MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

INTRODUCTION

     TeleBanc Financial Corporation  ("TeleBanc" or the "Company") was organized
by its majority stockholder, MET Holdings Corporation, to become, in March 1994,
the parent  savings  and loan  holding  company for  TeleBank  ("the  Bank"),  a
federally  chartered  savings bank.  All  references to the Company  include the
business of the Bank.  Financial  and other data as of and for all periods prior
to March 1994 represent the  consolidated  data of the Bank only. Prior to March
1996, the Bank was formerly known as Metropolitan Bank for Savings, F.S.B.

     During the second  quarter of 1994,  TeleBanc  completed its initial public
offering,  raising  $4.6  million  through  the  sale  of  common  stock  and an
additional  $17.3  million  through  the  issuance  of  subordinated  notes with
warrants. Since completion of the offering, the Company has emphasized growth of
the Bank  through  careful  leveraging  of the  proceeds.  At December 31, 1996,
TeleBanc  reported  total  assets of $648.0  million,  total  deposits of $390.5
million, and stockholders' equity of $24.7 million,  compared to $553.9 million,
$306.5 million, and $21.6 million, respectively, at December 31, 1995.

     Since 1989, the Bank has been  developing an operating  strategy that seeks
to minimize general and  administrative  expenses through more efficient deposit
gathering,  borrowing, and asset generation. From its headquarters in Arlington,
Virginia,  the Company attracts primarily low transaction  deposit accounts such
as  certificates  of  deposit  and money  market  accounts  by  advertising  and
conducting  public  relation  campaigns in select  markets.  Unlike  traditional
financial  institutions,  the Company pursues a "branchless"  marketing strategy
and thus interacts with its customers  primarily through the Company's toll free
telephone  number  and mail.  Company  representatives  utilize a  sophisticated
computer  software  system to market  and  process  deposits,  build a  customer
database for future products and provide quality service.  Other funding sources
for the Company  include  borrowings  from the Federal Home Loan Bank of Atlanta
("FHLB"), securities sold under agreements to repurchase, and subordinated debt.

     The  Company's  asset  acquisition  strategy  is  focused on  investing  in
one-to-four  unit,   single-family  mortgages  and  mortgage  backed  securities
purchased in the secondary  market rather than to originate  loans.  The Company
seeks to manage  interest  rate risk  through  matching  the  maturities  of its
deposit  solicitations  and borrowings as compared with its asset  purchases and
the use of certain hedging  techniques in order to operate profitably in various
interest rate environments.

     On February 28, 1997, the Company  consummated the sale of $29.9 million of
units in the form of convertible  preferred stock, senior subordinated notes and
warrants  and the  purchase  of the  assets  of  Arbor  Capital  Partners,  Inc.
("Arbor"), a registered investment advisor, funds manager and broker-dealer. MET
Holdings, TeleBanc's majority shareholder, owns a majority of Arbor.

     The $29.9 million in units were sold to investment  partnerships managed by
Conning  &  Company,  CIBC WG  Argosy  Merchant  Fund 2,  LLC,  the  Progressive
Corporation, and The Northwestern Mutual Life Insurance Company. Representatives
from the  Conning  partnerships  and the CIBC  Merchant  Fund will  serve on the
Board. The units consist of $13.7 million in 9.5% senior subordinated notes with
198,088 detachable warrants,  $16.2 million in 4.0% convertible preferred stock,
and rights to 205,563 contingent warrants.

     Also in connection with the sale of units, the Arbor asset  acquisition was
structured as a tax free issuance of 162,461 shares of TeleBanc common stock and
a $500,000 cash payment for the Arbor assets.  An independent  appraisal  valued
the assets to be acquired from Arbor at $3.1 million. Consistent with TeleBanc's
charter,  the number of shares issued to Arbor as consideration is limited to 5%
of total market value of outstanding TeleBanc stock at the time of acquisition.

     The  following  financial  review  presents  management's  analysis  of the
consolidated  financial  condition and results of  operations  of TeleBanc,  and
should  be  read  together  with  the  consolidated   financial  statements  and
accompanying notes.

INTEREST RATE SENSITIVITY MANAGEMENT

     The Company actively monitors the sensitivity of its assets and liabilities
to various  interest rate  environments due to repricing in future time periods.
Effective interest rate sensitivity management seeks to ensure that net interest
income is protected from the impact of changes in interest rates.

     The  Company's  strategies  are intended to  stabilize  the  Company's  net
interest rate spread under a variety of changes in interest  rates. In an effort
to manage growth  effectively,  the Company undertook a slow, yet steady path to
leverage the initial


<PAGE>
public  offering  proceeds  and  invest  in   interest-earning   assets.  It  is
management's intent to leverage the $29.9 million private placement proceeds and
invest in  interest-earning  assets  in a path  similar  to that of the  initial
public offering.  This growth was funded by raising deposits and incurring debt,
including  FHLB  advances and  securities  sold under  agreements  to repurchase
("reverse  repos").  The Company's deposit  gathering  strategy tends to rely on
higher  yielding money market accounts and  certificates of deposit  accumulated
through the Bank's branchless banking telephone and mail operations, rather than
relying on higher  overhead  products  such as  extensive  branch  networks  and
transaction accounts (i.e., checking accounts).  Similarly, the Company tends to
invest  its  funds in assets  purchased  in the  secondary  market  rather  than
incurring overhead for extensive loan origination  operations.  As a result, the
Company's  interest rate spread may be lower than that of traditional  financial
institutions.   By   seeking   to   match   closely   the   maturities   of  its
interest-sensitive assets and liabilities,  the Company believes it can maintain
relatively  consistent  interest  rate spreads and mitigate much of the interest
rate risk associated with such assets and liabilities.

     The Company utilizes hedging techniques to reduce its overall interest rate
risk exposure over a one-to-seven  year period.  Management's  hedging practices
are directed towards the following risks:  interest rate sensitivity gap between
the  amount  of  interest-earning  assets  and the  amount  of  interest-bearing
liabilities,  loan  prepayments and premature  withdrawal of deposits.  A policy
adopted  by  the  Company's  Board  of  Directors   prohibits   management  from
speculative  purchases or sales of futures,  options,  stripped  mortgage-backed
securities and other mortgage derivative products.

     Interest rate swaps, caps,  floors,  collars and financial options are used
to manage interest rate exposure by hedging certain assets and liabilities,  and
are not used for speculative  purposes.  The Company's  interest rate spread was
1.84%,  1.72%,  and 1.51% for 1996, 1995 and 1994,  respectively.  The Company's
yield on  interest-earning  assets for such periods was 1.94%,  1.88% and 1.62%,
respectively.  Since the initial  public  offering in May 1994,  the Company has
steadily grown both assets and liabilities, with average interest earning assets
growing  from  $206.9  million  for the  quarter  ended March 31, 1994 to $575.5
million for the year ended  December  31,  1996,  and average  interest  bearing
liabilities  growing from $206.1 million to $564.3 million over the same period.
The Company's  ongoing strategy is to maintain a relatively stable interest rate
margin and interest rate spread.

     The Company  matches its assets and  liabilities by examining the extent to
which  such  assets  and  liabilities  are  "interest  rate  sensitive"  and  by
monitoring  interest rate sensitivity "gap." An asset or liability is said to be
interest rate  sensitive  within a specific  period if it will mature or reprice
within  that  period.  The  interest  rate  sensitivity  gap is  defined  as the
difference between the amount of  interest-earning  assets maturing or repricing
within a specific  time  period and the amount of  interest-bearing  liabilities
maturing or repricing within the same time period. A gap is considered  positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate  sensitive  liabilities,  and is  considered  negative  when the  amount of
interest  rate  sensitive  liabilities  exceeds  the  amount  of  interest  rate
sensitive  assets.  Generally,  during a period  of  rising  interest  rates,  a
negative gap would  adversely  affect net  interest  income while a positive gap
would result in an increase in net interest income; conversely,  during a period
of falling  interest  rates,  a negative  gap would result in an increase in net
interest income and a positive gap would adversely  affect net interest  income.
The  Company's  current  asset-liability  management  strategy is to maintain an
evenly matched  one-to-five year gap giving effect to hedging,  but depending on
market conditions and related circumstances,  a positive or negative one-to-five
year gap of up to 20% may be acceptable.  Giving effect to the Company's hedging
activities,  the  Company's  one-year gap at December  31, 1996 is (0.16)%.  The
Company's hedge-effected one-to-five year gap at such date is (11.59)%.

     The following  assumptions  were used by management in order to prepare the
Company's  gap  table  set  forth on the next  page.  Non-amortizing  investment
securities  are  shown  in  the  period  in  which  they  contractually  mature.
Investment  securities  which contain embedded options such as puts or calls are
shown in the period in which that  security is  currently  expected to be put or
called or to mature.  The table  assumes  that  fully-indexed,  adjustable-rate,
residential  mortgage loans and  mortgage-backed  securities prepay at an annual
rate  between  10% and 15%,  based on  estimated  future  prepayment  rates  for
comparable market benchmark securities and the Company's prepayment history. The
table also assumes that fixed rate,  current-coupon  residential loans prepay at
an annual rate of between 10% and 15%. The above assumptions were adjusted up or
down on a pool by pool basis to model the effects of product type,  coupon rate,
rate adjustment  frequency,  lifetime cap, net coupon reset margin, and periodic
rate caps upon prevailing  annual  prepayment  rates. Time deposits are shown in
the period in which they contractually mature, and savings deposits are shown to
reprice  immediately.  The interest rate sensitivity of the Company's assets and
liabilities  could vary  substantially if different  assumptions were used or if
actual experience differs from the assumptions used.

     Certain  shortcomings  are inherent in the method of analysis  presented in
the gap  table.  Although  certain  assets  and  liabilities  may  have  similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes in market interest rates.  The interest rates on certain types of assets
and liabilities may fluctuate in

<PAGE>


advance of changes in market interest rates, while interest rates on other types
of assets and  liabilities  may lag behind  changes  in market  interest  rates.
Certain assets, such as adjustable-rate  mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the assets.
In the  event of a change in  interest  rates,  prepayment  rates  would  likely
deviate  significantly  from those assumed in calculating the table. The ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.

     Management  measures  the  efficiency  of  its  asset/liability  management
strategies  by  analyzing,  on a quarterly  basis,  the Bank's  theoretical  Net
Portfolio Value (NPV) and the effect that changes in interest rates are expected
to have on NPV. The Board of Directors has established  limits within which such
changes  in NPV are  expected  to be  maintained  in the  event of a  change  in
interest rates. Under proposed Office of Thrift Supervision ("OTS") regulations,
an institution's  interest rate risk exposure is measured based upon a 200 basis
point  parallel shift in market  interest  rates.  A savings  institution  whose
measured  interest  rate risk  exposure is greater  than  specified  levels must
deduct an  interest  rate risk  component  from  total  capital  for  purpose of
determining  regulatory  risk-based capital levels. As of December 31, 1996, the
Bank would not have been  required to deduct any  interest  rate risk  component
from capital under the proposed OTS interest rate risk capital regulations.
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------
                                                              REPRICING       REPRICING      REPRICING
                                                                WITHIN          WITHIN         WITHIN   REPRICING
                                        BALANCE       PERCENT     0-3            4-12           1-5       OVER
(Dollars in Thousands)           DECEMBER 31, 1996    OF TOTAL   MONTHS          MONTHS        YEARS    5 YEARS
-----------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>     <C>             <C>            <C>       <C>
Interest-earning assets:
Loans receivable, net                   $351,821       56.21%  $  17,339       $140,267       $133,274  $  60,941
Investment securities
  available for sale, interest
  bearing accounts & FHLB stock           88,636        14.16     27,654            487          9,908     50,587
Mortgage-backed
   securities available for sale         184,743        29.51     49,942         69,131         47,702     17,968
Federal funds sold                           750         0.12        750             --             --         --
                                        ---------    -------------------------------------------------------------
Total interest-earning assets           $625,950      100.00%  $  95,685       $209,885       $190,884  $ 129,496
Non-interest earning assets:              22,015     -------------------------------------------------------------
                                        --------
Total assets                            $647,965
                                        --------
Interest-bearing liabilities:
Savings deposits                        $111,843       18.35%   $111,843     $       --     $       -- $       --
Time deposits                            278,643        45.72     31,739         92,011        151,462      3,431
FHLB advances                            144,800        23.76    134,800         10,000             --         --
Other borrowings                          57,581         9.45     57,581             --             --         --
Subordinated debt                         16,586         2.72         --             --             --     16,586
                                        ---------    -------------------------------------------------------------
Total interest-bearing liabilities      $609,453      100.00%   $335,963       $102,011       $151,462  $  20,017
Non-interest bearing liabilities          13,854     -------------------------------------------------------------
                                        --------
Total liabilities                       $623,307
Stockholders' equity                      24,658
Total liabilities and                   --------
  stockholders equity                   $647,965
Periodic repricing difference
  (periodic gap)                                             $ (240,278)     $  107,874     $   39,422  $ 109,479
Cumulative repricing difference
  (cumulative gap)                                           $ (240,278)    $ (132,404)    $  (92,982) $   16,497
Cumulative gap to total assets                                  (37.08)%       (20.43)%       (14.35)%      2.55%
Cumulative gap to total assets
   hedge effected (a)                                           (11.40)%        (0.16)%       (11.59)%      2.55%
                                        --------------------------------------------------------------------------
</TABLE>
(a)  The hedge effected  cumulative  gap to total assets  reflects the effect of
     hedging instruments on the Company's gap at December 31, 1996. For purposes
     of determining the effect of such hedging  instruments,  interest rate swap
     agreements  are treated as part of the hedged  liability,  hence,  the cash
     flows from the swap and the hedged  asset or  liability  are netted and the
     resulting  cash flows are used in the gap  calculation.  Interest  rate cap
     agreements  also are treated as part of the hedged asset or  liability  and
     weighted by market's  estimate of the likelihood the cap strike will be met
     or exceeded. The net cash flows are used in the gap calculations.
<PAGE>
FINANCIAL CONDITION

     The Company's total assets  increased by $94.1 million or 17.0% from $553.9
million at  December  31,  1995 to $648.0  million at  December  31,  1996.  The
increase in assets during 1996 primarily  reflects  continued  leveraging of the
Bank's capital. At December 31, 1993, the Bank had stockholders' equity of $12.4
million.  Following  the  Company's  initial  public  offering in May 1994,  the
Company  increased  the Bank's  equity by $15.0  million,  thereby  supporting a
31-month  period of  growing  the Bank from  $220.3  million in assets to $648.0
million in assets as of December 31, 1996.  Growth in assets is  attributable to
increases  in  mortgage-backed  securities  and loans  receivable.  The  primary
sources of funds for this growth in assets were deposits and borrowings.

     Loans  receivable,  net and loans receivable held for sale increased $103.3
million or 41.6%,  from $248.5 million at December 31, 1995 to $351.8 million at
December 31, 1996. The increase  reflects whole loan purchases of $182.0 million
offset by $51.2 million of principal  repayments and $27.0 million of loans sold
in 1996.  In the  second  quarter  of 1996,  the  Company  reevaluated  its loan
investment  strategy.  The Company  determined  that the probable sale of loans,
subsequent  to a  restructuring  or credit  enhancement,  would add value to the
portfolio.  Pursuant to this strategy, the Company created a loans held for sale
category with a one-time  transfer of loans from the  investment  portfolio that
have  characteristics  that make them  susceptible to sale after  restructuring,
credit enhancement,  or other improvements.  Loans held for sale are recorded at
the lower of cost or market. Going forward, the Company will maintain loans held
for sale and loans held for investment categories.

     Mortgage-backed securities, available-for-sale, decreased $49.6 million, or
21.2%,  from $234.4  million at December 31, 1995 to $184.7  million at December
31, 1996. Investment securities, available for sale, increased $38.7 million, or
96.5%,  from $40.1 million at December 31, 1995 to $78.8 million at December 31,
1996. These securities are held for liquidity  purposes and increased along with
the growth of assets of the Bank in 1996.

     Deposits increased $84.0 million, or 27.4%, from $306.5 million at December
31, 1995 to $390.5  million at  December  31,  1996,  largely as a result of the
Company's  marketing  efforts to attract money market and certificate of deposit
accounts, as well as the purchase of deposits from a failed institution.  During
fiscal year 1996,  approximately  $21.4  million of interest was credited to the
accounts while deposits  exceeded  withdrawals by $62.6 million,  resulting in a
net change of $84.0 million.  During 1996,  significant emphasis was also placed
upon raising deposits as a source of funds for asset growth.

     FHLB advances  increased  $39.3 million,  or 37.3%,  from $105.5 million at
December  31, 1995 to $144.8  million at December 31,  1996.  Other  borrowings,
composed of securities  sold under  agreements to  repurchase,  decreased  $36.3
million,  or 38.7%,  from $93.9 million at December 31, 1995 to $57.6 million at
December 31, 1996. This slight increase in net borrowings reflects the Company's
effort to focus funding efforts on deposits yet maintain additional funds at low
interest rates in order to support asset growth.

     Stockholders'  equity  increased  $3.1 million to $24.7 million at December
31, 1996 from $21.6  million at December 31, 1995.  The increase  reflects  $2.6
million  in net  income  and an  unrealized  gain  for the  year  on  securities
available  for sale of $541,000,  net of taxes,  which  increases  the Company's
stockholders' equity, but does not impact the statement of operations.

     The consolidated  average balance sheets, along with income and expense and
related  interest  yields  and rates at  December  31,  1996 and for each of the
preceding  three fiscal years are shown on the  following  page.  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 savings  institutions have  traditionally used as an indicator of
profitability.  Another indicator of an institution's  profitability is its "net
yield on  interest-earning  assets," which is its net interest income divided by
the average balance of interest-earning  assets. Net interest income is affected
by the  interest  rate spread and by the  relative  amounts of interest  earning
assets and interest-bearing  liabilities.  When interest-earning assets equal or
exceed  interest-bearing  liabilities,  any positive  interest  rate spread will
generate net  interest  income.  As discussed  above,  the  Company's  operating
strategy  tends to result in lower  spreads  and margins  than other  comparable
financial  institutions,  but the Company  believes lower net interest income is
mitigated by savings in general and administrative expenses.


<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                             1996                        1995
                                  Balance     Average  Interest     Average    Average  Interest   Average
(Dollars in thousands)    December 31, 1996   Balance  Inc./Exp.  Yield/Cost   Balance  Inc./Exp. Yield/Cost
--------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>       <C>          <C>      <C>       <C>          <C>
Interest-earning assets:
Loans receivable, net(a)           $351,821   $279,038  $23,089      8.28%    $201,737  $17,726      8.80%
Mortgage-backed &
  related securities                     --         --       --        --      233,728   18,614      7.96
Investment securities (b)(c)          9,810     12,841      871      6.79       13,627      990      7.27
Mortgage-backed &
  related securities, AFS           184,743    221,656   17,955      8.10       19,138    1,597      8.35
Investment securities, AFS           78,826     61,169    3,959      6.47       25,516    2,071      8.12
Federal funds sold                      750        842       44      5.22          810       49      6.05
Trading account                          --         --       --        --        1,932      166      8.59
                                   --------   ----------------------------    ----------------------------
Total-interest earning assets      $625,950   $575,546  $45,918      7.98%    $496,488  $41,213      8.31%
Non-interest earning assets          22,015     26,929                          15,388
                                   --------   ----------------------------    ----------------------------
Total assets                       $647,965   $602,475                        $511,876
                                   --------   ----------------------------    ----------------------------
Interest-bearing liabilities:
Savings deposits                   $111,843   $ 99,346 $  4,815      4.85%    $ 41,387  $ 2,111      5.10%
Time deposits                       278,643    258,870   16,542      6.39      223,745   14,930      6.67
FHLB advances                       144,800    120,678    6,689      5.54      104,142    6,571      6.31
Other borrowings                     57,581     68,154    4,569      6.70       97,906    6,230      6.36
Subordinated debt, net               16,586     17,250    2,200     12.75       17,250    2,089     12.11
                                   --------   ----------------------------    ----------------------------
Total interest-bearing liabilities $609,453   $564,298  $34,815      6.14%    $484,430  $31,931      6.59%
Non-interest-bearing liabilities     13,854     15,900                           8,150
                                   --------   ----------------------------    ----------------------------
Total liabilities                  $623,307   $580,198                        $492,580
Stockholders' equity                 24,658     22,277                          19,296
                                   --------   ----------------------------    ----------------------------
Total liabilities and stockholders'
  equity                           $647,965   $602,475                        $511,876
                                   --------   ----------------------------    ----------------------------
Excess of interest-earning assets
  over interest-bearing liabilities/
  net interest income/interest rate
   spread                          $ 16,497   $ 11,248  $11,136      1.84%    $ 12,058  $ 9,313     1.72%
Net yield on interest earning assets                                 1.94%                          1.88%
Ratio of interest-earning assets
  to interest-bearing liabilities                                  101.99%                        102.49%
--------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
------------------------------------------------------------------------
                                                 1994
                                        Average   Interest    Average
(Dollars in thousands)                  Balance   Inc./Exp.  Yield/Cost
------------------------------------------------------------------------
Interest-earning assets:
Loans receivable, net(a)               $127,805    $10,813       8.46%
Mortgage-backed &
  related securities                    136,304      9,328       6.84
Investment securities (b)(c)             14,627        801       5.48
Mortgage-backed &
  related securities, AFS                 8,934        645       7.22
Investment securities, AFS               13,705        771       5.63
Federal funds sold                        2,092         83       3.97
Trading account                              --         --         --
                                       -------------------------------
Total-interest earning assets          $303,467    $22,441       7.39%
Non-interest earning assets              18,794
                                       -------------------------------
Total assets                           $322,261
                                       -------------------------------
Interest-bearing liabilities:
Savings deposits                       $ 17,587    $   518       2.95%
Time deposits                           140,485      9,209       6.56
FHLB advances                            82,533      4,278       5.18
Other borrowings                         47,715      2,281       4.78
Subordinated debt, net                    9,555      1,227      12.84
                                       -------------------------------
Total interest-bearing liabilities     $297,875    $17,513       5.88%
Non-interest-bearing liabilities          7,401
                                       -------------------------------
Total liabilities                      $305,276
Stockholders' equity                     16,985
                                       -------------------------------
Total liabilities and stockholders'
  equity                               $322,261
                                       -------------------------------
Excess of interest-earning assets
  over interest-bearing liabilities/
  net interest income/interest rate
   spread                              $  5,592    $ 4,928       1.51%
Net yield on interest earning assets                             1.62%
Ratio of interest-earning assets
  to interest-bearing liabilities                              101.88%
----------------------------------------------------------------------
---------
(a)  Includes mortgages held for sale and investments.
(b)  Includes  interest-bearing  deposits,  repurchase  agreements,   investment
     securities held to maturity, and FHLB stock.
(c)  Interest  income and average  yields on municipal  bonds are presented on a
     tax equivalent basis.

LIQUIDITY MANAGEMENT AND FUNDING

     Liquidity is a company's ability to maintain  sufficient cash flows to fund
operations  and  meet  existing  and  future  obligations,   including  maturing
liabilities, loan commitments, and depositors' withdrawals. The asset portion of
the  balance  sheet  provides  liquidity  through  short-term   investments  and
maturities and repayments of loans and investment  securities.  Other sources of
asset liquidity include sales of loans or securities.

     Liquidity is provided through the Company's ability to attract and maintain
sufficient deposits and to access available funding markets. Federal regulations
require that the Bank maintain an average of 5.00%  liquidity  ratio in relation
to certain  borrowings and the deposit base.  The Bank exceeded the  requirement
throughout 1996 and 1995.

     The  Company  continues  to  enhance  the core  deposit  base  through  its
branchless  marketing  strategy  that targets  individual  savers who deposit an
average of $23,000.  Management is developing new deposit products responsive to
our customers needs and cross  marketing  these  services,  which should provide
stable  funding  sources in future  periods.  In 1995,  the  Company  introduced
callable CDs,  money market  accounts,  and the Refer a Saver(TM)  Program.  The
callable  CDs are  redeemable  at the option of the  Company  any time after the
second  anniversary  of the date of deposit,  which allows  management  to hedge
against  prepayment  risk.  The Refer a  Saver(TM)  Program  rewards  current CD
account holders with cash for each new customer referred to the Company.


<PAGE>

     The  following  table shows the  changes in deposits  for each of the prior
periods:

                                                    YEARS ENDED DECEMBER 31,
                                              ----------------------------------
(Dollars in thousands)                          1996         1995         1994
----------------------                          ----         ----         ----
Balance at beginning of period                $306,500     $212,411     $113,132
Deposits in excess of (less than)
   withdrawals                                  62,629       76,866       91,806
Interest credited on deposits                   21,357       17,223        7,473
                                              ----------------------------------
Balance at end of period                      $390,486     $306,500     $212,411
                                              ==================================

     Management  believes  that  liquidity  of bank  deposits  coupled with FDIC
insurance will continue to encourage depositors to maintain significant portions
of their funds in insured depository  accounts.  Management also believes that a
high level of service  and  convenience  coupled  with a growing  acceptance  of
electronic and branchless banking will allow the Company to compete  efficiently
and  effectively  against other FDIC insured banks and other non-bank  financial
institutuions.  Largely as a result of management's  marketing  efforts in 1996,
the Company experienced an increase in money market account balances, which cost
less than the cost of FHLB  advances,  other  borrowings,  and  certificates  of
deposit accounts. Total deposits increased $84.0 million, or 27.4%, during 1996.
Savings deposits  increased $32.4 million,  or 40.8%, and certificate of deposit
accounts increased $51.6 million, or 22.7% during 1996.

     The  Company  also  relies  upon  borrowed  funds to  provide  a source  of
liquidity at attractive interest rates. Total borrowings increased $3.0 million,
or 1.5%, during 1996.  Advances from the FHLB increased $39.3 million, or 37.3%,
during the period  largely as a result of attractive  interest  rates and due to
the various  products offered by the FHLB to member  institutions.  Advances are
collateralized  by  specific  liens  on  mortgage  loans in  accordance  with an
"Advances,  Specific Collateral Pledge and Security  Agreement",  which requires
the Company to maintain qualified  collateral equal to 120 to 160 percent of the
Company's advances. Accordingly, the Company increased single-family residential
mortgage  loan  collateral  to the  FHLB to  $186.1  million  during  the  year.
Additional  borrowings from the FHLB are contingent  upon the Company  providing
the appropriate  collateral.  Repurchase  agreements decreased $36.3 million, or
38.7%,  during  1996.  Principally,  mortgage-backed  securities  are pledged as
collateral for the repurchase agreements.  As of December 31, 1996, the Bank had
approximately $100.0 million in additional borrowing capacity.

     In the second  quarter  of 1994,  TeleBanc  completed  its  initial  public
offering,  raising an aggregate of $21.9 million  through the issuance of common
stock and subordinated  notes with warrants.  The subordinated debt represents a
very stable, although relatively expensive,  source of funds. Upon completion of
the offering,  the Company  invested $15.0 million of the proceeds as capital of
the Bank. At December 31, 1996,  subordinated  debt, net was $16.6 million.  The
annual  expense  to service  the debt is $2.2  million.  Subject  to  regulatory
approval,  the Bank will  dividend  this  balance to the  Company to service the
debt. There are various regulatory  limitations on the extent to which federally
chartered  savings  institutions may pay dividends.  Also,  savings  institution
subsidiaries  of holding  companies  generally are required to provide their OTS
Regional  Director  with no less than 30 days'  advance  notice of any  proposed
declaration on the institution's stock. Under terms of the indenture pursuant to
which the subordinated  notes were issued,  the Company presently is required to
maintain,  on an  unconsolidated  basis,  liquid assets in an amount equal to or
greater than $2.0  million,  which  represents  100% of the  aggregate  interest
expense for one year on the  subordinated  debt. The Company had $2.9 million in
liquid assets at December 31, 1996.

CAPITAL ADEQUACY

     The Company's stockholders' equity at December 31, 1996, was $24.7 million.
This  represents a $3.1 million,  or 14.4%,  increase  from the prior year.  The
increase reflects $2.6 million in net income and an unrealized gain for the year
on securities  available-for-sale  of $541,000,  net of taxes, which pursuant to
SFAS 115 increases the Company's  stockholders'  equity, but does not impact the
statement of operation. See Note 2 of the Consolidated Financial Statements.

     The Bank meets all  current and fully  phased-in  capital  requirements  as
adjusted for the changes  which are effective to the  computation  of risk-based
capital and core capital at December 31, 1996.

     The required  and actual  amounts and ratios of capital  pertaining  to the
Bank as of December 31, 1996 are set forth as follows

<TABLE>
<CAPTION>
(dollars in thousands):
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           TO BE WELL
                                                           FOR CAPITAL                                 CAPITALIZED UNDER
                                                           ADEQUACY                                    PROMPT CORRECTIVE
                                 ACTUAL                    PURPOSES:                                   ACTION PROVISIONS:
                          -----------------   -----------------------------------------   ------------------------------------------
                           AMOUNT   RATIO            AMOUNT               RATIO               AMOUNT                      RATIO
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>      <C>      <C>                     <C>                 <C>                     <C>
As of December 31, 1996:
Total Capital (to risk
   weighted assets)         $34,104  10.41%   greater than $ 26,205   greater than 8.0%   greater than  $32,756   greater than 10.0%
Tier 1 Capital (to risk
   weighted assets)         $31,726   9.69%   greater than $ 13,102   greater than 4.0%   greater than  $19,654   greater than  6.0%
Tier 1 Capital (to
  average assets)           $31,726   5.08%   greater than $ 24,999   greater than 4.0%   greater than  $31,248   greater than  5.0%
Tangible                    $31,711   5.07%   greater than $  9,374   greater than 1.5%                     N/A                  --
As of December 31, 1995:
Total Capital (to risk
   weighted assets)         $30,680  11.74%   greater than $ 20,899   greater than 8.0%   greater than  $26,264   greater than 10.0%
Tier 1 Capital (to risk
   weighted assets)         $28,944  11.08%   greater than $ 10,450   greater than 4.0%   greater than  $15,674   greater than  6.0%
Tier 1 Capital (to
   average assets)          $28,944   5.31%   greater than $ 21,798   greater than 4.0%   greater than  $27,261   greater than  5.0%
Tangible                    $29,201   5.36%   greater than $  8,178   greater than 1.5%   greater than      N/A                  --

</TABLE>


<PAGE>




EARNINGS PERFORMANCE

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 , 1995 AND
1994

NET INCOME.  Net income for fiscal year 1996 was $2.6  million  compared to $2.7
million  for fiscal  year 1995.  Net  income for 1996  includes  the effect of a
one-time  $1.7  million,  before tax,  assessment  to  recapitalize  the Savings
Association Insurance Fund ("SAIF").  Without such assessment,  net income would
have  been $3.6  million.  Net  income  for the year  ended  December  31,  1996
consisted primarily of $11.0 million in net interest income, $1.8 million in net
gains on the sale of loans  held  for sale and  mortgage-backed  and  investment
securities  offset  by  $9.1  million  in  non-interest  expenses,  $919,000  in
provision  for loan losses and $1.2 million in income tax  expenses.  For fiscal
year 1996,  the Company's  return on average assets and return on average equity
was 0.42% and 11.46%,  respectively.  Based on 2,316,616 weighted average shares
of common  stock  issued and  outstanding  as well as common  stock  equivalents
earnings per share was $1.12.

     Net income  increased by $2.2 million,  or 407.4%,  from $540,000 in fiscal
year 1994,  to $2.7  million in fiscal year 1995.  Net income for the year ended
December 31, 1995  consisted  primarily of $8.6 million in net interest  income,
$1.6 million in gains on the sale of  mortgage-backed  securities  available for
sale, $1.1 million in gains on the sale of investment  securities  available for
sale and  $677,000  in profit on trading  activities  offset by $6.2  million in
total non-interest expenses,  $1.7 million in provision for loan losses and $1.7
million in income taxes.  The Company's  return on average  assets and return on
average equity was 0.53% and 14.10%,  respectively.  Based on 2,068,597 weighted
average  shares of common stock issued and  outstanding  as well as common stock
equivalents, earnings per share was $1.33.

NET INTEREST INCOME.  Net interest income is the principal source of a financial
institution's  income stream and represents the spread between  interest and fee
income  generated from earning assets and the interest  expense paid on deposits
and  borrowed  funds.  Fluctuations  in  interest  rates as well as  volume  and
composition changes in interest-earning assets and interest-bearing  liabilities
materially affect net interest income.

     Net interest income increased by $2.4 million,  or 27.9%, from $8.6 million
to $11.0 million for the years ended  December 31, 1995 and 1996,  respectively.
Interest rate spreads increased from 1.72% to 1.84% for the years ended December
31, 1995 and 1996, respectively.  The improvement in spreads reflects a 45 basis
point decline in the costs of interest-bearing  liabilities offset by a 33 basis
point decline in the yield of interest-earning  assets. Average interest-earning
assets were $575.5 million for 1996 compared to $496.5 million for 1995.

     Net interest income increased $3.9 million,  or 82.4%, from $4.7 million to
$8.6  million for the years  ended  December  31,  1994 and 1995,  respectively.
Interest rate spreads increased to 1.72% from 1.51% for the years ended December
31,  1995 and 1994,  respectively.  The  improvement  in  spreads  reflects  the
repricing of adjustable  interest-bearing  assets and the slight  improvement in
the ratio of interest-earning assets to interest-bearing  liabilities to 102.49%
in 1995 from  101.88%  in 1994.  Average  interest-earning  assets  were  $496.5
million for 1995 compared to $303.5 million for 1994.

     The following table allocates the period-to-period changes in the Company's
various categories of interest income and expense between changes due to changes
in volume (calculated by multiplying the change in average volume of the related
interest-earning  asset or  interest-bearing  liability  category  by the  prior
year's rate) and changes due to changes in rate  (changes in rate  multiplied by
prior  year's  volume).  Changes due to changes in  rate-volume  (change in rate
multiplied  by changes in volume) have been  allocated  proportionately  between
changes in volume and changes in rate.


<PAGE>
<TABLE>
<CAPTION>
                                                                1996 vs. 1995                             1995 vs. 1994
                                                           INCREASE (DECREASE) DUE TO                INCREASE (DECREASE) DUE TO
                                                           --------------------------                --------------------------
(Dollars in thousands)                                  VOLUME         RATE       TOTAL            VOLUME          RATE       TOTAL
----------------------                                  ------         ----       -----            ------          ----       -----
<S>                                                     <C>      <C>          <C>                  <C>          <C>        <C>
Interest-earning assets:
     Loans receivable, net (a)                          $  6,333 $    (968)   $   5,365            $  6,491     $   452    $  6,943
     Mortgage-backed and related securities               (9,307)   (9,307)     (18,614)              7,555       1,730       9,285
     Investment securities (b) (c)                            16      (134)        (118)                (50)        239         189
     Mortgage-backed and related securities
       available for sale                                 16,404       (45)      16,359                 837         115         952
     Investment securities available for sale (c)          2,194      (305)       1,889                 859         441       1,300
     Federal funds sold                                        2        (8)          (6)               (257)        224         (33)
     Trading account                                          17      (185)        (168)                167          --         167
                                                        -------------------------------            ---------------------------------
       Total interest-earning assets                    $ 15,659  $(10,952)   $   4,707            $ 15,602     $ 3,201    $ 18,803
Interest-bearing liabilities:
     Savings deposits                                   $  2,803  $   (100)   $   2,703            $  1,034     $   559    $  1,593
     Time deposits                                         2,208      (596)       1,612               5,553         168       5,721
     FHLB advances                                           972      (292)         680               1,253       1,040       2,293
     Other borrowings                                     (1,778)     (446)      (2,224)              3,004         946       3,950
     Subordinated debt                                        --       112          112                 928         (66)        862
                                                        -------------------------------            ---------------------------------
Total interest-bearing liabilities                         4,205    (1,322)       2,883              11,772       2,647      14,419
                                                        -------------------------------            ---------------------------------
Change in net interest income                            $11,454 $  (9,630)   $   1,824            $  3,830     $   554    $  4,384
                                                        ===============================            =================================
</TABLE>
----------
(a)  Includes mortgage and other loans.
(b)  Includes  interest-bearing  deposits,  repurchase  agreements,   investment
     securities held to maturity, and FHLB stock.
(c)  Interest  income  and  average  yields  on  municipal  bonds,  included  in
     investment securities, are presented on a tax equivalent basis.

INTEREST INCOME.  Total interest income increased $5.3 million,  or 13.1%,  from
$40.5 million for the year ended December 31, 1995 to $45.8 million for the year
ended December 31, 1996.  Interest  income on mortgage and other loans increased
$5.4 million or 30.5%.  The increase is largely  attributed to the $77.3 million
increase in average loan balance. Interest income on mortgage-backed  securities
held-to-maturity  and  available-for-sale  decreased by $2.2 million,  or 10.9%,
from $20.2  million at December  31, 1995 to $18.0  million at December 31, 1996
largely  as a result of a $31.2  million  decline  in  average  mortgage  backed
securities held-to-maturity and available-for-sale.

     Total interest income increased $18.3 million, or 82.4%, from $22.2 million
for the year  ended  December  31,  1994 to  $40.5  million  for the year  ended
December 31, 1995.  Interest  income on mortgage and other loans  increased $6.9
million or 63.9%.  The increase is primarily  attributable to an increase in the
average  balance of the loans  receivable  portfolio from $127.8 million for the
year ended  December 31, 1994 to $201.7  million for the year ended December 31,
1995 as well as a slight  increase in the average yield on the loans  receivable
portfolio  from 8.46% for the year ended December 31, 1994 to 8.80% for the year
ended  December 31, 1995.  Similarly,  interest  income on  mortgage-backed  and
related  securities,  including  those  available  for sale,  increased by $10.2
million,  or 102.0%,  from $10.0 million for the year ended December 31, 1994 to
$20.2 million for the year ended December 31, 1995  resulting  primarily from an
$107.6 million increase in the average balance and a 113 basis point increase in
the average yield of such securities.

INTEREST  EXPENSE.  Total interest expense  increased by $2.9 million,  or 9.1%,
from $31.9 million for the year ended December 31, 1995 to $34.8 million for the
year ended  December 31, 1996. The increase is  attributable  to a $79.9 million
increase in interest bearing  liabilities  offset by a 47 basis point decline in
interest costs.


<PAGE>





Total interest expense increased by $14.4 million,  or 82.3%, from $17.5 million
for the year  ended  December  31,  1994 to  $31.9  million  for the year  ended
December  31,  1995 as the  Company  funded its growth  with both  deposits  and
borrowings. The increase in total interest expense was primarily attributable to
a $186.6 million increase in interest bearing liabilities. The increase in total
interest expense reflects a $7.3 million increase and a $6.3 million decrease in
expenses relating to deposits and other borrowings, respectively.

PROVISION  FOR LOAN LOSSES.  The provision for loan losses is the annual cost of
providing  an  allowance or reserve for  anticipated  future  losses on the loan
portfolio.  The  allowance  reflects  management's  judgment  as  to  the  level
considered  appropriate  to absorb  such  losses  based upon a review of factors
including   delinquent  loan  trends,   historical  loss  experience,   economic
conditions, loan portfolio mix and the Company's internal credit review process.

     Total provisions for loan losses decreased by $800,000,  or 47.1% from $1.7
million for the year ended  December  31,  1995 to  $919,000  for the year ended
December 31, 1996. The decrease in loan loss  provisions is  attributable to the
Company's  acquisition of several pools of credit enhanced  mortgage loans which
have  correspondingly  lower  anticipated  losses  as  compared  to the  product
purchased in 1995.  The net loan  portfolio at December 31, 1996  includes  four
pools of credit  enhanced  one-to-four  family  mortgage  loans,  totaling $53.2
million. Two of these pools,  totaling $33.5 million, have a credit reserve from
the seller equal to 2.3% of the unpaid principal balance at the time of purchase
available  to offset  any  losses.  One pool,  totaling  $11.7  million,  has an
indemnification  whereby the seller must  repurchase  any loan that becomes more
than four payments  past due at any time during the life of the loan.  The final
pool of loans, totaling $8.0 million, has a credit reserve from the seller equal
to  approximately  10.0%  of  the  unpaid  principal  balance  at  the  time  of
acquisition.  Since the available credit enhancement associated with these loans
exceeds the expected  potential  losses,  the provision for loan losses declined
during 1996.

     Management  considers  many factors in determining  the required  levels of
loan loss  reserves,  including a detailed  analysis  of  specific  loans in the
portfolio,  known and inherent  risk in the  portfolio,  estimated  value of the
underlying  collateral,  assessment of general trends in the real estate market,
and current and prospective economic and regulatory  conditions.  The total loan
loss  allowance at December 31, 1996 and 1995 was $3.0 million and $2.3 million,
respectively, which was 0.8% and 0.9%, respectively, of total loans outstanding.
Total loan loss  allowance as a percentage  of total  non-performing  assets was
26.3% at December 31, 1996 as compared to 43.4% at December 31, 1995. Management
believes the allowance for loan losses is adequate at December 31, 1996 to cover
potential losses.

     Total  provisions for loan losses increased $1.2 million,  or 243.9%,  from
$492,000 for the year ended December 31, 1994 to $1.7 million for the year ended
December  31,  1995.  The  increase in the  provision  for loan losses  reflects
management's  intent to provide  prudent  reserves for potential loan losses and
for loan acquisitions made during periods of high growth.  During the year
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Year Ended December 31,
                                                              ----------------------------------------------------------------------
                                                                1996             1995          1994           1993         1992
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>            <C>             <C>          <C>
Balance at beginning of period                                $ 2,311           $ 989          $ 835           $ 659        $ 531
Loans charged off, net of recoveries:
     Real estate loans:
         One-to four family                                      (273)              -           (338)            (19)        (172)
         Commercial real estate                                     -               -              -               -         (235)
         Land                                                       -               -              -              (1)        (178)
         Construction                                               -               -              -               -          (13)
     Consumer and other:
         Lease financing                                            -               -              -               -         (303)
         Other                                                      -            (400)                           (15)           -
                                                              ----------------------------------------------------------------------
Total charge-offs                                                (273)           (400)          (338)            (35)        (901)
Provision for possible loan losses                                919           1,722            492             211          972
Allowance acquired through purchase                                 -               -              -               -           57
                                                              ----------------------------------------------------------------------
Balance at end of period                                       $2,957          $2,311          $ 989           $ 835        $ 659
                                                              ----------------------------------------------------------------------
Ratio of net  charge-offs to net average
  loans outstanding during the period                            .10%            .14%           .24%             .03%         .88%
</TABLE>

<PAGE>
ended  December 31, 1995,  the Company  provided  specific  reserves for several
single family homes. In addition,  the Company provided general reserves on loan
acquisitions  of $145.9  million  in  accordance  with the  Company's  loan loss
reserve policy.  The total loan loss allowance at December 31, 1995 and 1994 was
$2.3 million and $989,000 respectively which was 0.9% and 0.6%,  respectively of
total  loans  outstanding.  Total  loss  allowance  as  a  percentage  of  total
non-performing  assets was 46.9% at  December  31,  1995 as compared to 44.8% at
December 31, 1994.

NON-INTEREST  INCOME.  Total  non-interest  income declined by $1.0 million,  or
26.3%,  from $3.8  million for fiscal year 1995 to $2.8  million for fiscal year
1996. Loan fees and service charges increased  $756,000 due to fees collected on
$2.8 million in purchased  mortgage  servicing  rights. As a result of the newly
created loans held for sale category, the Company recognized non-interest income
on the  prepayments of loans held for sale. In the prior year, this income would
have been recognized as interest income.  Gains on loans held for sale increased
$642,000.  Gains on sales of mortgage-backed  securities and investments totaled
$935,000.

     Total  non-interest  income increased by $3.6 million from $175,000 for the
year ended  December  31, 1994 to $3.7  million for the year ended  December 31,
1995. In order to take  advantage of favorable  market  conditions,  the Company
sold six mortgage backed and investment  securities held for liquidity purposes,
for a $1.4  million  gain in 1995.  In  addition,  the  Company  realized a $2.0
million  gain on the  sale of two  mortgage-backed  securities  with  underlying
collateral of one-to-four  family dwellings  largely as a result of management's
ability to analyze,  purchase,  repackage and sell the  undervalued  securities.
With the significant growth in loan and deposit balances,  loan fees and service
charges as well as other  non-interest  income increased to $228,000 offset by a
$100,000 loss recorded in connection  with the kiting of a deposit.  The Company
also recognized a $232,000 gain on the sale of a loan.

NON-INTEREST  EXPENSES.  Total non-interest  expenses increased $2.9 million, or
46.8%,  from $6.2  million for fiscal year 1995 to $9.1  million for fiscal year
1996.  Non-interest expenses are composed of general and administrative expenses
and other non-interest expenses.  General and administrative  expenses increased
$2.8 million,  or 50.0%,  from $5.6 million for the year ended December 31, 1995
to $8.4 million for the year ended  December 31, 1996. The increase is primarily
attributed to the effect of a one-time $1.7 million  assessment to  recapitalize
the SAIF, a $660,000 increase in compensation, employee benefits and $483,000 in
federal insurance premiums and overall administrative costs for a higher deposit
base. As in previous  years,  it is the Company's  compensation  policy to pay a
combination  of salary and incentive  based  compensation  consisting of bonuses
tied to the overall Company's performance and individual performances consistent
with the improved  performance  of the Company net of SAIF  assessment,  bonuses
increased  to $1.1 million for 1996 from  $775,000  for 1995.  Bonuses were $1.1
million  and  $745,000   for  the  year  ended   December  31,  1996  and  1995,
respectively.  General and  administrative  expenses net of bonuses and the SAIF
assessment  as a  percentage  of total  assets was 0.86% and 0.87% for the years
ended  December  31, 1996 and 1995,  respectively.  General  and  administrative
expenses net of the SAIF  assessment  as a percentage  of total assets was 1.03%
and 1.00% for the years ended  December 31, 1996 and 1995,  respectively.  Other
non-interest  expense increased $21,000,  or 3.1%, from $679,000 at December 31,
1995 to $700,000 at December 31, 1996. The slight  increase is attributable to a
$213,000 increase in amortization of purchased  mortgage servicing rights offset
by a $192,000 decline in real estate owned expenses.

     Total  non-interest  expenses  increased $2.6 million,  or 70.7%, from $3.6
million for the year ended  December 31, 1994 to $6.2 million for the year ended
December 31, 1995. General and  administrative  expenses increased $2.1 million,
or 58.7%, from $3.5 million for the year ended December 31, 1994 to $5.6 million
for


<PAGE>



the year ended December 31, 1995. This increase reflects  increased expenses for
professional  services and other general and administrative  expenses related to
the  significant  growth  in loan and  deposit  balances  as well as a  $762,000
increase in compensation and employee  benefits,  a $189,000 increase in federal
insurance premiums due to a higher deposit base and a $40,000 increase in office
occupancy.  The  Company  incurred  $300,000  for  a  marketing  campaign  which
management  believes  will  ultimately  enhance  franchise  value.  General  and
administrative expenses net of bonuses as a percentage of total assets was 0.87%
and 0.78% for the years ended December 31, 1995 and 1994, respectively.  General
and  administrative  expenses as a percentage  of assets was 1.00% and 0.82% for
the years ended  December 31, 1995 and 1994,  respectively.  Other  non-interest
expenses  increased by  $526,000,  or 343.8%,  from  $153,000 for the year ended
December 31, 1994 to $679,000 for the year ended December 31, 1995. The increase
was  primarily  due to a  $210,000  loss  on the  sale of a  one-to-four  family
property sold in conjunction with the unwinding of an unrated mortgage  security
and $122,000 amortization of purchased mortgage servicing rights.

INCOME TAX EXPENSE.  Income tax expense is computed upon,  and generally  varies
proportionally with, earnings before income tax expense adjusted for non-taxable
income and non-deductible expense.

     The  effective  tax rate for the year  ended  December  31,  1996 was 31.9%
compared to 37.9% for 1995.  The income tax expense for the year ended  December
31,  1996 was $1.2  million as  compared  with $1.7  million  for the year ended
December 31, 1995.  The  effective tax rate  decreased  largely as a result of a
decline in general loan provisions which are  non-deductible  for federal income
tax purposes.

     The  effective  tax rate for 1995 was 37.9% as  compared to 25.2% for 1994.
The income tax expense for the year ended December 31, 1995 was $1.7 million, as
compared  with  $182,000 for the year ended  December 31,  1994.  The  Company's
effective  tax rate exceeded the  statutory  federal  income tax rate of 34% due
primarily to the  non-deductibility  for federal income tax purposes of goodwill
amortization and state taxes.

IMPACT OF INFLATION AND CHANGING PRICES

     Since interest rates and inflation rates do not always move in concert, the
effect of inflation on financial institutions may not necessarily be the same as
on  other   businesses.   A  bank's  asset  and  liability   structure   differs
significantly from that of industrial companies in that virtually all assets and
liabilities  are of a monetary  nature.  Management  believes that the impact of
inflation on financial  results  depends  upon the  Company's  ability to manage
interest  rate  sensitivity  and, by such  management,  reduce the  inflationary
impact upon  performance.  Interest  rates do not  necessarily  move in the same
direction,  or in the same magnitude, as the prices of other goods and services.
As discussed above, management seeks to manage the relationship between interest
sensitive  assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.

NEW ACCOUNTING STANDARDS

     In June 1996, the FASB issued SFAS No. 125,  "Accounting  for Transfers and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities,"  which
provides consistent  standards for distinguishing  transfers of financial assets
that are sales from transfers that are secured  borrowings.  It also establishes
criteria for the recognition of either a servicing asset or servicing  liability
for servicing  contracts to service financial assets. This standard is effective
for  transfers  and  servicing  of  financial  assets  and   extinguishments  of
liabilities   occurring   after   December  31,  1996,  and  is  to  be  applied
prospectively.  The Company believes the adoption of the new standard, effective
January 1, 1997,  did not have a material  impact on its  financial  position or
results of operations.

     In December  1996,  the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain  Provisions of SFAS 125" which amends the previously issued SFAS
No. 125 and deferred  implementation of the standards enumerated in SFAS No. 125
for  repurchase  agreements  and dollar  rolls,  securities  lending and similar
transactions  to  transfers of  financial  assets that occur after  December 31,
1997.


<PAGE>
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
(Dollars  in thousands)                                                         1996             1995
-------------------------------------------------------------------------------------------------------
<S>                                                                       <C>              <C>
ASSETS
Cash and cash equivalents                                                 $    3,259       $    8,965
Investment securities available-for-sale                                      78,826           40,058
Mortgage-backed securities available-for-sale                                184,743          234,385
Loans receivable, net                                                        185,757          248,492
Loans receivable held for sale                                               166,064               --
Other assets                                                                  29,316           22,043
                                                                         ----------------------------
     Total assets                                                            647,965          553,943
                                                                         ----------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                     390,486          306,500
Advances from the Federal Home Loan Bank of Atlanta                          144,800          105,500
Securities sold under agreements to repurchase                                57,581           93,905
Subordinated debt, net of original issue discount                             16,586           16,496
Other liabilities                                                             13,854            9,977
                                                                         ----------------------------
     Total liabilities                                                       623,307          532,378
                                                                         ----------------------------

Commitments and contingencies                                                     --               --

STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value, 3,500,000 shares authorized;
  2,049,500 issued and outstanding at December 31,1996 and 1995                   20               20
Additional paid-in capital                                                    14,637           14,637
Retained earnings                                                              7,905            5,353
Unrealized gain (loss) on securities available for sale,  net of tax           2,096            1,555
                                                                         ----------------------------
     Total stockholders' equity                                               24,658           21,565
                                                                         ----------------------------
     Total liabilities and stockholders' equity                             $647,965         $553,943
                                                                         ----------------------------
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

                     CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended  December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)                          1996           1995          1994
----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>            <C>
Interest income:
     Mortgage loans and other loans                                 $23,089       $ 17,726       $10,813
     Mortgage-backed and related securities                          17,955         20,205         9,973
     Investment securities                                            4,690          2,347         1,290
     Other                                                               66            233           132
                                                                    -------------------------------------
         Total interest income                                       45,800         40,511        22,208
                                                                    -------------------------------------
Interest expense:
     Deposits                                                        21,357         17,033         9,727
     Advances from the Federal Home Loan Bank of Atlanta              6,689          5,985         4,278
     Reverse repurchase agreements                                    4,569          6,839         2,281
     Subordinated debt                                                2,200          2,089         1,227
                                                                    -------------------------------------
         Total interest expense                                      34,815         31,946        17,513
                                                                    -------------------------------------
              Net interest income                                    10,985          8,565         4,695
     Provision for loan losses                                          919          1,722           492
                                                                    -------------------------------------
              Net interest income after provision for loan losses    10,066          6,843         4,203
                                                                    -------------------------------------
Non-interest income:
     Gain on sale of securities                                         935          3,412           118
     Gain on sale of loans                                              874            232            --
     Fees, service charges, and other                                   947            133            57
                                                                    -------------------------------------
              Total non-interest income                               2,756          3,777           175
Non-interest expenses:
     General and administrative expenses:
         Compensation and employee benefits                           3,690          3,030         1,807
         SAIF assessment                                              1,671             --            --
         Other                                                        3,014          2,531         1,696
                                                                    -------------------------------------
         Total general and administrative expenses                    8,375          5,561         3,503
     Other non-interest expenses:
         Net operating cost of real estate acquired through
           foreclosure                                                  238            430           (13)
         Amortization of goodwill and other intangibles                 462            249           166
                                                                    -------------------------------------
         Total other non-interest expenses                              700            679           153
                                                                    -------------------------------------
         Total non-interest expenses                                  9,075          6,240         3,656
                                                                    -------------------------------------
              Income before income tax expense                        3,747          4,380           722
              Income tax expense                                      1,195          1,660           182
                                                                    -------------------------------------
              Net income                                            $ 2,552       $  2,720      $    540
                                                                    -------------------------------------
Earning per share
     Primary                                                        $  1.12       $   1.33      $   0.31
                                                                    -------------------------------------
     Fully diluted                                                  $  1.09       $   1.33      $   0.31
                                                                    -------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.




<PAGE>
CONSOLIDATED  STATEMENTS OF CHANGES IN STOCKHOLDERS'  EQUITY

For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                                                           UNREALIZED
                                                                                          GAINS (LOSSES)
                                                ADDITIONAL                                ON AVAILABLE-
                                    PREFERRED       COMMON       PAID-IN       RETAINED     FOR-SALE
(Dollars in thousands)                  STOCK        STOCK       CAPITAL       EARNINGS    SECURITIES       TOTAL
-------------------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>        <C>             <C>          <C>          <C>
Balances at December 31, 1993            $ 3         $10        $  9,488        $2,591       $   286      $12,378
Dividends Paid ($0.38/share)              --          --              --          (498)           --         (498)
Stock conversion                          (3)          3              --            --            --           --
Sale of 750,000 shares
of common stock                           --           7           5,149            --            --        5,156
Net Income for the year ended
  December 31, 1994                       --          --              --           540            --          540
Unrealized Loss on Available-for-
  Sale securities, net of tax effect      --          --              --            --          (548)        (548)
                                      -----------------------------------------------------------------------------
Balances at December 31, 1994            $--         $20         $14,637        $2,633        $ (262)     $17,028
Net Income for the year ended
  December 31, 1995                       --          --              --         2,720            --        2,720
Unrealized Gain on Available-for-
  Sale securities, net of tax effect      --          --              --            --         1,817        1,817
                                      -----------------------------------------------------------------------------
Balances at December 31, 1995            $--         $20         $14,637        $5,353        $1,555      $21,565
Net Income for the year ended
  December 31, 1996                       --          --              --         2,552            --        2,552
Unrealized Gain on Available-for-
  Sale securities, net of tax effect      --          --              --            --           541          541
                                      -----------------------------------------------------------------------------
Balances at December 31, 1996             $--        $20         $14,637        $7,905        $2,096      $24,658
                                      =============================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended  December  31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                                          1996           1995         1994
-------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>           <C>
Cash flows from operating activities:
Net income                                                               $     2,552   $      2,720  $        540
Adjustments to reconcile net income to net cash provided
     by operating activities:
         Equity in undistributed earnings of subsidiaries                        274             --            --

         Provision for loan losses                                               919          1,722           492
         Provision for losses on foreclosed real estate                           78            213            22
         Other gains and losses, net                                          (1,011)          (153)          (95)
         Proceeds from sales of loans held for sale                           27,865             --            --
         Originations and purchases of loans held for sale                   (91,943)            --            --
         Net realized gains on available-for-sale securities and
            loans held for sale                                                 (935)        (3,412)         (145)
         Increase in accrued interest receivable                              (2,220)        (4,954)       (2,919)
         Increase in other assets                                             (2,433)           (80)       (3,621)
         Interest credited to deposits                                        21,361         17,033         7,473
         Increase in accrued expenses and other liabilities                    4,636          2,134         1,960
         Depreciation and amortization                                        (1,516)        (2,153)         (770)
         Deferred income taxes                                                (1,130)            --            --
                                                                ---------------------------------------------------
     Net cash (used in) provided by operating activities                     (43,503)        13,070         2,937
                                                                ---------------------------------------------------
     Cash flows from investing activities:
         Net increase in loans                                               (90,717)       (98,439)      (27,722)
         Equity investments in subsidiaries                                   (2,359)            --            --
         Purchases of available-for-sale securities                         (356,882)      (122,785)     (184,678)
         Proceeds from sale of available-for-sale securities                 220,293         71,084         7,977
         Proceeds from maturities of and principal payment
            on available-for-sale securities                                 201,547         39,646            --
         Net purchases of premises and equipment                                (842)          (537)         (279)
         Net expenditures on foreclosed real estate                               --
         Proceeds from sale of foreclosed real estate                          1,156             --           750
                                                                ---------------------------------------------------
     Net cash used in investing activities                                   (27,804)      (111,031)     (203,952)
                                                                ---------------------------------------------------

     Cash flows from financing activities:
         Net increase in non-interest bearing demands, savings,
            and NOW deposit accounts                                          62,625         77,056        91,806
         Increase in advances from FHLB                                      273,500         59,000       207,000
         Payments on advances from FHLB                                     (234,200)       (49,500)     (172,000)
         Net  increase in securities sold under agreements to repurchase     (36,324)        14,292        49,971
         Net increase in other borrowed funds                                     --             --        16,390
         Increase in common stock and additional paid in capital                  --             --         5,157
         Dividends paid on common and preferred stock                             --             --          (498)
                                                                ---------------------------------------------------
     Net cash provided by financing activities                                65,601        100,848       197,826
                                                                ===================================================
     Net increase (decrease) in cash and cash equivalents                     (5,706)         2,887        (3,189)
     Cash and cash equivalents at beginning of period                          8,965          6,078         9,267
                                                                ---------------------------------------------------
     Cash and cash equivalents at end of period                           $    3,259    $     8,965   $     6,078
                                                                ===================================================
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                                          1996           1995         1994
-------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>           <C>

     Supplemental information:
     Interest paid on deposits and borrowed funds                            $32,660        $29,852       $15,728
     Income taxes paid                                                           972            950           239
     Gross unrealized gain (loss) on marketable securities
      available-for-sale                                                       3,512          2,590          (889)
     Tax effect of gain (loss) on available-for-sale securities                1,416          1,036          (341)

See accompanying notes to consolidated financial statements.
</TABLE>


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

     TeleBanc Financial  Corporation  ("TeleBanc" or the "Company") is a savings
and loan  holding  company  organized  under the laws of Delaware  in 1994.  The
primary  business of the Company is the  activities  conducted by TeleBank  (the
"Bank"),  formerly known as Metropolitan Bank for Savings,  F.S.B. The Bank is a
federally chartered savings bank, which provides deposit accounts insured by the
Federal Deposit Insurance Corporation ("FDIC") to customers nationwide.
     During  the second  quarter of 1996,  the Bank,  through  its wholly  owned
subsidiary  TeleBanc Servicing  Corporation  ("TSC"),  funded 50% of the capital
commitment for a new entity,  AGT Mortgage Services,  LLC ("AGT").  AGT services
performing loans and administers  workouts for troubled or defaulted loans for a
fee.
     The Bank also  provided,  in the second quarter of 1996, 50% of the capital
commitment for an additional new entity,  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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The accompanying  consolidated financial statements include the accounts of
TeleBank  and TSC,  a wholly  owned  subsidiary.  All  significant  intercompany
transactions  and balances are  eliminated  in  consolidation.  In March,  1994,
TeleBanc  became the direct savings and loan holding company parent of the Bank.
Accordingly,  all financial data as of and for periods subsequent to March, 1994
represent the consolidated financial data of TeleBanc.

     The Bank's total  investment for the period ended December 31, 1996 through
TSC in AGT was $500,000. As of December 31, 1996 the Bank's equity investment in
AGT was $428,000 and total assets of AGT were $2.0  million.  The  investment in
AGT through TSC is accounted for under the equity method.

     The Bank's total investment for the period ended December, 1996 through TSC
in AGT PRA  was  $1.9  million.  As of  December  31,  1996  the  Bank's  equity
investment  in AGT PRA was $1.6  million  and total  assets of AGT PRA were $2.0
million. The investment in AGT PRA is accounted for under the equity method.

BASIS OF FINANCIAL STATEMENT PRESENTATION

     The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management  is  required  to make  estimates  and  assumptions  that  affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities  and  revenues and expenses  for the period.  Actual  results  could
differ significantly from those estimates. Material estimates for which a change
is  reasonably  possible in the  near-term  relate to the  determination  of the
allowance for loan losses,  the fair value of  investments  and  mortgage-backed
securities available-for-sale, loan receivables held for sale, and the valuation
of real estate acquired in connection with foreclosures.

     In addition, the regulatory agencies which supervise the financial services
industry  periodically  review the Bank's  allowance  for losses on loans.  This
review,  which is an integral part of their examination  process,  may result in
additions to the  allowance  for loan losses  based on judgments  with regard to
available information provided at the time of their examinations.

CASH AND CASH EQUIVALENTS

     Cash  and cash  equivalents  are  composed  of  interest-bearing  deposits,
certificates  of  deposit,  funds due from banks,  and  federal  funds sold with
original maturities of three months or less.

INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES

     The Company generally  classifies its debt and marketable equity securities
in one of three categories: held-to-maturity, trading, or available-for-sale. On
December  15,  1995,  the  Company  reclassified  the  entire   held-to-maturity
investment and mortgage-backed securities portfolios as available-for-sale.

     Held-to-maturity  securities are those  securities that the Company has the
ability  and  intent to hold until  maturity.  Held-to-maturity  securities  are
recorded at  amortized  cost,  adjusted  for the  amortization  or  accretion of
premiums or discounts.  Trading  securities are bought and held  principally for
the purpose of selling



<PAGE>

them in the near term.  Securities  purchased  for trading are carried at market
value with the  corresponding  unrealized  gains and losses being  recognized by
credits or charges to income.  The Company had no assets  classified  as trading
securities at December 31, 1996 and 1995.  All other  securities not included in
held-to-maturity    or   trading   are    classified   as    available-for-sale.
Available-for-sale  securities are recorded at fair value.  Unrealized gains and
losses on  available-for-sale  securities,  net of the related tax effects,  are
reported as a separate component of stockholders' equity until realized.

     A decline in market  value of any  held-to-maturity  or  available-for-sale
asset  below its cost,  that is deemed  other  than  temporary,  is  charged  to
earnings,  resulting  in the  establishment  of a new cost  basis for the asset.
Transfers of  securities  into the  available-for-sale  category are recorded at
fair value at the date of the transfer.  Any unrealized gain or loss at the date
of transfer is recognized as a separate  component of stockholders'  equity, net
of tax effect.

     Premiums and  discounts on  securities  are  amortized or accreted over the
life of the related  held-to-maturity  security as an  adjustment to yield using
the effective interest method.  Dividend and interest income are recognized when
earned.    Realized   gains   and   losses   for   securities    classified   as
available-for-sale  and trading are included in earnings  and are derived  using
the  specific  identification  method for  determining  the cost of the security
sold.

LOANS HELD FOR SALE

     Mortgages  acquired by the Company and intended  for sale in the  secondary
market are carried at lower of cost or estimated  market value in the aggregate.
Net unrealized losses are recognized  through a valuation  allowance by a charge
to income.  The market value of these  mortgage loans is determined by obtaining
market quotes for loans with similar  characteristics.  As of December 31, 1996,
no valuation allowance was recognized.

LOANS RECEIVABLE

     Loans  receivable  consists of mortgages that management has the intent and
ability to hold for the foreseeable  future or until maturity or pay-off and are
carried at amortized  cost  adjusted for  charge-offs,  the  allowance  for loan
losses,  any  deferred  fees or costs on  purchased  or  originated  loans,  and
unamortized premiums or discounts on purchased loans.

     The  loan  portfolio  is  reviewed  by  the  Company's  management  to  set
provisions  for  estimated  losses on loans which are charged to earnings in the
current period. In this review, particular attention is paid to delinquent loans
and loans in the process of  foreclosure.  The  allowance and provision for loan
losses are based on  several  factors,  including  continuing  examinations  and
appraisals of the loan  portfolio by  management,  examinations  by  supervisory
authorities,  continuing reviews of problem loans and overall portfolio quality,
analytical reviews of loan loss experience in relation to outstanding loans, and
management's  judgment with respect to economic conditions and its impact on the
loan portfolio.

NONPERFORMING/UNDERPERFORMING ASSETS

     Nonperforming/underperforming assets consist of loans for which interest is
no longer being accrued,  loans which have been  restructured in order to afford
the Company a better opportunity to collect amounts due on the loan, real estate
acquired  through  foreclosure  and  real  estate  upon  which  deeds in lieu of
foreclosure have been accepted. Interest previously accrued but not collected on
nonaccrual  loans is reversed  against  current  income when a loan is placed on
nonaccrual  status.  Accretion of deferred fees is  discontinued  for nonaccrual
loans.  All  loans  past due  ninety  days,  as well as other  loans  considered
uncollectible, are placed on non-accrual status. Interest received on nonaccrual
loans is recognized as interest income or, when it is doubtful that full payment
will be collected,  interest received is applied to principal.  Loans delinquent
more than ninety days are considered impaired by management and accounted for in
accordance with SFAS No.114.

DEPOSITS ACQUISITIONS

     On May 2,  1996,  TeleBanc  entered  into an  agreement  to assume  certain
deposit   liabilities   with  First   Commonwealth   Savings  Bank  FSB  ("First
Commonwealth"),  First Commonwealth Financial Corp., and John York, Jr. Pursuant
to this agreement,  TeleBanc  assumed certain  brokered and telephone  solicited
deposit accounts of First Commonwealth,  which deposits had a current balance of
approximately  $53.1  million as of April 30, 1996.  In the deposit  assumption,
First Commonwealth paid TeleBanc the amount of the deposit liabilities  assumed,
plus the amount of the deposit liabilities (less certain renewals) multiplied by
0.25 percent.

LOAN AND COMMITMENT FEES, DISCOUNTS AND PREMIUMS

     Loan fees and certain  direct loan  origination  costs are deferred and the
net fee or cost is  recognized  into interest  income using the interest  method
over  the  contractual  life of the  loans.  Premiums  and  discounts  on  loans
receivable  are  amortized  or  accreted,  respectively,  into income  using the
interest method over the remaining  period to contractual  maturity and adjusted
for anticipated  prepayments.  Premiums and discounts on loans held for sale are
not amortized or accreted,  respectively.  The premium or discount is recognized
as part of the loss or gain upon sale.


<PAGE>



REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND HELD FOR SALE

     Real estate properties  acquired through  foreclosure and held for sale are
recorded at fair value less estimated  selling costs at acquisition.  Fair value
is determined  by appraisal or other  appropriate  method of  valuation.  Losses
estimated  at the time of  acquisition  are  charged to the  allowance  for loan
losses. Valuations are periodically performed by management and an allowance for
losses is established  through a charge to operations if the carrying value of a
property exceeds its estimated fair value less selling costs.

DEFERRED FINANCING COSTS

     Deferred  financing costs related to the issuance of the subordinated notes
in May and June 1994 have been  capitalized  and are being  amortized  using the
interest method over the life of the subordinated notes.

INCOME TAXES

     Effective  January 1, 1993, the Bank adopted the provisions of Statement of
Financial  Accounting  Standards No. 109, Accounting for Income Taxes ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax  consequences  attributable to
temporary  differences  between  the  financial  statement  carrying  amounts of
existing  assets  and their  respective  tax  basis.  Deferred  tax  assets  and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered or settled.

FINANCIAL INSTRUMENTS

     Interest  rate swaps and caps are used by the Company in the  management of
its  interest-rate  risk.  The Company is generally  exposed to rising  interest
rates  because  of the  nature  of the  repricing  of  rate-sensitive  assets as
compared  with  rate-sensitive  liabilities.  The  objective of these  financial
instruments is to match estimated repricing periods of rate-sensitive assets and
liabilities to reduce interest rate exposure. These instruments are used only to
hedge  specific  assets  and  liabilities,  and are  not  used  for  speculative
purposes.

     The net  interest  received  or paid on these  contracts  is  treated as an
adjustment  to the interest  expense  related to the hedged  obligations  in the
period in which such amounts are due. Premiums and fees associated with interest
rate caps are amortized to interest  expense on a  straight-line  basis over the
lives of the contracts.

OTHER ASSETS

     Other assets  include  purchased loan  servicing  rights,  premiums paid on
interest rate caps, and prepaid assets.

     AGT services the loans underlying these servicing  rights.  The cost of the
loan  servicing  rights is amortized in  proportion  to, and over the period of,
estimated  net servicing  income.  Impairment  of mortgage  servicing  rights is
assessed  based on the fair value of those  rights.  Fair  values are  estimated
using  discounted  cash  flows  based on a current  market  interest  rate.  For
purposes of measuring  impairment,  the rights are stratified  based on mortgage
product  types.  The amount of impairment  recognized is the amount by which the
capitalized  mortgage servicing rights exceed their fair value in aggregate.  As
of December 31, 1996, no valuation allowance was recognized.

EARNINGS PER SHARE

     Earnings per share is computed by dividing adjusted net income by the total
of the weighted average number of common and preferred shares outstanding during
the respective  period.  The Company utilizes the modified treasury stock method
to calculate the weighted  average  number of common share  equivalents,  as the
exercise of all warrants and options  potentially  exercisable could result in a
greater than 20% increase in the number of shares  outstanding.  The calculation
requires  that total  proceeds  from the  exercise of  warrants  and options are
applied first to the repurchase of  outstanding  common shares up to a 20% limit
and second to the  reduction of existing  short-term  or long-term  debt and the
purchase of securities  or  commercial  paper.  The weighted  average  number of
common share equivalents  outstanding in the calculation of primary earnings per
share  was  2,316,616,   2,068,597,  and  1,748,934  in  1996,  1995  and  1994,
respectively,  after  giving  retroactive  effect  to a 100  for 1  stock  split
consummated in March,  1994.  The fully diluted  earnings per share includes all
potentially dilutive shares such as employee stock option plan shares,  warrants
and options. In addition, for purposes of determining fully diluted earnings per
share,  purchases of common stock made from  proceeds of the exercise of options
were assumed to have been made at the higher year-end price.


<PAGE>



RECLASSIFICATIONS

     Certain  reclassifications  of the 1995 and 1994 financial  statements have
been made to conform to the 1996 presentation.

NEW ACCOUNTING STANDARDS

     In June 1996, the FASB issued SFAS No. 125,  "Accounting  for Transfers and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities,"  which
provides consistent  standards for distinguishing  transfers of financial assets
that are sales from transfers that are secured  borrowings.  It also establishes
criteria for the recognition of either a servicing asset or servicing  liability
for servicing  contracts to service financial assets. This standard is effective
for  transfers  and  servicing  of  financial  assets  and   extinguishments  of
liabilities   occurring   after   December  31,  1996,  and  is  to  be  applied
prospectively.  The Company believes the adoption of the new standard, effective
January 1, 1997,  did not have a material  impact on its  financial  position or
results of operations.

     In December  1996, the FASB issued SFAS No. 127 -"Deferral of the Effective
Date of Certain  Provisions of SFAS No. 125", which amends the previously issued
SFAS No. 125 and deferred implementation of the standards enumerated in SFAS No.
125 for repurchase  agreements,  dollar rolls,  securities lending,  and similar
transactions  to  transfers of  financial  assets that occur after  December 31,
1997.

3. CAPITAL REQUIREMENTS AND SUPERVISORY AGREEMENTS

     The Bank is subject to various regulatory capital requirements administered
by the federal banking  agencies.  Failure to meet minimum capital  requirements
can initiate certain mandatory-and possibly additional  discretionary-actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the
Bank's  financial   statements.   Under  capital  adequacy  guidelines  and  the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  that involve  quantitative  measures of the Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  The Bank's capital amounts and  classification  are also
subject to  qualitative  judgments  by the  regulators  about  components,  risk
weightings, and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require  the Bank to  maintain  minimum  amounts  and ratios of total and Tier I
capital  to  risk-weighted  assets,  and of Tier I capital  to  average  assets.
Management  believes,  as of December 31, 1996,  that the Bank meets all capital
adequacy requirements to which it is subject.

     As of  December  31,  1996,  the  most  recent  notification  from  the OTS
categorized  the Bank as well  capitalized  under the  regulatory  framework for
prompt  corrective  action.  To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification that management believes have changed the institution's category.

     The Bank's  actual  capital  amounts and ratios are  presented in the table
below ($ in thousands):
<TABLE>
<CAPTION>


                                                                      For Capital
                                                                       Adequacy
                                    Actual                             Purposes:
                                    ------                             ---------
                              Amount      Ratio              Amount               Ratio
                              ------      -----             ------                -----
<S>                            <C>        <C>       <C>                     <C>
As of December 31, 1996:
Total Capital (to risk
   weighted assets)            $34,104    10.41%    greater than   $26,205   greater than 8.0%
   Tier I Capital (to risk
   weighted assets)            $31,726     9.69%    greater than   $13,102   greater than 4.0%
Tier I Capital (to
   average assets)             $31,726     5.08%    greater than   $24,999   greater than 4.0%
Tangible                       $31,711     5.07%    greater than   $ 9,374   greater than 1.5%

As of December 31, 1995:
Total Capital (to risk
   weighted Assets)            $30,680    11.74%    greater than   $20,899   greater than 8.0%
Tier I Capital (to risk
   weighted assets)            $28,944    11.08%    greater than   $10,450   greater than 4.0%
Tier 1 Capital (to average
   total assets)               $28,944     5.31%    greater than   $21,798   greater than 4.0%
Tangible                       $29,201     5.36%    greater than   $ 8,178   greater than 1.5%
</TABLE>

<PAGE>

                                               To Be Well
                                            Capitalized Under
                                            Prompt Corrective
                                            Action Provisions:
                                            ------------------
                                        Amount                Ratio
                                        ------                -----
As of December 31, 1996:
Total Capital (to risk
   weighted assets)              greater than $32,756    greater than 10.0%
   Tier I Capital (to risk
   weighted assets)              greater than $19,654    greater than  6.0%
Tier I Capital (to
   average assets)               greater than $31,248    greater than  5.0%
Tangible                                          N/A                  --

As of December 31, 1995:
Total Capital (to risk
   weighted Assets)              greater than $26,264    greater than 10.0%
Tier I Capital (to risk
   weighted assets)              greater than $15,674    greater than 6.0%
Tier 1 Capital (to average
   total assets)                 greater than $27,261    greater than 5.0%
Tangible                                          N/A                 --

     On August 8, 1996, the OTS terminated  the May 1993  Supervisory  Agreement
with TeleBank  subsequent to the completion of a full scope safety and soundness
examination of the Bank.


<PAGE>




4. Investment Securities

     The  cost  basis  and  estimated  fair  values  of  investment   securities
available-for-sale at December 31, 1996 and 1995, by contractual  maturity,  are
shown below (in thousands):
<TABLE>
<CAPTION>
                                                          GROSS            GROSS
                                        AMORTIZED         UNREALIZED       UNREALIZED           ESTIMATED
                                        COST              GAINS            LOSSES              FAIR VALUES
                                        ----              -----            ------              -----------
<S>                                     <C>               <C>               <C>                   <C>
1996:
Due within one year:
     Repurchase Agreement               $  1,730          $    --           $     --              $  1,730
     Margin Account                           18               --                 --                    18
Due within one to five years:
     Corporate Debt                        2,000               --                (10)                1,990
     Agency Notes                            988                1                 --                   989
     Municipal Bonds                         565                3                 --                   568
     Certificate of Deposit                  499               --                 --                   499
Due within five to ten years:
     Corporate Debt                        7,436               61                 --                 7,497
     Municipal Bonds                       3,560               27                 --                 3,587
Due after ten years:
     Agency Notes                         30,151              132                 --                30,283
     Equities                             14,011              220                 --                14,231
     Corporate Debt                       13,089              994                 --                14,083
     Municipal Bonds                       3,200              151                 --                 3,351
                                        --------          -------           --------              --------
                                         $77,247          $ 1,589           $    (10)             $ 78,826
                                        ========          =======           ========              ========
1995:
Due within one year:
     Agency Notes                        $ 3,359          $    --           $     --              $  3,359
Due within one to five years:
     Municipal Bonds                       2,946               15                 --                 2,961
Due within five to ten years:
     Corporate Debt                        6,162               79                 --                 6,241
     Municipal Bonds                       5,942               74                 --                 6,016
Due after ten years:
     Corporate Debt                       16,688            1,058                 --                17,746
Municipal Bonds                            3,472              263                 --                 3,735
                                        --------          -------           --------              --------
                                        $ 38,569          $ 1,489           $     --              $ 40,058
                                        ========          =======           ========              ========
</TABLE>

     The  proceeds  from sale,  gross  realized  gains and losses on  investment
securities  available  for sale  that  were  sold in 1996  were  $25.1  million,
$311,000 and  $153,000,  respectively.  The proceeds from sale,  gross  realized
gains and losses on investment  securities  available for sale that were sold in
1995 were $24.1 million, $1.1 million, and $52,000, respectively.

5. MORTGAGE-BACKED AND RELATED SECURITIES

     Mortgage-backed and related securities represent participating interests in
pools of long-term  first mortgage loans  originated and serviced by the issuers
of the  securities.  The Company has also  invested in  collateralized  mortgage
obligations  ("CMOs") which are securities  issued by special  purpose  entities
generally collateralized by pools of mortgage-backed  securities.  The Company's
CMOs are senior tranches  collateralized  by federal agency  securities or whole
loans.  The fair  value of  mortgage-backed  and  related  securities  fluctuate
according to current  interest rate  conditions and  prepayments.  Fair value is
estimated using quoted market prices. For illiquid securities, market prices are
estimated by obtaining  market price  quotes on similar  liquid  securities  and
adjusting the price to reflect differences  between the two securities,  such as
credit  risk,  liquidity,  term,  coupon,  payment  characteristics,  and  other
information.

     The  amortized  cost basis and  estimated  fair  values of  mortgage-backed
securities  available-for-sale  at December  31, 1996 and 1995,  by  contractual
maturity, are shown as follows (in thousands):

                                              GROSS        GROSS
                                 AMORTIZED  UNREALIZED   UNREALIZED  ESTIMATED
                                   COST       GAINS        LOSSES    FAIR VALUES
                                 ---------  ----------   ----------  -----------
1996:
Due within one to five years:
     Private issuer              $   4,172   $     --    $     (56)   $   4,116
Due within five to ten years:
     Private issuer                  8,262         75           --        8,337
     Collateralized mortgage
         obligations                   371         --           (3)         368
Due after ten years:
     Private issuer                132,791      1,367           --      134,158
     Collateralized mortgage
         obligations                24,896        461           --       25,357
     Agency certificates            12,310         97           --       12,407

                                 $ 182,802   $  2,000    $     (59)   $ 184,743
1995:
Due within one to five years:
     Private issuer              $   2,546   $     --    $     (15)   $   2,531
     Agency certificates             9,594         62           --        9,656
Due within five to ten years:
     Private issuer                  5,993         --         (111)       5,882
     Agency certificates             3,085         --           (6)       3,079
Due after ten years:
     Private issuer                181,481        260           --      181,741
     Agency certificates            22,252        686           --       22,938
     Collaterlized mortgage
         obligations                 8,325        233           --        8,558

                                 $ 233,276   $  1,241    $    (132)   $ 234,385

     At  December  31,  1996  and  1995,   $61.4  million  and  $108.5   million
respectively,  of private  issuer  mortgage-backed  securities  were  pledged as
collateral for reverse repurchase agreements.

     The proceeds from sale, gross realized gains and losses on  mortgage-backed
securities  available for sale that were sold in 1996 were $185.2 million,  $1.4
million and $707,000,  respectively.  The proceeds from sale and, gross realized
gains and losses on mortgage-backed securities available for sale that were sold
in 1995 were $39.7 million, $1.6 million and $3,000, respectively.


<PAGE>




6. LOANS RECEIVABLE

     Loans  receivable  at December 31, 1996 and 1995 are  summarized as follows
(in thousands):

                                                           1996          1995
                                                        ---------     ---------
First mortgage loans (principally conventional):
     Secured by one-to-four family residences           $ 359,563     $ 254,678
     Secured by commercial real estate                      4,017         4,553
     Secured by mixed-use property                          1,180         1,792
     Secured by five or more dwelling units                 1,516         1,286
     Secured by land                                          781           384
                                                          367,057     $ 262,693
Less:
     Net deferred loan origination fees                       (42)          (42)
     Unamortized discounts, net                           (13,750)      (14,129)
Total first mortgage loans                                353,265       248,522
Other loans:
     Home equity and second  mortgage loans                 1,208         2,202
     Other                                                    305            79
                                                          354,778       250,803
Less: allowance for loan losses                            (2,957)       (2,311)
Net loans receivable                                    $ 351,821     $ 248,492

     The mortgage  loans are located  primarily in New York,  California and New
Jersey  according  to  the  following   percentages  29.2%,   13.9%,  and  9.9%,
respectively.

     Mortgage loans for which the company owns the servicing rights are serviced
by AGT for a fee. The unpaid  principal  balance of mortgage  loans owned by the
Company  but  serviced  by  companies  other  than  AGT  was   $203,852,788  and
$103,349,000 at December 31, 1996 and 1995, respectively.

     Loans past due ninety days or more, and therefore on non-accrual  status at
December 31, 1996 and 1995, are summarized as follows (in thousands):

                                                          1996      1995
                                                          ----      ----
First mortgage loans:
     Secured by one-to-four family residences          $ 8,979   $ 4,526
     Secured by commercial real estate                   1,217       261
Home equity and second mortgage loans                       54       136
Total                                                  $10,250   $ 4,923

     The  interest  accrual  balance  for each loan that enters  non-accrual  is
reversed from income.  If all  nonperforming  loans had been  performing  during
1996,  1995 and 1994,  the Bank  would have  recorded  $789,000,  $365,000,  and
$113,000, respectively, in additional interest income. There were no commitments
to lend additional funds to these borrowers as of December 31, 1996 and 1995.

     Activity in the allowance for loan losses for the years ended  December 31,
1996, 1995 and 1994 is summarized as follows (in thousands):

                                             1996          1995          1994
                                             ----          ----          ----
Balance, beginning of the year              $ 2,311       $   989       $   835
Provision for loan losses                       919         1,722           492
Charge-offs, net                               (273)         (400)         (338)
Balance, end of year                        $ 2,957       $ 2,311       $   989

     According to SFAS No. 114, a loan is considered  impaired when,  based upon
current information and events, it is probable that a creditor will be unable to
collect  all  amounts  due  according  to the  contractual  terms  of  the  loan
agreement. The term "all amounts due" includes both the contractual interest and
principal payments of a loan as scheduled in the loan agreement. The Company has
determined that once a loan becomes 90 or more days past due,  collection of all
amounts due is no longer  probable and is  therefore  considered  impaired.  The
amount of  impairment  is measured  based upon the fair value of the  underlying
collateral and is reflected through the creation of a valuation allowance.

     The table below presents impaired loans as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                      AMOUNT
                                       TOTAL                    AMOUNT OF           OF RECORDED
                                   RECORDED INVESTMENT          SPECIFIC          INVESTMENT NET OF
DESCRIPTION OF LOANS                IN IMPAIRED LOANS           RESERVES          SPECIFIC RESERVES
--------------------                -----------------           --------          -----------------
<S>                                         <C>                 <C>                    <C>
1996:
Impaired loans:
Commercial real estate                      $  1,217            $    318               $   899
One-to-four family                             9,033               1,492                 7,541
Total                                       $ 10,250            $  1,810               $ 8,440

Restructured loans:
Commercial real estate                      $    251            $      8               $   243
One-to-four family                               184                   0                   184
Total                                       $    435            $      8               $   427

1995:
Impaired loans:
Commercial real estate                      $    261            $    222               $    39
One-to four family                             4,662               1,070                 3,592
Total                                       $  4,923            $  1,292               $ 3,631

Restructured loans:
Commercial real estate                      $    255            $     38               $   217
One-to-four family                               110                  26                    84
Total                                       $    365            $     64               $   301
</TABLE>


<PAGE>



         The average  recorded  investment in impaired  loans for the year ended
December 31, 1996 and 1995 was $2.5 million and $1.8 million,  respectively. The
related  amount of interest  income the Company  would  recognize as  additional
interest  income  for the  years  ended  December  31,  1996,  1995 and 1994 was
$789,000, $365,000 and $113,000,  respectively.  The Company's charge-off policy
for impaired  loans is consistent  with its  charge-off  policy for other loans;
impaired loans are charged-off when, in the opinion of management, all principal
and interest due on the impaired  loan will not be fully  collected.  Consistent
with the Company's method for non-accrual  loans,  interest received on impaired
loans is recognized as interest income, or when it is doubtful that full payment
will be collected, interest received is applied to principle.

7. REAL ESTATE ACQUIRED THROUGH FORECLOSURE

     Real estate  acquired  through  foreclosure  at December  31, 1996 was $1.3
million,  less the  allowance  for loan  losses of $65,000,  resulting  in a net
balance  of $1.2  million.  The real  estate  acquired  through  foreclosure  at
December  31,  1995 was $1.0  million,  less the  allowance  for loan  losses of
$213,000, resulting in a net balance of $787,000.

     Activity  in the  allowance  for real  estate  losses  for the years  ended
December 31, 1996, 1995, and 1994 is summarized as follows (in thousands):

                                                   1996        1995        1994
                                                   ----        ----        ----
Balance, beginning of year                        $ 213       $  92       $ 221
Provision for real estate losses                     77         256          22
Charge-offs                                        (225)       (135)       (151)
Balance, end of year                              $  65       $ 213       $  92

8. LOANS SERVICED FOR OTHERS

     Mortgage  loans  serviced  by  AGT  for  others  are  not  included  in the
accompanying  consolidated statements of financial condition because the related
loans  are not  owned by the  Company  or any of its  subsidiaries.  The  unpaid
principal  balances of these loans at December 31, 1996 and 1995 are  summarized
as follows (in thousands):
                                                                1996        1995
                                                                ----        ----
Mortgage loans underlying pass-through securities:
     Federal Home Loan Mortgage Corporation $                  2,843     $ 3,574
     Federal National Mortgage Association                    11,548       5,307
     Subtotal                                                $14,391       8,881
Mortgage loan portfolio serviced for:
     Other investors                                          31,465       9,315
Total                                                        $45,856     $18,196

     Custodial  escrow  balances held in connection  with the  fore-going  loans
serviced were approximately  $84,422 and $168,000 at December 31, 1996 and 1995,
respectively.

     In August 1995,  the Bank  purchased a loan  secured by mortgage  servicing
rights that were owned by an affiliate for $2.5  million.  The loan was paid off
in October  1995 in  conjunction  with the  Bank's  purchase  of the  underlying
servicing rights for $3.3 million.  Purchased  mortgage servicing rights of $2.8
million and $3.3  million as of December  31,  1996 and 1995,  respectively  are
included in other assets.

9. DEPOSITS

     The Bank initiates  deposits directly with customers through contact on the
phone,  the mail,  and walk-ins at its  headquarters.  On May 2, 1996,  TeleBanc
entered into an  agreement  to assume  certain  deposit  liabilities  with First
Commonwealth  Savings  Bank  FSB  ("First  Commonwealth"),   First  Commonwealth
Financial Corp., and John York, Jr. Pursuant to this agreement, TeleBanc assumed
certain   brokered  and   telephone   solicited   deposits   accounts  of  First
Commonwealth,  which  deposits  had a current  balance  of  approximately  $53.1
million as of April 30, 1996. In the deposit assumption, First Commonwealth paid
TeleBanc the amount of the deposit liabilities  assumed,  plus the amount of the
deposit liabilities (less certain renewals) multiplied by 0.25 percent. Deposits
at December 31, 1996 and 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                    WEIGHTED
                                    AVERAGE RATE AT
                                    DECEMBER 31                  AMOUNT                PERCENT
                                   ----------------       ------------------      --------------------
                                   1996        1995        1996       1995        1996        1995
                                   ----        ----        ----       ----        ----        ----
<S>                                 <C>        <C>        <C>        <C>            <C>         <C>
Demand accounts,
    non interest-
    bearing                           --%        --%      $    309   $  2,020          --%        0.7%
Money market                        5.10       5.23        109,835     75,732        28.1        24.7
Passbook savings                    3.00       3.00          1,758      1,748         0.5         0.6
Certificates of
    Deposit                         6.28       6.53        278,584    227,000        71.4        74.0
                                                          ---------------------------------------------
    Total                                                 $390,486   $306,500       100.0%      100.0%
                                                          ---------------------------------------------
</TABLE>

     Certificates of deposit and money market  accounts,  classified by rates as
of December 31, 1996 and 1995 are as follows (in thousands):

     Amount                               1996                       1995
     ------                               ----                       ----
     0 -   1.99%                       $   5,235                  $      --
     2 -   3.99%                             148                         --
     4 -   5.99%                         210,481                    141,750
     6 -   7.99%                         170,056                    158,375
     8 -   9.99%                           1,709                      1,817
     10 - 11.99%                             790                        790
     Total                             $ 388,419                  $ 302,732


<PAGE>



     At December 31, 1996,  scheduled  maturities of certificates of deposit and
money market accounts are as follows (in thousands):
<TABLE>
<CAPTION>
                  LESS THAN
                   ONE YEAR       1-2           2-3           3-4          4-5            5+
                    YEARS        YEARS         YEARS         YEARS        YEARS          YEARS            TOTAL
                    -----        -----         -----         -----        -----          -----            -----
<S>               <C>          <C>           <C>           <C>          <C>           <C>               <C>
 0 -  1.99%       $   5,235    $      --     $     --      $     --     $      --     $      --         $   5,235
 2 -  3.99%             148           --           --            --            --            --               148
 4 -  5.99%         158,566       36,344       13,459           910         1,161            41           210,481
 6 -  7.99%          64,828       22,325       54,864        12,002        12,626         3,411           170,056
 8 -  9.99%           1,058          543           --            75            --            33             1,709
10 - 11.99%             790           --           --            --            --            --               790
                  $ 230,625    $  59,212     $ 68,323      $ 12,987     $  13,787     $   3,485         $ 388,419
</TABLE>

     The aggregate amount of certificates of deposit with denominations  greater
than or equal to $100,000  was $45.1  million and $20.0  million at December 31,
1996 and 1995, respectively.

     Interest  expense on deposits for the years ended December 31, 1996,  1995,
and 1994 is summarized as follows (in thousands):

                               1996              1995              1994
                               ----              ----              ----
Money market                $  4,740          $  2,036          $   417
Passbook savings                  59                78               92
Certificates of deposit       16,558            14,919            9,218
Total                       $ 21,357          $ 17,033          $ 9,727

     Accrued  interest  payable on deposits  at  December  31, 1996 and 1995 was
$667,000 and $452,000, respectively.

10. ADVANCES FROM THE FHLB OF ATLANTA

     Advances to the Bank from the FHLB of Atlanta at December 31, 1996 and 1995
were as follows (dollars in thousands):

                                WEIGHTED                          WEIGHTED
                                AVERAGE                            AVERAGE
MATURITY             1996     INTEREST RATE       1995          INTEREST RATE
--------             ----     -------------       ----          -------------
1996             $       --      5.52%         $  51,000            5.52%
1997                 64,800      5.56             29,500            5.72
1998                 41,000      5.53                 --              --
1999                 39,000      5.60             25,000            5.59
Total            $  144,800      5.56%         $ 105,500            5.59%


     All  advances,  except for $2.0 million  which matured in November of 1996,
are floating rate advances and adjust  quarterly or  semi-annually to the London
InterBank  Offering Rate  ("LIBOR")  rate.  In 1996 and 1995,  the advances were
collateralized  by a  specific  lien on  mortgage  loans in  accordance  with an
"Advances,  Specific  Collateral Pledge and Security Agreement" with the FHLB of
Atlanta, executed September 10, 1980. Under this agreement, the Bank is required
to maintain qualified  collateral equal to 120 to 160 percent of the Bank's FHLB
advances,  depending on the  collateral  type. As of December 31, 1996 and 1995,
the Company secured these advances with an assignment of specific  mortgage loan
collateral  from  its  loan  and  mortgage-backed   security  portfolio.   These
one-to-four  family  whole  first  mortgage  loans  and  securities  pledged  as
collateral totaled  approximately  $186.1 million and $140.2 million at December
31, 1996 and 1995, respectively.

     The  Company is  required to be a member of the FHLB System and to maintain
an  investment in the stock of the FHLB of Atlanta at least equal to the greater
of 1 percent of the unpaid principal  balance of its residential  mortgage loans
or 1 percent  of 30  percent  of its total  assets or 1/20th of its  outstanding
advances from the FHLB.

11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Information  concerning  borrowings  under fixed and  variable  rate coupon
reverse repurchase agreements is summarized as follows (dollars in thousands):

                                                           1996          1995
                                                           ----          ----
Weighted average balance during the year                 $ 68,920      $ 97,692
Weighted average interest rate during the year               5.77%         6.29%
Maximum month-end balance during the year                $ 97,416      $119,507
Balance at year-end                                      $ 57,581      $ 93,905
Securities underlying the agreements
   as of the end of the year:
     Carrying value, including accrued interest          $ 61,418      $103,590
     Estimated market value                              $ 61,426      $103,891

     The securities sold under the reverse repurchase agreements at December 31,
1996 are due in less than one year.  The Company enters into sales of securities
under agreements to repurchase the




<PAGE>



same securities.  Reverse repurchase  agreements are collateralized by fixed and
variable rate mortgage-backed securities or investment grade securities. Reverse
repurchase  agreements  are  treated  as  financings,  and  the  obligations  to
repurchase  securities  sold are reflected as a liability in the balance  sheet.
The dollar amount of securities  underlying  the agreement  remains in the asset
accounts.  The securities  underlying the agreements are physical and book entry
securities and the brokers retain  possession of the securities  collateralizing
the reverse repurchase  agreements.  If the counterparty in a reverse repurchase
agreement  were to fail,  the  Company  might incur an  accounting  loss for the
excess  collateral  posted with the  counterparty.  As of December 31, 1996, the
Company's  amount  at risk did not  exceed  10% of the  Company's  stockholders'
equity with any one counterparty.

12. SUBORDINATED DEBT

     In May and June 1994, the Company issued 15,000 units of subordinated  debt
at a price  of  $15.0  million  and  2,250  units  at a price  of $2.3  million,
respectively.  The units each consist of $1,000 of 11.5%  subordinated notes due
in 2004 and 20 detachable warrants to purchase one share each of TeleBanc common
stock.  The  notes  may not be  redeemed  prior to May 1,  1999.  The  notes are
redeemable  at the  option of the  Company  after  May 1,  1999,  at an  initial
redemption  price of 105.75% of the principal  amount plus accrued interest with
the  redemption  price  declining  to  104.60%,  103.45%,  102.30%,  and 101.15%
annually each year  thereafter.  Interest is payable  semi-annually on May 1 and
November 1,  commencing  November 1, 1994.  The  indenture,  among other things,
restricts  the  ability of the  Company  under  certain  circumstances  to incur
additional  indebtedness,  limits cash dividends and other capital distributions
by the Company, requires the maintenance of a reserve initially equal to 150% of
the Company's annual interest expense on all indebtedness, restricts disposition
of the Bank or its assets and limits transactions with affiliates.

     The total value of the 345,000  warrants was $948,750  which resulted in an
original issue discount on the subordinated debt in the amount of $899,289.  The
original issue discount is amortized on a level yield basis over the life of the
debt. The warrants became  transferable on November 27, 1994 and are exercisable
on or after May, 27, 1995. The exercise price of each warrant is $7.65625.

13. PENSION PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN

     The  Company  sponsors an  Employee  Stock  Ownership  Plan  ("ESOP").  All
full-time employees of the Company who meet limited  qualifications  participate
in the ESOP.  Under the ESOP, the Company  contributes  cash to a separate trust
fund  maintained  exclusively for the benefit of those employees who have become
participants.  Participants will have shares of TeleBanc common stock, valued at
market  value,  allocated to their  personal  plan  accounts  based on a uniform
percentage  of wages.  At  December  31, 1996 and 1995,  the  Company  carried a
$305,000 and $240,000,  respectively,  note  receivable  from the ESOP which was
collateralized  by the Company's  common stock.  The ESOP owned 67,600 shares of
the  Company's  stock with  approximately  32,000 and  18,000  shares  vested at
December 31, 1996 and 1995,  respectively.  The  Company's  contribution  to the
ESOP,  which is reflected in compensation  expense,  was $224,000,  $210,000 and
$104,000 for the years ended December 31, 1996, 1995, and 1994, respectively.

14. INCOME TAXES

     Income tax expense for the years ended December 31, 1996, 1995, and 1994 is
summarized as follows (in thousands):

                                    1996             1995              1994
                                    ----             ----              ----
Current:      Federal              $1,194           $2,038           $  224
              State                   225              181               59
                                    1,419            2,219              283
Deferred:     Federal                 (78)            (474)             (86)
              State                  (146)             (85)             (15)
                                     (224)            (559)            (101)
Total:        Federal               1,116            1,564              138
              State                    79               96               44

Total                              $1,195           $1,660           $  182


     A reconciliation  of the statutory Federal income tax rate to the Company's
effective  income tax rate for the years ended December 31, 1996, 1995, and 1994
is as follows:

                                             1996          1995          1994
                                             ----          ----          ----
Federal income tax at
     statutory rate                          34.0%         34.0%         34.0%
State taxes, net of
     federal benefit                          4.2           4.2           4.2
Municipal bond interest,
     net of disallowed
     interest expense                        (3.6)         (7.0)        (18.0)
Other                                        (2.7)          6.7           5.0
Total                                        31.9%         37.9%         25.2%



<PAGE>



     Deferred income taxes result from temporary  differences in the recognition
of income and expense for tax versus financial reporting  purposes.  The sources
of these  temporary  differences and the related tax effects for the years ended
December 31, 1996 and 1995 are as follows (in thousands):

                                                     1996              1995
Deferred Tax Liabilities:
     Acquired Loan Servicing Rights                $  (12)            $ (15)
     Purchase Accounting  Premium
         - Land & Building                            (37)              (37)
     Purchase Accounting Premium
        on Investments                                 (3)               (3)
     Depreciation                                     (17)              (15)
     Tax Reserve in Excess of Base Year               (93)              (93)
     Prepaid Expenses                                 (52)              (25)
     FHLB Stock Dividends                            (168)             (168)
            Total                                    (382)            $(356)
Deferred Tax Assets:
     Purchase Accounting Discount
        on Loan Portfolio                               6                 4
     General Reserves & Real Estate
        Owned Losses                                  819               674
     Deferred Loan Fees                                14                16
           Total                                      839               694
     Net Deferred Tax Asset                           457               338
Tax Effect of Securities
        Available-for-sale
         adjustment to Fair Value
        (notes 4 and 5)                            (1,030)             (832)
Adjusted Net Deferred Tax Liability                 $(573)            $(494)

     The Company  carries an  accumulated  tax bad debt reserve of $643,000 with
the U.S. Internal Revenue Service for which income taxes have not been provided.
If the Bank were to convert from its thrift charter, the Bank would pay taxes of
approximately  $100,000  on this bad debt  reserve.  In  addition,  the Bank has
entered into a tax sharing  agreement  with TeleBanc under which it is allocated
its share of income tax expense or benefit based on its portion of  consolidated
income or loss. The net deferred tax liability is recorded in other  liabilities
on the balance sheet.

15. FINANCIAL INSTRUMENTS

     The Company is party to a variety of interest rate caps and swaps to manage
interest rate exposure. In general, the Company enters into agreements to assume
fixed-rate  interest payments in exchange for variable  market-indexed  interest
payments.  The effect of these  agreements  is to lengthen  short-term  variable
liabilities  into longer term  fixed-rate  liabilities  or to shorten  long-term
fixed rate assets into short-term  variable rate assets.  The net costs of these
agreements  are charged to interest  expense or interest  income,  depending  on
whether the agreement is designated to hedge a liability or an asset.

     Interest  rate swap  agreements  for the years ended  December 31, 1996 and
1995 are summarized as follows (dollars in thousands):

                                                     1996             1995
                                                     ----             ----
Weighted average fixed rate payments                  5.97%            5.93%
Weighted average original term                      5.0 yrs          6.0 yrs
Weighted average variable rate obligation             5.62%            5.63%
Notional amount                                    $130,000          $40,000
                                                   --------          --------

     The Company enters into interest rate cap  agreements to hedge  outstanding
FHLB advances and reverse repurchase agreements. Under the terms of the interest
rate cap agreements,  the Company generally would receive an amount equal to the
difference  between 3 month  LIBOR or 6 month LIBOR and the cap's  strike  rate,
multiplied  by the  notional  amount.  The  interest  rate  cap  agreements  are
summarized as follows (dollars in thousands):

--------------------------------------------------------------------------------
                         Effective             Notional                Maturity
Cap Strike Rate               Date              Balance                    Date
--------------------------------------------------------------------------------
        4%                 July 1992           $10,000                 July 1999
        5%                 July 1992            10,000                 July 1997
        6%              October 1996            20,000              October 1999
        7%              January 1997            10,000              January 2002
        7%              January 1995            10,000                 July 1998
        7%                 July 1995            10,000                 July 1997
        8%              January 1995            10,000              January 1997
        9%             December 1994            14,000             December 1998
        9.5%              April 1995            10,000                April 1997
        10%               April 1995            10,000              January 2002
        10%             January 1995            10,000              January 1997

     The  counterparties  to the interest rate cap agreements are Goldman Sachs,
Lehman Brothers,  Salomon Brothers, and UBS and contain credit risk of $729,000,
$257,000, $165,000, and $855,000,  respectively. The credit risk is attributable
to the unamortized  cap premium and any amounts due from the  counterparty as of
December 31,1996.  The total amortization  expense for premiums on interest rate
caps was $638,000,  $213,000 and $292,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS

     The fair value  information  for financial  instruments,  which is provided
below,  is  based on the  requirements  of  Statement  of  Financial  Accounting
Standards No. 107,  Disclosure About Fair Value of Financial  Instruments ("SFAS
No. 107") and does not



<PAGE>



represent the aggregate net fair value of the Bank. Much of the information used
to determine fair value is subjective and judgmental in nature,  therefore, fair
value  estimates,  especially  for less  marketable  securities,  may  vary.  In
addition,  the amounts  actually  realized or paid upon  settlement  or maturity
could be  significantly  different.  The following  methods and assumptions were
used to estimate the fair value of each class of financial  instrument for which
it is reasonable to estimate that value:

CASH AND  INTEREST-BEARING  DEPOSITS - Fair value is  estimated  to be  carrying
value.

FEDERAL FUNDS SOLD - Fair value is estimated to be carrying value.

SECURITIES  PURCHASED  UNDER AGREEMENT TO RESELL - Fair value is estimated to be
carrying value.

INVESTMENT  SECURITIES - Fair value is estimated by using quoted  market  prices
for most  securities.  For illiquid  securities,  market prices are estimated by
obtaining  market price quotes on similar  liquid  securities  and adjusting the
price to reflect  differences  between the two securities,  such as credit risk,
liquidity, term coupon, payment characteristics, and other information.

MORTGAGE-BACKED  AND RELATED  SECURITIES - Fair value is estimated  using quoted
market prices. For illiquid securities, market prices are estimated by obtaining
market price quotes on similar  liquid  securities  and  adjusting  the price to
reflect differences between the two securities,  such as credit risk, liquidity,
term coupon, payment characteristics, and other information.

LOANS  RECEIVABLE  - For  certain  residential  mortgage  loans,  fair  value is
estimated  using quoted market  prices for similar  types of products.  The fair
value of other  certain  types of loans is estimated  using quoted market prices
for securities backed by similar loans.

     The fair value for loans which could not be  reasonably  established  using
the previous two methods was  estimated by  discounting  future cash flows using
current rates for similar loans.

     Management   adjusts  the   discount   rate  to  reflect   the   individual
characteristics  of the  loan,  such  as  credit  risk,  coupon,  term,  payment
characteristics,  and the liquidity of the  secondary  market for these types of
loans.

DEPOSITS - For passbook savings,  checking and money market accounts, fair value
is estimated at carrying value. For fixed maturity certificates of deposit, fair
value is estimated by  discounting  future cash flows at the  currently  offered
rates for deposits of similar remaining maturities.

ADVANCES FROM THE FHLB OF ATLANTA - For adjustable rate advances,  fair value is
estimated at carrying value. For fixed rate advances, fair value is estimated by
discounting  future cash flows at the  currently  offered  rates for  fixed-rate
advances of similar  remaining  maturities.

SECURITIES  SOLD UNDER  AGREEMENTS TO REPURCHASE - Fair value is estimated using
carrying value. The securities are repriced on a semiannual basis.

SUBORIDNATED DEBT - For subordinated  debt, fair value is estimated using quoted
market prices.

OFF-BALANCE  SHEET  INSTRUMENTS  - The fair  value  of  interest  rate  exchange
agreements  is the  net  cost to the  Company  to  terminate  the  agreement  as
determined from market quotes.

     The fair value of financial instruments as of December 31, 1996 and 1995 is
as follows (in thousands):

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                       1996             1996               1995           1995
                                   Carrying             Fair            Carrying          Fair
                                      Value            Value               Value         Value
------------------------------------------------------------------------------------------------
<S>                                <C>             <C>                 <C>           <C>
ASSETS:
     Cash and cash equivalents     $   3,259       $   3,259           $   8,965     $   8,965
     Investment securities
          available-for-sale          78,826          78,826              40,058        40,058
     Mortgage-backed securities
         available-for-sale          184,743         184,743             234,210       234,210
     Loans receivable                351,821         365,401             248,667       261,198

LIABILITIES:
     Deposits                        390,486         393,820             306,500       311,476
     Advances from the
          FHLB Atlanta               144,800         144,800             105,500       105,526
     Securities sold under
         agreements to repurchase     57,581          57,581              93,905        93,905
     Subordinated debt, net           16,586          16,625              16,496        16,123
     Off-balance sheet
         financial instruments            --           1,684                  --           212
     Commitments to
         purchase loans                   --          54,721                  --        24,738
</TABLE>



<PAGE>



17. DISTRIBUTIONS

     The Company is subject to certain  restrictions  on the amount of dividends
it may  declare  without  prior  regulatory  approval.  At  December  31,  1996,
approximately  $6.4 million of retained  earnings  were  available  for dividend
declaration without prior regulatory approval.

18. STOCK BASED COMPENSATION

     In 1996,  directors,  officers and employees  were issued 80,500 options to
purchase  80,500 shares of TeleBanc common stock at prices ranging from $7.75 to
$8.875.  In 1995,  officers and employees were issued 32,000 options to purchase
32,000 shares of TeleBanc  common stock at a price of $5.50.  As of December 31,
1996 and 1995, 180,438 and 110,392,  respectively,  of the shares were vested at
exercise  prices ranging from $5.50 to $8.875.  The options'  exercise price was
the market  value of the stock at the date of  issuance.  No  options  have been
exercised or canceled.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                1996                                   1995
                                      ------------------------------           ----------------------------
                                                     WEIGHTED AVG.                           WEIGHTED AVG.
OPTIONS                                SHARES        EXERCISED PRICE            SHARES     EXERCISED PRICE
                                       (000's)                                  (000's)
-----------------------------------------------------------------------------------------------------------
<S>                                      <C>               <C>                    <C>           <C>
Outstanding at beginning of year         271               $6.51                  242           $6.64
Granted                                   81               $8.17                   32           $5.50
Exercised                                 --                  --                   --              --
Forfeited                                 --                  --                    3           $6.13
Outstanding at end of year               352               $6.89                  271           $6.51
Options exercisable at year-end          180               $6.69                  110           $6.55
Weighted avg. fair value
   of options granted                                      $2.61                                $1.81
</TABLE>

     The following table summarizes  information about fixed options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                        OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                                    -------------------------------         ------------------------------
RANGE OF                            NUMBER           WEIGHTED AVG.          NUMBER           WEIGHTED AVG.
EXERCISE PRICES                     OUTSTANDING     EXERCISED PRICE         EXERCISABLE    EXERCISED PRICE
                                    (000's)                                 (000's)
-----------------------------------------------------------------------------------------------------------
<C>                                     <C>               <C>                 <C>             <C>
$5.00 - $5.99                           32                $5.50               13              $5.50
$6.00 - $6.99                          114                $6.13               76              $6.13
$7.00 - $7.99                          176                $7.30               85              $7.20
$8.00 - $8.99                           30                $8.88                6              $8.88
$5.00 - $8.99                          352                $6.89              180              $6.69
</TABLE>

     As of  December  31,  1996 the fixed  options  outstanding  had a  weighted
average  remaining  contractual  life ranging  from 7.4 years to 9.6 years.  The
Company  accounts  for this plan under APB No. 25,  under which no  compensation
cost has been  recognized.  Had  compensation  cost for the plan been determined
consistent  with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                            YEAR ENDED            YEAR ENDED
                                                             12/31/96              12/31/95
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations:
<S>                                                           <C>               <C>
     As reported                                              $ 2,552           $ 2,720
     Pro forma                                                  2,342             2,662
Earnings per share:
     As reported                                                 1.12              1.33
     Pro forma                                                   1.03              1.30
Fully diluted earnings per share:
     As reported                                                 1.09              1.33
     Pro forma                                                   1.00              1.30
</TABLE>

     Because  the  method of  accounting  required  by SFAS No. 123 has not been
applied to  options  granted  prior to January  1995,  the  resulting  pro forma
compensation  cost may not be  representative  of that to be  expected in future
years.  The fair value of each option  grant is  estimated  on the date of grant
using the Roll Geske option  pricing model with the following  weighted  average
assumptions  for  grants;  risk-free  interest  rates of 5.25  percent  and 6.00
percent  for 1996 and  1995,  respectively;  expected  life of 10 years  for all
options  granted in 1996 and 1995;  expected  volatility  of 23  percent  and 16
percent for 1996 and 1995, respectively.

19. COMMITMENTS AND CONTINGENCIES

     In the  ordinary  course of business,  the Company has various  outstanding
commitments   and  contingent   liabilities   that  are  not  reflected  in  the
accompanying consolidated financial statements. The principal commitments of the
Company are as follows:

     At December 31, 1996,  the Company was obligated  under an operating  lease
for office  space with an original  term of ten years.  Net rent  expense  under
operating leases was approximately $142,000, $127,000, and $60,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.

     The projected  minimum rental  payments under the terms of the lease are as
follows:

YEARS ENDING DECEMBER 31,                                     AMOUNT
-------------------------                                     ------
1997                                                      $   177,000
1998                                                          165,000
1999                                                          167,000
2000                                                          169,000
2001                                                          171,000
2002 and thereafter                                           701,000
                                                          $ 1,550,000

     As of December  31, 1996,  the Company had  commitments  to purchase  $54.7
million of mortgage loans.

     The Company self-insures for a portion of health insurance expenses paid by
the Company as a benefit to its employees.  At December 31, 1996 and 1995, there
was no reserve needed for incurred but not reported  claims under this insurance
arrangement.

20. SUBSEQUENT EVENTS

     In February 1997, TeleBanc entered into definitive  agreements to raise new
capital in the form of convertible  preferred stock,  senior  subordinated notes
and  warrants  aggregating  $29.9  million and to  purchase  the assets of Arbor
Capital Partners, Inc. ("Arbor"), a registered investment advisor, funds manager
and  broker-dealer.  MET  Holdings,  TeleBanc's  majority  shareholder,  owns  a
majority of Arbor.

     The Board of  Directors  authorized  the sale of $29.9  million in units to
investment  partnerships  managed by Conning & Company,  CIBC WG Argosy Merchant
Fund 2, LLC,  The  Progressive  Corporation  and The  Northwestern  Mutual  Life
Insurance Company.  Representatives  from the Conning  partnerships and the CIBC
Merchant  Fund will serve on the Board of Directors  of the  Company.  The units
consist  of  $13.7  million  in 9.5%  senior  subordinated  notes  with  198,088
detachable  warrants,  $16.2 million in 4.0%  convertible  preferred  stock, and
rights to 205,563 contingent warrants. The Company finalized this transaction on
February 28, 1997.

     Also in connection with the sale of units, the Arbor asset  acquisition was
structured  as a tax free issuance of 162,461  shares of TeleBanc  common stock,
24,201 options, and a $500,000 cash payment for the Arbor assets. An independent
appraisal  valued  the  assets  to be  acquired  from  Arbor  at  $3.1  million.
Consistent  with  TeleBanc's  charter,  the number of shares  issued to Arbor as
consideration  is limited to 5% of total  market value of  outstanding  TeleBanc
stock at the time of  acquisition.  The Company  finalized the sale of the units
and the related Arbor asset acquisition on February 28, 1997.

21. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

Statements of Financial Condition
($ in thousands)

                                                                 December 31,
                                                              ------------------
                                                                1996       1995
                                                                ----       ----
ASSETS:
Cash                                                          $   159    $   210
Investment securities available-for-sale                        4,132      4,685
Mortgage-backed securities available-for-sale                  14,086        940
Investment securities held-to-maturity                             --         --
Loans receivable, net                                             305        240
Equity in net assets of subsidiary                             34,130     31,164
Deferred charges                                                  940      1,066
Other assets                                                    1,099        265
     Total assets                                             $54,851    $38,570
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Subordinated debt                                             $16,586    $16,496
Securities sold under agreements to repurchase                 12,831
Accrued interest payable                                          357        330
Taxes payable and other liabilities                               419        179
     Total liabilities                                        $30,193    $17,005
STOCKHOLDERS' EQUITY
Preferred Stock                                               $    --      $  --
Common Stock                                                       20         20
Additional Paid in Capital                                     14,637     14,637
Retained earnings                                               7,904      5,352
Unrealized gain/loss on securities available-for-sale           2,097      1,556
     Total stockholders' equity                                24,658     21,565
     Total liabilities and stockholders' equity               $54,851    $38,570


STATEMENTS OF OPERATIONS

($ in thousands)
                                                 December 31,
                                      ------------------------------
                                         1996       1995       1994
                                         ----       ----       ----
Interest income                       $   531    $   429    $   177
Interest expense                        2,163      2,111      1,227
Net interest loss                      (1,632)    (1,682)    (1,050)
Non interest income                       133         92          1
Total general and
   administrative expenses              1,393      1,046        320
Non interest expenses                     127        126         74
Net loss before equity in
   net income of subsidiary
   and income taxes                    (3,019)    (2,762)    (1,443)
Equity in net income
   of subsidiary                        6,716      4,434      1,434
Income taxes                            1,145     (1,048)      (531)
Net Income                            $ 2,552    $ 2,720    $   540
<PAGE>
<TABLE>
<CAPTION>

STATEMENT OF CASH FLOWS
                                                            Year ended December 31,
                                                -------------------------------------
(Dollars in thousands)                               1996         1995         1994
----------------------                               ----         ----         ----
Cash flows from operating activities:
<S>                                             <C>          <C>          <C>
Net income                                      $   2,552    $   2,720    $     540
Adjustments to reconcile net income to
   net cash provided by operating activities:
     Equity in undistributed earnings
        of subsidiaries                            (4,426)      (4,434)      (1,433)
     Net realized gains on securities                 (36)         (92)          --
     (Increase) decrease in other assets             (592)         162       (1,362)
     Increase in accrued expenses
        and other liabilities                         267          122          387
     Depreciation and amortization                    (58)         (32)          --
Net cash provided by operating activities          (2,293)      (1,554)      (1,868)
                                                -------------------------------------
Cash flows from investing activities:
     Net (increase) decrease in loan to
        Employee Stock Ownership Plan                 (65)          60         (300)
     Net (increase) decrease in equity
        investment                                  2,074        2,089      (13,644)
     Purchases of available-for-sale
        securities                               (100,574)     (20,771)      (4,612)
     Proceeds from sale of
        available-for-sale securities              11,103        5,170           --
     Proceeds from maturities of and
        principal payment  on
        available-for-sale securities              76,910       14,619           --
Net purchases of premises and equipment               (37)         (21)          (6)
Net cash (used in) provided by
   investing activities                           (10,589)       1,146      (18,562)
                                                -------------------------------------
Cash flows from financing activities:
     Net  increase in securities sold under
        agreements to repurchase                   12,831           --           --
     Increase in subordinated debt                     --           --       16,390
     Increase in common stock and
        additional paid in capital                     --           --        5,156
     Dividends paid on common and
        preferred stock                                --           --         (498)
                                                -------------------------------------
Net cash provided by (used in)
   financing activities                            12,831           --       21,048
Net increase (decrease) in cash and
   cash equivalents                                   (51)        (408)         618
                                                -------------------------------------
Cash and cash equivalents at
   beginning of period                                210          618            0

Cash and cash equivalents at
   end of period                                $     159    $     210    $     618
                                                =====================================
</TABLE>

     TeleBanc Financial  Corporation  commenced  activities on January 27, 1994,
the effective  date of its formation as a holding  company of the Bank. The Bank
paid  dividends of $2.2  million and $2.1  million to TeleBanc for  subordinated
interest  expense  payments  for the years  ended  December  31,  1996 and 1995,
respectively.

22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Condensed  quarterly  financial  data for the years ended December 31, 1996
and 1995 is shown as follows:

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                           ---------------------------------------------------------------
                                             MAR. 31,          JUNE 30,          SEPT. 30,       DEC. 31,
(Dollars in thousands except per share data)     1996             1996               1996           1996
----------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>               <C>             <C>
Interest income                             $  11,131         $  11,364          $ 11,871         $11,433
Interest expense                                8,357             8,449             9,034           8,975
                                           ---------------------------------------------------------------
     Net interest income                        2,774             2,915             2,837           2,458
Provision for loan and lease losses               419               200               125             175
Non-interest income                               605               291               540           1,320
General and administrative
   expenses                                     1,679             1,749             3,287           1,660
Other non-interest expenses                       300                81               247              71
     Income before income taxes                   981             1,176              (282)          1,872
Income tax expense                                332               417              (220)            667
                                           ---------------------------------------------------------------
     Net income                             $     649         $     759          $    (62)        $ 1,205
                                           ---------------------------------------------------------------
Net income per share                        $    0.31         $    0.35          $  (0.03)        $  0.51
                                           ===============================================================
</TABLE>

<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED
                                           ---------------------------------------------------------------
                                               MAR. 31,         JUNE 30,          SEPT. 30,      DEC. 31,
(Dollars in thousands except per share data)      1995             1995              1995          1995
----------------------------------------------------------------------------------------------------------
<S>                                           <C>                 <C>              <C>            <C>
Interest income                               $  8,653            $10,414          $10,681        $10,763
Interest expense                                 7,155              8,151            8,215          8,425
                                           ---------------------------------------------------------------
     Net interest income                         1,498              2,263            2,466          2,338
Provision for loan and lease losses                309                353              502            558
Non-interest income                                630                412              419          2,316
General and administrative
   expenses                                      1,248              1,473            1,401          1,439
Other non-interest expenses                         87                 79               90            423
     Income before income taxes                    484                770              892          2,234
Income tax expense                                 164                264              343            889
                                           ---------------------------------------------------------------
     Net income                               $    320            $   506          $   549        $ 1,345
                                           ---------------------------------------------------------------
Net income per share                          $   0.16            $  0.25          $  0.27        $  0.65
                                           ===============================================================
</TABLE>

<PAGE>

Report of the Independent Public Accountants

To the Board of Directors and Stockholders
of TeleBanc Financial Corporation and Subsidiaries

     We have audited the  accompanying  consolidated  balance sheets of TeleBanc
Financial  Corporation (a Delaware  Corporation) and Subsidiaries as of December
31,  1996  and  1995  and  the  related   consolidated   statements  of  income,
stockholders'  equity,  and cash flows for the years then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.  The  consolidated  statement  of income of the company for the year
ended  December  31,  1994 was  audited by other  auditors  whose  report  dated
February 24, 1995 expressed an unqualified opinion on that statement.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material  respects,   the  financial  position  of  TeleBanc  Financial
Corporation  and  Subsidiaries as of December 31, 1996 and 1995, and the results
of its  operations  and its cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.


                                                  /s/ ARTHUR ANDERSEN LLP


Washington, DC
February 14, 1997  (except with respect to the matters  discussed in Note 20, as
to which the date is February 28, 1997)

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<S>                             <C>                               <C>                                  <C>
BOARD OF DIRECTORS              CORPORATE OFFICERS                CORPORATE                            COMMON STOCK
                                                                  INFORMATION
Mitchell H. Caplan              David A. Smilow                                                        The  Common   Stock  is
Vice Chairman & President       Chairman & CEO                    TRANSFER AGENT                       currently        traded
TeleBanc   Financial                                               AND REGISTRAR                       "over-the counter"under
Corporation                     Mitchell H. Caplan                Fifth Third Trust &                  the symbol  "TBFC." The
                                Vice Chairman & President         Investment Division                  following   table  sets
David R. DeCamp                                                   Fifth Third Center                   forth the closing  high
Senior Vice President           Laurence P. Greenberg             Cincinnati, OH 45263                 and low bid  prices for
Grubb & Ellis, Co.              Executive Vice President          (513) 579-5300                       the  Common  Stock  for
                                Marketing                                                              the periods indicated.
Arlen W. Gelbard, Esq.                                            FORM 10-K
Partner                         Aileen Lopez Pugh                 A copy of the Company's              Initial Offering: $6.125
Hofheimer, Gartlir & Gross      Executive Vice President          Form  10-K  for  Fiscal
                                Chief Financial                   1996 as filed  with the              ---------------------------
Steven F. Piaker                 Officer/Treasurer                Securities and Exchange              1995       HIGH     LOW
Partner                                                           Commission    will   be              ---------------------------
Conning & Company               Sang-Hee Yi                       furnished  upon written              1st Q      5.625    5.50
                                Executive Vice President          request to:                          2nd Q      6.00     5.00
Dean C. Kehler                  Chief Operating Officer                                                3rd Q      6.625    6.0625
Managing Director                                                 Aileen Lopez Pugh                    4th Q      7.75     6.50
CIBC Wood Gundy Securities      Michael H. Aneiro                 Director of Shareholder
                                Senior Vice President             Relations                            ---------------------------
Mark Rollinson, Esq.            Portfolio Management              TeleBanc Financial                   1996       HIGH     LOW
Attorney                                                          Corporation                          ---------------------------
                                Catherine M. Gallahan             1111 N. Highland Street              1st Q      8.00     7.50
David A. Smilow                 Senior Vice President             Arlington, Virginia 22201            2nd Q      9.75     8.00
Chairman & CEO                  Systems                           (703) 247-3700                       3rd Q      10.00    8.875
TeleBanc Financial Corporation                                                                         4th Q      13.25    9.75
                                Michael T. Girouard               SPECIAL COUNSEL
Michael A. Smilow               Senior Vice President             Hogan  & Hartson L.L.P.              No dividends  were paid
Mortgage Finance Consultant     Chief Investment Officer          Columbia Square                      in 1995 and  1996.  The
                                                                  555 Thirteenth Street, NW            closing  per  share bid
                                Steven D. Greenwood               Washington, DC 20004-1109            price  of  the   Common
                                Senior Vice President                                                  Stock on  December  31,
                                Product Development               INDEPENDENT AUDITORS                 1996 was $13.25.
                                                                  Arthur Andersen LLP
                                Emidio Morizio                    8000 Towers Crescent Drive
                                Senior Vice President             Vienna, VA 22182                     ANNUAL MEETING
                                Operations
                                                                                                       The  Company's   Annual
                                Michael R. Opsahl                                                      Meeting of shareholders
                                Senior Vice President                                                  will be  held at  11:00
                                Chief Credit Officer                                                   am on Wednesday, May 7,
                                                                                                       1997  at the  Corporate
                                Jane H. Gelman                                                         offices   of   TeleBanc
                                Vice President                                                         Financial  Corporation,
                                Chief Administrative                                                   1111    N.     Highland
                                 Officer/Secretary                                                     Street,      Arlington,
                                                                                                       Virginia 22201.
                                Dennis E. Carlton
                                General Counsel


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TeleBanc Financial Corporation and subsidiaries
Selected Financial Data

                                                                                     Years ended December 31,
                                                             -----------------------------------------------------------------------
 (Dollars in thousands, except per share data)                      1996           1995          1994          1993         1992
                                                                    ----           ----          ----          ----         ----
<S>                                                            <C>            <C>           <C>           <C>          <C>
Interest income                                                $  45,800      $  40,511     $  22,208     $  16,667    $  19,425
Interest expense                                                  34,815         31,946        17,513        11,828       13,896
     Net interest income                                          10,985          8,565         4,695         4,839        5,529
Provision for loan and lease losses                                  919          1,722           492           211          972
Non-interest income                                                2,756          3,777           175         1,157        1,014
General and administrative expenses                                8,375          5,561         3,503         2,997        2,393
Other non-interest operating expenses                                700            679           153           739        1,234
     Income before income taxes and cumulative
       effect of change in accounting principle                    3,747          4,380           722         2,049        1,944
Income tax expense                                                 1,195          1,660           182           842          857
Cumulative effect of change in accounting principle                   --             --            --           170           --
     Net income                                                $   2,552      $   2,720     $     540     $   1,377     $  1,087

Earnings per share:
     Primary                                                   $    1.12      $    1.33     $    0.31     $    1.06     $   0.84
     Fully diluted                                             $    1.09      $    1.33     $    0.31     $    1.06     $   0.84

At December 31,
Total assets                                                    $647,965       $553,943      $427,292      $220,301     $229,374
Loans receivable, net                                            351,821        248,667       154,742       100,859       93,605
Mortgage-backed securities (a)                                   184,743        234,210       236,464        80,782       87,164
Investment securities (a)                                         78,826         40,058        12,444        18,110       13,570
Deposits                                                         390,486        306,500       212,411       113,132      130,100
Advances from the FHLB                                           144,800        105,500        96,000        61,000       53,750
Securities sold under agreements to repurchase                    57,581         93,905        79,613        29,642       29,642
Total stockholders equity                                         24,658         21,565        17,028        12,378       10,715

Financial ratios
Return on average
     Total assets                                                   0.61%          0.53%         0.17%         0.61%        0.45%
     Stockholders' equity                                          16.50%         14.10%         3.17%        11.79%       10.51%
Average stockholders' equity to average total assets                3.70%          3.77%         5.27%         5.20%        4.32%
Total general and administrative expenses to total assets (b)       1.03%(c)       1.00%         0.82%         1.36%        1.04%

Number of (b):
     Deposit accounts                                             16,506         12,919         8,564         2,932        3,568
     Full-time equivalent employees                                   39             30            29            18           17
Total assets per employee (b)                                $    16,614      $  18,465     $  14,734     $  12,239    $  13,493

(a) Includes available for sale, held to maturity, and held for sale. (b) At end of period. (c) Excludes SAIF assessment.
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