cumulative preferred
stock, Series A........................ 9,634 -- -- -- -- -- 9,634
Issuance of 4% cumulative preferred
stock, Series B........................ 2,070 -- -- -- -- -- 2,070
Issuance of 4% cumulative preferred
stock, Series C........................ 3,577 -- -- -- -- -- 3,577
Dividends on 4% cumulative preferred
stock.................................. -- -- -- -- (546) -- (546)
Unrealized gain on available for sale
securities, net of tax effect.......... -- -- -- -- -- 642 642
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1997............ 15,281 44 16,205 -- 11,556 2,738 45,824
Net income............................... -- -- -- -- 1,375 -- 1,375
Common stock issued...................... -- 54 69,994 -- -- -- 70,048
Dividends on 4% cumulative preferred
stock.................................. -- 1 1,738 -- (2,112) -- (373)
Conversion of 4% cumulative preferred
stock to common stock.................. (15,281) 24 15,257 -- -- -- --
Unearned ESOP shares..................... -- -- -- (2,578) -- -- (2,578)
Unrealized gain on available for sale
securities, net of tax effect.......... -- -- -- -- -- (861) (861)
-------- ---- -------- ------- ------- ------- --------
BALANCES AT DECEMBER 31, 1998............ $ -- $123 $103,194 $(2,578) $10,819 $ 1,877 $113,435
======== ==== ======== ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,375 $ 4,217 $ 2,552
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest............................. 1,362 394 --
Equity in (income) losses of subsidiaries..... (531) 1,129 274
Depreciation, amortization, and discount
accretion................................... 1,197 (1,038) (1,516)
Provision for loan losses..................... 905 921 919
Provision for losses on foreclosed real
estate...................................... -- 19 78
Other gains and losses, net................... (86) (1,624) (1,011)
Deferred income tax provision................. (3,004) (445) (224)
Proceeds from sales, repayments and maturities
of loans held-for-sale...................... 69,762 60,145 27,865
Purchases of loans held-for-sale.............. (2,297) (72,804) (91,943)
Net realized gains on available-for-sale
securities, loans held-for-sale and
trading..................................... (4,105) (2,613) (935)
Purchases of trading assets................... (623,913) (100,630) --
Proceeds from sales, repayments and maturities
of trading assets........................... 616,110 80,990 --
Increase in accrued interest receivable....... (7,089) (1,492) (2,220)
Increase in accrued expenses and other
liabilities................................. 1,113 345 3,730
Increase in other assets...................... (18,296) (3,373) (2,433)
Interest credited to deposits................. 45,023 25,958 21,361
----------- --------- ---------
Net cash (used in) provided by operating
activities............................... 77,526 (9,901) (43,503)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash received from business acquisition...... 10,347 -- --
Net increase in loans held to maturity, net of
loans received in business acquisition........ (281,603) (269,036) (90,717)
Loans extended to Employee Stock Ownership Plan.. (2,578) -- --
Equity investments in subsidiaries............... (1,687) (1,736) (2,359)
Purchases of available-for-sale securities, net
of securities received in business
acquisition................................... (1,286,948) (395,675) (356,882)
Proceeds from sales of available-for-sale
securities.................................... 379,166 144,718 220,293
Proceeds from maturities of and principal
payments on available-for-sale securities..... 214,466 197,036 201,547
Net sales (purchases) of premises and equipment,
net of premises and equipment received in
business acquisition.......................... (2,070) 110 (842)
Proceeds from sale of foreclosed real estate..... 978 1,563 1,156
----------- --------- ---------
Net cash used in investing activities....... (969,929) (323,020) (27,804)
----------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 54
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits, net of deposits
received in business acquisition.............. 335,136 105,777 62,625
Advances from Federal Home Loan Bank of
Atlanta....................................... 1,201,577 322,000 273,500
Payments on advances from Federal Home Loan Bank
of Atlanta.................................... (929,077) (266,800) (234,200)
Net increase (decrease) in securities sold under
agreements to repurchase...................... 124,526 222,328 (36,324)
Net increase in other borrowed funds, net of
borrowings received in business acquisition... 241 13,028 --
Proceeds from the issuance of trust preferred
securities, net............................... 25,813 9,572 --
Proceeds from the issuance of common stock and
preferred stock............................... 71,787 16,853 --
Dividend paid on Trust Preferred securities...... (1,362) (394) --
Dividends paid on preferred stock................ (2,112) (546) --
----------- --------- ---------
Net cash provided by financing activities... 826,529 421,818 65,601
----------- --------- ---------
Net (decrease) increase in cash and cash
equivalents...................................... (65,874) 88,897 (5,706)
Cash and cash equivalents at beginning of period... 92,156 3,259 8,965
----------- --------- ---------
Cash and cash equivalents at end of period......... $ 26,282 $ 92,156 $ 3,259
=========== ========= =========
SUPPLEMENTAL INFORMATION:
Interest paid on deposits and borrowed funds..... $ 74,701 $ 45,440 $ 32,660
Income taxes paid................................ 999 2,473 972
Gross unrealized (loss) gain on marketable
securities available-for-sale................. (1,389) 873 795
Tax effect of gain on available-for-sale
securities.................................... 528 231 254
Transfer from loans to REO....................... 1,923 1,454 1,513
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES:
Additional common stock, totaling 119,975 shares,
was issued upon conversion of 29,900 shares of
4% Cumulative Preferred Stock.
</TABLE>
The Company purchased all of the capital stock of DFC for $22.3 million, in
a merger transaction consummated on August 10, 1998. The total fair value of
assets acquired was $333.7 million and total fair value of liabilities assumed
was $315.4 million.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
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") and TeleBanc Capital Markets, Inc. ("TCM"). The Bank is a federally
chartered savings bank that provides deposit accounts insured by the Federal
Deposit Insurance Corporation ("FDIC") 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
("TBIS"), which was formed in May 1998 to offer co-branded insurance products.
In 1997, TSC funded 50% of the capital commitment for two entities, AGT Mortgage
Services, LLC ("AGT") and AGT PRA, LLC ("AGT PRA"). AGT, which ceased operation
on July 31, 1997, serviced performing loans and administered workouts for
troubled or defaulted loans for a fee. The primary business of AGT PRA is its
two-thirds investment in Portfolio Recovery Associates, LLC ("PRA"). PRA
acquires and collects delinquent consumer debt obligations for its own
portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Telebank, TCM, TCT I, TCT II and TSC. All significant intercompany transactions
and balances are eliminated in consolidation. The investment in AGT PRA is
accounted for under the equity method. The Company's net equity investment in
AGT PRA at December 31, 1998 totaled approximately $4.0 million. During 1998,
1997 and 1996, Telebank recorded $526,000, ($487,000), and ($155,000) in
earnings/(loss) from its investment in AGT PRA, respectively.
On 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.
Basis of Financial Statement Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities, and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates for which a change
is reasonably possible in the near-term relate to the determination of the
allowance for loan losses, the fair value of investments and mortgage-backed
securities available-for-sale, loans receivable held for sale, trading
securities and the valuation of real estate acquired in connection with
foreclosures and mortgage servicing rights. In addition, the regulatory agencies
that supervise the financial services industry periodically review the Bank's
allowance for losses on loans. This review, which is an integral part of their
examination process, may result in additions or deductions to the allowance for
loan losses based on judgments with regard to available information provided at
the time of their examinations.
F-8
<PAGE> 56
Cash and Cash Equivalents
Cash and cash equivalents are composed of interest-bearing and
non-interest-bearing deposits, certificates of deposit, funds due from banks,
and federal funds sold with original maturities of three months or less. The
Company is required to maintain an overnight balance of $2.4 million in its
account with the Federal Reserve Bank of Richmond. As of December 31, 1998, the
Company had $18.1 million of interest-bearing deposits that were held at other
depository institutions.
Investment Securities and Mortgage-Backed Securities
The Company generally classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale.
During 1997 and 1998, the Company held no investment or mortgage-backed
securities that it classified as held-to-maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Securities purchased for trading are carried at
market value with the corresponding realized and unrealized gains and losses
recognized by credits or charges to non-interest income. The Company had $29.6
million and $21.1 million classified as trading securities at December 31, 1998
and 1997, respectively. For the years ending December 31, 1998, 1997 and 1996,
the Company recognized $569,000, $564,000 and $0, respectively, in realized
gains from the sale of trading assets, as well as ($612,000), $640,000 and $0,
respectively, in unrealized depreciation or appreciation of trading assets. All
other securities not included in the trading category are classified as
available-for-sale. Available-for-sale securities are recorded at fair value.
Unrealized gains and losses on available-for-sale securities, net of the related
tax effects, are reported as a separate component of stockholders' equity until
realized. A decline in market value of any available-for-sale asset below its
cost, that is deemed other than temporary, is charged to earnings, resulting in
the establishment of a new cost basis for the asset. Transfers of securities
into the available-for-sale category are recorded at fair value at the date of
the transfer. Any unrealized gain or loss at the date of transfer from
held-to-maturity is recognized as a separate component of stockholders' equity,
net of tax effect. Dividend and interest income is recognized when earned.
Realized gains and losses for securities classified as available-for-sale and
trading are included in earnings and are derived using the specific
identification method for determining the cost of the security sold.
Loans Held for Sale
Mortgages acquired by the Company and intended for sale in the secondary
market are carried at lower of cost or estimated market value in the aggregate.
The market value of these mortgage loans is determined by obtaining market
quotes for loans with similar characteristics.
Loans Receivable
Loans receivable consist of mortgages that management has the intent and
ability to hold for the foreseeable future or until maturity or pay-off. These
loans are carried at amortized cost adjusted for charge-offs, the allowance for
loan losses, any deferred fees or costs on purchased or originated loans and
unamortized premiums or discounts on purchased loans.
Certain loans have been purchased by the Company with an expectation that
all contractual payments of the loan will not be collected. Discounts
attributable to credit issues are tracked separately, netted against the loan
balance, and are not included as a component of allowance for loan losses.
Discounts are accreted on a level yield basis only to the extent they are
expected to be realized.
The loan portfolio is reviewed by the Company's management to set
provisions for estimated losses on loans, which are charged to earnings in the
current period. The allowance for loan
F-9
<PAGE> 57
losses represents management's estimate of losses that have occurred as of the
respective reporting date.
In determining the level of the allowance, the Bank has established both
specific and general allowances. The amount of specific reserves is determined
through a loan-by-loan analysis of non-performing loans and larger dollar
non-single-family mortgage loans.
The general allowance is computed based on an assessment of performing
loans. Each month, the performing loan portfolio is stratified by asset type
(one- to four-family, commercial, consumer, etc.) and a range of expected loss
ratios is applied to each type of loan. Expected loss ratios range between 0.2%
and 2.0% depending upon asset type, loan-to-value ratio and current market and
economic conditions. The expected loss ratios are based on historical loss
experience adjusted to reflect industry loss experience. We also believe that an
adjustment is appropriate, at the present time, in estimating the losses
inherent in the loan portfolio due to the fact that the Bank purchases, rather
than originates in house, the majority of its loans and the limited amount of
historical loss experience to date.
Nonperforming Assets
Nonperforming assets consist of loans for which interest is no longer being
accrued, troubled loans that have been restructured in order to increase the
opportunity to collect amounts due on the loan, and real estate acquired in
settlement of loans. Interest previously accrued but not collected on nonaccrual
loans is reversed against current income when a loan is placed on nonaccrual
status. Accretion of deferred fees is discontinued for nonaccrual loans. All
loans at least ninety days past due, as well as other loans considered
uncollectable, are placed on nonaccrual status. Payments received on nonaccrual
loans are recognized as interest income or applied to principal when it is
doubtful that full payment will be collected.
Loan and Commitment Fees, Discounts and Premiums
Loan fees and certain direct loan acquisition costs are deferred and the
net fee or cost recognized into interest income using the interest method over
the contractual life of the loans. Premiums and discounts on loans receivable
are amortized or accreted, respectively, into income using the interest method
over the remaining period to contractual maturity and adjusted for anticipated
prepayments. Discounts on loans held for sale are recognized as part of the loss
or gain upon sale and not amortized or accreted, respectively.
Real Estate Acquired through Foreclosure and Held for Sale
Real estate properties acquired through foreclosure and held for sale are
recorded at fair value less estimated selling costs at acquisition. Fair value
is determined by appraisal or other appropriate method of valuation. Losses
estimated at the time of acquisition are charged to the allowance for loan
losses. Management performs periodic valuations and establishes an allowance for
losses through a charge to income if the carrying value of a property exceeds
its estimated fair value less selling costs.
Deferred Financing Costs
Deferred financing costs related to the issuance of the subordinated notes
have been capitalized and are being amortized using the interest method over the
life of the subordinated notes.
Income Taxes
Effective January 1, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the
F-10
<PAGE> 58
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Financial Instruments
The Company uses interest rate swaps, caps, floors and futures in the
management of its interest-rate risk. The Company is generally exposed to rising
interest rates because of the nature of the repricing of rate-sensitive assets
as compared with rate-sensitive liabilities. These instruments are used
primarily to hedge specific assets and liabilities. For interest rate swaps, the
net interest received or paid is treated as an adjustment to the interest income
or expense related to the hedged assets or obligations in the period in which
such amounts are due.
In order to be eligible for hedge accounting treatment, high correlation
must be probable at the inception of the hedge transaction and must be
maintained throughout the hedge period. Upon the sale or disposition of the
hedged item, the hedging instrument is marked-to-market with changes recorded in
the income statement. Any gain or loss that is incurred upon termination of a
hedging instrument is added to the carrying value of the hedged item and
amortized over its remaining life. Premiums and fees associated with interest
rate caps are amortized to interest income or expense on a straight-line basis
over the lives of the contracts. For instruments that are not designated or do
not qualify as hedges, realized and unrealized gains and losses are recognized
in the income statement as gain or loss on trading securities in the period
during which they are incurred.
Other Assets
Other assets include purchased loan servicing rights, premiums paid on
interest rate caps, and prepaid assets. The Bank services loans totaling $245.0
million as of December 31, 1998, which underlie these servicing rights. The cost
of the loan servicing rights is amortized in proportion to, and over the period
of, the estimated net servicing income. For the period ending December 31, 1998,
amortization expense of loan servicing rights was $925,000. Impairment of
mortgage servicing rights is assessed based on the fair value of those rights.
Fair values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on mortgage product types. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights exceed their fair
value in aggregate. As of December 31, 1998, the amortized cost and fair value
of the loan servicing rights were $2.4 million. No valuation allowance was
recognized at December 31, 1998. Effective January 1, 1997, the Company adopted
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
125"), as amended by Statement of Financial Accounting Standards No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125 -- An Amendment of FASB Statement No. 125 ("SFAS 127"). The implementation
of SFAS 125 did not have a material impact on the Company's financial position.
Federal Home Loan Bank Stock
The Federal Home Loan Bank ("FHLB") stock is carried at its amortized cost
of $25.2 and $10.0 million as of December 31, 1998 and 1997, respectively.
Advertising Costs
The Company's policy is to expense advertising costs when incurred. For the
years ended December 31, 1998, 1997, and 1996, the Company incurred advertising
expense of $4.6 million, $606,000, and $93,000, respectively.
F-11
<PAGE> 59
Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), effective for fiscal years beginning after December 15,
1997. This statement requires that certain financial activity typically
disclosed in stockholders' equity be reported in the financial statements as an
adjustment to net income in determining comprehensive income. The Company
adopted SFAS No. 130 effective January 1, 1998. As a result, comprehensive
income for the periods ending December 31, 1998 and 1997 is reported in the
Consolidated Statement of Operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related
Information("SFAS No. 131"), effective for fiscal years beginning after December
15, 1997. This statement requires entities to disclose selected information
regarding "reportable segments," which are defined as material operating
segments, and certain enterprise-wide information in quarterly and annual
reports. Segment disclosures are unnecessary, because only one operating segment
meets the materiality test to be considered a reportable segment. As of December
31, 1998, the Bank, considered one segment, accounted for approximately 97.5% of
the Company's combined total assets and approximately 96.0% of the Company's
combined 1998 revenues. As of December 31, 1998, the Company's other operating
segment, TCM, was not sufficiently material to be considered a reportable
segment, as defined by SFAS No. 131. In 1998, the Company did not earn
significant revenue from foreign sources and did not hold a material amount of
long-lived assets in foreign countries. Additionally, the Company does not rely
on any one source for a significant portion of its revenue.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). The statement establishes accounting and reporting standards requiring
that every derivative instrument, including derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at fair value. SFAS No. 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 No. 133 is effective for fiscal years
beginning after June 15, 1999, although a company may implement the statement as
of the beginning of any fiscal quarter after issuance, that is, fiscal quarters
beginning June 16, 1998 and after. SFAS No. 133 cannot be applied retroactively.
SFAS No. 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. We plan to adopt SFAS No. 133 as of January 1,
2000 but have not yet quantified the impact of adopting SFAS No. 133 on our
financial statements. However, the statement could increase volatility in
earnings and other comprehensive income.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Cost of Start-up
Activities("SOP 98-5"), which is effective for fiscal years beginning after
December 15, 1998. The statement requires that the cost of start-up activities
be expensed as incurred rather than capitalized, with initial application
reported as the cumulative effect of a change in accounting principle, as
described in Accounting Principles Board Opinion Number 20, Accounting Changes.
As of December 31, 1998, the Company carries on its books approximately $740,000
of capitalized start-up costs, relating primarily to the establishment of TBIS.
The Company intends to implement SOP 8-5 on January 1, 1999, and, as a result,
will recognize this amount, net of tax, as an expense classified as the
cumulative effect of a change in accounting principle.
F-12
<PAGE> 60
Reclassifications
Certain reclassifications of the 1997 and 1996 financial statements have
been made to conform to the 1998 presentation.
3. BUSINESS ACQUISITIONS
Effective August 10, 1998, the Company acquired Direct Financial
Corporation ("DFC"), a regional savings and loan holding company, and its wholly
owned subsidiary, Premium Bank F.S.B., a federal savings bank ("Premium Bank"),
in a merger transaction for approximately $22.3 million in cash (the "DFC
Acquisition"). This transaction has been accounted for under the purchase method
of accounting. The Company recorded the excess of the purchase price over the
estimated fair value of the net tangible assets acquired, as well as the direct
costs of the DFC Acquisition, as goodwill. The Company plans to amortize
goodwill over a period of 15 years using the straight-line method. At December
31, 1998, goodwill totaled $17.5 million, net of accumulated amortization of
$584,000. Operating results of DFC have been included with those of the Company
from the closing date.
The following pro forma combined financial information presents the
historical results of operations of the Company and DFC for the years ended
December 31, 1997 and 1998, with pro forma adjustments as if DFC had been
acquired as of the beginning of the periods presented. The pro forma information
presented is not necessarily indicative of what the results of operations
actually would have been if the transaction had occurred on the date indicated,
or of future results of operations.
<TABLE>
<CAPTION>
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income............................................. $113,394 $82,450
Interest expense............................................ 91,502 64,344
-------- -------
Net interest income....................................... 21,892 18,106
Provision for loan losses................................... 1,106 1,377
Non-interest income......................................... 7,671 4,533
Non-interest expense:
Selling, general and administrative expenses.............. 24,807 12,510
Other non-interest expense................................ 2,907 2,473
-------- -------
Income before income tax, minority interest and preferred
dividend.................................................. 743 6,279
Income tax expense.......................................... 625 2,128
Minority interest........................................... 1,362 394
-------- -------
Net income from continuing operations before nonrecurring
charges directly attributable to the transaction and
preferred dividend........................................ $ (1,244) $ 3,757
Preferred dividend.......................................... 2,112 546
-------- -------
Net income available to common stockholders................. $ (3,356) $ 3,211
======== =======
Other comprehensive income.................................. (861) 708
-------- -------
Comprehensive income........................................ $ (4,217) $ 3,919
======== =======
Earnings per share:
Basic..................................................... $ (0.43) $ 0.73
Diluted................................................... $ (0.43)(a) $ 0.51
</TABLE>
- ---------------
(a) The impact of the Company's outstanding options, warrants, and convertible
preferred stock is antidilutive for the year ended December 31, 1998.
F-13
<PAGE> 61
In April 1998, the Company purchased and assumed substantially all of the
assets and liabilities of MET Holdings Corporation ("MET") in accordance with
the Amended and Restated Acquisition Agreement between MET and the Company (the
"Agreement"), dated as of March 17, 1998. Thereafter, MET dissolved. Pursuant to
the Agreement, MET sold substantially all of its assets, including 2,866,162
shares of Common Stock owned by MET, and assigned substantially all of its
liabilities to the Company in exchange for 2,876,162 shares of Common Stock,
which shares were distributed to the shareholders of MET upon MET's dissolution.
The Company accounted for this transaction under the purchase method of
accounting and recorded the excess of the purchase price over the estimated fair
value of the net tangible assets acquired as goodwill. Goodwill from this
transaction totaled $275,000 at December 31, 1998, net of accumulated
amortization of $12,000. The Company amortizes this goodwill using the straight-
line method over a period of 15 years.
4. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets and of Tier I capital to average assets.
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject. As of December 31, 1998 and 1997,
the Office of Thrift Supervision categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
F-14
<PAGE> 62
The Bank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- ------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ----------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Core Capital (to adjusted
tangible assets).............. $122,871 5.57% > $88,310 >4.0% > $110,388 >5.0%
Tangible Capital (to tangible
assets)....................... $122,871 5.57% > $33,116 >1.5% N/A N/A
Tier I Capital (to risk weighted
assets)....................... $122,871 12.95% N/A N/A > $ 56,934 >6.0%
Total Capital (to risk weighted
assets)....................... $127,179 13.40% > $75,913 >8.0% > $ 94,891 >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
asset)........................ $ 52,617 11.25% N/A N/A > $28,057 >6.0%
Total Capital (to risk weighted
assets)....................... $ 55,701 11.91% > $37,409 >8.0% > $46,761 >10.0%
</TABLE>
F-15
<PAGE> 63
5. INVESTMENT SECURITIES
The cost basis and estimated fair values of available-for-sale investment
securities other than mortgage-backed securities at December 31, 1998 and 1997,
by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998:
Due within one year:
Municipal bonds.................... $ 145 $ -- $ -- $ 145
Due within one to five years:
Agency notes....................... 13,282 778 -- 14,060
Municipal bonds.................... 835 1 -- 836
Asset backed....................... 758 16 -- 774
Certificate of deposit............. 499 -- -- 499
Due within five to ten years:
Corporate debt..................... 4,981 307 -- 5,288
Municipal bonds.................... 980 9 -- 989
Other investments.................. 500 -- (132) 368
Due after ten years:
Corporate debt..................... 149,552 734 (2,369) 147,917
Equities........................... 13,937 457 (12) 14,382
Municipal bonds.................... 13,790 268 -- 14,058
Agency notes....................... 13,379 553 -- 13,932
Asset backed....................... 337 8 -- 345
Other investments.................. 6,815 1 (51) 6,765
-------- ------ ------- --------
$219,790 $3,132 $(2,564) $220,358
======== ====== ======= ========
1997:
Due within one year:
Agency notes....................... $ 539 $ -- $ -- $ 539
Other investments.................. 323 1 -- 324
Due within one to five years:
Municipal bonds.................... 565 12 -- 577
Other investments.................. 25,038 16 -- 25,054
Certificates of deposit............ 499 -- -- 499
Due within five to ten years:
Corporate debt..................... 7,433 242 -- 7,675
Municipal bonds.................... 3,562 130 -- 3,692
Other investments.................. 175 -- -- 175
Due after ten years:
Agency notes....................... 21,608 398 (40) 21,966
Equities........................... 15,038 436 (50) 15,424
Corporate debt..................... 11,103 797 -- 11,900
Municipal bonds.................... 3,200 212 -- 3,412
-------- ------ ------- --------
$ 89,083 $2,244 $ (90) $ 91,237
======== ====== ======= ========
</TABLE>
The proceeds from sale and gross realized gains and losses on investment
securities available for sale that were sold in 1998 were $85.7 million, $1.3
million, and $8,000, respectively.
F-16
<PAGE> 64
The proceeds from sale and gross realized gains and losses on investment
securities available for sale that were sold in 1997 were $25.9 million,
$423,000, and $34,000, respectively. The proceeds from sale and gross realized
gains and losses on investment securities available for sale that were sold in
1996 were $25.1 million, $311,000, and $153,000, respectively.
6. MORTGAGE-BACKED AND RELATED SECURITIES
Mortgage-backed and related securities represent participating interests in
pools of long-term first mortgage loans originated and serviced by the issuers
of the securities. The Company has also invested in collateralized mortgage
obligations ("CMOs"), which are securities issued by special purpose entities
generally collateralized by pools of mortgage-backed securities. The Company's
CMOs are senior tranches collateralized by federal agency securities or whole
loans. The fair value of mortgage-backed and related securities fluctuates
according to current interest rate conditions and prepayments. Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two securities, such as
credit risk, liquidity, term, coupon, payment characteristics, and other
information.
The amortized cost basis and estimated fair values of mortgage-backed
securities available-for-sale at December 31, 1998 and 1997, by contractual
maturity, are shown as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1998:
Due within one year:
Private issuer.................. $ 391 $ 12 $ -- $ 403
Due within one to five years:
Private issuer.................. 2,971 -- (10) 2,961
Due within five to ten years:
Agencies........................ 109 -- (1) 108
Collateralized mortgage
obligations.................. 4,110 25 -- 4,135
Private issuer.................. 8,560 389 (82) 8,867
Due after ten years:
Agencies........................ 11,154 48 (4) 11,198
Private Issuer.................. 107,159 2,790 (335) 109,614
Collateralized mortgage
obligations.................. 875,209 1,650 (1,982) 874,877
---------- ------ ------- ----------
$1,009,663 $4,914 $(2,414) $1,012,163
========== ====== ======= ==========
</TABLE>
F-17
<PAGE> 65
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUES
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1997:
Due within one year:
Agencies........................ $ 939 $ -- $ -- $ 939
Due within one to five years:
Agencies........................ 627 2 (6) 623
Private issuer.................. 2,643 -- (22) 2,621
Due within five to ten years:
Private issuer.................. 5,982 39 -- 6,021
Due after ten years:
Agencies........................ 23,907 124 (27) 24,004
Private Issuer.................. 143,889 2,971 (1,443) 145,417
Collateralized mortgage
obligations.................. 139,663 536 (621) 139,578
---------- ------ ------- ----------
$ 317,650 $3,672 $(2,119) $ 319,203
========== ====== ======= ==========
</TABLE>
The Company pledged $439.0 million and $104.7 million of private issuer
mortgage-backed securities as collateral for repurchase agreements at December
31, 1998 and 1997, respectively. The proceeds from sale and gross realized gains
and losses on mortgage-backed securities available for sale that were sold in
1998 were $294.8 million, $2.4 million, and $113,000, respectively. The proceeds
from sale and gross realized gains and losses on mortgage-backed securities
available for sale that were sold in 1997 were $112.4 million, $845,000, and
$253,000, respectively. The proceeds from sale and realized gains and losses on
mortgage-backed securities available for sale that were sold in 1996 were $185.2
million, $1.4 million, and $707,000.
F-18
<PAGE> 66
7. LOANS RECEIVABLE
Loans receivable at December 31, 1998 and 1997 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
First mortgage loans (principally conventional):
Secured by one- to four-family residences................. $897,168 $547,757
Secured by commercial real estate......................... 8,916 3,033
Secured by mixed-use property............................. 929 856
Secured by five or more dwelling units.................... 3,224 1,447
Secured by land........................................... 316 463
-------- --------
Total first mortgage loans.................................. 910,553 553,556
Other loans:
Home equity and second mortgage loans..................... 5,895 564
Other..................................................... 3,312 305
-------- --------
Total loans................................................. 919,760 554,425
Less:
Net deferred loan origination fees........................ (13) (34)
Unamortized discounts, net................................ (9,989) (9,938)
Other..................................................... (138) (155)
-------- --------
909,620 544,298
Less: allowance for loan losses............................. (4,766) (3,594)
-------- --------
Net loans receivable........................................ $904,854 $540,704
======== ========
</TABLE>
The mortgage loans are located primarily in California, New Jersey, and New
York according to the following percentages 24.8%, 10.4%, and 8.0%,
respectively. As of December 31, 1998, the mortgage loan portfolio consisted of
variable rate loans of $436.3 million, or 47.6%, and fixed rate loans of $480.1
million, or 52.4%. The weighted average maturity of mortgage loans secured by
one- to four-family residences is 291 months as of December 31, 1998. The unpaid
principal balance of mortgage loans owned by the Company but serviced by other
companies was $919.8 million and $301.5 million at December 31, 1998 and 1997,
respectively. Loans past due ninety days or more, and therefore on non-accrual
status at December 31, 1998 and 1997, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
First mortgage loans:
Secured by one- to four-family residences................. $7,727 $10,802
Secured by commercial real estate......................... 372 635
Home equity and second mortgage loans....................... 255 --
Other....................................................... 521 --
------ -------
Total............................................. $8,875 $11,437
====== =======
</TABLE>
The interest accrual balance for each loan that enters non-accrual is
reversed from income. If all non-performing loans had been performing during
1998, 1997, and 1996, the Bank would have recorded $597,000, $739,000 and
$789,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1998 and 1997.
F-19
<PAGE> 67
Activity in the allowance for loan losses for the years ended December 31,
1998, 1997, and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance, beginning of the year......................... $3,594 $2,957 $2,311
Provision for loan losses.............................. 905 921 919
Loan loss allowance acquired in merger with DFC........ 724 -- --
Charge-offs, net....................................... (457) (284) (273)
------ ------ ------
Balance, end of year................................... $4,766 $3,594 $2,957
====== ====== ======
</TABLE>
According to Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"), a loan is
considered impaired when, based upon current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The term "all amounts due" includes
both the contractual interest and principal payments of a loan as scheduled in
the loan agreement. The Company has determined that once a loan becomes 90 or
more days past due, collection of all amounts due is no longer probable and is
therefore considered impaired. The amount of impairment is measured based upon
the fair value of the underlying collateral and is reflected through the
creation of a valuation allowance.
The table below presents impaired loans as of December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
AMOUNT
TOTAL AMOUNT OF OR RECORDED
RECORDED INVESTMENT SPECIFIC INVESTMENT NET OF
DESCRIPTION OF LOANS IN IMPAIRED LOANS RESERVES SPECIFIC RESERVES
- -------------------- ------------------- --------- -----------------
<S> <C> <C> <C>
1998:
Impaired loans:
Commercial real estate............... $ 667 $ 351 $ 316
One- to four-family.................. 7,880 1,095 6,785
Other................................ 776 67 709
------- ------ ------
Total...................... $ 9,323 $1,513 $7,810
======= ====== ======
Restructured loans:
Commercial real estate............... $ -- $ -- $ --
One- to four-family.................. -- -- --
------- ------ ------
Total...................... $ -- $ -- $ --
======= ====== ======
1997:
Impaired loans:
Commercial real estate............... $ 635 $ 248 $ 387
One- to four-family.................. 10,802 1,760 9,042
------- ------ ------
Total...................... $11,437 $2,008 $9,429
======= ====== ======
Restructured loans:
Commercial real estate............... $ 248 $ -- $ 248
One- to four-family.................. 177 -- 177
------- ------ ------
Total...................... $ 425 $ -- $ 425
======= ====== ======
</TABLE>
The average recorded investment in impaired loans, as of December 31, 1998,
1997, and 1996 was $1.4 million, $2.3 million and $2.2 million, respectively.
The Company's charge-off policy for impaired loans is consistent with its
charge-off policy for other loans; impaired loans are charged-off when, in the
opinion of management, all principal and interest due on the
F-20
<PAGE> 68
impaired loan will not be fully collected. Consistent with the Company's method
for non-accrual loans, payments received on impaired loans is recognized as
interest income or applied to principal when it is doubtful that full payment
will be collected.
8. REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired through foreclosure at December 31, 1998 and December
31, 1997 was $1.5 million and $681,000, respectively.
9. LOANS SERVICED FOR OTHERS
Mortgage loans master serviced by the Bank for others are not included in
the accompanying consolidated statements of financial condition because the
related loans are not owned by the Company or any of its subsidiaries. The
unpaid principal balances of these loans at December 31, 1998 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mortgage loans underlying pass-through securities:
Federal Home Loan Mortgage Corporation.................... 110,162 148,269
Federal National Mortgage Association..................... $106,006 $135,973
-------- --------
Subtotal.................................................. 216,168 284,242
-------- --------
Mortgage loan portfolio serviced for:
Other investors........................................... 28,855 44,702
-------- --------
Total............................................. $245,023 $328,944
======== ========
</TABLE>
Custodial escrow balances held in connection with the foregoing loans
serviced were approximately $740,000 and $120,000 at December 31, 1998 and 1997,
respectively.
Included in other assets is purchased mortgage servicing rights of $2.4
million and $3.3 million as of December 31, 1998 and 1997, respectively.
10. DEPOSITS
The Bank initiates deposits directly with customers through contact on the
internet, the phone, the mail, and walk-in at its headquarters. Deposits at
December 31, 1998 and 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
DECEMBER 31 AMOUNT PERCENT
----------- --------------------- ---------------
1998 1997 1998 1997 1998 1997
---- ---- ---------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts, non-interest-
bearing........................... --% --% $ 5,605 $ 761 0.46% 0.15%
Demand accounts, interest-bearing... 3.81 -- 4,721 -- 0.39 --
Money market........................ 4.70 5.26 204,551 122,185 16.91 23.39
Passbook savings.................... 3.00 3.00 525 665 0.04 0.13
Certificates of deposit............. 5.93 6.24 926,983 398,610 76.65 76.33
Brokered callable certificates of
deposit........................... 6.16 -- 67,085 -- 5.55 --
---------- -------- ------ ------
Total..................... $1,209,470 $522,221 100.00% 100.00%
========== ======== ====== ======
</TABLE>
F-21
<PAGE> 69
Certificates of deposit and money market accounts, classified by rates as
of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT 1998 1997
- ------ ---------- --------
<S> <C> <C>
0 - 1.99%......................... $ 5 $ 5
2 - 3.99%......................... 424 --
4 - 5.99%......................... 756,618 231,048
6 - 7.99%......................... 440,711 289,046
8 - 9.99%......................... 793 696
10 - 11.99%........................ 44 --
12 - 20%........................... 24 --
---------- --------
Total.................... $1,198,619 $520,795
========== ========
</TABLE>
At December 31, 1998, scheduled maturities of certificates of deposit and
money market accounts are as follows (in thousands):
<TABLE>
<CAPTION>
LESS THAN 1-2 2-3 3-4 4-5 5+
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- -------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0 - 1.99%............ $ 5 $ -- $ -- $ -- $ -- $ -- $ 5
2 - 3.99%............ 424 -- -- -- -- -- 424
4 - 5.99%............ 642,358 53,613 41,260 940 17,354 1,093 756,618
6 - 7.99%............ 161,520 110,448 31,567 29,920 37,569 69,687 440,711
8 - 9.99%............ 469 284 -- 40 -- -- 793
10 - 11.99%........... 44 -- -- -- -- -- 44
12 - 20%.............. 24 -- -- -- -- -- 24
-------- -------- ------- ------- ------- ------- ----------
$804,844 $164,345 $72,827 $30,900 $54,923 $70,780 $1,198,619
======== ======== ======= ======= ======= ======= ==========
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than or equal to $100,000 was $197.5 million and $47.5 million at December 31,
1998 and 1997, respectively.
Interest expense on deposits for the years ended December 31, 1998, 1997,
and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Money market................................................ $ 7,961 $ 6,353 $ 4,740
Passbook savings............................................ 16 27 59
Checking.................................................... 46 -- --
Certificates of deposit..................................... 36,890 19,578 16,558
Brokered callable certificates of deposit................... 3,638 -- --
------- ------- -------
Total............................................. $48,551 $25,958 $21,357
======= ======= =======
</TABLE>
Accrued interest payable on deposits at December 31, 1998 and 1997 was $3.4
million and $728,000, respectively.
F-22
<PAGE> 70
11. ADVANCES FROM THE FHLB OF ATLANTA
Advances to the Bank from the FHLB of Atlanta at December 31, 1998 and 1997
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1998 INTEREST RATE 1997 INTEREST RATE
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
1998.............................. $ -- --% $ 71,000 6.02%
1999.............................. 466,500 5.19 129,000 5.77
2000.............................. 6,000 5.30 -- --
2001.............................. -- -- -- --
-------- ---- -------- ----
Total........................ $472,500 5.19% $200,000 5.86%
======== ==== ======== ====
</TABLE>
All advances are floating rate advances and adjust daily to the Federal
Funds Rate or quarterly or semi-annually to the London InterBank Offering Rate
("LIBOR") rate. In 1998 and 1997, the advances were collateralized by a specific
lien on mortgage loans in accordance with an "Advances, Specific Collateral
Pledge and Security Agreement" with the FHLB of Atlanta, executed September 10,
1980. Under this agreement, the Bank is required to maintain qualified
collateral equal to 120 to 160 percent of the Bank's FHLB advances, depending on
the collateral type. As of December 31, 1998 and 1997, the Company secured these
advances with an assignment of specific mortgage loan collateral from its loan
and mortgage-backed security portfolio. These one- to four-family whole first
mortgage loans and securities pledged as collateral totaled approximately $647.6
million and $259.9 million at December 31, 1998 and 1997, respectively. The
Company is required to be a member of the FHLB System and to maintain an
investment in the stock of the FHLB of Atlanta at least equal to the greater of
1 percent of the unpaid principal balance of its residential mortgage loans or 1
percent of 30 percent of its total assets or 1/20 of its outstanding advances
from the FHLB.
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning borrowings under fixed and variable rate coupon
repurchase agreements is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Weighted average balance during the year (calculated on a
daily basis).............................................. $259,846 $117,431
Weighted average interest rate during the year (calculated
on a daily basis)......................................... 5.69% 5.76%
Maximum month-end balance during the year................... $519,078 $279,909
Balance at year-end......................................... $401,100 $279,909
Mortgage-backed securities underlying the agreements as of
the end of the year:
Carrying value, including accrued interest................ $441,323 $295,556
Estimated market value.................................... $438,955 $295,500
</TABLE>
The securities sold under the repurchase agreements at December 31, 1998
are due in less than one year. The Company enters into sales of securities under
agreements to repurchase the same securities. Repurchase agreements are
collateralized by fixed and variable rate mortgage-backed securities or
investment grade securities. Repurchase agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheet. The dollar amount of securities underlying the agreement
remains in the asset accounts. The securities underlying the agreements are
physical and book entry securities and the brokers retain possession of the
securities collateralizing the repurchase agreements. If the counterparty in a
repurchase agreement were to fail, the Company may incur an accounting loss for
the excess collateral posted with the counterparty. As of December 31, 1998,
there were no
F-23
<PAGE> 71
counterparties with which the Company's amount at risk exceeded 10% of the
Company's stockholders' equity.
As of December 31, 1998, the Company carried borrowings of approximately
$3.3 million that were secured by a pool of loans owned by the Company. Under
the borrowing agreement, which expires in August 1999, the Company may not sell
or otherwise transfer the pledged assets.
13. SUBORDINATED DEBT
In May and June 1994, the Company issued 15,000 units of subordinated debt
at a price of $15.0 million and 2,250 units at a price of $2.3 million,
respectively. The units each consist of $1,000 of 11.5% subordinated notes due
in 2004 and 20 detachable warrants to purchase two shares each of Telebanc
Common Stock. The notes are subordinated to all senior indebtedness of the
Company and may not be redeemed prior to May 1, 1999. The notes are redeemable
at the option of the Company after May 1, 1999, at an initial redemption price
of 105.75% of the principal amount plus accrued interest with the redemption
price declining to 104.60%, 103.45%, 102.30%, and 101.15% annually each year
thereafter. Interest is payable semi-annually on May 1 and November 1,
commencing November 1, 1994. The indenture, among other things, restricts the
ability of the Company under certain circumstances to incur additional
indebtedness, limits cash dividends and other capital distributions by the
Company, requires the maintenance of a reserve equal to 100% of the Company's
annual interest expense on all indebtedness, restricts disposition of the Bank
or its assets, and limits transactions with affiliates. The annual interest
expense to service the subordinated debt is $2.0 million. The total value of the
690,000 warrants was $948,750, which resulted in an original issue discount on
the subordinated debt in the amount of $899,288. The original issue discount is
amortized on a level yield basis over the life of the debt. The warrants became
transferable on November 27, 1994 and are exercisable on or after May 27, 1995.
The exercise price of each warrant is $3.8281.
On February 28, 1997, the Company sold $29.9 million of units in the form
of 4% convertible preferred stock and 9.5% senior subordinated notes and
warrants to investment partnerships managed by Conning & Co., CIBC Wood Gundy
Argosy Merchant Fund 2, LLC, General American Life Insurance Company, The
Progressive Corporation, and The Northwestern Mutual Life Insurance Company.
Upon the sale of the units, representatives from the Conning partnerships and
the CIBC Merchant Fund were appointed to the Company's Board. The units consist
of $13.7 million in 9.5% senior subordinated notes with 396,176 detachable
warrants, $16.2 million in 4.0% convertible preferred stock, par value $0.01
(the "Preferred Stock"), and rights to 411,126 contingent warrants. The senior
subordinated notes, which are subordinated to all senior indebtedness of the
Company, are due on March 31, 2004 and stipulate increases over time in interest
rates subsequent to March 31, 2002 from 9.5% up to 15.25%. The warrants, each of
which entitles the bearer to purchase two shares of Common Stock, are
exercisable at $4.75 with an expiration date of February 28, 2005. The Preferred
Stock, which consisted of Series A Voting Convertible Preferred Stock, Series B
Nonvoting Convertible Preferred Stock, and Series C Nonvoting Convertible
Preferred Stock, converted to 2,399,479 shares of Common Stock upon consummation
of the Company's Equity Offering on July 28, 1998. The contingent warrants, each
of which entitles the bearer to purchase two shares of Common Stock, may be
exercised upon a change of control or at any time after February 19, 2002
("Exercise Event"). If the Company's annual internal rate of return is less than
25% at the time of an Exercise Event, unit holders may exercise the contingent
warrants for $0.005 until an internal rate of return of 25% is reached. The
annual interest expense to service the senior subordinated notes is $1.3
million. The Company paid $2.1 million and $546,000 in dividends on the
preferred stock in 1998 and 1997, respectively.
F-24
<PAGE> 72
14. 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 $10,000,000 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. The trust preferred
securities, which are subordinated to the 11.5% subordinated notes and the 9.5%
subordinated notes, mature in 2027 and have an annual dividend rate of 11.0%, or
$1.1 million, payable semi-annually, beginning in December 1997. The net
proceeds were used for general corporate purposes, including to fund Bank
operations and the creation and expansion of its financial service and product
operations.
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, (the "BLUS(SM)"), with a
liquidation amount of $25, 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. The BLUS(SM), which are subordinated to the 11.5%
subordinated notes and the 9.5% subordinated notes, mature in 2028 and have an
annual dividend rate of 9.0%, payable quarterly, beginning in September 1998.
The net proceeds were used for general corporate purposes, which include funding
the Company's continued growth and augmenting working capital.
15. STOCKHOLDERS' EQUITY
As of December 31, 1998, the authorized capital stock of the Company
consisted of 29.5 million shares of Common Stock and 500,000 shares of Preferred
Stock. In July and August 1998, the Company sold 5,175,000 shares of Common
Stock to the public at an offering price of $14.50 (the "Equity Offering").
Simultaneously, pursuant to a conversion agreement dated May 15, 1998, the
Company's 29,900 outstanding shares of Preferred Stock converted to 2,399,479
shares of Common Stock, upon consummation of the Equity Offering on July 28,
1998. In addition, upon the conversion, the Company issued a special dividend in
the amount of 119,975 shares of Common Stock to the holders of the Preferred
Stock.
16. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"),
effective December 15, 1997. This statement specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock.
Basic earnings per common share, as required by SFAS 128, is computed by
dividing adjusted net income by the total of the weighted average number of
common shares outstanding during the respective periods. Diluted earnings per
common share for the years ended December 31, 1998, 1997, and 1996 were
determined on the assumptions that the dilutive options and warrants were
exercised upon issuance. The options and warrants are deemed to be dilutive if
(a) the average market price of the related common stock for a period exceeds
the exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant agreement and
the resulting discount is sufficient to establish an effective exercise price
below the market price of the common stock obtainable upon exercise. The
Company's year to date weighted average number of common shares outstanding was
7,840,214 at December 31, 1998, 4,382,910 at December 31, 1997 and 4,099,000 at
December 31, 1996. For diluted earnings per share computation, weighted average
shares outstanding also include potentially dilutive securities.
F-25
<PAGE> 73
EPS CALCULATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------
INCOME SHARES PER SHARE AMOUNT
------- ------ ----------------
<S> <C> <C> <C>
Net income.................................... $ 1,375
Less: preferred stock dividends............... (2,112)
-------
Basic earnings per share
Income available to common shareholders....... $ (737) 7,840 $(0.09)
======= ====== ======
Options issued to management.................. -- 866
Warrants...................................... -- 757
Convertible preferred stock................... 2,112 1,368
------- ------
Diluted earnings per share.................... $ 1,375 10,831 $(0.09)(a)
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
INCOME SHARES PER SHARE AMOUNT
------ ------ ----------------
<S> <C> <C> <C>
Net income...................................... $4,217
Less: preferred stock dividends................. (546)
------
Basic earnings per share
Income available to common shareholders......... $3,671 4,383 $0.84
====== ===== =====
Options issued to management.................... -- 510
Warrants........................................ -- 501
Convertible preferred stock..................... 546 2,017
------ -----
Diluted earnings per share...................... $4,217 7,411 $0.57
====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
INCOME SHARES PER SHARE AMOUNT
------ ------ ----------------
<S> <C> <C> <C>
Basic earnings per share
Net income...................................... $2,552 4,099 $0.62
====== ===== =====
Options issued to management.................... -- 182
Warrants........................................ -- 125
------ -----
Diluted earnings per share...................... $2,552 4,406 $0.58
====== ===== =====
</TABLE>
- ---------------
(a) The impact of the Company's outstanding options, warrants, and convertible
preferred stock is antidilutive for the year ended December 31, 1998.
F-26
<PAGE> 74
17. INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997, and 1996 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current: Federal....................................... $1,706 $1,881 $1,194
State................................................ 164 221 225
------ ------ ------
1,870 2,102 1,419
Deferred: Federal...................................... (196) (398) (78)
State................................................ (25) (47) (146)
------ ------ ------
(221) (445) (224)
Total: Federal......................................... 1,510 1,483 1,116
State................................................ 139 174 79
------ ------ ------
$1,649 $1,657 $1,195
====== ====== ======
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the years ended December 31, 1998, 1997, and 1996
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0% 34.0%
State taxes, net of federal benefit......................... 4.2 4.2 4.2
Municipal bond interest, net of disallowed interest
expense................................................... (4.7) (5.8) (3.6)
Amortization of goodwill.................................... 9.8 -- --
Other....................................................... (5.7) (6.0) (2.7)
---- ---- ----
37.6% 26.4% 31.9%
==== ==== ====
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense for tax versus financial reporting purposes. The sources
of these temporary differences and the related tax effects for the years ended
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Purchase accounting premium............................... $ -- $ (75)
Depreciation.............................................. (185) (44)
Tax reserve in excess of base year........................ (101) (134)
Tax effect of securities available-for-sale adjustment to
fair value (notes 5 and 6)............................. (1,181) (722)
FHLB stock dividends...................................... (129) (129)
Other..................................................... (23) (89)
------- -------
Total............................................. (1,619) (1,193)
DEFERRED TAX ASSETS:
Reserves for loan losses.................................. 1,875 1,293
Acquisition of DFC........................................ 2,770 --
Other..................................................... 12 80
------- -------
Total............................................. 4,657 1,373
------- -------
Net deferred tax asset (liability)........................ $ 3,038 $ 180
======= =======
</TABLE>
F-27
<PAGE> 75
18. FINANCIAL INSTRUMENTS
The Company is party to a variety of interest rate caps, floors, swaps and
futures to manage interest rate exposure. The Company enters into interest rate
swap agreements to assume fixed-rate interest payments in exchange for variable
market-indexed interest payments. The effect of these agreements is to lengthen
short-term variable liabilities into longer-term fixed-rate liabilities or to
shorten long-term fixed rate assets into short-term variable rate assets. The
interest rate swaps are specifically designated to specific liabilities or, to a
lesser extent, assets at their acquisition. The net payments of these agreements
are charged to interest expense or interest income, depending on whether the
agreement is designated to hedge a liability or an asset.
Interest rate swap agreements for the years ended December 31, 1998 and
1997 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Weighted average fixed rate payments............. 6.04% 6.15%
Weighted average original term................... 4.2yrs 4.6yrs
Weighted average variable rate obligation........ 5.43% 5.81%
Notional amount.................................. $355,000 $205,000
</TABLE>
The counterparties to the interest rate swap agreements described above are
Goldman Sachs, Merrill Lynch, NationsBank, Nomura, and Salomon Brothers. As of
December 31, 1998, the Company had no credit risk associated with any of the
aforementioned counterparties. The interest rate swap agreements described above
required the Company to post cash of approximately $9.8 million as collateral.
The Company enters into interest rate cap agreements to hedge outstanding
mortgage loans, mortgage-backed securities, FHLB advances and repurchase
agreements. Under the terms of the interest rate cap agreements, the Company
generally would receive an amount equal to the difference between 3 month LIBOR
or 6 month LIBOR and the cap's strike rate, multiplied by the notional amount.
Premiums paid for the caps are amortized into expense based on the term of the
cap. The interest rate cap agreements are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
DATE BALANCE DATE
-------------- -------- --------------
<S> <C> <C> <C>
Cap Strike Rate
4.0%............................ July 1992 $ 10,000 July 1999
4.4%............................ September 1998 $250,000 November 2000
4.4%............................ September 1998 $400,000 October 2000
5.0%............................ September 1998 $300,000 October 2000
5.5%............................ September 1998 $150,000 September 2000
5.5%............................ September 1998 $150,000 September 1999
6.0%............................ September 1998 $150,000 September 2000
6.0%............................ September 1998 $150,000 September 1999
6.0%............................ October 1996 $ 20,000 October 1999
6.1%............................ December 1998 $225,000 December 1999
6.1%............................ December 1998 $225,000 December 1999
6.5%............................ August 1998 $ 50,000 August 2003
7.0%............................ January 1997 $ 10,000 January 2002
7.5%............................ July 1997 $ 25,000 July 1999
8.0%............................ July 1997 $ 25,000 July 2000
8.0%............................ June 1997 $ 25,000 June 2000
10.0%............................ April 1995 $ 10,000 January 2002
</TABLE>
F-28
<PAGE> 76
The counterparties to the interest rate cap agreements described above are
Goldman Sachs, Lehman Brothers, Merrill Lynch, NationsBank, Nomura, Salomon
Brothers, and UBS. As of December 31, 1998, the associated credit risk with the
aforementioned counterparties was $3.6 million, $366,000, $68,000, $1.8 million,
$11,000, $203,000, and $353,000, respectively. The credit risk is attributable
to the unamortized cap premium and any amounts due from the counterparty as of
December 31, 1998.
As of December 31, 1998, the Company was party to four interest rate caps
and one interest rate floor that were not designated as hedges. Realized and
unrealized gains and losses on these instruments have been recognized in the
income statement as gain or loss on trading securities. The following table
summarizes the Company's interest rate cap and floor agreements that were not
designated as hedges as of December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
EFFECTIVE NOTIONAL MATURITY
DATE BALANCE DATE
----------- -------- --------
<S> <C> <C> <C>
Cap Strike Rate
7.00%............................... May 1998 $50,000 May 2001
7.25%............................... May 1998 $50,000 May 2001
7.50%............................... May 1998 $25,000 May 2002
7.75%............................... August 1998 $25,000 May 2003
Floor Strike Rate
5.00%............................... August 1998 $25,000 May 2001
</TABLE>
The counterparties to the interest rate cap and floor agreements described
above are Lehman Brothers and Salomon Brothers. As of December 31, 1998, the
associated credit risk with the aforementioned counterparties was $128,000 and
$276,000, respectively. The total amortization expense for premiums on all
interest rate caps and floors was $1.6 million, $777,000 and $638,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
19. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The fair value information for financial instruments that is provided below
is based on the requirements of Statement of Financial Accounting Standards No.
107, Disclosure About Fair Value of Financial Instruments ("SFAS No. 107") and
does not represent the aggregate net fair value of the Bank. Much of the
information used to determine fair value is subjective and judgmental in nature.
Therefore, fair value estimates, especially for less marketable securities, may
vary. In addition, the amounts actually realized or paid upon settlement or
maturity could be significantly different. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument for
which it is reasonable to estimate that value:
CASH AND INTEREST-BEARING DEPOSITS -- Fair value is estimated to be
carrying value.
FEDERAL FUNDS SOLD -- Fair value is estimated to be carrying value.
SECURITIES PURCHASED UNDER AGREEMENT TO RESELL -- Fair value is
estimated to be carrying value.
INVESTMENT SECURITIES -- Fair value is estimated by using quoted
market prices for most securities. For illiquid securities, market prices
are estimated by obtaining market price quotes on similar liquid securities
and adjusting the price to reflect differences between the two securities,
such as credit risk, liquidity, term coupon, payment characteristics, and
other information.
MORTGAGE-BACKED AND RELATED SECURITIES -- Fair value is estimated
using quoted market prices. For illiquid securities, market prices are
estimated by obtaining market price quotes on similar liquid securities and
adjusting the price to reflect differences between the two
F-29
<PAGE> 77
securities, such as credit risk, liquidity, term coupon, payment
characteristics, and other information.
INTEREST RATE CAPS -- Fair value is based on quotes received from
third parties.
LOANS RECEIVABLE -- For certain residential mortgage loans, fair value
is estimated using quoted market prices for similar types of products. The
fair value of certain other types of loans is estimated using quoted market
prices for securities backed by similar loans. The fair value for loans
that could not be reasonably established using the previous two methods was
estimated by discounting future cash flows using current rates for similar
loans. Management adjusts the discount rate to reflect the individual
characteristics of the loan, such as credit risk, coupon, term, payment
characteristics, and the liquidity of the secondary market for these types
of loans.
DEPOSITS -- For passbook savings, checking and money market accounts,
fair value is estimated at carrying value. For fixed maturity certificates
of deposit, fair value is estimated by discounting future cash flows at the
currently offered rates for deposits of similar remaining maturities.
ADVANCES FROM THE FHLB OF ATLANTA -- For adjustable rate advances,
fair value is estimated at carrying value. For fixed rate advances, fair
value is estimated by discounting future cash flows at the currently
offered rates for fixed-rate advances of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -- Fair value is
estimated using carrying value. The securities are repriced on a semiannual
basis.
SUBORDINATED DEBT -- For subordinated debt, fair value is estimated
using quoted market prices.
OFF-BALANCE SHEET INSTRUMENTS -- The fair value of interest rate
exchange agreements is the net cost to the Company to terminate the
agreement as determined from market quotes.
F-30
<PAGE> 78
The fair value of financial instruments as of December 31, 1998 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1998 1997 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ 26,282 $ 26,282 $ 92,156 $ 92,156
Investment securities
available-for-sale.................. 220,358 220,358 91,237 91,237
Mortgage-backed securities available-
for-sale............................ 1,012,163 1,012,163 319,203 319,203
Loans receivable....................... 904,854 935,167 540,704 562,270
Trading................................ 29,584 29,584 21,110 21,110
Caps................................... 6,354 8,363 1,386 477
LIABILITIES:
Retail deposits........................ $1,142,385 $1,088,921 $522,221 $524,022
Brokered callable certificates of
deposit............................. 67,085 66,360 -- --
Advances from the FHLB Atlanta......... 472,500 472,500 200,000 200,000
Securities sold under agreements to
repurchase.......................... 404,435 404,435 279,909 279,909
Subordinated debt, net................. 29,855 30,810 29,614 30,953
Trust preferred........................ 35,385 35,385 9,572 10,000
Off-balance sheet instruments.......... -- (8,648) -- (1,818)
Commitments to purchase loans.......... -- 298 -- --
</TABLE>
20. DISTRIBUTIONS
The Bank is subject to certain restrictions on the amount of dividends it
may declare without prior regulatory approval. At December 31, 1998,
approximately $21.7 million of retained earnings was available for dividend
declaration.
21. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors an Employee Stock Ownership Plan ("ESOP"). All
employees of the Company who meet limited qualifications participate in the
ESOP. Under the ESOP, the Company contributes to a separate trust fund
maintained exclusively for the benefit of those employees who have become
participants. The ESOP has borrowed from the Company and used the proceeds to
acquire Company stock. The ESOP shares initially were pledged as collateral for
its debt to the Company. As the debt is repaid, shares are released from
collateral and allocated to active employees, based on the proportion of debt
service paid in the year. The Company accounts for its ESOP in accordance with
Statement of Position 93-6. Accordingly, the shares pledged as collateral are
reported as unearned ESOP shares in the statement of financial position. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares. As of December 31, 1998 and
1997, the ESOP owned 434,945 and 261,094 shares, respectively, of the Company's
stock, with approximately 223,000 and 196,536 shares allocated, respectively. As
of December 31, 1998 and 1997, the fair value of unearned shares held by the
ESOP was $6.7 million and $573,000, respectively. Compensation expense was
$391,000, $247,000 and $224,000 for the years ended December 31, 1998, 1997, and
1996, respectively.
22. STOCK BASED COMPENSATION
In 1998, the Company authorized and issued 959,710 options to directors,
officers and employees to purchase 959,710 shares of Telebanc Common Stock at
prices ranging from $9.75
F-31
<PAGE> 79
to $14.50. In 1997, directors, officers and employees were issued 698,402
options to purchase 698,402 shares of Telebanc Common Stock at prices ranging
from $1.33 to $6.75. As of December 31, 1998 and 1997, 904,797 and 598,248 of
the options outstanding, respectively, were vested at exercise prices ranging
from $1.33 to $14.50. The maximum term for the outstanding options is 10 years.
At the discretion of management, options are assigned a vesting period of five
years, with 20% of options vesting at the end of each year, or four years, with
20% of options vesting on the grant date and the remaining 80% vesting ratably
over the 4 years. As of December 31, 1998, the total number of authorized
options was 2,708,929. The options' exercise price was the market value of the
stock at the date of issuance.
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OPTIONS (000'S) PRICE (000'S) PRICE (000'S) PRICE
- ------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.......... 1,330 $ 4.86 704 $3.45 542 $3.26
Granted................................... 960 $12.53 698 $6.26 162 $4.09
Exercised................................. 46 $ 5.93 34 $3.26 -- --
Forfeited................................. 106 $ 7.34 38 $5.70 -- --
Expired................................... -- $ -- -- $ -- -- $ --
----- ----- -----
Outstanding at end of year................ 2,138 $ 8.20 1,330 $4.86 704 $3.45
===== ===== =====
Options exercisable at year-end........... 905 $ 5.84 598 $4.03 360 $3.45
===== ===== =====
Weighted avg. fair value of options
granted during the year................. $ 4.81 $1.75 $1.31
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING (000'S) OPTIONS EXERCISABLE (000'S)
-------------------------------------- ---------------------------
WEIGHTED
AVG.
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVG. AVG.
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Less than $5.00................. 690 6.04 $ 3.32 535 $ 3.24
$5.00 -- $7.49.................. 513 8.15 $ 6.75 189 $ 6.75
$7.50 -- $9.99.................. 373 9.07 $ 9.75 71 $ 9.75
$10.00 -- $12.49................ -- -- -- -- --
$12.50 -- $14.99................ 562 9.81 $14.50 110 $14.50
------ ---
Less than $5.00 -- $14.99....... 2,138 8.07 $ 8.20 905 $ 5.84
====== ===
</TABLE>
Because the method of accounting required by SFAS No. 123 has not been
applied to options granted prior to January 1996, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The fair value of each option grant is estimated on the date of grant
using the Black Scholes option pricing model with the following weighted average
assumptions for grants; risk-free interest rates of 4.71 percent, 5.08 percent
and 5.25 percent for 1998, 1997, and 1996, respectively; expected life of 5
years in 1998 and 10 years in 1997 and 1996 for all options granted; expected
volatility of 81.6 percent, 25.0 percent and 23 percent for 1998, 1997, and
1996, respectively.
F-32
<PAGE> 80
The Company accounts for this plan under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for the plan been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported.......................... $ (737) $3,671 $2,552
Pro forma............................ $(2,061) $2,629 $2,409
Basic earnings per share:
As reported.......................... $ (0.09) $ 0.84 $ 0.62
Pro forma............................ $ (0.26) $ 0.60 $ 0.59
Diluted earnings per share:
As reported.......................... $ (0.09) $ 0.57 $ 0.58
Pro forma............................ $ (0.26) $ 0.43 $ 0.55
</TABLE>
23. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:
At December 31, 1998, the Company was obligated under three operating
leases for office space with original terms ranging from three to ten years. Net
rent expense under operating leases was approximately $333,000, $238,000 and
$142,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The projected minimum rental payments under the terms of the lease are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1999........................................................ 419,000
2000........................................................ 382,000
2001........................................................ 294,000
2002........................................................ 297,000
2003........................................................ 185,000
2004 and thereafter......................................... 95,000
----------
$1,672,000
==========
</TABLE>
As of December 31, 1998, the Company had commitments to purchase $53.3
million of mortgage loans.
F-33
<PAGE> 81
24. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 4,941 $ 5,401
Investment securities available-for-sale.................... 2,468 4,186
Mortgage-backed securities available-for-sale............... 3,651 26,219
Loans receivable, net....................................... -- 566
Loan receivable held for sale............................... 2,089 6,367
Trading..................................................... -- 14,011
Equity in net assets of subsidiary.......................... 162,859 58,976
Deferred charges............................................ 1,291 1,460
Other assets................................................ 7,154 4,806
-------- --------
Total assets........................................... $184,453 $121,992
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debt........................................... $ 68,515 $ 39,614
Securities sold under agreements to repurchase.............. -- 33,555
Accrued interest payable.................................... 751 1,037
Taxes payable and other liabilities......................... 1,752 1,962
-------- --------
Total liabilities...................................... 71,018 76,168
-------- --------
Stockholders' Equity Preferred Stock........................ -- 15,281
Common Stock................................................ 123 44
Additional Paid in Capital.................................. 103,194 16,205
Unearned ESOP Shares........................................ (2,578) --
Retained earnings........................................... 10,819 11,556
Unrealized gain/loss on securities available-for-sale....... 1,877 2,738
-------- --------
Total stockholders' equity.................................. 113,435 45,824
-------- --------
Total liabilities and stockholders' equity............. $184,453 $121,992
======== ========
</TABLE>
F-34
<PAGE> 82
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income............................................. $ 2,777 $ 2,683 $ 531
Interest expense............................................ 4,311 4,352 2,163
------- ------- -------
Net interest loss........................................... (1,534) (1,669) (1,632)
Non interest income......................................... 383 13 133
Total selling, general and administrative expenses.......... 3,214 1,288 1,393
Other non-interest expenses................................. 285 195 127
------- ------- -------
Net loss before equity in net income of subsidiaries and
income taxes.............................................. (4,650) (3,139) (3,019)
Equity in net income of subsidiaries........................ 4,200 5,668 6,716
Income taxes................................................ (1,825) (1,688) 1,145
Preferred stock dividends................................... 2,112 546 --
------- ------- -------
Net income.................................................. (737) 3,671 2,552
Other comprehensive income, net of tax...................... (861) 642 541
------- ------- -------
Comprehensive income........................................ $(1,598) $ 4,313 $ 3,093
======= ======= =======
</TABLE>
F-35
<PAGE> 83
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 1,375 $ 4,217 $ 2,552
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries..... (4,200) (5,668) (4,426)
Purchases of loans held for sale..................... (2,622) (6,367) --
Proceeds from sales of loans held for sale........... 4,388 -- --
Proceeds from maturities of and principal payments on
loans held for sale............................... 2,512 -- --
Net (increase) in trading securities................. 14,011 (14,011) --
(Increase) decrease in other assets.................. (5,077) (4,227) (686)
Increase in accrued expenses and other liabilities... (258) 2,223 267
-------- -------- ---------
Net cash provided by operating activities.............. 10,129 (23,833) (2,293)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loan to Employee Stock
Ownership Plan.................................... (2,578) -- (65)
Net increase in loans................................ 566 (261) --
Net (increase) decrease in equity investments........ (97,736) (19,178) 2,074
Purchases of available-for-sale securities........... (25,476) (92,862) (100,574)
Proceeds from sale of available-for-sale
securities........................................ 36,873 80,159 11,103
Proceeds from maturities of and principal payments on
available-for-sale securities..................... 12,791 1,158 76,910
Net sales (purchases) of premises and equipment...... (50) -- (37)
-------- -------- ---------
Net cash (used in) provided by investing activities.... (75,610) (30,984) (10,589)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in securities sold under agreements to
repurchase........................................ (33,555) 20,724 12,831
Increase in subordinated debt........................ 28,901 23,028 --
Increase in common stock and additional paid in
capital........................................... 71,787 16,853 --
Dividends paid on common and preferred stock......... (2,112) (546) --
-------- -------- ---------
Net cash provided by financing activities.............. 65,021 60,059 12,831
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents... (460) 5,242 (51)
Cash and cash equivalents at beginning of period....... 5,401 159 210
-------- -------- ---------
Cash and cash equivalents at end of period............. $ 4,941 $ 5,401 $ 159
======== ======== =========
SUPPLEMENTAL INFORMATION:
Interest paid on borrowed funds...................... 4,597 3,734 2,074
</TABLE>
TeleBanc Financial Corporation commenced activities on January 27, 1994,
the effective date of its formation as a holding company of the Bank. The Bank
paid dividends of $0 and $992,000 to Telebanc for subordinated interest expense
payments for the years ended December 31, 1998 and 1997, respectively.
F-36
<PAGE> 84
25. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Condensed quarterly financial data for the years ended December 31, 1998
and 1997 is shown as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income................................. $18,071 $18,581 $27,632 $35,826
Interest expense................................ 14,477 15,276 21,979 28,573
------- ------- ------- -------
Net interest income........................... 3,594 3,305 5,653 7,253
Provision for loan and lease losses............. 250 75 300 280
Non-interest income............................. 1,947 1,104 1,832 2,681
General and administrative expenses............. 3,889 3,441 5,666 6,823
Other non-interest operating expenses........... 315 487 586 871
------- ------- ------- -------
Income before income taxes and minority
interest.................................... 1,087 406 933 1,960
Income tax expense.............................. 475 51 389 734
Minority interest in subsidiary................. 176 176 439 571
------- ------- ------- -------
Net income...................................... 436 179 105 655
Preferred stock dividends....................... 162 162 1,788 --
------- ------- ------- -------
Net income available to common stockholders... 274 17 (1,683) 655
Other comprehensive income...................... 262 (1,109) 8,579 (8,593)
------- ------- ------- -------
Comprehensive income............................ $ 536 $(1,092) $ 6,896 $(7,938)
======= ======= ======= =======
Basic earnings per share........................ $ 0.06 $ 0.00 $ (0.17)(1) $ 0.05
Diluted earnings per share...................... $ 0.05 $ 0.00 $ (0.17)(1) $ 0.05
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income................................. $12,837 $15,275 $14,821 $16,368
Interest expense................................ 9,878 11,865 11,548 12,772
------- ------- ------- -------
Net interest income........................... 2,959 3,410 3,273 3,596
Provision for loan and lease losses............. 243 308 120 250
Non-interest income............................. 607 1,244 1,084 1,158
General and administrative expenses............. 1,897 2,251 2,078 2,816
Other non-interest operating expenses........... 208 202 260 430
------- ------- ------- -------
Income before income taxes and minority
interest.................................... 1,218 1,893 1,899 1,258
Income tax expense.............................. 355 618 709 (25)
Minority interest in subsidiary................. -- 67 285 42
------- ------- ------- -------
Net income...................................... 863 1,208 905 1,241
Preferred stock dividends....................... 60 162 162 162
------- ------- ------- -------
Net income available to common stockholders... 803 1,046 743 1,079
Other comprehensive income...................... (1,165) 2,443 (24) (612)
------- ------- ------- -------
Comprehensive income............................ $ (362) $ 3,489 $ 719 $ 467
======= ======= ======= =======
Basic earnings per share........................ $ 0.19 $ 0.24 $ 0.16 $ 0.24
Diluted earnings per share...................... $ 0.15 $ 0.16 $ 0.11 $ 0.16
</TABLE>
- ---------------
(1) Reflects a $1.7 million nonrecurring, noncash charge related to the
additional Preferred Stock dividend payable in Common Stock, based on the
fair market value of the Common Stock at the time such dividend was paid.
The charge reduced net income available to common stockholders by the same
amount and diluted earnings per share in the third quarter of 1998 by $0.18
per share.
F-37
<PAGE> 85
UNDERWRITING
Telebanc, the selling stockholders and the underwriters for the U.S.
offering named below have entered into an underwriting agreement with respect to
the shares being
offered in the United States. Subject to certain conditions, each U.S.
underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
BancBoston Robertson Stephens Inc. .........................
Legg Mason Wood Walker, Incorporated........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
---------
Total............................................. 3,040,000
=========
</TABLE>
------------------------
If the U.S. underwriters sell more shares than the total number set forth
in the table above, the U.S. underwriters have an option to buy up to an
additional 456,000 shares from us to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
U.S. underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the U.S. underwriters by us and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the U.S. underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Paid by Telebanc
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling
Stockholders
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ $
Total................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the underwriters may change the offering price and the other
selling terms.
Telebanc and the selling stockholders have entered into underwriting
agreements with the international underwriters for the sale of 760,000 shares
outside the United States. The terms and conditions of each of the offerings are
the same and the sale of shares in each of the offerings are conditioned on each
other. Goldman Sachs International, BancBoston Robertson Stephens International
Limited, Legg Mason Wood Walker, Incorporated and Merrill Lynch International
are the international underwriters for the international offering outside the
United States. Telebanc has granted the international underwriters a similar
option to purchase up to an additional 114,000 shares.
The underwriters for each of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters also have agreed that they may sell shares among each
of the underwriting groups.
U-1
<PAGE> 86
Telebanc, our directors and certain officers, the selling stockholders and
certain of our other stockholders have agreed with the underwriters not to
dispose of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of the underwriters. This
agreement does not apply to any securities issued pursuant to employee benefit
plans, upon conversion of outstanding securities or in connection with
acquisitions, business combinations or strategic investments.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased shares sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, underwriters and selling
group members, if any, that are market makers in the common stock may make bids
for or purchases of the common stock in the Nasdaq National Market until such
time, if any, when a stabilizing bid for the securities has been made. Rule 103
generally provides that (1) a passive market maker's net daily purchases of the
common stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months, or any 60 consecutive
days ending within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part, (2) a passive
market maker may not effect transactions or display bids for the common stock at
a price that exceeds the highest independent bid for the common stock by persons
who are not passive market makers and (3) bids made by passive market makers
must be identified as such.
Telebanc and the selling stockholders estimate that the total expenses of
this offering, excluding underwriting discounts and commissions, will be
approximately $850,000.
Telebanc and the selling stockholders have agreed to indemnify the several
underwriters against specified liabilities, including liabilities under the
Securities Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside the United
States, to persons located in the United States.
U-2
<PAGE> 87
[Large full page of our web site screenshot and bar graph showing our account
and deposit volume for 1993 through 1998.]
<PAGE> 88
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 3
Use of Proceeds......................... 8
Price Range of Common Stock............. 8
Dividend Policy......................... 8
Capitalization.......................... 9
Selected Consolidated Financial and
Other Data............................ 10
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 12
Business................................ 27
Management.............................. 37
Principal and Selling Stockholders...... 40
Incorporation of Information We File
With the SEC.......................... 43
Where You Can Find More Information..... 43
Forward Looking Statements.............. 44
Validity of the Shares.................. 44
Experts................................. 44
Index to Consolidated Financial
Statements............................ F-1
Underwriting............................ U-1
</TABLE>
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
3,800,000 Shares
TELEBANC FINANCIAL
CORPORATION
Common Stock
---------------------
LOGO
---------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
LEGG MASON WOOD WALKER
INCORPORATED
MERRILL LYNCH & CO.
- ----------------------------------------------------------
- ----------------------------------------------------------
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred by TeleBanc
Financial Corporation (the "Registrant") in connection with the issuance and
distribution of the securities registered hereby, all of which expenses, except
for the registration fee and the Nasdaq National Market filing fee, are
estimates:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 69,500
Nasdaq National Market application and listing fees......... 17,500
NASD filing fee............................................. 25,500
Printing expenses........................................... 200,000
Legal fees and expenses (other than Blue Sky)............... 200,000
Accounting fees and expenses................................ 250,000
Blue Sky and NASD legal fees and expenses (including fees of
counsel).................................................. 7,000
Transfer agent fees and expenses............................ 5,000
Miscellaneous expenses...................................... 75,500
--------
Total............................................. $850,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify any person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened, pending or
completed action, suit or proceeding in which such person is made a party by
reason of his being or having been a director, officer, employee or agent of the
Delaware corporation. The DGCL provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a person
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors, or otherwise. The certificate of incorporation of the
Registrant provides for the elimination and limitation of the personal liability
of directors of the Registrant for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders; (ii) for acts of
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) in respect of certain unlawful dividend payments or
stock redemption or repurchases; and (iv) for any transaction from which the
director derived and improper benefit. In addition, the certificate of
incorporation provides that the Registrant shall, to the fullest extent
permitted by the DGCL, as amended from time to time, indemnify each or its
currently acting and former directors, officers, employees and agents. Article
Eight of the Registrant's bylaws, entitled "Indemnification", provides for
indemnification of the Registrant's directors, officers, employees and agents
under certain circumstances.
II-1
<PAGE> 90
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of Underwriting Agreement
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)
5* Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities being registered
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5)
23.2 Consent of Arthur Andersen L.L.P.
24** Power of Attorney (included on signature page to the
Registration Statement)
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of
Arlington, State of Virginia, on this 18th day of March, 1999.
TELEBANC FINANCIAL CORPORATION
(Registrant)
By: /s/ MITCHELL H. CAPLAN
------------------------------------
Mitchell H. Caplan
Vice Chairman, Chief Executive
Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated as of March 18, 1999.
<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
/s/ DAVID A. SMILOW Chairman of the Board
- --------------------------------------------
David A. Smilow
/s/ MITCHELL H. CAPLAN Vice Chairman of the Board, Chief Executive
- -------------------------------------------- Officer and President (principal executive
Mitchell H. Caplan officer)
/s/ SANG HAN Controller and Acting Chief Financial
- -------------------------------------------- Officer (acting principal financial and
Sang Han accounting officer)
* Director
- --------------------------------------------
David DeCamp
* Director
- --------------------------------------------
Dean C. Kehler
* Director
- --------------------------------------------
Marcia Myerberg
* Director
- --------------------------------------------
Steven F. Piaker
* Director
- --------------------------------------------
Mark Rollinson
*By: /s/ MITCHELL H. CAPLAN
- --------------------------------------------
Mitchell H. Caplan
Attorney-in-fact
</TABLE>
II-3
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
1.1 Form of U.S. Underwriting Agreement
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)
5* Opinion of Hogan & Hartson L.L.P. as to the legality of the
securities being registered
23.1 Consent of Hogan & Hartson L.L.P. (included as part of
Exhibit 5)
23.2 Consent of Arthur Andersen L.L.P.
24** Power of Attorney
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
Form of Underwriting Agreement
S&C Draft of March 18, 1999
TELEBANC FINANCIAL CORPORATION
COMMON STOCK (PAR VALUE $.01 PER SHARE)
--------------------------------------
UNDERWRITING AGREEMENT
(U.S. VERSION)
....................., 1999
Goldman, Sachs & Co.,
BancBoston Robertson Stephens Inc.,
Legg Mason Wood Walker, Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
TeleBanc Financial Corporation, a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of . . . . . . .shares and, at the election of
the Underwriters, up to . . . . . . additional shares of Common Stock, par
value $.01 per share ("Stock"), of the Company, and the stockholders of the
Company named in Schedule II hereto (the "Selling Stockholders") propose,
subject to the terms and conditions stated herein, to sell to the Underwriters
an aggregate of . . . . . . . shares of Stock. The aggregate of . . . . shares
to be sold by the Company and the Selling Stockholders is herein called the
"Firm Shares", and the aggregate of . . . . . additional shares to be sold by
the Company is herein called the "Optional Shares". The Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof are herein collectively called the "Shares".
It is understood and agreed to by all parties that the Company
and the Selling Stockholders are concurrently entering into an agreement (the
"International Underwriting Agreement") providing for the sale by the Company
and the Selling Stockholders of up to a total of ______ shares of Stock (the
"International Shares"), including the overallotment option thereunder, through
arrangements with certain underwriters outside the United States (the
"International Underwriters"), for whom Goldman Sachs International is acting as
the lead manager. Anything herein or therein to the contrary notwithstanding,
the respective closings under this Agreement and the International Underwriting
Agreement are hereby expressly made conditional on one another. The
Underwriters hereunder and the International Underwriters are simultaneously
entering into an Agreement between U.S. and International Underwriting
Syndicates (the "Agreement between Syndicates") which provides, among other
things, for the transfer of shares of Stock between the two syndicates. Two
forms of prospectus are to be used in connection with the offering and sale of
shares of Stock contemplated by the foregoing, one relating to the Shares
hereunder and the other relating to the International Shares. The latter form
of prospectus will be identical to the former except for certain substitute
pages as included in the registration statement and amendments thereto as
mentioned below.
<PAGE> 2
Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the context
may otherwise require, references hereinafter to the Shares shall include all
the shares of Stock which may be sold pursuant to either this Agreement or the
International Underwriting Agreement, and references herein to any prospectus
whether in preliminary or final form, and whether as amended or supplemented,
shall include both the U.S. and the international versions thereof.
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-3 (File
No. 333-72145) (the "Initial Registration Statement") in respect
of the Shares has been filed with the Securities and Exchange
Commission (the "Commission"); the Initial Registration
Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits
thereto but including all documents incorporated by reference in
the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective by the Commission in
such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities
Act of 1933, as amended (the "Act"), which became effective upon
filing, no other document with respect to the Initial
Registration Statement or document incorporated by reference
therein has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or
the Rule 462(b) Registration Statement, if any, has been issued
and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission (any
preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a)
of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various
parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto
and including (i) the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed
by virtue of Rule 430A under the Act to be part of the Initial
Registration Statement at the time it was declared effective and
(ii) the documents incorporated by reference in the prospectus
contained in the Initial Registration Statement at the time such
part of the Initial Registration Statement became effective,
each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule
462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the
"Registration Statement"; such final prospectus, in the form
first filed pursuant to Rule 424(b) under the Act, is
hereinafter called the "Prospectus"; any reference herein to
any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the Act, as of the
date of such Preliminary Prospectus or Prospectus, as the case
may be; any reference to any amendment or supplement to any
Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include any documents filed after the date of such
Preliminary Prospectus or Prospectus, as the case may be, under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference
to any amendment to the Registration Statement shall be deemed
to refer to and include any annual report of the Company filed
pursuant to Section 13(a) or 15(d) of the Exchange Act after the
effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement );
2
<PAGE> 3
(ii) No order preventing or suspending the use of
any Preliminary Prospectus has been issued by the Commission,
and each Preliminary Prospectus, at the time of filing thereof,
conformed in all material respects to the requirements of the
Act and the rules and regulations of the Commission thereunder
and did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein or by a Selling Stockholder expressly
for use in the preparation of the answers therein to Item 7 of
Form S-3;
(iii) The documents incorporated by reference in
the Prospectus, when they became effective or were filed with
the Commission, as the case may be, conformed in all material
respects to the requirements of the Act or the Exchange Act, as
applicable, and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading; and any further documents so
filed and incorporated by reference in the Prospectus or any
further amendment or supplement thereto, when such documents
become effective or are filed with the Commission, as the case
may be, will conform in all material respects to the
requirements of the Act or the Exchange Act, as applicable, and
the rules and regulations of the Commission thereunder and will
not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co. expressly
for use therein;
(iv) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will conform, in all
material respects to the requirements of the Act and the rules
and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration
Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement
thereto, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall
not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein or by a Selling Stockholder expressly
for use in the preparation of the answers therein to Item 7 of
Form S-3;
(v) Neither the Company nor any of its
subsidiaries has sustained since the date of the latest audited
financial statements included or incorporated by reference in
the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether
or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the
respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been
any change in the consolidated loans (other than changes in the
ordinary course
3
<PAGE> 4
of the Company's business), capital stock (other than grants or
exercises of options pursuant to the Company's employee stock
option plans), short-term debt (other than changes in the
ordinary course of the Company's business) or long-term debt of
the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material
adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the
Prospectus;
(vi) The Company and its subsidiaries have good
and marketable title in fee simple to all real property and good
and marketable title to all personal property owned by them, in
each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not
materially affect the value of such property and do not
materially interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; provided,
however, that the foregoing representation and warranty shall
not apply to any real property that the Company or any of its
subsidiaries has acquired by foreclosure in the ordinary course
of the Company's or such subsidiary's business; and any real
property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
(vii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, with power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, or is subject
to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction; TeleBank, a wholly
owned subsidiary of the Company ("TeleBank"), has been duly
formed and is validly existing as a federally chartered savings
bank; each other subsidiary of the Company has been duly
incorporated or formed, as applicable, and is validly existing
as a corporation, limited liability company or business trust,
as applicable, in good standing under the laws of its
jurisdiction of organization; each of TeleBank and the other
subsidiaries of the Company has the power and authority
(corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts
any business so as to require such qualification, or is subject
to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction;
(viii) The Company has an authorized capitalization
as set forth in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description of the Stock contained in the
Prospectus; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
(except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(ix) The unissued Shares to be issued and sold by
the Company to the Underwriters hereunder and under the
International Underwriting Agreement have been duly and validly
4
<PAGE> 5
authorized and, when issued and delivered against payment
therefor as provided herein, will be duly and validly issued and
fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(x) The issue and sale of the Shares to be sold
by the Company hereunder and under the International
Underwriting Agreement and the compliance by the Company with
all of the provisions of this Agreement and the International
Underwriting Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result
in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any
of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any
violation of the provisions of the Certificate of Incorporation
or By-laws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any
of their properties; and no consent, approval, authorization,
order, registration or qualification of or with any such court
or governmental agency or body is required for the issue and
sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement and the
International Underwriting Agreement, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters;
(xi) Neither the Company nor any of its
subsidiaries is in violation of its Certificate of
Incorporation, By-laws, limited liability company agreement,
declaration of trust or other charter document, as applicable;
and neither the Company nor any of its subsidiaries is in
default in the performance or observance of any obligation,
agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or
any of its properties may be bound, which default would,
individually or in the aggregate, have a material adverse effect
on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and
its subsidiaries, taken as a whole;
(xii) The statements set forth in the Prospectus
under the caption "Description of Securities", insofar as they
purport to constitute a summary of the terms of the Stock, under
the caption "Federal Income Tax Considerations" and under the
caption "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are
accurate, complete and fair; provided, however, that this
representation and warranty shall not apply to any statements
made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(xiii) Other than as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which
any property of the Company or any of its subsidiaries is the
subject which, if determined adversely to the Company or any of
its subsidiaries, individually or in the aggregate, would
reasonably be likely to have a material adverse effect on the
current or future consolidated financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries, taken as a
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<PAGE> 6
whole; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(xiv) The Company is not and, after giving effect
to the offering and sale of the Shares, will not be an
"investment company", as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act");
(xv) Arthur Andersen LLP, who have certified
certain financial statements of the Company and its
subsidiaries, are independent public accountants as required by
the Act and the rules and regulations of the Commission
thereunder;
(xvi) The Company has reviewed its operations and
that of its subsidiaries to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries
will be affected by the Year 2000 Problem and has examined
whether there would be a material adverse effect on the
Company's business, results of operations or financial condition
if any third party with which the Company or any of its
subsidiaries has a material relationship has a Year 2000
Problem. As a result of such review, the Company has not
identified any significant Year 2000 Problems and does not
anticipate that costs associated with the Year 2000 Problem will
have a material financial impact on the general current or
future consolidated financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken
as a whole. In addition, the Company has determined that the
impact of the Year 2000 Problem on the Company's and its
subsidiaries non-information technology systems does not present
a significant risk to the financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries, taken as a whole. The "Year 2000 Problem" as used
herein means any significant risk that computer hardware or
software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or
electrical systems of any kind will not, in the case of dates or
time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000;
(xvii) The Company is a registered savings and loan
holding company under the Home Owners' Loan Act ("HOLA"); the
activities of the subsidiaries of TeleBank are permitted
activities for subsidiaries of a federally chartered savings
bank under applicable law, including the rules and regulations
of the Office of Thrift Supervision set forth in Chapter V of
Title 12 of the Code of Federal Regulations;
(xiii) Except as described in the Prospectus, each
of the Company and its subsidiaries owns or possesses adequate
licenses or other rights to use all trademarks, service marks,
trade names, copyrights, and know-how necessary to conduct the
business now or proposed to be conducted by the Company and its
subsidiaries as described in the Prospectus, and neither the
Company nor any subsidiary has received any notice of
infringement of or notice of conflict with (and knows of no such
infringement of or conflict with) asserted rights of others with
respect to trademarks, service marks, trade names, copyrights,
and know-how which, individually or in the aggregate, is
reasonably likely to result in any material adverse effect upon
the financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole; the Company and each subsidiary does not in the conduct
of its business as now or proposed to be conducted as described
in the Prospectus, infringe or conflict with any right of any
third party, known to the Company, where such infringement or
conflict is reasonably likely to result in any material adverse
effect upon the financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, taken
as a whole;
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<PAGE> 7
(xix) Each of the Company and its subsidiaries has
obtained any permits, consents and authorizations required to be
obtained by it under laws or regulations relating to its
business (collectively, "Laws"), and any such permits, consents
and authorizations remain in full force and effect, except as to
any of the foregoing the absence of which (individually or in
the aggregate) will not have a material adverse effect on the
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole. Each of the Company and its subsidiaries is in
compliance with the Laws in all material respects, and there is
no pending or, to the Company's knowledge, threatened, action or
proceeding against the Company or any of its subsidiaries under
such Laws, other than any such actions or proceedings which,
individually or in the aggregate, if adversely determined, is
not reasonably likely to have a material adverse effect on the
financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, taken as a
whole; and
(xx) Except as disclosed in the Prospectus, there
are no holders of any security (debt or equity) of the Company
or any of its subsidiaries who have or will have any right to
require the registration of such security by virtue of the
filing of the Registration Statement or the execution by the
Company of this Agreement or the International Underwriting
Agreement.
(b) Each of the Selling Stockholders severally represents and
warrants to, and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and
orders necessary for the execution and delivery by such Selling
Stockholder of this Agreement, the International Underwriting
Agreement and the Custody Agreement hereinafter referred to, and
for the sale and delivery of the Shares to be sold by such
Selling Stockholder hereunder and under the International
Underwriting Agreement, have been obtained; and such Selling
Stockholder has full right, power and authority to enter into
this Agreement, the International Underwriting Agreement and the
Custody Agreement and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder hereunder and
under the International Underwriting Agreement;
(ii) The sale of the Shares to be sold by such
Selling Stockholder hereunder and under the International
Underwriting Agreement and the compliance by such Selling
Stockholder with all of the provisions of this Agreement, the
International Underwriting Agreement and the Custody Agreement
and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any statute, indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling
Stockholder is bound or to which any of the property or assets
of such Selling Stockholder is subject, nor will such action
result in any violation of any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of
such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately
prior to each Time of Delivery (as defined in Section 4 hereof)
such Selling Stockholder will have, good and valid title to the
Shares to be sold by such Selling Stockholder hereunder and
under the International Underwriting Agreement, free and clear
of all liens, encumbrances, equities or claims; and, upon
delivery of such Shares and payment therefor pursuant hereto and
thereto, good and valid title to such Shares, free and clear of
all liens, encumbrances, equities or claims, will pass to the
several Underwriters or the International Underwriters, as the
case may be;
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<PAGE> 8
(iv) During the period beginning from the date
hereof and continuing to and including the date 180 days after
the date of the Prospectus, not to offer, sell, contract to sell
or otherwise dispose of, except as provided hereunder or under
the International Underwriting Agreement, any securities of the
Company that are substantially similar to the Shares, including
but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock
or any such substantially similar securities (other than
pursuant to employee stock option plans existing on, or upon the
conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this Agreement), without your
prior written consent;
(v) Such Selling Stockholder has not taken and
will not take, directly or indirectly, any action that is
designed to or that has constituted or that might reasonably be
expected to cause or result in stabilization or manipulation of
the price of any security of the Company to facilitate the sale
or resale of the Shares;
(vi) To the extent that any statements or
omissions made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement
thereto are made in reliance upon and in conformity with written
information furnished to the Company by such Selling Stockholder
for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further
amendments or supplements to the Registration Statement and the
Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material
respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and will not contain
any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading;
(vii) In order to document the Underwriters'
compliance with the reporting and withholding provisions of the
Tax Equity and Fiscal Responsibility Act of 1982 with respect to
the transactions herein contemplated, such Selling Stockholder
will deliver to you in care of Goldman, Sachs & Co. prior to or
at the First Time of Delivery (as hereinafter defined) a
properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof);
(viii) Certificates in negotiable form representing
all of the Shares to be sold by such Selling Stockholder
hereunder and under the International Underwriting Agreement
have been placed in custody under a Custody Agreement, in the
form heretofore furnished to you in care of Goldman, Sachs & Co.
(the "Custody Agreement"), duly executed and delivered by such
Selling Stockholder to [NAME OF CUSTODIAN], as custodian (the
"Custodian"); and
(ix) The Shares represented by the certificates
held in custody for such Selling Stockholder under the Custody
Agreement are subject to the interests of the Underwriters
hereunder and the International Underwriters under the
International Underwriting Agreement; the arrangements made by
such Selling Stockholder for such custody are to that extent
irrevocable; the obligations of the Selling Stockholders
hereunder shall not be terminated by operation of law, whether
by the death or incapacity of any individual Selling Stockholder
or, in the case of an estate or trust, by the death or
incapacity of any executor or trustee or the termination of such
estate or trust, or in the case of a partnership or corporation,
by the dissolution of such partnership or corporation, or by the
occurrence of any other event; if any individual Selling
Stockholder or any such executor or trustee should die or become
incapacitated, or if any such estate or trust should be
terminated, or if any such partnership or corporation should be
dissolved, or if any other such event should occur, before the
delivery of the Shares hereunder, certificates representing the
Shares shall be
8
<PAGE> 9
delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement, of
the International Underwriting Agreement and of the Custody
Agreements.
2. Subject to the terms and conditions herein set forth, (a) the
Company and each of the Selling Stockholders agree, severally and not jointly,
to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company and each of the Selling
Stockholders, at a purchase price per share of $.............., the number of
Firm Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares to be sold by the
Company and each of the Selling Stockholders as set forth opposite their
respective names in Schedule II hereto by a fraction, the numerator of which is
the aggregate number of Firm Shares to be purchased by such Underwriter as set
forth opposite the name of such Underwriter in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares to be purchased by
all of the Underwriters from the Company and all of the Selling Stockholders
hereunder and (b) in the event and to the extent that the Underwriters shall
exercise the election to purchase Optional Shares as provided below, the
Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at the purchase price per share set forth in clause (a) of this Section 2, that
portion of the number of Optional Shares as to which such election shall have
been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares that such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to
purchase at their election up to ................... Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering overallotments in the sale of the Firm Shares. Any such election
to purchase Optional Shares may be exercised only by written notice from you to
the Company, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of
such notice.
3. Upon the authorization by you of the release of the Firm Shares,
the several Underwriters propose to offer the Firm Shares for sale upon the
terms and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours'
prior notice to the Company and the Selling Stockholders shall be delivered by
or on behalf of the Company and the Selling Stockholders to Goldman, Sachs &
Co., through the facilities of the Depository Trust Company ("DTC"), for the
account of such Underwriter, against payment by or on behalf of such
Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds to the account specified by the Company and the Custodian to
Goldman, Sachs & Co. at least forty-eight hours in advance. The Company will
cause the certificates representing the Shares to be made available for
checking and packaging at least twenty-four hours prior to the Time of Delivery
(as defined below) with respect thereto at the office of DTC or its designated
custodian (the "Designated Office"). The time and date of such delivery and
payment shall be, with respect to the Firm Shares, 9:30 a.m., New York time, on
............., 1999 or such other time and date as Goldman, Sachs & Co. and the
Company may agree upon in writing, and, with respect to the Optional Shares,
9:30 a.m.,
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<PAGE> 10
New York time, on the date specified by Goldman, Sachs & Co. in the written
notice given by Goldman, Sachs & Co. of the Underwriters' election to purchase
such Optional Shares, or such other time and date as Goldman, Sachs & Co. and
the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Time of Delivery", such time and date
for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by
or on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(m) hereof, will be delivered at the offices
of Sullivan & Cromwell, 1701 Pennsylvania Avenue, N.W., Washington, D.C. 20006
(the "Closing Location"), and the Shares will be delivered at the Designated
Office, all at such Time of Delivery. A meeting will be held at the Closing
Location at 3:00 p.m., New York City time, on the New York Business Day next
preceding such Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New
York Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in New York are
generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you
and to file such Prospectus pursuant to Rule 424(b) under the
Act not later than the Commission's close of business on the
second business day following the execution and delivery of this
Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further
amendment or any supplement to the Registration Statement or
Prospectus prior to the last Time of Delivery that shall be
reasonably disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice
thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement
to the Prospectus or any amended Prospectus has been filed and
to furnish you with copies thereof; to file promptly all reports
and any definitive proxy or information statements required to
be filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of the Prospectus and for so long as the delivery of a
prospectus is required in connection with the offering or sale
of the Shares; to advise you, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or
of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus, of the suspension of the qualification
of the Shares for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any
stop order or of any order preventing or suspending the use of
any Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you
may reasonably request to qualify the Shares for offering and
sale under the securities laws of such jurisdictions as you may
request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of
the Shares, provided that in connection therewith the Company
shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any
jurisdiction;
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(c) Prior to 10:00 A.M., New York City time, on the New
York Business Day next succeeding the date of this Agreement and
from time to time, to furnish the Underwriters with copies of
the Prospectus in New York City in such quantities as you may
reasonably request, and, if the delivery of a prospectus is
required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the
offering or sale of the Shares and if at such time any events
shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made when such Prospectus is
delivered, not misleading, or, if for any other reason it shall
be necessary during such period to amend or supplement the
Prospectus or to file under the Exchange Act any document
incorporated by reference in the Prospectus in order to comply
with the Act or the Exchange Act, to notify you and upon your
request to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as
many copies as you may from time to time reasonably request of
an amended Prospectus or a supplement to the Prospectus that
will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any
time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many
copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as
soon as practicable, but in any event not later than eighteen
months after the effective date of the Registration Statement
(as defined in Rule 158(c) under the Act), an earnings statement
of the Company and its subsidiaries (which need not be audited)
complying with Section 11(a) of the Act and the rules and
regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of
the Prospectus, not to offer, sell, contract to sell or
otherwise dispose of, except as provided hereunder and under the
International Underwriting Agreement, any securities of the
Company that are substantially similar to the Shares, including
but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock
or any such substantially similar securities (other than (i)
pursuant to employee stock option plans existing on the date of
this Agreement, (ii) pursuant to employee stock option plans
that are approved by the Company's stockholders at the next
annual meeting of the Company's stockholders and in the form
previously provided to Goldman, Sachs & Co., (iii) upon the
conversion or exchange of convertible or exchangeable securities
outstanding as of the date of this Agreement and (iv) other than
in connection with any acquisitions, business combinations or
strategic investments by the Company), without your prior
written consent;
(f) To furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a
balance sheet and statements of income, stockholders' equity and
cash flows of the Company and its consolidated subsidiaries
certified by independent public accountants) and, as soon as
practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after
the effective date of the Registration Statement), to make
available to its stockholders consolidated summary financial
information of the Company and its subsidiaries for such quarter
in reasonable detail;
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(g) During a period of five years from the effective date
of the Registration Statement, to furnish to you copies of all
reports or other communications (financial or other) furnished
to stockholders, and to deliver to you (i) as soon as they are
available, copies of any reports and financial statements
furnished to or filed with the Commission or any national
securities exchange on which any class of securities of the
Company is listed; and (ii) such additional non-confidential
information concerning the business and financial condition of
the Company as you may from time to time reasonably request
(such financial statements to be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally
or to the Commission);
(h) To use the net proceeds received by it from the sale
of the Shares pursuant to this Agreement and the International
Underwriting Agreement in the manner specified in the Prospectus
under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the
Shares on The Nasdaq Stock Market's Nasdaq National Market
("NASDAQ"); and
(j) To file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement, and at the
time of filing either to pay to the Commission the filing fee
for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b)
under the Act, if the Company elects to rely upon Rule 462(b).
6. The Company agrees with the several Underwriters that (a)
the Company will pay the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of
the Shares under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any Preliminary
Prospectus and the Prospectus and amendments and supplements thereto and the
mailing and delivering of copies thereof to the Underwriters and dealers; (ii)
the cost of printing or producing any Agreement among Underwriters, this
Agreement, the International Underwriting Agreement, the Agreement between
Syndicates, the Selling Agreements, the Blue Sky Memorandum, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under
state securities laws as provided in Section 5(b) hereof, including the fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with listing the Shares on the NASDAQ; and (v) the
filing fees incident to, and the reasonable fees and disbursements of counsel
for the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares; (b) the Company will pay or cause to be paid: (i) the cost of
preparing stock certificates; (ii) the cost and charges of any transfer agent
or registrar; and (iii) all other costs and expenses incident to the performance
of its obligations hereunder that are not otherwise specifically provided for
in this Section; and (c) such Selling Stockholder will pay or cause to be paid
all costs and expenses incident to the performance of such Selling
Stockholder's obligations hereunder that are not otherwise specifically
provided for in this Section, including (i) any fees and expenses of counsel
for such Selling Stockholder, (ii) such Selling Stockholder's pro rata share of
the fees and expenses of the Attorneys-in-Fact and the Custodian, and (iii) all
expenses and taxes incident to the sale and delivery of the Shares to be sold
by such Selling Stockholder to the Underwriters hereunder. It is understood,
however, that, except as provided in this Section, and Sections 8 and 11
hereof, the Underwriters will pay all of their own costs
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<PAGE> 13
and expenses, including the fees of their counsel, stock transfer taxes on
resale of any of the Shares by them, and any advertising expenses connected
with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the
Shares to be delivered at each Time of Delivery, shall be subject, in their
discretion, to the condition that all representations and warranties and other
statements of the Company and of the Selling Stockholders herein are, at and as
of such Time of Delivery, true and correct, the condition that the Company and
the Selling Stockholders shall have performed all of its and their obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for such
filing by the rules and regulations under the Act and in accordance with
Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the
Rule 462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order suspending
the effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on
the part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Sullivan & Cromwell, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such opinion
is attached as Annex II(a) hereto), dated such Time of Delivery, with respect
to the incorporation of the Company, the validity of the Shares being delivered
at such Time of Delivery, this Agreement, the Registration Statement, the
Prospectus and other related matters as you may reasonably request, and such
counsel shall have received such papers and information as they may reasonably
request to enable them to pass upon such matters;
(c) Hogan & Hartson L.L.P., special counsel for the Company, shall
have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(b) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing as of the date of the certificate specified
in such opinion, under the laws of the State of Delaware; the Company has
the corporate power and corporate authority under its Certificate of
Incorporation and the Delaware General Corporation Law to own its current
properties and to conduct its business as described in the Prospectus;
the Company is a registered savings and loan holding company under the
HOLA;
(ii) The authorized, issued and outstanding capital stock of
the Company as of December 31, 1998 is set forth in the Prospectus under
the caption "Capitalization"; all of the issued shares of Stock of the
Company shown as issued and outstanding under said caption and that have
been issued from January 1, 1999 to such Time of Delivery are duly and
validly authorized and, assuming the receipt of consideration therefor as
provided in resolutions of the Company's Board of Directors authorizing
issuance thereof, are validly issued, fully paid and non-assessable;
(iii) This Agreement and the International Underwriting Agreement have
been duly authorized, executed and delivered by the Company;
(iv) The Shares are duly and validly authorized and, when issued in
accordance with the provisions of this Agreement and the International
Underwriting Agreement, will be validly issued, fully paid and
non-assessable; the form of certificate evidencing the Shares complies
with the requirements of Section 158 of the Delaware General Corporation
Law;
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<PAGE> 14
(v) The issue and sale of the Shares being delivered at such Time of
Delivery by the Company hereunder and under the International
Underwriting Agreement, the compliance by the Company with all of the
provisions of this Agreement and the International Underwriting Agreement
and the consummation by the Company of the transactions herein and
therein contemplated will not (A) violate the Delaware General
Corporation Law or the Certificate of Incorporation or Bylaws of the
Company, (B) to such counsel's knowledge, violate any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their properties, or (C) conflict with, breach or constitute a default
under any agreement or contract filed as an exhibit to the Registration
Statement or filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998;
(vi) No consent, approval, authorization, order, registration or
qualification of or with any federal or Delaware or Virginia state court
or governmental agency or body is required for the issue and sale of the
Shares or the consummation by the Company of the transactions
contemplated by this Agreement and the International Underwriting
Agreement, except the registration under the Act of the Shares, and such
consents, approvals, authorizations, registrations or qualifications as
may be required under state securities or Blue Sky laws in connection
with the purchase and distribution of the Shares by the Underwriters and
the International Underwriters;
(vii) The information in the Prospectus under the captions "Description
of Securities," "Federal Income Tax Considerations" and "Underwriting,"
to the extent that such information constitutes or describes matters of
law or legal conclusions or constitutes summaries of documents described
therein, has been reviewed by us, and is correct in all material
respects; the Shares conform to the description of the Stock set forth in
the Prospectus under the caption "Description of Securities";
(viii) The Company is not an "investment company", as such term is
defined in the Investment Company Act;
(ix) The documents incorporated by reference in the Prospectus or any
further amendment or supplement thereto made by the Company prior to such
Time of Delivery (except for the financial statements and supporting
schedules included therein, as to which such counsel need express no
opinion), when they became effective or were filed with the Commission,
as the case may be, complied as to form in all material respects with the
requirements of the Act or the Exchange Act, as applicable, and the
applicable rules and regulations thereunder;
(x) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (except for the financial statements and supporting schedules
included therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Act and the applicable rules and regulations thereunder; and
(xi) Except as set forth in the Registration Statement and the
Prospectus, to such counsel's knowledge, no holders of Stock or other
securities of the Company have registration rights with respect to
securities of the Company, and all holders of securities of the Company
having rights to registration of such shares of Stock or other
securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived
such rights.
In addition, such counsel shall state that during the course of the
preparation of the Registration Statement and the Prospectus, such
counsel participated in conferences with officers and other
representatives of the Company, with representatives of the independent
public accountants of the
14
<PAGE> 15
Company and with you and your representatives. While such counsel has
not undertaken to determine independently, and such counsel does not
assume any responsibility for, the accuracy, completeness, or fairness of
the statements in the Registration Statement or Prospectus (other than
those referred to in the opinion referred to in subsection (vii) of this
Section 7(c)), such counsel shall state on the basis of these conferences
and their activities as special counsel to the Company in connection with
the Registration Statement that no facts have come to their attention
which cause them to believe that (i) the Registration Statement or any
further amendment thereto made by the Company prior to such Time of
Delivery, at the time it became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or that the Prospectus or any further amendment or supplement
thereto made by the Company prior to such Time of Delivery, as of its
date and as of such Time of Delivery, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, (ii) any of the
documents incorporated by reference in the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery, when such documents were filed or became effective, as the case
may be, contained, in the case of a registration statement that became
effective under the Act, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or, in the case
of other documents that were filed under the Exchange Act with the
Commission, an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such documents
were filed, not misleading, (iii) there are any legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries
is the subject that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate reasonably be
expected to have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others, or (iv) there are
any contracts or other documents of a character required to be described
in the Registration Statement or the Prospectus or required to be filed
as an exhibit to the Registration Statement that are not described or
referred to therein or so filed; provided that in making the foregoing
statements (which shall not constitute an opinion), such counsel need not
express any views as to the financial statements and supporting schedules
and other financial data included in or omitted from the Registration
Statement or the Prospectus.
In rendering such opinion, such counsel may state that they express
no opinion as to the laws of any jurisdiction outside the United States.
(d) Arlen W. Gelbard, Executive Vice President and
General Counsel of the Company, shall have furnished to you his written
opinion (a draft of such opinion is attached as Annex II(c) hereto),
dated such Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing as of the date of the
certificate specified in such opinion, under the laws of the State of
Delaware; the Company has the power and authority (corporate and other)
to own its properties and conduct its business as described in the
Prospectus; the Company is a registered savings and loan holding company
under the HOLA;
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<PAGE> 16
(ii) The authorized, issued and outstanding capital stock
of the Company as of December 31, 1998 is set forth in the Prospectus
under the caption "Capitalization", and all of the issued shares of Stock
of the Company are duly and validly authorized and are validly issued,
fully paid and non-assessable; the Shares are duly and validly authorized
and, when issued in accordance with the provisions of this Agreement and
the International Underwriting Agreement, will be validly issued, fully
paid and non-assessable; and the Shares conform to the description of the
Stock set forth in the Prospectus under the caption "Description of
Securities";
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing under
the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is
subject to no material liability or disability by reason of failure to be
so qualified in any such jurisdiction (such counsel being entitled to
rely in respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of officers
of the Company, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions and
certificates);
(iv) TeleBank has been duly formed and is validly existing
as a federally chartered savings bank and holds a valid certificate to do
business as such; each other subsidiary of the Company has been duly
incorporated or formed, as applicable, and is validly existing as a
corporation, limited liability company or business trust, as applicable,
in good standing under the laws of its jurisdiction of organization; and
all of the issued shares of capital stock of TeleBank and each such
subsidiary have been duly and validly authorized and issued, are fully
paid and non-assessable, and (except for directors' qualifying shares)
are owned directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims (such counsel being entitled to
rely in respect of the opinion in this clause upon opinions of local
counsel and in respect of matters of fact upon certificates of officers
of the Company or its subsidiaries, provided that such counsel shall
state that they believe that both you and they are justified in relying
upon such opinions and certificates);
(v) The Company and its subsidiaries have title in fee
simple to all real property owned by them, in each case free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property
and do not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; provided, however, that
counsel shall not be required to give any opinion with respect to any
real property that the Company or any of its subsidiaries has acquired by
foreclosure in the ordinary course of the Company's or such subsidiary's
business; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries (in giving the opinion in
this clause, such counsel may state that no examination of record titles
for the purpose of such opinion has been made, and that they are relying
upon a general review of the titles of the Company and its subsidiaries,
upon opinions of local counsel and abstracts, reports and policies of
title companies rendered or issued at or subsequent to the time of
acquisition of such property by the Company or its subsidiaries, upon
opinions of counsel to the lessors of such property and, in respect of
matters of fact, upon certificates of officers of the Company or its
subsidiaries, provided that such counsel shall state that they believe
that both you and they are justified in relying upon such opinions,
abstracts, reports, policies and certificates);
(vi) To the best of such counsel's knowledge and other
than as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its
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<PAGE> 17
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject that, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company hereunder and under the
International Underwriting Agreement, the compliance by the Company with
all of the provisions of this Agreement and the International
Underwriting Agreement and the consummation of the transactions herein
and therein contemplated will not (A) violate the Delaware General
Corporation Law or the Certificate of Incorporation or Bylaws of the
Company, (B) violate any statute or any order, rule or regulation,
judgment or decree of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties, or (C) conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject;
(viii) Neither the Company nor any of its subsidiaries is in
violation of its Certificate of Incorporation, By-laws, limited liability
company agreement, declaration of trust or other charter document, as
applicable; and neither the Company nor any of its subsidiaries is in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement, or lease or agreement or other instrument to which
it is a party or by which it or any of its properties may be bound, which
default would, individually or in the aggregate, have a material adverse
effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole;
(ix) The documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel need
express no opinion), when they became effective or were filed with the
Commission, as the case may be, complied as to form in all material
respects with the requirements of the Act or the Exchange Act, as
applicable and the applicable rules and regulations of the Commission
thereunder; such counsel shall also include a statement in his letter to
the following effect: no facts have come to his attention which cause him
to believe that any of such documents, when such documents became
effective or were so filed, as the case may be, contained, in the case of
a registration statement that became effective under the Act, an untrue
statement of a material fact, or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or, in the case of other documents that were filed under
the Exchange Act with the Commission, an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such documents were so filed, not misleading;
(x) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Act and the applicable rules and
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<PAGE> 18
regulations thereunder; such counsel shall also include a statement in
his letter to the following effect: although he does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus, no
facts have come to his attention which cause him to believe that, as of
its effective date, the Registration Statement or any further amendment
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that, as of its date and as of such Time of Delivery, the Prospectus or
any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
contained or contains an untrue statement of a material fact or omitted
or omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and he does not know of any amendment to the Registration
Statement required to be filed or of any contracts or other documents of
a character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or
the Prospectus which are not so filed or described therein; and
(xi) Except as set forth in the Registration Statement and
the Prospectus, no holders of Stock or other securities of the Company
have registration rights with respect to securities of the Company, and
all holders of securities of the Company having rights to registration of
such shares of Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights.
In rendering such opinion, such counsel may state that they express
no opinion as to the laws of any jurisdiction outside the United States.
(e) Arlen W. Gelbard, counsel for each of the Selling
Stockholders, shall have furnished to you his written opinion with
respect to each of the Selling Stockholders (a draft of each such opinion
is attached as Annex II(d) hereto), dated such Time of Delivery, in form
and substance satisfactory to you, to the effect that:
(i) A Custody Agreement has been duly executed and
delivered by such Selling Stockholder and constitutes the valid and
binding agreement of such Selling Stockholder in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles;
(ii) This Agreement and the International Underwriting
Agreement have been duly executed and delivered by or on behalf of
such Selling Stockholder; and the sale of the Shares to be sold by
such Selling Stockholder hereunder and thereunder and the
compliance by such Selling Stockholder with all of the provisions
of this Agreement, the International Underwriting Agreement and the
Custody Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a
breach or violation of any terms or provisions of, or constitute a
default under, any statute, indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such
counsel to which such Selling Stockholder is a party or by which
such Selling Stockholder is bound or to which any of the property
or assets of such Selling Stockholder is subject, nor will such
action result in any violation of any order, rule or regulation
known to such counsel
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<PAGE> 19
of any court or governmental agency or body having jurisdiction
over such Selling Stockholder or the property of such Selling
Stockholder;
(iii) No consent, approval, authorization or order of any
court or governmental agency or body is required for the
consummation of the transactions contemplated by this Agreement or
the International Underwriting Agreement in connection with the
Shares to be sold by such Selling Stockholder hereunder or
thereunder, except such as have been obtained under the Act and
such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of such Shares by the
Underwriters or the International Underwriters;
(iv) Immediately prior to such Time of Delivery, such
Selling Stockholder had good and valid title to the Shares to be
sold at such Time of Delivery by such Selling Stockholder under
this Agreement and the International Underwriting Agreement, free
and clear of all liens, encumbrances, equities or claims, and full
right, power and authority to sell, assign, transfer and deliver
the Shares to be sold by such Selling Stockholder hereunder and
thereunder; and
(v) Good and valid title to such Shares, free and clear
of all liens, encumbrances, equities or claims, has been
transferred to each of the several Underwriters or International
Underwriters, as the case may be, who have purchased such Shares in
good faith and without notice of any such lien, encumbrance, equity
or claim or any other adverse claim within the meaning of the
Uniform Commercial Code.
In rendering such opinion, such counsel may state
that he expresses no opinion as to the laws of any jurisdiction
outside the United States and in rendering the opinion in paragraph
(iv), such counsel may rely upon a certificate of such Selling
Stockholder in respect of matters of fact as to ownership of, and
liens, encumbrances, equities or claims on, the Shares sold by such
Selling Stockholder, provided that such counsel shall state that
he believes that both you and he are justified in relying upon such
certificate;
(f) On the date of the Prospectus at a time prior to the
execution of this Agreement, at 9:30 a.m., New York City time, on the
effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at each
Time of Delivery, Arthur Andersen LLP shall have furnished to you a
letter or letters, dated the respective dates of delivery thereof, in
form and substance satisfactory to you, to the effect set forth in Annex
I hereto (the executed copy of the letter delivered prior to the
execution of this Agreement is attached as Annex I(a) hereto and a draft
of the form of letter to be delivered on the effective date of any
post-effective amendment to the Registration Statement and as of each
Time of Delivery is attached as Annex I(b) hereto);
(g) (i) Neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest audited financial
statements included or incorporated by reference in the Prospectus any
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than
as set forth or contemplated in the Prospectus, and (ii) since the
respective dates as of which information is given in the Prospectus there
shall not have been any change in the consolidated loans, capital stock,
short-term debt or long-term debt of the Company or any of its
subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the
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<PAGE> 20
Company and its subsidiaries, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in
Clause (i) or (ii), is in the judgment of the Underwriters so material
and adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(h) On or after the date hereof until each such Time of
Delivery, (i) no downgrading shall have occurred in the rating accorded
the Company's debt securities by any "nationally recognized statistical
rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization
shall have publicly announced that it has under surveillance or review,
with possible negative implications, its rating of any of the Company's
debt securities;
(i) On or after the date hereof until each such Time of
Delivery there shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on
the New York Stock Exchange or on NASDAQ; (ii) a suspension or material
limitation in trading in the Company's securities on NASDAQ; (iii) a
general moratorium on commercial banking activities declared by Federal
or any State authorities; (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, if the effect of any such event specified in
this Clause (iv) in the judgment of the Underwriters makes it
impracticable or inadvisable to proceed with the public offering or the
delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus; or (v) the
occurrence of any material adverse change in the existing, financial,
political or economic conditions in the United States or elsewhere which,
in the judgment of the Underwriters, would materially and adversely
affect the financial markets, the markets for the Shares or the market
for any other equity securities;
(j) The Shares at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(k) The Company has obtained and delivered to the
Underwriters executed copies of an agreement from each executive officer,
director and key employee (as disclosed in the Prospectus under the
caption "Management") of the Company and each stockholder of the Company
that beneficially owns five percent or more of the outstanding Stock,
substantially to the effect set forth in Subsection 1(b)(iv) hereof in
form and substance satisfactory to you;
(l) The Company shall have complied with the provisions
of Section 5(c) hereof with respect to the furnishing of prospectuses on
the New York Business Day next succeeding the date of this Agreement; and
(m) The Company and the Selling Stockholders shall have
furnished or caused to be furnished to you at such Time of Delivery
certificates of officers of the Company and of the Selling Stockholders,
respectively, satisfactory to you, as to the accuracy of the
representations and warranties of the Company and the Selling
Stockholders, respectively, herein at and as of such Time of Delivery, as
to the performance by the Company and the Selling Stockholders of all of
their respective obligations hereunder to be performed at or prior to
such Time of Delivery, and as to such other matters as you may reasonably
request, and the Company shall have furnished or caused to be furnished
certificates as to the matters set forth in subsections (a) and (g) of
this Section.
8. (a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims,
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<PAGE> 21
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the Company and the Selling Stockholders shall not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein; provided, further, that the liability of a Selling Stockholder
pursuant to this subsection 8(a) shall not exceed the product of the number of
Shares sold by such Selling Stockholder and the initial public offering price
of the Shares as set forth in the Prospectus.
(b) Each Underwriter will indemnify and hold harmless the Company and
each Selling Stockholder against any losses, claims, damages or liabilities to
which the Company or such Selling Stockholder may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company
or such Selling Stockholder in connection with investigating or defending any
such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability that it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
21
<PAGE> 22
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and the Selling Stockholders on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the Selling Stockholders on the one
hand and the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (before deducting expenses) received by
the Company and the Selling Stockholders bears to the total underwriting
discounts and commissions received by the Underwriters with respect to the
Shares purchased under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, each of the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this subsection (d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company and the Selling Stockholders under
this Section 8 shall be in addition to any liability that the Company and the
respective Selling Stockholders may otherwise have
22
<PAGE> 23
and shall extend, upon the same terms and conditions, to each person, if any,
who controls any Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this Section 8 shall be in addition to any liability
that the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company and to
each person, if any, who controls the Company or any Selling Stockholder within
the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to
purchase the Shares that it has agreed to purchase hereunder at a Time of
Delivery, you may in your discretion arrange for you or another party or other
parties to purchase such Shares on the terms contained herein. If within
thirty-six hours after such default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company and the Selling Stockholders
shall be entitled to a further period of thirty-six hours within which to
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company and the Selling Stockholders that you have so
arranged for the purchase of such Shares, or the Company and the Selling
Stockholders notify you that they have so arranged for the purchase of such
Shares, you or the Company and the Selling Stockholders shall have the right to
postpone a Time of Delivery for a period of not more than seven days, in order
to effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement
or the Prospectus which in your opinion may thereby be made necessary. The
term "Underwriter" as used in this Agreement shall include any person
substituted under this Section with like effect as if such person had
originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you, the
Company and the Selling Stockholders as provided in subsection (a) above, the
aggregate number of such Shares which remains unpurchased does not exceed
one-eleventh of the aggregate number of all the Shares to be purchased at such
Time of Delivery, then the Company and the Selling Stockholders shall have the
right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares that such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you, the
Company and the Selling Stockholders as provided in subsection (a) above, the
aggregate number of such Shares that remains unpurchased exceeds one-eleventh
of the aggregate number of all of the Shares to be purchased at such Time of
Delivery, or if the Company and the Selling Stockholders shall not exercise the
right described in subsection (b) above to require non-defaulting Underwriters
to purchase Shares of a defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Second Time of Delivery, the obligations of
the Underwriters to purchase and of the Company to sell the Optional Shares)
shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses
to be borne by the Company and the Selling Stockholders and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter
from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made
23
<PAGE> 24
by or on behalf of them, respectively, pursuant to this Agreement, shall remain
in full force and effect, regardless of any investigation (or any statement as
to the results thereof) made by or on behalf of any Underwriter or any
controlling person of any Underwriter, or the Company, or any of the Selling
Stockholders, or any officer or director or controlling person of the Company,
or any controlling person of any Selling Stockholder, and shall survive
delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof;
but, if for any other reason any Shares are not delivered by or on behalf of
the Company and the Selling Stockholders as provided herein, the Company and
each of the Selling Stockholders pro rata (based on the number of Shares to be
sold by the Company and such Selling Stockholder hereunder) will reimburse the
Underwriters through you for all out-of-pocket expenses approved in writing by
you, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company and the Selling Stockholders shall
then be under no further liability to any Underwriter in respect of the Shares
not so delivered except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you; and in all
dealings with any Selling Stockholder hereunder, you and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement on
behalf of such Selling Stockholder made or given by such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex
or facsimile transmission to the Underwriters in care of Goldman, Sachs & Co.,
32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at 1111
North Highland Street, Arlington, Virginia 22201, Attention: Arlen W. Gelbard,
Telephone: (703) 247-3700; and if to the Company shall be delivered or sent by
mail, telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Secretary; provided, however, that
any notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered
or sent by mail, telex or facsimile transmission to such Underwriter at its
address set forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which
24
<PAGE> 25
address will be supplied to the Company or the Selling Stockholders by you on
request. Any such statements, requests, notices or agreements shall take
effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Underwriters, the Company and the Selling Stockholders and, to
the extent provided in Sections 8 and 10 hereof, the officers and directors of
the Company and each person who controls the Company, any Selling Stockholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein,
the term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
25
<PAGE> 26
If the foregoing is in accordance with your understanding, please sign and
return to us ten counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement among each of the Underwriters, the
Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters (U.S.
Version), the form of which shall be submitted to the Company and the Selling
Stockholders for examination, upon request, but without warranty on your part
as to the authority of the signers thereof.
Very truly yours,
TeleBanc Financial Corporation
By:
------------------------------
Name:
Title:
David A. Smilow
----------------------------------
Name: David A. Smilow
Mitchell H. Caplan
----------------------------------
Name: Mitchell H. Caplan
Accepted as of the date hereof:
Goldman, Sachs & Co.
BancBoston Robertson Stephens Inc.
Legg Mason Wood Walker, Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By:
----------------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
26
<PAGE> 27
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- -------------------- ----------------------
<S> <C> <C>
Goldman, Sachs & Co. . . . . . . . . . . . . . . . . .
BancBoston Robertson Stephens Inc. . . . . . . . . . .
Legg Mason Wood Walker, Incorporated . . . . . . . . .
Merrill Lynch, Pierce, Fenner & Smith Incorporated . .
-------------------- ----------------------
Total . . . . . . . . . . . . . . . . . . . . .
==================== ======================
</TABLE>
27
<PAGE> 28
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF SOLD IF
FIRM SHARES MAXIMUM OPTION
TO BE SOLD EXERCISED
-------------------- ----------------------
<S> <C> <C>
The Company. . . . . . . . . . . . . . . . . . . . . . . .
The Selling Stockholders: . . . . . . . . . . . . . . . . .
David A. Smilow . . . . . . . . . . . . . . . . . . .
Mitchell H. Caplan . . . . . . . . . . . . . . . . .
-------------------- ----------------------
Total . . . . . . . . . . . . . . . . . . . . . . .
==================== ======================
</TABLE>
28
<PAGE> 29
ANNEX I
Pursuant to Section 7(f) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent public accountants with respect to the
Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and notes
thereto examined by them and included or incorporated by reference in
the Registration Statement or the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Act or the Exchange Act, as applicable, and the related published
rules and regulations thereunder; and, if applicable, they have made a
review in accordance with standards established by the American
Institute of Certified Public Accountants of the consolidated interim
financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been separately furnished to the
Underwriters;
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants
of the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included in the Company's quarterly
report on Form 10-Q incorporated by reference into the Prospectus as
indicated in their reports thereon, copies of which have been
separately furnished to the Underwriters; and on the basis of
specified procedures, including inquiries of officials of the Company
who have responsibility for financial and accounting matters regarding
whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related published rules and
regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements
do not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the
related published rules and regulations;
(iv) The unaudited selected financial information with respect
to the consolidated results of operations and financial position of
the Company for the five most recent fiscal years included in the
Prospectus and included or incorporated by reference in Item 6 of the
Company's Annual Report on Form 10-K for the most recent fiscal year
agrees with the corresponding amounts (after restatement where
applicable) in the audited consolidated financial statements for such
five fiscal years that were included or incorporated by reference in
the Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K
and on the basis of limited procedures specified
<PAGE> 30
in such letter nothing came to their attention as a result of the
foregoing procedures that caused them to believe that this information
does not conform in all material respects with the disclosure
requirements of Items 301 and 302, respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and
other information referred to below, a reading of the latest
available interim financial statements of the Company and its
subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for
financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated statements
of income, consolidated balance sheets and consolidated statements
of cash flows included in the Prospectus and/or included or
incorporated by reference in the Company's Quarterly Reports on
Form 10-Q incorporated by reference in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Exchange Act as it applies to Form
10-Q and the related published rules and regulations, or (ii) any
material modifications should be made to the unaudited condensed
consolidated statements of income, consolidated balance sheets and
consolidated statements of cash flows included in the Prospectus
or included in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus, for them to be in
conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
or incorporated by reference in the Company's Annual Report on
Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements that were not
included in the Prospectus but from which were derived the
unaudited condensed financial statements referred to in Clause (A)
and any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in Clause (B) were not
determined on a basis substantially consistent with the basis for
the audited financial statements included or incorporated by
reference in the Company's Annual Report on Form 10-K for the most
recent fiscal year;
(D) any unaudited pro forma consolidated condensed
financial statements included or incorporated by reference in the
Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the
published rules and regulations thereunder or the pro forma
adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior
to the date of such letter,
2
<PAGE> 31
there have been any changes in the consolidated capital stock
(other than issuances of capital stock upon exercise of options
and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each
case that were outstanding on the date of the latest balance sheet
included or incorporated by reference in the Prospectus) or any
increase in the consolidated short-term debt or long-term debt of
the Company and its subsidiaries, or any decreases in consolidated
loans, consolidated net current assets or stockholders' equity or
other items specified by the Underwriters, or any increases in any
items specified by the Underwriters, in each case as compared with
amounts shown in the latest balance sheet included or
incorporated by reference in the Prospectus, except in each case
for changes, increases or decreases that the Prospectus discloses
have occurred or may occur or that are described in such letter;
and
(F) for the period from the date of the latest financial
statements included or incorporated by reference in the Prospectus
to the specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or the
total or per share amounts of consolidated net income or other
items specified by the Underwriters, or any increases in any items
specified by the Underwriters, in each case as compared with the
comparable period of the preceding year and with any other period
of corresponding length specified by the Underwriters, except in
each case for increases or decreases that the Prospectus discloses
have occurred or may occur or that are described in such letter;
and
(vii) In addition to the examination referred to in their
report(s) included or incorporated by reference in the Prospectus and
the limited procedures, inspection of minute books, inquiries and
other procedures referred to in paragraphs (iii) and (vi) above, they
have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards,
with respect to certain amounts, percentages and financial information
specified by the Underwriters that are derived from the general
accounting records of the Company and its subsidiaries, that appear in
the Prospectus (excluding documents incorporated by reference) or in
Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Underwriters or in documents incorporated
by reference in the Prospectus specified by the Underwriters, and have
compared certain of such amounts, percentages and financial
information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
3
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in this registration statement and to the incorporation by reference
in this registration statement of our report dated February 10, 1999 included in
TeleBanc Financial Corporation's Form 10-K for the year ended December 31, 1998
and to all references to our Firm included in this registration statement.
/s/ Arthur Andersen L.L.P.
Vienna, Virginia
March 19, 1999
