<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIRST FINANCIAL CARIBBEAN CORPORATION
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
COMMONWEALTH OF PUERTO RICO 66-0312162
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1159 FRANKLIN D. ROOSEVELT AVENUE
SAN JUAN, PUERTO RICO 00920
(809) 749-7100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
SALOMON LEVIS
CHIEF EXECUTIVE OFFICER
FIRST FINANCIAL CARIBBEAN CORPORATION
1159 FRANKLIN D. ROOSEVELT AVENUE
SAN JUAN, PUERTO RICO 00920
(809) 749-7100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
IGNACIO ALVAREZ JAMES R. TANENBAUM
JAVIER D. FERRER STROOCK & STROOCK & LAVAN
PIETRANTONI MENDEZ & ALVAREZ 7 HANOVER SQUARE
SUITE 1901, BANCO POPULAR CENTER NEW YORK, NEW YORK 10004-2696
209 MUNOZ RIVERA AVENUE
SAN JUAN, PUERTO RICO 00918
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
($1.00 per share)............ 1,610,000 shares $17.50 $28,175,000 $9,715.52
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 on the basis of the last sales price per share of the
Common Stock on October 27, 1995, as reported by the National Association of
Securities Dealers Automated Quotation National Market System.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 2, 1995
PROSPECTUS
[LOGO] 1,400,000 SHARES
FIRST FINANCIAL CARIBBEAN CORPORATION
COMMON STOCK
---------------------
Of the shares of Common Stock, par value $1.00 per share (the "Common
Stock"), of First Financial Caribbean Corporation, a Puerto Rico corporation
("FFCC" or the "Company"), offered hereby, 1,300,000 shares are being offered by
the Company and 100,000 shares are being offered by Salomon Levis (the "Selling
Stockholder"). The Company will not receive any of the proceeds from the sale of
the shares offered by the Selling Stockholder. See "Selling Stockholder" and
"Underwriting."
The Common Stock of the Company is traded in the over-the-counter market
and quoted on the National Association of Securities Dealers Automated Quotation
National Market System (the "NASDAQ NMS") under the symbol "FRCC." On November
1, 1995, the last reported sale price for the Common Stock as reported by the
NASDAQ NMS, was $17.50 per share.
---------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THE COMMISSIONER OF FINANCIAL
INSTITUTIONS OF PUERTO RICO OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE COMMISSION, THE OFFICE OF THE COMMISSIONER OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
DISCOUNTS PROCEEDS TO
PRICE TO AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
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<S> <C> <C> <C> <C>
Per Share................................... $ $ $
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Total(3).................................... $ $ $
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</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including under the Securities
Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering estimated at $ ,
$ of which is to be paid by the Company and $ of which is
to be paid by the Selling Stockholder.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 210,000 shares of Common Stock on the same terms and
conditions as the Common Stock offered hereby, solely to cover over-
allotments, if any. If the over-allotment option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively.
See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares
will be made in New York, New York on or about , 1995.
---------------------
BREAN MURRAY, FOSTER SECURITIES INC.
---------------------
THE DATE OF THIS PROSPECTUS IS , 1995.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There is incorporated herein by reference the following documents of the
Company heretofore filed by it with the Securities and Exchange Commission (the
"Commission"): Annual Report on Form 10-K for the year ended December 31, 1994;
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995, Current Report on Form 8-K
dated September 22, 1995 and Current Report on Form 8-K dated September 28,
1995.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering made hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded, shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including a
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference into such documents). Requests for
such copies should be directed to First Financial Caribbean Corporation,
Attention: Secretary, 1159 F.D. Roosevelt Avenue, San Juan, Puerto Rico 00920,
telephone: (809) 749-7108.
---------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Information as of particular dates concerning its directors and
officers and any material interest of such persons in transactions with the
Company is disclosed in proxy statements distributed to stockholders filed with
the Commission. The Company has filed with the Commission a registration
statement on Form S-3 (herein, together with all amendments, schedules and
exhibits thereto, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered hereby. This Prospectus does not contain all the information
set forth in such Registration Statement certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained herein concerning the provisions of documents are necessarily
summaries of such documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. For
further information, reference is hereby made to the Registration Statement and
all such reports, proxy statements and other information filed by the Company
which can be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the public reference facilities in the Commission's regional offices
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661, and Suite 1300, 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Common Stock is quoted on the NASDAQ NMS.
Reports and other information concerning the Company may also be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street, Washington,
D.C.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary, which is presented herein solely to furnish limited
introductory information regarding the Company and the offering, is qualified in
its entirety by, and should be read in conjunction with, the more detailed
information and the financial statements (including the notes thereto) appearing
elsewhere in this Prospectus or incorporated by reference herein. Unless
otherwise indicated, the information in this Prospectus assumes that the
over-allotment option described in "Underwriting" is not exercised.
THE COMPANY
The Company, together with its wholly-owned subsidiaries, is primarily
engaged in a wide range of mortgage banking activities, including the
origination, servicing, purchase and sale of mortgages on single-family
residences, the issuance and sale of various mortgage-backed securities, the
holding and financing of mortgage loans and mortgage-backed securities for sale
or investment, the purchase and sale of servicing rights associated with such
mortgage loans and, to a lesser extent, the origination of construction loans
and loans secured by commercial real estate (the "Mortgage Banking Business").
FFCC is the leading mortgage banking institution in Puerto Rico in terms of the
volume of origination of first mortgage loans on single-family residences. The
Company's Mortgage Banking Business is principally conducted through two
operating units: Doral Mortgage Corporation ("Doral Mortgage"), a wholly-owned
subsidiary of the Company, and HF Mortgage Bankers Division ("HF Division"), a
division of the Company. The Company also owns Doral Federal Savings Bank
("Doral Federal"), a federal savings and loan association which was acquired by
FFCC in September 1993. References herein to the "Company" or "FFCC" shall be
deemed to refer to the Company and its consolidated subsidiaries, unless the
context requires otherwise.
The Company is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), an approved issuer for the Government National Mortgage Association
("GNMA") and an approved servicer under the GNMA, FNMA and FHLMC mortgage-backed
securities programs. FFCC is also qualified to originate mortgage loans insured
by the Federal Housing Administration ("FHA") and guaranteed by the Veterans
Administration ("VA"). Prior to 1995, substantially all of the Company's
revenues were derived from its Mortgage Banking Business. See "Mortgage Banking
Business -- Sale of Loans; Issuance of Mortgage Backed Securities" herein.
The Company's strategy is to increase its volume of loan originations and
its servicing portfolio as well as to maximize net interest income. The Company
seeks to increase its volume of loan originations by emphasizing quality
customer service and maintaining the most extensive system of branch offices of
any mortgage banking institution in Puerto Rico. The Company strives to increase
its servicing portfolio by relying primarily on internal loan originations and
supplementing such originations with wholesale purchases of loans and mortgage
servicing rights from third parties. The Company currently emphasizes the
origination of 15-year and 30-year conventional and FHA-insured or VA-guaranteed
mortgage loans on single-family residences. The Company relies on net interest
income for a more significant portion of its earnings than mortgage banking
companies generally do. The Company seeks to maximize net interest income by
holding mortgage-backed securities, primarily GNMA securities, for longer
periods prior to sale than most mortgage banking companies. This strategy also
reduces the Company's overall effective tax rate because the interest on GNMA
securities backed by Puerto Rico mortgages is tax exempt under Puerto Rico law.
The Company's thrift subsidiary, Doral Federal, operates through two
branches in the San Juan metropolitan area, which serve primarily as
deposit-taking operations. Doral Federal has experienced rapid growth since its
acquisition by the Company, increasing from $13.1 million in assets as of
September 10, 1993 to $126.5 million in assets as of September 30, 1995. As of
September 30, 1995, Doral Federal had total deposits and net worth of $106.8
million and $8.5 million, respectively. The Company intends to continue to
increase the asset size, deposit base and branch network of Doral Federal and
expects that Doral Federal will make increasingly significant contributions to
the Company's consolidated earnings.
3
<PAGE> 5
Substantially all of FFCC's Mortgage Banking Business is conducted in
Puerto Rico where it operates through 18 branch offices, 15 of which are
operated by Doral Mortgage. Doral Mortgage also operates two small branches in
Miami and Orlando, Florida. FFCC's principal executive office is located at 1159
Franklin D. Roosevelt Avenue, San Juan, Puerto Rico 00920, and its telephone
number is (809) 749-7100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock to be Offered by the Company.... 1,300,000 shares.
Common Stock to be Offered by the Selling
Stockholder................................ 100,000 shares.
Common Stock to be Outstanding After the
Offering(1)(2)............................. 8,529,630 shares.
Use of Proceeds.............................. The net proceeds from the sale of the shares
of Common Stock offered hereby will be used
for general corporate purposes, which may
include: (i) making capital contributions to
Doral Federal; (ii) investing in mortgage
servicing rights through the internal
origination of mortgage loans, the
acquisition of mortgage loans with the
related servicing rights and the purchase of
contracts to service mortgage loans; (iii)
repaying existing indebtedness of the
Company; and (iv) funding possible
acquisitions of mortgage banking and other
financial institutions. Pending such use, the
proceeds may be temporarily invested in
short-term investments. The Company will not
receive any proceeds from the sale of Common
Stock by the Selling Stockholder. See "USE OF
PROCEEDS."
NASDAQ NMS Trading Symbol.................... "FRCC."
</TABLE>
- ---------------
(1) Based on 7,229,630 shares outstanding as of September 30, 1995.
(2) Does not include up to 727,100 shares of Common Stock issuable upon
conversion of the Company's 10 1/2% Cumulative Convertible Preferred Stock,
Series A and the Company's 8.25% Convertible Subordinated Debentures due
January 1, 2006 outstanding as of September 30, 1995.
4
<PAGE> 6
RECENT DEVELOPMENTS
UNAUDITED THIRD QUARTER RESULTS
The Company's unaudited net earnings for the quarter ended September 30,
1995 were $4.9 million, or $0.65 per fully diluted share. Net earnings for the
quarter ended September 30, 1994 were $3.9 million, or $0.51 per fully diluted
share. As noted below, effective the quarter ended June 30, 1995, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 122,
"Accounting for Mortgage Servicing Rights." Since SFAS No. 122 prohibits
retroactive application, historical accounting results have not been restated
and, accordingly, the accounting results for the quarter ended September 30,
1995 are not directly comparable to prior periods.
Revenues from mortgage loan sales and fees increased to $4.9 million for
the quarter ended September 30, 1995 compared to $2.7 million for the quarter
ended September 30, 1994. This increase reflected higher loan origination fees
which in turn had the effect of increasing gains on the sale of loans. The
increase in mortgage loan sales and fees was net of $400,000 in unrealized
losses related to the Company's portfolio of mortgage-backed securities held for
trading compared to unrealized gains of $1.5 million for the third quarter of
1994. Results for the third quarter of 1995 also included hedging gains of
approximately $509,000, compared to gains of $129,000 for the third quarter of
1994. Servicing fee income decreased $129,000 reflecting sales of servicing
during the fourth quarter of 1994 and second quarter of 1995 and the increased
amortization of excess servicing. Net interest income decreased by $1.7 million
reflecting decreased interest spreads as short-term interest rates on the
Company's borrowings have not decreased as rapidly as prevailing mortgage
interest rates. Doral Federal contributed approximately $580,000 to the
consolidated net earnings of the Company during the third quarter of 1995
compared to $56,000 for the third quarter of 1994.
The Company's loan production (originations and purchases) for the quarter
ended September 30, 1995 was $156 million compared to $153 million for the
quarter ended September 30, 1994. The Company's loan servicing portfolio
totalled approximately $2.6 billion and $2.7 billion at September 30, 1995 and
1994, respectively.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No.
122, an amendment to SFAS No. 65. The Company adopted SFAS No. 122 as of April
1, 1995. SFAS No. 122 requires the recognition of originated mortgage servicing
rights ("OMSRs") and purchased mortgage servicing rights ("PMSRs") as assets by
allocating total costs incurred between the loan and the servicing rights based
on their relative fair values. Under SFAS No. 65, the cost of OMSRs was not
recognized as an asset and was charged to earnings when the related loan was
sold. SFAS No. 122 has the effect of increasing gains on the sales of loans by
requiring that the carrying cost of the loans be reduced by the amount of the
related OMSRs. To date, the Company has used sales prices for comparable
mortgage servicing rights to determine the fair value of its capitalized
servicing rights. For the nine months ended September 30, 1995, the Company
realized additional net income of approximately $600,000 (representing $1.1
million of gross revenues) as a result of the adoption of SFAS No. 122. If the
Company had not adopted SFAS No. 122 during the second quarter of 1995, earnings
per common share for the nine-month period ended September 30, 1995 would have
been approximately $1.91 and $1.83 on a primary and fully-diluted basis,
respectively, and approximately $0.64 and $0.62 on a primary and fully-diluted
basis, respectively, for the quarter then ended. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Implementation
of New Accounting Standards."
POSSIBLE REPEAL OF SECTION 936
The budget bills passed in October 1995 by the House of Representatives and
the Senate contain provisions for the repeal of Section 936 ("Section 936") of
the Internal Revenue Code (the "Code") which provides incentives for United
States corporations to invest in Puerto Rico and helps create a pool of lower
cost funds in Puerto Rico. A repeal of the tax incentives offered under Section
936 could have an adverse
5
<PAGE> 7
effect on the general economic condition of Puerto Rico and the costs of funds
and liquidity for mortgage loans in Puerto Rico. The magnitude of the impact of
any such changes on the financial condition or profitability of the Company
cannot be determined at this time. The Company has taken steps to attempt to
reduce any adverse impact of such potential changes by diversifying its sources
of funding and identifying additional investors for its mortgage products. See
"BUSINESS OF THE COMPANY -- Puerto Rico Secondary Mortgage Market and Favorable
Tax Treatment."
POSSIBLE REGULATION UNDER THE FEDERAL BANK HOLDING COMPANY ACT
The Company is considering the possibility of converting Doral Federal into
a Puerto Rico-chartered commercial bank which would subject the Company to the
provisions of the Bank Holding Company Act of 1956. The Company believes that
following any such conversion it would be able to continue to conduct its
Mortgage Banking Business as presently conducted. See "BUSINESS OF THE
COMPANY -- Regulation-Savings and Loan Operations."
RECENT FINANCINGS
On June 30, 1995, FFCC entered into a syndicated credit agreement (the
"Syndicated Credit Agreement") with six banks providing for three credit
facilities totaling up to $125 million. The credit facilities were structured by
Bankers Trust Company, as administrative and syndicate agent. The three
facilities include: (i) a $100 million secured one-year revolving warehousing
credit facility to finance residential mortgage loans and mortgage-backed
securities; (ii) a $7 million secured one-year revolving credit facility to
provide financing for receivables and working capital needs; and (iii) an $18
million five-year senior secured term loan facility, secured with a portion of
the Company's servicing portfolio, to finance the acquisition of additional
servicing rights and general working capital purposes. The amounts available
under the Syndicated Credit Agreement are subject to a borrowing base which
consists of mortgage loans and mortgage-backed securities for the first
facility, receivables relating to servicing advances and real estate owned for
the second facility and mortgage servicing rights for the third facility.
On September 25, 1995, the Company entered into a Debenture Purchase
Agreement (the "Debenture Agreement") with BanPonce Corporation ("BanPonce"),
the largest financial institution based in Puerto Rico, providing for the
issuance and sale to BanPonce of up to $10,000,000 of its 8.25% Convertible
Subordinated Debentures Due January 1, 2006 (the "Subordinated Convertible
Debentures") in a private placement transaction. The Subordinated Convertible
Debentures are convertible into shares of Common Stock at a conversion price of
$17.50 per share, subject to adjustment in certain events. On September 25,
1995, approximately $6.6 million of Subordinated Convertible Debentures were
issued. The issuance and sale of the remaining Subordinated Convertible
Debentures to BanPonce are subject to the receipt of certain regulatory
approvals by BanPonce. The Subordinated Convertible Debentures are subordinated
to all existing and future senior debt (as defined in the Debenture Agreement)
of the Company. Under the Debenture Agreement, BanPonce has the right to acquire
up to 200,000 additional shares of Common Stock at a price of $17.50 per share
(subject to adjustment in certain events) to the extent that its investment in
the Company is diluted below certain levels. In addition, the Debenture
Agreement contains certain restrictions on the payment of dividends and other
financial covenants.
These recent financings reflect the efforts of the Company to diversify its
sources of funding and further strengthen its relationships with institutional
lenders and investors. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
USE OF PROCEEDS
The net proceeds to be received from the sale of shares of Common Stock
offered hereby are estimated at approximately $ ($ , if
the Underwriters' over-allotment option is exercised in full). The Company
intends to use such net proceeds for general corporate purposes, which may
include: (i) making capital contributions to Doral Federal; (ii) investing in
mortgage servicing rights through the internal
6
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origination of mortgage loans, the acquisition of mortgage loans with the
related servicing rights and the purchase of contracts to service mortgage
loans; (iii) repaying existing indebtedness of the Company; and (iv) funding
possible acquisitions of mortgage banking and other financial institutions.
Pending such use, the proceeds may be temporarily invested in short-term
investments.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholder.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the over-the-counter market and is quoted on
the NASDAQ NMS under the symbol "FRCC."
The table below sets forth on a per share basis, for the calendar quarters
indicated, the high and low sales prices as reported by the NASDAQ NMS, and the
cash dividends declared on the Common Stock during such periods, as adjusted, to
reflect a two-for-one stock split effective December 10, 1993.
<TABLE>
<CAPTION>
PRICE RANGE
------------------- CASH DIVIDENDS
HIGH LOW DECLARED PER SHARE
------- ------- ------------------
<S> <C> <C> <C>
Year Ended December 31, 1993
First Quarter................................ $12.50 $ 9.875 $ 0.10
Second Quarter............................... 12.50 10.50 0.10
Third Quarter................................ 15.375 11.75 0.10
Fourth Quarter............................... 18.25 14.25 0.10
Year Ended December 31, 1994
First Quarter................................ $19.00 $13.75 $ 0.13
Second Quarter............................... 14.75 11.00 0.13
Third Quarter................................ 15.00 10.625 0.13
Fourth Quarter............................... 13.50 10.50 0.13
Current Year Ending December 31, 1995
First Quarter................................ $13.50 $10.50 $ 0.13
Second Quarter............................... 15.50 12.00 0.15
Third Quarter................................ 17.75 14.00 0.15
Fourth Quarter (October 1 through November
1)........................................ 20.00 16.75 0.15
</TABLE>
On November 1, 1995, the last reported sale price for the Common Stock as
reported on the NASDAQ NMS was $17.50 per share.
The approximate number of shareholders of record of the Common Stock as of
October 30, 1995 was 884, which does not include beneficial owners whose shares
of Common Stock are held of record in the names of brokers and nominees.
After becoming a public corporation in December 1988, FFCC did not declare
any dividends until the third quarter of 1989 when the Board of Directors
authorized the payment of a regular quarterly cash dividend of $0.05 per share.
The quarterly cash dividend was increased by the Board of Directors to $0.0625
per share during the second quarter of 1990, to $0.075 per share during the
fourth quarter of 1991 and increased again to $0.10 per share during the first
quarter of 1993. The cash dividend was further increased to $0.13 effective for
the first quarter of 1994 and to $0.15 effective for the second quarter of 1995.
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants contained in the debt agreements of the Company,
the earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Debenture Agreement from paying
dividends on any capital stock (other than dividends payable in capital stock or
in stock rights), if an event of default under such agreement exists at such
time, or if the amount of dividends payable by the Company together with the
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<PAGE> 9
aggregate amount of dividends paid and other capital distributions made since
June 1, 1995, exceed the sum of: (i) 50% of the Company's Consolidated Net
Income (as defined in the Debenture Agreement), accrued from June 1, 1995 to the
end of the quarter ending not less than 45 days prior to the dividend payment
date; (ii) $20 million; and (iii) the net proceeds of any sale of capital stock
subsequent to June 1, 1995. In addition, under the Debenture Agreement, the
Syndicated Credit Agreement and other debt agreements of the Company, the
Company is prohibited from paying dividends if it fails to maintain specified
minimum levels of net worth, net earnings to debt service and dividends ratios,
and certain other financial ratios.
The terms of the Company's 10 1/2% Cumulative Convertible Preferred Stock,
Series A (the "Series A Preferred Stock") do not permit the payment of cash
dividends on Common Stock if dividends on the Series A Preferred Stock are in
arrears. The holders of shares of Series A Preferred Stock are entitled to
receive cumulative cash dividends when, as and if declared by the Board of
Directors, out of assets of the Company legally available therefor at a rate of
$1.05 per share of Series A Preferred Stock. See "DESCRIPTION OF CAPITAL
STOCK -- Series A Preferred Stock; Dividend Rights and Limitations."
See "CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS" for a discussion of
Puerto Rico withholding taxes applicable to dividends on the Common Stock
payable to non-residents of Puerto Rico.
8
<PAGE> 10
CAPITALIZATION
The following table sets forth the unaudited indebtedness and
capitalization of the Company at September 30, 1995 on an actual basis and as
adjusted to give effect to the issuance of the shares of Common Stock offered by
the Company hereby. This table should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term borrowings
Short-term portion of loans payable........................ $199,239 $199,239
Short-term portion of securities sold under agreements
to repurchase........................................... 327,427 327,427
-------- --------------
Total short-term borrowings........................ $526,666 $526,666
======== ===========
Long-term borrowings
Long-term portion of loans payable......................... $ 20,067 $ 20,067
Long-term portion of securities sold under agreements
to repurchase........................................... 34,550 34,550
Subordinated Convertible Debentures........................ 6,646 6,646
-------- --------------
Total long-term borrowings......................... $ 61,263 $ 61,263
======== ===========
Stockholders' equity
Preferred Stock, $1.00 par value, 2,000,000 shares
authorized; 173,667 shares of Series A Preferred Stock
issued and
outstanding............................................. $ 174 $ 174
Common Stock, $1.00 par value, 10,000,000 shares
authorized; 7,243,630 and 8,543,630 shares issued, as
adjusted(1)............................................. 7,244 8,544
Paid-in capital............................................ 16,644
Retained earnings.......................................... 77,952 77,952
Treasury Stock at par value, 14,000 shares................. (14) (14)
Unearned compensation under employment contracts........... (209) (209)
-------- --------------
Total stockholders' equity......................... $101,791 $
======== ===========
</TABLE>
- ---------------
(1) Does not include up to 727,100 shares of Common Stock issuable upon
conversion of the Series A Preferred Stock and the Subordinated Convertible
Debentures outstanding as of September 30, 1995.
9
<PAGE> 11
SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial and
operating data for the Company on a historical basis as of and for the
nine-month periods ended September 30, 1995 and 1994, and for each of the five
years in the period ended December 31, 1994. This information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
included elsewhere herein. Historical financial information for the nine-month
periods ended September 30, 1995 and 1994 is derived from unaudited financial
statements, which, in the opinion of management, include all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the results for such periods. Results for the nine-month period ended
September 30, 1995 are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............................. $ 67,351 $ 51,906 $ 72,043 $ 70,228 $ 49,804 $ 39,430 $ 44,733
Interest expense..................... 31,892 15,662 23,252 9,710 9,270 12,303 23,576
Loan origination costs and
administrative and general
expenses........................... 18,988 22,150 30,046 29,597 24,118 17,407 15,700
Spin-off expenses.................... -- -- -- -- -- -- 1,218
Income before income taxes........... 16,471 14,094 18,745 30,921 16,416 9,720 4,239
Puerto Rico taxes.................... 1,976 2,118 2,530 9,601 3,371 2,987 1,209
Income before cumulative effect...... 14,495 11,976 16,215 21,320 13,045 6,733 3,030
Cumulative effect.................... -- 1,215 1,215 -- -- -- --
Net income........................... 14,495 13,191 17,430 21,320 13,045 6,733 3,030
Cash dividends paid.................. 3,249 2,957 3,943 3,142 2,182 1,620 1,198
BALANCE SHEET DATA:
Mortgage loans held for sale and
mortgage-backed securities held for
trading and mortgage notes
receivable, net.................... 565,318 531,482 582,977 388,232 261,063 230,861 199,839
Loans receivable, net and
mortgage-backed securities and
investments held to maturity....... 138,418 85,079 102,328 16,901 -- -- 38,178
Total assets......................... 821,145 708,457 768,019 486,431 320,972 270,949 300,706
Loans payable and securities sold
under agreements to repurchase..... 587,929 530,050 586,491 335,994 227,179 210,548 254,051
Deposit accounts..................... 99,090 59,561 66,471 26,451 -- -- --
Stockholders' equity................. 101,791 87,227 90,496 76,945 58,467 36,041 26,125
PER SHARE DATA:(1)
Net Income:
Primary............................ 1.99 1.85 2.46 3.15 2.35 1.26 0.60
Fully diluted(2)................... 1.91 1.74 2.30 2.81 2.06 1.25 0.60
Cash dividends:
Common Stock....................... 0.43 0.39 .52 0.40 0.30 0.2625 0.2375
Series A Preferred Stock(2)........ 0.7875 0.7875 1.05 1.05 1.05 .525 --
Weighted average shares outstanding:
Primary............................ 7,207,798 6,918,824 6,942,734 6,614,854 5,321,600 5,135,206 5,052,700
Fully diluted...................... 7,576,964 7,576,964 7,576,964 7,516,964 6,347,392 5,411,744 5,052,700
OPERATING DATA:
Mortgage loans originated(3)....... 366,000 611,000 760,400 1,430,000 694,000 360,400 321,400
Loan servicing portfolio........... $2,621,000 $2,726,000 $2,644,000 $2,375,000 $1,700,000 $1,400,000 $1,193,000
</TABLE>
- ---------------
(1) Adjusted to reflect two-for-one stock split effective December 10, 1993.
(2) The Series A Preferred Stock was issued in July 1991.
(3) Excludes loans purchased from third parties.
10
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
FFCC has experienced significant growth in its business over the last
several years, which accelerated in 1992 and climbed to a record level in 1993
as a result of the historically low levels of interest rates and the increased
demand for refinancing loans. During 1994, loan originations decreased as higher
interest rates adversely impacted the refinance market which contributed to the
record originations levels of 1993. As a result, total mortgage production in
1994 was significantly lower than 1993 levels. FFCC, nevertheless, continued to
be the leading originator of mortgage loans in Puerto Rico in 1994 in terms of
the volume of origination of first mortgages on single-family residences. The
volume of loans originated by FFCC was approximately $760 million, $1.43
billion, $694 million, $360 million and $321 million for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990, respectively.
The increases in loan originations in 1990 and 1991 were primarily due to
an increased volume of loan originations in the HF Division following an
internal reorganization, expansion of Doral Mortgage's branch network and a
decline in prevailing interest rates. The increases in 1992 and 1993 were
principally due to declines in average mortgage interest rates which plunged to
their lowest levels in decades during 1993, thereby stimulating demand for both
refinancing loans and loans to finance the acquisition of new and existing
residential units. The decrease in 1994 as compared to 1993 is attributable to
rising interest rates causing a lower level of loan originations, decreased
refinancing activity and increased competition.
The Company became active again in the Puerto Rico wholesale mortgage loan
purchase market during the second quarter of 1994 in order to diversify its
sources of loan production and compensate for the decrease in volume caused by
higher interest rates and increased competition. During 1992 and 1993, the
Company's strategy was to increase its servicing portfolio through internal
originations. As a result of the high volume of loans originated in those years,
the Company was not active in the wholesale loan purchase market during 1992 and
1993. The amount of loans purchased from third parties was approximately $63
million, $1 million, $29 million, $48 million and $117 million for the years
ended December 31, 1994, 1993, 1992, 1991 and 1990, respectively. The Company
believes that the wholesale purchase of mortgage loans is a low cost initiative
that has proven to be successful in the past. Purchases of loans from third
parties are generally limited to FHA loans and VA loans.
The Company entered the savings and loan industry in September 1993 through
the acquisition of all the outstanding stock of Doral Federal, which currently
operates through two branches in Puerto Rico. During the year ended December 31,
1994, Doral Federal did not have a significant impact on the financial results
of the Company, experiencing net income of approximately $205,000 as a result of
increased expenses associated with creating the infrastructure necessary to
support bank growth. During 1994, Doral Federal did, however, experience
substantial growth in assets, increasing from $34 million in assets as of
December 31, 1993 to $86.4 million in assets as of December 31, 1994. This
growth was funded largely through increases in retail certificate of deposit
accounts and non-interest bearing accounts maintained by the Company, consisting
primarily of corporate and custodial accounts.
FFCC's results of operations are primarily influenced by: (i) the direction
of interest rates; (ii) the level of demand for mortgage credit, which is
affected by such external factors as the level of interest rates and the
strength of the Puerto Rico economy; and (iii) the relationship between mortgage
interest rates and the costs of funds.
The principal components of FFCC's revenues are: (i) loan origination fees
and net gains on sales of mortgage loans and mortgage-backed securities in the
secondary mortgage market; (ii) interest income received on mortgage loans and
mortgage-backed securities during the period FFCC holds them pending sale,
11
<PAGE> 13
net of interest paid on borrowed funds to finance such mortgage loans and
mortgage-backed securities; (iii) loan servicing fees; (iv) gains on sales of
mortgage servicing rights; and (v) other income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mortgage loan sales and fees............. $ 8,604 $ 9,800 $10,573 $35,230 $24,560
------- ------- ------- ------- -------
Interest income.......................... 46,667 32,976 46,508 23,775 16,983
Interest expense......................... 31,892 15,662 23,252 9,710 9,270
------- ------- ------- ------- -------
Net interest income...................... 14,775 17,314 23,256 14,065 7,713
------- ------- ------- ------- -------
Servicing income......................... 8,044 8,764 11,448 8,627 7,163
Gain on sale of servicing rights......... 3,623 -- 3,003 2,378 935
Other income............................. 413 366 511 218 163
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
Revenues from Mortgage Loan Sales and Fees. FFCC sells substantially all
of the loans that it originates, other than those originated by Doral Federal,
as part of its Mortgage Banking Business. Mortgage loans originated by Doral
Federal are generally held until maturity. When FFCC sells mortgage loans and
mortgage-backed securities, it realizes a net gain or loss which is equal to the
difference between FFCC's carrying cost and the selling price of the loans sold,
net of commitment fees paid. Net gain or loss on sale of loans is affected by
interest rate fluctuations on fixed-rate loans and securities, as well as by the
tax status of interest on mortgage loans under Puerto Rico income tax statutes.
Revenues from mortgage loan sales and origination fees decreased by 70%
during 1994 compared to increases of 43% and 57% experienced during 1993 and
1992, respectively. The decrease in 1994 was due to interest rate increases
resulting in a lower level of loan originations, lower gains on the sale of
mortgage loans and pressure on pricing as a result of increased competition. The
increases for years 1993 and 1992 were the result of increased volume of loan
originations due to a sharp decline in interest rates and increased gains on
sale of mortgage loans, as a result of favorable market conditions which
permitted the Company to obtain better prices on sales of mortgage loans and
mortgage-backed securities. The total volume of loans originated was
approximately $760.4 million for the year ended December 31, 1994 compared to
$1.432 billion for the prior year. The increase in prevailing interest rates
during 1994 significantly decreased the unusually high refinancing activity
experienced during 1993. During 1994, higher rates and decreased volume in the
Puerto Rico market led to increased competition among mortgage bankers and banks
to attract prospective borrowers, resulting in downward pressure on revenues
from origination and sale activities. In addition, advertising campaigns
launched during 1993 which often offered loans with no closing costs to the
borrower were gradually phased out and the Company as well as other market
participants were forced to increase interest rates and origination and discount
points. These increases resulted in a decrease in the demand for mortgage loans.
FFCC, however, continued to be the leading originator of first mortgage loans on
single-family residences in Puerto Rico. In 1994, the Company issued $596
million of GNMA mortgage-backed securities to rank No. 1 in Puerto Rico and No.
36 in the USA in such issuances, according to the "Mortgage Marketplace."
Refinancing loans as a percentage of total loans originated were 59% for the
year ended December 31, 1994, 78% for the year ended December 31, 1993 and 67%
for the year ended December 31, 1992.
Results for 1994 include a one-time benefit of $1.2 million from the
cumulative effect of the adoption of SFAS No. 115 "Accounting for Certain
Investments in Debt Equity Securities" as of January 1, 1994. This pronouncement
requires the Company to carry its mortgage-backed securities inventory at market
value. Any gains or losses from market fluctuations are reflected in the
Company's financial statements.
During 1994, the Company continued its program of pooling nonconforming
conventional loans into collateralized mortgage obligations ("CMOs") to be
issued by grantor trusts for sale to investors. Mortgage loan sales and fees
reflect a pre-tax profit of approximately $463,000, $3.5 million and $4.7
million for the
12
<PAGE> 14
years ended December 31, 1994, 1993 and 1992, respectively, in connection with
the pooling and sale of approximately $101 million, $115 million and $99 million
in conventional nonconforming mortgage loans to various grantor trusts. Sales of
CMOs decreased during the second half of 1994 as a result of decreased demand
from institutional investors in the Puerto Rico market and increased sales of
non-conforming loans in bulk. While the Company anticipates that it will enter
into similar transactions in the future, especially with non-conforming loans,
the frequency of such transactions and future gains related thereto, if any,
will be dependent on then existing market conditions.
Bulk sales of mortgages loans made during 1994, other than CMO
transactions, resulted in the recording of approximately $5.8 million of excess
servicing compared to $3 million and $378,000 in 1993 and 1992, respectively.
FFCC capitalizes as an asset an excess servicing fees receivable 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 fees receivable is recognized at the time of sale of the
related loan 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."
The amortization of excess servicing fees is based on the amount and timing
of estimated future cash flows. See Note 2 to the Notes to the Company's
Consolidated Condensed Financial Statements. Amortization of such excess
servicing fees for each of the years ended December 31, 1994 and 1993 was
approximately $570,000 and $160,000, respectively. The amortization of excess
servicing fee receivable is recorded as a reduction of servicing income.
For the years ended December 31, 1993 and 1992 increases in mortgage loan
sales and fees were partially offset by net losses on the trading of options on
futures contracts used for hedging purposes in the amount of $1.4 million per
year, while in 1994 such hedging activities produced gains in the amount of $2.2
million and, thereby, increased mortgage loan sales and fees by the same amount.
Net Interest Income. Net interest income is the difference between the
interest income earned on mortgage loans and mortgage-backed securities held for
trading and for investment, and the interest paid by FFCC on the short-term
warehousing lines of credit with commercial banks, repurchase agreements,
gestation lines of credit, advances and deposits, in the case of Doral Federal,
that finance such loans and mortgage-backed securities. The conditions that
affect net interest income from period to period include the relationship
between prevailing mortgage rates and the prime rate, the London Interbank
Offered Rate (LIBOR), cost of tax advantaged funds deposited in Puerto Rico
financial institutions ("936 Funds"), interest rates on fixed-rate loans and the
Company's average holding period before mortgage loans are sold.
In each year since FFCC's inception, interest income earned by FFCC on its
mortgage loans and mortgage-backed securities has exceeded interest expense on
FFCC's short-term bank borrowings and other financing arrangements. The
Company's weighted average interest rate spread was approximately 385 basis
points during 1994 as compared with approximately 411 basis points and 335 basis
points during 1993 and 1992, respectively. The increase in the interest rate
spread from 1992 to 1993 was due to lower short-term borrowing costs which
descended to historically low levels during 1993. In 1994, interest rates on
short term borrowings increased. The Company, however, was able to maintain its
spread due to among other things, the origination of higher yielding mortgages
and the funding of mortgage loans held by Doral Federal through lower costing
deposits. As of December 31, 1994, approximately $36.6 million, or 46% of total
deposits held at Doral Federal consisted of non-interest bearing accounts,
consisting primarily of servicing accounts and corporate demand accounts
maintained by the Company and its affiliates.
Net interest income increased by approximately 65% from 1993 to 1994, and
by approximately 82% from 1992 to 1993. Net interest income for Doral Federal
equalled $2.1 million for the year ended December 31, 1994 compared to $328,000
for the period from September 10, 1993 (the date of acquisition by FFCC) to
December 31, 1993.
The increase in net interest income was primarily the result of the
increased holdings of mortgage loans and mortgage-backed securities, and
favorable financing arrangements made in 1993 and continued during
13
<PAGE> 15
1994. Net interest income also reflected the Company's strategic decision to
hold mortgage loans and mortgage-backed securities, especially tax exempt GNMA
certificates, for longer periods of time prior to sale in order to maximize net
interest income.
Net interest income has generally represented a greater proportion of the
Company's total net income than that of most mortgage banking institutions. This
results primarily from the fact that the Company is able to finance a
substantial portion of the mortgage loans that it originates with lower cost
funds and holds mortgage-backed securities, mainly GNMA certificates, for longer
periods of time prior to sale than is customary for most mortgage bankers, in
order to maximize the interest produced by these securities. During the year
ended December 31, 1994, the Company held mortgage loans and mortgage-backed
securities for an average period of 212 days prior to sale as compared to 98
days for the year ended December 31, 1993. This increase in the amount of time
mortgage loans and mortgage-backed securities were held prior to sale was due
principally to a decision made by the Company in the first quarter of 1994 to
increase its level of holding of mortgage-backed securities for future sale and
to maximize the interest income produced by these securities, a substantial
portion of which is tax-exempt to the Company under Puerto Rico law. The result
was to increase both the Company's net interest income and its level of assets
held for sale, and to decrease the Company's effective tax rate.
Loan Servicing Fees. Loan servicing fees represent revenue earned by FFCC
for administering loans. FFCC's typical annual loan servicing fee depends on the
type of mortgage loan being serviced and ranges from 0.25% to 0.50% of the
declining outstanding principal amount of such loan. The size of FFCC's loan
servicing portfolio and the amount of its servicing fees have increased
substantially since FFCC's inception as a result of increases in loan
originations. Loan servicing fees increased 33% from 1993 to 1994, 20% from 1992
to 1993 and 30% from 1991 to 1992, primarily due to increases in the principal
amount of loans serviced as compared to prior years. The mortgage servicing
portfolio was approximately $2.6 billion at December 31, 1994, an increase of
approximately 10% over the December 31, 1993 level. At December 31, 1994,
approximately $35 million of the Company's servicing portfolio related to
mortgages originated outside Puerto Rico (all of which were originated in
Florida).
During 1994, total amortization of purchased mortgage servicing rights
("PMSRs") amounted to $730,000 versus $492,000 for 1993. The Company's
traditional strategy has been to increase the size of its servicing portfolio
through internal originations. However, during 1994, the Company reentered the
wholesale loan market by purchasing FHA loans and VA loans from third parties as
a means of compensating for the decrease in volume. This strategy has proven to
be effective in the past. When the Company purchases mortgage loans together
with the right to service the loans, a portion of the purchase price is
allocated to the related PMSR. As of December 31, 1994, the Company had $3.5
million in PMSR's. During the years ended December 31, 1994 and 1993 the Company
capitalized $581,100 and $69,800, respectively, of servicing rights, including
$54,800 related to the acquisition of Doral Federal.
The amount of principal prepayments on mortgage loans serviced by the
Company was $281 million, $537 million and $242 million for the years ended
December 31, 1994, 1993 and 1992, respectively. This represented approximately
11%, 26% and 15% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid were $41,800,
$54,600 and $44,500, respectively. Principal prepayments declined during 1994 as
a result of decreased refinancing activity caused by the increase in interest
rates. The primary means used by the Company to reduce the sensitivity of its
servicing fee income to changes in interest and prepayment rates is the
development of a strong internal origination capability that has allowed the
Company to continue to increase the size of its servicing portfolio even in
times of high prepayments.
Increases in prepayment rates over anticipated levels can adversely affect
a mortgage company's revenues and liquidity by increasing the amortization rates
for capitalized mortgage servicing rights and excess servicing fees receivable.
Given the recent rise in interest rates and corresponding decrease in prepayment
rates, no such adjustment were required during 1994. Moreover, given the
relatively small amount of capitalized mortgage servicing rights and excess
servicing fees reflected on the Company's balance sheet as of September 30,
1995, any unexpected increase in prepayment rates should not have a significant
impact on the revenues or liquidity
14
<PAGE> 16
of the Company as a result of increased amortization for capitalized mortgage
servicing rights and excess servicing fees receivable.
Gain on Sale of Servicing Rights. During the years ended December 31,
1994, 1993 and 1992 the Company sold servicing rights of $202 million, $198.7
million and $53.4 million, respectively, realizing pre-tax gains of
approximately $3 million, $2.4 million and $935,000, respectively. While the
Company's strategy is to retain the servicing rights of the mortgage loans it
originates, the Company may sell servicing rights from time to time in the
future when market conditions are favorable.
Other Income and Expenses. Other income increased 134% in 1994 as compared
to 1993, and 34% from 1992 to 1993. The increase during 1994 was due primarily
to fees earned by Doral Federal, increased fees received for voluntary mortgage
life insurance and other commissions.
Aggregate expenses in 1994 increased by $14 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 16.6% compared to the same
period of 1993. This decrease was a direct result of cost reduction efforts
implemented by management related to the decrease in loan volume. Employee costs
also reflected approximately $1.75 million in voluntary reductions taken by the
Chief Executive Officer in salary and incentive compensation. Telephone expense
increased 21% over 1993 levels and advertising expense remained slightly below
the prior year level since management considered it necessary to maintain or
increase the level of such expenses to ensure the Company retain its share of
the Puerto Rico market for mortgage loans in light of increased competition.
Rent expenses increased by $1.2 million as a result of prior year expansion
activities.
For 1993 compared to 1992 aggregate expenses increased by approximately
18%. This reflected increases in professional services, telephone and rent
expenses of 57%, 41% and 77%, respectively, as compared to 1992. Professional
services, rent and telephone expenses increases were attributable to the growth
experienced by the Company in both personnel and asset size.
Puerto Rico Income Taxes. The Puerto Rico maximum statutory corporate
income tax rate is 42%. Such maximum rate will be reduced to 39% for taxable
years commencing after June 30, 1995. For 1994, the effective income tax rate of
FFCC was 16.3% as compared to 31.0% for 1993, and 20.5% for 1992. The decrease
from 1994 to 1993 was due to the decision to increase holdings of GNMA
mortgage-backed securities and CMOs backed by such securities, the interest
income on which is tax exempt under Puerto Rico income tax law. The increase in
1993 from 1992 in the effective income tax rate was due principally to the fact
that during the year ended December 31, 1992, the Company received favorable tax
treatment on certain rights with a fair value of approximately $3.5 million
received as a dividend from a subsidiary, resulting in the exclusion of 85% of
said amount from gross income.
The lower effective tax rates (as compared to the maximum statutory rate)
experienced by FFCC, especially that experienced in 1994, reflect the fact that
the portion of the net interest income derived from certain FHA and VA mortgage
loans secured by property located in Puerto Rico and on GNMA securities backed
by such mortgage loans is exempt from income tax under Puerto Rico law. Income
tax savings to FFCC attributable to this exemption amounted to approximately
$5.4 million, $2.7 million and $2.2 million for the years ended December 31,
1994, 1993 and 1992, respectively. See Note 18 to the Company's Consolidated
Financial Statements for a reconciliation of the provision for income taxes to
the amount computed by applying the applicable Puerto Rico statutory tax rates
to income before taxes.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
The Company's net income for the nine months ended September 30, 1995
increased to $14.5 million, compared to $13.2 million for the corresponding
period in 1994. Consolidated results include the operations of Doral Federal,
which was acquired by the Company in September 1993. For the nine-month period
ended September 30, 1995, Doral Federal contributed approximately $1.2 million
to the Company's consolidated net earnings, compared to $58,000 for the nine
months ended September 30, 1994. Results for the first nine months of 1995
reflect the adoption by the Company as of April 1, 1995 of SFAS No. 122.
Additional net
15
<PAGE> 17
income of approximately $600,000 (representing $1.1 million of gross revenues)
was realized for the nine months ended September 30, 1995, as a result of the
adoption of SFAS No. 122. Since SFAS No. 122 does not permit retroactive
application, the results for the first nine months of 1995 and 1994 are not
directly comparable. Earnings for the first nine months of 1995 reflected a $3.6
million gain from the sale of mortgage servicing rights. No such sales were made
in the first nine months of 1994. Nine months results for 1994 include a
one-time 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.
Revenues from mortgage loan sales and fees for the nine months ended
September 30, 1995 decreased 12% to $8.6 million from $9.8 million during the
comparable period of 1994. This decrease was due, in part, to a lower volume of
loan originations. The total volume of loans originated and purchased was
approximately $422 million for the nine-month period ended September 30, 1995
compared to approximately $650 million for the nine-month period ended September
30, 1994. The decrease of 35% in loan originations and purchases was the result
of decreased demand for mortgage loans, especially refinancing loans.
Refinancing loans comprised 41% of loan originations in the first nine months of
1995 compared to 64% for the same period in 1994. The decrease also reflected
hedging losses of approximately $2.8 million for the first nine months of 1995
compared to hedging gains of $1.2 million for the first nine months of 1994.
Mortgage loan sales and fees also reflect approximately $1.1 million of
additional gain on sale of mortgage loans as the result of the adoption of SFAS
No. 122 during the second quarter of 1995. SFAS No. 122 has the effect of
increasing gains on sales of loans by requiring that the carrying cost of the
loans be reduced by the amount allocated to the related originated mortgage
serving right ("OMSR").
Following the adoption of SFAS No. 115, effective January 1, 1994,
unrealized gains and losses on holdings of trading securities 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, 1995 included $1.9 million in
gross unrealized gains on the Company's mortgage-backed securities held for
trading portfolio during such period compared to $429,000 of gross unrealized
gains for the comparable period of 1994.
Net interest income decreased by approximately $2.5 million or 15% for the
nine-month period ended September 30, 1995 versus the comparable period of 1994.
The decrease in net interest income for the nine-month period reflects decreased
interest spreads as mortgage interest rates have declined more rapidly than
short-term interest rates payable on warehousing and repurchase agreement lines
of credit. The interest rate spread also reflects higher financing costs
associated with a servicing secured term loan under the Company's syndicated
bank credit facility. The Company's weighted average interest rate spread was
277 basis points during the nine months ended September 30, 1995 compared to 415
basis points for the comparable period of 1994.
Loan servicing income decreased by approximately $800,000 or 9% for the
nine-month period ended September 30, 1995 versus the comparable period of 1994.
The decrease in loan servicing income is due primarily to sales aggregating
approximately $400 million of servicing rights made in the fourth quarter of
1994 and second quarter of 1995 and higher amortization of excess servicing fees
receivable. Amortization of excess servicing fee receivable for each of the
nine-month period ended September 30, 1995 and 1994 was approximately $634,000
and $348,000, respectively. The amortization of excess servicing fee receivable
is recorded as a reduction of servicing income. For the nine-month periods ended
September 30, 1995 and 1994, amortization of mortgage servicing rights was
$399,000 and $540,000, respectively, and was recorded as a component of "Other
Expenses." Effective April 1, 1995, with the adoption of SFAS No. 122, OMSRs
must be amortized in the same manner as PMSRs.
Aggregate expenses for the nine months period ended September 30, 1995
increased by $13.1 million compared to the same period for 1994, as a result of
higher interest expense associated with the financing of the Company's mortgage
loans and mortgage-backed securities portfolios. Loan origination, general and
administrative expenses decreased by $3.2 million compared to the same period
for 1994 as a result of cost reduction measures implemented by management in
line with the reduction in the volume of mortgage loan originations.
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<PAGE> 18
The provision for income taxes decreased to $2.0 million for the nine-month
period ended September 30, 1995, compared to $3.0 million for the nine-months
ended September 30, 1994, including $880,000 attributed to the cumulative effect
of adopting SFAS No. 115, due to a decrease in the effective tax rate from 18.5%
to 12%. 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 loans secured by residential property in Puerto
Rico and GNMA mortgage-backed securities composed of such loans is tax exempt
under Puerto Rico law.
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 expenses and servicing advances. 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 agreement 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. In the past, the Company has also
relied on privately-placed financings and public offerings of preferred stock
and Common Stock. As discussed below, in order to further diversify its sources
of funding, the Company entered into the Syndicated Credit Agreement during the
second quarter of 1995 and the Debenture Agreement during the third quarter of
1995.
Total liabilities were approximately 7.1 and 7.5 times stockholders' equity
at September 30, 1995 and December 31, 1994, respectively. The Company's
leverage at September 30, 1995 reflects an increase in stockholders' equity of
$11.3 million and increases in deposit accounts and advances from the Federal
Home Loan Bank of New York ("FHLB-NY").
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.
Included among FFCC's warehousing 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. FFCC held mortgage loans (including mortgage
loans converted into mortgage-backed securities) prior to sale for an average
period of approximately 348 days for the nine-month period ended September 30,
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 resulting from a decision made by
the Company to hold such mortgage-backed securities for longer periods of time
prior to sale in order to maximize net interest income. At September 30, 1995
and December 31, 1994, FFCC had available warehousing lines of credit, including
gestation lines of credit, of $700 million and $442 million, respectively. At
September 30, 1995 and December 31, 1994, FFCC had used approximately $177
million and $276 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 for its mortgage-backed securities
portfolio 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 or CMOs 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, 1995, FFCC had used approximately $354 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.
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."
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<PAGE> 19
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 5.9%, respectively, for the nine-month period ended September 30, 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.
On June 30, 1995, FFCC entered into the Syndicated Credit Agreement with
six banks providing for three credit facilities totaling up to $125 million. The
credit facilities were structured by Bankers Trust Company, as administrative
and syndicate agent. The three facilities include: (i) a $100 million secured
one-year revolving warehousing credit facility to finance residential mortgage
loans and mortgage-backed securities; (ii) a $7 million secured one-year
revolving credit facility to provide financing for receivables and working
capital needs; and (iii) an $18 million five-year senior secured term loan,
secured with a portion of the Company's servicing portfolio, to finance the
acquisition of additional servicing rights and general working capital purposes.
The amounts available under the Syndicated Credit Agreement are subject to a
borrowing base which consists of mortgage loans and mortgage-backed securities
for the first facility, receivables relating to servicing advances and real
estate owned for the second facility and mortgage servicing rights for the third
facility. At September 30, 1995, FFCC had drawn $14.9 million of the secured
term loan facility which is due and payable on June 30, 2000 and bears interest
at a variable rate which is adjusted periodically and is based on a spread over
one of various indices to be selected by the Company (7.95% as of September 30,
1995). This borrowing is classified as "Loans Payable" on the Company's
Consolidated Balance Sheet.
On September 25, 1995, the Company executed the Debenture Agreement with
BanPonce, a bank holding company headquartered in San Juan, Puerto Rico,
providing for the issuance and sale to BanPonce of up to $10,000,000 of
Subordinated Convertible Debentures in a private placement transaction. The
Subordinated Convertible Debentures will not be registered under the Securities
Act of 1933 (the "Securities Act") and may not be offered or sold in the United
States absent such registration or an applicable exemption from the registration
requirements of the Securities Act. The Subordinated Convertible Debentures are
convertible into shares of Common Stock at a conversion price of $17.50 per
share, subject to adjustment in certain events. The Subordinated Convertible
Debentures are subordinated to all existing and future senior debt (as defined
in the Debenture Agreement) of the Company. On September 25, 1995, the Company
issued to BanPonce $6,645,905 of the Subordinated Convertible Debentures
(convertible into approximately 4.99% of the outstanding shares of Common Stock
of the Company) concurrently with the execution of the Agreement. The issuance
and sale of the remaining $3,354,095 of Subordinated Convertible Debentures are
subject to BanPonce obtaining approval of the Federal Reserve Board for the
additional investment in the Subordinated Convertible Debentures. Under the
terms of the Debenture Agreement, BanPonce has 90 days from the date of the
execution of the Debenture Agreement to obtain such approval. If the entire
$10,000,000 of the Subordinated Convertible Debentures are issued, they would be
convertible into 571,428 shares, or 7% of the Company's total outstanding shares
of Common Stock as of September 30, 1995, assuming the conversion of all
outstanding shares of Series A Preferred Stock and all outstanding Subordinated
Convertible Debentures.
Under the terms of the Debenture Agreement, BanPonce also obtained the
right to acquire up to 200,000 additional shares of Common Stock at a price of
$17.50 per share (subject to adjustment in certain events) to the extent that
the shares of Common Stock issued or issuable upon conversion of the Convertible
Debentures represent less than 5% of the Company's fully diluted outstanding
shares of Common Stock. If BanPonce does not consummate the acquisition of the
additional $3,354,095 of Convertible Debentures as a result of its inability to
obtain Federal Reserve Board approval, such 5% threshold would be reduced
proportionally. Such right to acquire additional shares expires on June 30, 1999
and is subject to termination upon the occurrence of certain corporate events
involving the acquisition of the Company.
The Company is prohibited under the Debenture Agreement from paying
dividends on any capital stock (other than dividends payable in capital stock or
in stock rights), if an event of default under such agreements exists at such
time, or if the amount of dividends payable by the Company together with the
aggregate amount of dividends paid and other capital distributions made since
June 1, 1995, exceed the sum of (i) 50% of the Company's Consolidated Net Income
(as defined in the Debenture Agreement) accrued from June 1, 1995 to the end of
the quarter ending not less than 45 days prior to the dividend payment date;
(ii) $20 million; and (iii) the net proceeds of any sale of capital stock
subsequent to June 1, 1995. In addition, under the Debenture
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<PAGE> 20
Agreement, the Syndicated Credit Agreement, and other debt agreements of the
Company, if the Company fails to maintain specified minimum levels of net worth,
net earnings to debt service and dividends ratios, and certain other financial
ratios, dividends cannot be paid by the Company.
The Company also has entered into 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. These
agreements 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, 1995, the monthly average amount of funds
advanced by the Company under such servicing agreements was approximately $4.9
million.
During the nine-month period ended September 30, 1995, the Company
collected an average of approximately $900,000 per month in net servicing fees,
including late charges. As of September 30, 1995 and December 31, 1994, the
servicing portfolio amounted to approximately $2.6 billion. The relatively
stable amount of the servicing portfolio as of September 30, 1995 compared to
December 31, 1994, despite originations of $365.8 million during 1995 is due to
the sale during the second quarter of 1995 of approximately $208 million of
servicing rights and regular portfolio run-offs. 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.
As of September 30, 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 September 30, 1995 Doral Federal had tangible capital
and core capital of $8.1 million or approximately 6.67% of adjusted assets. As
of such date, Doral Federal had risk-based capital of $8.3 million or 16.7% of
risk adjusted assets.
Doral Federal obtains funding for its lending activities through the
receipt of deposits and, to a lesser extent, from other borrowings, such as
FHLB-NY advances and repurchase agreements with brokerage houses. As of
September 30, 1995, Doral Federal held $106.8 million in deposits at a weighted
average interest rate of 2.57%, approximately 33% of which consisted of
non-interest bearing deposits. Doral Federal, as a member of 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 September 30, 1995,
Doral Federal had $10.4 million in outstanding advances from the FHLB-NY at a
weighted average interest rate cost of 6.43% and $16.3 million of available
collateral to obtain additional advances.
Legislation has been proposed by Congress that would, among other matters,
recapitalize the FDIC Savings Association Insurance Fund (the "SAIF"). The
proposed legislation provides for a one-time assessment to be imposed on all
SAIF-insured deposits as of June 30, 1995, in order to recapitalize the SAIF and
eliminate the disparity of insurance premiums with the Bank Insurance Fund (the
"BIF"). Under such proposed legislation, the SAIF and the BIF would be merged
effective January 1, 1998. The special assessment rate is anticipated to be
between .85% to .90% of deposits and would be payable in early 1996. Based upon
Doral Federal's deposits at June 30, 1995 and assuming a special assessment of
.90%, Doral Federal's assessment would be approximately $864,000 on a pre-tax
basis.
FFCC expects that it will continue to have adequate liquidity arrangements
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.
CASH FLOWS
The interim Consolidated Statement of Cash Flows reflect the working
capital needs of the Company. Operating activities provided approximately $6.4
million of net cash during the nine-month period ended September 30, 1995,
versus approximately $50.6 million in the comparable period of 1994. The major
changes
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<PAGE> 21
in cash flow for the first nine months of 1995 were primarily related to a net
decrease of approximately $18 million in the Company's portfolio of mortgage
loans held for sale and mortgage-backed securities held for trading. Borrowings
reflect increased use of repurchase and gestation lines of credit which require
lower collateralization levels than bank warehousing lines of credits. In
addition, the Company incurred $22.1 million in liabilities related to
securities sold not yet purchased in connection with its interest rate risk
management strategy.
Investing activities used cash of approximately $45.7 million in the first
nine months of 1995 due primarily to net originations of loans receivable of
approximately $36.4 million. The Company capitalized $4.7 million of mortgage
servicing rights during the first nine months of 1995 related to wholesale
mortgage loan purchases and implementation in the second quarter of 1995 of SFAS
No. 122. 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. SFAS No. 122 requires that a portion of the cost of originating
a mortgage loan be allocated to the related mortgage servicing right based on
its fair value relative to the aggregate fair value of the loan and the related
servicing right taken as a whole. Investing activities also reflected an
increase in short-term servicing advances and accounts receivable of $6.2
million.
During the first nine months of 1995, financing activities provided
approximately $60.9 million of net cash due to additional deposit accounts
amounting to approximately $32.6 million received by Doral Federal, the
Company's thrift subsidiary and $21.5 million from the proceeds of a senior
secured term loan under the Company's syndicated bank facility and the issuance
of $6,645,905 of Subordinated Convertible Debentures. Dividend payments were
approximately $3.2 million for the nine months ended September 30, 1995.
ASSETS AND LIABILITIES
At September 30, 1995, total assets were $821 million compared to $768
million at December 31, 1994. This increase was due to several factors, of which
the most important include a net increase of $28.4 million in loans receivable
held at Doral Federal and a $21.7 million increase in cash and cash equivalents.
These increases were partially offset by a net decrease of $10 million in
mortgage loans held for sale and mortgage-backed securities held for trading and
for investment. Total liabilities were $719 million at September 30, 1995
compared to $678 million at December 31, 1994. This increase was largely the
result of an increase in deposit accounts and advances from the FHLB-NY in the
aggregate amount of $43 million. Securities sold under agreements to repurchase
increased by $58.2 million while loans payable decreased $63.5 million compared
to December 31, 1994, reflecting changes in the composition of the Company's
inventory. As of September 30, 1995, the Company was carrying a greater amount
of mortgage-backed securities inventory while the amount of mortgage loans held
for sale had decreased.
As of September 30, 1995, Doral Federal had $126.5 million in assets
compared to $86 million at December 31, 1994. This increase was due primarily to
an increase of $28.4 million in loans receivable. Loans receivable and
investments owned by Doral Federal are classified as held to maturity. At
September 30, 1995, Doral Federal's deposit accounts totalled $99.1 million
compared to $66.5 million at December 31, 1994. These amounts are net of $7.7
million and $12.8 million in corporate accounts of the Company which are
eliminated in the preparation of the Company's Consolidated Financial
Statements. Deposit accounts include $20.9 million in non-interest bearing
demand deposits representing escrow funds and other servicing accounts from
FFCC's servicing operations as well as FFCC corporate accounts. All other
deposit accounts as of September 30, 1995 are retail deposits, most of them in
the form of certificate of deposit accounts. 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 may 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 market risk through the use of forward commitments and
other hedging techniques. See "BUSINESS OF THE COMPANY -- Interest Rate
Management."
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<PAGE> 22
At September 30, 1995, investments held to maturity consisted of GNMA, FNMA
and FHLMC mortgage-backed securities, U.S. Treasury Notes, Federal Home Loan
Bank Notes and CMOs mortgage obligations. The Company has the intent and ability
to hold the investments to maturity by obtaining continuing financing under its
existing credit facilities. A portion of these securities are held at Doral
Federal and the maturity of such securities generally have been matched against
deposits.
As of September 30, 1995, FFCC held $2.0 million of real estate owned,
compared to $2.1 million as of December 31, 1994.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
On May 12, 1995, the Financial Accounting Standards Board issued SFAS No.
122, an amendment to SFAS No. 65. The Company adopted SFAS No. 122 as of April
1, 1995. SFAS No. 122 requires the recognition of all mortgage servicing rights
including OMSRs and PMSRs as assets by allocating total costs incurred between
the loan and the servicing rights based on their relative fair values. Under
SFAS No. 65, the cost of OMSRs was not recognized as an asset and was charged to
earnings when the related loan was sold. SFAS No. 122 has the effect of
increasing gains on sales of loans by requiring the carrying cost of the loans
to be reduced by the amount of the related OMSRs. To date, the Company has used
sales prices for comparable mortgage servicing rights to determine the fair
value of its servicing rights. For the nine months ended September 30, 1995, the
Company realized additional net income of approximately $600,000 as a result of
the adoption of SFAS No. 122. If the Company had not adopted SFAS No. 122 during
the second quarter of 1995, earnings per common share would have been
approximately $1.90 and $1.83 on a primary and fully-diluted basis,
respectively, for the nine-month period ended September 30, 1995 and
approximately $0.64 and $0.62 on a primary and fully-diluted basis,
respectively, for the quarter then ended.
SFAS No. 122 also requires that all capitalized mortgage servicing rights
be evaluated for impairment based on the excess of the carrying amount of
mortgage servicing rights over their fair value. For purposes of measuring
impairment, capitalized mortgage servicing rights are stratified pool by pool on
the basis of interest rates. An impairment is recognized whenever the prepayment
pattern of the mortgage pool indicates that the fair value of the related
capitalized servicing rights is less than its carrying amount. An impairment is
recognized by charging such excess to income. The Company determined that no
reserve for impairment was required for the nine months ended September 30,
1995.
PROSPECTIVE TRENDS
Market Trends. During most of 1995, interest rates on mortgage loans
declined significantly. To the extent such trend continues, demand and prices
for mortgage loans and mortgage-backed securities should increase thereby
favorably impacting gain on sale of mortgage loans.
The decrease in interest rates should also contribute to an increase in the
amount of originations by stimulating demand for mortgage loans. Increased
originations will allow the Company to increase the size of its servicing
portfolio. Servicing income should, therefore, continue to provide the Company
with a stable base of revenue. The Company believes that its strong internal
origination capacity will reduce the sensitivity of servicing fee income to any
changes in prepayment rates that may occur as a result of declines in interest
rates.
Doral Federal. The Company intends to continue to increase the asset size
of Doral Federal by increasing the amount of loans funded at and held by Doral
Federal as well as to increase the deposit base and branch network of such
thrift. The Company expects that the net interest income earned by Doral Federal
will make increasingly significant contributions to the consolidated net
earnings of the Company.
Proposed Repeal of Section 936. The United States Congress is currently
considering various proposals to repeal Section 936. While the final impact of
any such changes cannot be determined at this time, the repeal of Section 936
could have an adverse effect on the general economic condition of Puerto Rico,
the Company's predominant service area. The repeal of Section 936 could also
raise funding costs and reduce demand for mortgage loans and mortgage-backed
securities in Puerto Rico. In recent years, the Company has taken steps to
attempt to reduce any such adverse impact of the repeal of Section 936 by
diversifying its sources of funding and identifying additional investors for its
mortgage products. See "BUSINESS OF THE COMPANY -- Secondary Mortgage Market and
Favorable Tax Treatment."
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<PAGE> 23
BUSINESS OF THE COMPANY
GENERAL
The Company, together with its wholly-owned subsidiaries, is primarily
engaged in a wide range of mortgage banking activities, including the
origination, servicing, purchase and sale of mortgages on single-family
residences, the issuance and sale of various mortgage-backed securities, the
holding and financing of mortgage loans and mortgage-backed securities for sale
or investment, the purchase and sale of servicing rights associated with such
mortgage loans and, to a lesser extent, the origination of construction loans
and loans secured by commercial real estate (the "Mortgage Banking Business").
FFCC is the leading mortgage banking institution in Puerto Rico in terms of the
volume of origination of first mortgage loans on single-family residences. The
Company's Mortgage Banking Business is principally conducted through two
operating units: Doral Mortgage Corporation ("Doral Mortgage"), a wholly-owned
subsidiary of the Company, and HF Mortgage Bankers Division ("HF Division"), a
division of the Company. The Company also owns Doral Federal Savings Bank
("Doral Federal"), a federal savings and loan association which was acquired by
FFCC in September 1993 and operates through two branches in Puerto Rico.
References herein to the "Company" or "FFCC" shall be deemed to refer to the
Company and its consolidated subsidiaries, unless the context requires
otherwise.
The Company is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), an approved issuer for the Government National Mortgage Association
("GNMA") and an approved servicer under the GNMA, FNMA and FHLMC mortgage-backed
securities programs. FFCC is also qualified to originate mortgage loans insured
by the Federal Housing Administration ("FHA") and guaranteed by the Veterans
Administration ("VA"). Prior to 1995, substantially all of the Company's
revenues were derived from its Mortgage Banking Business. See "Mortgage Banking
Business -- Sale of Loans; Issuance of Mortgage Backed Securities" herein.
The Company's strategy is to increase its volume of loan originations and
its servicing portfolio as well as to maximize net interest income. The Company
seeks to increase its volume of loan originations by emphasizing quality
customer service and maintaining the most extensive system of branch offices of
any mortgage banking institution in Puerto Rico. The Company strives to increase
its servicing portfolio by relying primarily on internal loan originations and
supplementing such originations with wholesale purchases of loans and mortgage
servicing rights from third parties. The Company currently emphasizes the
origination of 15-year and 30-year conventional and FHA-insured or VA-guaranteed
mortgage loans on single-family residences. The Company relies on net interest
income for a more significant portion of its earnings than mortgage banking
companies generally do. The Company seeks to maximize net interest income by
holding mortgage-backed securities, primarily GNMA securities, for longer
periods prior to sale than most mortgage banking companies. This strategy also
reduces the Company's overall effective tax rate because the interest on GNMA
securities backed by Puerto Rico mortgages is tax exempt under Puerto Rico law.
The Company's thrift subsidiary, Doral Federal, operates through two
branches in the San Juan metropolitan area, which serve primarily as
deposit-taking operations, since to date most loans have been originated
pursuant to the Master Loan Production Agreement with the Company. See "Other
Lending and Investment Activities -- Loans held for Investment and Real Estate
Owned." Doral Federal has experienced rapid growth since its acquisition by the
Company, increasing from $13.1 million in assets as of September 10, 1993 to
$126.5 million in assets as of September 30, 1995. To date, this growth has been
funded largely through increases in retail certificate of deposit accounts and
non-interest bearing accounts maintained by the Company, consisting primarily of
corporate and custodial accounts. As of September 30, 1995, Doral Federal had
total deposits and net worth of $106.8 million and $8.5 million, respectively.
Custodial accounts associated with the Company's servicing portfolio, commercial
deposit accounts of the Company and retail deposits constituted approximately
20%, 7% and 73%, respectively, of Doral Federal's total deposit accounts. The
Company intends to continue to increase the asset size, deposit base and branch
network of Doral Federal.
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<PAGE> 24
During the year ended December 31, 1994, as a result of increased expenses
required to be incurred to support future growth, Doral Federal did not have a
significant impact on the financial results of the Company, experiencing a net
income of approximately $205,000. For the nine months ended September 30, 1995,
Doral Federal contributed net income of $1.2 million to the consolidated
earnings of the Company. FFCC expects that Doral Federal will make increasingly
significant contributions to the Company's consolidated earnings.
The business and profitability of FFCC depend, to a large degree, on its
ability to sell mortgage loans to investors in the secondary mortgage market at
prices that are higher than the prices at which FFCC originates or purchases
such loans. The growth of the secondary mortgage market is attributable in large
part to programs maintained by the FNMA, FHLMC and GNMA. In addition, part of
the Company's business is affected significantly by the continuation of various
programs administered by the FHA for HUD, which insures mortgage loans, and the
VA, which partially guarantees mortgage loans. Any discontinuation of, or
significant reduction in, the various programs administered by FNMA, FHLMC,
GNMA, FHA or VA could have a material adverse effect on the Company's
operations. See "Mortgage Banking Business -- Sale of Loans; Issuance of
Mortgage Backed Securities" herein.
The Company is subject to the rules and regulations of, and supervision by,
several Federal and Puerto Rico entities, including the Office of Thrift
Supervision (the "OTS"), FNMA, FHLMC, GNMA, FHA, VA, HUD, the Commissioner of
Financial Institutions of Puerto Rico (the "Commissioner") and the Department of
the Treasury of Puerto Rico ("Puerto Rico Treasury"), with respect to, among
other things, licensing requirements, establishment of maximum interest rates,
required disclosure to customers and the originating, processing, underwriting,
selling and securitizing of mortgage loans. See "Regulation" herein. Doral
Federal's operations are subject to regulation by the OTS and the Federal
Deposit Insurance Corporation ("FDIC"). FFCC's operations in the state of
Florida are subject to supervision by the Florida Department of Banking and
Finance. In addition, the Company's operations are affected by Federal and
Puerto Rico laws and regulations designed to promote economic development in
Puerto Rico, particularly the various Puerto Rico Industrial Incentives Acts
(the "Industrial Incentives Acts") and Section 936. See "Puerto Rico Secondary
Mortgage Market and Favorable Tax Treatment" herein.
Prior to 1992, FFCC's Mortgage Banking Business was exclusively conducted
in Puerto Rico and currently is conducted through 18 branches, 15 of which are
operated by Doral Mortgage. Since March 1992, Doral Mortgage has opened branch
offices in Orlando and Miami, Florida. The Florida offices are staffed by seven
employees and originated approximately $7.1 million and $6.3 million in mortgage
loans during nine months ended September 30, 1995 and the year ended December
31, 1994, respectively.
The following table sets forth the components of FFCC's revenues and the
percentage contribution of each component for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------------------------------
1995 1994 1994 1993 1992
-------------- ---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Mortgage loan sales
and fees.......... $ 8,604 13% $ 9,800 19% $10,573 15% $35,230 50% $24,560 49%
Servicing income.... 8,044 12 8,764 17 11,448 16 8,627 12 7,163 14
Interest income..... 46,667 69 32,976 64 46,508 65 23,775 34 16,983 34
Gain on sale of
servicing
rights............ 3,623 5 -- -- 3,003 4 2,378 4 935 2
Rental and other
income............ 413 (1) 366 (1) 511 (1) 218 (1) 163 (1)
------- --- ------- ----- ------- ----- ------- ----- ------- -----
Total(2).... $67,351 100% $51,906 100% $72,043 100% $70,228 100% $49,804 100%
======= === ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
- ---------------
(1) Represents less than one percent of revenues.
(2) Sums of the percentage columns may not add up to the totals due to rounding.
23
<PAGE> 25
MORTGAGE BANKING BUSINESS
Loan Origination and Purchase of Mortgages. FFCC has the most extensive
system of branch offices for originating mortgages loans of any mortgage banking
institution in Puerto Rico. HF Division operates two branches in the San Juan
Metropolitan area. Doral Mortgage operates 15 branches throughout Puerto Rico
and two small branch offices in the State of Florida. Centro Hipotecario, Inc.,
another wholly-owned mortgage banking subsidiary, operates an additional branch
in the San Juan metropolitan area.
FFCC originates both (a) conventional mortgages on single-family
residences, which generally (i) are insured by private mortgage insurers or (ii)
do not exceed 80% of the appraised value of the mortgaged property, and (b)
mortgages on single-family residences, guaranteed by the VA ("VA loans") or
insured by HUD ("FHA loans"). VA loans and FHA loans qualify for inclusion in
the mortgage-backed securities program sponsored by GNMA. A portion of the
conventional loans are conforming loans which qualify for inclusion in guarantee
programs sponsored by FNMA or FHLMC. The Company also originates construction
loans for owner-occupied single-family residences and other real estate
development and mortgage loans on commercial properties. Construction loans and
mortgage loans on commercial properties constituted less than 1% of the total
dollar volume of loans originated by the Company for the nine months ended
September 30, 1995 and the year ended December 31, 1994.
While the Company makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all the loans are fixed rate
mortgages. The Company emphasizes the origination of loans under $100,000. The
average loan size for FHA/VA mortgage loans and conventional mortgage loans was
approximately $61,600 and $52,000, respectively, for the year ended December 31,
1994.
The Company also offers second mortgages, which for the nine-month period
ended September 30, 1995, constituted less than 2% of the total loans originated
by the Company. The maximum loan-to-appraised value ratio on second mortgages
permitted by the Company is 80% (including the amount of any first mortgage). In
1994, the Company also began to aggressively offer personal loans up to $40,000
secured by mortgages. These loans are generally secured by first or second
mortgages on single-family residences, are payable within three to ten years and
provide for higher interest rates than typical first mortgages.
Loan origination activities performed by FFCC include soliciting,
completing and processing mortgage loan applications and preparing and
organizing the necessary loan documentation. Loan applications are examined for
compliance with underwriting criteria and, if all requirements are met, FFCC
issues a commitment to the prospective borrower specifying the amount of the
loan and the loan origination fees, points and closing costs to be paid by the
borrower or seller and the date on which the commitment expires.
FFCC purchases FHA loans and VA loans from Doral Mortgage and other
mortgage bankers for resale to institutional investors in the form of GNMA
securities. The Company's strategy is to increase its servicing portfolio
primarily through internal originations through its branch network and, to a
lesser extent, purchases from third parties. Purchases of loans from other
mortgage bankers in the wholesale loan market is generally limited to FHA Loans
and VA Loans and provides the Company with a source of low cost production that
allows FFCC to continue to increase the size of its servicing portfolio. The
Company purchased approximately $57 million in loans from third parties during
the nine months ended September 30, 1995 and $63 million, $1 million and $29
million, for the years ended December 31, 1994, 1993 and 1992, respectively.
24
<PAGE> 26
The following table sets forth the number and dollar amount of the
Company's mortgage loan originations (excluding purchases from third parties)
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE INITIAL LOAN BALANCES)
<S> <C> <C> <C> <C> <C> <C> <C>
FHA/VA LOANS:
Number of Loans........... 2,920 5,841 7,037 8,364 3,224 2,182 2,419
Volume of Loans........... $188,788 $355,522 $433,748 $ 532,654 $207,239 $132,005 $139,720
Percent of Total Volume... 52% 58% 57% 37% 30% 37% 43%
CONVENTIONAL AND OTHER
LOANS:(1)
Number of Loans........... 3,061 4,641 6,285 12,658 7,637 4,856 5,296
Volume of Loans........... $176,970 $255,852 $326,698 $ 899,794 $486,484 $228,411 $181,681
Percent of Total Volume... 48% 42% 43% 63% 70% 63% 57%
TOTAL LOANS:
Number of Loans........... 5,981 10,482 13,322 21,022 10,861 7,038 7,715
Volume of Loans........... $365,758 $611,374 $760,446 $1,432,448 $693,723 $360,416 $321,401
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans.............. $ 64,700 $ 60,900 $ 61,600 $ 63,700 $ 64,300 $ 60,500 $ 57,800
Conventional and other
Loans(1)................ $ 57,800 $ 55,100 $ 52,000 $ 71,100 $ 63,700 $ 47,000 $ 34,300
REFINANCINGS(2)........... 41% 64% 59% 78% 67% 67% 60%
</TABLE>
- ---------------
(1) Includes second mortgage loans and non-conforming loans (conventional loans
that do not qualify for inclusion in the guarantee programs sponsored by
FNMA or FHLMC).
(2) As a percentage of the total dollar volume of loans originated.
A substantial proportion of the Company's total mortgage loan originations
has consistently been comprised of refinancing loans. For the nine months ended
September 30, 1995 and the years ended December 31, 1994, 1993 and 1992,
refinancing activity represented approximately 41%, 59%, 78% and 67%,
respectively, of the Company's total dollar volume of mortgage loans originated.
The increase from 1992 to 1993 was principally due to a decline in average
mortgage interest rates which stimulated demand for refinancing of existing
mortgage loans. The decrease in refinancing activity during 1994 compared to
1993 was due to the rise in interest rates experienced during the second half of
1994. The continued weakness in refinance activity during 1995 reflects the
stabilization of interest rates following the unusually high refinance activity
experienced during 1993. A significant future increase in mortgage interest
rates in Puerto Rico could adversely affect the Company's business if it
resulted in a significant decrease in refinancing of first mortgage loans. In
recent years, the Company, especially through its HF Division, has increased
relations with realtors and developers in order to increase home purchase
related originations. The Company believes that by increasing its home purchase
originations it may somewhat offset the adverse effects that stabilizing or
increasing interest rate are likely to have on refinancing originations.
For the nine months ended September 30, 1995 and the years ended December
31, 1994, 1993 and 1992, non-conforming conventional loans represented
approximately 41%, 28%, 15% and 19%, respectively, of the Company's total volume
of mortgage loans originated.
All loan originations, regardless of whether originated through the retail
network or purchased from third parties, must be underwritten in accordance with
the Company's underwriting criteria, including loan-to-value ratios, borrower
income qualifications, debt ratios and credit history, investor requirements,
necessary insurance and property appraisal requirements. The Company's
underwriting standards also comply with the relevant guidelines set forth by
HUD, VA, FNMA, FHLMC, federal savings and loan regulatory authorities, private
mortgage investment conduits and private mortgage insurers, as applicable. The
Company's underwriting personnel, while operating out of loan offices, make
underwriting decisions independent of the Company's mortgage loan origination
personnel. Under the Company's quality control plan, the Company reverifies a
25
<PAGE> 27
portion of the mortgage loans funded each month, to provide reasonable assurance
that the Company's underwriting standards have been satisfied. The selection of
mortgage loans for reverification is done on a sampling basis to provide quality
control coverage for all mortgage loan programs and appraisers. In addition, the
Company reconfirms employment status, the source of down payment and other key
items, before loan funding occurs.
Typically, when a mortgage loan is originated, the borrower pays an
origination fee. These fees are generally in the range of 0% to 6% of the
principal amount of the mortgage loan, and are payable at the closing of such
loan. The Company receives these fees on mortgage loans originated through its
retail branches. The Company may charge additional fees depending upon market
conditions and regulatory considerations as well as the Company's objectives
concerning mortgage loan origination volume and pricing. The Company incurs
certain costs in originating mortgage loans, including overhead, out-of-pocket
costs and, in some cases, where the mortgage loans are subject to a purchase
commitment from private investors, related commitment fees. The volume and type
of mortgage loans and of commitments made by investors vary with competitive and
economic conditions, resulting in fluctuations in revenues from mortgage loan
originations. Generally accepted accounting principles ("GAAP") require that
general operating expenses incurred in originating mortgage loans be charged to
current expense. Direct origination costs and origination income must be
deferred and amortized using the interest method, until the repayment or sale of
the related mortgage loans. Historically, the value of servicing rights which
result from the Company's origination activities has exceeded the net costs
attributable to such activities.
Loan Servicing. The Company acquires servicing rights through its mortgage
loan originations and purchases from third parties. 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. Loan servicing includes
collecting principal and interest and remitting the same to the holders of the
mortgage loans or mortgage-backed securities to which such mortgage loan
relates, holding escrow funds for the payment of real estate taxes and insurance
premiums, contacting delinquent borrowers, supervising foreclosures in the event
of unremedied defaults and generally administering the loans. FFCC receives
annual loan servicing fees ranging from 0.25% to 0.50% of the declining
principal amount of the loans serviced plus any late charges. In general, FFCC's
servicing agreements are terminable by the investor for cause.
The Company's mortgage loan servicing portfolio is subject to reduction by
reason of normal amortization, prepayments and foreclosure of outstanding
mortgage loans. Additionally, the Company may sell mortgage loan servicing
rights from time to time to other institutions if market conditions are
favorable.
The following table sets forth certain information regarding the total loan
servicing portfolio of FFCC for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage Loans..... $1,042,393 $1,190,637 $1,062,108 $ 955,624 $ 851,853 $ 858,261 $ 813,123
Conventional and Other
Mortgage Loans.............. 1,578,516 1,535,387 1,581,418 1,420,031 885,571 554,745 379,944
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Servicing
Portfolio............... $2,620,909 $2,726,024 $2,643,526 $2,375,655 $1,737,424 $1,413,006 $1,193,067
========= ========= ========= ========= ========= ========= =========
BEGINNING SERVICING
PORTFOLIO................... $2,643,526 $2,375,655 $2,375,655 $1,737,424 $1,413,006 $1,193,067 $ 830,887
ADD:
Loans Funded and
Purchased(1)................ 422,415 649,540 823,834 1,433,448 693,723 386,695 411,595
LESS:
Servicing Sales Transferred... $ 208,508 -- 202,000 198,700 53,400 51,460 --
Run-off(2).................... 236,524 298,751 353,963 596,517 315,905 115,296 49,415
---------- ---------- ---------- ---------- ---------- ---------- ----------
ENDING SERVICING PORTFOLIO.... $2,620,909 $2,726,024 $2,643,526 $2,375,655 $1,737,424 $1,413,006 $1,193,067
========= ========= ========= ========= ========= ========= =========
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans............... 51,568 54,029 52,515 48,272 39,562 34,897 31,199
Weighted Average Interest
Rate........................ 8.41% 8.20% 8.21% 8.15% 9.09% 10.06% 10.53%
Weighted Average Maturity
(months).................... 194 205 192 226 204 224 228
Weighted Average Servicing Fee
Rate........................ .3991 .3913 .3945 .4195 .4040 .4242 .4396
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT
PERIOD END:(3)
60-89 days past due........... 1.52% 1.44% 1.53% 1.49% 1.39% 2.01% 2.36%
90 days or more past due...... 1.96% 1.44% 1.48% 1.62% 1.55% 2.26% 3.54%
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total delinquencies........... 3.48% 2.88% 3.01% 3.11% 2.94% 4.27% 5.90%
========= ========= ========= ========= ========= ========= =========
Foreclosures Pending.......... 1.01% 1.25% 1.19% 1.21% 1.44% 1.47% 1.10%
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Loans funded and purchased represent that portion of loans originated or
purchased with respect to which the servicing rights were retained by the
Company. In 1991, there is also included $49.2 million of servicing rights
acquired in bulk from a financial institution.
(2) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(3) Expressed as a percentage of the total number of loans serviced.
The Company's servicing portfolio has grown significantly over the past
five years. At September 30, 1995, the Company's servicing portfolio totalled
$2.62 billion compared to $2.64 billion at December 31, 1994. The lack of growth
was due to aggregate sales of servicing rights relating to $400 million
principal amount of mortgage loans during the last quarter of 1994 and first
nine months of 1995. Substantially all of the mortgage loans in the Company's
servicing portfolio are secured by single (one-to-four) family residences.
Substantially all of FFCC's mortgage servicing portfolio is composed of
mortgages secured by real estate in Puerto Rico. At September 30, 1995 and
December 31, 1994, approximately $42 million and $35 million, respectively, of
the Company's mortgage servicing portfolio related to mortgages secured by real
property outside Puerto Rico (all of which were secured by real property located
in Florida).
The amount of principal prepayments on mortgage loans serviced by the
Company was $108 million for the first nine months of 1995 and $281 million,
$537 million and $242 million for the years ended December 31, 1994, 1993 and
1992, respectively. This represented approximately 4%, 11%, 26% and 15% of the
aggregate principal amount of mortgage loans serviced during such periods and
the average size of the loans prepaid were $37,400, $41,800, $54,600 and
$44,500, respectively. Principal prepayments declined during the first nine
months of 1995 and the year ended December 31, 1994 as a result of decreased
refinancing activity caused by the increase in interest rates experienced
following the refinance boom of 1993. The primary means used by the Company to
reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability
that has allowed the Company to continue to increase the size of its servicing
portfolio even in times of high prepayments.
Servicing agreements relating to the mortgage-backed securities programs of
FNMA, FHLMC and GNMA, and certain other investors, 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. During nine months ended
September 30, 1995 and the year ended December 31, 1994, the monthly average
amount of funds advanced by FFCC under such servicing agreements was $4.9
million and $3.2 million, respectively. Funds advanced by FFCC pursuant to these
arrangements are generally recovered by FFCC within 30 days.
The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is non-recourse
or recourse. In non-recourse servicing, the principal credit risk to the
servicer is the cost of temporary advances of funds. In recourse servicing, the
servicer agrees to share
27
<PAGE> 29
credit risk with the owner of the mortgage loans such as FNMA or FHLMC or with
an insurer or guarantor. Losses on recourse servicing occur primarily when
foreclosure sale proceeds of the property underlying a defaulted mortgage are
less than the then outstanding principal balance and accrued interest of such
mortgage loan and the cost of holding and disposing of such underlying property.
At September 30, 1995 and December 31, 1994 and 1993, the Company was servicing
mortgage loans with an aggregate principal amount of $90 million and $112
million and $164 million, respectively, on a recourse basis. During the last
five years, losses incurred due to recourse servicing have not been significant.
FFCC's servicing rights provide a significant continuing source of income
for FFCC. There is a market in Puerto Rico for servicing rights, which are
generally valued in relation to the present value of the expected income stream
generated by the servicing rights. Among the factors which influence the value
of a servicing portfolio are servicing fee rates, loan balances, loan types,
loan interest rates, expected average life of underlying loans (which may be
reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors, and any recourse provisions. During the nine
months ended September 30, 1995 and the years ended December 31, 1994, 1993 and
1992, FFCC sold servicing rights on $209 million, $202 million, $198.7 million
and $53.4 million, respectively, of mortgage loans. While the Company's general
strategy is to retain the servicing rights related to the mortgage loans it
originates and purchases, FFCC may from time to time sell additional portions of
its servicing portfolio when market conditions are favorable.
The market value of, and earnings from, the Company's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, income generated from the Company's mortgage loan
servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of the Company's mortgage loan servicing portfolio
may be positively affected.
The mortgage loan delinquency rate in Puerto Rico is generally higher than
in the mainland United States. At September 30, 1995 and December 31, 1994, 1993
and 1992, 3.48%, 3.01%, 3.11% and 2.94%, respectively, of the number of loans in
FFCC's servicing portfolio were 60 or more days past due and, in addition,
1.01%, 1.19%, 1.21% and 1.44%, respectively, were in foreclosure. During the
nine months ended September 30, 1995 and the years ended December 31, 1994, 1993
and 1992, the percentage of loans in FFCC's servicing portfolio which were over
60 days past due but not in foreclosure at month end varied from 2.86% to 4.07%,
2.88% to 3.26%, 3.11% to 3.71%, and 2.12% to 4.28%, respectively. For the nine
months ended September 30, 1995 and the year ended December 31, 1994, the
percentage of the number of serviced loans in foreclosure ranged from 0.97% to
1.20% and from 1.14% to 1.31%, respectively. The percentage of the number of
serviced loans in foreclosure during 1993 and 1992 ranged from 1.19% to 3.37%
and from 1.06% to 1.77%, respectively.
HRU, Inc. provides mailing and electronic data processing services for
FFCC's mortgage servicing and earns fees from FFCC based on the volume of
mortgage loans serviced. Such fees are determined at fair market value and
amounted to approximately $640,000, $726,000, $617,000 and $410,000 for the nine
months ended September 30, 1995 and the years ended December 31, 1994, 1993 and
1992, respectively. FFCC owns 33% of HRU, Inc.
Foreclosure Experience. While delinquency rates in Puerto Rico are
generally higher than in the mainland United States, these rates are not
necessarily indicative of future foreclosure rates or losses on foreclosures.
Real estate owned as a result of foreclosures ("REO") related to the Company's
Mortgage Banking Business arises primarily through foreclosure on mortgage loans
repurchased from investors either because of breach of representations or
warranties or pursuant to recourse arrangements. As of September 30, 1995 and
December 31, 1994 and 1993, FFCC held REO with a book value of approximately
$2.0 million, $2.1 million and $2.9 million, respectively. As of September 30,
1995 and December 31, 1994 and 1993, an additional amount of REO consisting of
approximately $74,000 as of each date was rented under a United States
government subsidy program. Sales of REO resulted in net losses to FFCC of
approximately $144,000 for the nine months ended September 30, 1995, $473,000
for the year ended December 31, 1994, $1.05 million for the year ended December
31, 1993 and $439,150 for the year ended December 31, 1992. There is no liquid
secondary market for the sale of the Company's REO.
28
<PAGE> 30
With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA against foreclosure loss,
while the VA guarantee is subject to a limitation which is generally equal to
25% to 50% of the principal amount of the loan, up to a maximum ranging from
$22,500 to $50,750, depending upon the amount of the loan. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
September 30, 1995. FFCC, however, incurs about $2,200 per loan foreclosed in
interest and legal charges during the time between payment by FFCC and FHA or VA
reimbursement. For the nine months ended September 30, 1995 and the years ended
December 31, 1994, 1993 and 1992 total expenses related to FHA or VA loans
foreclosed amounted to $57,000, $464,000, $158,000 and $259,000, respectively.
Although FNMA and FHLMC are obligated to reimburse the Company for principal and
interest payments advanced by the Company as a servicer (except for recourse
servicing), the funding of delinquent payments or the exercise of foreclosure
rights involves costs to the Company which may not be recouped. Such nonrecouped
expenses have to date been immaterial. Of the total number of loans serviced by
the Company at September 30, 1995 and December 31, 1994, 1993 and 1992, 3.48%,
3.01%, 3.11% and 2.94%, respectively, were delinquent and in addition 1.01%,
1.19%, 1.21% and 1.44%, respectively were in foreclosure.
Any significant adverse economic developments in Puerto Rico, FFCC's
primary service area, could result in an increase in defaults or delinquencies
on mortgage loans that are serviced by FFCC or held by FFCC pending sale in the
secondary mortgage market, thereby reducing the resale value of such mortgage
loans.
Sale of Loans; Issuance of Mortgage-Backed Securities. FFCC customarily
sells most of the loans that it originates, except for those originated by Doral
Federal which are generally held until maturity, utilizing different sales
channels described below. FFCC issues GNMA-guaranteed mortgage-backed
securities, which involve the packaging of FHA loans or VA loans into pools of
$1 million or more ($2.5 million to $5 million for serial notes) for sale
primarily to broker-dealers in Puerto Rico. During the nine months ended
September 30, 1995 and the year ended December 31, 1994, FFCC issued
approximately $271 million and $596 million, respectively, in GNMA-guaranteed
mortgage-backed securities.
Certain GNMA-guaranteed mortgage-backed securities sold by FFCC are in the
form of GNMA serial notes which permit the investor to receive interest monthly
and to select among several expected maturity dates of the notes included in an
issue, each maturity having a specific yield. GNMA serial notes are sold in
pools of $2.5 million to $5 million. Such pools are composed solely of FHA loans
or VA loans originated in Puerto Rico. GNMA serial notes are sold to investment
banks in packages consisting of notes of different yields and maturities, which
range from 1 to 30 years and have an average maturity of 12 years, taking into
account historical experience with prepayments of the underlying mortgages. The
rates on the serial notes or GNMA pools must be 1/2 of 1% less than the rates on
the mortgages comprising the pool. Upon completion of the necessary processing,
the GNMA-guaranteed mortgage-backed securities are offered to the public through
securities broker-dealers. During nine months ended September 30, 1995 and the
year ended December 31, 1994, FFCC issued GNMA serial notes totalling
approximately $204 million and $68 million, respectively.
With respect to loans securitized through GNMA programs, the Company is
insured against foreclosure losses by HUD with respect to FHA loans or partially
guaranteed against foreclosure loss by the VA (at present, generally 25% to 50%
of the loan, up to a maximum amount ranging from $22,500 to $50,750, depending
upon the amount of the loan). According to the applicable VA guidelines, the
maximum amount of a VA loan originated in Puerto Rico is presently $184,000.
According to applicable FHA guidelines, the maximum amount of a FHA loan ranges
from $77,197 to $123,500, depending on the municipality where the mortgaged
property is located.
Conforming conventional loans originated or purchased by FFCC are either
sold directly to FNMA, FHLMC or private investors for cash or are grouped into
pools of $1 million or more in aggregate principal balance and exchanged for
FNMA or FHLMC-issued mortgage-backed securities, which FFCC sells to securities
broker-dealers. In connection with any such exchanges, the Company pays
guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed securities
provides FFCC with flexibility in selling the
29
<PAGE> 31
mortgages which it originates or purchases and also provides income by
increasing the value and marketability of the loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called non-conforming loans) are sold to financial institutions or other
private investors or are securitized into "private label" mortgage-backed
securities through grantor trusts or other mortgage conduits and sold through
broker-dealers. Each issue of mortgage-backed securities normally consists of
several classes of senior, subordinate and residual certificates. The residual
certificates evidence a right to receive payments on the mortgage loans after
payment of all required amounts on the senior and subordinate certificates then
due. Some form of credit enhancement, such as an insurance policy, letter of
credit or subordination, will generally be used to increase the credit rating of
the senior certificates and thereby improve their marketability. During the nine
months ended September 30, 1995 and the year ended December 31, 1994, the
Company completed sales of approximately $42 million and $101 million,
respectively, aggregate principal amount of mortgage-backed securities in
securitization transactions, of which $40 million and $96 million, respectively,
consisted of senior certificates insured by Financial Security Assurance, Inc.
("FSA"). Subject to market conditions, the Company contemplates entering into
similar securitization transactions in the future. As part of its arrangement
with FSA, the Company has agreed to retain and pledge to FSA the residual
certificates issued by the respective trusts. The Company also generally retains
the subordinate certificates issued in such transactions. As of September 30,
1995 and December 31, 1994, the Company held approximately $9.8 million and
$11.1 million, respectively, in subordinate certificates and $8.8 million and
$9.4 million, respectively, in residual certificates issued in securitization
transactions involving the Company. Currently a liquid secondary market for
subordinate or residual certificates does not exist in Puerto Rico. The value of
residual certificates is subject to substantial fluctuations as a result of
changes in prevailing interest rates. In October 1995, the Company entered into
a one-year credit facility with a local financial institution to finance its
portfolio of subordinate certificates. The financing is in the amount of
approximately $9.9 million and bears interest at 8.5%. Certain of these
certificates were previously being financed under an agreement with a
shareholder and the former Chairman of the Board and Chief Executive Officer of
the Company.
While the Company's exchanges of mortgage loans into agency securities and
sales of mortgage loans are generally made on a non-recourse basis, the Company
also engages in the sale or exchange of mortgage loans on a recourse basis. In
the past, recourse sales often involved sale of non-conforming loans to local
financial institutions. Recourse sales have decreased in recent years, in part
due the securitization of non-conforming loans into private label
mortgage-backed securities and increased sales channels that allow the Company
to sell non-conforming loans to investors on a non-recourse basis. The Company
estimates the fair value of the retained recourse obligation at the time
mortgage loans are sold. Normally, the fair value of any retained recourse is
immaterial because the Company is able to resell repurchased loans for at least
their carrying costs. Accordingly, as of September 30, 1995, the Company did not
deem it necessary to establish reserves for possible losses related to recourse
obligations. At September 30, 1995 and December 31, 1994, the Company had loans
in its servicing portfolio with provisions for recourse in the principal amount
of approximately $90 million and $112 million, respectively, as compared to $164
million as of December 31, 1993 and $244 million as of December 31, 1992. Of
these recourse loans, approximately $16 million and $18 million, respectively,
in principal amount consisted of loans sold to FNMA into securities of such
agencies, and approximately $74 million and $94 million principal amount,
respectively, consisted of non-conforming loans sold to other private investors.
At September 30, 1995 existing commitments to sell loans to FHLMC and FNMA
aggregated $10 million, and were on a non-recourse basis.
In addition to the sale of the "private label" mortgage-backed securities
referred to above, the Company has, from time to time, sold mortgage-backed
securities in bulk to local broker-dealers or financial institutions. These
mortgage-backed securities are normally converted into collateralized mortgage
obligations by the purchasers and sold in the local Puerto Rico market.
From time to time, the Company may sell mortgage-backed securities subject
to put arrangements. Pursuant to these arrangements, the Company grants the
purchaser of the mortgage-backed securities a put option that grants the buyer
the right to sell and obligates the Company to buy, the securities at a future
date at a negotiated price. Sales of securities with puts are accounted for as
sales or borrowings based on an
30
<PAGE> 32
assessment of the probability that the put option will be exercised. If on the
transaction date, the Company determines that it is probable that the put option
will not be exercised the transaction is accounted for as a sale. Conversely, if
it is determined that it is probable that the put option will be exercised the
transaction will be accounted for as a secured borrowing. As of September 30,
1995, the Company had outstanding $136.5 million in mortgage-backed securities
sold subject to put arrangements. The put arrangements on approximately $100.6
million of such mortgage-backed securities expire by December 31, 1995.
Market Interest Rates and Net Interest Income. A greater proportion of the
Company's net income has generally been composed of net interest income than is
typical of mortgage banking institutions in the mainland United States. This is
primarily due to the fact that the Company traditionally has held mortgage loans
and mortgage-backed securities, particularly GNMA certificates, for longer
periods prior to sale than mortgage banking institutions generally do. For the
nine months ended September 30, 1995 and the year ended December 31, 1993, the
Company held mortgage loans (including mortgage-backed securities) prior to sale
for an average period of 348 and 212 days, respectively, as compared to 98 days
for the year ended December 31, 1993. The increase in the number of days
mortgage loans and mortgage-backed securities were held prior to sale for the
first nine months of 1995 was primarily due to the decision of the Company to
maximize net interest income produced by tax exempt FHA and VA mortgages and
GNMA securities. The decrease in the average period mortgage loans were held
prior to sale during the year ended December 31, 1993 as compared to the prior
year was primarily due to favorable market conditions that allowed the Company
to increase its sale of mortgage-backed securities, the continued pooling and
selling of non-conforming loans as mortgage-backed securities and a shift in
emphasis from origination of FHA and VA loans to FHLMC and FNMA conforming loans
which the Company normally sells within 60 days of origination.
The relative emphasis on the origination of FHLMC and FNMA conforming loans
versus FHA and VA loans is dependent on market conditions, the relative pricing
and return on origination of the different types of mortgage loans and the
maximum loans amounts for the various types of loans. Mortgage loans and
mortgage-backed securities have been held for longer periods by the Company
primarily for two reasons. The first relates to Puerto Rico regulatory
requirements and the operation of the GNMA serial note program in Puerto Rico.
In order to be able to fund the origination of mortgage loans with
tax-advantaged 936 Funds (see "Puerto Rico Secondary Mortgage Market and
Favorable Tax Treatment" below), mortgages qualifying for favorable tax
treatment must be segregated and separately funded from non-qualifying
mortgages. This requirement, together with the fact that the GNMA serial note
pools consist of a minimum of $2.5 million principal amount of mortgage loans as
compared to $1 million for other GNMA programs, obligates the Company to hold
mortgage loans and mortgage-backed securities for longer periods prior to sale
in order to assemble such pools. In addition to the foregoing regulatory
constraints, the Company has made a strategic decision to hold GNMA certificates
for longer periods to take advantage of attractive interest rate spreads and
thereby maximize the Company's net interest income and tax exempt income.
Interest rate spreads on certain mortgage loans and mortgage-backed securities
in Puerto Rico have traditionally been high due to the ability of mortgage
banking institutions to finance their inventory of mortgage loans and
mortgage-backed securities with lower-cost tax advantaged funds. As a result,
such spreads have allowed the Company to maximize its net interest income. See
"Interest Rate Management."
Changes in prevailing market interest rates between the time FFCC funds a
mortgage loan and the time the mortgage loan or mortgage-backed security is sold
to permanent investors could reduce FFCC's net interest income on mortgage loans
held prior to sale and gains from the sale of loans, thereby reducing FFCC's net
income. FFCC attempts to manage these risks by securing commitments for future
delivery or engaging in managed hedging transactions such as those described
under "Interest Rate Management."
Interest Rate Management. The Company's Mortgage Banking Business is
subject to the risk that future changes in interest rates may adversely affect
the value of the Company's portfolio of mortgage loans and mortgage-backed
securities. Interest rate fluctuations may also adversely affect net interest
income. FFCC attempts to minimize these risks through the use of forward
commitments and other hedging techniques.
31
<PAGE> 33
The Company does not generally hedge conventional loans in the pipeline or
in the process of origination because it does not generally lock in or guarantee
the customer a specific interest rate on such loans through the closing date but
rather offers customers an interest rate that will be based on a prevailing rate
that adjusts weekly. In the case of FNMA and FHLMC conforming loans and FNMA and
FHLMC mortgage-backed securities, the Company seeks to obtain commitments for
the purchase of such loans or mortgage-backed securities following the funding
of such loans. These loans are normally sold to institutional investors or at
the FNMA and FHLMC cash windows. To the extent the Company does engage in
offerings of its mortgage products that lock in or guarantee the interest rate
until the closing date, the Company attempts to obtain forward commitments at
the time it fixes the rates for the loans. At September 30, 1995, the amount of
forward commitments was $35 million.
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 $37 million as of September 30, 1995. The Company does not obtain
forward commitments for such GNMA certificates because they are financed
pursuant to long-term repurchase agreements. The Company has the right to
substitute GNMA certificates subject to the repurchase agreements with similar
GNMA certificates at any time. 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
interest paid on these securities under Puerto Rico law. This relative stability
of prices for Puerto Rico GNMA securities allows the Company to implement a less
aggressive hedging strategy to attempt to protect the value of these assets than
what might otherwise be required.
In the case of nonconforming conventional loans and GNMA mortgage-backed
securities not subject to long-term repurchase agreements, the Company seeks to
protect itself from interest rate risk by purchasing listed options on treasury
bond futures contracts and other interest rate sensitive instruments. 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 value of the asset or liability being hedged.
The level of investment in such options is increased or decreased in relation to
interest rates changes and other market factors.
The operations of the Company are also subject to interest rate risk
because its interest-earning assets and interest-bearing liabilities reprice at
different times and varying amounts. FFCC's loans held for sale and
mortgage-backed securities held for trading inventories are fixed rate
interest-earning assets that are not subject to repricing (except for
replacement of assets through repayments and new originations) while the
short-term borrowings used to finance these positions normally reprice on a
quarterly basis. To protect against major fluctuations in short-term interest
rates, the Company purchases listed put options on financial instruments,
including Eurodollars contracts. This policy attempts to ensure a relatively
stable short-term cost of funds.
In the future, FFCC may utilize alternative hedging techniques, including
futures, options or other, synthetically-created hedge vehicles, to help
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. For the
nine months ended September 30, 1995, the Company experienced hedging losses of
$2.8 million, while for the year ended December 31, 1994, the Company
experienced hedging gains of $2.2 million. During the years ended December 31,
1993 and 1992, FFCC experienced losses of approximately $1,367,000 and
$1,376,000, respectively, from its hedging activities. Losses on hedging
activities are generally indicative of higher gains on mortgage loans and
mortgage-backed securities.
Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, United States and Puerto Rico tax laws
provide an economic incentive for Puerto Rico residents and Section 936
Corporations (defined below) to invest in certain mortgage loans and
mortgage-backed securities originated in Puerto Rico, including FHA and
32
<PAGE> 34
VA loans and GNMA certificates, thereby tending to increase the secondary market
demand for, and the resale value of, such mortgage loans and mortgage-backed
securities. These tax advantages also favorably affect FFCC's net interest
income by helping create a pool of lower-cost funds that FFCC can access through
financial intermediaries such as banks and broker-dealers and use to fund
mortgage loans and mortgage-backed securities pending sale.
Under various Puerto Rico industrial incentives acts (the "Incentives
Acts"), certain investment income earned by qualified manufacturing entities or
service enterprises ("Exempt Companies") is exempt from Puerto Rico income tax.
The Industrial Incentive Acts also encourage investment in Puerto Rico by
allowing Exempt Companies to reduce the otherwise applicable 10% tax (the
"Tollgate Tax") on distributions to shareholders by investing their exempt
industrial development income ("IDI") in Puerto Rico for fixed periods of time,
generally from five years to ten years. Investment income that qualifies for
this exemption includes interest on certain mortgage loans and interest on funds
of Exempt Companies ("936 Funds") placed with eligible institutions in Puerto
Rico (primarily savings and loan associations, commercial banks and registered
broker-dealers), provided such funds are invested in certain "eligible
activities" in accordance with regulations promulgated by the Commissioner,
including certain mortgage loans and mortgage-backed securities.
Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936. Corporations that meet certain requirements and
elect the benefits of Section 936 ("Section 936 Corporations") are entitled to
credit against their United States corporate income tax a portion of such tax
attributable to (i) income derived from the active conduct of a trade or
business within Puerto Rico or from the sale or exchange of substantially all
assets used in the active conduct of such trade or business ("Active Business
Income") and (ii) qualified possession source investment income ("QPSII").
Interest derived from Puerto Rico mortgage loans and mortgage-backed securities
consisting of Puerto Rico mortgage loans generally qualifies as QPSII.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions of
Section 936. The amendments (the "OBRA Amendments"), which are generally
effective for taxable years beginning after December 31, 1993, permit a taxpayer
to compute the tax credit available under Section 936 (the "936 Credit") as
under prior law but limit the amount of credit allowed with respect to Active
Business Income under one of two alternatives to be selected at the option of
the taxpayer. Under the first alternative, the limit is equal to a fixed
percentage of the amount of tax credit allowable under prior law (the "Fixed
Percentage Method"). This fixed percentage commenced at 60% for taxable years
beginning in 1994 and is reduced by 5% per year until 1998. For taxable years
beginning in 1998, such percentage would be 40%. Under the second alternative
(the "Economic Activity Method"), which is based on the amount of economic
activity conducted by the taxpayer in Puerto Rico, the credit may not exceed the
sum of the following three components: (i) 60% of the qualified possession wages
and the allocable fringe benefits paid by the taxpayer, (ii) applicable
percentages of certain depreciation deductions claimed for regular tax purposes
by the taxpayer with respect to qualified tangible property and (iii) a portion
of the possession income taxes paid by the taxpayer except where the taxpayer
uses the profit-split method for determining its income. The OBRA Amendments did
not limit the 100% credit available under Section 936 for QPSII, including
income received from investment in certain Puerto Rico mortgage loans and
mortgage-backed securities.
The budget bills passed in October 1995 by the House of Representatives and
the Senate provide for the repeal of Section 936. The House bill, approved on
October 26, 1995 (the "House Bill"), would generally repeal Section 936 for
taxable years beginning after December 31, 1995. However, corporations that
qualified for and elected the 936 Credit available for a base year would
continue to be eligible to claim the 936 Credit for an additional ten years
under a special grandfather rule. A corporation that adds a substantial new line
of business after September 13, 1995, would cease to be eligible to claim the
936 Credit under this grandfather rule, beginning with the taxable year in which
such new line of business is added.
Under the House Bill, the amount of income that would be eligible for the
936 Credit during the grandfather period would be subject to a cap equal to the
corporation's average possession income from the base period years, adjusted for
inflation. A taxpayer's possession income would equal the sum of its Active
Business Income and QPSII. The average possession income would generally be
based on the average income
33
<PAGE> 35
of the taxpayer's five most recent years ending before September 13, 1995,
determined by disregarding the taxable years in which inflation adjusted
possession incomes were highest and lowest. If a taxpayer's possession income in
a year during the grandfather period exceeds the cap, then such possession
income for purposes of the 936 Credit would be an amount equal to the cap. A
taxpayer's 936 Credit would also remain subject to further limitations imposed
by the OBRA Amendments.
The Senate bill, passed on October 28, 1995 (the "Senate Bill"), provides
for the repeal of Section 936 in six years, i.e., after the year 2001. Under the
Senate Bill passed on October 28, 1995, the 936 Credit determined under the
Fixed Percentage Method would be reduced by 10% every year after 1998 and
repealed after year 2001. No limitations on the volume of income nor the
manufacturing of new products is imposed as under the House Bill. Corporations
not currently covered by Section 936 could elect to be covered thereunder until
year 2001. The Senate Bill does not change the 936 Credit determined under the
Economic Activity Method for the next six years. The Senate Bill repeals the 936
Credit for QPSII attributable to investments made after October 13, 1995. Under
a grandfather rule, however, the 936 Credit is available until year 2001 for
QPSII attributable to investments made before October 14, 1995.
The two bills have been referred to a Congressional conference committee
for resolution of any differences and the bill as finally approved by both
houses of Congress will be presented to the President for his signature or veto.
The Government of Puerto Rico has proposed an alternative (the "Puerto Rico
Government Proposal") to the House and Senate Bills. The Puerto Rico Government
Proposal basically adopts the ten year grandfather period for the existing 936
Credit. In addition, however, it provides for the creation of a new tax credit
for qualifying corporations that invest in "economically distressed
jurisdictions." This new credit would not be subject to a ten-year phase-out.
An "economically distressed jurisdiction" would be defined to include any
state or territory of the United States, including Puerto Rico, that meets
certain economic criteria and that is designated as such by the Secretary of the
Treasury of the United States. The economic criteria indicating economic
distress, based on each of the five years preceding the date of determination,
would be: (i) an unemployment rate that is more than twice the national average,
(ii) per capita income of less than one-half the national average and (iii) a
poverty rate of 50% or more. The applicable credit would be similar to the 936
Credit determined under the Economic Activity Method introduced by the OBRA
Amendments.
The repeal of Section 936 as contemplated by the House Bill, the Senate
Bill or under similar legislation could have an adverse effect on the general
economic condition of Puerto Rico by reducing incentives for investment in
Puerto Rico. Any such adverse effect on the general economy of Puerto Rico could
lead to an increase in mortgage delinquencies and a reduction in the level of
residential construction and demand for mortgage loans. The elimination of
Section 936 could also lead to a decrease in the amount of 936 Funds invested in
Puerto Rico financial assets by 936 Corporations to the extent that the level of
operations and production in Puerto Rico by such 936 Corporations is decreased
over time and therefore increase funding costs and decrease liquidity in the
Puerto Rico financial market. The magnitude of the impact of any such changes on
the Company's profitability or financial condition cannot be determined at this
time. The Company has taken steps to attempt to reduce the impact of any such
adverse changes by diversifying its sources of funding and identifying
additional investors for its mortgage products. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Liquidity and
Capital Resources." During recent periods, the disparity between the cost of 936
Funds and other sources of funding such as the Euro-dollar market have
decreased, thereby reducing the adverse effect that the loss of such funding
could have on the profitability of the Company.
In addition to the foregoing incentives, interest derived from FHA loans or
VA loans secured by real property in Puerto Rico originated after June 30, 1983,
and, under certain circumstances, on or before February 15, 1973, and from GNMA
certificates consisting of such mortgages, is exempt from Puerto Rico income
tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift and estate
taxes. Individuals who are bona fide residents of Puerto Rico are also not
subject to United States federal income tax on income from Puerto Rico sources,
including interest income derived from mortgage loans originated in Puerto Rico
34
<PAGE> 36
whose mortgagors are residents of Puerto Rico. The exemption for interest earned
on FHA loans, VA loans and GNMA certificates tends to increase the demand for
these products and the price the Company may obtain upon their sale. On October
18, 1995, the Puerto Rico Finance Board announced that it had completed its
review of the tax exempt treatment of interest on FHA and VA loans and would not
recommend any change in the current treatment.
Any change in Puerto Rico's political status could result in the
elimination or modification of these tax benefits described above. See "THE
COMMONWEALTH OF PUERTO RICO -- Relationship of Puerto Rico with the United
States."
OTHER LENDING AND INVESTMENT ACTIVITIES
Loans Held for Investment and Real Estate Owned. The Company, through
Doral Federal, originates for investment mortgage loans secured by residential
real estate, including personal loans up to $40,000 secured by first or second
mortgages. To a lesser extent, Doral Federal also originates development and
construction loans and loans secured by commercial real estate. Prior to being
acquired by the Company in September 1993, Doral Federal also engaged in
unsecured consumer and commercial lending and finance leases. At September 30,
1995, December 31, 1994 and 1993, loans held for investment which were
originated as part of the Company's other lending activities through Doral
Federal, net of unearned income, totalled $63.2 million, $34.9 million and $9.6
million, respectively, and 81%, 85% and 67%, respectively, of such loans were
secured by mortgages on owner-occupied single-family residences. While Doral
Federal has nationwide lending authority as a federal savings association,
substantially all of its loans are secured by real property located in Puerto
Rico. At September 30, 1995 and December 31, 1994, 99.5% and 94%, respectively,
of the mortgage loans held for investment by Doral Federal were secured by
property located in Puerto Rico. At September 30, 1995, the largest loan held
for investment by Doral Federal was $645,000 and the maximum aggregate amount of
loans that Doral Federal could make to a single borrower under OTS regulations
was $1.2 million. The Company anticipates continued growth in Doral Federal's
portfolio of loans held for investment.
In connection with FFCC's acquisition of Doral Federal, Doral Federal
entered into a Master Loan Production Agreement with the Company whereby the
Company agreed to help the thrift meet its stated production goals by, among
other things, (1) advertising, promoting and marketing to the general public,
(2) interviewing prospective borrowers and initial processing of loan
applications, consistent with Doral Federal's underwriting guidelines, and (3)
providing personnel and facilities with respect to the execution of loan
agreements. The terms of the Master Loan Production Agreement are believed to be
at least as favorable to Doral Federal as those prevailing for comparable
transactions with or involving other non-affiliated companies. In the future,
Doral Federal may determine to engage in direct mortgage loan originations
through its branch network.
For mortgage loans originated prior to November 1, 1995, Doral Federal had
in effect a Master Purchase, Servicing and Collection Agreement (the "Master
Purchase Agreement") with the Company providing for the sale by Doral Federal to
the Company of the servicing rights to all first and second mortgage loans
secured by residential properties, all loans secured by commercial real estate,
all commercial business loans, consumer and any other loans secured by mortgages
which presently are, or will become, part of Doral Federal's loan portfolio (the
"Loans"). The Master Purchase Agreement further provides that the Company,
exclusively, will service the Loans according to a fee schedule contained in the
Master Purchase Agreement. The fee schedule provides that the purchase price of
the servicing rights with respect to the Loans is a percentage of the
outstanding principal amount of such Loans. The terms of the Master Purchase
Agreement are believed to be at least as favorable to Doral Federal as those
prevailing for comparable transactions with or involving other non-affiliated
companies.
For Loans originated after November 1, 1995, the Master Purchase Agreement
is being replaced with a Master Servicing and Collection Agreement (the "Master
Servicing Agreement") whereby Doral Federal will contractually agree to service
all Loans originated after the date of the Master Servicing Agreement, but will
not purchase the intangible right to service such Loans. The Company will be
entitled to receive a servicing
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<PAGE> 37
fee equal to 25 basis points of the outstanding principal amount of the Loans
being serviced. Doral Federal would retain the right to terminate the Company's
servicing rights without cause upon notice to the Company.
The following table set forth certain information regarding the Company's
loans held for investment as part of its other lending activities through Doral
Federal as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, PERCENT DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1995 OF TOTAL 1994 OF TOTAL 1993 OF TOTAL
------------- -------- ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Construction loans........ $ 2,777 4% $ 1,061 3% $ 179 2%
Residential mortgage
loans................... 45,571 70 23,293 66 6,439 65
Commercial real estate.... 5,260 8 2,044 6 576 6
Consumer -- Secured by
mortgage................ 7,102 11 6,283 18 -- --
Consumer -- other......... 397 (1. 1,009 3 1,442 15
Other(2):................. 2,661 6 1,560 4 1,278 13
------------- --- ------------ --- ------------ ---
Gross loans(3).......... $63,768 100% $ 35,250 100% $9,915 100%
------------- ------------ ------------
Less:
Unearned interest and
deferred loan fees... (381) (13) (119)
Reserve for loan
losses............... (216) (428) (234)
------------- ------------ ------------
(597) (441) (353)
------------- ------------ ------------
Loans receivable,
Net(4)............... $63,171 $ 34,809 $9,561
========== ========== ==========
</TABLE>
- ---------------
(1) Less than one percent.
(2) Includes commercial loans, loans on savings deposits, leases and loan
secured with land.
(3) Sum of the columns may not add up to the totals due to rounding.
(4) Net of deferred loan fees resulting from the sale of servicing rights to
affiliates which are eliminated in the preparation of the Company's
Consolidated Financial Statements.
Doral Federal originates adjustable and fixed interest rate loans. However,
given traditional consumer preferences in Puerto Rico for fixed rate mortgage
loans, Doral Federal's principal product, the Company does not anticipate
significant growth in adjustable rate mortgages. As of September 30, 1995 and
December 31, 1994, approximately 7% and 9%, respectively, of Doral Federal's
loans held for investment were adjustable rate loans. The adjustable rate loans
have interest rate adjustment limitations and are generally tied to the prime
rate. Future market factors may affect the correlation of the interest rate
adjustment with the rate Doral Federal pays on the short-term deposits that have
primarily funded these loans.
The following information indicates as of September 30, 1995, with respect
to the Company's loans held for investment through Doral Federal, the time
periods during which fixed rates loans mature and adjustable rate loans reprice:
<TABLE>
<CAPTION>
FIXED RATE LOANS ADJUSTABLE RATE LOANS
------------------------------------------ -----------------------------------------
BOOK TERM OF DATE OF BOOK
TERM TO MATURITY VALUE RATE ADJUSTMENT VALUE
--------------------------- ------- --------------------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 month - 1 year $ 1,415 1 month - 1 year $4,093
1 year - 3 years 1,445 Non-performing 565
------
3 years - 5 years 4,985 $4,658
======
5 years - 10 years 11,243
10 years - 20 years 19,796
Over 20 years 19,566
Non-performing 660
-------
$59,110
=======
</TABLE>
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<PAGE> 38
Nonperforming Assets and Allowance for Loans Losses. Nonperforming assets
("NPAs") consist of loans on a non-accrual basis and other REO. Doral Federal's
policy is to place all loans 90 days or more past due on non-accrual basis, at
which point all unpaid interest previously accrued is deducted from income.
Interest income is recognized when the borrower makes a payment, and the loan
will return to an accrual basis when it is no longer 90 or more days delinquent
and collectability is reasonably assured. Mortgage loans held for sale as part
of the Company's Mortgage Banking Business are normally only placed on a
non-accrual basis upon commencement of foreclosure proceedings (which normally
occurs within six to eight months following default). For the nine months ended
September 30, 1995 and the years ended December 31, 1994 and 1993, the Company
would have recognized $202,000, $287,000 and $51,000, respectively, in
additional interest income had all delinquent loans owned by the Company been
accounted for an accrual basis. See "BUSINESS OF THE COMPANY."
The following table sets forth information with respect to the Company's
non-accrual loans, REO and other nonperforming assets as of September 30, 1995
and December 31, 1994 and 1993.
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1995 1994 1993
------------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage Banking Business(1):
Non-accrual loans.................................... $ 1,250 $4,260(2) $1,091
Other real estate owned.............................. 2,044 2,029 2,827
Other nonperforming assets(3)........................ 448 448 402
Other Lending Activities(4):
Non-accrual loans.................................... 1,196 459 499
Other real estate owned.............................. -- 87 101
Total NPAs as a percentage of loans receivable, net
and other real estate owned....................... 1.9% 1.6% 6.1%
Ratio of allowance for loan receivables to
nonperforming loans............................... 18.06% 93.25% 46.90%
</TABLE>
- ---------------
(1) Includes mortgage loans held for sale and real estate owned related to the
Company's Mortgage Banking Business. Consists primarily of construction and
commercial loans.
(2) Of the amount shown, a non-affiliated government institution was required to
buy $2.9 million at par on a non-recourse basis.
(3) This amount refers to a mortgage loan to a real estate partnership to which
the Company previously sold REO. This loan is included in "Mortgage-backed
securities and investments held to maturity" in the Company's financial
statements.
(4) Includes mortgage loans and REO of Doral Federal.
The Mortgage Banking Business' other REO arises primarily through
foreclosure on mortgage loans repurchased from investors, either because of
breach of representations or warranties or pursuant to recourse arrangements.
The Company believes that the value of the REO reflected on its financial
statements represents a reasonable estimate of the properties' fair value, net
of cost of sales. During the past five years, the impact of loans repurchased as
the result of breach of representations or warranties or recourse arrangements
has not been material.
The percentage of the allowance for loan losses to nonperforming loans held
for investment will not remain constant due to the nature of Doral Federal's
portfolio of mortgage loans, which are primarily collateralized by real estate.
The collateral for each nonperforming mortgage loan is analyzed by Doral Federal
to determine potential loss exposure. This loss exposure in conjunction with
other factors, contributes to the overall assessment of the adequacy of the
allowance for loan losses. On an on-going basis, management monitors the loan
portfolio and evaluates the adequacy of the allowance for loan losses, by
considering such factors as historical loan loss experience, known problem
loans, evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio. Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense and
credited to the allowance in amounts deemed appropriate by management based upon
its
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<PAGE> 39
evaluation of the known and inherent risks in the loan portfolio. While
management believes that the current allowance for loan losses is sufficient,
future additions to the allowance may be necessary. The following table
summarizes certain information regarding the Company's allowance for loan losses
related to loans held for investment by Doral Federal and losses on other real
estate owned for both Doral Federal and the Mortgage Banking Business for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER
SEPTEMBER 30, 31,
------------- --------------------
1995 1994 1994 1993 1992
----- ----- ----- ----- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REAL ESTATE HELD FOR SALE:
Balance at beginning of period.................... $ 356 $ 525 $ 525 $ 400 $ --
Provision for losses.............................. -- -- -- 100 400
Losses charged to the allowance................... -- (169) (169) -- --
Other............................................. -- -- -- 25 --
----- ----- ----- ----- ----
Balance at end of period.......................... $ 356 $ 356 $ 356 $ 525 $400
===== ===== ===== ===== ====
RESERVE FOR LOAN RECEIVABLES(1):
Balance at beginning of period.................... $ 428 $ 234 $ 234 $ 516
Provision for loan losses......................... 85 128 168 23
Recoveries........................................ 5 26 26 --
Losses charged to the allowance................... (302) -- -- (305)
----- ----- ----- -----
Balance at end of period.......................... $ 216 $ 388 $ 428 $ 234
===== ===== ===== =====
</TABLE>
- ---------------
(1) Relates to loans held for investment by Doral Federal, which the Company
acquired in September 1993.
Other Investments. As of September 30, 1995, the Company held
approximately $75.3 million of mortgage-backed securities and other investments
which are classified as held to maturity because the Company has the intent to
hold these securities until maturity. Of this amount, approximately $33 million
were held by Doral Federal. The $42.3 million in mortgage-backed securities held
as part of the Company's Mortgage Banking Business consist of tax exempt
GNMA-backed CMO certificates. The holding of these securities until maturity is
consistent with the Company's strategy to maximize tax exempt interest income.
The Company does not believe that the holding of these securities will have an
adverse effect on the liquidity of the Company because it believes that it will
be able to obtain continuous financing for these securities under its existing
credit facilities or pursuant to deposits, in the case of Doral Federal.
The following table provides certain information regarding the composition
of the Company's mortgage-backed securities and other investments held to
maturity as of the dates indicated below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
SEPTEMBER 30, 1995 1994 1993
------------------- ---------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
CMO certificates of non-
affiliated issuers..... $41,826 $41,906 $42,052(1) $42,175 $ -- $ --
GNMA...................... 13,781 14,045
FHLMC..................... 4,450 4,392 4,600 4,470 2,959 2,914
FNMA...................... 7,230 7,230 7,748 7,310 3,169 3,160
DEBT SECURITIES:
Federal Home Loan Bank
Notes.................. 4,998 4,978 9,972 9,712 -- --
U.S. Treasury Notes....... 1,994 1,998 1,984 1,949 -- --
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
SEPTEMBER 30, 1995 1994 1993
------------------- ---------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER INVESTMENTS:
FHLB stock at cost........ 520 520 715 715 -- --
Mortgage notes
receivables............ 448 448 448 448 402 402
--------- ------- --------- ------- --------- -------
Total............. $75,247 $75,517 $67,519 $66,779 $ 6,530 $ 6,476
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes approximately $4.9 million of interest only certificates.
The following table provides information on the contractual or expected
maturities (in the case of mortgage-backed securities) of the Company's
mortgage-backed securities and investments held to maturity as of September 30,
1995:
<TABLE>
<CAPTION>
MORTGAGE-
BACKED DEBT
SECURITIES SECURITIES
----------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Less than 1 year............................................. $ 968 $6,992
After 1 year through 5 years................................. 24,447 --
After 5 years through 10 years............................... 12,483 --
After 10 years............................................... 30,357 --
----------------- ----------
Total.............................................. $68,255 $6,992
============= =======
</TABLE>
The aggregate gross unrealized holding gains and losses for the Company's
mortgage-backed securities and investments held to maturity as of the dates
indicated are detailed below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
SEPTEMBER 30, 1995 1994 1993
---------------------- ---------------------- ----------------------
MORTGAGE- MORTGAGE- MORTGAGE-
BACKED DEBT BACKED DEBT BACKED DEBT
SECURITIES SECURITIES SECURITIES SECURITIES SECURITIES SECURITIES
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized holding
gains....................... $ 344 $ 4 $ 397 $ -- $ -- $ --
Gross unrealized holding
losses...................... 58 20 843 295 54 --
</TABLE>
PUERTO RICO INCOME TAXES
FFCC is subject to Puerto Rico income taxes which range from 22% on taxable
income of $25,000 or less, to 42% (reduced to 39% for taxable years commencing
after June 30, 1995) on taxable income in excess of $300,000. The net interest
income derived by FFCC from FHA loans or VA loans secured by residential
properties located in Puerto Rico originated after June 30, 1983 and GNMA
securities backed by such loans is excluded from FFCC's gross income in
computing its regular income tax. Therefore, such income is tax-exempt to FFCC.
However, under the Puerto Rico Income Tax Act of 1954, as amended ("PRITA"), to
the extent that FFCC holds obligations on which the interest is not subject to
Puerto Rico income tax, including FHA loans or VA loans acquired after December
31, 1987 ("Exempt Obligations"), FFCC's interest expense deduction in computing
its regular corporate income tax will be reduced in the same proportion that
said Exempt Obligations bear to its total assets. Income tax savings of FFCC
attributable to this exemption amounted to $5.4 million, $2.7 million and $2.2
million in 1994, 1993 and 1992, respectively.
The Company is also subject to an alternative minimum tax of 22% on its
alternative minimum tax net income. In computing the Company's alternative
minimum tax net income its interest expense deduction will be reduced in the
same proportion that its Exempt Obligations (irrespective of the date on which
the same were acquired by the Company) bear to its total assets. Therefore, to
the extent that the Company holds FHA
39
<PAGE> 41
loans or VA loans and other Exempt Obligations, it may be subject to the payment
of the 22% alternative minimum tax.
Under PRITA, corporations are not permitted to file consolidated returns
with their subsidiaries and affiliates. FFCC is entitled to an 85% dividend
received deduction under the PRITA on dividends received from Doral Mortgage or
any other Puerto Rico corporation subject to tax under PRITA, which, assuming a
maximum corporate tax rate of 42%, results in an effective income tax rate on
such dividends of 6.3%. No dividends received deduction is available for
dividends received from U.S. corporations such as Doral Federal. Effective July
1, 1995, the PRITA also provides for the elimination of the existing 29%
withholding tax applicable on interest paid to non-resident corporations and
individuals as well as a reduction of the withholding tax applicable to
dividends payable to non-resident corporations and individuals from 25% to 10%.
On October 31, 1994, the Government of Puerto Rico enacted a new
comprehensive internal revenue act known as the Puerto Rico Internal Revenue
Code of 1994 (the "PRIRC"). While the PRIRC incorporates many of the prior
provisions of the PRITA, it also provides for various amendments and changes
from prior law. Most changes affecting corporations are effective for taxable
years commencing after June 30, 1995. The existing exemption for interest on FHA
loans and VA loans and GNMA securities was not affected by the PRIRC.
Among the most important changes introduced by the PRIRC are (i) a
reduction in the maximum marginal statutory corporate tax rate from 42% to 39%,
(ii) the elimination of the deduction for bad debt expense arising from the use
of the reserve method for bad debt reserve and the related prorated recapture of
the outstanding balance of the reserve existing as of June 30, 1995 over a four
year period and (iii) optional use of a new method of accelerated depreciation
for capital assets purchased during taxable years beginning after June 30, 1995.
On October 19, 1995, the House of Representatives of the Legislature of Puerto
Rico approved a bill to amend the PRIRC to provide a 100% dividend received
deduction for dividends received by a corporation from certain controlled Puerto
Rico corporations. Such bill must be approved by the Senate and the Governor of
Puerto Rico before becoming law.
The Company does not believe that the changes implemented by the PRIRC will
have a material adverse affect on the business or financial condition of the
Company. In fact, the elimination and reduction of the withholding tax on
interest payments and dividends, respectively, should help the Company to obtain
funding from sources outside Puerto Rico.
UNITED STATES INCOME TAXES
FFCC and Doral Mortgage are corporations organized under the laws of Puerto
Rico. Accordingly, FFCC and Doral Mortgage are subject generally to United
States income tax only on their income, if any, from sources within the United
States. Prior to 1992, the Company did not earn any income that was subject to
United States income tax. However, in March 1992, Doral Mortgage opened a branch
in Florida. Accordingly, Doral Mortgage is subject to both Florida income and
franchise taxes and Federal income tax on income effectively connected with the
conduct of the trade or business of this branch. The maximum United States
corporate income tax rate is presently 35% and the Florida income and franchise
tax rate is currently 5.5%. In addition, the United States may impose a branch
profits tax of 30% in the event that profits from the Florida branch are
repatriated to Puerto Rico. Both the Federal tax as well as the branch profits
tax may be claimed as a tax credit in Puerto Rico, subject to certain
limitations.
Doral Federal, as a federal savings association, is also subject to U.S.
income taxes. Doral Federal has also elected to qualify for the benefits
provided under Section 936 which allows an income tax credit for a portion of
the U.S. income taxes attributable to the earnings derived from sources within
Puerto Rico. See "Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment" for a description of these benefits and of certain proposals to
repeal Section 936.
40
<PAGE> 42
EMPLOYEES
At September 30, 1995, FFCC employed 681 persons, of whom 364 were
administrative personnel, 81 were loan originators, 92 were involved in
processing of loan applications (including quality control auditors), 18 were
loan underwriters, and 126 were involved in loan servicing activities. None of
FFCC's employees is represented by a labor union and FFCC considers its employee
relations to be excellent.
REGULATION -- MORTGAGE BANKING BUSINESS
The Company's Mortgage Banking Business is subject to the rules and
regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans and the issuance and sale of
mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on prospective
borrowers and fix maximum loan amounts, and with respect to VA loans, fix
maximum interest rates. Moreover, lenders such as the Company are required
annually to submit to FNMA, FHA, FHLMC, GNMA and VA audited financial
statements, and each regulatory entity has its own financial requirements. The
Company's affairs are also subject to supervision and examination by FNMA, FHA,
FHLMC, GNMA, HUD and VA at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are
subject to, among others, the Equal Credit Opportunity Act, Federal
Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the
regulations promulgated thereunder which, among other things, prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. The Company is also
subject to regulation by the Commissioner, with respect to, among other things,
licensing requirements and establishment of maximum interest rates. Although the
Company believes that it is in compliance in all material respects with
applicable Federal and Puerto Rico laws, rules and regulations, there can be no
assurance that more restrictive laws or rules will not be adopted in the future,
which could make compliance more difficult or expensive, restrict the Company's
ability to originate or sell mortgage loans or sell mortgage-backed securities,
further limit or restrict the amount of interest and other fees earned from the
origination of loans, or otherwise adversely affect the business or prospects of
the Company. See "BUSINESS OF THE COMPANY -- General."
FFCC is licensed by the Commissioner as a mortgage banking institution in
Puerto Rico. Such authorization to act as a mortgage banking institution must be
renewed as of January 1 of each year. In the past, FFCC has not had any
difficulty in renewing its authorization to act as a mortgage banking
institution, and management is unaware of any existing practices, conditions or
violations which would result in FFCC being unable to receive such authorization
in the future. FFCC operations in the State of Florida are subject to
supervision by the Florida Department of Banking and Finance.
Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Commissioner for the
acquisition of control of any mortgage banking institution licensed under the
Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term
"control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to Section 5
of the Mortgage Banking Law, upon receipt of notice of a proposed transaction
that may result in change of control, the Commissioner is obligated to make such
inquiries as he deems necessary to review the transaction. Under the Mortgage
Banking Law, the determination of the Commissioner whether or not to authorize a
proposed change of control is final and non-appealable.
REGULATION -- SAVINGS AND LOAN OPERATIONS
The Company
As a result of the acquisition of Doral Federal in September 1993, FFCC
became a savings and loan holding company ("SLHC"), subject to the restrictions
and requirements of the Home Owners' Loan Act of 1933, as amended (the "HOLA").
FFCC is registered as an SLHC with the Director (the "Director") of the
41
<PAGE> 43
Office of Thrift Supervision (the "OTS") and is subject to the various
requirements of Sections 10 and 11 of the HOLA and the regulations thereunder,
including examination, supervision and reporting requirements. Of particular
importance, is the requirement that a subsidiary savings association give the
Director at least 30 days' advance notice of the proposed declaration by its
directors of dividends on its stock. Any such dividend declared within the
30-day notice period, or declared without giving such notice, is invalid.
Payment of cash dividends by a savings association on shares of its capital
stock is also subject to the limitations on capital distributions imposed by the
OTS. See "Regulation -- Savings and Loan Operations -- Doral
Federal -- Dividends."
Federal law and OTS regulations place certain limits on the types of
activities in which a SLHC and its subsidiaries may engage. However, in general,
these activity restrictions do not apply to a holding company that controls only
one savings and loan association, provided such association meets the "qualified
thrift lender" test, which generally requires an association to have 65% of its
portfolio assets in "qualified thrift investments" for nine months out of the
immediately preceding 12 months. For Puerto Rico-based institutions, these
investments include, among other things, home mortgages, mortgage-backed
securities, and personal loans. Under some circumstances (principally not
holding sufficient "qualified thrift assets" to meet the "qualified thrift
lender test"), a SLHC may be deemed for regulatory purposes to become a bank
holding company. In such event, a SLHC would become subject to certain activity
restrictions. In addition, savings association subsidiaries would be subject to
the activity and branching restrictions applicable to national banks, including
the application of the statutes and regulations governing the payment of
dividends by a national bank in the same manner and to the same extent as though
it were a national bank. Under the National Bank Act, national banks are only
permitted to pay dividends out of "net profits" (as defined therein) subject to
the requirement that a certain portion of net profits must be carried
periodically to the bank's surplus fund until the surplus fund shall equal its
common capital. Capital may not be used to pay dividends. Doral Federal
currently is in compliance with the "qualified thrift lender" test and expects
to continue to comply with this requirement.
With certain specific exceptions, a SLHC is prohibited from acquiring more
than 5% of the "voting shares" of a savings association that is not a
subsidiary, or of another SLHC that is not a subsidiary. An association which is
a subsidiary of a SLHC is prohibited from or subject to restrictions upon
engaging in certain transactions involving its affiliates under the provisions
of Sections 23A and 23B of the Federal Reserve Act,which are made applicable,
with certain exceptions, to savings associations by Section 11(a) of the HOLA.
In general, the term "affiliate" with respect to such subsidiary savings
association would include the SLHC, its subsidiaries and companies controlled by
it, and would also include a bank subsidiary of a savings association, but not a
non-bank subsidiary thereof (unless a contrary determination were made pursuant
to Section 23A as to such non-bank subsidiary). As a general rule, a savings
association may borrow up to the amount authorized by the laws under which the
savings association operates. However, if the savings association fails to meet
its regulatory capital requirement, it must notify the Director of its intent to
issue securities evidencing such borrowings. Such securities may not be issued
if the OTS disapproves.
Because of the Company's status as an SLHC, owners of the Common Stock are
subject to certain restrictions and disclosure obligations under various federal
laws, including the Change in Bank Control Act (the "Control Act") and the
Savings and Loan Holding Company Act (the "Holding Company Act"). Regulations
pursuant to the Control Act and the Holding Company Act generally require prior
OTS approval for an acquisition of control of an insured institution (as
defined) or holding company thereof by any person (or persons acting in
concert). Control is deemed to exist if, among other things, a person (or
persons acting in concert) acquires more than 25% of any class of voting stock
of an insured institution or holding company thereof. Control is presumed
subject to rebuttal if a person (or persons acting in concert) acquires more
than 10% of any class of voting stock or 25% of any class of nonvoting stock and
is subject to any of the "control factors" set forth in such regulations. The
control factors relate, among other matters, to the percentage of such company's
debt or equity owned by the person (or persons acting in concert), agreements
giving the person (or persons acting in concert) influence over a material
aspect of the company's management or policies, and the number of seats on the
board of directors of the company held by the person (or persons acting in
concert). One of the "control factors" is a holder's status as one of the two
largest holders of any
42
<PAGE> 44
class of voting stock. The concept of acting in concert is very broad and also
is subject to certain rebuttable presumptions, including among others, that
relatives, business partners, management officials, affiliates and others are
presumed to be acting in concert with each other and their businesses. This
regulatory requirement may have the effect of discouraging takeover attempts
against the Company and may limit the ability of persons, other than Company
directors duly authorized by the Company's board of directors, to solicit or
exercise proxies, or otherwise exercise voting rights, in connection with
matters submitted to a vote of the Company's stockholders.
Doral Federal
General. Doral Federal is a federal savings association. Accordingly, its
investments, borrowing, lending, issuance of securities, establishment of
offices and all other aspects of its operation are subject to the jurisdiction
of the OTS.
As a creditor and financial institution, Doral Federal is subject to
certain regulations promulgated by the Federal Reserve Board (the "Federal
Reserve"), including, without limitations, Regulation B (Equal Credit
Opportunity Act), Regulation DD (The Truth in Savings Act), Regulation E
(Electronic Funds Transfer Act), Regulation F (Limits on Exposure to Other
Banks), Regulation Z (Truth in Lending Act), Regulation CC (Expedited Funds
Availability Act), Regulation X (Real Estate Settlement Procedures Act),
Regulation BB (Community Reinvestment Act) and Regulations C (Home Mortgage
Disclosure Act). As a real property lender and as owner of real property,
including REO, pursuant to foreclosure, financial institutions, including Doral
Federal, may also be subject to potential liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property.
Capital Requirements. FIRREA established capital standards for savings
associations, including three capital requirements: a "leverage limit" or "core
capital requirement," a "tangible capital requirement" and a "risk-based capital
requirement." FIRREA required the Director to promulgate regulations to
proscribe and maintain uniform capital standards for all savings associations.
Pursuant to FIRREA, these capital standards must be no less stringent than the
capital standards applicable to national banks.
As of September 30, 1995, Doral Federal complied with each of the then
current tangible capital, core capital, and risk-based capital requirements and
was also in compliance with the fully phased-in capital requirements. In the
event that Doral Federal fails to satisfy any applicable capital requirements,
Doral Federal may be subject to sanctions, and its operations may be subject to
severe regulatory restrictions and limitations. Set forth below is a description
of Doral Federal's actual capital levels relative to its regulatory capital
requirements as of September 30, 1995:
<TABLE>
<CAPTION>
AMOUNT RATIO(1)
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
TANGIBLE CAPITAL:
Capital position.... $8,102 6.67%
Capital
requirement....... 1,891 1.50
Tangible capital
excess............ 6,211 5.17
<CAPTION>
AMOUNT RATIO(1)
------ --------
<S> <C> <C>
CORE CAPITAL:
Capital position.... $8,102 6.67%
Capital
requirement....... 3,782 3.00
Core capital
excess............ 4,320 3.67
<CAPTION>
AMOUNT RATIO(1)
------ --------
<S> <C> <C>
RISK-BASED CAPITAL:
Capital position.... $8,313 16.89%
Capital
requirement....... 3,938 8.00
Risk-based capital
excess............ 4,375 8.89
</TABLE>
- ---------------
(1) Ratio of capital to total adjusted assets for tangible and core capital and
ratio of capital to risk-weighted assets for risk-based capital.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") federal banking regulators must take prompt corrective action in
respect of depository institutions that do not meet minimum capital
requirements. The FDICIA and regulations thereunder establish five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution is deemed well capitalized if it maintains a leverage
ratio of at least 5%, a risk-based Tier I capital ratio of at least 6% and a
risk-based Total capital ratio of at least 10% and
43
<PAGE> 45
is not subject to any written agreement or directive to meet a specific capital
level. A depository institution is deemed adequately capitalized if it is not
well capitalized but maintains a leverage ratio of at least 4% (or at least 3%
if given the highest regulatory rating and not experiencing or anticipating
significant growth), a risk-based Tier I capital ratio of at least 4% and a
risk-based Total capital ratio of at least 8%. A depository institution is
deemed undercapitalized if it fails to meet the standards for adequately
capitalized institutions (unless it is deemed significantly or critically
undercapitalized). An institution is deemed significantly undercapitalized if it
has a leverage ratio of less than 3%, a risk-based Tier I capital ratio of less
than 3% or a risk-based Total capital ratio of less than 6%. An institution is
deemed critically undercapitalized if it has tangible equity equal to 2% or less
of total assets. A depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives a less than satisfactory examination rating in any one
of four categories.
At September 30, 1995, Doral Federal was well capitalized. An institution's
capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall
financial condition or prospects of Doral Federal and should be considered in
conjunction with other available information regarding the Doral Federal's
financial condition and results of operations.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. In addition, undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic assumptions
and is likely to succeed in restoring the depository institution's capital. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is significantly undercapitalized. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized depository
institutions are subject to appointment of a receiver or conservator.
Deposit Insurance. Doral Federal's deposits are insured to the fullest
extent of the law by the Savings Association Insurance Fund ("SAIF"), which is
managed by the FDIC. During 1993, the insurance premium for Doral Federal and
other SAIF members was a flat rate of 0.23% of deposits. The Federal Deposit
Insurance Corporation Improvements Act ("FDICIA") required the FDIC to implement
a risk-based assessment system, under which an institution's assessment will be
based on the probability that the deposit insurance fund will incur a loss with
respect to the institution, the likely amount of any such loss, and the revenue
needs of the deposit insurance fund. Under this system, the FDIC established
premium rates for SAIF insured institutions and banks insured by the Bank
Insurance Fund (the "BIF") within a range from 0.23% to 0.31% based upon their
capital ratios and supervisory evaluation. Doral Federal's insurance premium
assessment was set at 0.26% effective January 1, 1994.
On August 8, 1995, the FDIC revised the premium schedule for BIF-insured
banks to provide a range of .04% to .31% of deposits (as compared to the former
range of .23% to .31% of deposits for both BIF and SAIF insured institutions) in
anticipation of the BIF achieving its statutory reserve ratio. The lower
premiums for BIF members became effective in the third quarter of 1995. As a
result, BIF members generally will pay lower premiums than the SAIF members. It
is anticipated that the SAIF will not be adequately recapitalized until 2002,
absent a substantial increase in premium rates or the imposition of special
assessments or other significant developments, such as a merger of the SAIF and
the BIF. As a result of this disparity, SAIF members could be placed at a
significant competitive disadvantage to BIF members due to higher costs for
deposits insurance.
Proposed legislation under consideration by Congress provides for a
one-time assessment to be imposed on all SAIF insured deposits, as of June 30,
1995, in order to recapitalize the SAIF and eliminate the disparity. Under the
proposed legislation, the BIF and the SAIF would be merged effective January 1,
1998. The special assessment rate is anticipated to be .85% to .90% of deposits.
Based upon Doral Federal's level of
44
<PAGE> 46
SAIF deposits at June 30, 1995, and assuming a special assessment of .90%, Doral
Federal's assessment would be approximately $864,000 on a pre-tax basis.
Enforcement Provisions. FIRREA's enforcement provisions are applicable not
only to savings institutions but also to all depository institutions. FIRREA
introduces the new term "institution-affiliated party" to agency enforcement
authority. The term includes: (1) directors, officers, employees, agents, and
controlling stockholders; (2) persons required to file a change-in-control
notice; (3) certain persons who participate in the affairs of the savings
institution (which include stockholders, consultants, and joint venture
partners); and (4) independent contractors (including attorneys' appraisers, and
accountants) who knowingly or recklessly cause or participate in a violation,
breach of duty or unsafe practice likely to cause a loss to the savings
institution. FIRREA includes significantly increased penalties for violations of
cease-and-desist orders and other regulations and lowered the requirements for
the issuance of such orders.
Payment of Dividends. Doral Federal's payment of dividends is subject to
the limitations of the capital distribution regulations promulgated by the OTS.
The OTS' regulation determines a savings association's ability to pay dividends,
make stock repurchases, or enter into other types of capital distributions,
according to the institution's capital position. The rule establishes
"safe-harbor" amounts of capital distributions that institutions can make after
providing notice to the OTS, without constituting an unsafe or unsound practice
based on whether the association meets certain specified tiers or levels of
capital requirements. An association can distribute amounts in excess of the
safe-harbor amount only with the prior approval of the OTS.
For associations such as Doral Federal, that meet all applicable capital
requirements, the safe-harbor amount is the greater of (a) 75% of net income for
the prior four quarters, or (b) the sum of (i) the current year's net income and
(ii) the amount that causes the excess of the association's total
capital-to-risk weighted assets ratio over 8% to be only one-half of such excess
at the beginning of the year; provided, however, that the association must
continue to satisfy applicable capital requirements after the distribution.
On December 5, 1994, the OTS published a notice of proposed rulemaking to
amend its capital distribution regulation. Under the proposal, institutions
would be permitted to make capital distributions that would not result in their
capital being reduced below the level required to remain "adequately
capitalized," as defined above under FDICIA. In addition, savings association
which have one of the two highest composite CAMEL ratings and are not held by a
savings and loan holding company would not be required to provide advance notice
of the capital distribution to the OTS. The Company does not believe that the
proposal will adversely affect its ability to make capital distributions if it
is adopted substantially as proposed.
Proposed Banking Legislation. Various legislation, including proposals to
overhaul the bank regulatory system, expand bank and bank holding company powers
and limit the investments that a depository institution may make with insured
funds, is from time to time introduced in Congress. The Company cannot determine
the ultimate effect that such potential legislation, if enacted, or implementing
regulations, would have upon its financial condition or results of operations.
POSSIBLE CONVERSION AND REGULATION UNDER THE FEDERAL BANK HOLDING COMPANY ACT
Legislation has been introduced in the House of Representatives that would
require, by no later than January 1, 1998, that all federally chartered savings
associations, such as Doral Federal, either convert to a national bank, state
bank or state savings association or liquidate. Any institution not converted by
such date would become a national bank by operation of law. Under such proposed
legislation, the OTS would be abolished and its functions transferred to the
other Federal banking agencies.
Existing savings and loan holding companies, such as the Company, would
become bank holding companies subject to supervision and examination by the
Federal Reserve Board (the "Federal Reserve") under the Bank Holding Company Act
of 1956 (the "BHCA"). The BHCA and Federal Reserve regulations promulgated
thereunder generally place limitations on the types of activities in which a
bank holding company and its subsidiaries may engage. In general, such
activities must be banking services or activities so closely related to the
business of banking as to be a proper incident thereto. Regulation K promulgated
by the Federal Reserve, generally grants bank holding companies and their
subsidiaries somewhat broader powers with
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respect to activities conducted "outside the United States" than with respect to
activities conducted within the United States. For purposes of Regulation K,
Puerto Rico is considered to be outside the United States. Notwithstanding the
foregoing, under the provisions of the proposed legislation, any savings and
loan holding company that becomes a bank holding company as a result of such act
would be grandfathered from the bank holding company activity restrictions
described above, provided that: (i) any former savings association subsidiary
continues to meet the "qualified thrift lender test;" (ii) the former savings
subsidiary continues to limit its activities to those permissible under its
former Federal thrift charter; and (iii) the holding company does not acquire
any additional FDIC insured depository institution. At this time, certain
aspects of the proposed legislation remain unresolved and no assurances can be
given as to whether or in what form the legislation will be enacted or its
effect on Doral Federal or the Company.
Independent of the requirements of the Charter Convergence Act, the Company
is currently considering the possibility of converting Doral Federal into a
Puerto Rico chartered commercial bank as a result of the reduction in the 936
Credit introduced by the OBRA Amendments as well as the possible repeal of
Section 936 by the House Bill or the Senate Bill. To the extent that the income
earned by Doral Federal is not fully covered by the 936 Credit, Doral Federal
would be subject to double taxation on its income earned in Puerto Rico since it
is generally not entitled to a credit under Puerto Rico tax law for federal
income taxes paid with respect to income earned in Puerto Rico. In addition,
dividends payable by a United States corporation, such as Doral Federal, to a
Puerto Rico corporation, such as the Company, are not entitled to any dividends
received deduction and are subject to taxation as ordinary income at the normal
statutory tax rates.
In addition to the activity restrictions discussed above, the BHCA also
imposes various other restrictions on bank holding companies and their
subsidiaries. Many of these restrictions are similar to those currently imposed
on the Company under the Savings and Loan Holding Company Act (the "SLHCA").
For example, the BHCA contains change of control provisions similar to those
contained in the SLHCA. See "THE BUSINESS OF THE COMPANY -- Regulation --
Savings and Loan Operations -- The Company." Sections 23A and 23B of the
Federal Reserve Act also apply in the same manner to bank holding companies and
their subsidiaries as to savings and loan holding companies.
Furthermore, as a bank holding company, the Company would, however, be
subject to certain additional regulatory restrictions that are not otherwise
applicable to savings and loan holding companies. For example, unlike savings
and loan holding companies, bank holding companies are subject to certain
regulatory capital requirements. Under the Federal Reserve's risk-based capital
guidelines, a bank holding company must maintain a ratio of total capital
("Total Capital") to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of credit) equal to 8%. At least half of the
Total Capital is to be comprised of common equity, retained earnings, minority
interests in consolidated subsidiaries, noncumulative perpetual preferred stock
and a limited amount of cumulative perpetual preferred stock, less goodwill and
less certain intangible assets discussed below ("Tier 1 capital"). The remainder
may consist of a limited amount of subordinated debt, other preferred stock,
certain other instruments, and a limited amount of loan and lease loss reserves
("Tier 2 capital").
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 capital to total assets, less goodwill and, less certain other
intangible assets discussed below (the "leverage ratio") of 3% for bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. Furthermore, the guidelines
indicate that the Federal Reserve will continue to consider a "tangible Tier 1
leverage ratio" (deducting all intangibles) and other indica of capital strength
in evaluating proposals for expansion or new activities. The tangible Tier 1
leverage ratio is the ratio of a banking organization's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
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The Federal Reserve has adopted regulations with respect to risk-based and
leverage capital ratios that require most intangibles, including core deposit
intangibles, to be deducted from Tier 1 capital. The regulations, however,
permit the inclusion of a limited amount of intangibles related to purchased
mortgage servicing rights and purchased credit card receivables.
The Federal Reserve has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only out
of current operating earnings.
The Company believes that if it were to become subject to the provisions of
the BHCA it would be in compliance with all of the above regulatory and capital
requirements and would be able to continue to conduct its Mortgage Banking
Business as presently conducted.
The conversion of Doral Federal into a Puerto Rico chartered bank would
also subject Doral Federal to supervision and examination by the Commissioner
and to the provisions of the Puerto Rico Banking Act and the regulations
promulgated thereunder. The Company does not believe that the application of
such laws or regulations would have an adverse effect on the manner in what
Doral Federal currently conducts its operations.
In addition to the possible conversion of Doral Federal into a Puerto Rico
commercial bank and the possible application of the BHCA to the Company's
operations, the Company may, in the future, consider other changes in corporate
structure or organization that could result in the transfer of all or a part of
the Company's Mortgage Banking Business to Doral Federal or a subsidiary of
Doral Federal. Any such reorganization could subject the Company to additional
regulatory requirements.
COMPETITION
Prior to March 1992, Puerto Rico was FFCC's exclusive service area.
Although Doral Mortgage has since opened branch offices in Orlando and Miami,
Florida, Puerto Rico remains the Company's predominant service area accounting
for substantially all of the Company's loan originations for the nine months
ended September 30, 1995 and the years ended December 31, 1994 and 1993. Within
Puerto Rico, FFCC's primary market area is the San Juan metropolitan area, which
accounted for approximately 47% and 79% of FFCC loan originations in 1994 and
1993, respectively. The competition in Puerto Rico for the origination of
mortgages is substantial. The Company competes not only with other mortgage
bankers, but also with banks and savings and loan associations. There are
approximately 36 mortgage banks, two savings institutions and 21 commercial
banks operating in Puerto Rico, including affiliates of banks headquartered in
the United States, Canada and Spain. The Company competes principally by
offering loans with competitive features, by emphasizing the quality of its
customer service and pricing its range of products at competitive rates.
THE COMMONWEALTH OF PUERTO RICO
GENERAL
Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,000 miles southeast of Miami, Florida. It is approximately 100
miles long and 35 miles wide. The population of Puerto Rico for 1990, as
determined by the United States Census Bureau, was approximately 3.6 million as
compared to 3.2 million in 1980. The Puerto Rico Planning Board estimates that
the San Juan metropolitan area has a population in excess of 1.0 million.
RELATIONSHIP OF PUERTO RICO WITH THE UNITED STATES.
The Constitution of Puerto Rico was drafted by a popularly elected
constitutional convention, overwhelmingly approved in a special referendum and
approved "as a compact" by the United States Congress and the President,
becoming effective upon proclamation of the Governor of Puerto Rico on July 25,
1952. Puerto Rico's relationship to the United States under the compact is
referred to herein as "Commonwealth status." The United States and Puerto Rico
share a common defense, market and currency. Puerto Rico exercises virtually the
same control over its internal affairs as a state government does. The people of
Puerto
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Rico are citizens of the United States, but do not vote in national elections
and are represented in Congress by a Resident Commissioner who has a voice in
the House of Representatives but only limited voting rights. Most federal taxes,
except those such as social security taxes which are imposed by mutual consent,
are not levied in Puerto Rico. No federal income tax is collected from Puerto
Rico residents on ordinary income earned from sources within Puerto Rico, except
for Federal employees who are subject to taxes on their salaries. Corporations
organized under the laws of Puerto Rico are treated as foreign corporations for
federal income tax purposes. There are two major views in Puerto Rico with
respect to the island's relationship to the United States, one essentially
favoring the existing Commonwealth status and the other favoring statehood.
On November 14, 1993, a plebiscite was held in Puerto Rico to allow
eligible voters an opportunity to express their preference between statehood,
Commonwealth (with certain changes) and independence for Puerto Rico. The
Commonwealth status obtained the most votes, receiving 48.6% of the votes cast,
and statehood and independence received 46.3% and 4.4% of the votes casts,
respectively.
A change in the political status of Puerto Rico could result in
modifications to or elimination of the Puerto Rico laws providing favorable tax
treatment for investment in Puerto Rico mortgages and of Section 936 and,
therefore, could adversely affect the Company's cost of borrowing, the liquidity
of the secondary mortgage market and the financial performance of FFCC. See
"BUSINESS OF THE COMPANY -- Puerto Rico Secondary Mortgage Market and Favorable
Tax Treatment" herein.
THE ECONOMY
Puerto Rico has established policies and programs directed at the
development of manufacturing and the expansion and modernization of the island's
infrastructure. The investment of funds by mainland United States, foreign and
local entities in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have been to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population. The percentage of
the college-age population enrolled in institutions of higher learning has
increased from 16.8% in 1970 to 36.8% in 1993.
The economy of Puerto Rico is closely integrated with that of the mainland
United States. During the fiscal year ended June 30, 1994, approximately 87% of
Puerto Rico's exports went to the United States mainland, which was also the
source of approximately 67% of Puerto Rico's imports. For the fiscal year ended
June 30, 1994, Puerto Rico experienced a positive adjusted merchandise trade
balance of $4.3 billion.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals and electronics. The service sector also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth in response
to the expansion of the manufacturing sector.
Gross product increased from $22.8 billion ($19.3 billion in 1987 prices)
for fiscal 1991 to $28.4 billion ($21.2 billion in 1987 prices) for fiscal 1995,
an increase of 24.4% (10% in 1987 prices). Since fiscal 1985, personal income,
both aggregate and per capita, has increased consistently each fiscal year. In
fiscal 1994, aggregate personal income was $25.7 billion ($21.6 billion in 1987
prices) and personal income per capita was $7,047 ($5,902 in 1987 prices).
Average employment increased from 977,000 in fiscal 1991 to 1,051,300 in fiscal
1995. Average unemployment decreased from 15.2% in fiscal 1991 to 13.8% in
fiscal 1995.
Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollars and the level
of interest rates and changes to existing tax incentive legislation as discussed
below.
Legislation has been introduced in Congress to repeal Section 936. The
elimination of the benefits of Section 936, without the substitution of another
fiscal incentive to attract investment to Puerto Rico, could have an adverse
effect on the future growth of the Puerto Rico economy. At this point, the
Company cannot
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predict the impact of the repeal of Section 936 on the economy of Puerto Rico or
on the financial condition or prospects of the Company. See "BUSINESS OF THE
COMPANY -- Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment".
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL
The Company is authorized to issue 10,000,000 shares of Common Stock, $1.00
par value, and 2,000,000 shares of Serial Preferred Stock, $1.00 per value (the
"Serial Preferred Stock"). The following summary of certain rights and
privileges of the Common Stock and Serial Preferred Stock of the Company does
not purport to be complete. Statements in this summary are qualified in their
entirety by reference to the Company's Certificate of Incorporation and the
amendments thereto and to the General Corporation Law of Puerto Rico.
COMMON STOCK
As of September 30, 1995, there were 7,229,630 shares of Common Stock
issued and outstanding. In addition, as of that date, a total of 727,100 of the
Company's authorized but unissued shares had been reserved for possible issuance
upon the conversion of all outstanding Series A Preferred Stock and Subordinated
Convertible Debentures. The Common Stock is traded in the over-the-counter
market on the NASDAQ NMS. The holders of the Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
stockholders. Each share of Common Stock has the same relative rights as, and is
identical in all respects with, each other share of Common Stock. There are no
cumulative voting rights for the election of directors.
Subject to the rights of holders of the outstanding Series A Preferred
Stock and any other outstanding shares of Serial Preferred Stock, in the event
of the liquidation, dissolution or distribution of assets of the Company, the
holders of Common Stock are entitled to share ratably in the assets of the
Company legally available for distribution to stockholders. The Common Stock has
no redemption, conversion or sinking fund privileges.
Subject to any dividend preferences which may be established with respect
to Serial Preferred Stock, the holders of Common Stock are entitled to receive,
pro rata, dividends when and as declared by the Board of Directors out of funds
legally available therefor.
Holders of Common Stock do not have preemptive rights to subscribe for or
purchase additional securities of the Company.
Chemical Bank, New York, New York, is the transfer agent and registrar for
the Common Stock.
SERIAL PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to fix
the designation, voting powers, preferences, limitations and relative rights of
any series of the Company's Serial Preferred Stock at the time of issuance. The
holders of Common Stock may be adversely affected since preferred stock issued
in the future may be designated with special rights or preferences by the Board
of Directors over the holders of the Common Stock as to dividends, liquidation
rights, voting rights (e.g., separate class right to approve a merger or sale of
substantially all the assets of the Company) and other matters. The issuance of
Serial Preferred Stock under certain circumstances may have the effect of
delaying, deferring or preventing a change in control of the Company.
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SERIES A PREFERRED STOCK
As of September 30, 1995, there were 173,667 shares of the Company's Series
A Preferred Stock outstanding, the only series of the Serial Preferred Stock
designated as of such date. The Series A Preferred Stock is traded in
over-the-counter market on the NASDAQ market.
Dividend Rights and Limitations. The holders of the shares of Series A
Preferred Stock, in preference to holders of the Common Stock, are entitled to
receive cumulative cash dividends when, as and if declared by the Board of
Directors, out of the assets of the Company legally available therefore at the
annual rate of 10 1/2% of the liquidation value thereof or $1.05 per share per
annum, payable quarterly on March 31, June 30, September 30 and December 31 of
each year.
The Company may not declare, set apart or pay any dividend on or make any
distribution of assets (other than dividends paid or other distributions made in
stock of the Company ranking junior to the Series A Preferred Stock as to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Company) to holders of, or redeem, purchase,
set apart or otherwise acquire (except upon conversion or exchange for stock of
the Company ranking junior to the Series A Preferred Stock as to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up of the Company) shares of Common Stock or of any other stock of the
Company ranking junior to the Series A Preferred Stock with respect to the
payment of dividends or upon liquidation, dissolution or winding up, unless all
accrued and unpaid dividends on the Series A Preferred Stock for all prior
dividend periods have been or contemporaneously are declared and paid and the
full quarterly dividend on the Series A Preferred Stock for the current dividend
period has been or contemporaneously is declared and set apart for payment.
Liquidation Rights. Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of the Series A Preferred
Stock are entitled to receive out of the assets of the Company an amount in cash
equal to $10.00 per share plus accrued and unpaid dividends thereon to the date
of such distribution, before any payment may be made to the holders of Common
Stock or any other securities of the Company ranking junior to the Series A
Preferred Stock in respect of dividends or as to the distribution of assets upon
liquidation.
Conversion Rights. The holders of shares of Series A Preferred Stock have
the right, at their option, to convert such shares into shares of Common Stock
of the Company at any time at a conversion price, subject to adjustment under
certain conditions, of $5.00 per share, or a one for two basis.
Redemption. The Series A Preferred Stock are subject to redemption in
whole or in part, at the option of the Company on or after January 1, 1995 and
on or prior to December 31, 1996 at $11.00 per share and thereafter at
redemption prices declining to a price of $10.30 per share on or after January
1, 2002. There is no mandatory redemption or sinking fund obligation with
respect to the Series A Preferred Stock.
Voting Rights. The holders of shares of the Series A Preferred Stock are
not entitled to any voting rights except as required by law or as described
below.
The affirmative vote or consent of the holders of at least a majority of
the outstanding shares of the Series A Preferred Stock, voting as a class, is
required to increase or decrease the number of authorized shares of the Series A
Preferred Stock or create or authorize any shares of any other class of stock,
ranking on a parity with the Series A Preferred Stock as to dividends or upon
liquidation, or to authorize the reclassification of any authorized stock of the
Company into any such parity shares or the creation of any obligation or
security convertible into or evidencing the right to purchase any such parity
shares.
The affirmative vote or consent of the holders of at least two-thirds of
the outstanding shares of the Series A Preferred Stock, voting as a class, is
required (i) for any amendment, alteration or repeal of any provision of the
Company's Certificate of Incorporation which would alter or materially affect
the special rights, powers or preferences of the Series A Preferred Stock or
(ii) to create, issue, amortize or reissue any class of stock ranking prior to
the Series A Preferred Stock as to dividends or upon liquidation, or to
authorize the reclassification of any authorized stock of the Company into any
such prior shares, or the creation,
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authorization, issue or reissuance of any obligation or security convertible
into or evidencing the right to purchase any such prior shares.
Chemical Bank, New York, New York, is the transfer agent, conversion agent
and registrar for the Series A Preferred Stock.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax aspects
relevant to a decision to purchase Common Stock. This discussion is based upon
the Code, the applicable Treasury Regulations (the "Regulations") and judicial
and administrative interpretations of the Code and Regulations, all as in effect
on the date of this Prospectus. Each investor should be aware that the Code, the
Regulations and any interpretations thereof are subject to change and that any
change could be applied retroactively.
This discussion does not purport to deal with all aspects of federal income
taxation that may be relevant to particular investors in light of their personal
investment circumstances or to certain types of investors subject to special
treatment under the Code (for example, banks, foreign persons, life insurance
companies or tax exempt organizations). EACH INVESTOR IS STRONGLY URGED TO
CONSULT ITS OWN TAX ADVISOR AS TO ANY FEDERAL, STATE, LOCAL OR OTHER TAX
CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE COMMON
STOCK.
SALE OR EXCHANGE OF THE COMMON STOCK
United States Shareholders. Gain or loss will be recognized by a
shareholder who is a United States citizen or resident (in each case other than
a bona fide resident of Puerto Rico during the entire taxable year) or
corporation ("United States Shareholder") upon the sale or exchange of the
Common Stock in an amount equal to the difference between the amount realized
upon the sale or exchange and the tax basis of the Common Stock sold or
exchanged. Such gain or loss will be capital gain or loss if the Common Stock is
a capital asset in the hands of the shareholder and will be long-term capital
gain or loss if the shareholder's holding period in the Common Stock is more
than one year.
Puerto Rico Shareholders. In general, gain from the sale or exchange of
the Common Stock by an individual who is a bona fide resident of Puerto Rico
during the entire taxable year will not be includible in such shareholder's
gross income and will be exempt from federal income taxation. No deduction or
credit will be allowed for any amount that is allocable to or chargeable against
amounts excluded from gross income by reason of the preceding sentence. A
corporation organized under the laws of Puerto Rico will also not be subject to
federal income tax on gain recognized from the sale or exchange of the Common
Stock unless the corporation is engaged in a trade or business in the United
States and the sale or exchange of the Common Stock is effectively connected
with that trade or business.
DISTRIBUTIONS ON COMMON STOCK
United States Shareholders. Distributions made by the Company with respect
to the Common Stock to a United States Shareholder will be treated as dividends
for federal income tax purposes to the extent such distributions are treated as
made out of the Company's current or accumulated earnings and profits, and will
be includible in gross income and characterized as ordinary income to the
shareholders. To the extent that such distributions exceed the Company's current
or accumulated earnings and profits, such excess will be treated as a return of
capital and will be applied against and reduce the adjusted basis of the Common
Stock in the hands of each holder. The amount of any such distribution which
exceeds the adjusted basis of the Common Stock in the hands of the holder will
be treated as gain from the sale or exchange of such stock, generally reportable
as capital gain (provided the Common Stock is held as a capital asset). If the
Company does not have sufficient earnings and profits during a year for all
distributions made to holders of Common Stock and any outstanding series of
preferred stock to be treated as dividends, then, generally, current earnings
and profits will be allocated first to the distributions made to holders of
preferred stock. Generally, corporate
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United States Shareholders will not be allowed any dividends received deduction
with respect to dividends paid with respect to the Common Stock.
Puerto Rico Shareholders. In general, distributions made by the Company
with respect to the Common Stock to an individual who is a bona fide resident of
Puerto Rico during the entire taxable year or to a corporation organized under
the laws of Puerto Rico will not be includible in such shareholder's gross
income and will be exempt from federal income taxation. A corporation organized
under the laws of Puerto Rico that is engaged in a trade or business within the
United States, however, will be taxed on the dividends if they are effectively
connected with that trade or business.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS
The Code provides special rules regarding certain distributions received by
United States persons (which term includes United States citizens who are
residents of Puerto Rico but not Puerto Rico corporations) with respect to, and
sales and other dispositions (including pledges) of, stock of a Passive Foreign
Investment Company ("PFIC"). Unless a special election is made to include income
of a PFIC currently, the shareholders of a PFIC who receive certain dividends or
capital distributions from a PFIC are generally required to pay an interest
charge to the IRS in recompense for the perceived deferral of tax between the
time that earnings are realized by a PFIC and the time such amounts are received
by its shareholders. A non-United States corporation, such as the Company, will
be treated as a PFIC if 75% or more of its gross income is passive income or if
the average percentage of its assets (by value) that produce, or are held for
the production of, passive income is at least 50%. Special rules apply in the
case of income derived from the active conduct of a banking business, and
certain items of income received from affiliates, as well as with respect to the
treatment of corporations 25% or more of the value of the stock of which is
owned by such non-United States corporation. The IRS has issued proposed
regulations under the PFIC provisions pursuant to which individuals who have
been full-year bona fide residents of Puerto Rico for all taxable years during
which they have held the stock of a PFIC would not be subject to federal income
taxes on any portion of the amount they would have otherwise been required to
include in gross income under the PFIC rules.
The Company believes that it was not a PFIC for the taxable year ended
December 31, 1994. The Company expects to conduct its affairs in such a manner
so that it will not meet the criteria to be considered a PFIC in the foreseeable
future.
CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS
The following discussion summarizes certain Puerto Rico income tax aspects
relevant to a decision to purchase the Common Stock. This discussion is based
upon the Puerto Rico Income Tax Act of 1954, as amended (the "PRITA"), the
Puerto Rico Internal Revenue Code of 1994, as amended (the "PR Code"), the
applicable regulations under the PRITA and the PR Code and judicial and
administrative interpretations of the PRITA and the PR Code and regulations
under the PRITA and the PR Code, all as in effect on the date of this
Prospectus. Each investor should be aware that the PRITA, the PR Code, the
regulations promulgated thereunder and any interpretations thereof are subject
to change and that any change could be applied retroactively.
This discussion does not purport to deal with all aspects of Puerto Rico
income taxation that may be relevant to particular investors in light of their
personal investment circumstances or to certain types of investors subject to
special treatment under the PRITA (for example, non-resident aliens, life
insurance companies and certain U.S. qualified pension plans). EACH INVESTOR IS
STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR AS TO ANY PUERTO RICO INCOME TAX
CONSIDERATIONS AFFECTING THE PURCHASE, HOLDING AND DISPOSITION OF THE COMMON
STOCK.
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SALE OR EXCHANGE OF COMMON STOCK
Gain or loss will be realized on the sale or exchange of the Common Stock
equal to the difference between the amount received upon the sale or exchange
and the tax basis of such shares. Such gain or loss will be capital gain or loss
if the Common Stock is held as a capital asset and will be long-term capital
gain or loss if the holding period for the Common Stock exceeds six months.
Puerto Rico Residents and Corporations. Any gain on the sale or exchange
of the Common Stock by a Puerto Rico resident individual or corporation will be
taxable. If the shareholder is an individual and the gain is a long-term capital
gain, it will be taxable at a maximum rate of 20%. If the shareholder is a
Puerto Rico corporation and the gain is a long-term capital gain, it will be
taxable at a maximum rate of 25%.
Non-resident Individual U.S. citizens. A United States citizen
non-resident of Puerto Rico will not be subject to Puerto Rico income tax on the
sale or exchange of the Common Stock if the sale or exchange is effected outside
of Puerto Rico.
Foreign Corporations. A Resident Foreign Corporation (as defined below)
will be subject to a maximum tax rate of 25% on long term capital gains from the
sale or exchange of the Common Stock to the extent that such gain is (i) from
sources within Puerto Rico or (ii) from sources outside Puerto Rico and
effectively connected to the conduct of a Puerto Rico trade or business
("ECI-PR"). For Puerto Rico income tax purposes, the gain from the sale of the
Common Stock is considered derived from the place where all rights, title and
interest on the stock pass from the seller to the purchaser.
On the sale or exchange of the Common Stock, a foreign corporation not
engaged in trade or business in Puerto Rico ("ETB-PR") will be subject to a 29%
tax on the excess of capital gains derived from sources within Puerto Rico over
capital losses of the same nature. An amount equal to 25% of the gross sales
price will be withheld from the proceeds of any sale which constitutes income
from sources within Puerto Rico, which amount will be credited against the tax
liability.
Foreign Partnerships. Under the PRITA, partnerships are generally taxed as
corporations. Accordingly, the discussion with respect to foreign corporations
is equally applicable to most foreign partnerships.
DISTRIBUTIONS ON COMMON STOCK
Distributions of property made by the Company with respect to the Common
Stock will be treated as dividends for Puerto Rico income tax purposes and will
be taxable in the manner described below to the extent the Company has either
current or accumulated earnings and profits. To the extent that the amount of
the distributions paid on the Common Stock exceeds the holder's allocable share
of the Company's current or accumulated earnings and profits for Puerto Rico
income tax purposes, such distributions will be treated as a return of capital
(rather than as a dividend) and will be applied against and reduce the adjusted
basis of the Common Stock in the hands of such holder. The amount of any such
distribution which exceeds the adjusted basis of Common Stock in the hands of
the holder will be treated as a gain from the sale or exchange of such shares of
stock, taxable in the manner described below. If the Company does not have
sufficient current or accumulated earnings and profits during a year for all
distributions paid to shareholders of Common Stock and any outstanding series of
preferred stock during the year to be treated as dividends, then current
earnings and profits generally will be allocated first to the distributions paid
to holders of the outstanding preferred stock.
The following discussion regarding the Puerto Rico income taxation of
dividends paid on the Common Stock assumes that such dividends are from Puerto
Rico sources. Generally, dividends paid by a corporation organized under the
laws of Puerto Rico are considered to be from Puerto Rico sources unless the
Puerto Rico corporation derives less than 20% of its gross income from Puerto
Rico sources during the three taxable years preceding the year of declaration of
the dividends (or part of such period as the corporation has been in existence).
Since its incorporation in 1972, the Company has derived more than 20% of its
gross income from Puerto Rico sources.
53
<PAGE> 55
Puerto Rico Residents and Corporations. Individual residents of Puerto
Rico, whether United States citizens or aliens, and corporations organized under
the laws of Puerto Rico will be subject to Puerto Rico income tax on dividends
received on the Common Stock.
The PRITA and the PR Code impose a maximum income tax of 10% on the total
amount of dividends paid by the Company on the Common Stock to individuals
residents of Puerto Rico if such dividends are subject to a withholding tax of
10%. An individual may make an election for such withholding not to apply, but
will be required to include as ordinary income the dividend received which will
be subject to normal tax rates. The maximum Puerto Rico income tax rate for
individuals is 34.5% for taxable years commencing after December 31, 1994 and
33% for taxable years commencing after December 31, 1995.
No withholding tax is imposed on distributions of dividends to corporations
organized under the laws of Puerto Rico. Such dividends will be taxed at the
normal corporate tax rates, but such corporations will be entitled to the same
Dividend Deduction (as defined below) described under "Foreign Corporations."
Non-Resident Individual U.S. Citizens. The PRITA and PR Code impose a 10%
withholding tax on the total amount of any dividend paid by the Company on the
Common Stock to an individual United States citizen who is a non-resident of
Puerto Rico.
A United States citizen who is a non-resident of Puerto Rico may elect, in
the same manner that a Puerto Rico resident elects, to include the dividends
received as ordinary income at the regular graduated rates. Notwithstanding the
making of such election, a 10% withholding would still be made on the total
amount of any dividend distribution unless the individual files with the
Company, prior to the first dividend distribution for the taxable year, a
Withholding Exemption Certificate to the effect that said individual's gross
income from sources within Puerto Rico during the taxable year does not exceed
$1,300, if single, or $3,000, if married.
Subject to certain limitations imposed by the Code, any Puerto Rico income
tax paid or deemed paid on a dividend distribution on the Common Stock is
creditable against the federal income tax liability of the shareholder.
Foreign Corporations. For purposes of the PRITA and the PR Code, a
corporation organized outside of Puerto Rico is considered a "foreign
corporation." Taxation of dividends paid by the Company to such a foreign
corporation will depend on whether the foreign corporation is ETB-PR.
A foreign corporation ETB-PR (a "Resident Foreign Corporation") must file a
Puerto Rico income tax return and is taxed at the normal corporate tax rates on
the net income derived from Puerto Rico sources and on certain items of income
from sources outside Puerto Rico which are ECI-PR. Net income from Puerto Rico
sources includes the gross income from Puerto Rico sources, including any cash
dividends paid by the Company, less applicable deductions. A Resident Foreign
Corporation will be entitled to claim a dividend received deduction in computing
its Puerto Rico income tax liability equal to 85% of the dividends received from
the Company (the "Dividend Deduction"), provided that the Dividend Deduction may
not exceed 85% of the corporate taxpayer's net taxable income in Puerto Rico.
Based on the applicable maximum Puerto Rico corporate income tax rate of 42% and
39% for taxable years commencing before July 1, 1995 and after June 30, 1995,
respectively, the maximum effective tax rate on dividends to a Resident Foreign
Corporation would be 6.30% and 5.85%, respectively, after the Dividend
Deduction.
A foreign corporation not ETB-PR will be subject to a 10% withholding tax
imposed on the gross dividends received from the Company.
Foreign Partnerships. Under the PRITA, partnerships are generally taxed as
corporations. Accordingly, the discussion with respect to foreign corporations
is equally applicable to most foreign partnerships.
54
<PAGE> 56
SELLING STOCKHOLDER
The following table sets forth information as of September 30, 1995 with
respect to the ownership of Common Stock (including shares of Common Stock
issuable upon conversion of the Series A Preferred Stock) by Salomon Levis (the
"Selling Stockholder"), the number of shares of Common Stock being offered for
the account of the Selling Stockholder, and the number of shares of Common Stock
and Series A Preferred Stock to be owned by the Selling Stockholder following
completion of the offering.
<TABLE>
<CAPTION>
SHARES OWNED BEFORE THE OFFERING(1) SHARES BEING SOLD SHARES OWNED AFTER THE OFFERING(1)
----------------------------------------- ------------------------- -----------------------------------------
NUMBER % OF NUMBER % OF NUMBER NUMBER NUMBER % OF NUMBER % OF
(COMMON)(2) CLASS (PREFERRED) CLASS (COMMON)(2) (PREFERRED) (COMMON)(2) CLASS (PREFERRED) CLASS
----------- ----- ----------- ----- ----------- ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salomon
Levis........ 461,186 6.3% 50,000 28.8 % 100,000 -- 361,186 4.2% 50,000 28.8 %
</TABLE>
- ---------------
(1) Does not include 297,006 shares of Common Stock owned by Zoila Levis, David
Levis and Mario S. Levis who together with Salomon Levis filed a Schedule
13D with the Commission on October 5, 1995, disclosing the existence of an
informal understanding among such persons regarding the disposition and
voting of the shares of Common Stock held by them.
(2) Includes 100,000 shares of Common Stock which the Selling Stockholder has
the right to acquire upon conversion of the 50,000 shares of Series A
Preferred Stock owned by him.
Salomon Levis is the Chairman of the Board and Chief Executive Officer of
the Company. He is the brother of Zoila Levis, the President of the Company, and
the uncle of Mario S. Levis, an Executive Vice President and Treasurer of the
Company.
Salomon Levis, together with Zoila Levis, Mario S. Levis and Davis Levis
filed a Schedule 13D with the Commission on October 5, 1995, disclosing the
existence of an informal understanding among such persons regarding the
disposition and voting of the shares of Common Stock held by them. David Levis
is the brother of Salomon Levis and Zoila Levis and the father of Mario S.
Levis. He is a director emeritus of the Company and formerly served as the
Company's Chairman of the Board and Chief Executive Officer.
55
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company and the Selling Stockholder have
agreed to sell to each of the Underwriters named below (the "Underwriters"), for
which Brean Murray, Foster Securities Inc. is acting as representative (the
"Representative"), and each of the Underwriters severally has agreed to purchase
from the Company and the Selling Stockholder, the aggregate number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES(1)
-------------------------------------------------------------------------- ---------
<S> <C>
Brean Murray, Foster Securities Inc. .....................................
---------
Total...........................................................
========
</TABLE>
- ---------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
Under the terms and conditions of the Underwriting Agreement, the Company
and the Selling Stockholder are obligated to sell, and the Underwriters are
obligated to purchase, all of the shares of Common Stock set forth in the table
above, if any of the shares of Common Stock are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain selected dealers at such public offering price less a
concession not to exceed $ per share. The Underwriters or such selected
dealers may reallow a commission to certain other dealers not to exceed $
per share. After the offering to the public, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representative.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 210,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price,
less the underwriting discounts and commissions, as set forth on the cover page
of this Prospectus. If the Underwriters exercise this option, then each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase a number of option shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby.
The Company and the Selling Stockholder have agreed to reimburse the
Underwriters for up to $165,000 of the Underwriters' out-of-pocket expenses
(including fees of its counsel) in connection with the sale of the Common Stock
offered hereby. Of such amount of expenses, $ will be paid by the Company
and $ will be paid by the Selling Stockholder. The Company and the Selling
Stockholder also have agreed to indemnify the Underwriters or contribute to
losses arising out of certain liabilities that may be incurred in connection
with this offering, including liabilities under the Securities Act.
The Representative has in the past performed investment banking services
for the Company. A. Brean Murray, the President and Chief Executive Officer of
the Representative, is a director of the Company.
56
<PAGE> 58
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholder by Pietrantoni Mendez &
Alvarez, San Juan, Puerto Rico. Certain legal matters will be passed upon for
the Underwriters by Stroock & Stroock & Lavan, New York, New York.
EXPERTS
The financial statements as of December 31, 1994 and 1993 and for each of
the three years in the period ended December 31, 1994 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
57
<PAGE> 59
FIRST FINANCIAL CARIBBEAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED ANNUAL AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants..................................................... F-2
Financial Statements
Consolidated Balance Sheet as of December 31, 1994 and 1993......................... F-3
Consolidated Statement of Income and Retained Earnings for the years ended December
31, 1994, 1993, and 1992......................................................... F-4
Consolidated Statement of Changes in Capital Stock for the years ended December 31,
1994, 1993 and 1992.............................................................. F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and
1992............................................................................. F-6
Notes to Consolidated Financial Statements.......................................... F-8
INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of September 30, 1995 and December 31, 1994......................... F-33
Consolidated Statement of Income and Retained Earnings for the nine months ended
September 30, 1995 and September 30, 1994........................................... F-34
Consolidated Statement of Cash Flows for the nine months ended September 30, 1995 and
September 30, 1994.................................................................. F-35
Notes to Consolidated Financial Statements............................................ F-36
</TABLE>
All financial schedules have been omitted because they are not applicable
or because the required information is shown in the financial statements or
notes thereto.
F-1
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
February 1, 1995
To the Board of Directors
and Stockholders of
First Financial Caribbean Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and retained earnings, of changes in capital
stock and of cash flows present fairly, in all material respects, the financial
position of First Financial Caribbean Corporation and its subsidiaries at
December 31, 1994 and 1993, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective January 1, 1994.
Price Waterhouse
Certified Public Accountants
(of Puerto Rico)
License No 10 Expires Dec. 1, 1995
Stamp 1249271 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.
F-2
<PAGE> 61
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 35,916,125 $ 37,306,845
Mortgage loans held for sale, net............................... 263,773,383 262,515,526
Mortgage-backed securities, held for trading in 1994 and for
sale
in 1993....................................................... 319,203,574 125,715,979
Mortgage-backed securities and investments held to maturity..... 67,519,426 6,530,322
Loans receivable, net........................................... 34,808,938 9,561,253
Accounts receivable and mortgage servicing advances, net........ 7,086,045 15,330,765
Accrued interest receivable..................................... 7,874,551 4,021,411
Excess servicing fees receivable................................ 8,756,589 3,463,945
Property, leasehold improvements and equipment, net............. 7,466,980 5,771,193
Cost in excess of fair value of net assets acquired............. 6,609,402 6,536,570
Real estate held for sale, net.................................. 2,115,911 2,928,305
Purchased mortgage servicing rights............................. 3,543,032 3,994,788
Prepaid and other assets........................................ 3,345,368 2,754,349
------------ ------------
Total assets.......................................... $768,019,324 $486,431,251
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable................................................... $282,761,437 $192,794,175
Securities sold under agreements to repurchase.................. 303,730,017 143,199,642
Deposit accounts................................................ 66,471,111 26,450,846
Advances from Federal Home Loan Bank............................ 419,245 2,431,379
Accounts payable and other liabilities.......................... 17,792,644 38,401,583
Income tax payable.............................................. 2,571,773 3,748,979
Deferred tax liability.......................................... 3,776,899 2,460,000
------------ ------------
Total liabilities..................................... 677,523,126 409,486,604
------------ ------------
Commitments and contingencies (Note 22)
------------ ------------
Stockholders' equity:
10.5% Cumulative Convertible Preferred Stock, Series A, $1 par
value, 2,000,000 shares authorized;
204,329 shares issued and outstanding (1993 -- 414,413)
(liquidating preference of $10 per share, aggregating
$2,043,290)................................................ 204,329 414,413
Common stock, $1 par value, 10,000,000 shares authorized;
7,182,306 shares issued and outstanding
(1993 -- 6,762,138)........................................ 7,182,306 6,762,138
Paid-in capital............................................... 16,674,402 16,884,486
Retained earnings............................................. 66,706,435 53,219,178
------------ ------------
90,767,472 77,280,215
Treasury stock at par value, 14,000 shares...................... (14,000) (14,000)
Unearned compensation under employment contracts................ (257,274) (321,568)
------------ ------------
Total stockholders' equity............................ 90,496,198 76,944,647
------------ ------------
Total liabilities and stockholders' equity............ $768,019,324 $486,431,251
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE> 62
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Mortgage loan sales and fees.............................. $10,572,734 $35,230,405 $24,559,391
Servicing income.......................................... 11,447,772 8,627,024 7,163,354
Interest income........................................... 46,507,972 23,774,659 16,983,192
Gain on sale of servicing rights.......................... 3,003,459 2,378,000 934,697
Other income.............................................. 510,705 218,123 162,975
----------- ----------- -----------
72,042,642 70,228,211 49,803,609
----------- ----------- -----------
Expenses:
Interest.................................................. 23,251,898 9,710,091 9,269,798
Employee cost............................................. 6,000,632 7,194,699 8,788,742
Taxes, other than payroll and income taxes................ 1,480,785 768,048 844,990
Maintenance............................................... 712,627 615,503 413,528
Advertising............................................... 4,205,312 4,620,177 2,706,060
Professional services..................................... 3,658,557 3,611,639 2,306,172
Telephone................................................. 2,076,049 1,719,687 1,219,857
Rent...................................................... 2,674,812 1,444,866 816,215
Other..................................................... 9,236,858 9,622,256 7,022,331
----------- ----------- -----------
53,297,530 39,306,966 33,387,693
----------- ----------- -----------
Income before income taxes and cumulative effect of change
in accounting principle................................... 18,745,112 30,921,245 16,415,916
Income taxes:
Current................................................... 2,092,696 7,141,681 3,371,097
Deferred.................................................. 436,899 2,460,000 --
----------- ----------- -----------
2,529,595 9,601,681 3,371,097
----------- ----------- -----------
Income before cumulative effect of change in accounting
principle................................................. 16,215,517 21,319,564 13,044,819
Cumulative effect of change in accounting
principle -- adoption of SFAS 115, net of deferred income
taxes of $880,000......................................... 1,215,000 -- --
----------- ----------- -----------
Net income......................................... 17,430,517 21,319,564 13,044,819
Retained earnings at beginning of year...................... 53,219,178 35,041,903 24,179,049
Less cash dividends:
Convertible preferred stock $1.05 per share............. 325,045 496,948 538,547
Common stock $.52 per share (1993 -- $.40; 1992 -- $.30
per share)............................................ 3,618,215 2,645,341 1,643,418
----------- ----------- -----------
Retained earnings at end of year............................ $66,706,435 $53,219,178 $35,041,903
============ ============ ============
Earnings per share:
Primary:
Income before cumulative effect of change in accounting
principle............................................. $ 2.29 $ 3.15 $ 2.35
Cumulative effect of change in accounting principle..... .17 -- --
----------- ----------- -----------
Net income......................................... $ 2.46 $ 3.15 $ 2.35
============ ============ ============
Fully diluted:
Income before cumulative effect of change in accounting
principle............................................. $ 2.14 $ 2.81 $ 2.06
Cumulative effect of change in accounting principle..... .16 -- --
----------- ----------- -----------
Net income......................................... $ 2.30 $ 2.81 $ 2.06
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE> 63
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL STOCK
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN TREASURY
STOCK STOCK CAPITAL STOCK
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1991...................... $513,572 $2,591,910 $ 9,253,843 ($26,050)
Shares issued on November 5, 1992................. -- 690,000 10,637,999 --
Shares converted.................................. (2,677) 2,677 -- --
Shares issued under restricted stock plan......... -- -- 366,713 19,050
-------- ---------- ----------- --------
Balance at December 31, 1992...................... 510,895 3,284,587 20,258,555 (7,000)
Stock split on December 10, 1993.................. -- 3,381,069 (3,374,069) (7,000)
Shares converted.................................. (96,482) 96,482 -- --
-------- ---------- ----------- --------
Balance at December 31, 1993...................... 414,413 6,762,138 16,884,486 (14,000)
Shares converted.................................. (210,084) 420,168 (210,084) --
-------- ---------- ----------- --------
Balance at December 31, 1994...................... $204,329 $7,182,306 $16,674,402 ($14,000)
======== ========= ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 64
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1993 1992
------------ --------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 17,430,517 $ 21,319,564 $ 13,044,819
------------ --------------- ------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization................ 1,533,750 698,300 519,308
Amortization of excess servicing fees
receivable................................. 566,668 160,785 28,000
Amortization of cost in excess of fair value
of net assets acquired..................... 358,097 255,476 247,077
Amortization of purchased mortgage servicing
rights..................................... 730,059 492,000 506,000
Gain on sale of servicing rights............. (3,003,459) (2,378,000) (934,697)
Cumulative effect of change in accounting
principle.................................. (1,215,000) -- --
Allowances for losses........................ 299,523 1,012,500 715,055
Origination and purchases of mortgage loans
held for sale.............................. (797,582,000) (1,432,448,000) (693,723,000)
Principal repayments and sales of mortgage
loans held for sale........................ 216,918,548 620,387,650 428,834,495
Purchases of mortgage-backed securities held
for trading................................ (265,025,000) (182,883,000) (127,706,000)
Principal repayments and sales of
mortgage-backed securities held for
trading.................................... 653,479,000 860,471,000 345,758,000
Increase in accrued interest receivable...... (3,853,140) (18,979) (527,399)
Increase in loans payable.................... 89,967,262 98,215,950 31,534,057
Increase (decrease) in interest payable...... 788,079 (149,082) 77,917
Increase (decrease) in securities sold under
agreements to repurchase................... 160,530,375 14,444,412 (4,193,527)
(Decrease) increase in accounts payable and
other liabilities.......................... (21,838,018) 3,480,563 12,892,958
(Decrease) increase in income tax payable.... (1,177,206) 3,365,157 (2,006,518)
Deferred tax provision....................... 436,899 2,460,000 --
Amortization of unearned compensation under
employment contracts....................... 64,294 299,952 235,756
------------ --------------- ------------
Total adjustments....................... 31,978,731 (12,133,316) (7,742,518)
------------ --------------- ------------
Net cash provided by operating
activities............................ 49,409,248 9,186,248 5,302,301
------------ --------------- ------------
Cash flows from investing activities:
Redemption (purchase) of certificates of
deposit...................................... -- 2,500,000 (2,500,000)
Purchases of mortgage-backed securities and
investments held to maturity................. (61,789,000) (6,127,850) --
Principal repayments of mortgage-backed
securities and investments held to
maturity..................................... 799,896 --
Originations of loans receivables............... (26,252,000) -- --
Principal repayments of loans receivable........ 836,792 756,275 --
Decrease in mortgage notes receivable........... -- 6,763,184 16,635,365
Decrease (increase) in accounts receivable and
mortgage servicing advances.................. 8,112,720 (958,587) (6,682,023)
Additions to excess servicing fees receivable... (5,859,312) (3,103,139) (549,591)
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE> 65
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1993 1992
------------ --------------- ------------
<S> <C> <C> <C>
Purchase of property, leasehold improvements and
equipment.................................... (3,229,537) (2,981,977) (990,888)
Payments of contingent purchase price of
subsidiary................................... (430,929) (985,900) (450,497)
Proceeds from disposal of real estate held for
sale......................................... 3,163,069 4,363,585 6,219,250
Acquisition of real estate held for sale........ (2,350,675) (3,699,118) (4,955,184)
Mortgage servicing rights acquired.............. (581,130) (14,943) (251,091)
Proceeds from sale of servicing rights.......... 3,306,286 2,378,000 934,697
Cash resulting from acquisition of Doral Federal
Savings Bank, net of purchase price.......... -- 227,000 --
(Increase) decrease in prepaid and other
assets....................................... (591,019) 166,963 (447,670)
------------ --------------- ------------
Net cash (used) provided by investing
activities............................ (84,864,839) (716,507) 6,962,368
Cash flows from (used by) financing activities:
Increase in deposits taken...................... 40,020,265 18,141,846 --
Decrease in loans payable related to mortgage
notes receivable............................. -- (3,845,899) ($10,708,935)
Proceeds from issuance of common and preferred
stock, net................................... -- -- 11,327,999
Repayment of advances from Federal Home Loan
Bank......................................... (2,012,134) (1,003,621) --
Dividends declared and paid..................... (3,943,260) (3,142,289) (2,181,965)
------------ --------------- ------------
Net cash provided (used) by financing
activities............................ 34,064,871 10,150,037 (1,562,901)
------------ --------------- ------------
Net (decrease) increase in cash and cash
equivalents..................................... (1,390,720) 18,619,778 10,701,768
Cash and cash equivalents at beginning of year.... 37,306,845 18,687,067 7,985,299
------------ --------------- ------------
Cash and cash equivalents at end of year.......... $ 35,916,125 $ 37,306,845 $ 18,687,067
=========== ============== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities:
Noncash financing activities-conversion of
preferred
stock........................................ $ 2,100,840 $ 964,820 $ 26,770
=========== ============== ===========
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................... $ 13,073,000
Cash paid....................................... 1,200,000
---------------
Liabilities assumed............................... $ 11,873,000
==============
Supplemental Cash Flow Information:
Cash used to pay interest....................... $ 22,460,000 $ 9,561,000 $ 9,191,000
=========== ============== ===========
Cash used to pay income taxes................... $ 3,260,000 $ 3,780,000 $ 5,370,000
=========== ============== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE> 66
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- REPORTING ENTITY
The consolidated financial statements include the accounts of First
Financial Caribbean Corporation and its wholly-owned subsidiaries ("FFCC" or the
"Company"), Doral Mortgage Corporation ("Doral"), RSC Corp. ("RSC"), Centro
Hipotecario, Inc. and Doral Federal Savings Bank ("Doral Federal"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On September 10, 1993, the Company acquired all of the outstanding common
stock of Doral Federal Savings Bank (formerly Catano Federal Savings Bank) at a
price of approximately $1,200,000, including transaction expenses. This
acquisition was accounted for using the purchase method of accounting. The
acquisition cost plus direct costs of the merger were allocated to the
individual assets acquired and liabilities assumed based on their fair values.
The excess of acquisition cost over the fair values of assets acquired and
liabilities assumed amounting to approximately $271,000 was recorded as goodwill
and is being amortized over a ten-year period. The consolidated statements of
income and retained earnings for the year ended December 31, 1993 includes the
results of operations of Doral Federal since the date of the acquisition.
Proforma results of operations for 1993 and 1992 as though the acquisition
had been made at the beginning of such periods are substantially similar to
actual results of operations for the periods and therefore are not presented.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company is primarily engaged in the origination, purchase and sale of
FHA, VA and conventional first and second mortgage loans and in providing and/or
arranging for interim financing for the construction of residences and other
types of real estate developments in Puerto Rico and Florida. The Company, in
combination with its subsidiaries, services FHA insured, VA guaranteed and
conventional mortgage loans pooled for issuance of Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) backed securities and collateralized
mortgage obligations certificates issued by grantor trusts established by the
Company (CMO Certificates). Doral Federal is a federal savings bank that
operates through two branches located in Puerto Rico.
The following summarizes the more significant accounting policies used by
the Company.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). This statement requires the Company to classify and
account for investments on equity securities that have readily determinable fair
values and all investments in debt securities as follows:
Debt securities that the Company 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 and
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.
F-8
<PAGE> 67
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ($1,215,000 net of approximately $880,000 in taxes and
approximately $405,000 of related expenses). This unrealized gain is shown in
the 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.
Mortgage-backed securities, held for trading in 1994 and for sale in 1993
Mortgage-backed securities held for trading are recorded at fair value.
Changes in fair value are recorded currently in income since the adoption of FAS
115. Prior to the adoption of FAS 115, these securities were held for sale and
therefore carried at the lower of cost or market.
Mortgage-backed securities and investments held to maturity
Mortgage-backed securities and investments held to maturity are recorded at
amortized cost.
Mortgage loans held for sale
Mortgage loans held for sale are recorded at the lower of cost or market
computed on an aggregate portfolio basis.
LOANS RECEIVABLE
Loans receivable are held by Doral Federal principally for investment
purposes. These consist of residential first and second mortgages, commercial
and consumer loans with maturity dates ranging from one to twenty years.
Loans receivable are presented at the unpaid balance, less unearned
interest and allowance for loan losses. Unearned interest on commercial and
consumer loans is amortized using a method which results in a uniform level rate
of return on the principal amounts outstanding.
ALLOWANCES FOR LOSSES
Allowances for losses provide for estimated losses on mortgage loans held
for sale, loans receivable, accounts receivable and real estate held for sale
based upon a review of the loan portfolio, loss experience, economic conditions
and other pertinent factors.
The Company estimates the fair value of the retained recourse obligation of
loan sold with recourse at the time the loans are sold. Ordinarily the amounts
involved are minimal insofar as the recourse obligations are met by substituting
loans which the Company has generally been able to rehabilitate and resell for
at least their carrying amount. Accordingly, a reserve for possible losses
arising from recourse obligations has not been deemed necessary.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
The cost in excess of fair value of net assets acquired is amortized on the
straight-line basis over their estimated useful lives (30 year period for the
acquisition of Doral and RSC, and a 10 year period for the acquisition of Doral
Federal).
F-9
<PAGE> 68
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME AND EXPENSE RECOGNITION
Loan origination fees and related direct loan origination costs are
deferred and amortized to income as an adjustment of yield throughout the life
of the related mortgage loan. Such fees and costs related to loans held for sale
are deferred and recognized in income as a component of gain on sale of loans
when the related loans are sold.
Gains on sales of mortgages are recognized at the time of sale of pools, or
individual loans, to investors.
SALE OF SECURITIES WITH PUT ARRANGEMENTS
From time to time the Company may sell mortgage-backed securities and
mortgage loans with put arrangements. In these arrangements the Company grants
the buyer a put option that allow the buyer to sell the securities back to the
Company at a negotiated price in the future. The accounting for these
transactions (as borrowing or sale) is based on an assessment of the probability
that the put option will be exercised. If on the transaction date, management
determines that it is probable that the put option will be exercised, the
transaction is accounted for as a borrowing. If it is not judged probable that
the put option will be exercised, the transaction is accounted for as a sale.
The premium collected on such put and any gain on the mortgage loans sold
are deferred until the negotiated net option period expires. When a transaction
is initially recorded as a sale but exercise of the put option later becomes
probable, the Company accrues any losses expected upon the exercise of the put
option and periodically adjusts the estimated loss accrual.
INTEREST RATE RISK MANAGEMENT
The Company has various mechanisms to reduce its exposure to interest rate
fluctuations, as they affect the values of the portfolio holdings and the prices
of newly generated loans, loans to be originated and sales with put options.
The Company enters into financial derivatives such as options on futures
contracts designated as hedges which are marked to market on a monthly basis.
Changes in the market value of future contracts that qualify as hedges of
existing assets or liabilities are recognized as an adjustment of the carrying
amount of the hedged items. Gains and losses related to contracts that are
effective hedges are deferred to be recognized in income in the same period as
gains and losses on the hedged item.
LOAN SERVICING
The Company pools FHA insured and VA guaranteed mortgages for issuance of
GNMA mortgage-backed securities. Also, conventional loans are pooled and issued
as FNMA or FHLMC mortgage-backed securities and CMO certificates. Mortgages
included in the resulting GNMA, FNMA and FHLMC pools, CMO certificates and
certain pools of conventional loans sold to investors are serviced by the
Company. The Company is required to advance funds to make scheduled payments to
investors, if payments due have not been received from the mortgagors. At
December 31, 1994, accounts receivable include advances to investors of
approximately $3,100,000 (1993 -- $2,800,000). The Company is also required to
foreclose on loans in the event of default by the mortgagor, and to make full
payment on foreclosed loans. No asset or liability is recorded in the books of
account of the Company for mortgages serviced, except for acquired servicing
rights. Mortgage loan servicing fees, which are based on a percentage of the
principal balances of the mortgages serviced, are credited to income as mortgage
payments are collected.
F-10
<PAGE> 69
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SALES OF SERVICING RIGHTS
The Company recognizes gain or loss on the sale of servicing rights when
the sales contract is executed, all regulatory related approvals are obtained
and the title and all risks and rewards of ownership have been irrevocably
transferred to the buyer.
EXCESS SERVICING FEES RECEIVABLE
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 such 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 excess servicing fees receivable,
amounts equal to the present value of servicing fees to be received in future
years in excess of normal rates based upon the estimated lives of the loans and
using long-term interest rates that reflect the risks of the assets. The
adjustment results in a receivable that is realized through receipt of the
excess service fee over time. The Company evaluates periodically the net
realizable value of its excess servicing fees receivable based on the present
value of the estimated remaining future excess servicing fees revenue, using the
same discount rate utilized to calculate the original excess servicing fees
receivable asset. Any impairment in the value of the excess servicing fees
receivable due to actual and anticipatory prepayment experience, is recognized
currently as a reduction of excess servicing fees receivable. The resulting
excess servicing fees receivable is amortized over the estimated life using a
method approximating the level-yield method. This amortization is recorded as a
reduction of servicing income.
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights are initially recorded at the lower of
cost or present value of estimated future net servicing income stream. The
amount capitalized is amortized in proportion to, and over the period of,
estimated net servicing income. Amortization is adjusted prospectively to
reflect changes in prepayment experience. Any unamortized balance related to
rights sold is charged to income at time of sale.
Purchased mortgage 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.
REAL ESTATE HELD FOR SALE
The Company acquires real estate through foreclosures. These properties are
held for sale and are stated at the lower of fair value, minus estimated costs
to sell, or cost.
PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment are carried at cost.
Depreciation and amortization are provided on the straight-line method over the
estimated useful lives of the assets or the terms of the leases, if shorter, for
leasehold improvements, ranging from five to ten years.
INCOME TAXES
In January 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The adoption of
FAS 109 changed the Company's method of
F-11
<PAGE> 70
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting for income taxes from the deferred method (APB11) to an asset and
liability approach. Previously, the Company deferred the past tax effects of
timing differences between financial reporting and taxable income. The asset and
liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of other assets and liabilities. A
valuation allowance is recognized for any deferred tax asset for which, based on
management's evaluation, it is more likely than not (a likelihood of more than
50%) that some portion or all of the deferred tax asset will not be realized.
The initial application of this standard had no effect because there were no
significant temporary differences at January 1, 1993.
ACCOUNTING FOR IMPAIRMENT OF A LOAN
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan." This statement,
which the Company must adopt for fiscal years beginning after December 15, 1994,
requires that impaired loans that are within the scope of the statement be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent.
The Company does not expect the adoption of this statement to have a
material effect on the results of its operations or its financial condition.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING RECEIVABLES AND
FOR SECURITIZATION OF MORTGAGE LOANS
In June 1994, the Financial Accounting Standards Board (the "Board") issued
an exposure draft that will change the accounting for servicing rights related
to loans originated by an entity. These rights are not presently recognized in
the financial statements. The Board concluded in this exposure draft, among
other things, that an entity that services mortgage loans for others in return
for a fee should recognize those servicing rights as assets, however acquired.
The Board has indicated that it plans to issue a final statement in the second
quarter of 1995.
Management believes that initially the proposed changes will have a
positive effect on the Company's results of operations and financial condition.
However, as a final statement has not yet been issued, disclosure of monetary
nature is not considered necessary.
STATEMENT OF CASH FLOWS
Cash and cash equivalents include cash in banks and certificates of deposit
(1994 -- $330,000 and 1993 -- $1,800,000) and other highly liquid securities
with an original maturity of three months or less.
At December 31, 1994, other highly liquid securities include $9,820,659 of
securities purchased under agreements to resell as follows:
<TABLE>
<CAPTION>
AMOUNT MATURITY
---------- ----------------
<S> <C> <C>
Lehman Brothers Puerto Rico, Inc..................... $4,903,008 January 3, 1995
Merrill Lynch Government Securities of Puerto Rico,
Inc................................................ 4,917,651 January 3, 1995
----------
$9,820,659
=========
</TABLE>
F-12
<PAGE> 71
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
Primary net income per share is determined by dividing net income, after
deducting preferred stock dividends, by the weighted average number 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 of the convertible preferred stock are converted into common
stock.
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 on record date of 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 convertible into two shares of common
stock at a conversion price of $5 per share.
The number of shares of common stock used for computing the primary and
fully diluted earnings per share was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Primary....................................... 6,942,734 6,614,854 5,321,600
Fully diluted................................. 7,576,964 7,576,964 6,347,392
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that will be realized in the future.
OTHER
Certain amounts reflected in the 1993 and 1992 consolidated financial
statements have been reclassified to conform to the presentation for 1994.
NOTE 3 -- COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Doral and RSC were acquired in December 1986, these transactions were
accounted for by the purchase method of accounting resulting in $1,620,000 of
cost in excess of the fair value of net assets acquired. Subsequent contingent
payments under the purchase agreements are accounted for as additional cost over
the fair value of assets acquired. The amount of such pay-outs are determined
based on a percentage ranging from 1/16% to 1/4% of the aggregate principal
amount of mortgage loans closed. The deferred pay-out portion has been
discounted using an imputed interest rate of 8%.
F-13
<PAGE> 72
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The changes in cost in excess of fair value of net assets acquired are
shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period..................... $6,536,570 $5,535,146 $5,331,726
Contingent payments under Doral purchase
agreement........................................ 430,929 985,900 450,497
Acquisition of Doral Federal Savings Bank.......... -- 271,000 --
Amortization expense............................... (358,097) (255,476) (247,077)
---------- ---------- ----------
Balance at end of period........................... $6,609,402 $6,536,570 $5,535,146
========= ========= =========
</TABLE>
Total accumulated amortization relating to cost in excess of fair value of
net assets acquired amounted to $2,975,502, $2,617,405 and $2,361,929 at
December 31, 1994, 1993 and 1992, respectively.
NOTE 4 -- REGULATORY REQUIREMENTS
The Company is a U.S. Department of Housing and Urban Development (HUD)
approved, non-supervised mortgagee and must maintain an excess of current assets
over current liabilities and a minimum net worth, as defined by the various
regulatory agencies. The Company is also required to maintain fidelity bonds and
errors and omissions insurance coverages based on the balance of its servicing
portfolio.
As a result of the acquisition of Doral Federal, the Company became legally
a savings and loan holding company ("SLHC") subject to the restrictions and
requirements of the Home Owners' Loan Act of 1933, as amended (the "HOLA"). As a
SLHC, the Company was required to register with the Director of the Office of
Thrift Supervision (the "OTS") and is subject to various requirements of the
HOLA, including examination, supervision and reporting requirements. Federal law
and OTS regulations place certain limits on the types of activities in which a
SLHC and its subsidiaries may engage. However, in general, these activity
restrictions do not apply to a holding company that controls only one savings
and loan association, provided such association meets the "qualified thrift
lender" test which generally requires the association to have 65% of its
portfolio assets in "qualified thrift investments." For Puerto Rico based
institutions, these investments include, among other things, home mortgages,
mortgage-backed securities, and personal loans. Doral Federal is also subject to
certain regulatory capital requirements. The Company has complied with these
regulatory requirements.
NOTE 5 -- MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Mortgage Loans:
Conventional loans.................................... $194,208,574 $161,239,636
FHA/VA loans.......................................... 60,275,811 93,541,434
Construction and commercial loans..................... 9,288,998 7,734,456
------------ ------------
$263,773,383 $262,515,526
=========== ===========
</TABLE>
F-14
<PAGE> 73
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the aggregate amortized cost and approximate market
value of these loans are as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED APPROXIMATE
COST HOLDING GAINS HOLDING LOSSES MARKET VALUE
- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C>
$263,773,383 $2,548,760 ($ 1,669,790) $264,652,353
=========== ============ ============ ===========
</TABLE>
Proceeds from sales of mortgage loans held for sale and mortgage-backed
securities held for trading during 1994 were approximately $774,313,000
(1993 -- $1,656,000,000). Gross gains of $56,010,000 (1993 -- $49,882,000) and
gross losses of $41,452,000 (1993 -- $14,652,000) were realized on those sales.
At December 31, 1994, construction and commercial loans include
approximately $4,260,000 in which the accrual of interest income has been
discontinued. This amount includes approximately $2,900,000 (plus accrued
interest) of loans which the Company is contractually entitled to transfer to a
non-related financial institution on a non-recourse basis. If these loans had
been accruing interest, the additional interest income realized would have been
approximately $230,000.
NOTE 6 -- MORTGAGE-BACKED SECURITIES HELD FOR TRADING
Mortgage-backed securities held for trading consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Mortgage-backed securities:
CMO certificates.............................................. $158,252,188 $ 53,267,904
GNMA.......................................................... 152,494,112 48,652,131
FHLMC......................................................... 7,217,040 23,442,533
FNMA.......................................................... 1,240,234 353,411
------------ ------------
$319,203,574 $125,715,979
=========== ===========
</TABLE>
CMO certificates include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1993
------------ -----------
<S> <C> <C>
Certificates of other issuers.................................... $137,824,467 $39,769,904
Residual certificates, CMO's established by the Company.......... 9,355,934 9,448,000
Subordinated certificates, CMO's established by the Company...... 11,071,787 4,050,000
------------ -----------
$158,252,188 $53,267,904
=========== ==========
</TABLE>
At December 31, 1994, CMO certificates include approximately $16,251,000 of
interest only certificates.
Net unrealized holding losses on trading securities included in earnings at
December 31, 1994 include the following:
<TABLE>
<S> <C>
Unrealized holding losses included in mortgage loan sales and fees...... ($3,985,000)
Unrealized holding gains presented as Cumulative Effect of Change in
Accounting Principle.................................................. 2,500,000
-----------
Net unrealized holding losses................................. ($1,485,000)
==========
</TABLE>
F-15
<PAGE> 74
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- MORTGAGE-BACKED SECURITIES AND INVESTMENTS HELD TO MATURITY
Mortgage-backed securities and investments held to maturity consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1993
------------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage backed securities:
CMO certificates of other issuers... $42,052,074 $42,175,115 -- --
FHLMC............................... 4,600,372 4,469,976 $2,958,750 $2,914,000
FNMA................................ 7,747,202 7,308,743 3,169,100 3,160,000
Debt securities:
Federal Home Loan Bank Notes........ 9,972,150 9,712,450 -- --
U.S. Treasury Notes................. 1,984,296 1,949,360 -- --
Other investments:
FHLB stock at cost.................. 715,000 715,000 -- --
Mortgage notes receivables.......... 448,332 448,332 402,472 402,472
----------- ----------- ---------- ----------
$67,519,426 $66,778,976 $6,530,322 $6,476,472
========== ========== ========= =========
</TABLE>
Management has the intent to hold these securities and believes it has the
ability to hold them to maturity by obtaining continuing financing under its
existing credit facilities. In addition, part of the above securities are held
by Doral Federal and the maturities of these have generally been matched against
the subsidiary's deposits.
At December 31, 1994, CMO certificates include approximately $4,943,000 of
interest only certificates.
Contractual maturities of mortgage-backed securities and investments held
to maturity at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
MBS DEBT SECURITIES
----------- ---------------
<S> <C> <C>
After 1 year through five years........................ $24,625,724 $12,404,778
After 5 years through 10 years......................... 17,426,350 --
After 10 years......................................... 12,347,574 --
----------- ---------------
$54,399,648 $12,404,778
========== ===========
</TABLE>
Amount due within one year is not significant.
Aggregate gross unrealized holding gains and losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1994 1993 1994 1993
-------- ------- -------- -------
MBS DEBT SECURITIES
------------------- -------------------
<S> <C> <C> <C> <C>
Gross unrealized holding gains............... $397,026 -- -- --
======== ======= ======== =======
Gross unrealized holding losses.............. $842,839 $53,850 $294,637 --
======== ======= ======== =======
</TABLE>
F-16
<PAGE> 75
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LOANS RECEIVABLE
Loans receivable consist of:
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Construction loans....................................... $ 1,060,528 $ 178,856
Residential mortgage loans............................... 23,292,969 6,439,390
Commercial real estate................................... 2,044,120 576,181
Consumer -- Secured by mortgage.......................... 6,283,092 --
Consumer -- other........................................ 1,008,704 1,442,252
Loans on savings deposits................................ 956,212 710,931
Commercial............................................... 392,940 440,104
Leases................................................... 27,727 127,083
Land secured............................................. 183,896 --
----------- ----------
Gross loans.................................... 35,250,188 9,914,797
----------- ----------
Less:
Unearned interest and deferred loan fees............... (13,204) (119,344)
Reserve for loan losses................................ (428,046) (234,200)
----------- ----------
(441,250) (353,544)
----------- ----------
Total loans.................................... $34,808,938 $9,561,253
========== =========
</TABLE>
As of December 31, 1994, Doral Federal has loans amounting to approximately
$459,000 in which the accrual of interest income had been discontinued. If these
loans had been accruing interest, the additional interest income realized would
have been approximately $57,000.
Doral Federal originates adjustable and fixed interest rate loans. The
adjustable rate loans have interest rate adjustment limitations and are
generally tied to various market indexes. Future market factors may affect the
correlation of the interest rate adjustment with the rate Doral Federal pays on
the short-term deposits that have primarily funded these loans. At December 31,
1994 the composition of loans receivable was as follows:
<TABLE>
<CAPTION>
ADJUSTABLE RATES
FIXED RATES -------------------------------------
- ------------------------------------- TERM TO DATE
TERM TO MATURITY BOOK VALUE OF RATE ADJUSTMENT BOOK VALUE
- ---------------------- ----------- ---------------------- -----------
<S> <C> <C> <C>
1 month -- 1 year $ 853,895 1 month -- 1 year $ 2,996,441
1 year -- 3 years 1,333,774 Non-performing 251,519
-----------
3 years -- 5 years 2,963,533
5 years -- 10 years 7,597,972 $ 3,247,960
==========
10 years -- 20 years 10,511,433
Over 20 years 8,093,279
Non-performing 207,092
-----------
$31,560,978
==========
</TABLE>
F-17
<PAGE> 76
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- ALLOWANCES FOR LOSSES
The changes in the allowances for losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable and mortgage servicing advances:
Balance at beginning of period........................... $1,446,563 $1,283,925 $1,051,425
Provision for losses..................................... 132,000 889,500 315,055
Losses charged to the allowance.......................... (14,862) (726,862) (82,555)
---------- ---------- ----------
Balance at end of period................................. $1,563,701 $1,446,563 $1,283,925
========= ========= =========
Real estate held for sale:
Balance at beginning of period........................... $ 525,000 $ 400,000 $ --
Provision for losses..................................... -- 100,000 400,000
Losses charged to the allowance.......................... (168,965) -- --
Other.................................................... -- 25,000 --
---------- ---------- ----------
Balance at end of period................................. $ 356,035 $ 525,000 $ 400,000
========= ========= =========
Reserve for bank loan losses:
Balance at beginning of period........................... $ 234,200 $ 516,200
Provision for loan losses................................ 167,523 23,000
Recoveries............................................... 26,323 --
Losses charged to the allowance.......................... -- (305,000)
---------- ----------
Balance at end of period................................. $ 428,046 $ 234,200
========= =========
</TABLE>
NOTE 10 -- EXCESS SERVICING FEES RECEIVABLE
The changes in excess servicing fees receivable are shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993 1992
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of period........................ $ 3,463,945 $ 521,591 $ --
Additions............................................. 5,859,312 3,103,139 549,591
Amortization
Scheduled........................................ (566,668) (160,785) (28,000)
Unscheduled...................................... -- -- --
------------ ------------ -----------
Balance at end of period.............................. $ 8,756,589 $ 3,463,945 $ 521,591
=========== =========== ==========
</TABLE>
No write-down of excess servicing fees receivable was required during any
of the above periods.
F-18
<PAGE> 77
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Office furniture and equipment.................................... $ 5,984,310 $ 4,316,131
Leasehold improvements............................................ 4,243,689 2,953,177
Automobiles....................................................... 287,211 334,912
Real estate under rental agreements............................... 73,660 73,660
Office building................................................... 406,815 398,695
----------- -----------
10,995,685 8,076,575
Less -- Accumulated depreciation and amortization............... (3,528,705) (2,448,353)
----------- -----------
7,466,980 5,628,222
Construction in progress related to leasehold improvements........ -- 142,971
----------- -----------
$ 7,466,980 $ 5,771,193
========== ==========
</TABLE>
NOTE 12 -- PURCHASED MORTGAGE SERVICING RIGHTS
The changes in purchased mortgage servicing rights are shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period................... $3,994,788 $ 4,416,955 $ 4,671,864
Capitalization of rights on loans purchased...... 581,130 69,833 251,091
Rights sold...................................... (302,827) -- --
Impairments...................................... -- -- --
Amortizations:
Scheduled...................................... (730,059) (492,000) (506,000)
Unscheduled.................................... -- -- --
---------- ----------- -----------
Balance at end of period......................... $3,543,032 $ 3,994,788 $ 4,416,955
========= ========== ==========
</TABLE>
Acquisitions in 1993 includes $54,980 of servicing rights related to the
acquisition of Doral Federal. The Company's servicing portfolio amounted to
approximately $2,644,000,000 and $2,375,000,000 at December 31, 1994 and 1993,
respectively, including $112,000,000 and $164,000,000 respectively, of loans
sold with recourse which are not government guaranteed or insured.
During the years ended December 31, 1994, 1993 and 1992, the Company sold
rights to service loans, amounting to approximately $202,000,000, $198,700,000
and $53,400,000, respectively. No servicing rights were purchased in 1994, 1993
and 1992.
F-19
<PAGE> 78
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
Amounts retained on mortgage loans, generally paid within
5 days.................................................. $ 3,044,286 $11,723,787
Customer mortgages and closing expenses payable........... 1,235,655 5,351,719
Deferred compensation plan................................ 2,416,948 2,663,722
Incentive compensation payable............................ 3,302,446 7,472,221
Accrued expenses and other payables....................... 7,793,309 11,190,134
----------- -----------
$17,792,644 $38,401,583
========== ==========
</TABLE>
NOTE 14 -- LOANS PAYABLE
At December 31, 1994 and 1993, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totalling $367,000,000 and
$257,500,000, respectively. Advances under these facilities are secured by loans
held for inclusion in GNMA, FNMA and FHLMC pools or for sale to financial
investors. Loans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Loans payable resulting from use of warehousing lines of
credit and gestation or presale facilities. At various
variable rates averaging 7.17% and 4.60% at December
31, 1994 and 1993, respectively, and other financing
arrangements.......................................... $265,705,957 $192,615,644
Demand note payable at 10% interest, interest due
monthly, collateralized by CMO certificates........... 3,250,000 --
Unsecured medium term notes, payable at interest rates
ranging from 11.23% to 13.63%, final payment dates
ranging from May 31, 1995 to December 31, 1996........ 3,170,000 --
Due to Bank, collateralized by stockholder's assets with
approximate market value of $4,900,000, at 5.90%
interest rate and due on December 8, 1995............. 4,540,000 --
Unsecured notes payable at 9% interest rate, final
payment dates ranging from August 1996 to September
1998.................................................. 6,095,480 --
Note payable to bank.................................... -- 178,531
------------ ------------
$282,761,437 $192,794,175
=========== ===========
</TABLE>
Maximum borrowings outstanding at any month-end during 1994 and 1993 were
$283,000,000 and $227,000,000, respectively. The approximate average outstanding
borrowings during the periods were $149,000,000 and $198,000,000, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 5.7% in 1994 and 4.2% in 1993.
In December 1994 the Company completed a private placement of medium term
notes amounting to $3,170,000 with varying maturities ranging from six months to
two years. These notes were offered exclusively to residents of Puerto Rico in a
private placement that was exempt from the registration requirements under the
Securities Act of 1933, as amended. The notes are unsecured.
F-20
<PAGE> 79
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The existing warehousing credit facilities require the Company to maintain
certain capital ratios and to comply with other requirements. At December 31,
1994, the Company was in compliance with these requirements.
At December 31, 1994 the scheduled aggregate annual maturities of loans
payable were approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------
<S> <C>
1995................................................................. $275,325,957
1996................................................................. 4,260,480
1997................................................................. 2,390,000
1998................................................................. 785,000
------------
$282,761,437
===========
</TABLE>
NOTE 15 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company sells mortgage-backed securities and mortgage loans under
agreements to repurchase. At December 31, 1994 and 1993, the Company had several
repurchase agreement lines of credit, totalling $560,000,000 and $215,000,000,
respectively. At December 31, 1994 and 1993, the Company had a liability of
$303,730,017 and $143,199,642, respectively, relating to such agreements at
interest rates ranging from 3.77% to 6.75% in 1994 and 2.9% to 9.0% in 1993.
These agreements mature at various dates as follows:
DECEMBER 31, 1994:
<TABLE>
<CAPTION>
APPROXIMATE
MARKET AND BOOK
REPURCHASE VALUE OF UNDERLYING
TYPE OF SECURITY LIABILITY SECURITIES
------------------------------------------------------ ------------ -------------------
<S> <C> <C>
GNMA(1)............................................... $ 90,648,904 $ 98,448,093
FHLMC(1).............................................. 4,360,352 4,995,961
CMO Certificates(1)................................... 144,785,836 166,578,950
------------ -------------------
239,795,092 270,023,004
------------ -------------------
GNMA(2)............................................... 9,399,101 10,461,432
CMO Certificates(2)................................... 14,662,910 16,719,287
------------ -------------------
24,062,011 27,180,719
------------ -------------------
GNMA(6)............................................... 37,058,246 42,735,912
FHLMC(6).............................................. 979,260 1,240,234
FNMA(6)............................................... 1,835,408 2,221,079
39,872,914 46,197,225
------------ -------------------
$303,730,017 $ 343,400,948
=========== =============
</TABLE>
Since January 1, 1994, the underlying securities are accounted for at
market as required by FAS 115. Therefore, carrying amounts and market value are
the same.
F-21
<PAGE> 80
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1993:
<TABLE>
<CAPTION>
APPROXIMATE
BOOK VALUE OF MARKET VALUE
UNDERLYING REPURCHASE OF UNDERLYING
TYPE OF SECURITY SECURITIES LIABILITY SECURITIES
--------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
GNMA(1)...................................... $ 14,628,596 $ 12,945,001 $ 14,865,127
FHLMC(1)..................................... 20,952,707 20,728,297 20,719,930
CMO Certificates(1).......................... 18,737,511 21,574,579 19,327,187
Conventional Loans(1)........................ 34,455,652 28,610,265 34,455,652
------------- ------------ -------------
88,774,466 83,858,142 89,367,896
------------- ------------ -------------
CMO Certificates(2).......................... 16,027,450 15,700,000 16,302,500
------------- ------------ -------------
CMO Certificates(4).......................... 5,054,379 3,120,480 5,045,982
------------- ------------ -------------
CMO Certificates(5).......................... 1,048,182 785,000 1,037,700
------------- ------------ -------------
GNMA(6)...................................... 34,476,127 36,671,667 35,796,639
FHLMC(6)..................................... 2,527,855 2,688,836 2,543,110
FNMA(6)...................................... 353,035 375,517 359,507
------------- ------------ -------------
37,357,017 39,736,020 38,699,256
------------- ------------ -------------
$ 148,261,494 $143,199,642 $ 150,453,334
=========== =========== ===========
</TABLE>
- ---------------
(1) Term up to 30 days
(2) Term over 30 days to 90 days
(3) Term over 90 days to 1 year
(4) Term between 1 to 3 years
(5) Term between 3 to 5 years
(6) Term between 5 to 8 years
Maximum borrowings outstanding at any month-end during 1994 and 1993 under
the agreements to repurchase were $353,000,000 and $152,000,000, respectively.
The approximate average borrowings outstanding during the periods were
$302,000,000 and $125,000,000, respectively. The weighted average interest rate
of such borrowings, computed on a monthly basis was 4.33% in 1994 and 3.34% in
1993.
At December 31, 1994, securities sold under agreements to repurchase are
classified by dealer as follows:
<TABLE>
<CAPTION>
APPROXIMATE
MARKET VALUE
OF
BALANCE OF UNDERLYING
BORROWING SECURITIES
------------ ------------
<S> <C> <C>
Lehman Brothers Puerto Rico, Inc.......................... $114,351,089 $132,262,320
CS First Boston (Puerto Rico), Inc........................ 126,747,688 140,394,656
PaineWebber, Inc. of Puerto Rico.......................... 12,178,622 14,508,969
Merrill Lynch Government Securities of Puerto Rico, SA.... 35,779,545 39,456,075
Bear Stearns Securities Corp.............................. 10,493,073 12,137,928
CS First Boston Corporation............................... 4,180,000 4,641,000
------------ ------------
Total........................................... $303,730,017 $343,400,948
=========== ===========
</TABLE>
F-22
<PAGE> 81
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- DEPOSIT ACCOUNTS
At December 31, deposits and their weighted average interest rates are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993
------------------ ------------------
AMOUNT % AMOUNT %
----------- ---- ----------- ----
<S> <C> <C> <C> <C>
Regular savings.................................. $ 5,621,092 2.99 $ 4,880,761 2.98
NOW accounts..................................... 2,788,200 3.14 2,146,504 3.12
Non-interest bearing deposits.................... 23,774,402 -- 14,034,261 --
Certificates of deposit.......................... 34,287,417 5.56 5,389,320 3.33
----------- ---- ----------- ----
$66,471,111 2.73 $26,450,846 1.59
========== ==== ========== ====
</TABLE>
At December 31, 1994 certificates of deposit over $100,000 in the aggregate
amounted to $7,690,000. A summary of certificates of deposit by maturity as of
December 31, 1994 follows:
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Within one year.............................................. $10,591,820 $5,249,618
One to two years............................................. 1,155,840 --
Two to three years........................................... 17,697,646 --
Three to four years.......................................... 992,112 45,000
Four to five years........................................... 34,202 14,202
Five years and thereafter.................................... 3,815,797 80,500
----------- ----------
$34,287,417 $5,389,320
========== =========
</TABLE>
A summary of certificates of deposit by interest rate at December 31, 1994
follows:
<TABLE>
<CAPTION>
RATE AMOUNT
------------------------------------------------------------------------ -----------
<S> <C>
2.9% or less............................................................ $ 16,000
From 3.00% to 3.99%..................................................... 47,497
From 4.00% to 4.99%..................................................... 9,720,574
From 5.00% to 5.99%..................................................... 14,258,235
From 6.00% to 6.99%..................................................... 5,818,772
From 7.00% to 8.00%..................................................... 4,426,339
-----------
Total......................................................... $34,287,417
==========
</TABLE>
At December 31, 1994, Doral Federal has deposits from officers, directors,
employees and major stockholders of the Company amounting to approximately
$1,400,000 (1993 -- $1,300,000).
The Company as a servicer of loans is required to maintain certain balances
on behalf of the borrowers, called escrow funds. At December 31, 1994, escrow
funds amounted to approximately $32,125,000 (1993 -- $62,650,000), of which
$21,132,000 were deposited with Doral Federal (1993 -- $7,754,000). The
remaining escrow funds, $10,993,000 (1993 -- $54,896,000), were deposited with
other banks and therefore excluded from the Company's assets and liabilities.
F-23
<PAGE> 82
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- ADVANCES FROM THE FEDERAL HOME LOAN BANK
At December 31, 1994, advances from the Federal Home Loan Bank of New York
("FHLB") consist of the following:
<TABLE>
<S> <C>
7.76% due on August 21, 1996.............................................. $400,000
Other..................................................................... 19,245
--------
$419,245
========
</TABLE>
At December 31, 1994, the Company had qualified collateral, in the form of
first mortgage notes and mortgage-backed securities with a carrying value of
$6,994,693, of which approximately $480,000 were pledged to secure advances from
the FHLB. The remaining collateral was available to secure additional advances
from the FHLB.
NOTE 18 -- INCOME TAXES
Under the provisions of Law No. 38 of May 20, 1983, the Company is exempt
from the payment of Puerto Rico income taxes on the interest earned on mortgages
on residential properties located in Puerto Rico which were executed after June
30, 1983, and are insured or guaranteed pursuant to the provisions of the
National Housing Act of June 27, 1934, as amended, and pursuant to the
Provisions of the Servicemen's Readjustment Act of 1944, as amended. As a
result, net interest income has generally represented a greater proportion of
the Company's total net income than that of a typical non-Puerto Rican mortgage
banking institution. The Company holds exempt loans and mortgage-backed
securities for periods of time prior to sale, in order to maximize the tax
exempt interest produced by these securities and loans.
Doral Federal, as a federally chartered financial institution operating in
Puerto Rico, is subject to U.S. Federal income taxes. Doral Federal has filed an
election under Section 936 of the U.S. Internal Revenue Code, whereby a
possession tax credit is allowed for federal income taxes attributable to income
from operations in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 limited the 936 credit
effective for tax years beginning in 1994 to 60% and would be reduced by 5% per
year until 1998. Substantially all income of the Company was from its mortgage
banking business in Puerto Rico and, therefore, the amount of the 936 credit, if
any, as well as the United States income tax was not significant.
Consolidated tax returns are not permitted under the Puerto Rico Income Tax
Law, therefore, income tax returns are filed individually by each Company.
F-24
<PAGE> 83
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from amounts computed by applying
the applicable Puerto Rico statutory tax rate to income before taxes. A
reconciliation of the difference follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1993 1992
------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Income before income
taxes.................. $20,840,112 $30,921,245 $16,415,916
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
% OF PRETAX % OF PRETAX % OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates... $ 8,752,847 42.0 $12,986,923 42.0 $ 6,894,684 42.0
Tax effect of exempt
interest
income -- net.......... (5,435,541) (26.1) (2,717,262) (8.8) (2,185,608) (13.3)
Tax effect of capital
gains.................. (510,588) (2.5) (471,920) (1.5) (414,269) (2.5)
Tax effect of dividend
income................. (1,261,584) (7.7)
Tax effect of
amortization of
goodwill, other non-
deductible expenses and
other.................. 602,877 2.9 (196,060) (0.7) 337,874 2.0
----------- ----------- ----------- ----------- ----------- -----------
Provision for
income
taxes......... $ 3,409,595 16.3 $ 9,601,681 31.0 $ 3,371,097 20.5
============ ========== ============ ========== ============ ==========
</TABLE>
At December 31, the components of the net deferred tax liability are:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax liabilities resulting from:
Untaxed income.......................................... $(3,700,899) $(1,365,000)
Deferred costs.......................................... (2,139,000) (1,095,000)
----------- -----------
(5,839,899) (2,460,000)
----------- -----------
Deferred tax assets:
Unrealized losses....................................... 1,266,000 --
Net operating loss...................................... 797,000 --
----------- -----------
2,063,000 --
----------- -----------
Net deferred tax liability................................ $(3,776,899) $(2,460,000)
========== ==========
</TABLE>
Deferred income tax expense for the year ended December 31, 1994 amounted
to $1,316,899 of which $436,899 is presented as current and $880,000 is shown as
part of the cumulative effect of change in accounting principle.
At December 31, 1994 net operating losses available to offset future
taxable Puerto Rico source income are as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRES ON
---------- -------------
<S> <C> <C>
Doral................................................... $1,900,000 2001
Doral Federal........................................... 600,000 1997 to 2000
</TABLE>
F-25
<PAGE> 84
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 31, 1994 a new income tax law (the "New Law") was approved by
the Government of Puerto Rico. Among the most important changes included in the
New Law are:
Reduction of the maximum corporate income tax rate from 42% to 39%.
Elimination of the reserve method for bad debts and prorated
recapture of outstanding balance as of June 30, 1995 over a four
year period.
Use of a new accelerated method of depreciation.
Reduction of the income tax rate on dividends.
Substantially all changes are effective on July 1, 1995. Management
believes that these changes will not have a material effect on Company's results
of operations or financial position.
NOTE 19 -- RELATED PARTY TRANSACTIONS
On December 8, 1994, the Company entered into an agreement with one of its
stockholders. Under the agreement the stockholder provided the Company
approximately $4,700,000 of GNMA backed securities which the Company sold under
agreements to repurchase to another financial institution. In exchange for
providing the GNMA backed securities, the stockholder received approximately
$4,700,000 of CMO Class B Subordinated Certificates. As part of the agreement,
the Company pledged as collateral to the stockholder approximately $1,500,000 of
CMO Class B subordinated certificates. Such collateral was provided to protect
the stockholder from changes in the market price of the CMO Class B Subordinated
Certificates.
Mortgage loans held for sale include approximately $280,000 of loans to
various officers of the Company at prevailing interest rates (1993 -- $521,000).
The Company paid a computer service bureau, in which it holds a 25%
interest, $726,000, $617,000 and $410,000 for services rendered during the years
ended December 31, 1994, 1993 and 1992, respectively. At December 31, 1994 and
1993 company's equity in this service bureau was not significant.
The Company has a 15% interest in a real estate partnership amounting to
approximately $135,000 and which is carried at cost because of its
immateriality. At December 31, 1994 and 1993, Mortgage-backed securities and
investments held to maturity include approximately $450,000 and $400,000,
respectively due from the Partnership. In addition, at December 31, 1994 and
1993, Accounts receivable includes approximately $510,000 due from the
Partnership.
NOTE 20 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and sell
mortgage-backed securities and loans, and options on futures contracts. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the statement of financial position.
The contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments. The
Company's exposure to credit losses in the event of non-performance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on-balance
sheet instruments. At December 31, 1994, commitments to extend credit to
individuals for residential mortgages amounted to approximately $7,600,000 and
commitments to sell mortgage-backed securities and loans amounted to
approximately $54 million. Management believes that the Company has the ability
to meet these commitments and that no loss will result from the same.
Commitments
F-26
<PAGE> 85
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to extend credit are agreements to lend a customer as long as the conditions
established in the contract are met. Commitments generally have fixed expiration
dates or other termination clauses.
Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the company upon
extension of credit, is based on management's credit evaluation of the
counterparty. A geographic concentration exist within the Company's mortgage
loans portfolio since most of the Company's business activity is with customers
located in Puerto Rico.
The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts confer
the right from sellers to buyer to take a future position at a stated price.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in securities values and interest rates.
Collateral for securities purchased under agreements to resell is kept by the
seller under custody agreements. Collateral for securities sold under agreements
to repurchase is kept by the purchaser.
NOTE 21 -- PENSION AND COMPENSATION PLANS
The Company has a noncontributory target benefit pension plan ("the Plan").
The Plan covers all full time Company employees that have completed one year of
service and have attained age 21.
Under the Plan, the Company contributes annually the funding amount which
is projected to be necessary to fund the target benefit. The target benefit is
based on years of service and the employees' compensation, as defined in the
Plan. The Company has the right to terminate the Plan at any time. Upon
termination, all amounts credited to the participants' accounts will become 100%
vested.
Contributions to the Plan during the years ended December 31, 1994, 1993
and 1992 amounted to approximately $700,000, $503,000 and $120,000,
respectively. Plan assets consist principally of mortgage loans purchased from
the Company and mortgage-backed securities.
The Company has unfunded deferred incentive compensation arrangements (the
"Deferred Compensation") with certain employees. The Deferred Compensation is
determined as a percentage of net income arising from the mortgage banking
activities, as defined, and is payable to participants after a five year vesting
period. For the year ended December 31, 1994 there was no deferred compensation
expense. The expense for the years ended December 31, 1993 and 1992, amounted to
approximately $885,000 and $568,000, respectively.
The Company also has incentive compensation arrangements with certain
employees payable currently. The incentive payments are based on the amount of
mortgage loans closed and consolidated net income in excess of established
return on stockholders' equity, as defined in the agreements. The expense under
these arrangements for the years ended December 31, 1994, 1993 and 1992 amounted
to approximately $2,721,000, $7,866,000 and $3,370,000, respectively.
NOTE 22 -- COMMITMENTS AND CONTINGENCIES
The Insurance and Indemnity Agreements (the "Agreements") covering certain
financial guaranty insurance policies, that insure the payment of senior
certificates issued by CMO grantors trusts established by the Company, provide,
among other things, for the following:
The Company's consolidated debt shall not exceed 1000% (10 times) of
consolidated stockholders' equity.
F-27
<PAGE> 86
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company cannot sell, transfer or pledge the residual certificates
issued by the trusts (amounting to approximately $6,100,000) without the
insurance company approval because the residual certificates are pledged as
collateral to the insurance company.
At December 31, 1994 the Company was in compliance with these requirements.
The Company has several noncancellable operating leases for office
facilities expiring through 2005. Total minimum rental commitments for leases in
effect at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
------------------------------------------------------------------------- ----------
<S> <C>
1995..................................................................... $1,884,000
1996..................................................................... 1,514,000
1997..................................................................... 980,000
1998..................................................................... 601,000
1999..................................................................... 426,000
2000 and thereafter...................................................... 80,000
</TABLE>
Total rental expense for the years ended December 31, 1994, 1993 and 1992
amounted to approximately $2,675,000, $1,445,000 and $817,000, respectively.
The Company is subject to legal proceedings and claims which have arisen in
the ordinary course of its business and have not been finally adjudicated. These
actions, when finally concluded and determined, will not, in the opinion of
management, have a material adverse effect upon the financial position or
results of operations of the Company.
During 1994 the Company sold mortgage-backed securities and mortgage loans
with put options.
At December 31, 1994, the amount sold and the date on which the net option
periods expire are as follows:
<TABLE>
<CAPTION>
AMOUNT SOLD OPTION EXPIRES ON
- ------------ -----------------------
<C> <S> <C>
$ 33,500,000 ........................................ Within six months
112,400,000 ........................................ Six months to one year
24,900,000 ........................................ One to two years
28,900,000 ........................................ Three to four years
- ------------
$199,700,000
===========
</TABLE>
If the put option is exercised, the Company would have to buy back
approximately $176,900,000 at the original sales price and approximately
$22,800,000 at par.
As part of its hedging program, the Company includes the risks associated
with its put arrangements.
NOTE 23 -- CAPITAL STOCK AND PAID-IN CAPITAL
The Company has a Restricted Stock Plan (the "Restricted Stock Plan") and a
Stock Option Plan. The Restricted Stock Plan provides for the granting of up to
250,000 shares of common stock to selected officers at no cost. At December 31,
1994 and 1993, the number of shares awarded and issued under the Restricted
Stock Plan was 177,806 shares, including 88,903 shares issued on December 10,
1993 as result of the stock split (1992- 88,903 shares). The terms of the
Restricted Stock Plan permit the imposition of restrictions ranging from one to
five years on the sale or disposition of the shares issued. At December 31,
1994, 38,100 of the shares issued under the Restricted Stock Plan were subject
to such restrictions. The Stock Option Plan provides for selected officers and
key employees to purchase up to 300,000 shares of common stock at prices equal
to the fair market value on date of grant. No options have been awarded.
F-28
<PAGE> 87
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 10.5% Cumulative Convertible Preferred Stock Series A, has a
liquidation preference of $10 per share plus accrued dividends and is
convertible at the option of the holder into two shares of common stock at a
conversion price of $5 per share. It is redeemable in whole or part at the
option of the Company on or after January 1, 1995 and on or prior to December
31, 1996 at $11 per share, and thereafter, at redemption prices declining to a
minimum of $10.30 per share on January 1, 2002. Dividends are cumulative from
the date of issue and are payable quarterly.
Present regulations limit the amount of dividends that Doral Federal may
pay. Payment of such dividends is prohibited if, among other things, the effect
of such payment would be to cause the capital of Doral Federal to fall below the
regulatory capital requirements.
NOTE 24 -- SUPPLEMENTAL INCOME STATEMENT INFORMATION
Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs. Pursuant
to FAS-91 direct loan origination costs 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. Without the application of FAS-91, employee costs and other
expenses would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Employee costs.................................. $28,537,321 $35,822,728 $22,312,690
========== ========== ==========
Other expenses.................................. $12,802,432 $12,824,650 $ 8,396,395
========== ========== ==========
</TABLE>
Set forth below is a breakdown of direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loans inventory or offset
against mortgage loan sales and fees.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Offset against mortgage loan sales and fees..... $21,008,323 $29,220,886 $14,648,012
Capitalized as part of loan inventory........... 5,093,940 2,609,537 250,000
----------- ----------- -----------
$26,102,263 $31,830,423 $14,898,012
========== ========== ==========
</TABLE>
As a result of increases in interest rates during 1994, the industry
experienced a reduction in volume. Such reduction resulted in marked competition
which affected pricing decisions. Capitalized costs therefore increased due to a
reduction in the net fee per case charged to borrowers, and an increase in the
number of cases in the Company's pipeline.
NOTE 25 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1994 and 1993, FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instrument as the amount at which the instruments could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
F-29
<PAGE> 88
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant differences can arise between the fair value and carrying amount of
financial instruments that are recognized at historical cost amounts.
<TABLE>
<CAPTION>
1994 1993
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........................... $ 35,916 $ 35,916 $ 37,307 $ 37,307
Excess servicing fees receivable.................... 8,757 8,757 3,464 3,464
Accrued interest receivable......................... 7,875 7,875 4,021 4,021
Accounts receivable and mortgage servicing
advances......................................... 7,086 7,086 15,331 15,331
Mortgage loans held for sale........................ 263,773 264,652 262,516 263,047
Mortgage-backed securities held for trading......... 319,204 319,204 125,716 128,307
Mortgage-backed securities and investments held to
maturity......................................... 67,519 66,779 6,530 6,476
Loans receivable.................................... 34,809 34,809 9,561 9,561
-------- ---------- -------- ----------
$744,939 $ 745,078 $464,446 $ 467,514
======== ======== ======== ========
Financial liabilities:
Deposit accounts.................................... $ 66,471 $ 66,471 $ 26,451 $ 26,451
Loans payable....................................... 282,761 282,761 192,794 192,794
Securities sold under agreements to repurchase...... 303,730 303,730 143,200 143,200
Advances from FHLB.................................. 419 419 2,431 2,431
Payables and accrued liabilities.................... 17,793 17,793 38,402 38,402
Income taxes payable................................ 6,349 6,349 6,209 6,209
-------- ---------- -------- ----------
$677,523 $ 677,523 $409,487 $ 409,487
======== ======== ======== ========
</TABLE>
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Cash and cash equivalents: valued at the carrying amounts in the
consolidated balance sheet. The carrying amounts are reasonable estimates of
fair value due to the short period to maturity. This approach applies to cash
and cash equivalents, accounts receivable and mortgage servicing advances,
accrued interest receivables and the majority of the financial liabilities.
Excess servicing fees receivable: valued based on the present value of the
estimated remaining future excess servicing fee revenue.
Derivatives: fair value is estimated as the amounts that the Company would
receive or pay to terminate the contracts at the reporting date, taking into
account the current unrealized gains or losses of open contracts. Market or
dealer quotes are available for many derivatives; otherwise, pricing or
valuation models are applied to current market information to estimate fair
value.
Mortgage loans held for sale, mortgage backed securities held for trading,
and mortgage-backed securities and investments held to maturity: valued at
quoted market prices if available. For securities without quoted prices, fair
values represent quoted market prices for comparable instruments. In a few other
cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk.
F-30
<PAGE> 89
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans receivables: valued on the basis of estimated future principal and
interest cash flows, discounted at various rates. Loan prepayments are assumed
to occur at rates experienced in previous periods when interest rates were at
levels similar to current levels, adjusted for any differences in interest rate
outlook. Future cash flows for homogeneous categories of loans, such as
residential mortgage loans, are estimated on a portfolio basis and discounted at
current rates offered for similar loan terms to new borrowers with similar
credit profiles. Quoted market prices for securities backed by similar loan,
adjusted for different loan characteristics, are also used in estimating fair
value.
Deposit accounts: for demand deposits and deposits with no defined
maturities, fair value is taken to be the amount payable on demand at the
reporting date. The fair value of fixed-maturity deposits, including
certificates of deposit, is estimated using rates currently offered for deposits
of similar remaining maturities. The value of long-term relationships with
depositors is not taken into account in estimating the fair values disclosed.
Loans payable and securities sold under agreements to repurchase: The
carrying amounts are reasonable estimates of fair values due to short period to
maturity.
NOTE 26 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Financial data showing results of the 1994 and 1993 quarters is presented
below. These results are unaudited. Net income per share was retroactively
adjusted to reflect the two-for-one split effected on December 10, 1993. In the
opinion of management all adjustments necessary for a fair presentation have
been included:
<TABLE>
<CAPTION>
QUARTERS
---------------------------------------------
1ST 2ND 3RD 4TH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1994
Revenue............................... $15,074 $18,967 $17,864 $20,138
Net income............................ 4,522 4,785 3,882 4,242
Net income per share:
Primary............................ .65 .68 .54 .59
Fully diluted...................... .60 .63 .51 .56
1993
Revenue............................... $15,378 $18,986 $18,775 $17,089
Net income............................ 4,241 6,957 5,630 4,492
Net income per share:
Primary............................ .63 1.04 .83 .65
Fully diluted...................... .56 .92 .74 .59
</TABLE>
NOTE 27 -- RISK MANAGEMENT ACTIVITIES
The Company's principal objective in holding derivatives and certain other
financial instruments for purposes other than trading is the management of
interest rate risks arising out of its portfolio holdings and related
borrowings. The operations of the Company are subject to interest rate risk to
the extent that interest-earning assets and interest-bearing liabilities mature
or reprice at different times or in differing amounts. Risk management
activities are aimed at optimizing realization on sales of mortgage loans and/or
mortgage backed securities and net interest income, given levels of interest
rate risks consistent with the Company's business strategies.
Asset/liability risk management activities are conducted in the context of
Company's asset sensitivity to interest rate changes. This sensitivity arises
due to changes in the value of mortgage-backed securities and
F-31
<PAGE> 90
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loans held to maturity and for trading to interest-bearing liabilities repricing
more frequently than interest-earning assets. This means that if interest rates
are increasing, margins will narrow as borrowings reprice up faster than assets.
The converse applies when rates are declining.
To achieve its risk management objective, the Company uses a combination of
derivative financial instruments, particularly, futures and options, as well as
other types of contracts such as forward sales commitments.
As part of the interest rate risk management at December 31, 1994, the
Company, as a purchaser, had unexpired options where it had the right to sell
bond contracts for a notional amount of $210,000,000. As a writer, the Company
had unexpired options and futures where it had the obligations to sell bond
contracts for a notional amount of $40,500,000, and obligations to buy bond
contracts for a notional amount of $17,500,000. In addition, at December 31,
1994 the Company had approximately $54 million of forward commitment to sell
mortgage-backed securities and loans.
Generally the options have expired without being exercised. During the
years ended December 31, 1994, 1993 and 1992 net gains (net losses) from futures
transactions, designated as hedges, amounted to approximately $2,172,000,
($1,367,000), and ($1,376,000), respectively. These amounts are presented as
part of mortgage loan sales and fees. At December 31, 1994, mortgage loans held
for sale includes deferred losses related to hedges amounting to approximately
$225,000.
The credit risk of futures contracts is limited, due to daily cash
settlement of the net change in value of open contracts with the exchange in
which the instrument is traded. Forwards have a greater degree of credit risk,
depending on the types of counterparties involved, as daily cash settlements are
not required. Options are contracts that grant the purchaser, for a premium
payment, the right to either purchase from or sell to the writer of the option a
financial instrument at a specified price within a specified period of time or
on a specified date.
The risk that counterparties to both derivative and cash instruments might
default on their obligations is monitored on an on-going basis. To manage the
level of credit risk the Company deals with counterparties of good credit
standing, enters into master netting agreements whenever possible and, when
appropriate, obtains collateral. Master netting agreements incorporate rights of
set off that provide for the net settlement of subject contracts with the same
counterparty in the event of default.
All derivative financial instruments are subject to market risk, the risk
that future changes in market conditions may make an instrument less valuable or
more onerous. For example, fluctuations in market prices and interest rates
change the market value of the instruments. If the instruments are recognized at
market value, these changes directly affect reported income. Exposure to market
risk is managed in accordance with risk limits set by senior management by
buying or selling instruments or entering into offsetting positions.
F-32
<PAGE> 91
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................ $ 57,595 $ 35,916
Mortgage loans held for sale, net.................................... 183,955 263,773
Mortgage-backed securities held for trading, net..................... 381,363 319,204
Mortgage-backed securities and investments held to maturity.......... 75,247 67,519
Loans receivable, net................................................ 63,171 34,809
Accounts receivable and mortgage servicing advances, net............. 13,064 7,086
Accrued interest receivable.......................................... 6,882 7,875
Excess servicing fee receivable...................................... 10,439 8,757
Property, leasehold improvements and equipment, net.................. 6,692 7,467
Cost in excess of fair value of net assets acquired.................. 6,536 6,609
Real estate held for sale, net....................................... 2,044 2,116
Mortgage servicing rights, net....................................... 7,781 3,543
Prepaid expenses and other assets.................................... 6,376 3,345
------------- ------------
Total assets............................................... $ 821,145 $768,019
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable........................................................ $ 219,306 $282,761
Securities sold under agreements to repurchase....................... 361,977 303,730
Convertible Subordinated Debentures.................................. 6,646 --
Deposit accounts..................................................... 99,090 66,471
Advances from Federal Home Loan Bank................................. 10,410 419
Accounts payable and other liabilities............................... 16,011 17,793
Income tax payable................................................... 305 2,572
Deferred tax liability............................................... 5,609 3,777
------------- ------------
Total liabilities.......................................... 719,354 677,523
------------- ------------
Commitments and contingencies
------------- ------------
Stockholders' equity:
10.5% Cumulative Convertible Preferred Stock, Series A, $1.00 par
value, 2,000,000 shares authorized; 173,667 shares issued and
outstanding (1994 -- 204,329) (liquidating preference of $10 per
share, aggregating $1,806,970).................................. 174 204
Common stock, $1.00 par value, 10,000,000 shares authorized;
7,243,630 shares issued and outstanding (1994 -- 7,182,306)..... 7,244 7,182
Paid-in capital.................................................... 16,644 16,675
Retained earnings.................................................. 77,952 66,706
------------- ------------
102,014 90,767
Treasury stock at par value, 14,000 shares........................... (14) (14)
Unearned compensation under employment contracts..................... (209) (257)
------------- ------------
Total stockholders' equity................................. 101,791 90,496
------------- ------------
$ 821,145 $768,019
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE> 92
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE-MONTH PERIOD ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Mortgage loans sales and fees.............. $ 4,899 $ 2,704 $ 8,604 $ 9,800
Servicing income........................... 2,603 2,731 8,044 8,764
Interest income............................ 15,749 12,301 46,667 32,976
Gain on sale of servicing rights........... -- -- 3,623 --
Rental and other income.................... 114 128 413 366
------------- ------------- ------------- -------------
23,365 17,864 67,351 51,906
------------- ------------- ------------- -------------
Expenses:
Interest................................... 11,708 6,603 31,892 15,662
Employee cost, net (See Note i)............ 1,081 648 4,953 4,011
Taxes, other than payroll and income
taxes................................... 279 293 802 649
Maintenance................................ 180 201 478 555
Advertising................................ 586 1,264 1,580 3,206
Professional services...................... 667 649 2,044 2,303
Telephone.................................. 423 451 1,278 1,530
Rent....................................... 531 666 1,550 2,024
Other, net (See Note i).................... 2,542 2,536 6,303 7,872
------------- ------------- ------------- -------------
17,997 13,311 50,880 37,812
------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect
Income taxes:................................ 5,368 4,553 16,471 14,094
------------- ------------- ------------- -------------
Current.................................... 85 159 144 361
Deferred................................... 355 512 1,832 1,757
------------- ------------- ------------- -------------
440 671 1,976 2,118
------------- ------------- ------------- -------------
Income before cumulative effect.............. 4,928 3,882 14,495 11,976
Cumulative effect of change in accounting
principle -- adoption of SFAS No. 115, net
of income taxes of $880.................... -- -- -- 1,215
------------- ------------- ------------- -------------
Net income......................... 4,928 3,882 14,495 13,191
Retained earnings at beginning of period..... 74,159 60,556 66,706 53,219
Less cash dividends paid:
Convertible preferred stock............. 47 79 144 248
Common stock............................ 1,088 906 3,105 2,709
------------- ------------- ------------- -------------
Retained earnings at end of period........... $77,952 $63,453 $77,952 $63,453
========== ========== ========== ==========
Earnings per share:
Primary:
Income before cumulative effect......... $ 0.68 $ 0.54 $ 1.99 $ 1.68
Cumulative effect....................... -- -- -- .17
------------- ------------- ------------- -------------
Net Income......................... $ 0.68 $ 0.54 $ 1.99 $ 1.85
========== ========== ========== ==========
Fully Diluted:
Income before cumulative effect............ $ 0.65 $ 0.51 $ 1.91 $ 1.58
Cumulative effect.......................... -- -- -- .16
------------- ------------- ------------- -------------
Net Income......................... $ 0.65 $ 0.51 $ 1.91 $ 1.74
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-34
<PAGE> 93
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
------------------------
1995 1994
--------- ---------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 14,495 $ 13,191
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of excess servicing fee receivable......................................... 634 348
Amortization of cost in excess of fair value of net assets acquired..................... 282 296
Amortization of mortgage servicing rights............................................... 399 540
Depreciation and amortization........................................................... 1,287 1,116
Gain on sale of servicing rights........................................................ (3,623) --
Cumulative effect of change in accounting principle..................................... -- (1,215)
Allowances for losses................................................................... 229 206
Origination and purchases of mortgage loans held for sale............................... (386,061) (639,639)
Principal repayment and sales of loans held for sale.................................... 208,754 177,450
Purchases of mortgage-backed securities held for trading................................ (68,528) (199,864)
Principal repayments and sales of mortgage-backed securities held for trading........... 259,854 520,018
Decrease (increase) in interest receivable.............................................. 992 (2,499)
(Decrease) increase in loans payable.................................................... (100,445) 37,174
Increase in loans payable related to securities sold not yet purchased.................. 22,090 --
Increase in interest payable............................................................ 339 239
Increase in securities sold under agreements to repurchase.............................. 58,247 156,882
Decrease in payables and accrued liabilities............................................ (2,121) (13,343)
Decrease in income tax payable.......................................................... (2,267) (2,947)
Deferred tax provision.................................................................. 1,832 2,637
Amortization of unearned compensation under employment contracts........................ 48 49
--------- ---------
Total adjustments................................................................. (8,058) 37,448
--------- ---------
Net cash provided by operating activities......................................... 6,437 50,639
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of mortgage-backed securities and investments held to maturity................ (5,855) (60,941)
Principal repayments of investments held to maturity.................................... 1,768 302
Origination of loans receivable......................................................... (36,354) (9,901)
Principal repayments of loans receivable................................................ 7,992 1,552
Increase in accounts receivable and mortgage servicing advances......................... (6,207) (50)
Additions to excess servicing fee receivable............................................ (2,316) (2,472)
Purchase of property, leasehold improvements and equipment.............................. (512) (3,010)
Additions to cost in excess of fair value of net assets acquired........................ (209) (185)
Proceeds from disposal of real estate held for sale..................................... 1,392 2,300
Acquisition of real estate held for sale................................................ (1,321) (1,718)
Increase in mortgage servicing rights................................................... (4,722) (626)
Proceeds from sale of servicing rights.................................................. 3,708 --
Increase in other assets................................................................ (3,031) (1,245)
--------- ---------
Net cash used by investing activities............................................. (45,667) (75,994)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loans payable related to senior secured term loan and subordinated debt
issuance.............................................................................. 21,546 --
Increase in deposits.................................................................... 32,619 33,110
Dividends declared and paid............................................................. (3,246) (2,957)
Increase in advances from Federal Home Loan Bank ("FHLB")............................... 9,990 --
Repayment of advances from FHLB......................................................... -- (2,009)
--------- ---------
Net cash provided by financing activities......................................... 60,909 28,144
--------- ---------
Net increase in cash and cash equivalents............................................... 21,679 2,789
Cash and cash equivalents at beginning of period........................................ 35,916 37,307
--------- ---------
Cash and cash equivalents at end of period.............................................. $ 57,595 $ 40,096
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Noncash financing activities -- conversion of preferred stock........................... $ 307 $ 1,100
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest............................................................... $ 31,553 $ 15,423
========= =========
Cash used to pay income taxes........................................................... $ 3,965 $ 3,308
========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-35
<PAGE> 94
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated 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 quarter and nine-month period ended
September 30, 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 outstanding shares of the Company's 10 1/2% Cumulative
Convertible Preferred Stock, Series A (the "Series A Preferred Stock") are
converted into common stock. Conversely, no such assumption was made with
respect to the Company's 8.25% Convertible Subordinated Debentures due January
1, 2006 because such an assumption would have had an anti-dilutive effect on
fully-diluted net income per share.
d. Cash dividends per share paid for the quarter and nine-month period
ended September 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
QUARTER ENDED ENDED SEPTEMBER
SEPTEMBER 30, 30,
------------------ ------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Series A Preferred Stock....................... $0.2625 $0.2625 $0.7875 $0.7875
Common Stock................................... $ 0.15 $ 0.13 $ 0.43 $ 0.39
</TABLE>
e. At September 30, 1995, escrow funds include approximately $20.9 million
deposited with Doral Federal Savings Bank ("Doral Federal"). These funds are
included in the Company's financial statements. Escrow funds also include
approximately $22.0 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 GNMA, FNMA and FHLMC
mortgage-backed securities, U.S. Treasury Notes, Federal Home Loan Bank Notes
and collateralized mortgage obligations.
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>
NINE-MONTH PERIOD
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary................................... 7,226,293 6,964,413 7,207,798 6,918,824
Fully diluted............................. 7,576,964 7,576,964 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 $5.9 million and $5.9 million,
respectively, for the quarters ended September 30, 1995 and 1994, and $18.1
million and $21.7 million, respectively, for the nine month periods ended
September 30, 1995 and September 30, 1994, except for the application of
SFAS-91. Other expenses would have been $3.1 million and $3.3 million,
respectively, for the quarters ended September 30, 1995 and
F-36
<PAGE> 95
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
1994, and $8.7 million and $10.7 million, respectively, for the nine-month
periods ended September 30, 1995 and September 30, 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>
NINE-MONTH PERIOD
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- -----------------
1995 1994 1995 1994
------ ------ ------- -------
<S> <C> <C> <C> <C>
Employee Costs.................................... $4,829 $5,275 $13,183 $17,651
Other Costs....................................... 538 793 2,344 2,853
------ ------ ------- -------
$5,367 $6,068 $15,527 $20,504
====== ====== ======= =======
</TABLE>
j. On May 12, 1995, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122"), an amendment to SFAS No. 65. The Company elected to
adopt this standard for its financial statement reporting in the second quarter
of 1995. SFAS No. 122 prohibits retroactive application to 1994. Accordingly,
the Company's financial statement reporting for the first quarter of 1995 and
for the quarter and nine-month period ended September 30, 1994 was accounted for
under the original SFAS No. 65 and such results are not directly comparable to
the results for the quarter and nine-months period ended September 30, 1995 with
respect to this specific matter.
For the nine-month period ended September 30, 1995, the Company realized
additional net income of approximately $600,000 (representing $1.1 million of
gross revenues) as a result of the adoption of SFAS No. 122. If the Company had
not adopted SFAS No. 122 in the second quarter of 1995, the Company would have
reported a net income of approximately $13.9 million for the nine-month period
ended September 30, 1995 and approximately $4.7 million for the quarter then
ended. Earnings per common share would have been approximately $1.91 and $1.83
on a primary and fully-diluted basis, respectively, for the nine-month period
ended September 30, 1995 and approximately $0.64 and $0.62 on a primary and
fully-diluted basis, respectively, for the quarter then ended.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing right based on its fair value
relative to the aggregate fair value of loan and the related servicing right
taken as a whole. To determine the fair value of the servicing rights created
after the adoption of SFAS No. 122, the Company used the market prices under
comparable servicing sale contracts.
SFAS No. 122 also requires that all capitalized mortgage servicing rights
be evaluated for impairment based on the excess of the carrying amount of
mortgage servicing rights over their fair value. For purposes of measuring
impairment, capitalized mortgage servicing rights are stratified pool by pool on
the basis of interest rates. An impairment is recognized whenever the prepayment
pattern of the mortgage pool indicates that the fair value of the related
capitalized servicing rights is less than its carrying amounts. An impairment is
recognized by charging such excess to income. The Company determined that no
reserve for impairment was required for the nine months ended September 30,
1995.
F-37
<PAGE> 96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation Of Certain Documents By
Reference...........................
Available Information.................
Prospectus Summary....................
Recent Developments...................
Use Of Proceeds.......................
Price Range Of Common Stock And
Dividend Policy.....................
Capitalization........................
Selected Financial Data...............
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations.......................
Business Of The Company...............
The Commonwealth Of Puerto Rico.......
Description Of Capital Stock..........
Certain Federal Income Tax
Considerations......................
Certain Puerto Rico Income Tax
Considerations......................
Selling Stockholder...................
Underwriting..........................
Legal Matters.........................
Experts...............................
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,400,000 SHARES
FIRST FINANCIAL
CARIBBEAN CORPORATION
COMMON STOCK
($1.00 PAR VALUE)
------------------------
PROSPECTUS
------------------------
BREAN MURRAY, FOSTER
SECURITIES INC.
, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than commissions
and fees of the Underwriters. All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
-------------------------------------------------------------------------- --------
<S> <C>
Securities and Exchange Commission registration fee....................... $ 9,716
NASD filing fee........................................................... 3,318
Printing expenses......................................................... 125,000
Blue Sky fees and expenses (including legal fees)......................... 31,426
Accounting fees and expenses.............................................. 50,000
Legal fees and expenses................................................... 310,000
Miscellaneous expenses.................................................... 25,000
--------
Total........................................................... $554,460
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 202(10) of the General Corporation Law of the Commonwealth of
Puerto Rico provides that a corporation may indemnify its officers and directors
against liabilities they may incur in their capacity as such, except in such
matters as to which they have been adjudged to be liable for negligence or
misconduct in the performance of their duties. Such rights of indemnification
are not to be exclusive of any other rights to which such officers or directors
may be entitled under any by-law, agreement, vote of stockholders or otherwise.
In addition, Section 404 of the General Corporation Law provides that if
the directors or officers of any corporation organized under the laws of the
Commonwealth of Puerto Rico shall knowingly cause to be published or give out
any written statement or report of the condition or business of the corporation
that is false in any material respect, the officers and directors causing such
report or statement to be published, or given out, or assenting thereto, shall
be jointly and severally liable for any loss or damage resulting therefrom.
Effective January 1, 1996, a new Puerto Rico General Corporation Act (the
"PR GCC") will go into effect. Article 4.09 of the PR GCC will authorize Puerto
Rico corporations to indemnify their officers and directors against liabilities
arising out of pending or threatened actions, suits or proceedings to which they
are or may be parties by reason of being directors or officers. Article 1.02 of
PR GCC will also permit a Puerto Rico corporation to include in its Certificate
of Incorporation a provision eliminating the personal liability of its directors
to such corporation or its shareholders for monetary damages resulting from
certain breaches of the director's fiduciary duty of care.
The Certificate of Incorporation of the Company provides that the Company
shall indemnify its directors, officers and employees to the fullest extent
permitted by law. The Company also maintains directors' and officers' liability
insurance on behalf of its directors and officers.
II-1
<PAGE> 98
ITEM 16. EXHIBITS. (Parenthetical number denotes incorporation by reference as
described in footnote.)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------------------------------------------------------------------
<C> <S> <C>
1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 -- By-laws of FFCC, as amended.(2)
4.1 -- Common Stock Certificate.(3)
4.2 -- Series A Preferred Stock Certificate.(3)
5 -- Opinion regarding legality and consent of Pietrantoni Mendez & Alvarez.
8 -- Opinion regarding tax matters of Pietrantoni Mendez & Alvarez.
23.1 -- Consent of Price Waterhouse.
23.2 -- Consent of Pietrantoni Mendez & Alvarez (included in the opinion of counsel filed
as Exhibit 5 hereto).
24.1 -- Powers of Attorney (included on Page II-4).
</TABLE>
- ---------------
(1) Incorporated herein by reference to the same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File
No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No.
0-17224).
(3) Incorporated herein by reference to the same exhibit number of the Company's
Annual Report on Form 10-K for the year ended December 31, 1991 (File No.
0-17224).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 15 above, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-2
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Municipality of San Juan, Commonwealth of Puerto Rico, on the
31st day of October, 1995.
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ SALOMON LEVIS
---------------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Salomon Levis and Richard F. Bonini and each of them, each with full power to
act without the other, his true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him and in his name,
place and stead in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
registration statement relating to the same offering as this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ SALOMON LEVIS Chairman of the Board and October 31, 1995
- --------------------------------------------- Chief Executive Officer
Salomon Levis
/s/ RICHARD F. BONINI Senior Executive Vice October 31, 1995
- --------------------------------------------- President and Director
Richard F. Bonini
/s/ LUIS ALVARADO Executive Vice President, October 31, 1995
- --------------------------------------------- Chief Financial Officer,
Luis Alvardo Principal Financial
Officer
/s/ RICARDO MELENDEZ Vice President and October 31, 1995
- --------------------------------------------- Controller
Ricardo Melendez
/s/ A. BREAN MURRAY Director October 31, 1995
- ---------------------------------------------
A. Brean Murray
/s/ EDGAR M. CULLMAN, JR. Director October 31, 1995
- ---------------------------------------------
Edgar M. Cullman, Jr.
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ FREDERICK M. DANZIGER Director October 31, 1995
- ---------------------------------------------
Frederick M. Danziger
/s/ JOHN L. ERNST Director October 31, 1995
- ---------------------------------------------
John L. Ernst
/s/ ZOILA LEVIS Director October 31, 1995
- ---------------------------------------------
Zoila Levis
/s/ VICTOR M. PONS, JR. Director October 31, 1995
- ---------------------------------------------
Victor M. Pons, Jr.
</TABLE>
II-4
<PAGE> 101
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <S> <C> <C>
1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 -- By-laws of FFCC, as amended.(2)
4.1 -- Common Stock Certificate.(3)
4.2 -- Series A Preferred Stock Certificate.(3)
5 -- Opinion regarding legality and consent of Pietrantoni Mendez & Alvarez.
8 -- Opinion regarding tax matters of Pietrantoni Mendez & Alvarez.
23.1 -- Consent of Price Waterhouse.
23.2 -- Consent of Pietrantoni Mendez & Alvarez (included in the opinion of
counsel filed as Exhibit 5 hereto).
24.1 -- Powers of Attorney (included on Page II-4).
</TABLE>
- ---------------
(1) Incorporated herein by reference to the same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File
No. 0-17224).
(2) Incorporated herein by reference to the same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994 (File No.
0-17224).
(3) Incorporated herein by reference to the same exhibit number of the Company's
Annual Report on Form 10-K for the year ended December 31, 1991 (File No.
0-17224).
<PAGE> 1
EXHIBIT 1
1,400,000 Shares
FIRST FINANCIAL CARIBBEAN CORPORATION
Common Stock
UNDERWRITING AGREEMENT
________________, 1995
BREAN MURRAY, FOSTER SECURITIES INC.
As Representative of the
several Underwriters
633 Third Avenue
New York, New York 10017
Ladies and Gentlemen:
FIRST FINANCIAL CARIBBEAN CORPORATION, a Puerto Rico
corporation (the "Company"), and Salomon Levis (the "Selling Stockholder")
propose to sell an aggregate of 1,400,000 shares (the "Firm Shares") of the
Company's common stock, par value $0.01 per share (the "Common Stock"), of
which 1,300,000 shares are to be issued and sold by the Company and 100,000
shares are to be sold by the Selling Stockholder, in each case to you and the
other underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representative (the
"Representative"). The Company also has agreed to grant to you and the other
Underwriters an option (the "Option") to purchase up to an additional 210,000
shares of Common Stock (the "Option Shares") on the terms and for the purposes
set forth in Section 1(b) hereto. The Firm Shares and the Option Shares are
hereinafter collectively referred to as the "Shares."
The Company and the Selling Stockholder hereby confirm as
follows their respective agreements with the Representative and the several
other Underwriters.
1. Agreement to Sell and Purchase.
(a) On the basis of the respective
representations, warranties and agreements of the Company and the Selling
Stockholder herein contained and subject to all the terms and conditions of
this Agreement, (i) the Company agrees to sell to each Underwriter and each
Underwriter, severally and not jointly, agrees to purchase from the Company at
a purchase price of $[_____] per share, the number of Firm Shares set forth
opposite the name of such Underwriter in Column (1) of Schedule
<PAGE> 2
II hereto, plus such additional number of Firm Shares which such Underwriter
may become obligated to purchase pursuant to Section 11 hereof, and (ii) the
Selling Stockholder agrees to sell to each Underwriter and each Underwriter,
severally and not jointly, agrees to purchase from such Selling Stockholder at
the same purchase price per Share, the number of Firm Shares set forth opposite
the name of such Underwriter in Column (2) of Schedule II, plus such additional
number of Firm Shares which such Underwriter may become obligated to purchase
pursuant to Section 11 hereof.
(b) Subject to all the terms and conditions of
this Agreement, the Company grants the Option to the several Underwriters to
purchase, severally and not jointly, the Option Shares at the same price per
share as the Underwriters shall pay for the Firm Shares. The option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time and from time
to time on or before the 30th day after the date of this Agreement (or on the
next business day if the 30th day is not a business day), upon notice (the
"Option Shares Notice") in writing or by telephone (confirmed in writing) by
the Representative to the Company no later than 5:00 p.m., New York City time,
at least two and no more than five business days before the date specified for
closing in the Option Shares Notice (the "Option Closing Date") setting forth
the aggregate number of Option Shares to be purchased and the time and date for
such purchase. On the Option Closing Date, the Company will issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice and each Underwriter will purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representative in such manner as it deems
advisable to avoid fractional shares.
2. Delivery and Payment. Delivery of the Firm Shares shall
be made to the Representative for the accounts of the Underwriters against
payment of the purchase price by certified or official bank checks payable in
New York Clearing House (next-day) funds to the order of each of the Company
and the Selling Stockholder (the "Closing") at the office of Stroock & Stroock
& Lavan, counsel to the Underwriters, Seven Hanover Square, New York, New York
10004. Such payment shall be made at 10:00 a.m., New York City time, on the
third full business day following the date of this Agreement, or at such other
time on such other date, not later than seven business days after the date of
this Agreement, as may be agreed upon by the Company, the Selling Stockholder
and the Representative (such date is hereinafter referred to as the "Closing
Date"). Time shall be of the essence and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation
of each Underwriter hereunder.
-2-
<PAGE> 3
To the extent the Option is exercised, delivery of the Option
Shares against payment by the Underwriters (in the manner specified above) will
take place at the offices specified above for the Closing Date at the time and
date (which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as the
Representative shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection
with the issuance, sale and delivery of the Firm Shares and Option Shares by
the Company to the respective Underwriters shall be borne by the Company. The
Company and the Selling Stockholder will pay and save each Underwriter and any
subsequent holder of the Shares harmless from any and all liabilities with
respect to or resulting from any failure or delay in paying Federal or state
stamp and other transfer taxes, if any, which may be payable or determined to
be payable in connection with the original issuance, sale or delivery to such
Underwriter of the Firm Shares and Option Shares.
Certificates in negotiable form (endorsed in blank or
accompanied by stock powers in blank, with signatures appropriately guaranteed,
and any funds necessary for the purchase of stock transfer stamps) representing
all of the Shares to be sold by the Selling Stockholder have been placed in
custody under a custody agreement (the "Custody Agreement") with Chemical
Bank, as custodian (the "Custodian"), and the Selling Stockholder has duly
executed and delivered a power of attorney (a "Power of Attorney") appointing
[_______________] and [____________________], and each of them, as such Selling
Stockholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute this Agreement and to deliver this Agreement on behalf of such Selling
Stockholder, to authorize the delivery of the Shares to be sold by such Selling
Stockholder hereunder and otherwise to act on behalf of such Selling
Stockholder in connection with the transactions contemplated by this Agreement
and such Custody Agreement. The Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholder
under the Custody Agreement are subject to the interests of the Underwriters
hereunder and the arrangements made by such Selling Stockholder for such
custody, as well as the appointment by such Selling Stockholder of the
Attorneys-in-Fact, are, to that extent, irrevocable. The Selling Stockholder
specifically
-3-
<PAGE> 4
agrees that his obligations hereunder shall not be terminated, except as
otherwise provided herein, by any act of such Selling Stockholder, operation of
law or otherwise, whether by the death or incapacity of such Selling
Stockholder, or by the occurrence of any other event. If the Selling
Stockholder should die or become incapacitated, or if any other such event
should occur, before the delivery of the Shares hereunder, certificates
representing the Shares held in custody for the Selling Stockholder shall be
delivered pursuant to the terms and conditions of this Agreement and the
Custody Agreement, and the actions taken by the Attorneys-in-Fact pursuant to
the Power of Attorney shall be as valid as if such death, incapacity or other
event had not occurred, whether or not the Custodian or the Attorneys-in-Fact
shall have received notice of such death, incapacity or other event.
3. Representations and Warranties of the Company. The
Company represents, warrants and covenants to each Underwriter that:
(a) A registration statement on Form S-3
(Registration No. 33-_____) relating to the Shares, including a preliminary
prospectus relating to the Shares and such amendments to such registration
statement as may have been required to the date of this Agreement, has been
prepared by the Company under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (collectively referred to as
the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission. The
Commission has not issued any order preventing or suspending the use of the
Prospectus (as defined below) or any Preliminary Prospectus (as defined below)
or instituted or, to the knowledge of the Company, threatened any proceeding
for that purpose. The term "Preliminary Prospectus" as used herein means a
preliminary prospectus relating to the Shares included at any time as part of
the foregoing registration statement or any amendment thereto before it became
effective under the Act and any prospectus filed with the Commission by the
Company pursuant to Rule 424(a) of the Rules and Regulations. Copies of such
registration statement and amendments and of each related Preliminary
Prospectus have been delivered to the Representative. If such registration
statement has not become effective, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit such
registration statement to become effective will be filed promptly by the
Company with the Commission. If such registration statement has become
effective, a final prospectus relating to the Shares containing information
permitted to be omitted at the time of effectiveness by Rule 430A will be filed
by the Company with the Commission in accordance with Rule 424(b) of the Rules
and Regulations promptly after execution and delivery of this Agreement. The
term "Registration Statement" means the registration statement
-4-
<PAGE> 5
as amended at the time it becomes or became effective (the "Effective Date"),
including all financial statements and schedules and all exhibits, documents
incorporated therein by reference and all information contained in any final
prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or in a term sheet described in Rule 434 of the Rules and
Regulations in accordance with Section 5 hereof and deemed to be included
therein as of the Effective Date by Rule 430A of the Rules and Regulations.
The term "Prospectus" means the prospectus relating to the Shares as first
filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations
or, if no such filing is required, the form of final prospectus relating to the
Shares included in the Registration Statement at the Effective Date.
References herein to any document or other information incorporated by
reference in the Registration Statement shall include documents or other
information incorporated by reference in the Prospectus (or if the Prospectus
is not in existence, in the most recent Preliminary Prospectus). References
herein to any Preliminary Prospectus or the Prospectus shall be deemed to
include all documents and information incorporated by reference therein and
shall be deemed to refer to and include any documents and information filed
after the date of such Preliminary Prospectus or Prospectus, as the case may
be, and so incorporated by reference, under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
(b) On the date that any Preliminary Prospectus
was filed with the Commission, the date the Prospectus is first filed with the
Commission pursuant to Rule 424(b) (if required), at all times subsequent to
and including the Closing Date and, if later, the Option Closing Date and when
any post-effective amendment to the Registration Statement becomes effective or
any amendment or supplement to the Prospectus is filed with the Commission, the
Registration Statement, each Preliminary Prospectus and the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment or supplement thereto), including the financial statements
included in the Prospectus, did or will comply with all applicable provisions
of the Act and the Rules and Regulations and did or will contain all statements
required to be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to
the Registration Statement becomes effective, no part of the Registration
Statement or any such amendment did or will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading. At the
Effective Date, the date the Prospectus or any amendment or supplement to the
Prospectus is filed with the Commission and at the Closing Date and, if later,
the Option Closing Date, the Prospectus did not or will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
-5-
<PAGE> 6
the statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on
and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representative specifically for inclusion in the
Registration Statement or Prospectus or any amendment or supplement thereto.
There are no contracts or other documents required to be filed as exhibits to
the Registration Statement by the Act or the Regulations that have not been so
filed. The documents which are incorporated by reference in any Preliminary
Prospectus or the Prospectus or from which information is so incorporated by
reference, when they became effective or were filed with the Commission, as the
case may be, complied in all material respects with the requirements of the Act
and the Rules and Regulations or the Exchange Act and the rules and regulations
thereunder, as applicable, and did not, when such documents were so filed,
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and any documents so filed and incorporated by reference subsequent
to the effective date of the Registration Statement shall, when they are filed
with the Commission, conform in all material respects with the requirements of
the Act and the Rules and Regulations and the Exchange Act and the rules and
regulations thereunder, as applicable.
(c) The only subsidiaries of the Company (each, a
"Subsidiary" and collectively, the "Subsidiaries") are those listed on Exhibit
A hereto. Except as set forth in the Prospectus (or if the Prospectus is not
in existence, in the most recent Preliminary Prospectus) or as acquired in
connection with the exercise of its rights as a creditor, or pursuant to a bona
fide collateral pledge arrangement, neither the Company nor any Subsidiary
owns, nor at the Closing Date and the Option Closing Date, will own an interest
in any corporation, partnership, trust, joint venture or other business entity.
The Company has been and, at the Closing Date and Option Closing Date, will be
duly organized and validly existing as a corporation under the laws of the
Commonwealth of Puerto Rico and the United States and is and, at the Closing
Date and Option Closing Date, will be in good standing with the Commonwealth of
Puerto Rico. The Company is registered as a unitary savings and loan company
under the Home Owners Loan Act of 1933 ("HOLA") and is and, at the Closing Date
and Option Closing Date, will be in good standing with the Office of Thrift
Supervision ("OTS"). Each of the Subsidiaries is and, at the Closing Date and
Option Closing Date, will be a corporation duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of
incorporation. Each of the Company and its Subsidiaries is and, at the Closing
Date and the Option Closing
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<PAGE> 7
Date, will be duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business or use of its
property and assets makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its Subsidiaries taken as a whole.
(d) The outstanding shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable and are not subject to any preemptive or similar rights. The
Shares to be issued and sold by the Company will be, upon such issuance and
payment therefor, duly authorized, validly issued, fully paid and nonassessable
and will not be subject to any preemptive or similar rights. The Company has,
and, upon completion of the sale of the Shares, will have, an authorized,
issued and outstanding capitalization as set forth in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus). The description of the securities of the
Company in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) is, and at the
Closing Date and, if later, the Option Closing Date, will be, complete and
accurate in all respects. No holders of securities of the Company are entitled
to have such securities registered under the Registration Statement, except
where such rights have been waived.
(e) The consolidated financial statements and the
related notes of the Company included in the Registration Statement or
incorporated therein by reference and the Prospectus (or, if the Prospectus is
not in existence, in the most recent Preliminary Prospectus) present fairly the
financial condition of the Company and its Subsidiaries as of the dates
indicated and the consolidated results of operations, and cash flows of the
Company and its Subsidiaries for the periods covered thereby, all in conformity
with generally accepted accounting principles ("GAAP") applied on a consistent
basis throughout the entire periods involved. Price Waterhouse (the
"Accountants"), who have reported on those of such financial statements and
related notes which are audited, are independent accountants with respect to
the Company and its Subsidiaries within the meaning of the Act and the
applicable and published rules and regulations.
(f) The Company maintains a system of internal
accounting control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit
preparation of
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<PAGE> 8
financial statements in conformity with GAAP and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(g) Except as set forth in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date and, if later, the Option Closing Date, (i) there has not
been, and will not have been, any material adverse change in the business,
properties, prospects, condition (financial or otherwise), net worth or results
of operations of the Company and its Subsidiaries considered as one enterprise,
(ii) neither the Company nor any of its Subsidiaries has entered into, or will
have entered into any material transactions other than pursuant to this
Agreement, and (iii) the Company has not, and will not have, paid or declared
any dividends or other distributions of any kind on any class of its capital
stock, except for the payment or declaration of quarterly dividends in the
ordinary course of its business.
(h) The Company and each of its Subsidiaries have
good and marketable title to all properties and assets described in the
Registration Statement, including the documents incorporated by reference
therein, and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), as owned by it, free and clear of all liens,
security interests, restrictions, pledges, encumbrances, charges, equities,
claims, easements, leases and tenancies (collectively, "Encumbrances") other
than those described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) or
those that will not materially affect the value of such properties and assets
or will not interfere with the use made and proposed to be made of such
properties and assets. The Company and each of its Subsidiaries have valid,
subsisting and enforceable leases for the properties and assets described in
the Registration Statement or in the documents incorporated by reference
therein, and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) as leased by them, free and clear of all
Encumbrances, other than those described in the Registration Statement or in
the documents incorporated by reference therein, and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), or
those that will not materially affect the value of such properties and assets
or will not interfere with the use made and proposed to be made of such
properties and assets.
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<PAGE> 9
(i) The Company is not required to be registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act").
(j) Except as set forth in the Registration
Statement, or incorporated therein by reference, and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), there
are no actions, suits, arbitrations, claims, governmental or other proceedings
(formal or informal), or investigations pending or threatened against or
affecting the Company or any of its Subsidiaries, or any directors, officers or
shareholders of the Company or any of its Subsidiaries in their respective
capacities as such, or any of the properties or assets owned or leased by the
Company or any of its Subsidiaries, before or by any Federal or state court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign (collectively, a "Governmental Body"), wherein an
unfavorable ruling, decision or finding would adversely affect the business,
properties, prospects, condition (financial or otherwise), net worth or results
of operations of the Company and its Subsidiaries taken as a whole and would be
required to be disclosed in the Registration Statement and Prospectus (or if
the Prospectus is not in existence, in the most recent Preliminary Prospectus).
Neither the Company nor any Subsidiary is in violation of, or in default with
respect to, any law, rule, or regulation, or any order, judgment, or decree,
except as described in the Prospectus (or if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) or such as in the
aggregate do not now have and can reasonably be expected in the future not to
have a material adverse effect upon the operations, business, properties, or
assets of the Company and its Subsidiaries taken as a whole; nor is the Company
or any Subsidiary presently required under any order, judgment or decree to
take any action in order to avoid any such violation or default.
(k) The Company and each of its Subsidiaries have
and, at the Closing Date and the Option Closing Date, will have all
governmental licenses, permits, consents, orders, approvals, franchises,
certificates and other authorizations (collectively, "Licenses") necessary to
carry on their respective businesses and own or lease their respective
properties as contemplated in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
The Company and each of its Subsidiaries have and, at the Closing Date and the
Option Closing Date, will have complied in all material respects with all laws,
regulations and orders applicable to it or its business, assets and properties.
Neither the Company nor any of its Subsidiaries is, nor, at the Closing Date
and the Option Closing Date, will be in default (nor has any event occurred
which, with notice or lapse of time or both, would constitute a default) in the
due performance and observation of any term,
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<PAGE> 10
covenant or condition of any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which they are a party or by which their
respective properties are bound or affected, the violation of which would
individually or in the aggregate have a material adverse effect on the
business, properties, prospects, condition (financial or otherwise), net worth
or results of operations of the Company and its Subsidiaries. There are no
governmental proceedings or actions pending or threatened for the purpose of
suspending, modifying or revoking any License held by the Company and its
Subsidiaries.
(l) No consent, approval, authorization or order
of, or any filing or declaration with, any Governmental Body is required for
the consummation of the transactions contemplated by this Agreement or in
connection with the issuance and sale of the Shares by the Company, except such
as have been obtained and such as may be required under state securities or
Blue Sky laws or the bylaws and rules of the National Association of Securities
Dealers, Inc. (the "NASD") in connection with the purchase and distribution by
the Underwriters of the Shares to be sold hereby.
(m) The Company has full power (corporate and
other) and authority to enter into this Agreement and to carry out all the
terms and provisions hereof to be carried out by it. This Agreement has been
duly authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company and is enforceable against the Company in
accordance with the terms hereof, except as rights to indemnity and
contribution may be limited by federal or state securities laws or the public
policy underlying such laws. Except as disclosed in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the execution, delivery and the performance of this
Agreement and the consummation of the transactions contemplated hereby will not
result in the creation or imposition of any Encumbrance upon any of the
properties or assets of the Company or any of the Subsidiaries pursuant to the
terms or provisions of, or result in a breach or violation of or conflict with
any of the terms or provisions of, or constitute a default under, or give any
other party a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, (i) the Certificate of Incorporation or
By-laws of the Company, in each case as amended, or (ii) any contract or other
agreement to which the Company or any of the Subsidiaries is a party or by
which it or any of the respective assets or properties are bound or affected,
the violation of which would individually or in the aggregate have a material
adverse effect on the business, properties, prospects, condition (financial or
otherwise), net worth or results of operations of the Company and its
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<PAGE> 11
Subsidiaries or (iii) any judgment, ruling, decree, order, law, statute, rule
or regulation of any Governmental Body applicable to the Company or any of the
Subsidiaries or their respective businesses or properties, the violation of
which would individually or in the aggregate have a material adverse effect on
the business, properties, prospects, condition (financial or otherwise), net
worth or results of operations of the Company and its Subsidiaries. The
Company has full power and authority to authorize, issue, offer and sell the
Shares, as contemplated by this Agreement, free of any preemptive rights.
(n) No statement, representation, warranty or
covenant made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Representative was
or will be, when made, inaccurate, untrue or incorrect in any material respect.
Each certificate signed by an officer of the Company and delivered to the
Representative or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(o) Neither the Company nor any of its directors,
officers or affiliates has taken, nor will he, she or it take, directly or
indirectly, any action designed, or which might reasonably be expected in the
future, to cause or result in, under the Act or otherwise, or which has
constituted, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares or otherwise.
(p) The Shares have been approved for quotation
on the National Association of Securities Dealers Automated Quotation National
Market System ("NASDAQ NMS"), subject only to notice of issuance.
(q) Neither the Company nor any of its
Subsidiaries is involved in any collective labor dispute with its employees nor
is any such dispute threatened or imminent.
(r) Neither the Company nor any of its
Subsidiaries nor, to the Company's best knowledge, any employee or agent of the
Company or any Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds of the Company or any Subsidiary
in violation of any law, rule or regulation or of a character required to be
disclosed in the Registration Statement and Prospectus (or, if the Prospectus
is not in existence, in the most recent Preliminary Prospectus).
(s) The business, operations and facilities of the
Company and its Subsidiaries have been and are being conducted in compliance
with all applicable laws, ordinances, rules, regulations, Licenses, permits,
approvals, plans,
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<PAGE> 12
authorizations or requirements relating to occupational safety and health, or
pollution, or protection of health or the environment (including, without
limitation, those relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous or toxic substances,
materials or wastes into ambient air, surface water, groundwater or land, or
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of chemical substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes, whether
solid, gaseous or liquid in nature) of any governmental department, commission,
board, bureau, agency or instrumentality of the United States or any state or
political subdivision thereof, and all applicable judicial or administrative
agency or regulatory decrees, awards, judgments and orders relating thereto;
and neither the Company nor any of its Subsidiaries has received any notice
from any governmental instrumentality or any third party alleging any violation
thereof or liability thereunder (including, without limitation, liability for
costs of investigating or remediating sites containing hazardous substances
and/or damages to natural resources), except where failure to so comply would
not have a material adverse effect on the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company and its
Subsidiaries taken as a whole. The intended use and occupancy of each of the
facilities owned or operated by the Company and its Subsidiaries complies in
all material respects with all applicable codes and zoning laws and
regulations, and there is no pending or threatened condemnation, zoning change,
environmental or other proceeding or action that will in any material respect
adversely affect the size of, use of, improvements on, construction on, or
access to such facilities.
(t) The Company filed all foreign, federal, state
and local tax returns that are required to be filed or has requested extensions
thereof and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any of the
foregoing is due and payable.
(u) The Company meets the requirements for use of
Form S-3 under the Rules and Regulations.
(v) The deposit accounts of Doral Federal Savings
Bank, a Subsidiary of the Company ("Doral Federal") are insured by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC") to the legal maximum, and no proceeding for the
termination or revocation of such insurance is pending or threatened. Doral
Federal is a member in good standing of the Federal Home Loan Bank of New York.
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<PAGE> 13
(w) None of the Company, Doral Federal, their
affiliates, or any of their respective directors or officers is subject to any
order or directive of, or party to any agreement with, any regulatory agency
having jurisdiction with respect to its business or operations except as
disclosed in the Prospectus (or if the Prospectus is not in existence, in the
most recent Preliminary Prospectus).
4. Representations and Warranties of the Selling Stockholder.
The Selling Stockholder represents, warrants and covenants to each Underwriter
that:
(a) Such Selling Stockholder has full power and
authority to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it. All authorizations and consents
necessary for the execution and delivery by such Selling Stockholder of this
Agreement have been given. This Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder and constitutes a
valid and binding agreement of such Selling Stockholder and is enforceable
against such Selling Stockholder in accordance with the terms hereof, except as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws now or hereafter in effect relating to or affecting creditors'
rights generally or by general principles of equity relating to the
availability of remedies and except as rights to indemnity and contribution may
be limited by federal or state securities laws or the public policy underlying
such laws.
(b) Such Selling Stockholder has full power and
authority to enter into the Power of Attorney in the form heretofore furnished
to the Underwriters and the Custody Agreement in the form heretofore furnished
to the Underwriters and to carry out all the terms and provisions thereof to be
carried out by it. All authorizations and consents necessary for the execution
and delivery by such Selling Stockholder and of the Power of Attorney and the
Custody Agreement have been given. Each of the Power of Attorney and the
Custody Agreement has been duly authorized, executed and delivered by such
Selling Stockholder and is enforceable against such Selling Stockholder in
accordance with the terms thereof.
(c) Such Selling Stockholder now has, and at the
time of delivery thereof hereunder will have, (i) good and marketable title to
the Shares to be sold by such Selling Stockholder hereunder, free and clear of
all Encumbrances, and (ii) full legal right and power, and all authorizations
and approvals required by law, to sell, transfer and deliver the Shares to the
Underwriters hereunder and to make the representations, warranties and
agreements made by such Selling Stockholder herein.
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<PAGE> 14
(d) On the Closing Date all stock transfer or other
taxes (other than income taxes) which are required to be paid in connection
with the sale and transfer of the Shares to be sold by such Selling Stockholder
to the several Underwriters hereunder will have been fully paid or provided for
by such Selling Stockholder and all laws imposing such taxes will have been
fully complied with.
(e) None of the execution, delivery or performance
of this Agreement, the Power of Attorney or the Custody Agreement and the
consummation of the transactions contemplated herein or therein by such Selling
Stockholder conflicts or will conflict with or results or will result in any
breach or violation of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any Encumbrance upon,
any property or assets of such Selling Stockholder pursuant to (i) the terms of
any contract or other agreement to which such Selling Stockholder is a party or
by which he is bound or to which any of his properties is subject; (ii) any
statute, rule or regulation of any Governmental Body having jurisdiction over
such Selling Stockholder or any of his activities or properties; or (iii) the
terms of any judgment, decree or order of any arbitration or Governmental Body
having such jurisdiction.
(f) No consent, approval, authorization or order of,
or any filing or declaration with, any Governmental Body is required for the
consummation by such Selling Stockholder of the transactions on his part
contemplated herein, except such as have been obtained and such as may be
required under state securities or Blue Sky laws or the bylaws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of
the Shares to be sold by such Selling Stockholder.
(g) The sale of the Shares proposed to be sold by
such Selling Stockholder is not prompted by such Selling Stockholder's
knowledge of any material non-public information concerning the Company.
(h) On the date that any Preliminary Prospectus was
filed with the Commission, the date the Prospectus is first filed with the
Commission pursuant to Rule 424(b) (if required), at all times subsequent to
and including the Closing Date and, if later, the Option Closing Date and when
any post-effective amendment to the Registration Statement becomes effective or
any amendment or supplement to the Prospectus is filed with the Commission, all
information with respect to such Selling Stockholder included in the
Registration Statement, each Preliminary Prospectus and the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment or supplement thereto), did or will comply with all applicable
provisions of the Act and the Rules and
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<PAGE> 15
Regulations and did or will contain all statements required to be stated
therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no information regarding such Selling Stockholder
included in the Registration Statement or any such amendment did or will
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading. At the Effective Date, the date the Prospectus or any
amendment or supplement to the Prospectus is filed with the Commission and at
the Closing Date and, if later, the Option Closing Date, the information
regarding such Selling Stockholder included in the Prospectus did not or will
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(i) Such Selling Stockholder has no reason to
believe that the representations and warranties of the Company contained in
Section 3 are not true and correct in all material respects.
(j) Such Selling Stockholder has not distributed and
will not distribute the Registration Statement, any Preliminary Prospectus, the
Prospectus or any other offering material in connection with the offering and
sale of the Shares. Such Selling Stockholder has not taken, directly or
indirectly, any action designed, or which might reasonably be expected, to
cause or result in, under the Act or otherwise, or which has caused or resulted
in, stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares.
5. Representations and Warranties of the Underwriters. Upon
your authorization of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale to the public upon the terms set
forth in the Prospectus. The Representative represents and warrants to the
Company and the Selling Stockholder that, assuming compliance by the Company
with all relevant provisions of the Act in connection with the Registration
Statement, the Representative will conduct all offers and sales of the Shares
in compliance with the relevant provisions of the Act and the Regulations and
all applicable state securities laws and regulations.
6. Agreements of the Company and the Selling Stockholder.
The Company (as to Sections 6(a) - (j)) and the Selling Stockholder (as to
Sections 6(k) and (l)) covenants and agrees with each of the several
Underwriters as follows:
(a) The Company will not, either prior to the
Effective Date or thereafter during such period as the
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<PAGE> 16
Prospectus is required by law to be delivered in connection with sales of the
Shares by an Underwriter or dealer, file any amendment or supplement to the
Registration Statement or the Prospectus, unless a copy thereof shall first
have been submitted to the Representative within a reasonable period of time
prior to the filing thereof and the Representative shall not have objected
thereto in good faith.
(b) If the Registration Statement is not yet
effective, the Company will use its best efforts to cause the Registration
Statement to become effective not later than the time indicated in Section 7(a)
hereof. The Company will notify the Representative promptly, and will confirm
such advice in writing, (i) when the Registration Statement has become
effective and when any post-effective amendment thereto becomes effective, (ii)
of any request by the Commission for amendments or supplements to the
Registration Statement or the Prospectus or for additional information, (iii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose or the threat thereof, (iv) of the happening of
any event during the period mentioned in the second sentence of Section 6(f)
that in the judgment of the Company makes any statement made in the
Registration Statement or the Prospectus untrue or that requires the making of
any changes in the Registration Statement or the Prospectus in order to make
the statements therein, in light of the circumstances in which they are made,
not misleading and (v) of receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission relating
to the Company, the Registration Statement, any Preliminary Prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. The Company will prepare the Prospectus in a form approved by
the Representative and will file such Prospectus pursuant to Rule 424(b) under
the Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Act. If the Company has omitted any information from the Registration
Statement pursuant to Rule 430A, the Company will use its best efforts to
comply with the provisions of and make all requisite filings with the
Commission pursuant to said Rule 430A and to notify the Representative promptly
of all such filings.
(c) If, at any time when a Prospectus relating to
the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
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<PAGE> 17
circumstances under which they were made, not misleading, or the Registration
Statement, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein not misleading, or if for any other reason it is necessary
at any time to amend or supplement the Prospectus or the Registration Statement
to comply with the Act or the Rules and Regulations, the Company will promptly
notify the Representative thereof and, subject to Section 5(b) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(d) The Company will furnish to the
Representative, without charge, two signed copies of the Registration Statement
and of any post-effective amendment thereto, including financial statements and
schedules, and all exhibits thereto and will furnish to the Representative,
without charge, for transmittal to each of the other Underwriters, copies of
the Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(e) The Company will comply with all the
provisions of all undertakings contained in the Registration Statement.
(f) On the Effective Date, and thereafter from
time to time for such period as the Prospectus is required by the Act to be
delivered, the Company will deliver to each of the Underwriters, without
charge, as many copies of the Prospectus or any amendment or supplement thereto
as the Representative may reasonably request. The Company consents to the use
of the Prospectus or any amendment or supplement thereto by the several
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur
which in the judgment of the Company or counsel to the Underwriters should be
set forth in the Prospectus in order to make any statement therein, in the
light of the circumstances under which it was made, not misleading, or in the
Registration Statement in order to make any statement therein not misleading,
or if it is necessary to supplement or amend the Prospectus or the Registration
Statement to comply with law, the Company will forthwith prepare and duly file
with the Commission an appropriate supplement or amendment thereto, and will
deliver to each of the Underwriters, without charge, such number of copies
thereof as the Representative may reasonably request.
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<PAGE> 18
(g) Prior to any public offering of the Shares by
the Underwriters, the Company will cooperate with the Representative and its
counsel in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
the Representative may reasonably request; provided, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject.
(h) During the period of five years commencing on
the Effective Date, the Company will furnish to the Representative and each
other Underwriter who may so request copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock, and will
furnish to the Representative and each other Underwriter who may so request a
copy of each annual or other report it shall be required to file with the
Commission.
(i) The Company will make generally available to
holders of its securities, as soon as may be practicable, but in no event later
than the last day of the fifteenth full calendar month following the calendar
quarter in which the Effective Date falls, a consolidated earnings statement
(which need not be audited but shall be in reasonable detail) for a period of
12 months commencing after the Effective Date, and satisfying the provisions of
Section 11(a) of the Act (including Rule 158 of the Rules and Regulations).
(j) The Company will apply the net proceeds from
the offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds."
(k) Neither the Company nor the Selling
Stockholder will at any time, directly or indirectly, take any action intended,
or which might reasonably be expected, to cause or result in, or which will
constitute, stabilization of the price of the shares of Common Stock to
facilitate the sale or resale of any of the Shares.
(l) The Selling Stockholder will deliver to the
Representative prior to or on the Effective Date a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
7. Expenses.
(a) Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company and
the Selling Stockholder will pay, or
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<PAGE> 19
reimburse if paid by the Representative, all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholder under
this Agreement, including, but not limited to, costs and expenses of or
relating to (i) the preparation, printing and filing of the Registration
Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus,
any amendment or supplement to the Registration Statement or the Prospectus,
the Custody Agreements and the Powers of Attorney, (ii) the preparation and
delivery of certificates representing the Shares, (iii) the printing of this
Agreement, the Agreement among Underwriters, any Dealer Agreements and any
Underwriters' Questionnaire, (iv) furnishing (including costs of shipping and
mailing) such copies of the Registration Statement, the Prospectus and any
Preliminary Prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, (v) the quotation of the
Shares on the NASDAQ NMS, (vi) any filings required to be made by the
Underwriters with the NASD, (vii) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 6(g), including the reasonable
fees, disbursements and other charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (viii) counsel and accountants to
the Company and the Selling Stockholder and (ix) the transfer agent for the
Shares; provided, that, the aggregate maximum amount of legal fees (not
including disbursements) of counsel to the Underwriters which the Company and
Selling Stockholder will pay in connection with sub-sections (vi) and (vii) of
this paragraph (a) will be $15,000.
(b) Whether or not the transactions contemplated by
this Agreement are consummated or if this Agreement shall be terminated by the
Company or the Selling Stockholder pursuant to any of the provisions hereof,
the Company and the Selling Stockholder will reimburse the Representative for
all of its accountable out-of-pocket fees and expenses (including the fees,
disbursements and other charges of its counsel) incurred by it in connection
herewith, up to an aggregate amount of $165,000, which amount includes the
legal fees (but not disbursements) to be paid by the Company and the Selling
Stockholder relating to sub-sections (vi) and (vii) of paragraph (a) above.
8. Conditions of the Obligations of the Underwriters. The
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement
has become effective shall be received by the Representative not later than
12:00 p.m., New York City time, on the date of this Agreement or at such later
date and time as shall be consented
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<PAGE> 20
to in writing by the Representative and all filings required by Rule 424 of the
Rules and Regulations and Rule 430A shall have been made.
(b) (i) No stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall be pending or threatened by the Commission,
(ii) no order suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue Sky
laws of any jurisdiction shall be in effect, and no proceeding for such purpose
shall be pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities, and (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representative and the
Representative did not object thereto in good faith, and the Representative
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of the foregoing
clauses (i), (ii) and (iii).
(c) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, (i)
there shall not have been a material adverse change in the general affairs,
business, business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company whether or not arising from
transactions in the ordinary course of business, and (ii) the Company shall not
have sustained any material loss or interference with its business, assets or
properties from fire, explosion, flood or other casualty, whether or not
covered by insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the
Representative any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there
shall have been no litigation or other proceeding instituted against the
Company or any of its officers, directors or shareholders in their capacities
as such, or any of its assets or properties, before or by any Governmental Body
in which litigation or proceeding an
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<PAGE> 21
unfavorable ruling, decision or finding would materially and adversely affect
the business, properties, business prospects, condition (financial or
otherwise), net worth or results of operations of the Company.
(e) Each of the representations and warranties of
the Company contained herein shall be true and correct at the Closing Date and,
with respect to the Option Shares, at the Option Closing Date, as if made on
such date, and all covenants and agreements herein contained to be performed on
the part of the Company and all conditions herein contained to be fulfilled or
complied with by the Company at or prior to the Closing Date and, with respect
to the Option Shares, at or prior to the Option Closing Date, shall have been
fully performed, fulfilled or complied with.
(f) The Representative shall have received an
opinion, dated the Closing Date and the Option Closing Date, from Pietrantoni
Mendez & Alvarez, San Juan, Puerto Rico, counsel for the Company to the
following effect:
(i) The Company has been duly organized and
validly existing as a corporation under the laws of the
Commonwealth of Puerto Rico and the United States and is in
good standing with the Commonwealth of Puerto Rico. The
Company is registered as a savings and loan holding company
under HOLA and is in good standing with the OTS. Each of
Doral Mortgage Corporation ("Doral Mortgage") and Doral
Federal Savings Bank ("Doral Federal"), each a Subsidiary, is
a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of
incorporation. Each of the Company, Doral Mortgage and Doral
Federal is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the
nature or conduct of its business or use of its property and
assets makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect
on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its
Subsidiaries taken as a whole;
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<PAGE> 22
(ii) The Company has an authorized capitalization as
set forth in the Prospectus; all of the outstanding shares of
Common Stock have been duly authorized and validly issued by
the Company, are fully paid and nonassessable and are free of
any preemptive or other rights to subscribe for any of the
Shares, except for the rights of BanPonce Corporation
("BanPonce") to acquire up to 200,000 additional shares of
Common Stock pursuant to Article 11 of a Debenture Purchase
Agreement dated September 25, 1995 between the Company and
BanPonce (the "Debenture Purchase Agreement"); the Company has
duly authorized the issuance and sale of the Shares to be
sold by it hereunder; such Shares, when issued by the Company
and paid for in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform
in all material respects to the description thereof contained
in the Prospectus and will not be subject to any preemptive,
subscription or other similar rights; the Shares have been
duly authorized for quotation on the NASDAQ NMS; and no
holders of securities of the Company are entitled to have
such securities registered under the Registration Statement,
except for the registration rights of BanPonce under Article
10 of the Debenture Purchase Agreement, which have been
waived;
(iii) The Registration Statement is effective under
the Act; any required filing of the Prospectus pursuant to
Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b); and no stop order suspending
the effectiveness of the Registration Statement or any
amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement or any
amendment thereto has been issued, and, to the best knowledge
of such counsel, no proceedings for that purpose have been
instituted or are pending or are threatened or contemplated
under the Act;
(iv) The Registration Statement originally filed
with respect to the Shares and each amendment thereto and the
Prospectus and, if any, each amendment and supplement thereto
(other than the documents incorporated therein by reference
and not including the financial statements, schedules and
other financial data contained therein, as to which such
counsel need not express any opinion), complied as to form in
all material respects with the requirements of the Act, the
Exchange Act and the related rules and regulations thereunder;
(v) The descriptions contained and summarized in the
Registration Statement, or incorporated therein by reference,
and the Prospectus of contracts and other documents are
accurate and fairly represent in all
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<PAGE> 23
material respects the information required to be shown by the
Act and the Rules and Regulations; and the statements set
forth under the headings "Recent Developments," "Business,"
"Description of Capital Stock," "Certain Federal Income Tax
Considerations" and "Certain Puerto Rico Income Tax
Considerations" in the Prospectus, insofar as such statements
constitute a summary of legal matters, documents or
proceedings referred to therein, provide an accurate summary
of such legal matters, documents and proceedings;
(vi) To the knowledge of such counsel, there are no
contracts or documents which are required by the Act to be
described in the Registration Statement or the Prospectus or
to be filed as exhibits to the Registration Statement which
are not filed or incorporated therein by reference as required
by the Act and the Rules and Regulations;
(vii) To the knowledge of such counsel after
reasonable investigation, there is not pending or threatened
against the Company or any of the Subsidiaries any action,
suit, arbitration, claim governmental or other proceeding
(informal or formal) or investigation before or by any
Governmental Body of a character required to be disclosed in
the Registration Statement or the Prospectus which is not so
disclosed therein. To the knowledge of such counsel after
reasonable investigation, neither the Company nor any
Subsidiary is in violation of, or in default with respect to,
any law, rule, or regulation, or any order, judgment or
decree, except as described in the Registration Statement or
Prospectus or such as in the aggregate do not now have and can
reasonably be expected in the future not to have a material
adverse effect upon the operations, business, properties, or
assets of the Company and its Subsidiaries taken as a whole;
nor is the Company or any Subsidiary presently required under
any order, judgment or decree to take any action in order to
avoid any such violation or default;
(viii) The Company has full legal right, power, and
authority to enter into this Agreement and to consummate the
transactions provided for herein; this Agreement has been duly
authorized, executed and delivered by the Company; this
Agreement, assuming due authorization, execution and delivery
by each other party hereto, is a valid and binding agreement
of the Company, enforceable in accordance with its terms,
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in
effect relating to or affecting
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<PAGE> 24
creditors' rights generally or by general principles of equity
relating to the availability of remedies and except as rights
to indemnity and contribution may be limited by federal or
state securities laws or the public policy underlying such
laws;
(ix) None of the Company's execution or delivery of
this Agreement, its performance hereof, its consummation of
the transactions contemplated herein or its application of the
net proceeds of the offering in the manner set forth under the
caption "Use of Proceeds," conflicts or will conflict with or
results or will result in any breach or violation of any of
the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any Encumbrance upon,
any property or assets of the Company pursuant to (A) the
terms of the Certificate of Incorporation or By-laws of the
Company, in each case as amended; (B) the terms of any
contract or other agreement to which the Company is a party or
by which it is or may be bound or to which any of its
properties is or may be subject and of which such counsel has
knowledge; (C) any statute, rule or regulation of any
Governmental Body having jurisdiction over the Company or any
of its activities or properties; or (D) the terms of any
judgment, decree or order of any arbitrator or Governmental
Body having such jurisdiction and of which such counsel has
knowledge; and no consent, approval, authorization or order of
any Governmental Body has been or is required for the
Company's performance of this Agreement or the consummation of
the transactions contemplated hereby, except such as have been
obtained under the Act or may be required under state
securities or blue sky laws in connection with the purchase
and distribution by the Underwriters of the Shares;
(x) To such counsel's knowledge after reasonable
investigation, the conduct of the respective businesses of the
Company and its Subsidiaries is not in violation of any
federal, state or local statute, administrative regulation or
other law, which violation is likely to have a material
adverse effect on the Company and its Subsidiaries taken as a
whole; and the Company and its Subsidiaries have obtained all
licenses as are necessary or required for the ownership,
leasing and operation of their respective properties and the
conduct of their businesses as presently conducted;
(xi) The Company is not required to be registered as
an investment company under the Investment Company Act;
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<PAGE> 25
(xii) To the knowledge of such counsel, the Company
is not in any breach or violation of any of the terms or
provisions of, or in default under (nor has an event occurred
which with notice or lapse of time or both would constitute a
default or acceleration under), (A) the terms of its
Certificate of Incorporation or By-laws, in each case as
amended; (B) the terms of any contract or other agreement
known to such counsel after reasonable investigation to which
the Company is a party or by which the Company is or may be
bound or to which any of its properties or assets is or may be
subject; (C) any statute, rule or regulation of any
Governmental Body having jurisdiction over the Company or any
of its activities, assets or properties; or (D) the terms of
any judgment, decree or order, known to such counsel after
reasonable investigation, of any arbitrator or Governmental
Body having such jurisdiction, which breach, violation or
default could have a material adverse effect on the Company
and its Subsidiaries taken as a whole;
(xiii) To such counsel's knowledge after reasonable
investigation, no legal or governmental proceedings are
pending to which the Company or any of its Subsidiaries is a
party or by which the assets or property of the Company or any
of its Subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and
are not described therein and to the knowledge of such
counsel, no such proceedings have been threatened against the
Company or any of its Subsidiaries or any of their respective
assets or properties;
(xiv) The deposit accounts of Doral Federal are
insured by the SAIF of the FDIC to the legal maximum, and no
proceeding for the termination or revocation of such insurance
is pending or threatened. Doral Federal is a member in good
standing of the Federal Home Loan Bank of New York; and
(xv) To the knowledge of such counsel, none of the
Company, Doral Federal, their affiliates, or any of their
respective directors or officers is subject to any order or
directive of, or party to any agreement with, any regulatory
agency having jurisdiction with respect to its business or
operations except as disclosed in the Registration Statement
or the Prospectus.
In addition, such counsel shall state that in the course of
the preparation of the Registration Statement and the Prospectus, such counsel
has participated in conferences with
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<PAGE> 26
officers and representatives of the Company and with the Accountants, at which
conferences such counsel made inquiries of such officers, representatives and
Accountants and discussed the contents of the Registration Statement and the
Prospectus and, on the basis of the foregoing, nothing has come to such
counsel's attention that causes such counsel to believe that the Registration
Statement as of the date it was declared effective and as of the date of such
opinion contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact required to be stated therein or
necessary to make the statement therein not misleading or that the Prospectus
as of the date thereof and as of the date of such opinion, contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need not express any opinion
with respect to the financial statements, schedules and other financial data
included in the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials and, as to matters
involving the application of laws of any other jurisdiction than the
Commonwealth of Puerto Rico and the United States (to the extent satisfactory
in form and scope to counsel for the Underwriters) such counsel may rely upon
the opinion of local (including in-house) counsel to the Company. The
foregoing opinion shall also state that such counsel has no reason to believe
that the Underwriters are not justified in relying upon such opinion of local
counsel, and copies of such opinion shall be delivered to the Representative
and its counsel.
References to the Registration Statement and the Prospectus in
this paragraph (f) shall include any amendment or supplement thereto at the
date of such opinion.
(g) The Representative shall have received an
opinion, dated the Closing Date, from Pietrantoni, Mendez & Alvarez, San Juan,
Puerto Rico, counsel for the Selling Stockholder to the following effect:
(i) The Selling Stockholder has full legal right,
power and authority to enter into this Agreement and to sell,
assign, transfer and deliver in the manner provided herein the
Shares sold by such Selling Stockholder; this Agreement has
been duly authorized, executed and delivered by such Selling
Stockholder; and this Agreement, assuming due authorization,
execution and delivery by each other party hereto, is a valid
and binding agreement of such
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<PAGE> 27
Selling Stockholder, enforceable in accordance with its terms,
except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in
effect relating to or affecting creditors' rights generally or
by general principles of equity relating to the availability
of remedies and except as rights to indemnity and contribution
may be limited by federal or state securities laws or the
public policy underlying such laws;
(ii) The Selling Stockholder has full legal right,
power and authority to enter into the Custody Agreement and
Power of Attorney and to consummate the transactions provided
for therein; such Custody Agreement and Power of Attorney has
been duly authorized, executed and delivered by such Selling
Stockholder; and such Custody Agreement and Power of Attorney,
assuming due authorization, execution and delivery by each
other party hereto thereto, is a valid and binding agreement
of such Selling Stockholder, enforceable in accordance with
its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights
generally or by general principles of equity relating to the
availability of remedies and except as rights to indemnity and
contribution may be limited by federal or state securities
laws or the public policy underlying such laws;
(iii) To the knowledge of such counsel, none of the
execution, delivery or performance of this Agreement, the
Power of Attorney or the Custody Agreement and the
consummation of the transactions contemplated herein or
therein by the Selling Stockholder conflicts or will conflict
with or results or will result in any breach or violation of
any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any
Encumbrance upon, any property or assets of such Selling
Stockholder pursuant to (A) the terms of any contract or other
agreement known to such counsel after reasonable investigation
to which such Selling Stockholder is a party or by which he is
bound or to which any of his properties is subject; (B) any
statute, rule or regulation of any Governmental Body having
jurisdiction over such Selling Stockholder or any of his
activities or properties; or (C) the terms of any judgment,
decree or order known to such counsel after reasonable
investigation, of any arbitration or Governmental Body having
such jurisdiction; and
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<PAGE> 28
(iv) Upon delivery of the Shares to be sold
hereunder by the Selling Stockholder and payment therefor in
accordance with the terms of this Agreement and assuming that
each of the Underwriters which has severally purchased such
Shares acquires such Shares in good faith without notice of
any adverse claim (within the meaning of the Uniform
Commercial Code), such Underwriter will have acquired all of
the rights of the Selling Stockholder to the Shares sold by
him hereunder, free and clear of any adverse claim.
(h) The Representative shall have received an
opinion, dated the Closing Date and the Option Closing Date, from Stroock &
Stroock & Lavan, counsel to the Underwriters, which opinion shall be
satisfactory in all respects to the Representative. In rendering such opinion,
such counsel may rely as to all matters of law of the Commonwealth of Puerto
Rico upon the opinion of Pietrantoni Mendez & Alvarez, San Juan, Puerto Rico.
(i) Concurrently with the execution and delivery
of this Agreement, or, if the Company elects to rely on Rule 430A, on the date
of the Prospectus, the Accountants shall have furnished to the Representative a
letter, dated the date of its delivery (the "Original Letter"), addressed to
the Representative and in form and substance satisfactory to the
Representative, to the effect that:
(i) they are independent accountants within the
meaning of the Act and the applicable published rules and
regulations thereunder;
(ii) in their opinion, the consolidated financial
statements of the Company and its Subsidiaries audited by them
and included in the Registration Statement comply as to form
in all material respects with the applicable accounting
requirements of the Act, the Exchange Act and the published
rules and regulations thereunder with respect to Registration
Statements on Form S-3;
(iii) on the basis of procedures (but not an audit
in accordance with generally accepted auditing standards)
consisting of: (a) reading the minutes of meetings of the
stockholders and the Board of Directors of the Company and its
Subsidiaries since December 31, 1994 as set forth in the
minute books through a specified date not more than five
business days prior to the date of delivery of the Original
Letter; (b) performing the procedures specified by the
American Institute of Certified Public Accountants for a
review of interim financial information as described
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<PAGE> 29
in SAS No. 71, "Interim Financial Information," on the
unaudited condensed interim financial statements of the
Company and its Subsidiaries included in the Registration
Statement and reading the unaudited interim financial data for
the period from the date of the latest balance sheet included
in the Registration Statement to the date of the latest
available interim financial data; and (c) making inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters regarding the specific items
for which representations are requested below; nothing has
come to their attention as a result of the foregoing
procedures that caused them to believe that: (1) the unaudited
condensed interim financial statements, included in the
Registration Statement, do not comply as to form in all
material respects with the applicable accounting requirements
of the Exchange Act and the published rules and regulations
thereunder; (2) any material modifications should be made to
the unaudited condensed interim financial statements, included
in the Registration Statement, for them to be in conformity
with generally accepted accounting principles; (3) (i) at the
date of the latest available interim financial data and at a
specified date not more than five business days prior to the
date of delivery of the Original Letter there was any change
in the capital stock, loans payable, or securities sold under
agreements to repurchase or any decreases in the consolidated
stockholders' equity of the Company and its Subsidiaries as
compared with amounts shown in the December 31, 1994 balance
sheet included in the Registration Statement or (ii) for the
period from January 1, 1995 to a specified date not more than
five business days prior to the date of delivery of the
Original Letter, there were any decreases, as compared with
the corresponding period in the preceding year, in
consolidated revenues, income before taxes or in the total or
per-share amounts of net income, except in all instances for
changes or decreases which the Registration Statement
discloses have occurred or may occur, or they shall state any
specific changes or decreases; and
(iv) the information set forth under the captions
"Prospectus Summary," "Capitalization," "Selected Financial
Data" and "Business of the Company," which is expressed in
dollars (or percentages derived from such dollar amounts) and
has been obtained from accounting records which are subject to
the internal controls of the Company's accounting system or
which has been derived directly from such accounting records
and analysis or
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<PAGE> 30
computations, is in agreement with such records or
computations made therefrom.
At the Closing Date and, as to the Option Shares, the Option
Closing Date, the Accountants shall have furnished to the Representative a
letter, dated the date of its delivery, which shall confirm, on the basis of a
review in accordance with the procedures set forth in the Original Letter, that
nothing has come to their attention during the period from the date of the
Original Letter referred to in the prior sentence to a date (specified in the
letter) not more than five days prior to the Closing Date or the Option Closing
Date, as the case may be, which would require any change in the Original Letter
if it were required to be dated and delivered at the Closing Date or the Option
Closing Date, as the case may be.
In the event that the letters referred to above set forth any
such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representative deems such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representative, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Shares as contemplated by the Registration Statement, as amended as of the date
hereof.
(j) At the Closing Date and, as to the Option
Shares, the Option Closing Date, there shall be furnished to the Representative
an accurate certificate, dated the date of its delivery, signed by each of the
Chief Executive Officer and the Chief Financial Officer of the Company, in form
and substance satisfactory to the Representative, to the effect that to the
best of their knowledge:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A)
as of the date of such certificate, (x) the Registration
Statement does not contain any untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein
not misleading and (y) the Prospectus does not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading and
(B) since the Effective Date no event has occurred as a result
of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein not untrue or
misleading in any material respect;
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(ii) Each of the representations and warranties of
the Company contained in this Agreement were, when originally
made, and are, at the time such certificate is delivered, true
and correct in all respects; each of the covenants required
herein to be performed by the Company on or prior to the date
of such certificate has been duly, timely and fully performed
and each condition herein required to be complied with by the
Company on or prior to the delivery of such certificate has
been duly, timely and fully complied with.
(iii) No stop order suspending the effectiveness of
the Registration Statement or any post-effective amendment
thereto and no order directed at any document incorporated by
reference in the Registration Statement or any amendment
thereto or the Prospectus has been issued, and no proceedings
for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the
Commission.
(k) The Shares shall be qualified for sale in
such states as the Representative may reasonably request, each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date and the Option Closing Date.
(l) Prior to the Closing Date, the Shares shall
have been accepted for quotation on the NASDAQ NMS.
(m) At the Closing Date, there shall be furnished
to the Representative an accurate certificate, dated the date of its delivery,
from the Selling Stockholder (which may be signed by an Attorney-in-Fact), in
form and substance satisfactory to the Representative, to the effect that:
(i) The Registration Statement and Prospectus and,
if any, each amendment and each supplement thereto contain all
statements required to be included therein regarding such
Selling Stockholder, and (A) as of the date of such
certificate, (x) the Registration Statement does not contain
any untrue statement of a material fact regarding such Selling
Stockholder or omit to state a material fact regarding such
Selling Stockholder required to be stated therein or necessary
in order to make the statements therein regarding such Selling
Stockholder not misleading and (y) the Prospectus does not
contain any untrue statement of a material fact regarding such
Selling Stockholder or omit to state a material fact regarding
such Selling Stockholder required to be stated therein or
necessary in order to make the statements therein regarding
such
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<PAGE> 32
Selling Stockholder, in the light of the circumstances under
which they were made, not misleading and (B) since the
Effective Date no event has occurred as a result of which it
is necessary to amend or supplement the Prospectus in order to
make the statements therein regarding such Selling Stockholder
not untrue or misleading in any material respect;
(ii) Each of the representations and warranties
of such Selling Stockholder contained in this Agreement were,
when originally made, and are, at the time such certificate is
delivered, true and correct in all respects; and
(iii) Each of the covenants required herein to be
performed by such Selling Stockholder on or prior to the date
of such certificate has been duly, timely and fully performed
and each condition herein required to be complied with such
Selling Stockholder on or prior to the delivery of such
certificate has been duly, timely and full complied with.
(n) The Company and the Selling Stockholder shall
have furnished to the Representative such certificates, letters and other
documents, in addition to those specifically mentioned herein, as the
Representative may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement
in the Registration Statement or the Prospectus, as to the accuracy at the
Closing Date and the Option Closing Date of the representations and warranties
of the Company or the Selling Stockholder, as to the performance by the Company
or the Selling Stockholder of their obligations hereunder, or as to the
fulfillment of the conditions concurrent and precedent to the obligations
hereunder of the Underwriters.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you. The Company and the Selling Stockholder will
furnish you with such conformed copies of such opinions, certificates, letters
and other documents as you shall reasonably request.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of
each Underwriter and each person, if any, who controls each Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages or liabilities, joint or
several (and actions in respect thereof), to which they, or any of them, may
become subject under the Act or other Federal or state
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<PAGE> 33
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
made by the Company in Section 3 of this Agreement, (ii) any untrue statement
or alleged untrue statement of any material fact contained in (A) any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or (B)
any application or other document, or any amendment or supplement thereto,
executed by the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify the Shares
under the securities or blue sky laws thereof or filed with the Commission or
any securities association or securities exchange (each, an "Application"), or
(iii) the omission or alleged omission to state in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any amendment or supplement to
the Registration Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse, as incurred, each Underwriter and each such
other person for any legal or other expenses reasonably incurred by such
Underwriter or such other person in connection with investigating, defending or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability based solely upon an untrue statement or omission or alleged untrue
statement or omission in any of such documents made in reliance upon and in
conformity with information relating to any Underwriter furnished in writing to
the Company by the Representative on behalf of any Underwriter expressly for
inclusion therein; provided, further, that such indemnity with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter (or
any such other person) from whom the person asserting any such loss, claim,
damage, liability or action purchased Shares which are the subject thereof to
the extent that any such loss, claim, damage or liability (i) results from the
fact that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that was
corrected in the Prospectus (or any amendment or supplement thereto), unless
such failure to deliver the Prospectus (as amended or supplemented) was the
result of noncompliance by the Company with Section 6(f). This indemnity
agreement will be in addition to any liability that the Company might otherwise
have. The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or
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<PAGE> 34
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party
to each claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of each Underwriter and each such
other person from all liability arising out of such claim, action, suit or
proceeding.
(b) The Selling Stockholder agrees to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person, if any, who controls each
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act from and against any and all losses, claims, damages or
liabilities, joint or several (and actions in respect thereof), to which he may
become subject under the Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
(i) any untrue statement or alleged untrue statement made by such Selling
Stockholder in Section 4 of this Agreement, (ii) any untrue statement or
alleged untrue statement of any material fact contained in (A) any Preliminary
Prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus or (B) any
Application executed by such Selling Stockholder or based upon written
information furnished by or on behalf of such Selling Stockholder, or (iii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus or any Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse, as incurred, each Underwriter and each such
other person for any legal or other expenses reasonably incurred by such
Underwriter or such other person in connection with investigating, defending or
appearing as a third- party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that such Selling Stockholder
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based solely upon an untrue statement
or omission or alleged untrue statement or omission in any of such documents
made in reliance upon and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representative on behalf
of any Underwriter expressly for inclusion therein; provided, further, that
such indemnity with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter (or any such other person) from whom the person
asserting any such loss, claim, damage, liability or action purchased Shares
which are the subject thereof to the extent that any such loss, claim, damage
or liability (i) results from the fact that such Underwriter failed to send or
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<PAGE> 35
give a copy of the Prospectus (as amended or supplemented) to such person at or
prior to the confirmation of the sale of such Shares to such person in any case
where such delivery is required by the Act and (ii) arises out of or is based
upon an untrue statement or omission of a material fact contained in such
Preliminary Prospectus that was corrected in the Prospectus (or any amendment
or supplement thereto), unless such failure to deliver the Prospectus (as
amended or supplemented) was the result of noncompliance by the Company with
Section 6(f); and provided further, however, that such Selling Stockholder will
be liable in any such case only to the extent that such loss, claim, damage,
liability or action arises out of or is based upon any untrue statement or
omission or alleged untrue statement or omission made in the Registration
Statement or any amendment thereto or in the Prospectus or any amendment or
supplement thereto or any Application in reliance upon and in conformity with
information furnished to the Company by such Selling Stockholder. This
indemnity agreement will be in addition to any liability that such Selling
Stockholder might otherwise have. Such Selling Stockholder will not, without
the prior written consent of each Underwriter, settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit
or proceeding in respect of which indemnification may be sought hereunder
(whether or not such Underwriter or any person who controls such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
is a party to each claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of each Underwriter and
each such other person from all liability arising out of such claim, action,
suit or proceeding. The Company and such Selling Stockholder may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(c) Each Underwriter will indemnify and hold
harmless the Company, the Selling Stockholder, each person, if any, who
controls the Company or the Selling Stockholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, each director of the Company
and each officer of the Company who signed the Registration Statement against
any losses, claims, damages or liabilities (or actions in respect thereof) to
which the Company, the Selling Stockholder and any such director, officer or
controlling person may become subject under the Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus or any Application, or material fact
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<PAGE> 36
required to be stated therein or (ii) the omission or the alleged omission to
state in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or any Application, a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through the Representative expressly for use therein; and, subject
to the limitation set forth immediately preceding this clause, will reimburse,
as incurred, any legal or other expenses reasonably incurred by the Company,
the Selling Stockholder and any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or any action in respect thereof. The Company and the Selling
Stockholder acknowledge that, for all purposes under this Agreement, the
statements set forth under the heading "Underwriting" and the information in
the first paragraph on the inside front cover of any Preliminary Prospectus and
the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representative on behalf of the
Underwriters expressly for inclusion in the Registration Statement, any
Preliminary Prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that each Underwriter might otherwise have.
(d) Promptly after receipt by an indemnified
party under this Section 9 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party or parties under this Section 9, notify such indemnifying
party or parties of the commencement thereof; but the omission so to notify the
indemnifying party or parties will not relieve it or them from any liability
which it or they may have to any indemnified party under the foregoing
provisions of this Section 9 or otherwise unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by
the indemnifying party. If any such action is brought against an indemnified
party and it notifies an indemnifying party or parties of its commencement, the
indemnifying party or parties against which a claim is made will be entitled to
participate therein and, to the extent that it or they may wish, to assume the
defense thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnifying party
shall not have the
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<PAGE> 37
right to direct the defense of such action on behalf of such indemnified party
or parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 9 for any legal or
other expenses other than reasonable costs of investigation subsequently
incurred by such indemnified party in connection with the defense thereof,
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representative in the case of
paragraph (a) of this Section 9, representing the indemnified parties under
such paragraph (a) who are parties to such action or actions), or (ii) the
indemnifying party has authorized in writing the employment of counsel for the
indemnified party at the expense of the indemnifying party. After such notice
from the indemnifying party to such indemnified party, the indemnifying party
will not be liable for the costs and expenses of any settlement of such action
effected by such indemnified party without the consent of the indemnifying
party, unless such indemnified party waived its rights under this Section 9 in
which case the indemnified party may effect such a settlement without such
consent.
(e) If the indemnification provided for in the
foregoing paragraphs of this Section 9 is unavailable or insufficient to hold
harmless an indemnified party under paragraph (a) or (b) above in respect of
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) (i) in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party or parties, on the one hand, and the indemnified party, on
the other, from the offering of the Shares or (ii) if, but only if, the
allocation provided by the foregoing clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
indemnifying party or parties on the one hand, and the indemnified party, on
the other, in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
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<PAGE> 38
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholder, on the one hand, and the Underwriters, on the other, shall be
deemed to be in the same proportion as the total proceeds from the offering of
the Shares (before deducting expenses) received by the Company and the Selling
Stockholder bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the Prospectus. Relative fault shall be determined by reference to whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company, the Selling Stockholder or the Representative on behalf of the
Underwriters, the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Stockholder and the Underwriters agree that it would not be just
and equitable if contributions pursuant to this Section 9(e) were to be
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages, liabilities (or actions in respect thereof) referred to above in this
Section 9(e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 9(e), no Underwriter shall be required to contribute any amount in
excess of the total underwriting discounts received by it with respect to the
Shares purchased by such Underwriter under this Agreement, less the aggregate
amount of any damages that such Underwriter has otherwise been required to pay
in respect of the same or any substantially similar claim. No person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
as provided in this Section 9(e) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 9(e),
each person, if any, who controls an Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act will have the same rights to
contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement and each person,
if any, who controls the Company or the Selling Stockholder within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, will have the same
rights to contribution as the Company and the Selling Stockholder, subject in
each case to the provisions of this paragraph (e). Any party entitled to
contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such
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<PAGE> 39
party in respect of which a claim for contribution may be made under this
Section 9(e), will notify any such party or parties from whom contribution may
be sought, but the omission so to notify will not relieve the party or parties
from whom contribution may be sought from any other obligation(s) it or they
may have hereunder or otherwise than under this paragraph (e) or (y) to the
extent that such party or parties were not adversely affected by such omission.
The contribution agreement set forth above shall be in addition to any
liabilities which any indemnifying party may otherwise have. No party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(f) The indemnity and contribution agreements
contained in this Section 9 and the representations and warranties of the
Company and the Selling Stockholder contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of the Underwriters, (ii) acceptance of any of the Shares and
payment therefor or (iii) any termination of this Agreement.
10. Termination. The obligations of the several Underwriters
under this Agreement may be terminated at any time prior to the Closing Date
(or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company from the Representative, without liability on
the part of any Underwriter to the Company or the Selling Stockholder if, prior
to delivery and payment for the Firm Shares (or the Option Shares, as the case
may be), in the sole judgment of the Representative, (i) trading in the Common
Stock or securities generally shall have been suspended by the Commission or by
the NASDAQ NMS, (ii) minimum or maximum prices shall have been established for
the Common Stock or securities generally on either the NASDAQ NMS or the New
York Stock Exchange, or additional material governmental restrictions, not in
force on the date of this Agreement, shall have been imposed upon trading in
securities generally by any of such market or exchange or by order of the
Commission or any court or other governmental authority, (iii) a general
banking moratorium shall have been declared by the United States or New York
State authorities, or (iv) any material adverse change in the financial or
securities markets in the United States or any outbreak or material escalation
of hostilities or declaration by the United States of a national emergency or
war or other calamity or crisis shall have occurred, the effect of any of which
is such as to make it, in the sole judgment of the Representative,
impracticable or inadvisable to market the Shares on the terms and in the
manner contemplated by the Prospectus. Any termination pursuant to Section 10
shall be without liability of any party to any other party except as provided
in Sections 7(a) and 9.
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<PAGE> 40
11. Default of Underwriters. If one or more Underwriters
default in their obligations to purchase Firm Shares or Option Shares hereunder
and the aggregate number of such Shares that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Shares or Option Shares to be purchased by all of the
Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representative for the purchase of such Shares
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Shares or Option
Shares that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Shares that is more than ten percent of the aggregate number of Firm
Shares or Option Shares, as the case may be, to be purchased by all of the
Underwriters at such time hereunder, and if arrangements satisfactory to the
Representative are not made within 36 hours after such default for the purchase
by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representative) of the Shares with respect to which
such default occurs, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter, the Company or the Selling Stockholder
other than as provided in Section 12 hereof. In the event of any default by
one or more Underwriters as described in this Section 11, the Representative
shall have the right to postpone the Firm Closing Date or the Option Closing
Date, as the case may be, established as provided in Section 11 hereof for not
more than seven business days in order that any necessary changes may be made
in the arrangements or documents for the purchase and delivery of the Firm
Shares or Option Shares, as the case may be. As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under
this Section 11. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
12. Survival. The respective representations,
warranties, agreements, covenants, indemnities and other statements of the
Company, its officers, the Selling Stockholder and the several Underwriters set
forth in this Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, the Selling Stockholder, any Underwriter or any controlling person
referred to in Section 9 hereof and (ii) delivery of and payment for the
Shares. The respective agreements, covenants, indemnities and other statements
set forth in Sections 7 and 9 hereof shall remain in
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<PAGE> 41
full force and effect, regardless of any termination or cancellation of this
Agreement.
13. Notices. Notice given pursuant to any of the provisions
of this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company, at the office of the Company, 1159
Franklin D. Roosevelt Avenue, San Juan, Puerto Rico 00920, Attention: Salomon
Levis, (b) if to the Selling Stockholder, at the office of Salomon Levis, c/o
First Financial Caribbean Corporation, 650 Munoz Avenue, San Juan, Puerto Rico
00918, Attention: Salomon Levis, or (c) if to the Underwriters, to the
Representative at the offices of Brean Murray, Foster Securities Inc., 633
Third Avenue, New York, New York 10017, Attention: A. Brean Murray. Any such
notice shall be effective only upon receipt. Any notice under Section 9 or 10
may be made by telex or telephone, but if so made shall be subsequently
confirmed in writing.
14. Successors. This Agreement shall inure to the benefit of
and shall be binding upon the several Underwriters, the Company, the Selling
Stockholder and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person except that (i) the indemnities of the
Company and the Selling Stockholder contained in Section 9 of this Agreement
shall also be for the benefit of any person or persons who control any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnities of the Underwriters contained in Section
9 of this Agreement shall also be for the benefit of the directors of the
Company, the officers of the Company who have signed the Registration Statement
and any person or persons who control the Company or the Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act.
No purchaser of Shares from any Underwriter shall be deemed a successor because
of such purchase. This Agreement shall not be assignable by either party
hereto without the prior written consent of the other party.
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF
THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
16. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an
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<PAGE> 42
original, but all of which together shall constitute one and the same
instrument.
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the Selling Stockholder and the several
Underwriters.
Very truly yours,
FIRST FINANCIAL CARIBBEAN CORPORATION
By: _________________________________
Name:
Title:
SELLING STOCKHOLDER
SALOMON LEVIS
By: _________________________________
Name:
Confirmed as of the date first
above mentioned:
BREAN MURRAY, FOSTER SECURITIES INC.
By: _______________________________
Name:
Title:
Acting on its behalf and
as the Representative of the
other several Underwriters
named in Schedule II hereof.
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<PAGE> 43
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
(1) (2) (3)
Number of Number of Aggregate
Firm Shares Firm Shares Number of
to be to be Firm
Purchased Purchased from Shares to
from the Selling be
the Company Stockholder Purchased
----------- -------------- ---------
<S> <C> <C> <C>
Brean Murray, Foster
Securities Inc. . . . .
----------- -------------- ---------
Total . . . . . . .
=========== ============== =========
</TABLE>
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<PAGE> 44
EXHIBIT A
LIST OF SUBSIDIARIES
1. Doral Mortgage Corporation
2. RSC Corp.
3. Centro Hipotecario, Inc.
4. Doral Federal Savings Bank
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<PAGE> 1
EXHIBIT 5
November 1, 1995
First Financial Caribbean Corporation
1159 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico 00920
RE: REGISTRATION STATEMENT ON FORM S-3 WITH RESPECT TO 1,610,000 SHARES OF
COMMON STOCK OF FIRST FINANCIAL CARIBBEAN CORPORATION
Dear Sirs:
We are acting as counsel for First Financial Caribbean Corporation (the
"Company") and Salomon Levis (the "Selling Stockholder") in connection with the
registration under the Securities Act of 1933, as amended, and pursuant to the
Company's Registration Statement on Form S-3, to be filed with the Securities
and Exchange Commission on or about November 2, 1995 (the "Registration
Statement"), covering a proposed sale by the Company and the Selling Stockholder
of up to 1,610,000 shares (all such shares being hereinafter collectively
referred to as the "Shares") of the Company's Common Stock, $1.00 par value per
share. Of the Shares being registered for sale, up to 1,510,000 shares are being
offered by the Company (the "Company Shares") and 100,000 shares (the "Selling
Stockholder Shares") are being offered by the Selling Stockholder.
We have examined and are familiar with the originals or copies certified or
otherwise identified to our satisfaction of such documents, corporate records
and other instruments relating to the incorporation of the Company and to the
authorization and issuance of the Shares, and made such investigations of law as
we have deemed necessary and advisable. In addition, we have assumed that the
Selling Stockholder Shares were issued for value at the time of their original
issue.
Based upon the foregoing and having regard to legal considerations that we
deem relevant, we are of the opinion that when the Registration Statement shall
have been declared effective, when the Company Shares have been issued in
accordance with the authorization of the Board of Directors of the Company, and
when the Shares have been duly countersigned by the Company's transfer agent and
registrar and sold and delivered as contemplated by the Registration Statement
and the Underwriting Agreement referred to therein, the Shares will be duly
authorized and validly issued, fully-paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and consent to the reference to our firm under the
caption "Legal Matters" in the Registration Statement and in the Prospectus
constituting a part thereof. In giving the foregoing consent, we do not thereby
admit that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
We are members of the Bar of the Commonwealth of Puerto Rico and do not
purport to be experts in, or to render any opinions with respect to, the laws of
any state or jurisdiction other than the laws of the Commonwealth of Puerto Rico
and the Federal laws of the United States of America.
Very truly yours,
Pietrantoni Mendez & Alvarez
<PAGE> 1
EXHIBIT 8
November 1, 1995
First Financial Caribbean Corporation
1159 Franklin D. Roosevelt Avenue
San Juan, Puerto Rico 00920
RE: FIRST FINANCIAL CARIBBEAN CORPORATION
REGISTRATION STATEMENT ON FORM S-3
Gentlemen:
We have acted as counsel for First Financial Caribbean Corporation (the
"Company") in connection with a Registration Statement on Form S-3, as amended
(the "Registration Statement"), to be filed with the Securities and Exchange
Commission on or about November 2, 1995 for the purpose of registering under the
Securities Act of 1933, as amended, 1,610,000 shares of Common Stock, $1.00 par
value, of the Company.
We have examined the prospectus contained in the Registration Statement
(the "Prospectus") and have reviewed the summary of certain federal and Puerto
Rico income tax considerations of the proposed offering described in the
Prospectus (the "Summary") appearing under the captions "Certain Federal Income
Tax Considerations" and "Certain Puerto Rico Income Tax Considerations." We have
also reviewed such other documents and instruments and as we have considered
necessary for the purpose of this opinion. In addition, we have relied on
certificates of officers of the Company as to certain factual matters.
It is our opinion that the statements of law contained in the Summary,
subject to the limitations stated in the Summary and below, while not purporting
to discuss all possible federal and Puerto Rico income tax ramifications of the
offering, are accurate statements of the principal federal and Puerto Rico tax
consequences to the investors who may participate in the offering described in
the Prospectus.
Our opinion is based upon the review of the Prospectus and of applicable
federal and Puerto Rico income tax statutes, regulations, rulings and decisions,
as now in effect. A change in any of the foregoing could necessitate a change in
our opinion. In addition, our opinion pertains only to the accuracy of the
statements of law contained in the Summary. As to statements of fact, we are
relying upon your representation that such factual statements are accurate.
Very truly yours,
Pietrantoni Mendez & Alvarez
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated February 1, 1995,
relating to the financial statements of First Financial Caribbean Corporation,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
PRICE WATERHOUSE
San Juan, Puerto Rico
November 1, 1995
