<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- -----------------
Commission file number 0-17224
First Financial Caribbean Corporation
-------------------------------------
(Exact name of registrant as specified in its charter)
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1159 F.D. Roosevelt Avenue,
Puerto Nuevo
San Juan, Puerto Rico 00920-2998
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (809) 749-7100
including area code --------------
Former name, former address and Not Applicable
former fiscal year, if changed --------------
since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Number of shares of Common Stock outstanding at September 30, 1994 - 6,968,904
---------
Page 1 of 17 pages.
<PAGE> 2
2
FIRST FINANCIAL CARIBBEAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<S> <C> <C>
Consolidated Balance Sheet as of September 30, 1994 and December 31, 1993 . . . . . . . . . . . . . . . . . . 3
Consolidated Statement of Income and Retained Earnings - Quarters ended September 30, 1994 and
September 30, 1993 and nine-month period ended September 30, 1994 and September 30, 1993 . . . . . . . . . . . 4
Consolidated Statement of Cash Flows - Nine-month period ended September 30, 1994 and September
30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 3
3
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
(unaudited) (audited)
----------- ---------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 40,096 $ 37,307
Mortgage loans held for sale, net 242,621 262,516
Mortgage-backed securities held for trading, net 288,861 125,716
Mortgage-backed securities and investments held to maturity 67,169 6,530
Loans receivable, net 17,910 9,561
Accounts receivable and mortgage servicing advances, net 15,174 15,330
Accrued interest receivable 6,521 4,022
Capitalized servicing fee differential 5,588 3,464
Property, leasehold improvements and equipment, net 7,665 5,771
Cost in excess of fair value of net assets acquired 6,426 6,537
Real estate held for sale, net 2,346 2,928
Purchased mortgage servicing rights, net 4,081 3,995
Prepaid expenses and other assets 3,999 2,754
-------- --------
$708,457 $486,431
======== ========
Escrow funds (See contra) $ 50,004 $ 62,650
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $229,968 $192,794
Securities sold under agreements to repurchase 300,082 143,200
Deposit accounts 59,561 26,451
Advances from Federal Home Loan Bank 422 2,431
Accounts payable and other liabilities 25,298 38,402
Income tax payable 802 3,749
Deferred tax liability 5,097 2,460
------- --------
Total liabilities 621,230 409,487
------- --------
Commitments and contingencies
-------- --------
Stockholders' equity:
10.5% Cumulative Convertible Preferred Stock, Series A,
$1.00 par value, 2,000,000 shares authorized; 304,030
shares issued and outstanding (1993 - 414,413) (liquidating
preference of $10 per share, aggregating $3,040,300) 304 414
Common stock, $1.00 par value, 10,000,000 shares
authorized; 6,982,904 shares issued and outstanding (1993- 6,983 6,762
6,762,138)
Paid-in capital 16,774 16,885
Retained earnings 63,453 53,219
-------- --------
87,514 77,280
Treasury stock at par value, 14,000 shares (14) (14)
Unearned compensation under employment contracts (273) (322)
-------- --------
Total stockholders' equity 87,227 76,944
-------- --------
$708,457 $486,431
======== ========
Liability for escrow funds (See contra) $ 50,004 $ 62,650
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 4
4
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousand of dollars, except per share data)
Unaudited
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
------------------------------ -------------------------------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Mortgage loans sales and fees $ 2,704 $10,414 $ 9,800 $26,918
Servicing income 2,731 2,076 8,764 6,406
Interest income 12,301 6,260 32,976 17,292
Gain on sale of servicing rights ---- ---- ---- 2,378
Rental and other income 128 25 366 145
------- ------- ------- -------
17,864 18,775 51,906 53,139
------- ------- ------- -------
Expenses:
Interest 6,603 2,523 15,662 7,216
Employee cost, net (See Note m) 648 1,061 4,011 5,452
Taxes, other than payroll and income taxes 293 135 649 349
Maintenance 201 96 555 380
Advertising 1,264 1,310 3,206 2,912
Professional services 649 827 2,303 2,666
Telephone 451 419 1,530 1,160
Rent 666 432 2,024 1,270
Other, net (See Note m) 2,536 3,079 7,872 5,889
------- ------- ------- --------
13,311 9,882 37,812 27,294
------- ------- ------- --------
Income before income taxes and cumulative effect 4,553 8,893 14,094 25,845
Income taxes:
Current 159 2,117 361 7,511
Deferred 512 1,146 1,757 1,506
------- ------- ------- ---------
671 3,263 2,118 9,017
------- ------- ------- --------
Income before cumulative effect 3,882 5,630 11,976 16,828
Cumulative effect of change in accounting
principle-adoption of SFAS 115, net of income
taxes of $880 ---- ---- 1,215 ----
------- ------- ------- -------
Net income 3,882 5,630 13,191 16,828
Retained earnings at beginning of period 60,556 44,667 53,219 35,042
Less cash dividends paid:
Convertible preferred stock 79 126 248 390
Common stock 906 662 2,709 1,971
------- ------- ------- --------
Retained earnings at end of period $63,453 $49,509 $63,453 $49,509
======= ======= ======= =======
Earnings per share:
Primary:
Income before cumulative effect $ 0.54 $ 0.83 $ 1.68 $ 2.50
Cumulative effect --- --- .17 ---
------- ------- ------- --------
Net Income $ 0.54 $ 0.83 $ 1.85 $ 2.50
======= ======= ======= =======
Fully Diluted:
Income before cumulative effect $ 0.51 $ 0.74 $ 1.58 $ 2.22
Cumulative effect --- --- .16 ---
------- ------- ------- --------
Net Income $ 0.51 $ 0.74 $ 1.74 $ 2.22
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
5
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Nine Month Period Ended September 30,
-----------------------------------
1994 1993
---- ----
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,191 $ 16,828
--------- --------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of capitalized servicing fee differential . . . . . . . . . . . . . . . . 348 75
Amortization of cost in excess of fair value of net assets acquired . . . . . . . . . 296 174
Amortization of purchased mortgage servicing rights . . . . . . . . . . . . . . . . . 540 369
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,116 491
Gain on sale of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2,378)
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . (1,215) -
Allowances for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 193
Origination and purchases of mortgage loans held for sale . . . . . . . . . . . . . . (639,639) (1,115,929)
Principal repayment and sales of loans held for sale . . . . . . . . . . . . . . . . . 177,450 573,121
Purchases of mortgage-backed securities held for trading . . . . . . . . . . . . . . . (199,864) (167,963)
Principal repayments and sales of mortgage-backed securities held for trading . . . . 520,018 629,729
Increase in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,499) (1,116)
Increase in loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,174 93,990
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 1,744
Increase (decrease) in securities sold under agreements to repurchase . . . . . . . . 156,882 (24,168)
Decrease in payables and accrued liabilities . . . . . . . . . . . . . . . . . . . . . (13,343) (474)
(Decrease) increase in income tax payable . . . . . . . . . . . . . . . . . . . . . . . (2,947) 5,698
Increase in deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . 2,637 1,506
Amortization of unearned compensation under employment contracts . . . . . . . . . . . 49 205
--------- --------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,448 (4,733)
--------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . 50,639 12,095
--------- --------
Cash flows from investing activities:
Acquisition of certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . - (1,808)
Purchases of mortgage-backed securities and investments held to maturity . . . . . . . . (60,941) -
Principal repayments of investments held to maturity . . . . . . . . . . . . . . . . . . 302 -
Origination of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,901) -
Principal repayments of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . 1,552 -
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) (11,759)
Additions to capitalized servicing fee differential . . . . . . . . . . . . . . . . . . . (2,472) (1,487)
Purchase of property, leasehold improvements and equipment . . . . . . . . . . . . . . . (3,010) (2,016)
Additions to cost in excess of fair value of net assets acquired . . . . . . . . . . . . (185) (692)
Proceeds from disposal of real estate held for sale . . . . . . . . . . . . . . . . . . . 2,300 1,423
Acquisition of real estate held for sale . . . . . . . . . . . . . . . . . . . . . . . . (1,718) (719)
Increase in purchased mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . (626) (12)
Proceeds from sale of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . - 2,378
(Decrease) increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,245) 663
Cash acquired in Doral Federal Savings Bank, net of purchase price . . . . . . . . . . . - 227
Decrease in mortgage notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . - 5,977
--------- --------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . (75,994) (7,825)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,110 4,410
Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,957) (2,361)
Repayment of advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,009) (301)
Decrease in loans payable related to mortgage notes receivable . . . . . . . . . . . . . - (3,846)
--------- --------
Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . 28,144 ( 2,098)
--------- --------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . 2,789 2,172
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . 37,307 18,687
--------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 40,096 $ 20,859
========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
6
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousand of dollars)
<TABLE>
<CAPTION>
Nine-Month Period Ended
September 30,
----------------
1994 1993
---- ----
(unaudited)
<S> <C> <C>
Supplemental Schedule of Noncash Investing and Financing Activities:
Noncash financing activities-conversion of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . $ 1,100 $ 750
======= =======
On September 10, 1993, the Company acquired all of the outstanding capital stock of Doral Federal Savings
Bank (formerly Catano Federal Savings Bank) for $1,200,000 (including transaction costs). In conjunction
with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - $13,073
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,200)
------- -------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - $11,873
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,423 $ 5,472
Cash used to pay income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,308 1,813
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
7
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
a. The Consolidated Condensed Financial Statements (unaudited) have
been prepared in conformity with the accounting policies stated in
the Company's Annual Audited Financial Statements included in the
Company's 1993 Annual Report to Stockholders, and should be read in
conjunction with the Notes to the Consolidated Financial Statements
appearing in that report. All adjustments (consisting only of
normal recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of results for the interim periods
have been reflected.
b. The results of operations for the nine-month period ended September
30, 1994 are not necessarily indicative of the results to be
expected for the full year.
c. In January 1994, the Company adopted Statement of Financial
Accounting Standard No. 115 "Accounting for certain investments in
Debt and Equity Securities." The adoption of SFAS 115 requires the
Company to classify and account for investments in equity securities
that have readily determinable fair values and all investments in
debt securities in one of the following three categories:
- Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as held to
maturity and reported at amortized cost.
- Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term
are classified as trading. Such securities are to be
reported at fair value, with unrealized gains and losses
included in earnings. Mortgage-backed securities held for
sale in conjunction with mortgage banking activities must
be classified as trading securities.
- Debt and equity securities not classified as either
held-to-maturity or trading are classified as available-for-
sale and reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate
component of shareholders' equity.
The adoption of this standard resulted in the classification of
approximately $132 million in mortgage-backed securities as trading
securities and the recognition of a gross unrealized gain of
approximately $2.5 million as of January 1, 1994 ($1.215 million net
of taxes and related expenses). This unrealized gain is shown in
the accompanying Consolidated Statement of Income and Retained
Earnings under the caption "Cumulative Effect of Change in
Accounting Principle -- Adoption of SFAS 115." Unrealized gains and
losses on holdings of trading securities after January 1, 1994, are
included in earnings as a component of mortgage loan sales and fees.
d. Primary net income per share is determined by dividing net income,
after deducting preferred stock dividends, by the weighted average
number of shares of common stock outstanding considering the
dilutive effect of restricted stock awards. Fully diluted net
income per share has been computed based on the assumption that all
the shares of the Company's 10 1/2% Cumulative Convertible Preferred
Stock, Series A (the "Series A Preferred Stock") are converted into
common stock.
<PAGE> 8
8
e. Cash dividends per share paid for the quarter and nine-month period
ended September 30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month period ended
September 30, September 30,
--------------------- ------------------------
1994 1993 1994 1993
<S> <C> <C> <C>
Series A Preferred Stock $0.2625 $0.2625 $0.7875 $0.7875
Common Stock $0.13 $0.10 $0.39 $0.30
</TABLE>
f. At September 30, 1994, escrow funds include approximately $19.1
million deposited with Doral Federal Savings Bank ("Doral Federal").
These funds are included in the Company's financial statements.
Escrow funds also include approximately $30.9 million deposited with
other banks which are excluded from the Company's assets and
liabilities
g. On October 25, 1993, the Company declared a two-for-one stock split
on its shares of common stock outstanding. The stock split was
effected in the form of a stock dividend of one additional share of
common stock for each share of common stock held of record date on
November 22, 1993. As a result, a total of 3,381,069 shares of
common stock were issued on December 10, 1993. Also as a result of
the stock split referred to above, each outstanding share of the
Company's Series A Preferred Stock is now convertible into two
shares of common stock at a conversion price of $5 per share.
For purposes of the computation of earnings per share and common
stock dividends per share, the stock split including the effect of
the preferred stock's change in the computation of common stock
equivalents, was retroactively recognized for the first quarter of
1993.
h. Certain reclassifications of prior year's data have been made to
conform to 1994 classifications.
i. Investments held to maturity consist of FNMA/FHLMC mortgage-backed
securities, U.S. Treasury notes, Federal Home Loan Bank notes and
collateralized mortgage obligations.
j. The purchase price paid for contractual rights to service mortgage
loans (not exceeding the present value of estimated future net
servicing income) is capitalized and amortized in proportion to, and
over the period of estimated net servicing income. The Company
evaluates the net realizable value of purchased mortgage servicing
rights by stratifying the mortgage servicing portfolio and reviewing
the payment history on a pool by pool basis. Whenever it is
determined that there is a prepayment pattern indicative that the
fair value is less than the carrying amounts an impairment is
recognized by charging such excess to income. Prepayment rates tend
to increase (causing faster amortization) as mortgage interest
rates decline, and are inversely affected as mortgage interest rates
increase. Amortization of purchased servicing rights is based on
related pools principal amortization.
k. The Company sells substantially all of the mortgage loans it
produces (other than those originated by Doral Federal) and retains
the servicing rights thereto. These servicing rights entitle the
Company to a future stream of cash flows based on the outstanding
principal balance of the mortgage loans and the related contractual
service fee. Gains and losses on sales of mortgage loans are
adjusted to reflect as income or loss servicing fees that vary from
normal servicing fee rates set by federally approved secondary
market makers. Accordingly, the Company has recorded as capitalized
servicing fee differential, amounts equal to the present value of
servicing fees to be received in future years in excess of normal
rates based upon the estimated life of the loans. The adjustment
results in a receivable that
<PAGE> 9
9
is realized through receipt of the excess service fee over time.
The Company evaluates the net realizable value of its capitalized
servicing fee differential based on the present value of the
estimated remaining future excess servicing fee revenue, using the
same discount factor used in the original calculation of the
capitalized servicing fee differential.
l. The number of shares of common stock used for computing the primary
and fully diluted net income per share was as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
--------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary 6,964,413 6,603,630 6,918,824 6,575,942
Fully diluted 7,576,964 7,576,964 7,576,964 7,576,964
</TABLE>
m. Employee costs and other expenses are shown in the Consolidated
Statement of Income and Retained Earning net of direct loan
origination costs which pursuant to FAS-91 are capitalized as part
of the carrying cost of mortgage loans and are offset against
mortgage loan sales and fees when the loans are sold. Employee costs
would have been $5.8 million and $8.7 million, respectively, for
the quarters ended September 30, 1994 and 1993 and $21.7 million and
$25.3 million, respectively, for the nine month periods ended
September 30, 1994 and 1993, except for the application of FAS-91.
Other expenses would have been $3.4 million and $5.5 million,
respectively, for the quarters ended September 30, 1994 and 1993 and
$10.7 million and $10.6 million, respectively, for the nine month
periods ended September 30, 1994 and 1993, except for the
application of FAS-91.
Set Forth below is a breakdown of direct loan origination costs
that were capitalized or offset against mortgage loan sales and fees.
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
--------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Offset against mortgage loan sales and fees . . . . $6,069 $ 8,769 $15,409 $22,424
Capitalized as part of loan inventory . . . . . . . - 1,272 5,095 2,099
------ ------- ------- -------
$6,069 $10,041 $20,504 $24,523
====== ======= ======= =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The interim Consolidated Condensed Statement of Cash Flows reflect the working
capital needs of the Company. Operating activities provided approximately
$50.6 million of net cash during the nine-month period ended September 30,
1994, versus approximately $12.1 million in the comparable period of 1993.
The major changes were an increase of approximately $156.9 million in
securities sold under agreements to repurchase and a net increase of
approximately $163.1 million in mortgage-backed securities held for trading.
Both increases relate to a decision made in the first quarter of 1994 to
increase holdings of mortgage-backed securities to maximize net interest
income produced by these securities, a substantial portion of which is tax
exempt to the Company under Puerto Rico income tax law. Consistent with this
strategy, during the third quarter of 1994 the Company purchased approximately
$42 million of mortgage-backed securities which are being financed under long
term financing agreements and held until maturity.
Investing activities used cash of approximately $76.0 million in the first
nine months of 1994 due primarily to purchases of mortgage-backed securities
and investments held to maturity in the amount of approximately $60.9, due to
the decision made in the third quarter to invest in mortgage backed securities
and hold them to maturity. Purchases of furniture, equipment and leasehold
improvements used cash of approximately $3.0 million. Acquisition of real
estate owned used cash of approximately $1.7 million while disposals
contributed cash of approximately $2.3 million. Purchases of mortgage
servicing rights used cash of approximately $626,000 reflecting the Company's
decision to enter the wholesale mortgage loan purchase market during the second
quarter of 1994. When the
<PAGE> 10
10
Company purchases mortgage loans together with the related servicing rights, a
portion of the purchase price is allocated to the servicing rights
acquired.
During the first nine-months of 1994, financing activities provided
approximately $28.1 million of net cash due to additional deposit accounts
amounting to approximately $33.1 million attracted by Doral Federal, the
Company's thrift subsidiary, net of quarterly dividend payments of
approximately $2.9 million and repayment of advances to the Federal Home Loan
Bank of approximately $2.0 million.
Total liabilities were approximately 7.1 and 5.3 times stockholders' equity at
September 30, 1994 and December 31, 1993, respectively. The increased leverage
at September 30, 1994 was due mainly to a significant increase in securities
sold under agreements to repurchase as compared to December 31, 1993. The
additional debt was incurred to finance the higher levels of mortgage-backed
securities held for trading and until maturity.
As of September 30, 1994, Doral Federal met all its fully phased-in capital
requirements (i.e. tangible and core capital of at least 1.5% and 3.0%,
respectively, of adjusted assets and risk-based capital at least 8% of risk
adjusted assets. As of September 30, 1994 Doral Federal had tangible capital
and core capital to $5.7 million or approximately 8.12% of adjusted assets. As
of such date, Doral Federal had risk-based capital of $6.0 million or 22.33% of
risk adjusted assets.
FFCC borrows money under warehousing lines of credit to fund its mortgage loan
commitments and repays the borrowings as the mortgages are sold. The
warehousing lines of credit then become available for additional borrowings.
FFCC held mortgage loans prior to sale for an average period of approximately
182.5 days for the nine-month period ended September 30, 1994 and 98 days
during the year ended December 31, 1993. The increase in the days mortgage
loans were held prior to sale was due to higher levels of mortgage-backed
securities held for trading and a decision made by the Company to hold such
mortgage-backed securities for longer periods of time in order to maximize net
interest income. At September 30, 1994 and December 31, 1993, FFCC had
available warehousing lines of credit of $122.5 million. At September 30, 1994
and December 31, 1993, FFCC had used approximately $45.9 million and $54.8
million, respectively, of credit available under its warehousing lines of
credit. FFCC's warehousing lines of credit are generally terminable at the
discretion of the lender.
FFCC also obtains short-term financing through repurchase agreement lines of
credit with financial institutions and investment banking firms. Under these
agreements, FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed
securities and simultaneously agrees to repurchase them at a future date at a
fixed price. FFCC uses the proceeds of such sales to repay borrowings under
its warehousing lines of credit. The effective cost of funds under repurchase
agreements is typically lower than the cost of funds borrowed under FFCC's
warehousing lines of credit. At September 30, 1994, FFCC had used
approximately $250.9 million of credit under repurchase agreement
lines of credit. FFCC's continued use of repurchase agreements will depend on
the cost of repurchase agreements relative to the cost of borrowing under its
warehousing lines of credit with banks.
In addition, included among FFCC's credit facilities are gestation or pre-sale
facilities which permit the Company to obtain more favorable rates once
mortgage loans have been pooled for securitization but prior to the actual
issuance of the mortgage-backed securities as well as to finance such
mortgage-backed securities upon their issuance. At September 30, 1994 and
December 31, 1993, FFCC had available gestation facilities of $300 million and
$150 million, respectively. At September 30, 1994 and December 31, 1993, FFCC
had used approximately $153.2 million and $36.1 million, respectively, of
credit available under its gestation facilities. Approximately $104 million of
the $153.2 million used by the Company at September 30, 1994 were used to
finance mortgage loans while approximately $49.2 million were used to finance
mortgage-backed securities.
Doral Federal obtains funding for its lending activities through the receipt of
deposits and to a lesser extent from other borrowings such as Federal Home Loan
Bank advances and repurchase agreements with brokerage houses. Doral Federal,
as a member of Federal Home Loan Bank of New York (the "FHLB-NY"), has access
to collateralized borrowings from the FHLB-NY up to a maximum of 25% of its
qualifying assets.
<PAGE> 11
11
The monthly weighted average interest rate of FFCC's borrowings for warehousing
lines of credit and for repurchase agreement lines of credit was 5.09% and
3.98%, respectively, for the nine-month period ended September 30, 1994
compared to 4.25% for warehousing lines of credit and 3.34% for repurchase
agreements in each case for the year ended December 31, 1993.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA and certain other investors as well as mortgage loans sold
to certain other purchasers, require FFCC to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. Funds advanced by FFCC pursuant to these
arrangements are generally recovered by FFCC within 30 days. During the
nine-month period ended September 30, 1994, the monthly average amount of funds
advanced by the Company under such servicing agreements was approximately $2.8
million.
During the nine-month period ended September 30, 1994, the Company collected an
average of $973,000 per month in net servicing fees, including late charges.
At September 30, 1994 and December 31, 1993, the servicing portfolio amounted
to approximately $2.7 billion and $2.4 billion, respectively. The Company may,
from time to time, determine to sell portions of its servicing
portfolio as well as to purchase servicing rights from third parties.
FFCC generally has been able to provide for its growth and expansion and for
continued liquidity with funds from short-term borrowings and revenues from
operations. FFCC expects that it will have adequate resources to finance its
operations. On November 3, 1994, the Company commenced a private placement of
up to $5.0 million of its medium term notes with varying maturities from six
months to two years. The offering is conditioned on a minimum of $2.0 million
of notes being sold. The notes are being offered exclusively to residents of
Puerto Rico in a private placement that is exempt from the registration
requirements of the Securities Act of 1933, as amended. The Company will
continue to explore alternative and supplementary methods of financing its
operations, including both debt and equity financing. There can be no
assurance, however, that the Company will be successful in consummating any
such transactions.
Assets and Liabilities
At September 30, 1994, total assets were $708 million compared to $486 million
at December 31, 1993. This increase was due primarily to an increase of $163
million in mortgage-backed securities held for trading as a result of the
decision made by the Company in the first quarter of 1994 to increase its
holdings of mortgage-backed securities in order to maximize tax exempt interest
income produced by these securities. Total liabilities were $621 million at
September 30, 1994 compared to $409 million at December 31, 1993. This
increase was largely the result of an increase in securities sold under
agreements to repurchase related to the financing of the higher level of
mortgage-backed securities held for trading and until maturity.
As of September 30, 1994, Doral Federal had $70.8 million in assets compared to
$33.8 million at December 31, 1994 and to $13.1 million a year ago when the
institution was acquired by the Company. This increase was due primarily to an
increase of $13.4 million in loans receivable and to a $18.8 million increase
in investments, consisting of FNMA/FHLMC mortgage-backed securities, United
States Treasury Notes and FHLB-NY notes. Loans receivable and investments
owned by Doral Federal are classified as held to maturity. At September 30,
1994, Doral Federal's deposit accounts totalled $59.6 million compared to $24.5
million at December 31, 1993 and $8.3 million a year ago when it was acquired.
Deposit accounts include $19.1 million in non-interest bearing demand deposits
representing escrow funds and other servicing accounts from First Financial's
servicing operations. All other deposits at September 30, 1994, are retail
deposits, most of them in the form of certificates of deposit. The increase in
deposits is due to an aggressive campaign to attract funds offering
competitive interest rates.
Increase in interest rates adversely affect the value of the Company's
inventory of mortgage backed securities held for trading and can adversely
affect the gain on sale of mortgage loans. The Company has various mechanisms
to reduce its exposure to interest rate fluctuations, as they affect the values
of the portfolio holdings of mortgage loans and mortgage-backed securities and
the prices of newly created loans and loans to be originated. Among other
things, the Company enters into options on futures contracts designated as
trading hedges which are marked to
<PAGE> 12
12
market on a monthly basis with the resulting gains and losses charged to
operations. Losses on futures contracts are generally indicative of higher
profits on sale of mortgage loans, conversely gains on futures contracts are
indicative of lower profits or losses on the sale of mortgage loans. Changes
in the market value of futures contracts that qualify as hedges of existing
assets or liabilities are recognized as an adjustment of the carrying amount of
the hedged items. For the quarter and nine-month periods ended September 30,
1994, FFCC experienced gains of approximately $129,000 and $1,186,000,
respectively, from its hedging activities, compared to losses of $1,129,000 and
$1,493,000 for the quarter and nine-month period of 1993, respectively.
As of September 30, 1994, FFCC held $2.3 million of real estate owned, compared
to $2.9 million as of December 31, 1993.
Results of Operations for Quarters Ended September 30, 1994 and 1993
Net income for the quarter ended September 30, 1994 decreased to $3.9 million
from $5.6 million for the comparable period of 1993. This decrease is largely
attributable to a lower level of loan originations, lower gains on the sale of
mortgage loans and , the effect of increased competition on pricing decisions.
Doral Federal achieved profitability during the third quarter of 1994 and
contributed approximately $56,000 in net income for the quarter.
Revenues from mortgage loan sales and origination fees decreased to $2.7
million for the quarter ended September 30, 1994 from $10.4 million for the
comparable period of 1993. This decrease was due to a combination of lower
prices on the sales of mortgage loans and mortgage-backed securities resulting
from increases in prevailing interest rates, reduced fees as a result of
competition and a reduction in the volume of loan originations. As a result of
the adoption of SFAS 115, unrealized gains and losses on holding of trading
securities after January 1, 1994 are included in earning as a component of
mortgage loan sales and fees. Mortgage loan sales and fees for the quarter
ended September 30, 1994, included $1.5 million relating to gross unrealized
gains of the Company's trading securities portfolio during the quarter.
The Company entered the Puerto Rico wholesale mortgage loan purchase market
during the second quarter of 1994 to diversify its sources of loan production
and compensate for the decrease in the volume caused by higher interest rates
and increased competition. The total volume of loans originated and purchased
was $153 million for the three-month period ended September 30, 1994 compared
to $437 million for the three-month period ended September 30, 1993. The total
volume of loans purchased was approximately $32 million for the three-month
period ended September 30, 1994. There were no purchases made during the 1993
period. The decrease in loan originations was the result of decreased demand
for mortgage loans, especially refinancing loans, due to increases in mortgage
interest rates.
Net interest income increased by $2.0 million for the three-month period ended
September 30, 1994 versus the comparable period of 1993. Approximately
$534,000 or 27% of the increase was related to the operations of Doral Federal.
During the third quarter of 1994 the Company continued to realize a major
percentage of total revenues from interest income associated with the Company's
mortgage-backed securities inventory, resulting from an increase in the length
of time for which the Company holds mortgage loans and mortgage-backed
securities prior to sale a substantial portion of which is tax-exempt to the
Company under Puerto Rico law. The implementation of this strategy has led to
increases in the Company's net interest income and the amount of assets held
for sale and a decrease in the Company's effective tax rate.
The Company continues to maintain and monitor its hedging program to manage the
risk to the value of its mortgage-backed securities portfolio due to changes in
interest rates. Net interest income totaled $5.7 million in the 1994 third
quarter of 1994, versus $3.7 million a year earlier. Higher interest rates
have negatively impacted the refinance market and have increased the likelihood
that total mortgage production in Puerto Rico will continue to be lower than
levels experienced by the industry during the first quarter of 1994. Because
of the Company's ability to finance its mortgage-backed securities inventory
with low-cost tax advantaged funds, the Company has made a strategic decision
to compensate, in part, for the decrease in mortgage loan sales and fees by
increasing net interest income through investment in mortgage-backed
securities, an activity that improves net interest income while lowering the
Company's effective tax rates.
<PAGE> 13
13
The weighted average interest rate spread was 410 basis points during the third
quarter of 1994 compared to 449 basis points for the comparable period of 1993.
When FFCC sells the mortgage loans it has originated or purchased, it generally
retains the rights to service such loans and receives the related servicing
fees. Mortgage loan servicing fees are based on a percentage of the principal
balances of the mortgages serviced and are credited to income as mortgage
payments are collected. Loan servicing income increased 32% to $2.7 million
for the quarter ended September 30, 1994 compared to $2.1 million for the same
period in 1993. The increase is primarily attributable to the growth in the
Company's servicing portfolio.
FFCC capitalizes as an asset a servicing fee differential on loans sold with
servicing rights retained whenever the stated servicing fee rate is materially
higher than servicing fee normally permitted by FNMA, GNMA or FHLMC. The
capitalized servicing fee differential is recognized at the time of sale as an
adjustment to the resulting gain or loss on the loans sold and is recorded in
the accompanying Consolidated Statement of Income and Retained Earnings under
"Mortgage loan sales and fees." Amortization of capitalized servicing fee
differential is based on the amount and timing of estimated future cash flows.
See Note k to the Notes to Consolidated Condensed Financial Statements.
Amortization of such servicing fee for each of the quarters ended September 30,
1994 and 1993 was approximately $148,000 and $47,000, respectively. The
amortization of servicing fee differential is recorded as a reduction of
servicing income. The Company's servicing portfolio totaled $2.7 billion at
September 30, 1994 compared to $2.1 billion at the same date a year ago. The
Company's servicing portfolio at September 30, 1994 increased $300 million over
the December 31, 1993 level.
The cost of acquiring the rights to service mortgage loans is capitalized by
the Company on its financial statements. The amount capitalized is amortized
in proportion to, and over the period of, estimated net servicing income. Any
unamortized balance related to rights sold is charged to income at time of
sale. Capitalized purchased servicing rights are analyzed quarterly by
stratifying the mortgage servicing portfolio and reviewing the payment history
on a pool-by-pool basis. Whenever it is determined that there is a prepayment
pattern indicative that the fair value of the purchased mortgage servicing
rights (determined based on estimated future net cash flows discounted at
current rates) will be less than their carrying amounts, an impairment is
recognized by charging such excess to income. At September 30, 1994, the
unamortized balance of purchased servicing rights approximates their fair
value. The amortization of purchased mortgage servicing rights for the
quarters ended September 30, 1994 and 1993 was $180,000 and $123,000,
respectively, and is recorded in the accompanying Consolidated Statement of
Income and Retained Earnings under "Other Expenses." The Company entered the
Puerto Rico wholesale mortgage market during the second quarter of 1994 and
during the third quarter of 1994 the Company purchased approximately $32
million in FHA and VA mortgages from third parties. As a result of such
acquisitions, the Company capitalized approximately $515,000 in servicing
rights during the third quarter of 1994.
Aggregate expenses for the quarter ended September 30, 1994 increased by $3.4
million compared to the third quarter of 1993, primarily as a result of higher
interest expense associated with the financing of the Company's mortgage loans
and mortgage backed securities portfolios. Employee costs decreased 38.9%
compared to the same quarter of the prior year. This is a direct result of
cost reduction efforts implemented by management related to the decrease in
loan volume. Advertising and telephone expenses have remained slightly higher
than third quarter 1993 levels because management considered it necessary to
maintain the level of such expenses to ensure the
<PAGE> 14
14
Company retain its share of the Puerto Rico market for mortgage loans.
Increase in rent expenses are associated with prior year expansion
activities.
The provision for income taxes decreased to $671,000 for the three-month period
ended September 30, 1994, compared to $3.3 million for the three-month period
ended September 30, 1993, due to a decrease in income before taxes together
with a decrease in the effective tax rate. The decrease in the effective tax
rate was due primarily to an increase in the proportion of total income before
taxes consisting of tax exempt income. Interest on FHA and VA mortgages
secured by real property in Puerto Rico and GNMA mortgage-backed securities
consisting of such mortgages are tax exempt under Puerto Rico law.
Results of operations for the nine-months period ended September 30, 1994 and
September 30, 1993
The Company's net income for the nine months ended September 30, 1994,
decreased to $13.2 million, compared to $16.8 million for the corresponding
period in 1993. Consolidated results for the 1994 periods include the
operations of Doral Federal acquired by the Company in September 1993. For the
nine-month period ended September 30, 1994, Doral Federal's net income amounted
to approximately $58,000. Nine months results for 1994 include a benefit of
$1.2 million from the cumulative effect of the adoption of SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994. Earnings for the first nine months of 1993 reflected a $2.4
million gain from the sale of mortgage servicing rights. No such sales were
made in the first nine months of 1994.
Revenues from mortgage loan sales and fees decreased 64% to $9.8 million from
$26.9 a year ago. This decrease was due to a combination of lower prices on
the sales of mortgage loans and mortgage-backed securities related to increases
in prevailing interest rates, reduced fees as a result of competitive factors
and a reduction in the volume of loan originations. The total volume of loans
originated and purchased was approximately $650 million for the nine-month
period ended September 30, 1994 compared to approximately $1.115 billion for
the nine month period ended September 30, 1993. The decrease of 42% in loan
originations and purchases was the result of decreased demand for mortgage
loans, including refinancing loans, due to increases in mortgage interest
rates. Refinancing loans comprised 64% of production in the first nine-months
of 1994 compared to 74% for the same period in 1993.
As a result of the adoption of SFAS 115, unrealized gains and losses on
holdings of trading securities after January 1, 1994 are included in earnings
as a component of mortgage loan sales and fees. Mortgage loan sales and fees
for the nine-month period ended September 30, 1994, included $400,000 related
gross unrealized gains of the Company's trading securities portfolio during
such period.
Net interest income increased by approximately $7.2 million or 72 % for the
nine-month period ended September 30, 1994 versus the comparable period of
1993. This increase was largely the result of carrying a significantly larger
portfolio of mortgage-backed securities. Doral Federal contributed $1.5
million of net interest income during the first nine months of 1994 compared to
only $35,000 for the same period of 1993. The weighted average interest rate
spread was 415 basis points during the nine months ended September 30, 1994
compared to 423 basis points for the comparable period of 1993.
Loan servicing income increased 37% to $8.8 million for the nine-month period
ended September 30, 1994 compared to $6.4 million for the same period in 1993.
The increase in loan servicing income is due primarily to growth in the
Company's servicing portfolio. Amortization of capitalized servicing fee
differential for each of the nine-month periods ended September 30, 1994 and
1993 was approximately $348,000 and $75,000, respectively. The amortization of
capitalized servicing fee differential is recorded as a reduction of servicing
income. For the nine-month periods ended September 30, 1994 and 1993,
amortization of purchased mortgage servicing rights was $540,000 and $369,000,
respectively.
Aggregate expenses for the nine months period ended September 30, 1994
increased by $10.5 million compared to the same period for 1993, primarily as a
result of higher interest expense associated with the financing of the
Company's mortgage loans and mortgage backed securities portfolios. Employee
costs decreased 26.4% compared
<PAGE> 15
15
to the same period of 1993. This is a direct result of cost reduction efforts
implemented by management related to the decrease in loan volume. Advertising
and telephone expense have remained slightly above 1993 levels since management
considered it necessary to maintain the level of such expenses to ensure the
Company retain its share of the Puerto Rico market for mortgage loans.
Increases in rent expenses are associated with prior year expansion
activities.
The provision for income taxes decreased to $3 million for the nine-month
period ended September 30, 1994, including $880,000 attributed to the
cumulative effect of adopting SFAS 115, compared to $9.0 million for the
nine-months ended September 30, 1993, due to a decrease in income before taxes
together with a decrease in the effective tax rate from 34% to 20%. The
decrease in the effective income tax rate was due primarily to an increase in
the proportion of total income before taxes consisting of tax exempt income.
Interest on FHA and VA mortgage loans secured by residential property in Puerto
Rico and GNMA mortgage-backed securities composed of such loans is tax exempt
under Puerto Rico law.
<PAGE> 16
16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Other than legal proceedings in the normal course of its business, the
Company is not a party to any material legal proceeding and, to the knowledge
of the Company's management, there are no material legal proceedings
threatened. In the opinion of the Company's management, the pending and
threatened legal proceedings of which management is aware will not have a
material adverse effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
Not Applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 - OTHER INFORMATION
Dividend declaration
On October 31, 1994 the Board of Directors authorized the declaration of
a cash dividend of $ 0.2625 per share to be paid on December 31, 1994 to
shareholders of record on December 9, 1994 of the Company's 10 1/2% Cumulative
Convertible Preferred Stock, Series A, and also authorized a quarterly $0.13
per share cash dividend to be paid on December 2, 1994 to shareholders of
record as of November 14, 1994 of the Company's Common Stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
<PAGE> 17
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
FIRST FINANCIAL CARIBBEAN CORPORATION
(Registrant)
Date: November 11, 1994 /s/ Salomon Levis
-------------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: November 11, 1994 /s/ Richard F. Bonini
-------------------------------------
Richard F. Bonini
Senior Executive Vice President
and Secretary
Date: November 11, 1994 /s/ Luis Alvarado
-------------------------------------
Luis Alvarado
Executive Vice President
Chief Financial Officer and
Principal Accounting Officer
</TABLE>
