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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 March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17224
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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
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(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 March 31, 1995 - 7,204,708
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FIRST FINANCIAL CARIBBEAN CORPORATION
INDEX
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<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
--------------------
Consolidated Balance Sheet as of March 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . 3
Consolidated Statement of Income and Retained Earnings - Three month period ended
March 31, 1995 and March 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows - Three-month period ended March 31, 1995 and
March 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 7
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-------------------------------
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 13
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Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-----------------
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
--------------------------------
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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3
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSAND OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
(unaudited) (audited)
----------- ---------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 34,023 $ 35,916
Mortgage loans held for sale, net 236,036 263,773
Mortgage-backed securities held for trading, net 366,543 319,204
Mortgage-backed securities and investments held to maturity 67,016 67,519
Loans receivable, net 44,228 34,809
Accounts receivable and mortgage servicing advances, net 10,386 7,086
Accrued interest receivable 9,347 7,875
Excess servicing fee receivable 9,340 8,757
Property, leasehold improvements and equipment, net 7,160 7,467
Cost in excess of fair value of net assets acquired 6,578 6,609
Real estate held for sale, net 2,164 2,116
Purchased mortgage servicing rights, net 3,621 3,543
Prepaid expenses and other assets 3,596 3,345
-------- --------
$800,038 $768,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $245,750 $282,761
Securities sold under agreements to repurchase 360,798 303,730
Deposit accounts 79,764 66,471
Advances from Federal Home Loan Bank 416 419
Accounts payable and other liabilities 13,475 17,793
Income tax payable 2,572 2,572
Deferred tax liability 4,304 3,777
-------- --------
Total liabilities 707,079 677,523
-------- --------
Commitments and contingencies
-------- --------
Stockholders' equity:
10.5% Cumulative Convertible Preferred Stock, Series A,
$1.00 par value, 2,000,000 shares authorized; 186,128
shares issued and outstanding (1994 - 204,329) (liquidating
preference of $10 per share, aggregating $1,861,280) 186 204
Common stock, $1.00 par value, 10,000,000 shares
authorized; 7,218,708 shares issued and outstanding (1994- 7,219 7,182
7,182,306)
Paid-in capital 16,656 16,675
Retained earnings 69,153 66,706
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93,214 90,767
Treasury stock at par value, 14,000 shares (14) (14)
Unearned compensation under employment contracts (241) (257)
--------- --------
Total stockholders' equity 92,959 90,496
-------- --------
$800,038 $768,019
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</TABLE>
The accompanying notes are an integral part of this statement.
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FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousand of dollars, except per share data)
Unaudited
<TABLE>
<CAPTION>
Quarter Ended
===============================
March 31, 1995 March 31, 1994
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<S> <C> <C>
Revenues:
Mortgage loans sales and fees $ 2,496 $ 3,475
Servicing income 2,690 2,768
Interest income 15,374 8,724
Rental and other income 150 107
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20,710 15,074
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Expenses:
Interest 9,780 3,571
Employee cost, net (See Note i) 2,572 1,410
Taxes, other than payroll and income taxes 236 283
Maintenance 136 135
Advertising 455 820
Professional services 698 917
Telephone 411 515
Rent 503 441
Other, net (See Note i) 1,962 3,280
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16,753 11,372
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Income before income taxes and cumulative effect 3,957 3,702
Income taxes:
Current --- 108
Deferred 527 287
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527 395
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Income before cumulative effect 3,430 3,307
Cumulative effect of change in accounting principle-
adoption of SFAS 115, net of income taxes of $880 --- 1,215
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Net income 3,430 4,522
Retained earnings at beginning of period 66,706 53,219
Less cash dividends paid:
----
Convertible preferred stock 48 86
Common stock 935 899
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Retained earnings at end of period $69,153 $56,756
======= =======
Earnings per share:
Primary:
Income before cumulative effect $ 0.47 $ 0.47
Cumulative effect --- 0.18
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Net Income $ 0.47 $ 0.65
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Fully Diluted:
Income before cumulative effect $ 0.45 $ 0.44
Cumulative effect --- 0.16
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Net Income $ 0.45 $ 0.60
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</TABLE>
The accompanying notes are an integral part of this statement.
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FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSAND OF DOLLARS)
<TABLE>
<CAPTION>
Three-Month Period Ended
March 31,
------------------------
1995 1994
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,430 $ 4,522
--------- ---------
Adjustments to reconcile net income to net cash (used) provided by in operating
activities:
Amortization of excess servicing fee receivable . . . . . . . . . . . . . . . . . 217 68
Amortization of cost in excess of fair value of net assets acquired . . . . . . . 94 76
Amortization of purchased mortgage servicing rights . . . . . . . . . . . . . . . 228 180
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 385 329
Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . --- (1,215)
Allowances for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 115
Origination and purchases of mortgage loans held for sale . . . . . . . . . . . . (132,591) (264,801)
Principal repayment and sales of loans held for sale . . . . . . . . . . . . . . 76,078 96,341
Purchases of mortgage-backed securities held for trading . . . . . . . . . . . . . (41,964) (139,974)
Principal repayments and sales of mortgage-backed securities held for trading . . 78,875 161,987
Increase in interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . (1,472) (1,059)
(Decrease) increase in loans payable . . . . . . . . . . . . . . . . . . . . . . . (37,012) 1,669
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 624 209
Increase in securities sold under agreements to repurchase . . . . . . . . . . . . 57,067 146,185
Decrease in payables and accrued liabilities . . . . . . . . . . . . . . . . . . . (4,941) (69)
Increase in income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . --- 108
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 287
Amortization of unearned compensation under employment contracts . . . . . . . . . 16 17
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Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,791) 453
--------- ---------
Net cash (used) provided by in operating activities . . . . . . . . . . . . . . . (361) 4,975
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed securities and investments held to maturity . . . . . . --- (10,066)
Principal repayments of investments held to maturity . . . . . . . . . . . . . . . . 503 279
Origination of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (11,509) (3,090)
Principal repayments of loans receivable . . . . . . . . . . . . . . . . . . . . . . 2,090 1,210
(Increase) decrease in accounts receivable and mortgage servicing advances . . . . . (3,378) 1,897
Additions to excess servicing fee receivable . . . . . . . . . . . . . . . . . . . . (801) (366)
Purchase of property, leasehold improvements and equipment . . . . . . . . . . . . . (78) (1,685)
Additions to cost in excess of fair value of net assets acquired . . . . . . . . . . (62) (164)
Proceeds from disposal of real estate held for sale . . . . . . . . . . . . . . . . 261 788
Acquisition of real estate held for sale . . . . . . . . . . . . . . . . . . . . . . (310) (438)
Increase in purchased mortgage servicing rights . . . . . . . . . . . . . . . . . . (305) ---
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250) (260)
--------- ---------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . (13,839) (11,895)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,293 11,882
Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (983) (985)
Repayment of advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (303)
--------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 12,307 10,594
--------- ---------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . (1,893) 3,674
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . 35,916 37,307
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . $ 34,023 $ 40,981
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Noncash financing activities-conversion of preferred stock . . . . . . . . . . . . . $ 182 $ 2,100
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,308 $ 1,011
Cash used to pay income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . --- ---
</TABLE>
The accompanying notes are an integral part of this statement.
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6
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 1994 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 three-month period ended March 31,
1995 are not necessarily indicative of the results to be expected
for the full year.
c. 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.
d. Cash dividends per share paid for the three-month period ended March
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Three-Month period ended
March 31,
------------------------
1995 1994
---- ----
<S> <C> <C>
Series A Preferred Stock $0.2625 $0.2625
Common Stock $0.13 $0.13
</TABLE>
e. At March 31, 1995, escrow funds include approximately $17.5 million
deposited with Doral Federal Savings Bank ("Doral Federal"). These
funds are included in the Company's financial statements. Escrow
funds also include approximately $15.9 million deposited with other
banks which are excluded from the Company's assets and liabilities
f. Certain reclassifications of prior year's data have been made to
conform to 1995 classifications.
g. Investments held to maturity consist of FNMA/FHLMC mortgage-backed
securities, U.S. Treasury Notes, Federal Home Loan Bank Notes and
collateralized mortgage obligations.
<PAGE> 7
7
h. The number of average shares of common stock used for computing the
primary and fully diluted net income per share was as follows:
<TABLE>
<CAPTION>
Three-Month Period Ended
--------------------------------
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Primary 7,185,011 6,840,433
Fully diluted 7,576,964 7,576,964
</TABLE>
i. Employee costs and other expenses are shown in the Consolidated
Statement of Income and Retained Earnings net of direct loan
origination costs which, pursuant to SFAS-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 $5.7 million and $7.6 million, respectively,
for the quarters ended March 31, 1995 and 1994, except for the
application of SFAS-91. Other expenses would have been $2.8 million
and $4.4 million, respectively, for the quarters ended March 31,
1995 and 1994, except for the application of SFAS-91.
Set forth below is a breakdown of direct loan origination costs that
were deferred pursuant to SFAS-91.
<TABLE>
<CAPTION>
Three-Month Period Ended
-------------------------------
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
Employee costs $3,218 $6,190
Other costs 831 1,073
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continuous access to short term sources of debt
financing and equity capital. The Company's cash requirements arise from loan
originations and purchases, repayments of debt upon maturity, payments of
operating and interest, servicing advances and loan repurchases. The Company's
primary sources of liquidity are sales in the secondary mortgage market of the
loans it originates and purchases, short term borrowings under warehouse,
gestation and repurchase agreements lines of credit secured by pledges of its
loans and mortgage-backed securities (in most cases until such loans are sold
and the lenders repaid) and revenues from operations.
The interim Consolidated Condensed Statement of Cash Flows reflect the working
capital needs of the Company. Operating activities used approximately $361,000
of net cash during the three-month period ended March 31, 1995, versus
providing approximately $5.0 million in the comparable period of 1994. The
major changes in cash flow for the first quarter of 1995 compared to 1994 were
primarily related to a net increase of approximately $20.0 million in the
Company's portfolio of mortgage loans held for sale and mortgage-backed
securities held for trading.
<PAGE> 8
8
This increase resulted in an increase on related borrowings of $20 million
reflecting increased use of repurchase and gestation lines of credit which
require lower collateralization levels than bank warehousing lines of credits.
Investing activities used cash of approximately $13.8 million in the first
three months of 1995 due primarily to net originations of loans receivable of
approximately $9.4 million. The Company capitalized $305,000 of mortgage
servicing rights during the first quarter of 1995 related to wholesale mortgage
loan purchases. When the Company purchases mortgage loans together with the
related servicing rights, a portion of the purchase price is allocated to the
servicing rights acquired. Investing activities also reflected an increase in
short term servicing advances and accounts receivable of $3.4 million.
During the first three-months of 1995, financing activities provided
approximately $12.3 million of net cash due to additional deposits amounting to
approximately $13.3 million received by Doral Federal, the Company's thrift
subsidiary, net of quarterly dividend payments of approximately $983,000.
Total liabilities were approximately 7.6 and 7.5 times stockholders' equity at
March 31, 1995 and December 31, 1994, respectively. The Company's leverage at
March 31, 1995 reflects an increase in securities sold under agreements to
repurchase which was partially offset by a decrease in loans payable as compared
to December 31, 1994.
As of March 31, 1995, 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 March 31, 1995 Doral Federal had tangible capital and
core capital of $6.1 million or approximately 6.0% of adjusted assets. As of
such date, Doral Federal had risk-based capital of $6.4 million or 15.7% 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 (including mortgage loans converted into
mortgage-backed securities) prior to sale for an average period of
approximately 383 days for the three-month period ended March 31, 1995 and 212
days during the year ended December 31, 1994. 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 March 31, 1995 and December 31, 1994, FFCC
had available warehousing lines of credit of $92 million. At March 31, 1995
and December 31, 1994, FFCC had used approxi- mately $35.9 million and $79.6
million, respectively, of credit available under its warehousing lines of
credit. FFCC's warehousing lines of credit are generally subject to
termination 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 March 31, 1995, FFCC had used approximately
$344.5 million of credit under repurchase agreements. 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.
Also, included among FFCC's credit facilities are gestation or pre-sale
facilities which permit the Company to obtain more favorable rates once
mortgage loans are in the process of 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 March 31, 1995 and December
31, 1994, FFCC had available gestation facilities of $450 million and $350
million, respectively. At March 31, 1995 and December 31, 1994, FFCC had used
approximately $179.00 million and $196.0 million, respectively, of credit
available under its gestation facilities. Approximately $162.7 million of the
$179.0 million used by the Company at March 31, 1995 were used to finance
mortgage loans while approximately
<PAGE> 9
9
$16.3 million were used to finance mortgage-backed securities. Borrowings
under gestation credit facilities used to finance whole loans are classified as
"Loans payable" on the Company's Consolidated Balance Sheet while borrowings
under such credit facilities used to finance mortgage-backed securities are
classified as "Securities sold under agreements to repurchase."
The monthly weighted average interest rate of FFCC's borrowings for warehousing
lines of credit and for repurchase agreement lines of credit was 7.2% and 5.8%,
respectively, for the three-month period ended March 31, 1995 compared to 5.7%
for warehousing lines of credit and 4.3% for repurchase agreements in each case
for the year ended December 31, 1994.
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. At March 31,
1995, Doral Federal held $95.7 million in deposits at a weighted average
interest rate of 3.53%. Doral Federal, as a member of Federal Home Loan Bank
of New York (the "FHLB-NY"), also has access to collateralized borrowings from
the FHLB-NY up to a maximum of 30% of its total assets. Such advances must be
secured by qualifying assets with a value equal to between 105% to 115% of the
advances. At March 31, 1995, Doral Federal had $400,000 in outstanding
advances from the FHLB-NY at a weighted average interest rate cost of 7.76%.
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
three-month period ended March 31, 1995, the monthly average amount of funds
advanced by the Company under such servicing agreements was approximately $5.1
million.
During the three-month period ended March 31, 1995, the Company collected an
average of approximately $900,000 per month in net servicing fees, including
late charges. At March 31, 1995 and December 31, 1994, the servicing portfolio
amounted to approximately $2.7 billion and $2.6 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 continue to have adequate resources to
finance its operations. 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 March 31, 1995, total assets were $800 million compared to $768 million at
December 31, 1994. This increase was due primarily to a net increase of $20
million in mortgage loans held for sale and 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. The increase
also reflects the purchase during the first quarter of 1995 of approximately
$33.2 million in mortgage-backed securities previously sold with put
arrangements. Total liabilities were $707 million at March 31, 1995 compared
to $678 million at December 31, 1994. 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 to maturity.
As of March 31, 1995, Doral Federal had $103.1 million in assets compared to
$86.3 million at December 31, 1994. This increase was due primarily to an
increase of $9 million in loans receivable. Loans receivable and investments
owned by Doral Federal are classified as held to maturity. At March 31, 1995,
Doral Federal's deposit accounts totalled $79.8 million compared to $66.5
million at December 31, 1994. Deposit accounts include $17.5 million in
non-interest bearing demand deposits representing escrow funds and other
servicing accounts from First
<PAGE> 10
10
Financial's servicing operations. All other deposits at March 31, 1995, 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 by
offering competitive interest rates.
The sale of mortgage loans and mortgage-backed securities can generate a gain
or a loss. Losses on sales of loans occur when FFCC sells loans at a discount
from their book value. A loss from the sale of loans mays occur if interest
rates rise between the time FFCC fixes the interest rates charged to the
borrowers on the loans and the time the loans or mortgage-backed securities are
sold to investors.
FFCC attempts to minimize this interest rate risk through the use of forward
commitments and other hedging techniques. In the case of FNMA and FHLMC
conforming loans and FNMA, FHLMC and GNMA mortgage-backed securities, the
Company often seeks to obtain commitments for the purchase of loans or
mortgage-backed securities at the time it fixes the interest rates on the
loans. In the case of GNMA securities, the Company normally holds such
securities for longer periods prior to sale in order to maximize its net
interest income and to take advantage of the tax exempt status of the interest
on such securities under Puerto Rico law. The Company has in place long-term
reverse repurchase agreements secured by GNMA certificates with a principal
amount of approximately $42.7 million. The Company does not obtain forward
commitments for such GNMA certificates because they are financed pursuant to
long-term repurchase agreements. Prices for GNMA certificates in Puerto Rico
tend to be more stable than on the mainland U.S. because of the tax exempt
status of such securities under Puerto Rico law.
In the case of FNMA and FHLMC conforming loans and mortgage-backed securities
not subject to long term repurchase agreements, the Company also seeks to
protect itself from interest rate risk by purchasing options on interest rate
sensitive instruments such as eurodollar certificates of deposit, futures
contracts and, to a lesser extent, options on treasury bond futures contracts.
Contracts designated as trading hedges are marked-to-market on a monthly basis
with the resulting gains and losses charged to operations. Changes in the
market value of futures contracts that qualify as hedges of existing assets and
liabilities are recognized as an adjustment to the book value of the asset or
liability being hedged. The level of investment in such options is increased
or decreased as interest rates change and may reach significant levels relative
to the Company's liabilities. In the future, FFCC may utilize alternative
hedging techniques including futures, options or other synthetically created
hedge vehicles to held mitigate interest rate and market risk. However, there
can be no assurance that any of the above hedging techniques will be
successful. To the extent they are not successful, the Company's profitability
may be adversely affected. Losses on hedging activities are generally
indicative of higher profits realized on the sale of mortgage loans and
mortgage-backed securities.
As of March 31, 1995, FFCC held $2.2 million of real estate owned, compared to
$2.1 million as of December 31, 1994.
Results of Operations for Quarters Ended March 31, 1995 and 1994
Net income for the quarter ended March 31, 1995 decreased to $3.4 million from
$4.5 million for the comparable period of 1994. The results for the first
quarter of 1994 included a one-time benefit of approximately $1.2 million from
the cumulative effect of adopting SFAS 115. Doral Federal contributed
approximately $263,000 in net income for the first quarter of 1995 compared to
a loss of $67,000 for the first quarter of 1994.
Revenues from mortgage loan sales and origination fees decreased to $2.5
million for the quarter ended March 31, 1995 from $3.5 million for the
comparable period of 1994. 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. Mortgage loan
sales and fees for the quarter ended March 31, 1995, included approximately
$3.1 million relating to gross unrealized gains of the Company's
mortgage-backed securities held for trading portfolio experienced during the
quarter compared to a reduction in mortgage loan sales and fees of
approximately $170,000 from gross unrealized losses on mortgage-backed
securities held for trading during the first quarter of 1994. As a result of
the adoption of SFAS 115,
<PAGE> 11
11
unrealized gains and losses on mortgage-backed securities held for trading
after January 1, 1994 are included in earning as a component of mortgage loan
sales and fees.
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 $144 million for the three-month period ended March 31, 1995 compared to
$268 million for the three-month period ended March 31, 1994. The total volume
of loans purchased was approximately $20 million for the three-month period
ended March 31, 1995. There were no purchases made during the 1994 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 $400,000 for the three-month period ended
March 31, 1995 versus the comparable period of 1994. This increase reflected
an increase of approximately $465,000 of net interest income related to the
operations of Doral Federal and a decrease of $65,000 from the mortgage banking
operations of the Company. 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 $5.6 million in the first quarter
of 1995, versus $5.2 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.
The weighted average interest rate spread was 315 basis points during the first
quarter of 1995 compared to 428 basis points for the comparable period of 1994.
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 decreased 3% to $2.7 million for
the quarter ended March 31, 1995 compared to $2.8 million for the same period
in 1994. The decrease is primarily attributable to the sale of $200 million of
servicing rights made in the fourth quarter 1994 and the higher amortization of
excess servicing.
FFCC capitalizes as an asset an excess servicing fee 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
excess servicing fee receivable 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 excess servicing fee
receivable is based on the amount and timing of estimated future cash flows.
Amortization of such excess servicing fee receivable for each of the quarters
ended March 31, 1995 and 1994 was approximately $217,000 and $68,000,
respectively. The amortization of excess servicing fee receivable is recorded
as a reduction of servicing income. The Company's servicing portfolio totaled
$2.7 billion at March 31, 1995 compared to $2.5 billion at the same date a year
ago. The Company's servicing portfolio at March 31, 1995 increased $100,000
over the December 31, 1994 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
<PAGE> 12
12
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 March 31, 1995, the
unamortized balance of purchased servicing rights approximates their fair
value. The amortization of purchased mortgage servicing rights for the
quarters ended March 31, 1995 and 1994 was $228,000 and $180,000, 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
first quarter of 1995 the Company purchased approximately $20 million in FHA
and VA mortgages from third parties. As a result of such acquisitions, the
Company capitalized approximately $305,000 in servicing rights during the first
quarter of 1995.
Aggregate expenses for the quarter ended March 31, 1995, increased by
approximately $5.4 million compared to the first quarter of 1994, 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 for the first quarter of 1995 were approximately $2.6 million compared to
$1.8 million for the first quarter of 1994. This increase was due to the
application of SFAS-91 which requires the Company to defer employee costs
directly related to its loan origination activities. As a result of the large
volume of loan originations experienced during the first quarter of 1994, a
greater amount of employee costs were deferred pursuant to SFAS-91 during the
first quarter of 1994 than the comparable period of 1995. Employee costs would
have been $5.7 million and $7.6 million, respectively, for the quarters ended
March 31, 1995 and 1994, but for the application of SFAS-91. See Note i to the
Company's Consolidated Financial Statements contained herein. Advertising and
telephone expenses decreased from first quarter 1994 levels in line with the
reduction in the volume of originations. Increase in rent expenses are
associated with prior year expansion activities.
The provision for income taxes decreased to $527,000 for the three-month period
ended March 31, 1995, compared to $1,275,000 for the three-month period ended
March 31, 1994, as a result of a decrease in the Company's 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.
<PAGE> 13
13
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
The Annual Stockholders Meeting of First Financial Caribbean Corporation
was held on April 26, 1995. A quorum was obtained with 5,655,577 votes
represented in person or by proxy, which represented approximately 78.5% of all
votes eligible to be cast at the meeting. Eight directors of the Company,
Salomon Levis, Zoila Levis, Richard F. Bonini, Edgar M. Cullman, Jr., Frederick
M. Danziger, John L. Ernst, A. Brean Murray and Victor M. Pons, Jr., were
reelected for additional one-year terms. The following proposals were voted
upon at the meeting with the following results:
Proposal 1: Election of Directors
<TABLE>
<CAPTION>
NOMINEES FOR ONE-YEAR TERM VOTES FOR VOTES WITHHELD
-------------------------- --------- --------------
<S> <C> <C>
Salomon Levis 5,630,261 25,316
Richard F. Bonini 5,630,267 25,310
Edgar M. Cullman, Jr. 5,630,167 25,410
Frederick M. Danziger 5,630,167 25,410
John L. Ernst 5,630,167 25,410
Zoila Levis 5,630,167 25,410
A. Brean Murray 5,622,999 25,578
Victor M. Pons, Jr. 5,622,999 25,578
</TABLE>
<PAGE> 14
14
Proposal 2: Ratification of the Appointment of Price Waterhouse as the
Company's Independent Accountants for 1995.
For: 5,640,853
Against: 6,204
Abstain: 8,520
There were no broker non-votes with respect to any of the two proposals.
ITEM 5 - OTHER INFORMATION
Dividend declaration
On April 26, 1995, the Board of Directors authorized the declaration of a
cash dividend of $ 0.2625 per share to be paid on June 30, 1995 to shareholders
of record on June 11, 1995 of the Company's 10- 1/2% Cumulative Convertible
Preferred Stock, Series A, and also authorized a quarterly $0.15 per share cash
dividend to be paid on June 2, 1995 to shareholders of record as of May 9, 1995
of the Company's Common Stock. The Common Stock dividend reflected a $0.02 per
share increase over the prior quarterly dividend.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
<PAGE> 15
15
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.
FIRST FINANCIAL CARIBBEAN CORPORATION
(Registrant)
Date: May 12, 1995 /s/ Salomon Levis
---------------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: May 12, 1995 /s/ Richard F. Bonini
-----------------------------------------
Richard F. Bonini
Senior Executive Vice President
and Secretary
Date: May 12, 1995 /s/ Luis Alvarado
------------------------------------------
Luis Alvarado
Executive Vice President
Chief Financial Officer and
Principal Accounting Officer
<PAGE> 16
16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
Description Page
----------- ----
<S> <C>
27 Financial Data Schedule (for SEC use only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST FINANCIAL CARIBBEAN CORPORATION FOR THE THREE
MONTHS ENDED MARCH 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 34,023
<SECURITIES> 433,559
<RECEIVABLES> 19,733
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,099
<DEPRECIATION> 3,939
<TOTAL-ASSETS> 800,038
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 7,219
0
186
<OTHER-SE> 85,554
<TOTAL-LIABILITY-AND-EQUITY> 800,038
<SALES> 0
<TOTAL-REVENUES> 20,710
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,780
<INCOME-PRETAX> 3,957
<INCOME-TAX> 527
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,430
<EPS-PRIMARY> .47
<EPS-DILUTED> .45
</TABLE>
