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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 33-76930
TELEBANC FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3759196
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
--------------------------------------------------
(Address of principal executive office) (Zip code)
(703) 247-3700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months ( or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding for the issuer's classes of
common stock, as of April 28, 1998.
$.01 par value of common stock 2,242,494
(class) (outstanding)
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TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Consolidated Statements of Financial Condition - March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Operations -- Three months ended March 31,
1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Equity - Three
months ended March 31, 1998 and 1997 6
Consolidated Statements of Cash Flows - Three months ended March 31,
1998 and 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Part II -- Other Information
- ----------------------------
Item 4, Submission of Matters to Security Holders 15
Item 5, Other Information 16
Item 6, Exhibits and Reports on Form 8-K 16
Signatures 17
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in Thousands, Except Per Share Data)
March 31, December 31,
--------- ------------
1998 1997
---- ----
Assets: (unaudited)
Cash and cash equivalents $ 31,559 $ 92,156
Trading securities 42,129 21,110
Investment securities available for sale 123,963 91,237
Mortgage-backed securities available for sale 260,152 319,203
Loans receivable, net 418,676 391,618
Loans receivable held for sale 138,381 149,086
Other assets 33,293 35,942
------ ------
Total assets $ 1,048,153 $ 1,100,352
========= =========
Liabilities and Stockholders' Equity:
Liabilities:
Retail deposits $ 560,554 $ 522,221
Brokered callable certificates of deposit 42,286 --
Advances from the Federal Home Loan Bank of Atlanta 190,000 200,000
Securities sold under agreements to repurchase 153,970 279,909
Subordinated debt, net 29,672 29,614
Other liabilities 15,605 13,212
------ ------
Total liabilities 992,087 1,044,956
------- ---------
Corporation-Obligated Mandatorily Redeemable Capital Securities
of Subsidiary Trust Holding Soley Junior Subordinated
Debentures of the Corporation 9,526 9,572
Stockholders' Equity:
4% Cumulative preferred stock, $0.01 par value,
500,000 shares authorized
Series A, 18,850 issued and outstanding 9,634 9,634
Series B, 4,050 issued and outstanding 2,070 2,070
Series C, 7,000 issued and outstanding 3,577 3,577
Common stock, $0.01 par value, 8,500,000 shares authorized;
2,242,494 and 2,229,161 issued and outstanding at March
31, 1998 and December 31, 1997 22 22
Additional paid-in capital 16,387 16,207
Retained earnings 11,850 11,576
Accumulated other comprehensive income, net of tax 3,000 2,738
----- -----
Total stockholders' equity 46,540 45,824
------ ------
Total liabilities and stockholders' equity $ 1,048,153 $ 1,100,352
========= =========
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
Three Months Ended
March 31,
---------
1998 1997
---- ----
Interest income:
Loans $ 10,365 $ 7,557
Mortgage-backed and related securities 5,074 3,805
Investment securities 1,786 1,444
Trading securities 636 --
Other 210 31
--- --
Total interest income 18,071 12,837
------ ------
Interest expense:
Retail deposits 8,055 5,705
Brokered callable certificates of deposit 374 --
Advances from the Federal Home Loan Bank of Atlanta 2,718 2,073
Repurchase agreements 2,451 1,457
Subordinated debt 879 643
--- ---
Total interest expense 14,477 9,878
------ -----
Net interest income 3,594 2,959
Provision for loan losses 250 243
--- ---
Net interest income after provision for loan
losses 3,344 2,716
----- -----
Non-interest income:
Gain on sale of securities 891 238
Gain on sale of loans 121 127
Gain on trading securities 62 23
Gain (loss) on equity investment 526 (109)
Fees, service charges, and other 347 339
--- ---
Total non-interest income 1,947 618
----- ---
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits 1,950 1,176
Other 1,939 721
----- ---
Total selling, general and administrative
expenses 3,889 1,897
----- -----
(continued)
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(Dollars in Thousands, Except Per Share Data)
(unaudited)
Three Months Ended
March 31,
---------
1998 1997
---- ----
Other non-interest expenses:
Net operating costs of real estate acquired
through foreclosure 82 74
Amortization of goodwill and other intangibles 233 134
--- ---
Total other non-interest expenses 315 208
--- ---
Total non-interest expenses 4,204 2,105
----- -----
Income before income tax expense 1,087 1,229
Income tax expense 475 355
Minority interest in subsidiary 176 --
--- --
Net income $ 436 $ 874
=== ===
Preferred stock dividends 162 60
--- --
Net income available to common stockholders $ 274 $ 814
=== ===
Other comprehensive income, before tax:
Unrealized holding gain (loss) on securities
arising during the period 814 (1,017)
Less: reclassification adjustment for gains
included in net income (891) (238)
----- -----
Other comprehensive income, before tax (77) (1,255)
Income tax expense related to reclassification
adjustment for gains on sale of securities 339 90
--- --
Other comprehensive income, net of tax 262 (1,165)
--- -------
Comprehensive income $ 536 $ (351)
=== =====
Earnings per share:
Basic $ 0.12 $ 0.38
Diluted $ 0.10 $ 0.30
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in Thousands, Except Per Share Data)
(unaudited)
Accumulated
Other
Additional Comprehensive
Preferred Common Paid-in Retained Income (Loss),
Stock Stock Capital Earnings Net of Tax Total
----- ----- ------- -------- ---------- -----
Balances at December 31, 1996 $ -- $ 20 $ 14,637 $ 7,905 $ 2,096 $ 24,658
Net income for the three months ended
March 31, 1997 -- -- -- 874 -- 874
Stock issued -- 2 1,272 -- -- 1,274
Issuance of 4% Cumulative Preferred
Stock, Series A 9,634 -- -- -- -- 9,634
Issuance of 4% Cumulative Preferred
Stock, Series B 2,070 -- -- -- -- 2,070
Issuance of 4% Cumulative Preferred
Stock, Series C 3,577 -- -- -- -- 3,577
Dividends on 4% Cumulative Preferred
Stock -- -- -- (60) -- (60)
Unrealized loss on available for sale
securities, net of tax effect -- -- -- -- (1,165) (1,165)
-- -- -- -- ------- -------
Balances at March 31, 1997 $ 15,281 $ 22 $ 15,909 $ 8,719 $ 931 $ 40,862
====== == ====== ===== === ======
Balances at December 31, 1997 $ 15,281 $ 22 $ 16,207 $ 11,576 $ 2,738 $ 45,824
Net income for the three months ended
March 31, 1998 -- -- -- 436 -- 436
Stock issued -- -- 180 -- -- 180
Dividends on 4% Cumulative Preferred
Stock -- -- -- (162) -- (162)
Unrealized gain on available for sale
securities, net of tax effect -- -- -- -- 262 262
-- -- -- -- --- ---
Balances at March 31, 1998 $ 15,281 $ 22 $ 16,387 $ 11,850 $ 3,000 $ 46,540
====== == ====== ====== ===== ======
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three Months Ended
------------------
March 31,
---------
1998 1997
---- ----
Net cash (used by) provided by operating activities $ (4,776) $ 4,650
------- -----
Cash flows from investing activities:
Net increase in loans (26,002) (84,134)
Purchases of available for sale securities (143,899) (124,251)
Proceeds from sale of available for sale securities 151,543 10,640
Proceeds from maturities of and principal payments on
available for sale securities 18,419 70,321
Proceeds from sale of foreclosed real estate 494 259
Equity investment in subsidiaries (724) (700)
Net purchases of premises and equipment (226) (277)
----- -----
Net cash used in investing activities (395) (128,142)
----- ---------
Cash flows from financing activities:
Net increase in deposits 80,619 4,517
Net increase in subordinated debt -- 12,858
Increase in advances from Federal Home Loan Bank of
Atlanta 87,500 107,000
Payment on advances from Federal Home Loan Bank of Atlanta (97,500) (86,800)
Net increase in borrowed funds 52 --
Net (decrease) increase in securities sold under
agreements to repurchase (125,939) 74,685
Increase in common stock, preferred stock, and additional
paid in capital 180 16,555
Interest paid to minority interest in subsidiary (176) --
Dividends paid on common and preferred stock (162) (60)
----- ----
Net cash (used in) provided by financing activities (55,426) 128,755
-------- -------
Net (decrease) increase in cash and cash equivalents (60,597) 5,263
Cash and cash equivalents at beginning of period 92,156 3,259
------ -----
Cash and cash equivalents at end of period $ 31,559 $ 8,522
====== =====
Supplemental information:
Interest paid on deposits and borrowed funds $ 13,692 $ 8,647
Income taxes paid 242 260
Gross unrealized gain (loss) on securities available for sale 465 (1,638)
Tax effect of gain (loss) on available for sale securities $ 203 $ (473)
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1. BASIS OF PRESENTATION
The Company operates its business principally through two wholly owned
subsidiaries, TeleBank, a federally chartered savings bank ("TeleBank"),
and TeleBanc Capital Markets, Inc. ("TCM"). TeleBank offers savings and
investment products insured up to applicable limits by the Federal Deposit
Insurance Corporation (the "FDIC"), and TCM is a registered broker-dealer and
investment advisor specializing in one-to-four family mortgage loans and
mortgage-backed securities. TCM manages the portfolios of TeleBanc Financial and
TeleBank. The Company also owns all of the beneficial interests represented by
common securities in a Delaware trust, TeleBanc Capital Trust I ("TCT I"), which
was formed solely for the purpose of issuing capital securities. In 1997, TCT I
issued $10.0 million 11.0% Capital Securities, Series A and invested the net
proceeds in the Company's 11.0% Junior Subordinated Deferrable Interest
Debentures, Series A (the "TCT I Junior Subordinated Debentures"). TeleBank,
through its wholly owned subsidiary TeleBanc Servicing Corporation ("TSC"), owns
50% of AGT PRA, LLC ("AGT PRA"). The primary business of AGT PRA is its
investment in Portfolio Recovery Associates, LLC ("PRA"). PRA acquires and
collects delinquent consumer debt obligations for its own portfolio. The
accompanying consolidated financial statements include the accounts of TeleBank,
TCM, TCT, and TSC, all wholly owned subsidiaries of TeleBank. All significant
intercompany transactions and balances are eliminated in consolidation. The
investment, $2.9 million, in AGT PRA is accounted for under the equity method.
The financial statements as of March 31, 1998 and for the three months
ended March 31, 1998 and 1997 are unaudited, but in the opinion of management,
contain all adjustments, consisting solely of normal recurring entries,
necessary to present fairly the consolidated financial condition as of March 31,
1998 and the results of consolidated operations for the three months ended March
31, 1998 and 1997. The results of consolidated operations for the three months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year. The Notes to Consolidated Financial Statements for
the year ended December 31, 1997, included in the Company's Annual Report to
Stockholders for 1997, should be read in conjunction with these statements.
Certain prior year's amounts have been reclassified to conform to the
current year's presentation.
Effective January 1, 1998, PRA changed its method of accounting from the
cost recovery method to the installment method, resulting in income of $547,000.
This change is not expected to have a material effect on the full year's results
of operations.
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TELEBANC FINANCIAL CORPORATION
NOTE 2. EARNINGS PER SHARE
Basic earnings per common share, as required by Statement of
Financial Accounting Standards No. 128, is computed by dividing adjusted
net income by the total of the weighted average number of common shares
outstanding during the respective periods. Diluted earnings per common
share for the quarters ended March 31, 1998 and 1997 were determined on
the assumptions that the dilutive options and warrants were exercised upon
issuance. The options and warrants are deemed to be dilutive if (a) the
average market price of the related common stock for a period exceeds the
exercise price or (b) the security to be tendered is selling at a price
below that at which it may be tendered under the option or warrant
agreement and the resulting discount is sufficient to establish an
effective exercise price below the market price of the common stock
obtainable upon exercise. The Company's quarter to date weighted average
number of common shares outstanding was 2,233,805 at March 31, 1998 and
2,106,088 at March 31, 1997. For diluted earnings per share computation,
weighted average shares outstanding also include potentially dilutive
securities.
EPS Calculation
Income Shares Per Share Amount
------ ------ ----------------
---------------------------------------------------------
For the Quarter Ended March 31, 1998
---------------------------------------------------------
Net income $ 436,408
Less: preferred stock dividends (161,965)
-------------------
Basic earnings per share
Income available to common
shareholders $ 274,443 2,233,805 $ 0.12
===================
Options issued to management -- 333,180
Warrants -- 311,506
Convertible preferred stock -- --
-------------------------------------
Diluted earnings per share $ 274,443 2,878,491 $ 0.10(a)
=========================================================
For the Quarter Ended March 31, 1997
---------------------------------------------------------
Basic earnings per share
Net income $ 813,755 2,106,088 $ 0.38
===================
Options issued to management -- 190,051
Warrants -- 181,008
Convertible preferred stock 60,287 417,888
-------------------------------------
Diluted earnings per share $ 874,042 2,895,035 $ 0.30
=========================================================
(a) The impact of the convertible preferred stock is antidilutive for the three
months ended March 31, 1998. The Company expects that earnings in
future periods will be such that the impact of the convertible preferred stock
on earnings per share will be dilutive.
NOTE 3. RECENT EVENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning
after December 15, 1997. This statement requires that certain financial
activity typically disclosed in stockholders' equity be reported in the
financial statements as an
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TELEBANC FINANCIAL CORPORATION
adjustment to net income in determining comprehensive income. The Company
adopted SFAS 130 effective January 1, 1998. As a result, comprehensive income
for the periods ending March 31, 1998 and 1997 are reported in the Consolidated
Statement of Operations.
Consistent with its operating strategy, the Company has signed an
agreement to acquire DFC, a thrift holding company and its federally chartered
savings bank subsidiary, Premium Bank, in a transaction expected to be
consummated in the third quarter of 1998, subject to regulatory approval.
TeleBanc Financial is acquiring DFC because DFC has employed a direct marketing
strategy similar to that of the Company, and thus presents the opportunity for
the Company to acquire the deposits and customers of a financial institution
without acquiring significant infrastructure. DFC currently operates from a
single branch in New Jersey located outside of Philadelphia, Pennsylvania, and
its customer and deposit base is concentrated in the Mid-Atlantic region of the
United States. The Company does intend to retain a significantly scaled down
portion of DFC's employees and intends to close DFC's single branch location.
The Company may open a regional business development office in the location of
the former DFC branch. DFC also originates residential mortgage loans, although
the Company intends to discontinue mortgage loan origination upon its
acquisition of DFC. DFC also offers credit cards to its customers through a
relationship with First Data Resources and Card Management Services. In 1998,
in reliance upon DFC's existing credit card relationships, the Company also
intends to offer its customers co-branded credit cards.
At March 31, 1998, DFC reported total assets of $320.3 million, loans
receivable, net of $181.2 million, total deposits of $288.7 million and total
stockholders' equity of $12.3 million. TeleBanc will pay approximately $21.4
million in the transaction, and will assume approximately $6 million in
liabilities which the Company intends to repay at the time the transaction is
consummated.
In April 1998, the shareholders of TeleBanc and MET Holdings ("MET") voted
to approve and adopt the Amended and Restated Acquisition Agreement, dated as of
March 17, 1998. Subsequently, TeleBanc completed the acquisition of MET whereby
MET sold substantially all of its assets, including 1,433,081 shares of TeleBanc
common stock owned by MET, and assigned substantially all of its liabilities to
TeleBanc in exchange for 1,438,081 shares of TeleBanc common stock.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
Information contained in this Prospectus contains forward-looking statements
which are subject to risks and uncertainties. When used anywhere in this
Prospectus, the words "anticipate," "believe," "could," "estimate," "expect,"
"may," "will," "should" or the negative thereof and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results could differ
materially from those discussed in this Prospectus. Factors that could
contribute to such differences include, but are not limited to, those discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this report.
This discussion and analysis includes descriptions of material changes
which have affected the Company's consolidated financial condition and
consolidated results of operations during the periods included in the Company's
financial statements.
FINANCIAL CONDITION (MARCH 31, 1998 COMPARED TO DECEMBER 31, 1997)
With the anticipated consummation of the Direct Financial Corporation
acquisition and a corresponding increase in assets of approximately $320
million, management maintained assets at
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TELEBANC FINANCIAL CORPORATION
relatively stable levels in the first quarter of 1998. As of March 31, 1998,
assets totaled $1.0 billion, a $52.2 million decline, as compared to $1.1
billion as of December 31, 1997. While the Company's corresponding liability
levels also remained stable, deposits increased $38.3 million, or 7.3%, to
$560.5 million at March 31, 1998 from $522.2 million at December 31, 1997 and
retail customer accounts grew 4.6% from the prior quarter to approximately
22,000 at March 31, 1998. Cash and cash equivalents declined by $60.6 million to
$31.6 million at March 31, 1998, from $92.2 million at December 31, 1997, a
decrease of 65.7%. Trading securities, investment securities available for sale
and mortgage-backed securities available for sale decreased by $5.4 million to
$426.2 million at March 31, 1998 from $431.6 million at December 31, 1997. Loans
receivable, net increased $27.1 million to $418.7 million at March 31, 1998 from
$391.6 million at December 31, 1997, an increase of 6.9%. Loans receivable held
for sale decreased $10.7 million to $138.4 million at March 31, 1998 from $149.1
million at December 31, 1997. The Company continued to experience growth in
overall retail deposit balances. Savings and certificates of deposit increased
$38.4 million to $560.6 million at March 31, 1998 from $522.2 million at
December 31, 1997, an increase of 7.3%. In the first quarter of 1998, the
Company also sold brokered callable certificates of deposit, which totaled $42.3
million at March 31, 1998. FHLB advances and other borrowings declined by $133.5
million to $389.2 million at March 31, 1998 from $522.7 at December 31, 1997.
Stockholders' equity increased $700,000 from $45.8 million at
December 31, 1997 to $46.5 million at March 31, 1998. The increase
reflects the exercise of $180,000 in options, net income of $436,000 and
an unrealized gain on securities of $262,000 offset by $162,000 in
preferred dividends.
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TELEBANC FINANCIAL CORPORATION
The consolidated average balance sheets, along with income and expense and
related interest yields and rates for the quarters ended March 31, 1998 and 1997
are shown below. The table also presents information for the periods indicated
with respect to the difference between the weighted average yield earned on
interest-earning assets and weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which saving institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net interest margin," which is its net
interest income divided by the average balance of interest-earning assets. When
interest-earning assets approximate or exceed interest-bearing liabilities, any
positive interest rate spread will generate interest income.
Quarter ended March 31, 1998 Quarter ended March 31, 1997
-------------------------------------------------------------------------------------
Interest Average Interest Average
(Dollars in thousands) Average Income/ Annualized Average Income/ Annualized
(unaudited) Balance Expense Yield/Cost Balance Expense Yield/Cost
------- ------- ---------- ------- ------- ----------
Interest-earning assets:
Loans receivable, net $ 545,827 $ 10,358 7.59% $ 383,990 $ 7,565 7.88%
Investment securities 5,459 78 5.70 4,817 88 7.30
Mortgage-backed and related
securities available for sale 271,001 5,074 7.49 193,572 3,805 7.86
Investment securities
available for sale (a) 109,270 1,736 6.35 79,251 1,229 6.20
Federal funds sold 951 14 5.82 1,557 20 5.14
Investment in FHLB 9,400 168 7.25 7,840 140 7.14
Trading account 29,672 549 7.41 -- -- --
----------- ---------- ----------- ------------- ---------- -----------
Total interest-earning assets $ 971,580 $ 17,977 7.40% $ 671,027 $ 12,847 7.66%
Non-interest-earning assets $ 27,382 $ 33,414
----------- ------------
Total assets $ 998,962 $ 704,441
=========== ============
Interest-bearing liabilities:
Retail deposits $ 540,093 $ 8,062 6.02% $ 394,842 $ 5,798 5.87%
Brokered callable CDs 22,720 374 6.67 -- -- --
FHLB advances 177,055 2,718 6.14 151,919 2,263 5.96
Other borrowings 163,059 2,385 5.85 89,573 1,266 5.65
Subordinated debt, net 29,944 880 11.75 21,164 643 12.15
----------- ---------- ----------- ------------- ----------- -----------
Total interest-bearing
liabilities $ 932,871 $ 14,419 6.23 $ 657,498 $ 9,970 6.11%
Non-interest-bearing
liabilities $ 23,591 $ 15,462
----------- -------------
Total liabilities 956,462 $ 672,960
Stockholders' equity $ 42,500 $ 31,481
----------- -------------
Total liabilities and
stockholders' equity $ 998,962 $ 704,441
=========== =============
Excess of interest-earning
assets over interest-bearing
liabilities/net interest
income/interest rate spread $ 38,709 $ 3,558 1.17% $ 13,529 $ 2,877 1.59%
=========== ========== =========== ============= =========== ===========
Net interest margin 1.47% 1.71%
=========== ===========
Ratio of interest-earning
assets to interest-bearing
liabilities 104.15% 102.06%
=========== ===========
(a) Interest income and average yields on municipal bonds are presented on a tax
equivalent basis.
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TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Net Income. Net income for the three months ended March 31, 1998 decreased
$438,000 to $436,000 from $874,000 for the quarter ended March 31, 1997, a
decrease of 50.1%. Net income for the three months ended March 31, 1998
consisted primarily of $3.6 million of net interest income and $1.9 million in
non-interest income reduced by $250,000 in provision for loan losses, $4.2
million in non-interest expenses and $475,000 in income tax expense. Net income
for the three months ended March 31, 1997 consisted primarily of $3.0 million in
net interest income and $618,000 in non-interest income reduced by $243,000 in
provision for loan losses, $2.1 million in non-interest expenses and $355,000 in
income tax expense. Net income available to common shareholders was $274,000 net
of stock dividends of $162,000 for the quarter ended March 31, 1998. The
Company's return on average assets and return on average equity for the quarter
ended March 31, 1998 were 0.11% and 2.58%, respectively.
Net Interest Income. Net interest income was $3.6 million and $3.0 million
for the three months ended March 31, 1998 and 1997, respectively, reflecting an
annualized interest rate spread of 1.17% and 1.59% for the three months ended
March 31, 1998 and 1997, respectively. Average interest-earning assets were
$971.6 million and $671.0 million for the quarters ending March 31, 1998 and
1997, respectively. Average interest-bearing liabilities were $932.9 million and
$657.5 million for the quarters ending March 31, 1998 and 1997, respectively. In
the quarter ending March 31, 1998, total interest-earning assets, consisting
primarily of loans receivable, net and mortgage-backed and related securities,
yielded 7.40% as compared to 7.66% for the same period in 1997. The decline in
yield is due to increased prepayments of loans and mortgage-backed securities
with premium balances, increased purchases of mortgage loans with lower credit
risk and corresponding lower yield, and decreased spreads as a result of
prevailing market conditions. Total interest-bearing liabilities cost 6.23% in
the first quarter of 1998 as compared to 6.11% in the same period in 1997. The
increase in the cost of interest-bearing liabilities reflects increases in the
average interest rates paid on brokered callable certificates of deposit, other
borrowings, and subordinated debt.
Provision for Loan Losses. Total provision for loan losses increased
$7,000 or 2.9% from $243,000 for the three months ending March 31, 1997 to
$250,000 for the three months ending March 31, 1998. Management provides prudent
reserves for estimated loan losses. In the first quarter of 1998, the Company
provided $170,000 in general reserves for first quarter loan acquisitions and
charged off approximately $80,000 of mortgage loans. During the quarter ended
March 31, 1997, the Company provided an additional $200,000 in general reserves
for loan acquisitions and charged off approximately $43,000 of mortgage loans.
The total loan loss allowance at March 31, 1998 and December 31, 1997 was $3.8
million and $ 3.6 million, respectively, which was 0.68% and 0.67%,
respectively, of total loans outstanding.
Non-Interest Income. The Company reported an increase of $1.3 million in
non-interest income from $618,000 for the three months ended March 31, 1997, to
$1.9 million for the three months ended March 31, 1998, largely as a result of
increased income from the Company's loans held for sale portfolio, loan fees,
and sales of liquid assets. For the three months ended March 31,
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TELEBANC FINANCIAL CORPORATION
1998, the Company reported gains of $891,000 from the sale of mortgage-backed
and investment securities, $121,000 on prepayments of loans held for sale,
$526,000 from equity investments, and $347,000 in loan servicing charges and
other fees. Non-interest income for the first quarter of 1997 consisted of gains
of $238,000 from the sale of securities, $127,000 on loan prepayments, and
$253,000 in fees and service charges.
Non-Interest Expenses. Total non-interest expenses increased by
approximately $2.1 million from $2.1 million for the three months ended March
31, 1997 to $4.2 million for the three months ended March 31, 1998. The increase
is primarily attributable to marketing and operating expenses directly
associated with TeleBank brand building and customer acquisition campaigns. The
annualized general and administrative expenses net of marketing costs as a
percentage of assets were 0.97% and 1.48% for the three months ended March 31,
1997 and 1998, respectively.
Income Tax Expense. The effective tax rate for the quarter ended March 31,
1998 was 43.7% compared to 28.9% for the quarter ended March 31, 1997. The
income tax expense for the quarter ended March 31, 1998 was $475,000 compared to
$355,000 for the quarter ended March 31, 1997.
LIQUIDITY
Liquidity represents the Company's ability to raise funds to support asset
growth, fund operations and meet obligations, including deposit withdrawals,
maturing liabilities, and other payment obligations, to maintain reserve
requirements and to otherwise meet its ongoing obligations. The Company has
historically met its liquidity needs primarily through financing activities,
consisting principally of increases in core deposit accounts, maturing
short-term investments, loans and repayments of investment securities, and to a
lesser extent, sales of loans or securities.
The Company continued to experience growth in overall retail deposit
balances. Savings and certificates of deposit increased $38.4 million to $560.6
million at March 31, 1998 from $522.2 million at December 31, 1997, an increase
of 7.3%. In the first quarter of 1998, the Company also sold brokered callable
certificates of deposit, which totaled $42.3 million at March 31, 1998. FHLB
advances and other borrowings declined by $133.5 million to $389.2 million at
March 31, 1998 from $522.7 at December 31, 1997.
The Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement, which may vary at the
discretion of the OTS depending upon economic conditions and deposit flows, is
based upon a percentage of deposits and short-term borrowings. The minimum
required ratio is 5.0%. At March 31, 1998, the Bank's liquidity ratio was 7.54%.
As of March 31, 1998, the Company had commitments to purchase $21.4
million in loans. Also, certificates of deposit that are scheduled to mature in
less than one year as of March 31, 1998 totaled $157.2 million. In the normal
course of business, the Company makes various commitments to extend credit and
incurs contingent liabilities that are not reflected in the balance sheets.
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TELEBANC FINANCIAL CORPORATION
CAPITAL RESOURCES
At March 31, 1998, TeleBank was in compliance with all of its regulatory
capital requirements and its capital ratios exceeded the ratios for
"well-capitalized" institutions under OTS regulations.
The following table sets forth TeleBank's regulatory capital levels at
March 31, 1998 in relation to the regulatory requirements in effect at that
date. The information below is based upon the Company's understanding of the
regulations and interpretations currently in effect and may be subject to
change.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
Total Capital (to risk
weighted assets) $57,859 11.6% >$39,792 >8.0% >$46,739 >10.0%
Core Capital (to adjusted
tangible assets) $54,533 5.5% >$39,783 >4.0% >$49,728 >5.0%
Tangible Capital (to
tangible assets) $54,526 5.5% >$14,918 >1.5% N/A N/A
Tier I Capital (to
risk weighted assets) $54,533 11.0% N/A N/A >$29,844 >6.0%
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to Security Holders
On April 13, 1998, the Company held a Special Meeting of Stockholders (the
"Special Meeting") to approve and adopt the amended and restated Acquisition
Agreement, dated as of March 17, 1998, by and between TeleBanc and MET, in which
TeleBanc assumed substantially all of the assets of MET including 1,433,081
shares of TeleBanc common stock, and assumed substantially all of the
liabilities of MET in exchange for 1,438,081 shares of TeleBanc common stock.
The votes cast at the Special Meeting were as follows:
For 2,379,932
Withheld 1,000
Abstained --
Not Voting 604,589
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TELEBANC FINANCIAL CORPORATION
Item 5. Other Information
No information to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on January 29, 1998
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17
TELEBANC FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TeleBanc Financial Corporation
------------------------------
(Registrant)
Date: May 15, 1998 By: /s/ Mitchell H. Caplan
-------------------- -------------------------------------
Mitchell H. Caplan
President and Chief Executive Officer
Date: May 15, 1998 By: /s/ Aileen Lopez Pugh
-------------------- -------------------------------------
Aileen Lopez Pugh
Executive Vice President and Chief
Financial Officer
17