1
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 SEPTEMBER 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 000-24549
TELEBANC FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3759196
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1111 N. HIGHLAND STREET, ARLINGTON, VIRGINIA 22201
--------------------------------------------------
(Address of principal executive office) (Zip code)
(703) 247-3700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding for the issuer's classes of common
stock, as of October 21, 1999.
common stock, $0.01 par value 33,641,074
- ----------------------------- ----------
(class) (outstanding)
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TELEBANC FINANCIAL CORPORATION
FORM 10-Q
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Item 1.
Consolidated Statements of Financial Condition - September 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Income -
Three and nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity - Nine
months ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3.
Quantitative and Qualitative Disclosures about Market Risk 20
Part II -- Other Information
- ----------------------------
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits 20
(b) Reports on Form 8-K 20
Signatures 21
3
TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands, Except Per Share Data)
September 30, December 31,
1999 1998
----- ----
(unaudited)
ASSETS:
Cash and cash equivalents $ 40,067 $ 25,941
Trading securities 38,269 29,584
Investment securities available for sale 178,622 220,699
Mortgage-backed securities available for sale 1,426,053 1,012,163
Loans receivable held for sale 89,862 117,928
Loans receivable, net 2,064,647 786,926
Other assets 143,724 90,100
----------- -----------
Total assets $ 3,981,244 $ 2,283,341
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Retail deposits $ 2,095,584 $ 1,142,385
Brokered callable certificates of deposit 67,098 67,085
Advances from the Federal Home Loan Bank of Atlanta 477,000 472,500
Securities sold under agreements to repurchase and other borrowings 790,474 404,435
Subordinated debt, net -- 29,855
Other liabilities 14,870 18,261
----------- -----------
Total liabilities 3,445,026 2,134,521
----------- -----------
Company-Obligated Mandatorily Redeemable Preferred Capital Securities
of Subsidiary Trust Holding Soley Junior Subordinated Debentures of
the Company 30,584 35,385
Stockholders' equity:
Common stock, $0.01 par value, 135,000,000 shares authorized;
33,641,074 and 24,384,154 issued and outstanding at September 30, 1999
and December 31, 1998 339 246
Additional paid-in capital 505,223 103,071
Unearned ESOP shares (2,122) (2,578)
Retained earnings 12,510 10,819
Unrealized (loss) gain on available-for-sale securities, net of tax (10,316) 1,877
----------- -----------
Total stockholders' equity 505,634 113,435
----------- -----------
Total liabilities and stockholders' equity $ 3,981,244 $ 2,283,341
=========== ===========
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Loans $ 36,815 $ 13,599 $ 80,681 $ 35,063
Mortgage-backed securities 24,384 9,966 63,267 20,249
Investment securities 3,070 3,046 9,746 6,818
Trading securities 442 812 1,037 2,156
Other 1,166 209 2,670 630
--------- --------- --------- ---------
Total interest income 65,877 27,632 157,401 64,916
Interest expense:
Retail deposits 26,504 12,285 63,571 29,097
Brokered callable certificates of deposit 1,120 1,122 3,328 2,516
Advances from the Federal Home Loan Bank of Atlanta 9,266 3,044 21,362 8,575
Repurchase agreements and other borrowings 10,209 4,647 24,354 8,903
Subordinated debt -- 881 1,475 2,641
--------- --------- --------- ---------
Total interest expense 47,099 21,979 114,090 51,732
--------- --------- --------- ---------
Net interest income 18,778 5,653 43,311 13,184
Provision for loan losses 1,348 300 2,503 625
--------- --------- --------- ---------
Net interest income after provision for loan losses 17,430 5,353 40,808 12,559
Non-interest income:
Gain on sale of available-for-sale securities 2,206 1,424 2,844 3,064
(Loss) gain on sale of loans (454) 227 1,159 421
Gain (loss) on trading securities 552 (106) 106 (50)
(Loss) gain on equity investment -- (35) 4,284 414
Fees, service charges and other 404 322 1,565 1,034
--------- --------- --------- ---------
Total non-interest income 2,708 1,832 9,958 4,883
Non-interest expenses:
Selling, general and administrative expenses:
Compensation and employee benefits 4,038 1,926 11,606 5,546
Advertising and marketing 6,250 1,699 12,112 2,904
Loan servicing 1,778 462 4,068 1,094
Other 5,129 1,579 10,559 4,084
--------- --------- --------- ---------
Total selling, general and administrative expenses 17,195 5,666 38,345 13,628
Other non-interest expenses:
Net operating costs of real estate acquired through foreclosure (12) 43 (27) 226
Amortization of goodwill and other intangibles 445 543 1,619 1,162
--------- --------- --------- ---------
Total other non-interest expenses 433 586 1,592 1,388
--------- --------- --------- ---------
Total non-interest expenses 17,628 6,252 39,937 15,016
--------- --------- --------- ---------
(continued)
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (CONTINUED)
(In Thousands, Except Per Share Data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Income before income tax expense 2,510 933 10,829 2,426
Income tax expense 1,247 389 5,058 915
Minority interest in subsidiary, net of tax 526 439 1,626 791
-------- -------- --------- --------
Income before extraordinary loss and cumulative effect of accounting
change 737 105 4,145 720
Extraordinary loss on early extinguishment of debt, net of tax -- -- 1,985 --
-------- -------- --------- --------
Income before cumulative effect of accounting change 737 105 2,160 720
Cumulative effect of accounting change, net of tax -- -- 469 --
-------- -------- --------- --------
Net income 737 105 1,691 720
Preferred stock dividends -- 1,788 -- 2,112
-------- -------- --------- --------
Net income (loss) available to common shareholders $ 737 $(1,683) $ 1,691 $(1,392)
======== ======== ========= ========
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities arising during the period $(4,573) $ 9,462 $(10,430) $ 9,632
Less: reclassification adjustment for gains included in net income (1,368) (883) (1,763) (1,900)
-------- -------- --------- --------
Other comprehensive income, net of tax (5,941) 8,579 (12,193) 7,732
-------- -------- --------- --------
Comprehensive income $(5,204) $ 6,896 $(10,502) $ 6,340
======== ======== ========= ========
Earnings per share:
Basic:
Income before extraordinary loss and cumulative effect of accounting
change $ 0.02 $ (0.08) $ 0.12 $ (0.11)
Extraordinary loss on early extinguishment of debt, net of tax -- -- (0.06) --
-------- -------- --------- --------
Income before cumulative effect of accounting change 0.02 (0.08) 0.06 (0.11)
Cumulative effect of accounting change, net of tax -- -- (0.02) --
-------- -------- --------- --------
Net income $ 0.02 $ (0.08) $ 0.04 $ (0.11)
======== ======== ========= ========
Diluted:
Income before extraordinary loss and cumulative effect of accounting
change $ 0.02 $ (0.08) $ 0.11 $ (0.11)
Extraordinary loss on early extinguishment of debt, net of tax -- -- (0.06) --
-------- -------- --------- --------
Income before cumulative effect of accounting change 0.02 (0.08) 0.05 (0.11)
Cumulative effect of accounting change, net of tax -- -- (0.01) --
-------- -------- --------- --------
Net income $ 0.02 $ (0.08) $ 0.04 $ (0.11)
======== ======== ========= ========
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY,
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(In Thousands)
(unaudited)
Additional Unearned
Preferred Common Paid-in ESOP Retained
Stock Stock Capital Shares Earnings
----- ----- ------- ------ --------
Balances at December 31, 1997 $ 15,281 $ 88 $ 16,161 $ -- $ 11,556
Net income for the nine months ended September 30,
1998 -- -- -- -- 720
Stock issued in equity offering -- 103 68,972 -- --
Exercise of warrants and stock options -- 3 844 -- --
Dividends on 4% Cumulative Preferred Stock -- 2 1,737 -- (2,112)
Conversion of 4% Cumulative Preferred Stock to
common stock (15,281) 48 15,233 -- --
Loan to Employee Stock Ownership Plan -- -- -- (2,638) --
Unrealized loss on available-for-sale securities,
net of tax effect -- -- -- -- --
--------- --------- --------- --------- ---------
Balances at September 30, 1998 $ -- $ 244 $ 102,947 $ (2,638) $ 10,164
========= ========= ========= ========= =========
Balances at December 31, 1998 $ -- $ 246 $ 103,071 $ (2,578) $ 10,819
Net income for the nine months ended September 30,
1999 -- -- -- -- 1,691
Stock issued in equity offering -- 79 395,776 -- --
Exercise of warrants and stock options, including
related tax benefit -- 14 4,400 -- --
Buy-back of trust preferred securities -- -- (410) -- --
Release of unearned Employee Stock Ownership
Plan shares -- -- 2,386 456 --
Unrealized loss on available-for-sale securities,
net of tax effect -- -- -- -- --
--------- --------- --------- --------- ---------
Balances at September 30, 1999 $ -- $ 339 $ 505,223 $ (2,122) $ 12,510
========= ========= ========= ========= =========
Unrealized
Loss on
Available-
for-Sale
Securities Total
---------- -----
Balances at December 31, 1997 $ 2,738 $ 45,824
Net income for the nine months ended September 30,
1998 -- 720
Stock issued in equity offering -- 69,075
Exercise of warrants and stock options -- 847
Dividends on 4% Cumulative Preferred Stock -- (373)
Conversion of 4% Cumulative Preferred Stock to
common stock -- --
Loan to Employee Stock Ownership Plan -- (2,638)
Unrealized loss on available-for-sale securities,
net of tax effect 7,732 7,732
--------- ---------
Balances at September 30, 1998 $ 10,470 $ 121,187
========= =========
Balances at December 31, 1998 $ 1,877 $ 113,435
Net income for the nine months ended September 30,
1999 -- 1,691
Stock issued in equity offering -- 395,855
Exercise of warrants and stock options, including
related tax benefit -- 4,414
Buy-back of trust preferred securities -- (410)
Release of unearned Employee Stock Ownership
Plan shares -- 2,842
Unrealized loss on available-for-sale securities,
net of tax effect (12,193) (12,193)
--------- ---------
Balances at September 30, 1999 $(10,316) $ 505,634
========= =========
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
-----------------
September 30,
-------------
1999 1998
---- ----
Net cash provided by (used in) operating activities $ 6,899 $ (2,215)
Cash flows from investing activities:
Net cash received from business acquisition -- 7,722
Net increase in loans held to maturity, net of loans received in business acquisition (1,279,333) (139,145)
Loans extended to Employee Stock Ownership Plan -- (2,638)
Release of unearned shares held by Employee Stock Ownership Plan 456 --
Equity investment in subsidiary 8,472 (1,392)
Purchases of available-for-sale securities, net of securities received in business
acquisition (934,928) (939,077)
Proceeds from sales of available-for-sale securities 275,267 326,424
Proceeds from maturities of and principal payments on available-for-sale securities 245,751 137,770
Net purchases of premises and equipment, net of premises and equipment received in
business acquisition (19,711) (1,010)
Proceeds from sale of foreclosed real estate 1,538 713
----------- -----------
Net cash used in investing activities (1,702,488) (610,633)
Cash flows from financing activities:
Net increase in deposits, net of deposits received in business acquisition 953,212 244,949
Advances from the Federal Home Loan Bank of Atlanta 2,177,010 672,077
Payments on advances from the Federal Home Loan Bank of Atlanta (2,172,510) (664,077)
Net increase in securities sold under agreements to repurchase 386,039 199,833
Net increase in other borrowed funds, net of borrowings received in business
acquisition -- 178
Net decrease in subordinated debt (29,855) --
Proceeds from the issuance of common stock 402,246 71,661
Proceeds from issuance of trust preferred securities -- 25,708
Repurchase of trust preferred securities (4,801) --
Dividends paid on trust preferred securities (1,626) (791)
Dividends paid on common and preferred stock -- (2,112)
----------- -----------
Net cash provided by financing activities 1,709,715 547,426
----------- -----------
Net increase (decrease) in cash and cash equivalents 14,126 (65,422)
Cash and cash equivalents at beginning of period 25,941 92,156
----------- -----------
Cash and cash equivalents at end of period $ 40,067 $ 26,734
=========== ===========
Supplemental information:
Interest paid on deposits and borrowed funds $ 110,772 $ 46,246
Income taxes paid 285 999
Gross unrealized (loss) gain on available-for-sale securities (20,794) 12,414
Tax effect of loss (gain) on available-for-sale securities $ 8,601 $ (4,682)
See accompanying notes to consolidated financial statements.
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TELEBANC FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1. BASIS OF PRESENTATION
Telebanc Financial Corporation (the "Company" or "Telebanc") is a
savings and loan holding company organized under the laws of Delaware in 1994.
The primary business of the Company is the activities conducted by TeleBank (the
"Bank" or "Telebank") and TeleBanc Capital Markets, Inc. ("TCM"). The Bank is a
federally chartered savings bank that provides deposit accounts insured by the
Federal Deposit Insurance Corporation to customers nationwide. TCM is a funds
manager and registered broker-dealer. TeleBanc Capital Trust I ("TCT I") and
TeleBanc Capital Trust II ("TCT II") are business trusts formed for the purpose
of issuing capital securities and investing the proceeds in junior subordinated
debentures issued by the Company. The Bank, through its wholly owned subsidiary
TeleBanc Servicing Corporation ("TSC"), owns 100% of TeleBanc Insurance
Services, Inc. ("TBIS"), which was formed in May 1998 to offer co-branded
insurance products. Until April 1999, TSC also owned 50% of AGT PRA, LLC ("AGT
PRA"). The primary business of AGT PRA is its two-thirds investment in Portfolio
Recovery Associates, LLC ("PRA"), which acquires and collects delinquent
consumer debt obligations for its own portfolio.
The financial statements as of September 30, 1999 and for the three
and nine months ended September 30, 1999 and 1998 are unaudited but, in the
opinion of management, contain all adjustments, consisting solely of normal
recurring entries, necessary to present fairly the consolidated financial
condition as of September 30, 1999 and the results of consolidated operations
for the three and nine months ended September 30, 1999 and 1998. The results of
consolidated operations for the three and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the
entire year. The Notes to Consolidated Financial Statements for the year ended
December 31, 1998, included in the Company's Annual Report to Stockholders for
1998, should be read in conjunction with these statements.
Effective June 8, 1999, the Board of Directors of the Company
approved the distribution of a two-for-one stock split of its outstanding common
stock, par value $0.01 (the "Common Stock"). Effective June 22, 1998, the Board
of Directors of the Company approved the distribution of a 100% stock dividend
on its outstanding Common Stock. The effects of the stock split and the stock
dividend have been retroactively applied in the consolidated financial
statements for all periods presented.
Certain prior year's amounts have been reclassified to conform to
the current year's presentation.
Effective January 1, 1999, the Company changed its method of
accounting for start-up costs to comply with Statement of Position 98-5,
Reporting on the Cost of Start-up Activities ("SOP 98-5"), issued by the
American Institute of Certified Public Accountants in 1998. SOP 98-5 requires
that start-up activities be expensed as incurred rather than capitalized.
Therefore, as of January 1, 1999, the Company expensed all previously
capitalized start-up costs, reporting the expense as a cumulative effect of
accounting change in the Consolidated Statement of Operations and Comprehensive
Income.
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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. Options and warrants are deemed to be dilutive if
the average market price of the related Common Stock for the period exceeds the
exercise price.
In February 1997, the Company issued 29,900 shares of 4% Cumulative
Preferred Stock (the "Preferred Stock"), par value $0.01, which was convertible
to 4,798,958 shares of the Company's Common Stock. For purposes of the diluted
earnings per share calculation, the Company assumed that all outstanding shares
of Preferred Stock had converted to Common Stock as of the beginning of the
respective periods. In July 1998, the Preferred Stock converted to Common Stock
and, therefore, was no longer outstanding as of September 30, 1998 or 1999.
The Company's year-to-date weighted average number of common shares
outstanding was 30,134,439 at September 30, 1999 and 12,627,500 at September 30,
1998. For the diluted earnings per share computation, weighted average shares
outstanding also includes potentially dilutive securities.
EPS CALCULATION
Income Shares Per Share Amount
------ ------ ----------------
-------------------------------------------------------------------
For the Quarter Ended September 30, 1999
-------------------------------------------------------------------
Basic earnings per share
Net income $ 737,000
Premium on redemption of trust preferred securities (a) (29,000)
------------------------
Adjusted net income $ 708,000 33,622,955 $ 0.02
======================== ==================
Options issued to management 3,007,386
Warrants 865,098
-------------------
Diluted earnings per share
Net income $ 737,000
Premium on redemption of trust preferred securities (a) (29,000)
------------------------
Adjusted net income $ 708,000 37,495,439 $ 0.02
===================================================================
Income Shares Per Share Amount
------ ------ ----------------
------------------------------------------------------------------
For the Quarter Ended September 30, 1998
------------------------------------------------------------------
Basic earnings per share
Net income $ 105,000
Less: Preferred Stock dividends (1,788,000)
-----------------------
Income available to common shareholders $ (1,683,000) 19,843,426 $ (0.08)
==================
Options issued to management -- --
Warrants -- --
Convertible Preferred Stock -- --
Diluted earnings per share $ (1,683,000) 19,843,426 $ (0.08)(b)
==================================================================
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TELEBANC FINANCIAL CORPORATION
Income Shares Per Share Amount
------ ------ ----------------
------------------------------------------------------------------
For the Nine Months Ended September 30, 1999
------------------------------------------------------------------
Basic earnings per share
Income before extraordinary loss and cumulative effect of
accounting change $ 4,145,000
Premium on redemption of trust preferred securities (a) (410,000)
-----------------------
Adjusted income before extraordinary loss and cumulative
effect of accounting change 3,735,000 30,134,439 $ 0.12
Extraordinary loss on early extinguishment of debt, net of tax (1,985,000) (0.06)
----------------------- ------------------
Adjusted income before cumulative effect of accounting change 1,750,000 0.06
Cumulative effect of accounting change, net of tax (469,000) (0.02)
----------------------- ------------------
Adjusted net income $ 1,281,000 $ 0.04
======================= ==================
Options issued to management 3,175,682
Warrants 1,141,233
-------------------
Diluted earnings per share
Income before extraordinary loss and cumulative effect of
accounting change $ 4,145,000
Premium on redemption of trust preferred securities (a) (410,000)
-----------------------
Adjusted income before extraordinary loss and cumulative
effect of accounting change 3,735,000 34,451,354 $ 0.11
===================
Extraordinary loss on early extinguishment of debt, net of tax (1,985,000) (0.06)
----------------------- ------------------
Adjusted income before cumulative effect of accounting change 1,750,000 0.05
Cumulative effect of accounting change, net of tax (469,000) (0.01)
-----------------------
------------------
Adjusted net income $ 1,281,000 $ 0.04
======================= ==================
Income Shares Per Share Amount
------ ------ ----------------
-------------------------------------------------------------------
For the Nine Months Ended September 30, 1998
-------------------------------------------------------------------
Basic earnings per share
Net income $ 720,000
Less: Preferred Stock dividends (2,112,000)
------------------------
Income available to common shareholders $ (1,392,000) 12,627,500 $ (0.11)
==================
Options issued to management -- --
Warrants -- --
Convertible Preferred Stock -- --
------------------------ -------------------
Diluted earnings per share $ (1,392,000) 12,627,500 $ (0.11)(b)
===================================================================
(a) This charge represents costs incurred to purchase certain of the
Company's trust preferred securities on the open market. The costs were
charged against additional paid-in capital but are a deduction for
earnings per share purposes. Refer to Note 3 for further discussion.
(b) The impact of the Company's outstanding options, warrants and Preferred
Stock is antidilutive for the three and nine months ended September 30,
1998.
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TELEBANC FINANCIAL CORPORATION
NOTE 3. TRUST PREFERRED SECURITIES
In June 1997, the Company formed TCT I, which in turn sold, at
par, 10,000 shares of trust preferred securities, Series A, liquidation amount
of $1,000, for a total of $10.0 million. TCT I is a business trust formed for
the purpose of issuing capital securities and investing the proceeds in junior
subordinated debentures issued by the Company. These junior subordinated
debentures, which are the sole assets of TCT I, have a principal amount of $10.0
million and bear interest at an annual rate of 11.0%. The junior subordinated
debentures mature in 2027.
In May 1999, the Company purchased $1.0 million face amount of
TCT I trust preferred securities on the open market at a price of 112.5%. The
Company deemed these repurchased securities to be retired and, therefore, wrote
off the resulting premium and a proportionate share of the discount on TCT I
securities against additional paid-in capital. For the nine-month period ended
September 30, 1999, the Company has assumed that this amount, which totals
$174,000, decreases net income for earnings per share purposes.
In July 1998, the Company formed TCT II, a business trust
formed solely for the purpose of issuing capital securities. TCT II sold, at
par, 1,100,000 shares of Beneficial Unsecured Securities, Series A, with a
liquidation amount of $25 per share, for a total of $27.5 million and invested
the net proceeds in the Company's 9.0% Junior Subordinated Deferrable Interest
Debentures, Series A. These Junior Subordinated Deferrable Interest Debentures,
Series A, which are the sole assets of TCT II, have a principal amount of $27.5
million and mature in 2028.
In June 1999, the Company purchased $3.6 million face amount
of TCT II trust preferred securities on the open market at par. The Company
deemed these repurchased securities to be retired and, therefore, wrote off
$207,000 of the discount on TCT II securities against additional paid-in
capital. For the nine-month period ended September 30, 1999, the Company has
assumed that this amount decreases net income for earnings per share purposes.
In July 1999, the Company purchased $500,000 face amount of
TCT II trust preferred securities on the open market at par. The Company deemed
these repurchased securities to be retired and, therefore, wrote off $29,000 of
the discount of TCT II securities against additional paid-in capital. For the
three- and nine-month periods ended September 30, 1999, the Company has assumed
that this amount decreases net income for earnings per share purposes.
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). The statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at fair
value. SFAS 133 requires that changes in the derivative instrument's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative
instrument's gains and losses to offset related results on the hedged item in
the income statement and requires that a company formally document, designate
and assess the effectiveness of transactions that receive hedge accounting
treatment. SFAS 133 is effective for fiscal years beginning after June 15, 2000,
although a company may implement the statement as of the beginning of any fiscal
quarter after issuance, that is, fiscal
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TELEBANC FINANCIAL CORPORATION
quarters beginning June 16, 1999 and after. SFAS 133 cannot be applied
retroactively. SFAS 133 must be applied to (a) derivative instruments and (b)
certain derivative instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 and, at the
Company's election, before January 1, 1998. The Company plans to adopt SFAS 133
as of January 1, 2001 but has not yet quantified the impact of adopting SFAS 133
on its financial statements. However, the statement could increase volatility in
earnings and other comprehensive income.
NOTE 5. RECENT EVENTS
In April 1999, the Company sold 7,940,000 shares of its Common
Stock to the public on a post-split basis, raising aggregate net proceeds of
$395.9 million. The Company is using the majority of the proceeds to invest as
additional capital of Telebank and for general corporate purposes, which include
funding the Company's continued growth and augmenting working capital.
In April 1999, TSC sold its equity investment in AGT PRA for a
total of $9.3 million, which resulted in a $4.1 million gain. In anticipation of
the Company's rapid growth, it made a 50% investment in AGT PRA, which was in a
start-up phase, with the expectation that its two-thirds-owned subsidiary, PRA,
would manage the Company's non-performing assets. Over time, however, PRA began
to focus only on consumer credit. Therefore, the Company determined that its
investment in AGT PRA would not be a part of its core business and, accordingly,
sold its interest in the second quarter of 1999.
In May 1999, the Company completed the purchase of the
building that houses its current main headquarters in Arlington, Virginia, for
$10.2 million.
In June 1999, the Company used $18.3 million of proceeds from
the equity offering to redeem $17.3 million face amount of subordinated debt,
including a 5.75% premium. This debt had an interest rate of 11.5% and had an
original maturity date of May 1, 2004. Additionally, the Company used $13.7
million of proceeds to redeem $13.7 million face amount of subordinated debt,
which bore interest at 9.5% and had an original maturity date of March 31, 2004.
The Company recorded an extraordinary loss of approximately $2.0 million, net of
tax, on the early extinguishment of debt.
In June 1999, the Company announced an agreement to be
acquired by E*TRADE Group, Inc. ("E*TRADE"), in a stock-for-stock merger. The
acquisition is subject to approval by Telebanc's stockholders as well as
required regulatory approvals. In connection with the agreement, Telebanc and
E*TRADE entered into a Stock Option Agreement pursuant to which Telebanc granted
E*TRADE an option, exercisable under certain conditions, to purchase a certain
number of newly issued shares of Telebanc's Common Stock. Such option will
expire upon consummation of the merger.
NOTE 6. COMMITMENTS AND CONTINGENT LIABILITIES
As of September 30, 1999, the Company had commitments to purchase
$291.0 million in loans. Also, certificates of deposit that are scheduled to
mature in less than one year as of September 30, 1999 totaled $1.1 billion. In
the normal course of business, the Company makes various commitments to extend
credit and incur contingent liabilities that are not reflected in the balance
sheets.
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TELEBANC FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS OF AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1999
This Quarterly Report on Form 10-Q contains forward-looking
statements and information relating to Telebanc and its subsidiaries. The words
"believe", "expect", "may", "will", "should", "project", "contemplate",
"anticipate", "forecast", "intend" or similar terminology are intended to
identify forward-looking statements. These statements are based on the beliefs
of management as well as assumptions made using information currently available
to management. Because these statements reflect the current views of management
concerning future events, they involve risks, uncertainties and assumptions.
Therefore, actual results may differ significantly from the results discussed in
the forward-looking statements. Certain factors that may cause such a difference
include interest rate fluctuations, our ability to create brand awareness, our
ability to grow through the introduction of new products and services and our
ability to attain year 2000 compliance and to ensure year 2000 compliance from
the third parties with whom we do business.
This discussion and analysis includes descriptions of material
changes that have affected our consolidated financial condition and consolidated
results of operations during the periods included in our financial statements.
FINANCIAL CONDITION (SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998)
During the first nine months of 1999, total assets grew $1.7
billion, or 73.9%, to $4.0 billion at September 30, 1999 from $2.3 billion at
December 31, 1998. We achieved the majority of this growth by increasing our
loan portfolio, which grew $1.3 billion, or 143.1%, from $904.9 million at
December 31, 1998 to $2.2 billion at September 30, 1999, as we invested funds
received through retail deposits and other borrowings, as well as the proceeds
from our April 1999 equity offering, to build our core assets.
Available-for-sale mortgage-backed securities also increased, rising $400.0
million, or 40.0%, from $1.0 billion at December 31, 1998 to $1.4 billion at
September 30, 1999. At the same time, our portfolio of trading mortgage-backed
and investment securities increased $8.7 million, or 29.4%, to $38.3 million at
September 30, 1999 from $29.6 million at December 31, 1998.
We funded asset growth through additional retail deposits and other
borrowings, as well as $395.9 million of net proceeds from our April 1999 equity
offering. Retail deposits grew more quickly than anticipated, rising $1.0
billion, or 90.9%, to $2.1 billion at September 30, 1999 from $1.1 billion at
December 31, 1998. This rise corresponds to net retail customer account growth
of 46,567, representing a 91.6% increase from 50,835 retail deposit accounts at
the end of 1998 to 97,402 at September 30, 1999. Federal Home Loan Bank advances
and other borrowings increased $423.1 million, or 48.3%, from $876.9 million at
December 31, 1998 to $1.3 billion at September 30, 1999.
Stockholders' equity increased $392.2 million from $113.4 million at
December 31, 1998 to $505.6 million at September 30, 1999. This increase
reflects net income of $1.7 million, net proceeds of $395.9 million from our
recent equity offering, proceeds of $4.4 million from the exercise of options
and warrants, and $2.8 million of non-cash compensation expense related to the
release of unearned shares belonging to the Employee Stock Ownership Plan,
offset by a decrease of $410,000 related to the buy-back of trust preferred
securities and unrealized losses on available-for-sale securities of $12.2
million.
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TELEBANC FINANCIAL CORPORATION
The following table presents consolidated average balance sheet
data, income and expense and related interest yields and rates for the quarters
ended September 30, 1999 and 1998. The table also presents information for the
periods indicated with respect to net interest margin, an indicator of an
institution's profitability. Net interest margin is annualized net interest
income as a percentage of average interest-earning assets. Another indicator of
profitability is net interest spread, which is the difference between the
weighted average yield earned on interest-earning assets and weighted average
rate paid on interest-bearing liabilities. Average annualized yield includes the
incremental tax benefit of tax exempt income.
Quarter Ended September 30, 1999
--------------------------------------------------------
Interest Average
(In thousands) Average Income/ Annualized
(unaudited) Balance Expense Yield/Cost
------- ------- ----------
Interest-earning assets:
Loans receivable, net $ 1,983,946 $ 36,815 7.42%
Interest-bearing deposits 44,234 520 4.66
Mortgage-backed securities available for
sale 1,480,722 24,384 6.59
Investment securities available for sale 188,710 3,070 6.74
Investment in FHLB stock 34,186 646 7.50
Trading securities 24,270 442 7.28
--------------- --------------
Total interest-earning assets 3,756,068 65,877 7.03%
Non-interest-earning assets 139,349
---------------
Total assets $ 3,895,417
===============
Interest-bearing liabilities:
Retail deposits $ 1,857,109 $ 26,504 5.66%
Brokered callable certificates of deposit 67,076 1,120 6.62
FHLB advances 672,804 9,266 5.39
Other borrowings 730,772 10,209 5.47
Subordinated debt, net -- -- --
--------------- --------------
Total interest-bearing liabilities 3,327,761 47,099 5.62%
Non-interest-bearing liabilities 57,757
---------------
Total liabilities 3,385,518
Stockholders' equity 509,899
---------------
Total liabilities and stockholders' equity $ 3,895,417
===============
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income $ 428,307 $ 18,778
=============== ==============
Net interest spread 1.41%
================
Net interest margin (net yield on
interest-earning assets) 2.00%
================
Ratio of interest-earning assets to
interest-bearing liabilities 112.87%
================
Quarter Ended September 30, 1998
------------------------------------------------------
Interest Average
(In thousands) Average Income/ Annualized
(unaudited) Balance Expense Yield/Cost
------- ------- ----------
Interest-earning assets:
Loans receivable, net $ 694,955 $ 13,590 7.82%
Interest-bearing deposits 6,928 106 6.07
Mortgage-backed securities available for
sale 560,301 9,966 7.11
Investment securities available for sale 179,218 2,902 6.48
Investment in FHLB stock 10,714 202 7.50
Trading securities 14,297 271 7.59
---------------- --------------
Total interest-earning assets 1,466,413 27,037 7.38%
Non-interest-earning assets 63,326
----------------
Total assets $ 1,529,739
================
Interest-bearing liabilities:
Retail deposits $ 819,548 $ 12,366 5.99%
Brokered callable certificates of deposit 66,969 1,122 6.65
FHLB advances 199,411 3,044 5.97
Other borrowings 286,336 4,228 5.78
Subordinated debt, net 29,753 881 11.85
---------------- --------------
Total interest-bearing liabilities 1,402,017 21,641 6.10%
Non-interest-bearing liabilities 50,275
----------------
Total liabilities 1,452,292
Stockholders' equity 77,447
----------------
Total liabilities and stockholders' equity $ 1,529,739
================
Excess of interest-earning assets over
interest-bearing liabilities/net
interest income $ 64,396 $ 5,396
================ ==============
Net interest spread 1.28%
===============
Net interest margin (net yield on
interest-earning assets) 1.47%
===============
Ratio of interest-earning assets to
interest-bearing liabilities 104.59%
===============
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TELEBANC FINANCIAL CORPORATION
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
Net Income. Net income for the three and nine months ended September
30, 1999 totaled $737,000 and $1.7 million, increasing $2.4 million from $(1.7)
million for the three months ended September 30, 1998, and $3.1 million from
$(1.4) million for the nine months ended September 30, 1998. Net income for the
three months ended September 30, 1999, which is net of an $844,000 non-cash
charge incurred upon the release of unearned shares held by the Employee Stock
Ownership Plan, or ESOP, consisted primarily of $18.8 million of net interest
income and $2.7 million of non-interest income. This income was reduced by $1.3
million in provision for loan losses, $17.6 million in non-interest expenses,
including $539,000 related to the pending merger with E*TRADE, $1.2 million of
income tax expense and $526,000 of interest on trust preferred securities. Net
income for the three months ended September 30, 1998 consisted primarily of $6.1
million of net interest income and $1.8 million of non-interest income, offset
by a $300,000 loan loss provision, $6.7 million of non-interest expenses, income
tax expense of $389,000, interest on trust preferred securities of $439,000 and
$1.8 million of preferred stock dividends paid upon conversion of preferred
shares to common shares. Net income for the nine months ended September 30,
1999, which is net of a $2.0 million extraordinary loss and a $469,000
cumulative effect of accounting change, consisted primarily of $43.3 million of
net interest income and $10.0 million of non-interest income reduced by $2.5
million in provision for loan losses, $39.9 million in non-interest expenses,
$5.1 million in income tax expense and $1.6 million of interest on trust
preferred securities. Net income for the nine months ended September 30, 1998
consisted primarily of $13.6 million of net interest income and $4.9 million of
non-interest income, offset by $625,000 of provision for loan losses, as well as
$15.5 million of non-interest expenses, $915,000 of income tax expense, $791,000
of interest on trust preferred securities and $2.1 million of preferred stock
dividends. Our return on average assets and return on average equity for the
quarter ended September 30, 1999 were 0.08% and 0.58%.
Net Interest Income. Net interest income for the three-month periods
ended September 30, 1999 and 1998 totaled $18.8 million and $6.1 million,
reflecting an annualized net interest margin of 2.00% and 1.47%. These increases
in net interest income and margin are related to an increase in net interest
spread, coupled with an increase in net interest-earning assets during 1999.
During the third quarter of 1999, average interest-earning assets, consisting
primarily of loans receivable, net, and mortgage-backed securities, were $3.8
billion, with an average yield of 7.03%. In contrast, average interest-earning
assets during the same quarter in 1998 totaled $1.5 billion and reflected an
average yield of 7.38%. Average interest-bearing liabilities for the quarters
ended September 30, 1999 and 1998 were $3.3 billion and $1.4 billion, with an
average cost of 5.62% in the third quarter of 1999 as compared to 6.10% during
the same period in 1998. The decline in the yield on interest-earning assets and
the decline in the cost of interest-bearing liabilities resulted from changes in
overall market conditions during the latter part of 1998 and the first nine
months of 1999.
During the nine months ended September 30, 1999 and 1998, we earned
net interest income of $43.3 million and $13.6 million. Average interest-earning
assets, consisting primarily of loans receivable, net, and mortgage-backed
securities, were $3.0 billion and $1.1 billion for the nine months ended
September 30, 1999 and 1998, with average yields of 6.97% and 7.37%. Average
interest-bearing liabilities totaled $2.7 billion and $1.1 billion for the nine
months ended September 30, 1999 and 1998, with an average cost of 5.64% in the
first nine months of 1999, as compared to 6.18% in the same period in 1998.
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TELEBANC FINANCIAL CORPORATION
Provision for Loan Losses. The provision for loan losses reflects
management's intent to provide prudent reserves for potential losses on loans
acquired during the quarter. We recorded a loan loss provision of $1.3 million
for the third quarter of 1999, in accordance with our policy of providing
adequate reserves for losses in the portfolio. Net charge-offs during the
quarter totaled $34,000, which represents an annualized level of 1 basis point
of average loan balances for the quarter. As of September 30, 1999, our total
loan loss allowance was $7.1 million, or 0.33% of total loans outstanding. The
total loan loss allowance at September 30, 1998 was $4.7 million, which was
0.6% of total loans outstanding. The general loan loss allowance of $6.7
million totaled 78.8% of total non-performing assets of $8.5 million as of
September 30, 1999. As of September 30, 1998, the general loan loss allowance
of $4.2 million totaled 34.4% of total non-performing assets of $12.2 million.
Non-interest Income. Non-interest income totaled $2.7 million
during the third quarter of 1999, increasing $900,000 or 50.0%, from $1.8
million for the same period in 1998, primarily as a result of increased income
from the sale of mortgage-backed and investment securities. For the three months
ended September 30, 1999, we reported gains of $2.2 million from the sale of
available-for-sale mortgage-backed and investment securities, net realized and
unrealized gains of $552,000 on trading securities and $404,000 of income from
fees, service charges and other sources. This income was offset by losses of
$454,000 on sales and prepayments of held-for-sale loans during the quarter.
Non-interest income for the third quarter of 1998 consisted of gains of $1.4
million from the sale of mortgage-backed and investment securities, gains of
$227,000 on sales and prepayments of loans held for sale and $322,000 in loan
servicing charges and other fees, offset by losses of $106,000 from trading
activity and $35,000 on equity investment.
Similarly, non-interest income for the first nine months of
1999 increased $5.1 million, or 104.1%, over the same period in 1998. This
increase is largely due to a $4.1 million gain on equity investment that was
generated by the sale of our investment in AGT PRA. In anticipation of growth in
our primary asset class, one- to four-family mortgages, we made a 50% investment
in AGT PRA, which was in a start-up phase, with the expectation that its
two-thirds-owned subsidiary, PRA, would resolve our delinquent mortgage loans.
Over time, however, PRA began to focus only on consumer credit, and we
determined that our investment in AGT PRA would not be a part of our core
business. Accordingly, we sold our interest in the second quarter of 1999.
Non-interest Expenses. We increased our non-interest expenses
substantially during 1999, recording $17.6 million for the three months ended
September 30, 1999, or an increase of 162.7% from $6.7 million for the same
period in 1998. A substantial portion of this increase resulted from higher
marketing costs, as we continued our strategy of increasing marketing expenses
to grow our deposit base and expand the reach of our high-value banking
products. Specifically, advertising and marketing costs rose $4.6 million, or
270.6%, from $1.7 million for the quarter ended September 30, 1998 to $6.3
million for the third quarter of 1999. Additionally, compensation costs
increased $2.1 million, or 110.5%, from $1.9 million for the third quarter of
1998 to $4.0 million for the same quarter in 1999 due to additional personnel as
well as an $844,000 non-cash charge incurred upon the release of unearned shares
held by the ESOP. Loan servicing expense totaled $1.8 million in the third
quarter of 1999, increasing $1.3 million, or 289.6%, from $462,000 for the same
quarter in 1998, due to the significant increase in the size of our loan
portfolio as well as our decision to outsource our loan servicing function in
August 1998. Other selling, general and administrative expenses increased $3.1
million, or 155.0%, from $2.0 million for the quarter ended September 30, 1998
to $5.1 million for the same quarter in 1999. This increase is due in part to
approximately $870,000 of costs related to the pending merger with
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TELEBANC FINANCIAL CORPORATION
E*TRADE. Additionally, we incurred higher consulting and temporary service costs
due to our increased growth over the past year.
Non-interest expenses for the nine months ended September 30, 1999
totaled $39.9 million, increasing $24.4 million, or 157.4%, from $15.5 million
for the same period in 1998. This rise was driven by substantial increases in
compensation costs and marketing expenses. Annualized general and administrative
expenses, excluding marketing costs, for the three and nine months ended
September 30, 1999 totaled 1.10% and 0.88% of total ending assets. Excluding the
effect of the non-cash compensation charge incurred upon the release of unearned
shares held by the ESOP, these ratios, excluding marketing costs, totaled 1.02%
and 0.78% for the three and nine months ended September 30, 1999.
Income Tax Expense. Income tax expense for the quarter ended
September 30, 1999 totaled $1.2 million, yielding an effective tax rate of
49.7%, compared to $389,000 and an effective tax rate of 41.7% for the three
months ended September 30, 1998. This increase in the effective tax rate is due
primarily to the non-deductibility of the $844,000 non-cash compensation charge
incurred upon the release of unearned shares held by the ESOP. The effective tax
rate for the nine months ended September 30, 1999 was 46.7%, as compared to
37.7% for the nine months ended September 30, 1998.
LIQUIDITY
Liquidity represents our ability to raise funds to support asset
growth, fund operations and meet obligations, including deposit withdrawals,
maturing liabilities, and other payment obligations, to maintain reserve
requirements and to otherwise meet our ongoing obligations. We meet our
liquidity needs primarily through financing activities, such as increases in
core deposit accounts, maturing short-term investments, loans and repayments of
investment securities and, to a lesser extent, sales of loans or securities.
Telebank is required to maintain minimum levels of liquid assets as
defined by the regulations of the Office of Thrift Supervision, or OTS. This
requirement, which may vary at the discretion of the OTS depending upon economic
conditions and deposit flows, is based upon a percentage of deposits and
short-term borrowings. The minimum required ratio is 4.0%. At September 30,
1999, the Bank's liquidity ratio was 6.09%.
In April 1999, we raised capital through an equity offering, in
which we sold 7,940,000 post-split shares of common stock to the public, raising
aggregate net proceeds of $395.9 million. We used a portion of the net proceeds
of this offering to redeem $31.0 million face amount of subordinated debt in
June 1999.
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TELEBANC FINANCIAL CORPORATION
CAPITAL RESOURCES
At September 30, 1999, Telebank was in compliance with all of its
regulatory capital requirements, and its capital ratios exceeded the ratios for
"well-capitalized" institutions under OTS regulations.
The following table sets forth Telebank's regulatory capital levels
at September 30, 1999 in relation to the regulatory requirements in effect at
that date. The information below is based upon our understanding of the
regulations and interpretations currently in effect and may be subject to
change.
Required for Capital
Adequacy
Actual Purposes
Amount Ratio Amount Ratio
(In Thousands)
Core Capital (to adjusted
tangible assets) $ 440,469 11.20% $ 157,320 greater than 4.0%
Tangible Capital (to adjusted
tangible assets) $ 440,469 11.20% $ 58,995 greater than 1.5%
Tier I Capital (to
risk-weighted assets) $ 440,469 25.97% N/A N/A
Total Capital (to
risk-weighted assets) $ 447,170 26.36% $ 135,691 greater than 8.0%
Required to be Well-Capitalized under
Prompt Corrective Action Provisions
Amount Ratio
Core Capital (to adjusted
tangible assets) $ 196,651 greater than 5.0%
Tangible Capital (to adjusted
tangible assets) N/A N/A
Tier I Capital (to
risk-weighted assets) $ 101,768 greater than 6.0%
Total Capital (to
risk-weighted assets) $ 169,614 greater than 10.0%
YEAR 2000 ISSUES
In 1997, we began year 2000 planning, following the five steps
recommended by the Federal Financial Institutions Examination Council. We have
completed phases focused on awareness and assessment and continue to update the
results of these phases for new information received. Currently, the renovation
phase, which consists of implementing changes and monitoring vendor renovation,
and the validation phase, which consists of testing renovated systems, are
underway. We are monitoring vendors for software updates and final compliance
certification statements and have received certifications from all of our
vendors. Some vendors, however, have continued to update their products to
correct year 2000 issues even after certifying that they are year 2000
compliant, indicating that these certifications may not be final. As a result,
following the receipt of the final certification statements relating to those
systems identified as mission critical in the assessment phase, we internally
validate such certifications through testing. To date, we have identified no
significant year 2000 issues through our testing of mission critical systems.
Our mission critical systems include the deposit processing system, general
ledger system and internet banking applications. As of September 30, 1999, we
are substantially complete with all five phases of our year 2000 plan for
mission critical systems, including awareness, assessment, renovation,
validation and implementation. During the remainder of the year, we will focus
on testing and validating our plans to maintain business continuity in the event
of an unexpected failure. Additionally, as of September 30, 1999, we are 80%
complete with testing of non-mission critical systems. We anticipate completing
this testing during the fourth quarter of 1999.
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TELEBANC FINANCIAL CORPORATION
Additionally, we will continue developing our customer awareness program
designed to alleviate concerns or questions that may arise.
Our steady growth over the past several years has required that we
continually upgrade our systems; we do not anticipate that we will incur
material costs related to our year 2000 remediation efforts. We have analyzed
the impact of year 2000 issues on our non-information technology systems such as
embedded chips necessary for proper operation of mechanical systems and have
concluded that these issues do not present a significant risk to our operations.
Few upgrades have been accelerated due to the year 2000 issue. To
date, we have spent approximately $25,000 on upgrades related to our year 2000
remediation efforts. Additionally, in the second and third quarters we spent
approximately $25,000 to engage an outside consulting firm to provide an
additional hardware test environment to aid us in the testing of mission
critical systems. As of September 30, 1999, this process is complete. We
anticipate spending an additional $50,000 on compliance efforts before the year
2000.
The majority of our loans are serviced by large servicers that use
widely used loan servicing systems and are fully expected to be year 2000
compliant. We continue to monitor the servicers' year 2000 plans and testing.
However, approximately 5% of our loans are serviced by smaller loan servicers
whose systems may not be year 2000 compliant. If these systems were to fail,
principal and interest payments on the loans serviced by these servicers could
be delayed, and we would lose interest income that we would normally earn on
these funds. We have developed a contingency plan to address this loan
servicing issue specifically. Under the contingency plan, we notified these
servicers that if we did not receive confirmation of compliance by March 31,
1999, we would begin transferring servicing of these loans to servicers who are
known to be year 2000 compliant. As of October 21, 1999, all of these servicers
appear to be year 2000 compliant, and we do not currently believe that any
servicing transfers need to be made.
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.
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TELEBANC FINANCIAL CORPORATION
MARKET RISK
We manage interest rate risk through the use of financial
derivatives such as interest rate cap, swap and floor agreements. We use these
instruments to ensure that the market value of equity and net interest income
are protected from the impact of changes in interest rates. We have experienced
no material changes in market risk during the first nine months of 1999.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No information to report.
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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: October 22, 1999 By: /s/ Mitchell H. Caplan
------------------------------------------------ ---------------------------------------------------------
Mitchell H. Caplan
President and Chief Executive Officer
Date: October 22, 1999 By: /s/ Aileen Lopez Pugh
------------------------------------------------ ---------------------------------------------------------
Aileen Lopez Pugh
Executive Vice President and Chief Financial Officer
21