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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K405
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NO. 0-17224
FIRST FINANCIAL CARIBBEAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PUERTO RICO 66-0312162
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1159 FRANKLIN D. ROOSEVELT AVENUE
SAN JUAN, PUERTO RICO 00920
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (809) 749-7100.
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1 PAR VALUE
10-1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.
$69,475,644 approximately, based on the last sale price of $13 1/2 per
share on the NASDAQ National Market System on March 10, 1995. For the purposes
of the foregoing calculation only, all directors and executive officers of the
registrant have been deemed affiliates.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Common Stock: 7,202,284 shares as of March 10, 1995. (continued)
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
PART III
<TABLE>
<S> <C> <C>
Item 10 Directors and Executive Officers of the Information in response to this Item is
Registrant. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Election of Directors and Related Matters" in
the Company's definitive Proxy Statement for
use in connection with its 1995 Annual Meeting
of stockholders (the "Proxy Statement").
Item 11 Executive Compensation. Information in response to this Item is
incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Executive Compensation" in the Company's
Proxy Statement.
Item 12 Security Ownership of Certain Beneficial Information in response to this Item is
Owners and Management. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Security Ownership of Management and
Principal Holders" in the Company's Proxy
Statement.
Item 13 Certain Relationships and Related Information in response to this Item is
Transactions. incorporated into this Annual Report on
Form 10-K by reference to the section entitled
"Election of Directors and Related Matters" in
the Company's Proxy Statement.
</TABLE>
____________________
<PAGE> 3
FIRST FINANCIAL CARIBBEAN CORPORATION
1994 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 38
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . 38
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 53
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 53
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . 53
</TABLE>
IA089.ENS
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL.
First Financial Caribbean Corporation ("FFCC" or the "Company"),
together with its wholly-owned subsidiaries, including Doral Mortgage
Corporation ("Doral"), its principal subsidiary, 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, from time
to time, the purchase and sale of servicing rights associated with such mortgage
loans and, to a lesser extent, construction loans and loans secured by
commercial real estate (the "Mortgage Banking Business"). Substantially all of
FFCC's income is from its Mortgage Banking Business which, until the opening of
a branch in Florida in March 1992, was exclusively conducted in Puerto Rico. On
September 10, 1993, the Company acquired Doral Federal Savings Bank ("Doral
Federal"), a federal savings and loan association which operates through two
branches in Puerto Rico. In February 1994, the Company opened a second branch
in the State of Florida located in the City of Miami. 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, a mortgagee approved by the United States Department of
Housing and Urban Development ("HUD"), has been engaged in the Mortgage Banking
Business since its incorporation in Puerto Rico in 1972. The Company's Mortgage
Banking Business is principally conducted through two operating units: Doral and
HF Mortgage Bankers Division ("HF"), a division of the Company. During the first
quarter of 1994, the Company activated another mortgage banking subsidiary,
Centro Hipotecario de Puerto Rico, Inc., to serve primarily real estate brokers
and corporate employees. The Company acquired Doral and RSC Corp. ("RSC") from
Culbro Corporation ("Culbro") in September 1988 for $6 million in cash. FFCC
was a wholly-owned subsidiary of Culbro from December 1976 until December 1988
when all then outstanding shares of FFCC's common stock held by Culbro were
distributed to Culbro shareholders. Prior to 1976, FFCC was owned by Salomon
Levis and David Levis. 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 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 Federal National Mortgage Association
("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and the
Government National Mortgage Association ("GNMA"). In addition, part of the
Company's business is dependent upon the continuation of various programs
administered by the Federal Housing Administration ("FHA") for HUD, which
insures mortgage loans, and the Veterans Administration ("VA"), which partially
guarantees mortgage loans. Although the Company is not aware of any proposed
discontinuation of, or significant reduction in, the various programs
administered by FNMA, FHLMC, GNMA, FHA or VA, any such discontinuation or
reduction in the operation of such programs could have a material adverse effect
on the Company's operations. See "Mortgage Banking Business - Sale of Loans;
Issuance of Mortgage Backed Securities" herein.
<PAGE> 5
The Company is subject to the rules and regulations of, and supervision
by, several Federal and Puerto Rico entities, including, 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 - Mortgage Banking Business" herein.
The Company's operations are significantly 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 ("Section 936") of the United
States Internal Revenue Code of 1986, as amended (the "Code"). For a discussion
of these matters, see "Puerto Rico Secondary Mortgage Market and Favorable Tax
Treatment."
The Company's principal revenues from the Mortgage Banking Business are
loan servicing fees, loan origination fees, interest on mortgage loans and
various mortgage-backed securities held prior to sale, gains from the sale of
mortgage loans and various mortgage-backed securities, sales of servicing rights
and other income (primarily sales of real estate owned). The Company is an
approved seller/servicer for FHLMC and FNMA, an approved issuer for GNMA and an
approved servicer under the GNMA, FNMA and FHLMC mortgage-backed securities
programs. In addition, FFCC is qualified to originate FHA insured and VA
guaranteed mortgage loans. The Company is the largest mortgage banking
institution in Puerto Rico in terms of the volume of origination of first
mortgage loans on single-family residences.
To enter a new market and thereby expand its source of mortgage loan
originations and its servicing portfolio, Doral opened a branch in Royal Oak
Village Mall in the Orlando, Florida, metropolitan area in March 1992. This
office represents the first branch office opened by the Company outside of
Puerto Rico. In February 1994, Doral opened an additional branch office in
Miami, Florida. The Orlando and Miami offices together are staffed by seven
employees and originated approximately $6.3 million in mortgage loans during the
year ended December 31, 1994. FFCC's operations in the state of Florida are
subject to supervision by the Florida Department of Banking and Finance.
2
<PAGE> 6
The following table sets forth the components of FFCC's revenues and the
percentage contribution of each component for the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1994 1993 1992
--------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Mortgage loan sales and fees . . . . . . . . $10,573 15% $35,230 50% $24,560 49%
Servicing income . . . . . . . . . . . . . . 11,448 16% 8,627 12% 7,163 14%
Interest income . . . . . . . . . . . . . . 46,508 65% 23,775 34% 16,983 34%
Gain on sale of servicing rights . . . . . . 3,003 4% 2,378 4% 935 2%
Rental and other income . . . . . . . . . . 511 (1) 218 (1) 163 (1)
---- --- ----- --- ---- ---
Total(2) $72,043 100% $70,228 100% $49,804 100%
======= === ======= === ======= ===
</TABLE>
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(1)Represents less than one percent of revenues.
(2)Sums of the columns may not add up to the totals due to rounding.
DORAL FEDERAL SAVINGS BANK
On September 10, 1993, the Company acquired all the outstanding common
stock of Doral Federal, a federal savings association whose deposit accounts
are insured by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation. As of December 31, 1994, Doral Federal had total
assets of approximately $86.4 million and a net worth of approximately $6.4
million.
During the year ended December 31, 1994, Doral Federal did not have a
significant impact on the financial results of the Company, experiencing a
net income of approximately $205,000 notwithstanding increased expenses
associated with creating an infrastructure necessary to support future growth.
During 1994, Doral Federal, however, experienced substantial growth in assets
increasing from $34 million as of December 31, 1993 to $86.4 million 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 and its subsidiaries, consisting primarily of
corporate and custodial accounts.
Doral Federal operates through two branches located in the San Juan
metropolitan area. These branch locations serve primarily as deposit-taking
operations, since to date most loans have been originated pursuant to the Master
Loan Production Agreement referred to below. As of December 31, 1994, Doral
Federal had deposits of approximately $79.3 million. Custodial accounts
associated with the Company's servicing portfolio, commercial accounts of the
Company and retail deposits, constituted approximately 27%, 16% and 57%,
respectively, of Doral Federal's total deposit accounts.
Since its acquisition by FFCC, Doral Federal has been engaged primarily
in the origination of first mortgage loans on single family homes. During 1994,
Doral Federal also began to offer personal loans of up $40,000 secured by
mortgage on single family homes. These loans are generally secured by first
or second liens on the property. Puerto Rico usury regulation permits lenders
to charge a
3
<PAGE> 7
higher rate of interest on such loans than on conventional first mortgage
loans. To a lesser extent, Doral Federal also makes real estate development
loans and loans secured by commercial real estate.
Doral Federal has entered into a Master Loan Production Agreement with
the Company whereby the Company has agreed to 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.
Doral Federal has also entered into 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, and that Doral Federal will continue to process collections
of payments of the Loans, all 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, and depends on the term to
maturity of the 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 further information regarding Doral Federal, see "Other Lending and
Investment Activities" and "Regulation - Savings and Loan Operations - Doral
Federal."
MORTGAGE BANKING BUSINESS
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 operates two branches in the San Juan
Metropolitan area. Doral operates 15 branches in Puerto Rico located in
Arecibo, Bayamon (2 branches), Caguas, Carolina, Cayey, Fajardo, Guayama, Hato
Rey (2 branches), Humacao, Mayaguez, Ponce, Rio Piedras and Vega Baja. Centro
Hipotecario 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 substantial 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 developments 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 during the year ended
December 31, 1994.
4
<PAGE> 8
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 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. During 1994, second mortgages
constituted less than 4% 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).
During 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 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 through internal
originations through its branch network. However, in 1994, in order to
diversify its sources of loan production, the Company reentered the wholesale
mortgage loan market. Purchases of loans from other mortgage bankers in the
wholesale loan market provides the Company with a source of low cost production
that allows the Company to continue to increase the size of its servicing
portfolio. The Company purchased approximately $63 million in loans from third
parties during the year ended December 31, 1994 as compared to approximately $1
million, $29 million, $48 million and $117 million for the years ended December
31, 1993, 1992, 1991 and 1990, respectively.
5
<PAGE> 9
The following table sets forth the number and dollar amount of the
Company's mortgage loan production for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE INITIAL LOAN BALANCES)
<S> <C> <C> <C> <C> <C>
FHA/VA LOANS:
Number of Loans . . . 7,037 8,364 3,224 2,182 2,419
Volume of Loans . . . $433,748 $ 532,654 $207,239 $132,005 $139,720
Percent of Total Volume 57% 37% 30% 37% 43%
CONVENTIONAL AND OTHER
LOANS:(1)
Number of Loans . . . 6,285 12,658 7,637 4,856 5,296
Volume of Loans . . . $326,698 $ 899,794 $486,484 $228,411 $181,681
Percent of Total Volume 43% 63% 70% 63% 57%
TOTAL LOANS:
Number of Loans . . . 13,322 21,022 10,861 7,038 7,715
Volume of Loans . . . $760,446 $1,432,448 $693,723 $360,416 $321,401
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans . . . . . $ 61,600 $ 63,700 $ 64,300 $ 60,500 $57,800
Conventional and other
Loans(1) . . . . . $ 52,000 $ 71,100 $ 63,700 $ 47,000 $34,300
REFINANCINGS(2) . . . . . 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) which
generally have lower average initial loan sizes than
conforming first mortgage loans.
(2) As a percentage of the total dollar volume of loans originated.
A high proportion of the Company's total mortgage loans has
consistently been comprised of refinancing loans. For the years ended December
31, 1994, 1993 and 1992, refinancing activity represented approximately 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. 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 Mortgage Bankers
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.
6
<PAGE> 10
For the years ended December 31, 1994, 1993 and 1992, non-conforming
conventional loans represented approximately 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 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. The
Company receives these fees on mortgage loans originated through its retail
branches. The Company may charge additional fees depending upon market
conditions or 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 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.
SERVICING. The Company acquires servicing rights through its mortgage
loan originations and through acquisitions. 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
7
<PAGE> 11
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>
YEAR ENDED DECEMBER 31,
------------ ------------ ------------ ------------ ------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage
Loans . . . . . . . . . $1,062,108 $ 955,624 $ 851,853 $ 858,261 $ 813,123
Conventional and Other
Mortgage Loans . . . . 1,581,418 1,420,031 885,571 554,745 379,944
---------- ---------- ---------- ---------- ----------
Total Servicing Portfolio 2,643,526 $2,375,655 $1,737,424 $1,413,006 $1,193,067
========== ========== ========== ========== ==========
BEGINNING SERVICING
PORTFOLIO . . . . . . . $2,375,655 $1,737,424 $1,413,006 $1,193,067 $ 830,887
ADD:
Loans Funded and
Purchased(1) . . . . . 823,834 1,433,448 693,723 386,695 411,595
LESS:
Servicing Sales
Transferred . . . . . 202,000 198,700 53,400 51,460 ---
Run-off(2) . . . . . . . 353,963 596,517 315,905 115,296 49,415
---------- ---------- ---------- ---------- ----------
Ending Servicing Portfolio $2,643,526 $2,375,655 $1,737,424 $1,413,006 $1,193,067
========== ========== ========== ========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans . . . . 52,515 48,272 39,562 34,897 31,199
Weighted Average Interest
Rate . . . . . . . . . 8.21% 8.15% 9.09% 10.06% 10.53%
Weighted Average Maturity
(months) . . . . . . . 192 226 204 224 228
Weighted Average Servicing
Fee Rate . . . . . . . .3945 .4195 .4040 .4242 .4396
DELINQUENT MORTGAGE LOANS
AND PENDING FORECLOSURES
AT PERIOD END:(3)
60-89 days past due . . 1.53% 1.49% 1.39% 2.01% 2.36%
90 days or more past due 1.48% 1.62% 1.55% 2.26% 3.54%
---------- ---------- ---------- ---------- ----------
Total delinquencies . . 3.01% 3.11% 2.94% 4.27% 5.90%
========== ========== ========== ========== ==========
Foreclosures Pending . . 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.
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The Company's servicing portfolio has grown significantly in recent
years. At December 31, 1994, the Company's servicing portfolio totalled $2.64
billion compared to $2.38 billion at December 31, 1993, for an increase of 11%.
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 December 31, 1994, approximately $35 million 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 $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.
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 1994, the
monthly average amount of funds advanced by FFCC under such servicing agreements
was $3.2 million. 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 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 December 31, 1994 and
1993, the Company was servicing mortgage loans with an aggregate principal
amount of $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, although not reflected as an asset on FFCC's
financial statements (except for purchased 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. In the years ended December 31, 1994, 1993 and 1992, FFCC sold
servicing rights on $202 million, $198.7 million and $53.4 million,
respectively, of mortgages. While the Company's general strategy is to retain
the servicing rights related to the mortgage loans it originates and
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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 December 31, 1994, 1993 and 1992, 2.96%,
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, 1.19%, 1.21% and
1.44%, respectively, were in foreclosure. During 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 2.88%
to 3.26%, 3.11% to 3.71%, and 2.12% to 4.28%, respectively. For the year ended
December 31, 1994, the percentage of the number of serviced loans in foreclosure
ranged from 1.14% to 1.31%. 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%.
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 $726,000, $617,000 and $410,000 for the years ended
December 31, 1994, 1993 and 1992, respectively. FFCC owns a 25% interest in
HRU, Inc.
FORECLOSURE EXPERIENCE AND REAL ESTATE OWNED. 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. 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 December 31, 1994 and 1993, FFCC held real estate
owned as a result of foreclosures ("REO") with a book value of approximately
$2.1 million and $2.9 million, respectively. As of December 31, 1994 and 1993,
an additional amount of REO consisting of approximately $74,000 for each year
was rented under a United States government subsidy program. Sales of REO
resulted in net losses to FFCC of approximately $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.
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 of the lesser of 25% of the
loan or $46,000 plus the value of the collateral. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
December 31, 1994, 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 years ended December 31, 1994, 1993 and 1992 total
expenses related to FHA or VA loans foreclosed amounted to $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, 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 December 31, 1994, 1993 and 1992,
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2.96%, 3.11% and 2.94%, respectively, were delinquent and 1.19%, 1.21% and
1.44%, respectively were in foreclosure. (See the delinquency of mortgage
loans serviced in the table above.)
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.
In December 1990, the Company sold REO consisting of 89 residential
properties containing 104 housing units with a cost of approximately $4.7
million including previously incurred rehabilitation costs and construction
interest to a Puerto Rico partnership (the "Partnership") formed under a private
syndication. The general partner of the Partnership was a corporation that was
unrelated to the Company or its officers or directors. Several members of
senior management of the Company invested as limited partners. The Company also
invested approximately $135,000 in the Partnership, and owns a 15% interest in
the Partnership which is included at cost in "Other Assets" in the Company's
Balance Sheet. The REO was sold to the Partnership for $4.7 million which was
based on an estimate of the market value of the REO as reflected in an
independent appraisal report. The appraisal took into consideration the cost of
the improvements to be made which were reflected in the sales price to the
Partnership. The Company believes that the sales price of the REO was
comparable to that which the Company could have obtained in arm's length
transactions with unaffiliated parties. Approximately $600,000 of the purchase
price was paid in cash at the closing of the sale of the REO and the remainder
was evidenced by promissory notes (the "Notes") of the Partnership issued to the
Company in the amount of approximately $4.1 million.
The Notes bear interest payable on the first day of each month at the
prime rate of Citibank, N.A. (with a maximum and minimum rate of 13.5% and 9%,
respectively) and mature on April 1, 2006. During December 1990, February 1991
and March 1992, the Company sold a total of $2.8 million principal amount of the
Notes to a local financial institution with recourse.
On July 31, 1992, pursuant to a mutual agreement between the Company and
the general partner, due to what the Company believed was unsatisfactory
performance, the general partner withdrew from the Partnership and a new
non-profit corporation became the general partner. The Board of Directors of
the new non-profit corporation is composed of three members of FFCC's senior
management. In connection with such withdrawal, the Company agreed to indemnify
the original general partner from certain liabilities incurred during the period
it acted as general partner. The Partnership intends to sell or lease the REO
and the Company believes that the change in the general partner together with
existing market conditions should facilitate such process and that the matters
set forth above will not result in any material adverse affect on the financial
condition of the Company.
As of December 31, 1994, the principal balance of the Notes held by the
Company was approximately $450,000. At December 31, 1994, the Partnership owed
the Company $410,906, in past due interest and approximately $1.1 million for
advances made by the Company on behalf of the Partnership. The Company reserved
approximately $600,000 during 1994 and 1993 for possible losses from amounts due
from the Partnership. Accordingly, at December 31, 1994, the Company's balance
sheet only reflected accounts receivable due from the Partnership of
approximately $897,000. The Company holds $54,865 of the Partnership's funds as
security. At December 31, 1994, the Partnership had a net capital deficiency of
approximately $1.6 million.
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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. 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 year ended December 31, 1994, FFCC issued approximately
$596 million 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 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 the year ended
December 31, 1994, FFCC issued GNMA serial notes totalling approximately $68
million.
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 $46,000, 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 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 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 or letter of
credit will generally be used to increase the credit rating of the senior
certificates and thereby improve their marketability. During the year ended
December 31, 1994, the Company completed sales of approximately $101 million
aggregate principal amount of mortgage-backed securities in similar
transactions, of which $96 million consisted of senior certificates insured by
Financial Security Assurance, Inc. ("FSA"). Subject to market conditions, the
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Company contemplates entering into similar 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. As of December 31,
1994, the Company held approximately $11.1 million in subordinated
certificates and $9.4 million of residual issued by various grantor trusts
established by 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, to date, the Company has not deemed it
necessary to establish reserves for possible losses related to recourse
obligations. At December 31, 1994, the Company had loans in its servicing
portfolio with provisions for recourse in the principal amount of approximately
$112 million, as compared to $164 million as of December 31, 1993 and $244
million as of December 31, 1992. Of these recourse loans, approximately $18
million in principal amount consisted of loans sold to FNMA and FHLMC or
exchanged into securities of such agencies, and approximately $94 million
principal amount consisted of non-conforming loans sold to other private
investors. At December 31, 1994 existing commitments to sell loans to FHLMC and
FNMA aggregated $15 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 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 December 31, 1994, the Company had
sold approximately $200 million in mortgage-backed securities subject to puts.
The put arrangements on approximately $146 million of such mortgage-backed
securities expire in one year or less. See "Note 22 to the Company's
Consolidated Financial Statements."
INTEREST RATE MANAGEMENT. The sale of mortgage loans and
mortgage-backed securities can generate a gain or a loss. Cash losses on sales
of loans occur when FFCC sells loans at a discount from their book value. A
loss from the sale of loans 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 interest rate risk through the use of
forward commitments and other hedging techniques. In the case of FNMA and FHLMC
conforming loans and FNMA, FHLMC and GNMA
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mortgage-backed securities, the Company often seeks to obtain commitments for
the purchase of loans or mortgage-backed securities at the time it fixes the
interest rates for the loans. At December 31, 1994, the amount of such forward
commitments was $54 million or approximately 10% of the total of mortgage loans
held for sale and mortgage-backed securities held for trading as of such date.
In the case of GNMA securities, the Company normally holds such securities for
longer periods prior to sale in order to maximize its net interest income and
to take advantage of the tax exempt status of the interest on such securities
under Puerto Rico law. The Company has in place long-term reverse repurchase
agreements secured by GNMA certificates with a principal amount of
approximately $42.7 million. The Company does not obtain forward commitments
for such GNMA certificates because they are financed pursuant to long-term
repurchase agreements. 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.
In the case of FNMA and FHLMC conforming loans and mortgage-backed
securities not subject to long term repurchase agreements, the Company also
seeks to protect itself from interest rate risk by purchasing options on
interest rate sensitive instruments such as eurodollar certificates of deposit,
futures contracts and, to a lesser extent, options on treasury bond futures
contracts. Contracts designated as trading hedges are marked-to-market on a
monthly basis with the resulting gains and losses charged to operations.
Changes in the market value of futures contracts that qualify as hedges of
existing assets and liabilities are recognized as an adjustment to the book
value of the asset or liability being hedged. The level of investment in such
options is increased or decreased as interest rates change and may reach
significant levels relative to the Company's current liabilities. 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 years ended
December 31, 1993 and 1992, FFCC experienced losses of approximately $1,367,000
and $1,376,000, respectively, from its hedging activities while in 1994 such
hedging activities produced gains amounting to $2.2 million. Losses on hedging
activities are generally indicative of higher profits realized on the sale of
mortgage loans and mortgage-backed securities.
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 is typical for mortgage banking
institutions in the mainland United States. For the years ended December 31,
1994 and 1993, the Company held mortgage loans prior to sale for an average
period of 212 and 98 days, respectively, as compared to 118 days for 1992. The
increase in the number of days mortgage loans and mortgage-backed securities
were held prior to sale in 1994 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.
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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. The
fact that 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 has also helped
the Company maximize its net interest income. See "Interest Rate Management."
While holding mortgage loans and mortgage-backed securities for longer
periods has allowed FFCC to maximize its net interest income, changes in
prevailing market interest rates between the time FFCC commits to an interest
rate on 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 and
thereby reduce 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."
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 VA loans and GNMA
certificates, thereby increasing the secondary market demand for, and resale
value of, such mortgage loans and mortgage-backed securities. These tax
advantages also significantly 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.
The Company's operations are significantly affected by Federal and
Puerto Rico laws and regulations designed to promote economic development in
Puerto Rico, particularly the Industrial Incentives Acts and Section 936. Under
the Industrial Incentives Acts, certain investment income earned by qualified
manufacturing entities or service enterprises ("Exempt Companies") is exempt
from Puerto Rico income tax.
The various Industrial Incentive Acts (the "Incentives 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
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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.
On October 25, 1993 the Legislature of Puerto Rico enacted two bills
amending certain provisions of the Incentives Acts and the Puerto Rico Income
Tax Act of 1954, as amended (the "TIA"). In general, one of the bills has the
effect of increasing the minimum Tollgate Tax paid by an Exempt Company under
the Incentives Acts upon distribution of its IDI. Under that bill, any Exempt
Company under the TIA may reduce the 10% tollgate tax imposed on distributions
of IDI accumulated during taxable years beginning after December 31, 1992 to 6%
or 5% (compared to 5% and 2% under prior law) if at least 50% of the net IDI is
invested in investments described in Section 2(j) for more than five years or
more than eight years, respectively. The law also eliminated the provisions of
the Incentives Acts and those of the Tax Act that provided special Tollgate Tax
reduction benefits to investments of IDI in obligations of the Commonwealth
government and its instrumentalities and for investments for a period of more
than five years.
Under the other bill, Exempt Companies are now generally allowed to pay
an up-front 14% income tax (the "Alternative Tax") on the IDI derived during
taxable years beginning after December 31, 1992 including investment income
(other than interest on government obligations), in lieu of payment of the
otherwise applicable income tax on non-exempt income and of the Tollgate Tax on
future distributions of such IDI. The Alternative Tax can be reduced to 11% or
9% if the Exempt Company invests 25% or 50%, respectively, of its net IDI in
certain Puerto Rico investments for a period of five years. An Exempt Company
may satisfy up to one half of the 50% investment requirement by investing in
property, plant and equipment with a depreciable life of at least ten years.
The amendments, while maintaining important incentives for investing in
Puerto Rico could in the long-term have the effect of reducing the amount of
funds invested in Puerto Rico by Exempt Companies as a result of the changes in
the relative costs to an Exempt Company of distributing IDI to its shareholders
and, therefore, could result in an increase in the costs of funds for Puerto
Rico borrowers, including the Company, and a reduction in the demand for Puerto
Rico investments, including mortgage loans and mortgage-backed securities sold
by the Company. While the final impact on the Company of the adoption of the
amendments cannot be determined at this time, to date the adoption of the
amendments has not had a material adverse effect on the Company's business or
financial condition nor does the Company expect such an effect in the future.
Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936 of the Code ("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 ("active business
income") or from the sale or exchange of substantially all assets used in the
active conduct of such trade or business 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.
To qualify under Section 936 in any given taxable year a corporation
must derive (i) for the three-year period immediately preceding the end of such
taxable year, 80% or more of it gross income from sources
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within Puerto Rico and (ii) 75% or more of its gross income from the active
conduct of a trade or business in Puerto Rico.
A Section 936 Corporation may elect to compute its active business
income eligible for the Section 936 credit under one of three formulas: (i) a
cost sharing formula, whereby it is allowed to claim all profits attributable to
manufacturing intangibles and other functions carried out in Puerto Rico,
provided it contributes to the research and development expenses of its
affiliated group or pays certain royalties; (ii) a profit split formula, whereby
it is allowed to claim approximately 50% of the net income of its affiliated
group from the sale of products manufactured in Puerto Rico; or (iii) a cost
plus formula, whereby it is allowed to claim a reasonable profit on the
manufacturing costs incurred in Puerto Rico. To be eligible for the first two
formulas, a Section 936 Corporation must have a significant business presence in
Puerto Rico for purposes of the Section 936 rules.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions
of Section 936. The amendments (the "936 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 as under prior law but
limit the amount of credit allowed as determined 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. 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, 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 15% 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 936 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.
It is not possible at this time to predict the long-term effects that
the 936 Amendments will have on the economy of Puerto Rico. The 936 Amendments
could have an adverse effect on the long-term general economic condition of
Puerto Rico by gradually 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 adoption of the 936 Amendments
could also indirectly lead to a decrease in the amount of 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. While the final impact on the Company cannot be determined at this
time, to date the 936 Amendments have not had a material adverse effect on its
business or financial condition.
In connection with ongoing efforts to reduce the Federal budget deficit,
several Congressional leaders, including John Kasich, the Chairman of the Budget
Committee of the House of Representatives, have publicly expressed their desire
to re-examine the tax benefits available to U.S. corporations for operating and
investing in Puerto Rico under Section 936. To date, no formal action has been
taken in either House of Congress to further amend Section 936, and therefore,
it is not possible to predict what impact, if any, these discussions will have
on the operation of Section 936, the general economic condition of Puerto Rico
or the operations of the Company. The elimination or a substantial reduction of
the benefits currently
17
<PAGE> 21
available under Section 936 could have an adverse effect on the general
economic condition of Puerto Rico, FFCC's predominant service area, by reducing
U.S. tax incentives for investing in Puerto Rico. Any such change could also
have an adverse effect on the liquidity and prices for the Company's mortgage
loans and mortgage-backed securities by reducing the amount of tax-advantaged
funds available in the Puerto Rico financial system.
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 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 sale.
Puerto Rico government officials have publicly confirmed that the Puerto
Rico government is currently reviewing the tax exempt status of income earned on
FHA and VA loans secured by residential property located in Puerto Rico as well
as GNMA certificates backed by such mortgages. A committee consisting of
representatives of different agencies has been appointed to study the issue. The
committee will be requested to make recommendations which could include
elimination, reduction or other modification of the existing exemption. It is
expected that any such change would require legislative action and would have
prospective application.
The elimination of tax exemption on FHA/VA mortgage loans could
adversely affect the profitability of FFCC by reducing the prices it could
obtain for its FHA and VA loans and GNMA certificates. Such a change could also
reduce demand for FHA and VA loans because of the higher interest rates that
would be required to be charged on such loans. Such a change should not,
however, adversely affect liquidity since the Company could sell its FHA and VA
loans and GNMA certificates in the conventional U.S. mortgage market at
prevailing U.S. prices. The elimination of the tax exempt status of interest on
FHA and VA loans could also have a short-term positive effect on the Company
because the value of FFCC's existing inventory of FHA and VA loans and GNMA
securities existing at the time of any such legislative change would be
significantly enhanced.
The tax benefits available to investors of mortgage loans decrease the
yield Puerto Rico investors, including, Exempt Companies, require; therefore,
certain loans, specifically FHA, VA and FHLMC and FNMA conforming conventional
loans, are generated at interest rates which are lower than the prevailing
interest rates in the mainland United States. FFCC is also able to sell them to
local investors at prices higher than those at which comparable instruments
would be sold in the mainland United States. In addition, the tax incentives
available to Exempt Companies, particularly Section 936 Corporations, on
investments in Puerto Rico have created a large pool of tax-advantaged funds in
Puerto Rico that make it possible for FFCC to finance its loan originations and
inventory of mortgage loans at interest rates that generally are lower than
would be available otherwise and thereby generate a higher level of net interest
income than would otherwise be possible. FFCC borrows 936 Funds through
short-term repurchase agreements and warehousing lines of credit with banks and
broker-dealers. See "Borrowing Arrangements."
18
<PAGE> 22
Any change in the United States or Puerto Rico tax laws that would
reduce or eliminate the tax benefits available to Section 936 Corporations,
financial institutions or individuals on investments in Puerto Rico mortgage
loans and mortgage-backed securities, could have a material adverse effect on
the liquidity of the secondary mortgage market and the profitability of FFCC.
In addition, a change in Puerto Rico's political status could result in the
elimination or modification of these tax benefits. See "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. 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 December 31,
1994 and 1993, loans held for investment which were originated as part of the
Company's other lending activities, net of unearned income, totalled $34.9
million and $9.6 million, respectively, 85% and 67%, respectively, of which
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 December 31, 1994 and 1993, 94% and 75%, respectively, of the
mortgage loans held for investment by Doral Federal were secured by property
located in Puerto Rico. At December 31, 1994, the largest loan held for
investment was $550,000. As of December 31, 1994, the maximum aggregate
amount of loans that Doral Federal could make to a single borrower under OTS
regulations was $880,000.
In the future, the Company anticipates continued growth in its loans
held for investment in connection with continued growth in the operations of
Doral Federal.
19
<PAGE> 23
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:
<TABLE>
<CAPTION>
PERCENT PERCENT
1994 OF TOTAL 1993 OF TOTAL
---- -------- ---- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans $ 1,061 3.01% $ 179 1.81%
Residential mortgage loans 23,293 66.08 6,439 64.95
Commercial real estate 2,044 5.80 576 5.81
Consumer - Secured by mortgage 6,283 17.82 - -
Consumer - other 1,009 2.86 1,442 14.54
Loans on savings deposits 956 2.71 711 7.17
Commercial 393 1.12 440 4.44
Leases 28 0.08 127 1.28
Land secured 183 0.52 - -
------- ------ ------ ------
Gross loans(2) $35,250 100.00% 9,915 100.00%
------- ------ ------ ------
Less:
Unearned interest and deferred loan
fees (1) (13) (119)
Reserve for loan losses (428) (234)
------- ------
(441) (353)
------- ------
Loans receivable, Net(2) $34,809 $9,561
======= ======
----------------
(1) 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.
(2) Sum of the columns may not add up to the totals due to rounding.
</TABLE>
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. At December 31,
1994 and 1993, approximately 9% and 27%, respectively, of Doral Federal's
mortgage 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.
20
<PAGE> 24
The following information indicates, 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 RATES ADJUSTABLE RATES
TERM OF DATE OF
TERM TO MATURITY BOOK VALUE RATE ADJUSTMENT BOOK VALUE
---------------- ---------- --------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 month - 1 year $ 854 1 month - 1 year $2,996
1 year - 3 years 1,334 Non-performing 252
------
$3,248
======
3 years - 5 years 2,964
5 years - 10 years 7,598
10 years - 20 years 10,511
Over 20 years 8,093
Non-performing 207
$31,561
=======
</TABLE>
NONPERFORMING ASSETS AND ALLOWANCE FOR LOANS LOSSES. Nonperforming
assets ("NPAs") consist of loans on a non-accrual basis and other real estate
owned. Doral Federal's policy is to place all loans held for investment 90 days
or more past due on non-accrual basis, at which point a reserve for all unpaid
interest previously acquired is established. 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 non-accrual upon commencement of
foreclosure proceedings (which normally occur within six to eight months
following default). For the years ended December 31, 1994 and 1993, the
Company would have recognized $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-Regulation-Savings and Loan
Operations -- Doral Federal - Classification of Assets" for additional
information regarding classified assets of Doral Federal.
21
<PAGE> 25
The following table sets forth information with respect to the Company's
non-accrual loans, REO and other nonperforming assets for the years ended
December 31, 1994 and 1993.
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1994 1993
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage Banking Business:(1)
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,260 $ 1,091
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . 2,029 2,827
Other nonperforming assets(2) . . . . . . . . . . . . . . . . . . . . . 448 402
Other Lending Activities:(3)
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 499
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . 87 101
Total NPAs as a percentage of loans receivable, net and other real
estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6% 6.1%
Ratio of allowance for loan receivables to nonperforming loans. . . . . 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. Of this amount, a non-affiliated
government institution is required to buy $2.9 million at par on a
non-recourse basis.
(2)This amount refers to a mortgage loan to the partnership referred to
under "Mortgage Banking Business - Foreclosure Experience and Real Estate
Owned." This loan is included in "Mortgage-backed securities and
investments held to maturity" in the Company's financial statements.
(3)Includes mortgage loans and real estate owned by Doral Federal.
The Mortgage Banking Business' other real estate owned arises primarily
through foreclosure on mortgage loans repurchased from investors, either
because or breach of representations or warranties or pursuant to recourse
arrangements. The Company believes that the value of the REO reflected on its
financial statements represent 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 was not 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, and in conjunction with
other factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an on-going basis, management
monitors the loan
22
<PAGE> 26
portfolio and evaluates the adequacy of the allowance for loan losses. In
determining the adequacy of the allowance for loan losses, management considers
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 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE HELD FOR SALE:
Balance at beginning of period $525 $400 $ --
Provision for losses -- 100 400
Losses charged to the allowance (169) -- --
Other -- 25 --
---- ---- ----
Balance at end of period $356 $525 $400
==== ==== ====
RESERVE FOR LOAN RECEIVABLES(1):
Balance at beginning of period $234 $516
Provision for loan losses 168 23
Recoveries 26 --
Losses charged to the allowance -- (305)
---- ----
Balance at end of period $428 $234
==== ====
----------------------
(1) Relates to loans held for investment by Doral Federal.
</TABLE>
OTHER INVESTMENTS
As of December 31, 1994, the Company held approximately $67.5 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 $24.3 million were held by Doral
Federal. The $42.1 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 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.
23
<PAGE> 27
The following table provides certain information regarding the
composition of the Company's mortgage-backed securities and other investments
held to maturity.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1994 1993
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES:
CMO certificates
of non-affiliated issuers $42,052 $42,175 -- --
FHLMC 4,600 4,470 $2,959 $2,914
FNMA 7,747 7,309 3,169 3,160
DEBT SECURITIES:
Federal Home Loan Bank Notes 9,972 9,712 -- --
U.S. Treasury Notes 1,984 1,949 ------ ------
OTHER INVESTMENTS:
FHLB stock at cost 715 715
Mortgage notes receivables 448 448 402 402
------- ------- ------ ------
Total(2) $67,519 $66,779 $6,530 $6,476
======= ======= ====== ======
------------------------
(1) Includes approximately $4.9 million of interest only certificates.
(2) Sum of the columns may not add up to the totals due to rounding.
</TABLE>
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 at December 31,
1994:
24
<PAGE> 28
<TABLE>
<CAPTION>
MORTGAGE-
BACKED DEBT
SECURITIES SECURITIES
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years $24,626 $12,405
After 5 years through 10 years 17,426 ---
After 10 years 12,348 ---
------- -------
Total 54,400 $12,405
======= =======
</TABLE>
The aggregate gross unrealized holding gains and losses for the
Company's mortgage-backed securities and investments held to maturity are
detailed below:
DECEMBER 31,
------------------------------------------
1994 1993 1994 1993
MORTGAGE-BACKED
SECURITIES DEBT SECURITIES
--------------- ---------------
(DOLLARS IN THOUSANDS)
Gross unrealized holding gains $397 --- --- ---
Gross unrealized holding losses $843 54 295 ---
FUNDING
BORROWING ARRANGEMENTS RELATING TO MORTGAGE BANKING OPERATIONS.
Historically, a period of two to four months has normally elapsed between the
origination of a mortgage loan by FFCC and its sale to permanent investors. The
Company often holds GNMA certificates for longer periods to take advantage of
tax exempt interest income on such certificates while FNMA and FHLMC conforming
loans are normally sold within 60 days of origination. During this period, FFCC
generally completes the loan process, obtains a VA guarantee or HUD/FHA
insurance certificate or private mortgage insurance on the loan, and pools the
loans for resale in the secondary mortgage market.
Prior to issuance of GNMA or other mortgage-backed certificates, FFCC's
mortgage loans are funded almost entirely by borrowings under warehousing lines
of credit or other financing agreements such as pre-sale or gestation
facilities, with financial institutions. FFCC principal short term facilities
include warehousing lines of credit with three local commercial banks and
pre-sale or gestation facilities with three affiliates of major U.S. brokerage
houses. Pre-sale or gestation facilities generally permit the Company to obtain
more favorable financing rates once mortgage loans have been assigned to a pool
but prior to securitization. These facilities also generally allow for the
financing of mortgage-backed securities upon issuance. Typically, FFCC
finances on a monthly weighted average basis between 90% and 95% of the
principal amount of its mortgage loans and secures advances under its lines of
credit by pledging such loans and the servicing agreements relating thereto to
such banks or financial institutions, a practice commonly referred to as
"warehousing." On an absolute basis, the percentage of principal amount will
range from 90% for conventional mortgages (one bank will only lend up to 80% of
the principal amount of conventional mortgages) to 95% for FHA and VA loans. The
rates of interest FFCC pays under its warehousing lines of credit fluctuate
depending upon changes in the lender's cost of funds. FFCC warehousing lines of
credit are generally terminable at the discretion of the lender.
FFCC pays interest on its lines of credit at floating rates which vary
with market conditions. The interest rates on these lines of credit have been
lower than the interest rates which FFCC earns on the mortgage loans pledged to
secure such financing. Amounts borrowed under lines of credit are payable upon
demand and are usually repaid after FFCC packages such mortgage loans into GNMA,
FNMA or FHLMC
25
<PAGE> 29
certificates and receives the proceeds from the sale of such certificates or
the financing of such securities under repurchase agreements.
Commencing in 1993 the Company made a strategic decision to diversify
its sources of funding and to obtain funding from sources outside of Puerto
Rico. As of December 31, 1994, the Company's credit facilities included three
pre-sale or gestation facilities with affiliates of major U.S. brokerage
houses. Obtaining credit from financial institutions located outside Puerto
Rico generally permits the Company to obtain larger lines of credit and reduces
its dependence on tax advantaged funding available in the local market.
FFCC also obtains short-term financing through repurchase agreements
with financial institutions and investment banking firms. Under these
agreements, FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed securities
and, to a lesser extent, private label mortgage-backed securities and
simultaneously agrees to repurchase them at a future date at a fixed price.
FFCC uses the proceeds of such sales to repay borrowings under its bank
warehousing lines of credit. The effective cost of funds under repurchase
agreements is typically lower than the costs of funds borrowed under FFCC's
warehousing lines of credit. FFCC's continued use of repurchase agreements will
depend upon the cost of repurchase agreements relative to the cost of borrowing
under lines of credit from banks.
For further information on the terms of the borrowings utilized by the
Company to finance its inventory of mortgage loans and mortgage-backed
securities, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DEPOSITS. Deposits gathered by Doral Federal are its principal
sources of funds to fund its lending activities. At December 31, 1994, Doral
Federal held $79.2 million in deposits at a weighted average interest rate
cost of 2.73%. Doral Federal may also obtain funding through collateralized
borrowings from the Federal Home Loan Bank of New York (the "FHLB-NY") up to a
maximum of 30% of total assets. Such advances must be secured by qualifying
assets with a value equal to between 105% and 115% of the advance. At
December 31, 1994, Doral Federal had $419,245 in outstanding advances from the
FHLB-NY at a weighted average interest rate of 7.76%
Doral Federal offers passbook savings accounts, checking account, NOW
accounts and fixed interest rate certificate accounts with varying maturities.
A substantial portion of Doral Federal's deposits consist of non-interest
bearing wholesale deposit accounts such as corporate and custodial accounts.
At December 31, 1994, $36.5 million or approximately 46% of Doral Federal's
total deposits consisted of non-interest bearing accounts. Approximately 95%
of such amount relates to corporate and custodial accounts of the Company and
its affiliates. This amount includes approximately $12.8 million in corporate
accounts of the Company and its affiliates which are eliminated in the
preparation of the Company's Consolidated Financial Statements. Corporate
accounts of the Company as well as escrow and custodial accounts related to
the Company's Mortgage Banking Business represent a stable source of cheap
funding for Doral Federal. Refer to Note 16 of the Company's Consolidated
Financial Statements for additional information regarding the characteristics
of Doral Federal's deposit accounts.
26
<PAGE> 30
MARKET AREA AND COMPETITION
Prior to March 1992, Puerto Rico was FFCC's exclusive service area.
Puerto Rico remains the predominant service area accounting for 99% and 98% of
the Company's loan originations for 1994 and 1993, respectively. Within Puerto
Rico, FFCC's primary market area is the metropolitan San Juan area, which
accounted for approximately 47% of FFCC loan originations in 1994 and 1993,
respectively. The competition in Puerto Rico for the origination of mortgages
is substantial. Competition comes not only from other mortgage bankers, but
also from major 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
service and pricing its range of products at competitive rates.
In March 1992, Doral opened a branch office in the Orlando, Florida
metropolitan area. In February 1994, Doral opened an additional office in
Miami, Florida. The Company is considering the possibility of opening
additional offices in the State of Florida.
Puerto Rico, the fourth largest of the Caribbean islands, is located
approximately 1,600 miles southeast of New York, New York and 1,000 miles
east-southeast of Miami, Florida. It is approximately 100 miles long and 35
miles wide.
27
<PAGE> 31
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 Rico are citizens of the United States, but do not vote in
national elections and they 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. For many
years there have been 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,
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 Section 936 and of the Puerto Rico laws
providing favorable tax treatment for investment in Puerto Rico mortgages and,
therefore, could have a material adverse effect on the Company's cost of
borrowing, the liquidity of the secondary mortgage market and the financial
performance of FFCC. See "Puerto Rico Secondary Mortgage and Favorable Tax
Treatment" herein.
PUERTO RICO INCOME TAXES.
FFCC is subject to Puerto Rico income taxes. The income tax rates 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
28
<PAGE> 32
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 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 on dividends received from Doral 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%.
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
insured and VA guaranteed mortgage loan 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. Effective July 1, 1995, the PRIRC 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%.
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 are corporations organized under the laws of Puerto Rico.
Accordingly, FFCC and Doral 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 opened a branch in Florida.
Accordingly, Doral is subject to both Florida income and franchise 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 34% 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
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<PAGE> 33
repatriated to Puerto Rico. Both the federal tax as well as the branch profit
tax may be claimed as a credit in Puerto Rico, subject to certain limitations.
Doral Federal, as a federal savings association, is also subject to U.S.
income taxes. It will be entitled to a foreign tax credit for a portion of
income taxes paid to the Puerto Rico Treasury Department. 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. The election of the benefits available under Section 936 together
with the fact that Doral Federal has substantial tax loss carryforwards will
result in Doral Federal not having a significant U.S. income tax liability for
several years.
EMPLOYEES.
At December 31, 1994, FFCC employed 751 persons, of whom 229 were
administrative personnel, 121 were loan originators, 199 were involved in
processing of loan applications (including quality control auditors), 25 were
loan underwriters, and 177 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 "General."
FFCC is licensed by the Commissioner as a mortgage banking institution
in Puerto Rico. Such authorization to act 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
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<PAGE> 34
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.
REGULATIONS - 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").
As an SLHC, FFCC registered with the Director (the "Director") of the 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. Under
this regulation, the amount available for the payment of dividends during any
calendar year depends on whether such association meets or exceeds certain
specified tiers or levels of capital requirements (i.e., the "fully phased-in
capital requirement," the "minimum capital requirement," or less than the
"minimum capital requirement," for which latter tier specific written approval
is required for the payment of any cash dividend). Even though an association
may meet one of the specified levels of capital requirements, the OTS may
prohibit such payment if it determines that the making of such payment would
constitute an unsafe or unsound practice. The OTS may object to or authorize
capital distributions in excess of the safe harbor amount specified in such
Sections. 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") an SLHC may be deemed for regulatory purposes to
become a bank holding company. In such event, it would become subject to
additional regulatory restrictions including the
31
<PAGE> 35
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 Company's
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 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.
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<PAGE> 36
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 Bank, 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 Leading 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 real estate owned 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. Current capital requirements
are discussed below.
An institution is required by statute to maintain tangible capital of
not less than 1.5% of adjusted assets. "Tangible Capital" consist of core
capital less any intangible assets, plus purchased mortgage servicing rights
valued at the lesser of: (1) 100% of the amount of tangible capital that exists
before the deduction of any disallowed purchased mortgage servicing rights; (2)
90% of fair market value as determined by an independent market valuation; (3)
90% of the original purchase price, or (4) the remaining unamortized book value
of the servicing rights determined in accordance with generally accepted
accounting principles. Any purchased mortgage servicing rights over this limit
would generally be deducted in calculating tangible capital.
The Leverage Limit requires savings associations to maintain "core
capital" of not less than 3% of adjusted total assets. In July 1993, the
Director revised the Capital Regulations to provide that only those savings
associations rated a composite of 1 under the OTS MACRO rating system will be
permitted to operate at or near the minimum statutory requirements of 3% of
adjusted total assets, while all others associations are required to meet a
minimum core capital requirement of at least 100 to 200 basis points above the
3% minimum core capital requirement. In determining the amount of additional
capital required, the OTS indicated that it assesses both the quality of risk
management systems and the level of overall risk in each individual
association. "Core capital" generally includes common stockholders' equity
(including retained earnings), non cumulative perpetual preferred stock and any
related surplus and minority interest in the equity accounts of fully
consolidated subsidiaries. Intangible assets (other than purchased mortgage
servicing rights and qualifying goodwill) must be deducted from core capital
unless they meet a three part test relating to identifiability, marketability
and liquidity in which event they may be included in an amount up to 25% of
core capital. Excess servicing fees receivable ("ESFR") are not considered
intangibles and are therefore fully includable in capital calculations. Up to
50% of core capital may consist of purchased
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<PAGE> 37
mortgage servicing rights valued at the lower of 90% of fair market value, 90%
of original cost or the amortized book value as determined under GAAP. Doral
Federal did not have any qualifying supervisory goodwill or ESFRs in its core
capital at December 31, 1994. It had approximately $42,000 of purchased
servicing rights in its core capital as of December 31, 1994.
The risk-based capital requirement provides that the capital ratio
applicable to an asset will be adjusted to reflect the degree of credit risk
associated with such asset. The risk-based capital guidelines require the
maintenance of capital against off-balance sheet items, including assets sold
with recourse, as well as assets that are reported on the institution's
financial statements. After determination of an association's qualifying total
capital, total risk-weighted assets are ascertained. Under these guidelines,
an association's balance sheet assets and credit equivalent amounts of
off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several broad risk categories, and the
aggregate dollar amount of each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
categories are then added together to determine the total risk-weighted assets
that comprise the denominator of the risk-based capital ratio. The OTS
regulations assign single family residential mortgage loans and certain
"qualifying multifamily mortgage loans" to the fifty percent (50%) risk-weight
category.
The risk-based capital requirement generally requires savings
associations to maintain "total capital" equal to 8% of risk-weighted assets.
For purposes of the risk-based capital requirement, "total capital" means core
capital (as described above) plus "supplementary capital" (as described below),
provided that the amount of supplementary capital may not exceed the amount of
core capital, less certain assets. Supplementary capital, which is eligible for
unlimited use, includes, among other things, general allowances for loan losses
up to a maximum of 1.25% of risk-weighted assets. Under the risk-based capital
requirements, certain assets must be excluded from total capital. At December
31, 1994, Doral Federal had no investments, loans or other assets which were
required to be deducted from capital.
At December 31, 1994, 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 to be
effective as of January 1, 1995. 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 fully phased-in capital requirements:
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<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
ACTUAL RELATIVE TO FULLY
PHASED-IN REQUIREMENTS
-------------------------------
AMOUNT RATIO(1)
------ -----
(Dollars in thousands)
<S> <C> <C>
TANGIBLE CAPITAL:
Capital position $5,868 6.83%
Capital requirement 1,289 1.50
Tangible capital excess 4,579 5.33
CORE CAPITAL:
Capital position $5,868 6.83%
Capital requirement 2,577 3.00
Core capital excess 3,291 3.83
RISK-BASED CAPITAL:
Capital position $6,126 17.84%
Capital requirement 2,747 8.00
Risk-based capital excess 3,379 9.84
</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.
OTHER REGULATORY MATTERS
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 individual institutions 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 0.29% effective January 1, 1994.
AFFILIATED TRANSACTIONS. Savings association subsidiaries of a savings
and loan holding company are limited by the HOLA in the types of activities and
investments in which they may participate if the investment and/or activity
involves and affiliate. In general, savings association subsidiaries of savings
and loan holding companies are now subject to Sections 23A and 23B of the
Federal Reserve Act ("FRA") in the same manner and to the same extent as if the
savings association were a member bank. Section 23A of the FRA puts certain
qualitative and quantitative limitations on transactions between the Bank and
its
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<PAGE> 39
affiliates, including transactions involving (i) loans or extensions of credit
to the affiliate; (ii) the purchase of or investment in securities issued by an
affiliate; (iii) the purchase of certain assets from an affiliate; (iv) the
acceptance of securities issued by an affiliate as security for a loan or
extension of credit to any person; or (v) the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. Under Section 23B,
transactions between Doral Federal and an affiliate must meet certain
qualitative limitations. Such transactions must be on terms at least as
favorable to Doral Federal as transactions with unaffiliated companies. In
addition, Section 11 of HOLA, as amended by FIRREA, also specifically prohibits
a savings association subsidiary of a savings and loan holding company from
making loans or extensions of credit to an affiliate unless that affiliate is
engaged only in activities permitted to bank holding companies under Section
4(c) of the Bank Holding Company Act, or from purchasing or investing in the
securities of any affiliate (other than a subsidiary of the savings
association). The OTS may issue additional restriction if necessary to protect
the safety and soundness of any savings association.
ENFORCEMENT PROVISIONS. FIRREA's enforcement provisions are applicable
to all depository institutions, not just savings institutions. FIRREA
introduces the new term "institution-affiliated party" to agency enforcement
authority. The term includes: (i) directors, officers, employees, agents, and
controlling stockholders; (ii) persons required to file a change-in-control
notice; (iii) certain persons who participate in the affairs of the savings
institution (which include stockholders, consultants, and joint venture
partners); and (iv) independent contractors (including attorneys' appraisers,
and accountants) who knowingly or recklessly cause or participate in a
violation, breach or 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. At the same time,
the requirements for the issuance of such orders have been lessened.
LIQUIDITY. Under OTS regulations, Doral Federal is required to maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States Government, state or federal agency
obligations and certain corporate debt obligations and commercial paper) equal
to at least 5.0% of its average daily balance of its liquidity base during the
preceding calendar month and shall maintain an average daily balance of short
term liquid assets of not less than 1 percent of the average daily balance of
its liquidity base during the preceding calendar month. If at any time Doral
Federal's liquid assets do not at least equal (on an average daily basis for any
month) the amount required by these regulations (which requirement may not be
set at less than 4.0% nor more than 10.0% of Doral Federal's net withdrawable
accounts plus short term borrowings), Doral Federal would be subject to various
monetary penalties imposed by the OTS. Doral Federal must also maintain an
average daily balance of short term liquidity and short term liquid assets
(generally those having maturities of 12 months or less) equal to at least 1.0%
of its average daily balance of net withdrawals accounts plus short term debt.
At December 31, 1994, Doral Federal maintained liquidity and short liquidity
well in excess of that required by the foregoing regulations.
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, but without constituting an unsafe or
unsound practice. 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
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<PAGE> 40
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.
CLASSIFICATION OF ASSETS. Savings associations are required to review
their assets on a regular basis and, if warranted, classify them as
"substandard," "doubtful," or "loss." Adequate valuation allowances, consistent
with GAAP, are required to be established for classified assets. If any assets
are classified as substandard or doubtful, the association must establish a
prudent general allowance for possible future loan losses with respect thereto.
If an asset, or a portion thereof, is classified as a loss, the association must
either establish a specific valuation allowance equal to the amount classified
as loss or charge off such amount. In addition, a savings association is
required to set aside adequate valuation allowances to the extent that any
affiliate possesses assets which pose a risk to the savings and loan
association. The association's OTS Regional Director has the authority to
approve, disapprove or modify classification and amount established as an
allowance pursuant to such classification. In addition, a savings association
is required to record as liabilities off balance sheet items, such as letters of
credit, when loss becomes probable and estimable.
The following table sets forth information with respect to Doral
Federal's classified assets:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-------------------------------------------------------------------
SUBSTANDARD DOUBTFUL LOSS TOTAL
-------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One to four family . . . . . . . . $ 98 $--- $--- $ 98
Commercial . . . . . . . . . . . . 161 --- --- 161
REO . . . . . . . . . . . . . . . . . 87 --- --- 87
Consumer loans . . . . . . . . . . . 131 6 159 296
Other . . . . . . . . . . . . . . . . 20 1 3 24
----- ---- ---- ----
Total classified assets . . . . . . . $497 $ 7 $162 $666
</TABLE>
REAL ESTATE LENDING POLICIES AND PROCEDURES. Section 304 of FDICIA,
prescribes standards for real estate lending and requires that each insured
depository institution adopt and maintain written policies that establish
appropriate limits and standards for all extensions of credit that are secured
by liens on or interests in real estate. Each institution's policies must be
comprehensive, consistent with safe and sound lending practices, and must ensure
that the institution operated within limits and according to standards that are
reviewed and approved at least annually by the Board. Management has reviewed
Doral Federal's written policies related to the Section 304 requirements and
believe that they are in compliance with the requirements of that section.
ITEM 2. PROPERTIES
The executive and administrative offices of the Company are located at
1159 Franklin D. Roosevelt Avenue, Puerto Nuevo, San Juan, Puerto Rico and
consist of approximately 11,136 square feet of office space. Doral's executive
and administrative offices are located at 650 Munoz Rivera Avenue, San Juan,
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<PAGE> 41
Puerto Rico and consist of approximately 33,000 square feet of office space.
The Company also leases additional office space of approximately 31,000 square
feet throughout Puerto Rico. These offices are leased for various terms
expiring through 2005. Annual aggregate rental payments made in the years
1994, 1993 and 1992 were $2,675,000, $1,445,000 and $817,000, respectively.
Except for its interest in real estate held in the ordinary course of business
(including real estate owned as a result of foreclosures), the Company does not
own any real property except for the building and underlying real property
where Doral Federal's branch in Catano, Puerto Rico is located. The building
where the branch is located consists of approximately 2,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
Other than legal proceedings in the normal course of its business, the
Company is not a party to any material legal proceedings and, to the knowledge
of management of the Company, there are no material legal proceedings
threatened. In the opinion of the Company's management, the pending and
threatened legal proceedings of which management is aware will not have a
material adverse effect on the financial condition or results of operations of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
FFCC's Common Stock, $1.00 par value (the "Common Stock"), is traded on
the over-the-counter market and is quoted on the National Association of
Securities Dealers Automated Quotation National Market System ("NASDAQ NMS")
under the symbol "FRCC." The Company's Common Stock began trading on the NASDAQ
NMS on December 19, 1988.
FFCC's 10-1/2% Cumulative Convertible Preferred Stock, Series A, $1.00
par value (the "Series A Preferred Stock") is traded on the over-the-counter
market and is quoted on the NASDAQ system under the symbol FRCCP. The Company's
Series A Preferred Stock began trading on the NASDAQ system on July 1, 1991.
The table below sets forth, for the calendar quarters indicated, the
high and low sales prices on the NASDAQ NMS and the high and low bid quotes on
the NASDAQ system, for the Common Stock and Series A Preferred Stock,
respectively, and the dividends declared on the Common Stock and Series A
Preferred Stock during such periods. The quotations for the Series A Preferred
Stock represent inter-dealer prices, without retail mark-up, mark-down or
commissions and do not necessarily represent actual transactions.
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<PAGE> 42
<TABLE>
<CAPTION>
MARKET PRICE* DIVIDENDS DECLARED*
----------------------------------------------- -----------------------
COMMON SERIES A PREFERRED
CALENDAR -------------------- ------------------ SERIES A
YEAR QUARTER HIGH LOW HIGH LOW COMMON PREFERRED
---- ------- ---- --- ---- --- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1st $12 1/2 $ 9 7/8 $24 1/2 $20 1/2 $0.10 $0.2625
2nd 12 1/2 10 1/2 24 1/4 22 1/2 0.10 0.2625
3rd 15 3/8 11 3/4 30 23 1/4 0.10 0.2625
4th 18 1/4 14 1/4 35 1/2 28 1/2 0.10 0.2625
1994 1st $19 $13 3/4 $36 1/2 $29 1/2 $0.13 $0.2625
2nd 14 3/4 11 29 1/2 23 3/4 0.13 0.2625
3rd 15 10 5/8 28 23 3/4 0.13 0.2625
4th 13 1/2 10 1/2 27 22 0.13 0.2625
---------------
</TABLE>
* All share prices and dividend information with respect to the Common
Stock have been adjusted to reflect a two-for-one stock split effective
December 10, 1993.
As of March 10, 1995, the approximate number of record holders of the
Company's Common Stock and Series A Preferred Stock was 912 and 74,
respectively, which does not include beneficial owners whose shares are held in
record names of brokers and nominees. The last sales price for the Common Stock
and Series A Preferred Stock as quoted on the NASDAQ NMS and the NASDAQ System,
respectively, on such date was $13 1/2 and $24 1/4 per share, respectively.
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 $0.050
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. The payment of cash dividends in the
future is dependent upon the earnings, cash position and capital needs of the
Company, general business conditions and other matters deemed relevant by the
Company's Board of Directors.
The terms of the Series A Preferred Stock do not permit the payment of
cash dividends on the Company's Common Stock if dividends on the Company's
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.
The Company's existing warehousing credit facilities and repurchase
agreements do not impose restrictions on the ability of the Company to pay
dividends.
PRITA, generally imposes a withholding tax on the amount of any
dividends paid by FFCC to individuals, whether residents of Puerto Rico or not,
trusts, estates and special partnerships at a special 20% withholding tax rate.
The rate of withholding is 25% if the recipient is a foreign corporation or
partnership
39
<PAGE> 43
not engaged in trade or business within Puerto Rico. For dividends paid after
June 30, 1995, the withholding tax is reduced to 10% for all recipients.
Prior to the first dividend distribution for the taxable year,
individuals who are residents of Puerto Rico may elect to be taxed on the
dividends at the regular graduated rates, in which case the special 20% (10% for
post June 30, 1995 distributions) tax will not be withheld from such year's
distributions.
United States citizens who are non-residents of Puerto Rico may also
make such an election, and will not be subject to Puerto Rico tax on dividends
if 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.
United States income tax law permits a credit against United States
income tax liability, subject to certain limitations, for certain foreign income
taxes paid or deemed paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for the Company on a historical basis for each of the five years ended
December 31, 1994. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis" contained herein.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues 72,043 $ 70,228 $ 49,804 $ 39,430 $ 44,733
Interest expense 23,252 9,710 9,270 12,303 23,576
Loan origination costs and
administrative and general expenses 30,046 29,597 24,118 17,407 15,700
Spin-off expenses None None None None 1,218
Income before income taxes 18,745 30,921 16,416 9,720 4,239
Puerto Rico taxes 2,530 9,601 3,371 2,987 1,209
Income before cumulative effect 16,215 21,320 13,045 6,733 3,030
Cumulative effect 1,215 - - - -
Net income 17,430 21,320 13,045 6,733 3,030
Cash dividends paid 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 $582,977 $388,232 $261,063 $230,861 $199,839
Loans receivable, net and mortgage-
backed securities and investments
held to maturity 102,328 16,901 None None 38,178
Total assets 768,019 486,431 320,972 270,949 300,706
Loans payable and securities sold
under agreements to repurchase 586,491 335,994 227,179 210,548 254,051
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(Dollars in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Deposits $ 66,471 $ 26,451 - - -
Stockholders' Equity 90,496 76,945 58,467 36,041 26,125
PER SHARE DATA:(1)
Net Income- Primary 2.46 $ 3.15 2.35 1.26 0.60
- Fully diluted(2) 2.30 2.81 2.06 1.25 0.60
Cash dividends
Common Stock .52 0.40 0.30 0.2625 0.2375
Series A Preferred Stock(2) 1.05 1.05 1.05 .525 None
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . 6,942,734 6,614,854 5,321,600 5,135,206 5,052,700
Fully diluted . . . . . . . . . . . 7,576,964 7,576,964 6,347,392 5,411,744 5,052,700
OPERATING DATA:
Mortgage loans originated . . . . . $ 760,400 $1,430,000 $ 694,000 $ 360,400 $ 321,400
Loan Servicing Portfolio . . . . . . $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.
ITEM 7. 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. In 1994, higher interest rates negatively
impacted the refinance market responsible for the record originations levels of
1993. As a result, total mortgage production in Puerto Rico was significantly
lower than prior year levels. FFCC, nevertheless, continued to be the largest
originator of mortgage loans in Puerto Rico in 1994. 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 Mortgage Bankers division
following an internal reorganization, expansion of Doral'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 strongly 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 become active again in the Puerto Rico wholesale mortgage
loan purchase market during the second quarter of 1994 to diversify its sources
of loan production and compensate for the decrease in
41
<PAGE> 45
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 wholesale mortgage loan purchases is a
successful low cost initiative that has proven to be successful in the past.
The Company entered the savings and loan industry in September 1993
through the acquisition of all the outstanding stock of Doral Federal Saving
Bank ("Doral Federal"). Doral Federal 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 a
modest 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
growing from $34 million in assets as of December 31, 1993 to $86.4 million in
assets as of December 31, 1993. This growth was funded largely through
increases in retail certificate of deposit accounts and non-interest bearing
accounts maintained by the Company and its subsidiaries, consisting primarily of
corporate and custodial accounts.
FFCC's results of operations are primarily influenced by: (i) 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 economy in Puerto Rico; (ii) the
direction of interest rates; 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,
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>
Year Ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Revenues from mortgage loan sales
and fees $10,573 $35,230 $24,560
------- ------- -------
Interest income 46,508 23,775 16,983
Interest expense 23,252 9,710 9,270
------- ------- -------
Net interest income 23,256 14,065 7,713
------- ------- -------
Loan servicing fees 11,448 8,627 7,163
Gain on sale of servicing rights 3,003 2,378 935
Other income 511 218 163
</TABLE>
42
<PAGE> 46
RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER
31, 1994
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 declines 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, prior year advertising
campaigns 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 largest originator of mortgage loans 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." The percentage of mortgage loans that
were refinancing loans was 59% for the year ended December 31, 1994, 78% for the
year ended December 31, 1993 and 67% for the year ended December 31, 1991.
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
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. While the Company
anticipates that it will enter into similar transactions in the future,
especially with non-conforming loans, the frequency of such transactions, future
gains related thereto, if any, will be dependent on then existing market
conditions.
43
<PAGE> 47
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 fee 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 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 origination 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 and 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.
44
<PAGE> 48
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 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 typical 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 mortgage bankers
in the United States, 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, less than $36 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 $730,059 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 mortgage 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 $581,130 and $69,833, 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
45
<PAGE> 49
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 PMSRs and excess servicing fees receivable. Given the
recent rise in interest rates and corresponding decrease in prepayment rates,
the Company does not believe that the amortization estimates will have to be
adjusted in the foreseeable future. No such adjustment were required during
1994. Moreover, given the relatively small amount of PMSRs and excess servicing
fees receivable capitalized by the Company, any unexpected increase in
prepayment rates would not have a significant impact on the revenues or
liquidity of the Company as a result of increased amortization for PMSRs 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
mortgage-backed securities to maximize interest income produced by these
securities, a substantial portion 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
46
<PAGE> 50
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. Note 18 to the Company's
Consolidated Financial Statements includes 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.
ASSETS AND LIABILITIES
Total assets were approximately $768 million as of December 31, 1994,
reflecting an increase of approximately $282 million from December 31, 1993.
This increase was primarily due to an increase of $256 million in mortgage loans
held for sale and mortgage-backed securities held for trading and held to
maturity as a result of a strategic decision made during the first quarter of
1994 to hold such assets for longer periods prior to sale in order to maximize
net interest income. Consistent with this strategy, during 1994, the Company
purchased approximately $42 million in mortgage-backed securities which the
Company intends to hold until maturity. Such increase also reflects a reduction
in demand for tax exempt mortgage-backed securities during the second half of
1994. The increase also reflects the growth in assets experienced by Doral
Federal which grew from $34 million as of December 31, 1993 to $86.4 million as
of December 31, 1994. Total liabilities were approximately $678 million at
December 31, 1994 compared to $409 million at December 31, 1993. This increase
reflects increased borrowings of $250 million related to carrying a much larger
inventory of mortgage loans held for sale and mortgage-backed securities held
for trading and held to maturity than in 1993. The increase in liabilities also
reflects an increase in deposits held at Doral Federal from $24.5 million at
December 31, 1993 to $79.3 million at December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal financing needs are the financing of loan
funding activities, and the financing of its holdings of mortgage-backed
securities held for trading and held to maturity. To meet these financing
needs, the Company primarily relies on repurchase agreements, pre-sale funding
facilities, mortgage warehouse credit facilities and cash flow from operations.
During 1994, the Company's operating activities provided cash of $49.4
million. This cash resulted primarily from additional borrowings of $250.5
million (principally in the form of loans payable and repurchase agreements),
net income, loan repayments and sales proceeds net of cash used to fund
origination and the purchase of mortgage loans and mortgage-backed securities.
The $49.4 million of cash provided by operations plus the $34.1 million
generated by financing activities generally corresponds to the increase in cash
used in investing activities to purchase mortgage-backed securities for long
term investment and the origination of loans held for investment by Doral
Federal. Net cash provided by operating activities was $9.2 million and $5.3
million for 1993 and 1992, respectively.
Net cash used by investing activities increased to $84.9 million versus
$716,000 for 1993. This increase was primarily the result of an increase in
investments held to maturity and loans receivable of $61.8 million
47
<PAGE> 51
and $26.2 million, respectively. Acquisitions of real estate held for sale in
1994 used cash of $2.3 million while disposals of real estate owned contributed
cash of $3.2 million. Acquisitions of servicing rights during 1994 increased
by $581,000. This was due to an increase in purchases of loans from third
parties. When the Company purchases loans from third parties a portion of the
purchase price is allocated to the related servicing right. Excess servicing
fees receivable also increased $5.9 million as a result of certain bulk sales
of mortgage loans made during 1994.
Net cash provided by financing activities increased to $34.1 million for
1994 from $10.1 million for 1993. This was due primarily to an increase in
deposits held at Doral Federal in the amount of $40.0 million, reduced by $3.9
million in payments of dividends and repayment of advances from the Federal Home
Loan Bank of New York in the amount of $2.0 million. Net cash provided by
financing activities was $10.1 million in 1993 versus use of $1.6 million in
1992.
Total liabilities were approximately 7.5 and 5.3 times stockholders'
equity at December 31, 1994 and 1993, respectively. The increased leverage at
December 31, 1994 from December 31, 1993 resulted from a net increase of $250.5
million in loans payable and securities sold under agreements to repurchase and
in deposits held at Doral Federal of $40 million as compared to 1993. The
increase in borrowings were used to finance the higher levels of mortgage-backed
securities held for trading and held to maturity and the amount of time such
securities were held prior to sale.
FFCC borrows money under warehousing lines of credit to fund its
mortgage loan commitments and repays the borrowing as the mortgages are sold.
The warehousing lines of credit then become available for additional borrowing.
FFCC held mortgage loans prior to sale for an average period of approximately
212 days during the year ended December 31, 1994 and 98 days during the year
ended December 31, 1993. The increase is due to a decision made during the
first quarter of 1994 to increase the length of time the Company holds mortgage
loans and mortgage-backed securities prior to sale to increase net interest
income.
FFCC had available bank warehousing lines of credit of $92 million at
December 31, 1994 compared to $122.5 million at December 31, 1993. At December
31, 1994 and 1993, FFCC had used approximately $79.6 million and $54.8 million,
respectively, of credit available under its warehousing lines of credit. FFCC's
warehousing lines of credit are generally terminable at the discretion of the
lender. Interest rate spreads on certain mortgage loans and mortgage-backed
securities in Puerto Rico have traditionally been high due to the ability of the
Company to finance its mortgage loans and mortgage-backed securities with
lower-cost tax advantaged funds.
FFCC's also obtains funding under gestation or pre-sale facilities which
permit the Company to obtain more favorable rates once mortgage loans have been
pooled for securitization but prior to the actual issuance of the
mortgage-backed securities as well as to finance such mortgage-backed securities
upon their issuance. At December 31, 1994 and 1993, FFCC had available pre-sale
or gestation facilities of $350 million and $150 million, respectively. At
December 31, 1994 and 1993, FFCC had used approximately $196 million and $36
million, respectively, of credit available under its gestation facilities.
Approximately $186 million used by the Company at December 31, 1994 were used to
finance mortgage loans while approximately $10 million were used to finance
mortgage-backed securities.
FFCC also obtains short-term financing through repurchase agreement
lines of credit with financial institutions and investment banking firms. Under
these agreements, FFCC sells GNMA, FNMA or FHLMC guaranteed mortgage-backed
securities and to a lesser extent private label mortgage-backed securities and
48
<PAGE> 52
simultaneously agrees to repurchase them at a future date at a fixed price.
FFCC uses the proceeds of such sales to repay borrowing 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. FFCC available repurchase agreement lines of credit at December 31,
1994 and December 31, 1993 amounted to $485 million and $200 million,
respectively. At December 31, 1994 and 1993, FFCC had outstanding repurchase
obligations in the aggregate principal amount of approximately $293 million and
$107 million, respectively. FFCC's continued use of repurchase agreements will
depend upon the cost of repurchase agreements relative to the cost of borrowing
under its warehousing lines of credit with banks and other financial
institutions.
The weighted monthly average interest rate of FFCC's borrowings for
warehousing lines of credit (including the portion of gestation and pre-sale
agreements used to finance mortgage loans) and for repurchase agreement lines of
credit (including the portion of gestation and pre-sale agreements used to
finance mortgage-backed securities) was 5.7% and 4.3%, respectively, for the
year ended December 31, 1994 compared to 4.2% and 3.34%, respectively, for the
year ended December 31, 1993.
During the year ended December 31, 1994, the Company collected an
average of approximately $953,000 per month as net servicing fees, including
late charges. At December 31, 1994 and December 31, 1993, the servicing
portfolio amounted to approximately $2.6 billion and $2.4 billion,
respectively. The Company might in the future determine to sell part of the
servicing portfolio to raise additional funds.
Doral Federal obtains funding for its lending activities through the
receipt of deposits and to a lesser extent from other borrowings such as Federal
Home Loan Bank advances and repurchase agreements with brokerage houses. Doral
Federal, as a member of Federal Home Loan Bank of New York (the "FHLB-NY"), has
access to collateralized borrowings from the FHLB-NY up to a maximum of 25% of
its qualifying assets.
At times, the Company may have to meet margin requirements to cover
changes in the market value of its mortgage-backed securities. To the extent
that the required collateral levels are higher than the current market prices of
the mortgage-backed securities pledged as collateral, the Company must deposit
cash or certain government securities. In addition, the Company sometimes sells
mortgage-backed securities and loans with puts or with recourse arrangements.
The Company may be required to fund the repurchase loans or mortgage-backed
securities from time to time under the terms of such puts and recourse
arrangements. As of December 31, 1994, the Company's servicing portfolio
included approximately $112 million in mortgage loans subject to recourse
arrangements. The Company also had sold approximately $200 million in
mortgage-backed securities subject to puts. The puts on approximately $146
million of such mortgage-backed securities expire in one year or less. See Note
22 to the Company's Consolidated Financial Statements.
FFCC generally has been able to provide for its growth and expansion and
for continued liquidity with funds from short-term borrowings. The increased
level of mortgage-backed securities held in inventory during 1994, together with
the downward pressure on prices which reduced the amount that can be borrowed
against such securities, increased the liquidity needs of the Company. The
Company was able to meet these needs through increases in its short-term
borrowings and the use of alternative financing arrangements. For example,
during 1994 the Company raised approximately $3.2 million in unsecured debt
financing through a private placement of medium term notes with maturities
varying from six months to two years pursuant to a private placement offered and
sold exclusively to residents of Puerto Rico. The Company was also able
49
<PAGE> 53
to obtain $3.25 million in financing pursuant to the issuance of a demand note
to a private investor secured by subordinated CMO certificates. In addition,
the Company was able to obtain $4.7 million in financing by entering into a
swap transaction with David Levis, the former Chairman of the Board of the
Company, whereby Mr. Levis agreed to provide the Company with GNMA Certificates
for use as collateral in repurchase agreements in exchange for subordinated CMO
Certificates. The Company felt that these transactions represented an
innovative way to finance mortgage-backed assets such as the subordinated CMO
certificates that are difficult to finance with conventional methods under
current market conditions.
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. FFCC, nevertheless, expects that it will
continue to have adequate resources to finance its operations.
INFLATION
FFCC is affected by fluctuations in real estate values and interest
rates. Although general and administrative expenses have increased due to
inflation, the increase in real estate values in Puerto Rico in recent years
has been a positive factor for the Company's Mortgage Banking Business. The
average size of loans originated tends to increase as home values appreciate,
which serves to increase loan origination fees and servicing income faster than
the cost of providing such services. Significant increases in interest rates,
however, make it more difficult for potential borrowers to purchase desirable
residential properties and to qualify for mortgage loans and refinance
activity. As a result, higher interest rates may adversely affect the volume
of loan originations and income related to mortgage production. A high
interest rate environment, however, tends, to reduce prepayments and thereby
enhance the value and earnings of the Company's mortgage loan servicing
portfolio.
PROSPECTIVE TRENDS
MARKET TRENDS. During the second half of 1994, prevailing mortgage
rates began to steadily increase resulting in lower loan production (especially
from refinancings) and greater competition. The foregoing factors adversely
impacted earnings from loan origination activities. The Company was able to
compensate, in part, for the reduction in earnings from loan origination
activities by increasing its net interest income by increasing the length of
time it held mortgage loans and mortgage-backed securities prior to sale. This
strategy also had the effect of reducing the amount of the Company's tax
liability since a substantial portion of the Company's mortgage-backed
securities holdings consist of GNMA securities the interest on which is exempt
from income tax under Puerto Rico law. The Company has also taken steps to
reduce expenses, by reducing staff and embarking on a program to reduce
production-related and overhead expenses. The Company reduced its total
staffing levels from approximately 927 at December 31, 1993 to 735 at December
31, 1994.
The rise in interest rates experienced during 1994 resulted in decreased
profits on sales of mortgage loans and securities. The large supply of
mortgage-backed securities in the market, due to the large production of GNMA
securities during 1993, also resulted in downward pressure on prices and profit
from sales as a result of reduced demand. These factors resulted in significant
decreases on the gains on sale of loans and mortgage-backed securities as
compared to 1993. To the extent interest rates stabilize during 1995 and the
existing supply of mortgage-backed securities is absorbed by the market, the
Company expects demand and prices for mortgage loans and mortgage-backed
securities to increase. Certain of there positive
50
<PAGE> 54
trends have begun to be experienced during the first quarter of 1995.
Increasing the length of time the Company holds mortgage loans and
mortgage-backed securities prior to sale increases the risks of loss to the
value of the Company's inventory from fluctuations in interest rates. The
Company has implemented hedging strategies designed to reduce the risks to the
value of its mortgage loan and mortgage-backed securities inventory from
fluctuations in interest rates.
During 1994, the Company's servicing portfolio continued to increase
thereby increasing its servicing revenue base. This increase was accomplished
principally through internal originations. The Company expects the servicing
portfolio to further increase during 1995 both through internal originations and
increased purchase of servicing rights in the wholesale loan market. Servicing
income should, therefore, continue to provide a stable base of revenues. To the
extent interest rates continue to rise or level off, the servicing revenue
should be further enhanced as a result of decreases in prepayments in the
servicing portfolio. The increase in the servicing portfolio should also
contribute to an increase in net interest income because a significant amount of
the Company's servicing and escrow accounts, which are non-interest bearing, are
maintained at Doral Federal, thereby providing Doral Federal with an important
source of inexpensive funds. Such servicing and escrow accounts maintained at
Doral Federal amount to approximately $21.1 million as of December 31, 1994.
POSSIBLE PUERTO RICO AND UNITED STATES TAX LAW CHANGES. Puerto Rico
government officials have publicly confirmed that the Puerto Rico government is
currently reviewing the tax exempt status of income earned on FHA and VA loans
secured by residential property located in Puerto Rico as well as GNMA
certificates backed by such mortgages. A committee consisting of
representatives of different agencies has been appointed to study the issue. The
committee will be requested to make recommendations which could include
elimination, reduction or other modification of the existing exemption. It is
expected that any such change would require legislative action and would have
prospective application.
The elimination of tax exemption on FHA/VA mortgage loan, could
adversely affect the profitability of FFCC by reducing the prices it could
obtain for its FHA and VA loans and GNMA certificates. Such a change could also
reduce demand for FHA and VA loans because of the higher interest rates that
would be required to be charged on such loans. Such a change should not,
however, adversely affect liquidity since the Company could sell its FHA and VA
loans and GNMA certificates in the conventional U.S. mortgage market at
prevailing U.S. prices. The elimination of the tax exempt status of interest on
FHA and VA loans could also have a short-term positive effect on the Company
because the value of FFCC's existing inventory of FHA and VA loans and GNMA
securities existing at the time of any such legislative change would be
significantly enhanced.
In connection with ongoing efforts to reduce the Federal budget deficit,
several Congressional leaders, including John Kasich, the Chairman of the Budget
Committee of the House of Representatives, have publicly expressed their desire
to re-examine the tax benefits available to U.S. corporations for operating and
investing in Puerto Rico under Section 936 of the Internal Revenue Code
("Section 936"). The Omnibus Budget Reconciliation Act of 1993 effective for
taxable years beginning in 1994 reduced the benefits previously available under
Section 936. To date, no formal action has been taken in either House of
Congress to further amend Section 936, and therefore, it is not possible to
predict what impact, if any, these discussions will have on the operation of
Section 936, the general economic condition of Puerto Rico or the operations of
the Company. The elimination or a substantial reduction of the benefits
currently available under Section 936 could have an adverse effect on the
general economic condition of Puerto Rico, FFCC's predominant service area, by
reducing U.S. tax incentives for investing in Puerto Rico. Any such change
51
<PAGE> 55
could also have an adverse effect on the liquidity and prices for the Company's
mortgage loans and mortgage-backed securities by reducing the amount of
tax-advantaged funds available in the Puerto Rico financial system.
NEW ACCOUNTING STANDARDS. In May 1993, the Financial Accounting
Standards Board (the "FASB") issued the 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.
In June 1994, the FASB issued a Proposed Statement of Financial
Accounting Standards, Accounting for Mortgage Servicing Rights and Excess
Servicing Receivables and for Securitization of Mortgage Loans. This proposed
statement, as subsequently modified, would, among other provisions, require the
recognition of originated mortgage servicing rights ("OMSRs"), as well as
purchased mortgage servicing rights (PMSRs"), as assets. Presently, the cost of
OMSRs is included with the cost of the related loans and written off against
income when the loans are sold, but the cost of PMSRs is recorded as an asset.
Under the proposed statement, all capitalized mortgage servicing rights would be
evaluated for impairment on a discounted, disaggregated basis. This approach
would require stratification of the amortized costs of mortgage servicing rights
on the basis of the predominate characteristics of the underlying loans, such as
loan type, size, interest rate, date of origination, term and geographic
location. Under current accounting requirements, the impairment evaluation may
be made on either a discounted on an undiscounted basis. The Company uses a
disaggregated method. A final statement is expected in the second quarter of
calendar year 1995. The proposed statement is expected to be effective for
fiscal years commencing after December 31, 1995 and to only permit the
recognition of OMSRs with respect to mortgage loans originated after its
effective date.
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 a specific
impact is not possible at this time.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information call for by this Item 8 is hereby incorporated by
reference from the Company's Consolidated Financial Statements and Auditor's
Report beginning on page F-1 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
52
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters" contained in
Company's definitive Proxy Statement for its 1995 Annual Meeting of stockholders
(the "Proxy Statement") to be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
to the section entitled "Executive Compensation" of the Company's Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
to the section entitled "Security Ownership of Management and Principal Holders"
of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
to the section entitled "Election of Directors and Related Matters - Certain
Relationships and Related Transactions" of the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report.
(1) Financial Statements.
The information called for by this subsection of Item 14 is
set forth in the Financial Statements and Auditors' Report
beginning on page F-1 of this Form 10-K. The index to
Financial Statements is set forth on page F-2 of this Form
10-K.
(2) Financial Statement Schedules.
All financial schedules have been omitted because they are
not applicable or the required information is shown in the
financial statements or notes thereto.
(3) Exhibits.
53
<PAGE> 57
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 By-laws of FFCC, as amended as of May 26, 1994.(12)
3.3 Amendment to Certificate of Incorporation of FFCC filed with the Department of State of the
Commonwealth of Puerto Rico on May 23, 1991.(2)
3.4 Certificate of Designation creating the Series A Preferred Stock.(2)
3.5 Amendment to Certificate of Incorporation of FFCC filed with the Department of State of the
Commonwealth of Puerto Rico on April 28, 1993(1)
4.1 Common Stock Certificate.(2)
4.2 Series A Preferred Stock Certificate.(2)
10.12(f) Deferred Compensation Agreement dated as of November 14, 1988, between FFCC and Nancy
Hernandez.(3)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC and Culbro Corporation covering
the purchase of RSC Corp. and Doral Mortgage Corporation.(3)
10.16 Loan Agreement between Banco Commercial de Mayaguez and FFCC, dated November 20, 1990.(4)
10.18 Form of Contract of Pledge used by FFCC in connection with the Warehousing Loan Agreement dated
November 25, 1987, as amended, with Scotiabank de Puerto Rico.(5)
10.21 Tax Indemnification Agreement between Culbro Corporation and FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB, Inc. and David Levis, Salomon
Levis, Aida Levis and Carmen Levis covering the purchase of FFCC together with amendments or
supplements dated August 25, 1977, November 1, 1977, January 1, 1982, February 9, 1982, January 1,
1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986, between CMI Inc. and Salomon Levis and Carmen
Maria Serracante covering the purchase of RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986, between DRL, Inc. and Jesus M. Rodriguez and
Marta Melendez covering the purchase of Doral Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de Ponce, as trustee, and the Puerto Rico
Housing Finance Corporation dated September 25, 1990.(4)
10.30 Loan Agreement between FFCC and Puerto Rico Island Rental Limited Dividend Partnership S.E., dated
December 27, 1990.(4)
10.32 Warehousing Loan Agreement dated January 29, 1990 between FFCC and Banco Santander Puerto Rico.(4)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (a) [Reserved]
(b) [Reserved]
</TABLE>
54
<PAGE> 58
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
(c) Master Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated March 30,
1989.(4)
(d) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated October 26,
1989.(4)
(e) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November 28,
1989.(4)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated December 6,
1989.(4)
(g) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated September 11,
1990.(4)
(h) Master Repurchase Agreement between FFCC and Shearson Lehman Hutton Puerto Rico, Inc., dated
June 21, 1990.(4)
(i) Repurchase Agreement between FFCC and Banco Central Corp., dated October 11, 1991.(2)
(j) Repurchase Agreement between FFCC and Banco Central Corp., dated December 3, 1991.(2)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24, 1992.(5)
10.35 Employment Agreement dated January 1, 1992 between FFCC and Salomon Levis.(2)
10.36 Employment Agreement dated January 1, 1992 between FFCC and Zoila Levis.(2)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between FFCC and Scotiabank de Puerto
Rico.(2)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber Incorporated, dated as of March 24, 1992.(5)
10.40 Insurance and Indemnity Agreement dated as of May 28, 1992, between FFCC and Financial Security
Assurance Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de Puerto Rico and FFCC confirming the
renewal of the Loan Agreement dated November 25, 1987.(5)
10.42 Financing Agreement dated May 14, 1992, between FFCC and Banco Popular de Puerto Rico.(5)
10.43 Consulting Agreement dated June 1, 1992, between FFCC and Richard F. Bonini.(5)
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991, between FFCC and Banco Santander
Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992, between FFCC and Banco Santander Puerto
Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan Agreement between FFCC and Scotiabank
de Puerto Rico dated November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between FFCC and Scotiabank de Puerto Rico
dated November 25, 1987.(5)
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.48 Letter Agreement dated September 21, 1992, between FFCC and Banco Bilbao Vizcaya confirming the
extension and renewal of the Loan Agreement between Banco Commercial de Mayaguez and FFCC dated
November 20, 1990.(5)
10.49 Employment Agreement dated as of April 1, 1993 between FFCC and Luis Alvarado.
10.50 Customer Agreement, dated March 9, 1993, between FFCC and Meridian Capital Markets Inc. relating
to the execution of Forward Contracts.(6)
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC and Bear Sterns Mortgage Capital
Corporation.(7)
10.52 Master Production Agreement, dated as of September 15, 1993, between FFCC and Doral Federal.(8)
10.53 Master Purchase, Servicing and Collection Agreement, dated as of September 15, 1993, between FFCC
and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as of November 29, 1993 between FFCC
and Nomura Asset Capital Corporation.(13)
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993, between FFCC and Meridian Capital
markets, a Division of Meridian Bank.(13)
10.56 Financing Facility Agreement dated March 21, 1994, between Nomura Asset Capital Corporation,
FFCC and Doral.(12)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital, Inc., FFCC and Doral together
with Supplemental Terms to Master Repurchase Agreement, each dated as of January 12, 1995.(14)
10.58 Swap Agreement dated December 7, 1994, between FFCC and David Levis.(14)
10.59 Demand Note dated December 9, 1994.(14)
10.60 Form of Medium Term Note, 1994 Series PR-A.(14)
21 List of FFCC's subsidiaries.(13)
27 Financial Data Schedule (Edgar version only).(14)
28.1 Agreement and Plan of Reorganization dated as of December 11, 1992 between FFCC and Catano Federal
Savings Bank.(10)
--------------------
</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 Annual Report on From 10-K for the year ended December 31, 1991
(File No. 0-17224)
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10 filed with the Commission on
October 7, 1988, as amended by Form 8 amendments thereto.
56
<PAGE> 60
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-39651) filed with the
Commission on March 29, 1991.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File
No. 0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(11) Incorporated herein by reference to Exhibit Number 10.26 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(12) Incorporated herein by reference to same exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(13) 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, 1993.
(14) Filed herewith.
(b) Reports on Form 8-K.
Not applicable
57
<PAGE> 61
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR INCLUSION IN FORM 10-K
ANNUAL REPORT FILED WITH
SECURITIES AND EXCHANGE COMMISSION
F-1
<PAGE> 62
FIRST FINANCIAL CARIBBEAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FEBRUARY 1, 1995
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants ................................................... F-4
Financial Statements
Consolidated Balance Sheet as of December 31, 1994 and 1993 .................... F-5
Consolidated Statement of Income and Retained Earnings for the years ended
December 31, 1994, 1993, and 1992 ............................................ F-6
Consolidated Statement of Changes in Capital Stock for the years ended
December 31, 1994, 1993 and 1992 ............................................. F-7
Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993
and 1992 ..................................................................... F-8
Notes to Consolidated Financial Statements ..................................... F-10
</TABLE>
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements or notes thereto.
F-2
<PAGE> 63
FIRST FINANCIAL CARIBBEAN
-------------------------
CORPORATION
-----------
REPORT AND CONSOLIDATED
-----------------------
FINANCIAL STATEMENTS
--------------------
DECEMBER 31, 1994 AND 1993
--------------------------
F-3
<PAGE> 64
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-4
<PAGE> 65
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
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-5
<PAGE> 66
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-6
<PAGE> 67
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-7
<PAGE> 68
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)
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
----------- ------------ -----------
</TABLE>
(Continued)
The accompanying notes are an integral part of this statement.
F-8
<PAGE> 69
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
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-9
<PAGE> 70
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 collaterized
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.
F-10
<PAGE> 71
Page 2
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.
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.
F-11
<PAGE> 72
Page 3
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).
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.
F-12
<PAGE> 73
Page 4
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.
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.
F-13
<PAGE> 74
Page 5
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.
F-14
<PAGE> 75
Page 6
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 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.
F-15
<PAGE> 76
Page 7
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>
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>
F-16
<PAGE> 77
Page 8
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%.
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>
F-17
<PAGE> 78
Page 9
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>
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>
F-18
<PAGE> 79
Page 10
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.
F-19
<PAGE> 80
Page 11
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>
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.
F-20
<PAGE> 81
Page 12
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:
December 31,
<TABLE>
<CAPTION>
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 -
======== ======= ======== =========
NOTE 8 - LOANS RECEIVABLE:
Loans receivable consist of:
1994 1993
---- ----
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>
F-21
<PAGE> 82
Page 13
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>
Fixed rates Adjustable rates
----------- ----------------
Term to Book Term to date of Book
maturity value rate adjustment 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>
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>
F-22
<PAGE> 83
Page 14
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.
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>
F-23
<PAGE> 84
Page 15
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.
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>
F-24
<PAGE> 85
Page 16
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.
F-25
<PAGE> 86
Page 17
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.
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.
F-26
<PAGE> 87
Page 18
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-27
<PAGE> 88
Page 19
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.
F-28
<PAGE> 89
Page 20
At December 31, 1994, securities sold under agreements to repurchase are
classified by dealer as follows:
<TABLE>
<CAPTION>
Approximate
market value
Balance of 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>
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>
F-29
<PAGE> 90
Page 21
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.
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.
F-30
<PAGE> 91
Page 22
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.
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
=========== =========== ===========
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
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>
F-31
<PAGE> 92
Page 23
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>
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).
F-32
<PAGE> 93
Page 24
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 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.
F-33
<PAGE> 94
Page 25
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.
F-34
<PAGE> 95
Page 26
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.
- 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.
F-35
<PAGE> 96
Page 27
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
----------- -----------------
<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.
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.
F-36
<PAGE> 97
Page 28
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.
F-37
<PAGE> 98
Page 29
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. 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
======== ======== ======== ========
</TABLE>
F-38
<PAGE> 99
Page 30
<TABLE>
<CAPTION>
1994 1993
---- ----
Carrying Carrying
amount Fair value amount Fair value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
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-39
<PAGE> 100
Page 31
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>
F-40
<PAGE> 101
Page 32
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 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.
F-41
<PAGE> 102
Page 33
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-42
<PAGE> 103
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, First Financial Caribbean Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ Salomon Levis
--------------------------------------
Salomon Levis
Chairman of the Board and
Chief Executive Officer
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
/s/ Salomon Levis Chairman of the Board and March 30, 1995
----------------------------------- Chief Executive Officer
(Salomon Levis)
/s/ Luis Alvarado Executive Vice President, March 30, 1995
----------------------------------- Chief Financial Officer and
(Luis Alvarado) Principal Accounting Officer
/s/ Richard F. Bonini
----------------------------------- Director March 30, 1995
(Richard F. Bonini)
/s/ Edgar M. Cullman, Jr.
----------------------------------- Director March 30, 1995
(Edgar M. Cullman, Jr.)
/s/ Frederick M. Danziger
----------------------------------- Director March 30, 1995
(Frederick M. Danziger)
/s/ John L. Ernst
----------------------------------- Director March 30, 1995
(John L. Ernst)
/s/ Zoila Levis
-----------------------------------
(Zoila Levis) Director March 30, 1995
</TABLE>
<PAGE> 104
<TABLE>
<S> <C> <C>
/s/ A. Brean Murray
----------------------------------- Director March 30, 1995
(A. Brean Murray)
/s/ Victor M. Pons, Jr.
----------------------------------- Director March 30, 1995
(Victor M. Pons, Jr.)
</TABLE>
2
<PAGE> 105
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of FFCC, as currently in effect.(1)
3.2 By-laws of FFCC, as amended as of May 26, 1994(12)
3.3 Amendment to Certificate of Incorporation of FFCC filed with the
Department of State of the Commonwealth of Puerto Rico on May 23,
1991.(2)
3.4 Certificate of Designation creating the Series A Preferred Stock.(2)
3.5 Amendment to Certificate of Incorporation of FFCC filed with the
Department of State of the Commonwealth of Puerto Rico on April 28,
1993.(2)
4.1 Common Stock Certificate.(2)
10.12(f) Deferred Compensation Agreement dated as of November 14, 1988, between
FFCC and Nancy Hernandez.(3)
10.13 1988 FFCC Stock Option Plan.(3)
10.14 FFCC Restricted Stock Plan.(3)
10.15 Purchase Agreement dated as of September 21, 1988, between FFCC and
Culbro Corporation covering the purchase of RSC Corp. and Doral
Mortgage Corporation.(3)
10.16 Loan Agreement between Banco Commercial de Mayaguez and FFCC, dated
November 20, 1990.(4)
10.18 Form of Contract of Pledge used by FFCC in connection with the
Warehousing Loan Agreement dated November 25, 1987, as amended, with
Scotiabank de Puerto Rico.(5)
10.21 Tax Indemnification Agreement between Culbro Corporation and FFCC.(3)
10.22 Purchase Agreement dated as of November 30, 1976, between CMB, Inc.
and David Levis, Salomon Levis, Aida Levis and Carmen Levis covering
the purchase of FFCC together with amendments or supplements dated
August 25, 1977, November 1, 1977, January 1, 1982, February 9, 1982,
January 1, 1986 and January 1, 1987.(3)
10.23 Purchase Agreement dated as of October 15, 1986, between CMI Inc. and
Salomon Levis and Carmen Maria Serrancante covering the purchase of
RSC Corp.(3)
10.24 Purchase Agreement dated as of October 15, 1986, between DRL, Inc. and
Jesus M. Rodriguez and Marta Melendez covering the purchase of Doral
Mortgage Corporation.(3)
10.28 Agreement among Doral Mortgage Corporation, Banco de Ponce, as
trustee, and the Puerto Rico Housing Finance Corporation dated
September 25, 1990.(4)
</TABLE>
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.30 Loan Agreement between FFCC and Puerto Rico Island Rental Limited Dividend
Partnership S.E., dated December 27, 1990.(4)
10.32 Warehousing Loan Agreement dated January 29, 1990 between FFCC and Banco
Santander Puerto Rico.(4)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto
Rico.(4)
10.34 (a) [Reserved]
(b) [Reserved]
(c) Master Repurchase Agreement between FFCC and First Boston (Puerto
Rico), Inc. dated March 30, 1989.(4)
(d) Repurchase Agreement between FFCC and First Boston (Puerto Rico),
Inc., dated October 26, 1989.(4)
(e) Repurchase Agreement between FFCC and First Boston (Puerto Rico),
Inc., dated November 28, 1989.(4)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico),
Inc., dated December 6, 1989.(4)
(g) Repurchase Agreement between FFCC and First Boston (Puerto Rico),
Inc., dated September 11, 1989.(4)
(h) Master Repurchase Agreement between FFCC and Shearson Lehman Hutton
Puerto Rico, Inc., dated June 21, 1990.(4)
(i) Repurchase Agreement between FFCC and Banco Central Corp., dated
October 11, 1991.(2)
(j) Repurchase Agreement between FFCC and Banco Central Corp., dated
December 3, 1991.(2)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc.
dated as of March 24, 1992.(5)
10.37 Third Amendment to Loan Agreement dated June 5, 1991 between FFCC and
Scotiabank de Puerto Rico.(2)
10.35 Employment Agreement dated January 1, 1992 between FFCC and Solomon
Levis.(2)
10.36 Employment Agreement dated January 1, 1992 between FFCC and Zoila
Levis.(2)
10.39 Mark-to-Market Agreement between FFCC and PaineWebber Incorporated, dated as
of March 24, 1992.(5)
10.40 Insurance and Indemnity Agreement as of May 28, 1992, between FFCC and
Financial Security Assurance, Inc.(5)
10.41 Letter Agreement dated August 20, 1992 between Scotiabank de Puerto Rico and
FFCC confirming the renewal of the Loan Agreement dated November 25,
1987.(5)
</TABLE>
2
<PAGE> 107
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.42 Financing Agreement dated May 14, 1992, between FFCC and Banco Popular
de Puerto Rico.(5)
10.43 Consulting Agreement dated June 1, 1992, between FFCC and Richard F.
Bonini.(5)
10.44 Addendum to Warehousing Loan Agreement dated August 1, 1991, between
FFCC and Banco Santander Puerto Rico.(5)
10.45 Addendum to Warehousing Loan Agreement dated May 29, 1992, between FFCC
and Banco Santander Puerto Rico.(5)
10.46 Letter Agreement dated November 28, 1988 amending the Loan Agreement
between FFCC and Scotiabank de Puerto Rico dated November 25, 1987.(5)
10.47 Amendment dated June 29, 1989 to the Loan Agreement between FFCC and
Scotiabank de Puerto Rico dated November 25, 1987.(5)
10.48 Letter Agreement dated September 21, 1992, between FFCC and Banco
Vizcaya confirming the extension and renewal of the Loan Agreement
between Banco Commercial de Mayaguez and FFCC dated November 20,
1990.(5)
10.49 Employment Agreement dated as of April 1, 1993 between FFCC and Luis
Alvardo.
10.50 Customer Agreement, dated March 9, 1993, between FFCC and Meridian
Capital Markets Inc. relating to the execution of Forward
Contracts.(6)
10.51 Master Repurchase Agreement, dated March 24, 1993, between FFCC and Bear
Sterns Mortgage Capital Corporation.(7)
10.52 Master Production Agreement, dated as of September 15, 1993, between
FFCC and Doral Federal.(8)
10.53 Master Purchase, Service and Collection Agreement, dated as of September
15, 1993, between FFCC and Doral Federal.(9)
10.54 Mortgage Loan Purchase and Interim Servicing Agreement dated as of
November 29, 1993 between FFCC and Nomura Asset Capital Corporation.(13)
10.55 Purchase and Servicing Agreement, dated as of September 1, 1993, between
FFCC and Meridian Capital markets, a division of Meridian Bank.(13)
10.56 Financing Facility Agreement dated March 21, 1994, between Momura Asset
Capital Corporation, FFCC and Doral.(12)
10.57 Master Repurchase Agreement among Merrill Lynch Mortgage Capital, Inc.,
FFCC and Doral together with Supplemental Terms to Master Repurchase
Agreement, each dated as of January 12, 1995.(16)
10.58 Swap Agreement dated December 7, 1994, between FFCC and Davis
Levis.(14)
10.59 Demand Note dated December 9, 1994.(14)
10.60 Form of Medium Term Note, 1994 Series PR-A.(14)
21 List of FFCC's subsidaries.(13)
3
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule (EDGAR version only).(14)
28.1 Agreement and Plan of Reorganization dated as of December 11, 1992
between FFCC and Catano Federal Savings Bank.(10)
</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 Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 0-17224).
(3) Incorporated herein by reference to the same exhibit number as filed
pursuant to Item 15(b) of the Company's Form 10-Q filed with the Commission on
October 7, 19988, as amended by Form 8 amendments thereto.
(4) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-1 (No. 33-952292) files with the
Commission on September 23, 1992.
(5) Incorporated herein by reference to the same exhibit number of the
Company's Registration Statement on Form S-2 (No. 33-52292) filed with the
Commission on September 23, 1992.
(6) Incorporated by reference to exhibit number 19.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(7) Incorporated by reference to exhibit number 19.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-17224).
(8) Incorporated by reference to exhibit number 19.3 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No.
0-17224).
(9) Incorporated by reference to exhibit number 19.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No.
0-17224).
(10) Incorporated herein by reference to exhibit number 1 of the Company's
Current Report on Form 8-K filed with the Commission on December 16, 1992.
(11) Incorporated herein by reference to Exhibit Number 10.26 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(12) Incorporated herein by reference to exhibit number of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(13) Incorporated herein by reference to exhibit number of the Company's
Annual Report on Form 10-k for the year ended December 31, 1993.
4
<PAGE> 109
(14) Filed herewith.
(b) Reports on Form 8-K.
Not applicable
5
<PAGE> 1
EXHIBIT 10.57
Public Securities Association PSA
40 Broad Street, New York, NY 10004-2373
Telephone (212) 809-7000
MASTER REPURCHASE AGREEMENT
Dated as of January 12, 1995
Among:
MERRILL LYNCH MORTGAGE CAPITAL INC. ("Buyer")
and
FIRST FINANCIAL CARIBBEAN CORPORATION ("Seller")
and
DORAL MORTGAGE CORPORATION ("Seller")
1. Applicability
From time to time the parties hereto may enter into transactions in
which one party ("Seller") agrees to transfer to the other ("Buyer") securities
or financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand, against the transfer of funds by Seller. Each
such transaction shall be referred to herein as a "Transaction" and shall be
governed by this Agreement, including any supplemental terms or conditions
contained in Annex I hereto, unless otherwise agreed in writing.
2. Definitions
(a) "Act of Insolvency", with respect to any party, (i) the
commencement by such party as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar
law, or such party seeking the appointment of a receiver, trustee, custodian or
similar official for such party or any substantial part of its property, or
(ii) the commencement of any such case or proceeding against such party, or
another seeking such an appointment, or the filing against a party of an
application for a protective decree under the provisions of the Securities
Investor Protection Act of 1970, which (A) is consented to or not timely
contested by such party, (B) results in the entry of an order for relief, such
an appointment, the issuance of such a protective decree or the entry of an
order having a similar effect, or (C) is not dismissed within 15 days, (iii)
the making of a party of a general assignment for the benefit of creditors, or
(iv) the admission in writing by a party of such party's inability to pay such
party's debts as they become due;
(b) "Additional Purchased Securities", Securities provided by Seller
to Buyer pursuant to Paragraph 4(a) hereof;
(c) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions
thereon;
(f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(h) "Market Value", with respect to any Securities as of any date, the
price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued Income to the extent not included therein (other
than any Income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(i) "Price Differential", with respect to any Transaction hereunder as
of any date, the aggregate amount obtained by daily application of the Pricing
Rate for such Transaction to the Purchase Price for such Transaction on a 360
day per year basis for the actual number of days during the period commencing
on (and including) the Purchase Date for such Transaction and ending on (but
excluding) the date of determination (reduced by any amount of such Price
Differential previously paid by Seller to Buyer with respect to such
Transaction);
<PAGE> 2
(j) "Pricing Rate", the per annum percentage rate for determination of
the Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial banks
as published in The Wall Street Journal;
(l) "Purchase Date", the date on which Purchased Securities are
transferred by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Seller to Buyer
pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations
under clause (ii) of Paragraph 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to
Buyer in a Transaction hereunder, and any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with
respect to any Transaction at any time also shall include Additional Purchased
Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities
returned pursuant to Paragraph 4(b);
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application
of the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are to
be transferred from Buyer to Seller upon termination of a Transaction, which
will be determined in each case (including Transactions terminable upon demand)
as the sum of the Purchase Price and the Price Differential as of the date of
such determination, increased by any amount determined by the application of
the provisions of Paragraph 11 hereof;
(q) "Seller's Margin Amount", with respect to any Transaction as of
any date, the amount obtained by application of a percentage (which may be
equal to the percentage that is agreed to as the Buyer's Margin Amount under
subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date.
3. INITIATION; CONFIRMATION; TERMINATION
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation of either Buyer or Seller. On the Purchase Date for
the Transaction, the Purchased Securities shall be transferred to Buyer or its
agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or
Seller (or both), as shall be agreed, shall promptly deliver to the party a
written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the
Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be
terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to
the Transaction, and (v) any additional terms or conditions of the Transaction
not inconsistent with this Agreement. The Confirmation, together with this
Agreement, shall constitute conclusive evidence of the terms agreed between
Buyer and Seller with respect to the Transaction to which the Confirmation
relates, unless with respect to the Confirmation specific objection is made
promptly after receipt thereof. In the event of any conflict between the terms
of such Confirmation and this Agreement, this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand
shall be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date
specified in such demand, or on the date fixed for termination in the case of
Transactions having a fixed term, termination of the Transaction will be
effected by transfer to Seller or its agent of the Purchased Securities and any
Income in respect thereof received by Buyer (and not previously credited or
transferred to, or applied to the obligations of, Seller pursuant to Paragraph
5 hereof) against the transfer of the Repurchase Price to an account of Buyer.
4. MARGIN MAINTENANCE
(a) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Buyer is less than the aggregate Buyer's Margin Amount for all such
Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require
Seller in such Transactions, at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to Buyer ("Additional Purchased
Securities"), so that the cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchased Securities, will thereupon
equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount
of any Margin Deficit as of such date arising from any Transactions in which
such Buyer is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased
Securities subject to all Transactions in which a particular party hereto is
acting as Seller exceeds the aggregate Seller's Margin Amount for all such
Transactions at such time (a "Margin Excess"), then Seller may by notice to
Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash
or Purchased Securities to Seller, so that the aggregate Market Value of the
Purchased Securities, after deduction of any such cash or any Purchased
Securities so transferred, will thereupon not exceed such aggregate Seller's
Margin Amount (increased by the amount of any Margin Excess as of such date
arising from any Transactions in which such Seller is acting as Buyer).
(c) Any cash transferred pursuant to this Paragraph shall be
attributed to such Transactions as shall be agreed upon by Buyer and Seller.
<PAGE> 3
(d) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer or Seller (or
both) under subparagraphs (a) and (b) of this Paragraph may be exercised only
where a Margin Deficit or Margin Excess exceeds a specified dollar amount or a
specified percentage of the Repurchase Prices for such Transactions (which
amount or percentage shall be agreed to by Buyer and Seller prior to entering
into any such Transactions).
(e) Seller and Buyer may agree, with respect to any or all
Transactions hereunder, that the respective rights of Buyer and Seller under
subparagraphs (a) and (b) of this Paragraph to require the elimination of a
Margin Deficit or a Margin Excess, as the case may be, may be exercised
whenever such a Margin Deficit or Margin Excess exists with respect to any
single Transaction hereunder (caluculated without regard to any other
Transaction outstanding under this Agreement).
5. INCOME PAYMENTS
Where a particular Transaction's term extends over an Income payment
date on the Securities subject to that Transaction, Buyer shall, as the parties
may agree with respect to such Transaction (or, in the absence of any
agreement, as Buyer shall reasonably determine in its discretion), on the date
such Income is Payable either (i) transfer to or credit to the amount of Seller
an amount equal to such Income payment or payments with respect to any
Purchased Securities subject to such Transaction or (ii) apply the Income
payment or payments to reduce the amount to be transferred to Buyer by Seller
upon termination of the Transaction. Buyer shall not be obligated to take any
action pursuant to the preceding sentence to the extent that such action would
result in the creation of a Margin Deficit, unless prior thereto or
simultaneously therewith Seller transfers to Buyer cash or Additional Purchased
Securities sufficient to eliminate such Margin Deficit.
6. SECURITY INTEREST
Although the parties intend that all Transactions hereunder be sales
and purchases and not loans, in the event any such Transactions are deemed to
be loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller or its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all proceeds thereof.
7. PAYMENT AND TRANSFER
Unless otherwise mutually agreed, all transfers of funds hereunder
shall be in immediately available funds. All Securities transferred by one
party hereto to the other party (i) shall be in suitable form for transfer or
shall be accompanied by duly executed instruments of transfer or assignment in
blank and such other documentation as the party receiving possession may
reasonably request, (ii) shall be transferred on the book-entry system of a
Federal Reserve Bank, or (iii) shall be transferred by any other method
mutually acceptable to Seller and Buyer. As used herein with respect to
Securities, "transfer" is intended to have the same meaning as when used in
Section 8-313 of the New York Uniform Commercial Code or, where applicable, in
any federal regulation governing transfers of the Seucrities.
8. SEGREGATION OF PURCHASED SECURITIES
To the extent required by applicable law, all Purchased Securities in
the possession of Seller shall be segregated from other securities in its
possession and shall be identified as subject to this Agreement. Segregation
may be accomplished by appropriate identification on the books and records of
the holder, including a financial intermediary or a clearing corporation. Title
to all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall
relieve Buyer of its obligations to transfer Purchased Securities to Seller
pursuant to Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or
pay Income to, or apply Income to the obligations of, Seller pursuant to
Paragraph 5 hereof.
REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS
CUSTODY OF THE PURCHASED SECURTIES
Seller is not permitted to substitute other securities for
those subject to this Agreement and therefore must keep Buyer's
securities segregated at all times, unless in this Agreement Buyer
grants Seller the right to substitute other securities. If Buyer
grants the right to substitute, this means that Buyer's securities
will likely be commingled with Seller's own securities during the
trading day. Buyer is advised that, during any trading day that
Buyer's securities are commingled with Seller's securities, they
[will]* [may]** be subject to liens granted by Seller to [its clearing
bank]* [third parties]** and may be used by Seller for deliveries on
other securities transactions. Whenever the securities are
commingled, Seller's ability to resegregate substitute securities for
Buyer will be subject to Seller's ability to satisfy [the clearing]*
[any]** lien or to obtain substitute securities.
* Language to be used under 17 C.F.R. Sec. 403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
** Language to be used under 17 C.F.R. Sec. 403.5(d) if Seller is a financial
institution.
3
<PAGE> 4
9. SUBSTITUTION
(a) Seller may, subject to agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other Securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for
purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted
in this Agreement substitution by Seller of other Securities for Purchased
Securities; provided, however, that such other Securities shall have a Market
Value at least equal to the Market Value of the Purchased Securities for which
they are substituted.
10. REPRESENTATIONS
Each of Buyer and Seller represents and warrants to the other that (i)
it is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder
and has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party hereto, as
agent for a disclosed principal), (iii) the person signing this Agreement on
its behalf is duly authorized to do so on its behalf (or on behalf of any such
disclosed principal), (iv) it has obtained all authorizations of any
governmental body required in connection with this Agreement and the
Transactions hereunder and such authorizations are in full force and effect and
(v) the execution, delivery and performance of this Agreement and the
Transactions hereunder will not violate any law, ordinance, charter, by-law or
rule applicable to it or any agreement by which it is bound or by which any of
its assets are affected. On the Purchase Date for any Transaction Buyer and
Seller shall each be deemed to repeat all the foregoing representations made by
it.
11. EVENTS OF DEFAULT
In the event that (i) Seller fails to repurchase or Buyer fails to
transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller
or Buyer fails, after one business day's notice, to comply with Paragraph 4
hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of
Insolvency occurs with respect to Seller or Buyer, (v) any representation made
by Seller or Buyer shall have been incorrect or untrue in any material respect
when made or repeated or deemed to have been made or repeated, or (vi) Seller
or Buyer shall admit to the other its inability to, or its intention not to,
perform any of its obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written
notice to the defaulting party (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon the occurrence of an
Act of Insolvency,) the Repurchase Date for each Transaction hereunder shall be
deemed immediately to occur.
(b) In all Transactions in which the defaulting party is acting as
Seller, if the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, (i) the defaulting
party's obligations hereunder to repurchase all Purchased Securities in such
Transactions shall thereupon become immediately due and payable, (ii) to the
extent permitted by applicable law, the Repurchase Price with respect to each
such Transaction shall be increased by the aggregate amount obtained by daily
application of (x) the greater of the Pricing Rate for such Transaction or the
Prime Rate to (y) the Repurchase Price for such Transaction as of the
Repurchase Date as determined pursuant to subparagraph (a) of this Paragraph
(decreased as of any day by (A) any amounts retained by the nondefaulting party
with respect to such Repurchase Price pursuant to clause (iii) of this
subparagraph, (B) any proceeds from the sale of Purchased Securities pursuant to
subparagraph (d)(i) of this Paragraph, and (C) any amounts credited to the
account of the defaulting party pursuant to subparagraph (e) of this Paragraph)
on a 360 day per year basis for the actual number of days during the period
from and including the date of the Event of Default giving rise to such option
to but excluding the date of payment of the Repurchase Price as so increased,
(iii) all Income paid after such exercise or deemed exercise shall be retained
by the nondefaulting party and applied to the aggregate unpaid Repurchase
Prices owed by the defaulting party, and (iv) the defaulting party shall
immediately deliver to the nondefaulting party any Purchased Securities subject
to such Transactions then in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as
Buyer, upon tender by the nondefaulting party of payment of the aggregate
Repurchase Prices for all such Transactions, the defaulting party's right,
title and interest in all Purchased Securities subject to such Transactions
shall be deemed transferred to the nondefaulting party, and the defaulting
party shall deliver all such Purchased Securities to the nondefaulting party.
(d) After one business day's notice to the defaulting party (which
notice need not be given if an Act of Insolvency shall have occurred, and which
may be the notice given under subparagraph (a) of this Paragraph or the notice
referred to in clause (ii) of the first sentence of this Paragraph), the
nondefaulting party may:
(i) as to Transactions in which the defaulting party is acting
as Seller, (A) immediately sell, in a recognized market at such price
or prices as the nondefaulting party may reasonable deem satisfactory,
any or all Purchased Securities subject to such Transactions and apply
the proceeds thereof to the aggregate unpaid Repurchase Prices and any
other amounts owing by the defaulting party hereunder
4
<PAGE> 5
or (B) in its sole discretion elect, in lieu of selling all or a
portion of such Purchased Securities, to give the defaulting party
credit for such Purchased Securities in an amount equal to the price
therefor on such date, obtained from a generally recognized source or
the most recent closing bid quotation from such a source, against the
aggregate unpaid Repurchase Prices and any other amounts owing by the
defaulting party hereunder; and
(ii) as to Transactions in which the defaulting party is
acting as Buyer, (A) purchase securities ("Replacement Securities") of
the same class and amount as any Purchased Securities that are not
delivered by the defaulting party to the nondefaulting party as
required hereunder or (B) in its sole discretion elect, in lieu of
purchasing Replacement Securities, to be deemed to have purchased
Replacement Securities at the price therefor on such date, obtained
from a generally recognized source or the most recent closing bid
quotation from such a source.
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (i) with
respect to Purchased Securities (other than Additional Purchased Securities),
for any excess of the price paid (or deemed paid) by the nondefaulting party
for the Replacement Securities therefor over the Repurchase Price for such
Purchased Securities and (ii) with respect to Additional Purchased Securities,
for the price paid (or deemed paid) by the nondefaulting party for the
Replacement Securities therefor. In addition, the defaulting party shall be
liable to the nondefaulting party for interest on such remaining liability with
respect to each such purchase (or deemed purchase) until paid in full by Buyer.
Such interest shall be at a rate equal to the greater of the Pricing Rate for
such Transaction or the Prime Rate.
(f) For purposes of this Paragraph 11, the Repurchase Price for each
Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by the
nondefaulting party of its option under subparagraph (a) of this Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party
for the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of the
Pricing Rate for the relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement or
applicable law.
12. SINGLE AGREEMENT
Buyer and Seller acknowledge that, and have entered hereinto and will
enter into each Transaction hereunder in consideration of and in reliance upon
the fact that, all Transactions hereunder constitute a single business and
contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction
against obligations owing to them in respect of any other Transactions
hereunder and (iii) that payments, deliveries and other transfers made by
either of them in respect of any Transaction shall be deemed to have been made
in consideration of payments, deliveries and other transfers in respect of any
other Transactions hereunder, and the obligations to make any such payments,
deliveries and other transfers may be applied against each other and netted.
13. NOTICES AND OTHER COMMUNICATIONS
Unless another address is specified in writing by the respective party
to whom any notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in Annex II attached hereto.
14. ENTIRE AGREEMENT; SEVERABILITY
This Agreement shall supersede any existing agreements between the
parties containing general terms and conditions for repurchase transactions.
Each provision and agreement herein shall be treated as separate and
independent from any other provision or agreement herein and shall be
enforceable notwithstanding the unenforceability of any such other provision or
agreement.
15. NON-ASSIGNABILITY; TERMINATION
The rights and obligations of the parties under this Agreement and
under any Transaction shall not be assigned by either party without the prior
written consent of the other party. Subject to the foregoing, this Agreement
and any Transactions shall be binding upon and shall inure to the benefit of
the parties and their respective successors and assigns. This Agreement may be
cancelled by either party upon giving written notice to the other, except that
this Agreement shall, notwithstanding such notice, remain applicable to any
Transactions then outstanding.
5
<PAGE> 6
16. GOVERNING LAW
This Agreement shall be governed by the Laws of the State of New York
without giving effect to the Conflict of law principles thereof.
17. NO WAIVERS, ETC.
No express or implied waiver of any event of Default by either party
shall constitute a waiver of any other Event of Default and no exercise of any
remedy hereunder by any party shall constitute a waiver of its right to
exercise any other remedy hereunder. No modification or waiver of any
provision of this Agreement and no consent by any party to a departure herefrom
shall be effective unless and until such shall be in writing and duly executed
by both of the parties hereto. Without limitation on any of the foregoing, the
failure to give a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not
constitute a waiver of any right to do so at a later date.
18. USE OF EMPLOYEE PLAN ASSETS
(a) if assets of an employee benefit plan subject to any provision of
the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to
be used by either party hereto (the "Plan Party") in a Transaction, the Plan
Party shall so notify the other party prior to the Transaction under ERISA or
is otherwise exempt therefrom, and the other party may proceed in reliance
thereon but shall not be required so to proceed.
(b) Subject to the last sentence of subparagraph (a) of this
Paragraph, any such Transaction shall proceed only if Seller furnishes or has
furnished to Buyer its most recent available audited statement of its financial
condition and its most recent subsequent unaudited statement of its financial
condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller
shall be deemed (i) to represent to Buyer that since the date of Seller's
latest such financial statements, there has been no material adverse change in
Seller's financial condition which Seller has not disclosed to Buyer, and (ii)
to agree to provide Buyer with future audited and unaudited statements of its
financial condition as they are issued, so long as it is a Seller in any
outstanding Transaction involving a Plan Party.
19. INTENT
(a) The parties recognize that each Transaction is a "repurchase
agreement" as that term is defined in Section 101 of Title 11 of the United
States Code, as amended (except insofar as the type of Securities subject to
such Transaction or the term of such Transaction would render such definition
inapplicable), and a "securities contract" as that term is defined in Section
741 of Title 11 of the United State Code, as amended.
(b) It is understood that either party's right to liquidate Securities
delivered to it in Connection with Transactions hereunder or to exercise any
other remedies pursuant to Paragraph 11 hereof, is a contractual right to
liquidate such Transaction as described in Sections 555 and 559 of Title 11 of
the United States Code, as amended.
20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS
The parties acknowledge that they have been advised that:
(a) in the case of Transactions in which one of the parties is a
broker or dealer registered with the Securities and Exchange Commission ("SEC")
under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the
Securities Investor Protection Corporation has taken the position that the
provisions of the Securities Investors Protection Act of 1970 ("SIPA") do not
protect the other party with respect to any Transaction hereunder.
(b) in the case of Transactions in which one of the parties is a
government securities broker or a government securities dealer registered with
the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to
the other party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a
financial institution, funds held by the financial institution pursuant to a
Transaction hereunder are not a deposit and therefore are not insured by the
Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance
Corporation or the National Credit Union Share Insurance Fund, as applicable.
<TABLE>
<S> <C> <C>
MERRILL LYNCH MORTGAGE CAPITAL INC. FIRST FINANCIAL CARIBBEAN CORPORATION DORAL MORTGAGE CORPORATION
By: /s/ Louis V. Molinari By: /s/ Mario S. Levis By: /s/ Ernesto Carattini
-------------------------- ---------------------------- --------------------------------
Name: Louis V. Molinari Name: Mario S. Levis Name: Ernesto Carattini
-------------------------- ---------------------------- --------------------------------
Title: Director Title: Vice President and Treasurer Title: Vice Pres. & Assistant Secretary
-------------------------- ---------------------------- --------------------------------
Date: 1/12/95 Date: 1/12/95 Date: 1/12/95
-------------------------- ---------------------------- --------------------------------
</TABLE>
<PAGE> 7
ANNEX I
SUPPLEMENTAL TERMS AND CONDITIONS
The supplemental terms attached hereto as a continuation of this Annex
I are incorporated herein and made a part hereof as though fully set forth on
this page.
<PAGE> 8
ANNEX I
(continued)
SUPPLEMENTAL TERMS TO MASTER REPURCHASE AGREEMENT,
DATED AS OF JANUARY 12, 1995, AMONG
MERRILL LYNCH MORTGAGE CAPITAL INC. AND
FIRST FINANCIAL CARIBBEAN CORPORATION
AND DORAL MORTGAGE CORPORATION
1. APPLICABILITY. These Supplemental Terms (the "Supplemental Terms") to
Master Repurchase Agreement (the "Master Repurchase Agreement", and
collectively with these Supplemental Terms, the "Agreement") modify
the terms and conditions under which the parties hereto, from time to
time, enter into Transactions. To the extent that these Supplemental
Terms conflict with the terms of the Master Repurchase Agreement,
these Supplemental Terms shall control.
2. ADDITIONAL DEFINITIONS.
Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Master Repurchase Agreement. Capitalized
terms used in the Master Repurchase Agreement whose definitions are
modified in these Supplemental Terms shall, for all purposes of this
Agreement, be deemed to have such modified definitions.
"Adjusted Consolidated Debt" means, as of any date of determination,
(i) Consolidated Debt less (ii) the aggregate amount of Consolidated
Debt evidenced by Eligible Repurchase Agreements.
"Agency" shall refer to GNMA, FNMA or FHLMC, as the case may be.
"Agency Cash Purchase Commitment" shall refer (i) to the commitment of
an Agency to purchase Mortgage Loans from an Obligor under the
Agency's cash purchase program and (ii) where applicable, to the
written or printed evidence of such commitment.
"Agency Documentation" shall refer collectively to the Guides and
parts or chapters thereof and to GNMA, FNMA and FHLMC forms and
schedules.
<PAGE> 9
"Agency Mortgage Loans" shall refer to Mortgage Loans that qualify for
securitization or sale pursuant to the applicable Guide and are
intended to (i) back the Agency Security specified in the related
Confirmation/Funding Request or (ii) sold to an Agency under its cash
purchase program.
"Agency Payee Form" shall refer, with respect to Mortgage Loans to be
sold to an Agency under its cash purchase program, to FNMA Form 482
(Lender's Designation/Deletion of Payee Information) and FHLMC Form
987 (Wire Transfer Authorization for a Cash Warehouse Delivery), as
applicable, and to any superseding or successor form, on which forms
MLMCI is designated the payee of the Cash Purchase Price for such
Mortgage Loans.
"Agency Registration Form" shall refer to Form HUD 11705 (Schedule of
Subscriber), Fannie Mae Form 2014 (Delivery Schedule), FHLMC Form 939
(Settlement and Information Multiple Registration Form) or FHLMC Form
987 (Warehouse Delivery Form) as applicable, on which it is indicated
that the related Agency Security shall be issued to, and in the name
of, MLGSIPR.
"Agency Security" shall refer to a GNMA Security, a FNMA Security or a
FHLMC Security.
"Approvals" shall refer to the approvals of FHLMC, FNMA and GNMA
described in Paragraph 9(c)(ii) of these Supplemental Terms.
"Book Net Worth" shall refer to the Consolidated Stockholder's Equity
of the Obligors determined in accordance with GAAP less the sum of (i)
intercompany receivables, (ii) loans to officers or employees of such
Obligors and (iii) deferred charges.
"Business Day" shall mean any day excluding Saturday, Sunday and any
day on which banks located in the State of New York or the
Commonwealth of Puerto Rico are authorized or permitted to close for
business.
"Buyer's Margin Amount" shall have the meaning set forth in the Master
Repurchase Agreement except that the percentage referred to therein
for each Transaction shall be specified in the related
Confirmation/Funding Request.
"Cash Purchase Loan Schedule" shall refer to FNMA Form 1068 (FRM/GEM
Loan Schedule) or FNMA Form 1069 (ARM Loan Schedule), and to any
superseding or successor form, on
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<PAGE> 10
which forms MLMCI is designated the payee of the Cash Purchase Price
for Mortgage Loans purchased by FNMA.
"Cash Purchase Price" shall refer the cash price, and to the
corresponding cash proceeds, to be paid by an Agency, under its cash
purchase program, or by a Trade Investor, pursuant to its Trade
Commitment, for Mortgage Loans sold by an Obligor that are the subject
of a Transaction.
"Confirmation/Funding Request" shall have the meaning of
"Confirmation" set forth in the Master Repurchase Agreement but shall
be substantially in the form attached hereto as Exhibit A in the case
of Pooled Mortgage Loans, Exhibit B in the case of Non-Agency Mortgage
Loans and Exhibit C in the case of non-Pooled Mortgage Loans.
"Consolidated Debt" means shall refer to the Consolidated Debt of the
Obligors and their Consolidated Subsidiaries as of any date of
determination, determined on a consolidated basis.
"Consolidated Stockholders' Equity" means as of any date of
determination, the consolidated stockholders' equity of the Obligors
and their Consolidated Subsidiaries.
"Consolidated Subsidiary" means at any date of determination, any
subsidiary or other entity other than Doral Federal Savings Bank, the
accounts of which would be consolidated with those of an Obligor in
its consolidated financial statements.
"Covenant Compliance Certificate" shall have the meaning set forth in
Paragraph 12 of these Supplemental Terms.
"Custody Agreement" shall refer to the Custody Agreement, dated as of
January 12, 1995, by and among MLMCI, FFCC, DMC and the Custodian
named therein, as the same may be modified and amended from time to
time.
"Custodian" shall refer to the custodian named in the Custody
Agreement.
"Custody Receipt" shall refer to the Collateral Submission Summary
substantially in the form attached as an exhibit to the Custody
Agreement.
"DMC" shall refer to Doral Mortgage Corporation.
"Eligible Repurchase Agreement" shall refer to a repurchase obligation
with respect to any one of the following
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<PAGE> 11
securities: direct obligations of, and obligations fully guaranteed
as to timely payment by, (i) the United States of America or any
agency or instrumentality of the United States of America the
obligations of which are backed by the full faith and credit of the
United States of America, and (ii) direct obligations of, and
obligations guaranteed as to timely payment by FNMA or FHLMC.
"FFCC" shall refer to First Financial Caribbean Corporation.
"FHA" shall refer to the Federal Housing Administration.
"FHLMC" shall refer to the Federal Home Loan Mortgage Corporation.
"FHLMC Guide" shall refer to the Freddie Mac Sellers' and Servicers'
Guide, as such Guide may hereafter from time to time be amended.
"FHLMC Security" shall refer to a Mortgage Participation Certificate
issued and guaranteed by FHLMC and backed by a pool of Agency Mortgage
Loans.
"FNMA" shall refer to the Federal National Mortgage Association.
"FNMA Guide" shall refer to the Fannie Mae MBS Selling and Servicing
Guide, as such Guide may hereafter from time to time be amended.
"FNMA Security" shall refer to a Guaranteed Mortgage Pass-Through
Certificate issued and guaranteed by FNMA and backed by a pool of
Agency Mortgage Loans.
"GAAP" shall refer to generally accepted accounting principals
consistently applied.
"GNMA" shall refer to the Government National Mortgage Association.
"GNMA Guide" shall refer to the GNMA Mortgage-Backed Securities Guide,
as such Guide may hereafter from time to time be amended.
"GNMA Security" shall refer to a fully-modified pass-through
mortgage-backed certificate guaranteed by GNMA and backed by a pool of
Agency Mortgage Loans.
"Guide" shall refer to the GNMA Guide, the FNMA Guide or the FHLMC
Guide, as applicable.
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<PAGE> 12
"Master Bailee Letter" shall refer to a master bailee letter in the
form attached as an exhibit to the Custody Agreement.
"MLMCI" shall refer to Merrill Lynch Mortgage Capital Inc.
"MLGSIPR" shall refer to Merrill Lynch Government Securities Inc.
Puerto Rico.
"Mortgage" shall mean a first mortgage duly recorded or presented for
recordation on improved real property.
"Mortgage File" shall mean, as to each Mortgage Loan, the documents
relating to such Mortgage Loan that are held by the Custodian under
the Custody Agreement.
"Mortgage Loan Schedule" shall have the meaning set forth in the
Custody Agreement.
"Mortgage Note" shall mean a promissory note, together with any rider,
addendum or amendment thereto, evidencing a Mortgage Loan.
"Mortgage Loans" shall refer to the mortgage loans secured by first
liens on single family residential real property (including, without
limitation, condominiums and planned unit developments) delivered to
the Custodian pursuant to the Custody Agreement and shall include both
Agency and Non-Agency Mortgage Loans.
"Mortgaged Property" shall mean the real property, including all
buildings, structures, improvements or fixtures thereon and all
appurtenances, water rights, privileges and benefits pertaining
thereto, that is conveyed, pledged or mortgaged, or in which a
security interest is granted under a deed of mortgage to secure the
payment and performance of a Mortgage Loan.
"Non-Agency Mortgage Loans" shall refer to Mortgage Loans that are not
intended by the related Obligor to back an Agency Security or to be
sold to an Agency under its cash purchase program; such Mortgage Loans
may, but need not, conform to Agency securitization requirements
pursuant to the applicable Guide and may, at a later date, become
Agency Mortgage Loans.
"Obligor" shall refer to either FFCC or DMC, as appropriate.
"Pooled Mortgage Loan" shall refer to an Agency Mortgage Loan that is
included in a pool designated to back an Agency
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<PAGE> 13
Security and with respect to which the Custodian has made an initial
certification to the related Agency.
"Securities" shall, in addition to the definition set forth in the
Master Repurchase Agreement, refer to Mortgage Loans.
"Security Release Form" shall refer to (i) Freddie Mac Form 996
(Warehouse Lender Release of Security Interest) in the case of a FHLMC
Security, (ii) Fannie Mae Form 2004 (Security Release Certification)
in the case of a FNMA Security and (iii) Form HUD 11711A (Release of
Security Interest) in the case of a GNMA Security.
"Seller's Margin Amount" shall have the meaning set forth in the
Master Repurchase Agreement except that the percentage referred to
therein for each Transaction shall be specified in the related
Confirmation/Funding Request.
"Settlement Account" shall refer to the account established pursuant
to Section 15(a) of the Custody Agreement.
"Supplemental Bailee Letter" shall refer to a supplemental bailee
letter in the form attached as an exhibit to the Custody Agreement.
"Trade Investor" shall refer to any securities dealer or other
institutional mortgage investor (other than an Agency), acceptable to
MLMCI, who has made a Trade Commitment.
"Trade Commitment" shall refer to a fully executed trade confirmation
from the Trade Investor to Seller confirming the details of a
mandatory forward trade or similar arrangement (including, without
limitation, a commitment to purchase pass- through securities backed
by Non-Agency Mortgage Loans) acceptable to MLMCI between the Trade
Investor (as buyer) and the related Obligor (as seller) with respect
to one or more Non-Agency Mortgage Loans, constituting a valid,
binding and enforceable mandatory delivery commitment by a Trade
Investor and relate to pools of Non-Agency Mortgage Loans that satisfy
the delivery standards of the related Trade Investor.
"Transaction" shall, in addition to the definition set forth in the
Master Repurchase Agreement, refer to substitutions pursuant to
Paragraph 9 of the Master Repurchase Agreement.
"VA" shall refer to the Department of Veterans Affairs.
I-6
<PAGE> 14
"Warehouse Facility" shall refer to any contract providing for
financing by one or more lenders to either of the Obligors for the
purpose of originating or purchasing Mortgage Loans where such lenders
have a security interest in such Mortgage Loans as collateral for the
obligations of such Obligors to such lenders.
3. MODIFICATIONS TO MASTER REPURCHASE AGREEMENT.
(a) All references to Buyer in the Master Repurchase Agreement
shall be deemed to be references to MLMCI and all references
to Seller in the Master Repurchase Agreement shall be deemed
to be references to one or both Obligors, as the context may
require.
(b) Paragraph 11(d)(ii) of the Master Repurchase Agreement is
hereby deleted in its entirety and restated as follows:
(ii) as to Transactions in which the
defaulting party is MLMCI, (A) purchase securities or mortgage
loans (collectively, "Replacement Securities") of the same
class and amount, in the case of securities, and of
substantially the same maturity, principal amount and interest
rate, in the case of mortgage loans, as any Purchased
Securities that are not delivered by the defaulting party to
the non- defaulting party as required hereunder or (B) in its
sole discretion elect, in lieu of purchasing Replacement
Securities, to be deemed to have purchased Replacement
Securities at the price therefor on such date, calculated as
the average of the prices obtained from three nationally
recognized registered broker/dealers that buy and sell
comparable mortgage loans in the secondary market.
4. CONFIRMATION/FUNDING REQUESTS.
(a) Each Confirmation/Funding Request shall be prepared and duly
executed by the related Obligor and delivered to MLMCI prior
to 5:00 p.m., New York City time, on the Business Day prior to
the proposed Purchase Date for the related Transaction;
provided, however, that if MLMCI receives a completed
Confirmation Funding/Request prior to 12:00 p.m., New York
City time, on a Business Day, it will use reasonable efforts
(but is not obliged) to purchase the related Securities on
such Business Day. Each such Confirmation/Funding Request
delivered by an Obligor to MLMCI shall be complete in
I-7
<PAGE> 15
every respect except for the signature of an authorized
signatory of MLMCI.
(b) Each Confirmation/Funding Request shall be binding upon the
parties hereto unless written notice of objection is given by
the objecting party to the other parties within one (1)
Business Day after MLMCI has delivered the completed
Confirmation/Funding Request to the applicable Obligor.
(c) Notwithstanding the last sentence of Paragraph 3(b) of the
Master Repurchase Agreement, in the event of any conflict
between the terms of a Confirmation/Funding Request and this
Agreement, such Confirmation/Funding Request shall prevail.
5. INCOME PAYMENTS. All payments and distributions, whether in cash or
in kind, made on or with respect to the Purchased Securities shall,
unless otherwise mutually agreed by MLMCI and the related Obligor, be
paid, delivered or transferred:
(a) in the case of Agency Securities, directly to MLGSIPR as agent
for MLMCI; and
(b) in the case of Mortgage Loans, so long as an Event of Default
on the part of either Obligor or an Additional Event of
Termination set forth in Paragraph 11 of these Supplemental
Terms shall not have occurred and be continuing, directly to
the related Obligor from the related mortgagor.
6. MARKET VALUE DETERMINATION. MLMCI shall determine the Market Value
for the Purchased Securities in its reasonable business judgment from
time to time and at such time as it may elect in its sole discretion;
provided, however, that MLMCI shall not take into account any Mortgage
Loan that has been delinquent for at least thirty (30) days or any
Mortgage Loan with respect to which there is a breach of a
representation, warranty or covenant made by an Obligor in this
Agreement or the Custody Agreement that materially adversely affects
MLMCI's interest in such Mortgage Loan and which breach has not been
cured prior to the date on which Market Value is being determined.
7. INTENT OF THE PARTIES; SECURITY INTEREST.
(a) Each Transaction involving Mortgage Loans is entered into in
contemplation of (i) the issuance of one or more Agency
Securities backed by the related Agency Mortgage Loans, (ii)
the sale of Agency Mortgage Loans
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<PAGE> 16
to an Agency under its cash purchase program, (iii) the sale
of Non-Agency Mortgage Loans to a Trade Investor OR (IV)
REPURCHASE OF THE MORTGAGE LOANS BY THE OBLIGORS. The parties
intend that: (a) in the case of clause (i) of the preceding
sentence, each of the Obligors will act as issuer or seller
and/or servicer with respect to such Agency Securities, as
applicable, and that each Agency Security will be issued in
the name of, and delivered to or upon the order of, MLGSIPR;
(b) in the case of clause (ii), the Cash Purchase Price
relating to such Mortgage Loans will be paid by the related
Agency through the Settlement Account to MLMCI; and (c) in the
case of clause (iii), the Cash Purchase Price relating to such
Mortgage Loans will be paid by the related Trade Investor
through the Settlement Account to MLMCI.
(b) In the event, for any reason, any Transaction is construed by
any court as a secured loan rather than a purchase and sale,
the parties intend that MLMCI shall have a perfected first
priority security interest in all of the Purchased Securities.
(c) If delivery of the Purchased Securities shall take place in
the Commonwealth of Puerto Rico, such security interest shall
take the form of a pledge evidenced by a notarized instrument
in the forms attached hereto as Exhibits A, B and C. If
delivery of any Purchased Securities shall take place outside
of Puerto Rico (or if for any reason the Purchased Securities
shall not be delivered by the related Obligor to MLMCI), the
granting of such security interest shall be governed by the
laws of the State of New York and the phrase "security
interest" shall have the meaning given to said phrase by the
Uniform Commercial Code, as adopted by the State of New York.
(d) The Obligors agree to be jointly and severally liable for the
payment of all fees and expenses associated with perfecting
such security interest.
8. DELIVERY OF ADDITIONAL DOCUMENTS.
(a) The related Obligor shall, prior to or simultaneously with the
funding of each Transaction, deliver to MLMCI through the
Custodian the following documents:
(i) A fully executed Custody Receipt, and all other
applicable documents required by the Custody
Agreement;
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<PAGE> 17
(ii) In the case of a Transaction involving Agency
Mortgage Loans intended to be sold to an Agency under
its cash purchase program, evidence of the related
Agency Cash Purchase Commitment and a copy of the
related Agency Payee Form, each in form and substance
satisfactory to MLMCI; and
(b) The related Obligor shall, within sixty (60) days of an Agency
Mortgage Loan becoming subject to this Agreement where such
Agency Mortgage Loan is intended to back an Agency Security,
deliver to MLMCI a copy of the related Agency Registration
Form in form and substance satisfactory to MLMCI.
(c) The related Obligor shall, simultaneously with the funding of
the initial Transaction under this Agreement relating to each
type of Agency Security and from time to time thereafter upon
the request of MLMCI, deliver to MLMCI evidence of the
commitment of FHLMC, FNMA or GNMA, as appropriate, pursuant to
which the related Agency Securities shall be issued.
(d) The related Obligor shall deliver to MLMCI on a weekly basis
(or more frequently if requested by MLMCI), an investor
commitment report, substantially in the form attached hereto
as Exhibit E relating to all outstanding Confirmation/Funding
Requests for such Obligor.
(e) MLMCI, simultaneously with the funding of each Transaction
involving Agency Mortgage Loans, shall cause the Custodian to
be provided with an executed Security Release Form appropriate
for the related Agency Security indicating that MLMCI releases
its interest in the related Agency Mortgage Loans (i) in the
case of securitization of such Mortgage Loans into one or more
Agency Securities, upon the issuance of such Agency Security
or Securities and (ii) in the case of the cash purchase of
such Mortgage Loans, upon such Agency's payment of the related
Cash Purchase Price. Such form shall be prepared by the
related Obligor and provided to the Custodian on behalf of
MLMCI in advance of the date on which delivery thereof is
required hereby. The Custodian shall execute such form on
behalf of MLMCI.
(f) MLMCI, prior to its receipt of funds in respect of Non-Agency
Mortgage Loans or non-Pooled Mortgage Loans, shall provide the
Custodian with an executed letter indicating that MLMCI
releases its interest in the
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<PAGE> 18
related Non-Agency Mortgage Loans and non-Pooled Mortgage
Loans, substantially in the form of Exhibit F hereto.
(g) The related Obligor shall cause any documents relating to a
Mortgage Loan that are delivered to a Trade Investor for
inspection prior to purchase to be delivered under an
enforceable Master Bailee Letter, as supplemented by a
Supplemental Bailee Letter, that requires such Trade Investor
to act as bailee and custodian for MLMCI with respect to such
documents.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS.
(a) Each party represents and warrants, and shall on and as of the
Purchase Date of any Transaction be deemed to represent and
warrant, as follows:
(i) The execution, delivery and performance of this
Agreement and the performance of each Transaction do
not and will not result in or require the creation of
any lien, security interest or other charge or
encumbrance (other than pursuant hereto) upon or with
respect to any of its properties;
(ii) This Agreement is, and each Transaction when entered
into under this Agreement will be, a legal, valid and
binding obligation of it enforceable against it in
accordance with the terms of this Agreement, subject
to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and subject, as
to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a
proceeding in equity or at law); and
(iii) Since the date of the most recent balance sheet or
financial statement delivered by it pursuant to
Paragraph 12 hereof, there has been no material
adverse change in its financial condition or results
of operations.
(b) Each Obligor represents and warrants as to each Transaction
and the Mortgage Loans relating thereto as of the Purchase
Date of such Transaction as follows:
(i) All information provided by such Obligor to MLMCI
concerning the Mortgage Loans is true and correct;
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<PAGE> 19
(ii) All data and other information provided by or on
behalf of such Obligor to the Custodian, whether in
writing, by electronic transmission or on computer
tape or diskette or otherwise, is true and correct;
(iii) The related Obligor is servicing each Mortgage Loan
in strict conformity with the servicing standards
described in Paragraph 16(b) of these Supplemental
Terms; and
(iv) The additional representations and warranties set
forth at Exhibit D hereto.
(c) Each Obligor represents and warrants as to each Transaction
involving Agency Mortgage Loans and the Agency Mortgage Loans
relating thereto as of the Purchase Date of such Transaction
as follows:
(i) The consummation of the Transaction as contemplated
herein and in the Custody Agreement will not violate
any policy, regulation or guideline of the FHA or VA
or result in the voiding or reduction of the FHA
insurance, VA guarantee or any other insurance or
guarantee in respect of any Mortgage Loan, and such
insurance or guarantee is in full force and effect or
shall be in full force and effect as required by the
applicable GNMA Guide, FNMA Guide or FHLMC Guide;
(ii) The Obligor is (1) in the case of FFCC, a
GNMA-approved issuer, a GNMA-approved servicer, a
FHA-approved mortgagee, a VA-approved lender, a
FNMA-approved issuer, a FNMA-approved servicer and a
FHLMC-approved seller/servicer in good standing and
(2) in the case of DMC, a FHA-approved mortgagee, a
VA-approved lender and a FHLMC-approved
seller/servicer in good standing (as to each Obligor,
the "Approvals");
(iii) Each Agency Mortgage Loan conforms to the
requirements and specifications (including, without
limitation, all representations and warranties
required in respect thereof) set forth in the GNMA
Guide, FNMA Guide or FHLMC Guide, as applicable;
(iv) In the case of Pooled Mortgage Loans, each and every
document, certificate, instrument, insurance policy,
escrow and any other item necessary to
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satisfy the final delivery requirements of FHLMC,
FNMA or GNMA as required by the FHLMC Guide, the FNMA
Guide or the GNMA Guide, as applicable, for the
issuance of the related Agency Security are in form
and substance acceptable to FHLMC, FNMA or GNMA, as
appropriate, and have been delivered to the
Custodian;
(v) Such Obligor has no notice or knowledge of any fact,
event or circumstance whatsoever on the basis of
which FHLMC, FNMA or GNMA, as applicable, may (i)
delay the issuance of, or refuse to issue, the
related Agency Security or (ii) delay the payment of,
or refuse to pay, the related Cash Purchase Price;
and
(vi) Each copy of the document or documents evidencing the
Agency commitment delivered to MLMCI through the
Custodian pursuant to Paragraph 8(c) of these
Supplemental Terms, and each copy of the Agency Cash
Purchase Commitment delivered to MLMCI pursuant to
Paragraph 8(a)(ii) of these Supplemental Terms, is a
true and correct copy, and such GNMA, FHLMC or FNMA
commitment or Agency Cash Purchase Commitment, as
applicable, has not been withdrawn, amended or
supplemented except as has been theretofore disclosed
to MLMCI in writing.
(d) Each Obligor covenants with MLMCI as follows:
(i) Such Obligor shall immediately notify MLMCI if any
Approvals are withdrawn or modified;
(ii) Such Obligor shall notify MLMCI of any changes in the
terms of, or the parties to, the Warehouse Facility
within one (1) Business Day of such Obligor becoming
aware of such changes, whether or not such changes
have yet become effective;
(iii) In the case of a Transaction involving Agency
Mortgage Loans that will back an Agency Security,
such Obligor shall not alter or amend the Agency
Registration Form relating to such Transaction
following the initial preparation thereof without the
express approval of MLMCI;
(iv) In the case of a Transaction involving Agency
Mortgage Loans to be sold to an Agency under its cash
purchase program, such Obligor shall not
I-13
<PAGE> 21
alter or amend the "payee" designation on any Cash
Purchase Loan Schedule or Agency Payee Form relating
to such Transaction without the express prior written
approval of MLMCI;
(v) Without MLMCI's express prior written approval, such
Obligor shall not execute, in favor of any third
party other than MLMCI and MLGSIPR, any assignment of
rights held or purportedly held with respect to the
Mortgage Loans by such Obligor.
(vi) All financial and other covenants made by such
Obligor under the Warehouse Facility shall be deemed
to be made directly to MLMCI as though fully set
forth herein; provided, however, that any such
covenants that require such Obligor to obtain MLMCI's
consent prior to entering into financing arrangements
(other than the Transactions contemplated hereby)
shall be deemed to merely require prior written
notice by such Obligor to MLMCI of such financing
arrangements without any requirement for the consent
of MLMCI;
(vii) Such Obligor shall be at the time it delivers any
Purchased Securities to the Custodian or MLMCI for
any Transaction, and shall continue to be, through
the Purchase Date relating to each such Transaction,
the legal and beneficial owner of such Purchased
Securities free and clear of any lien, security
interest, option or encumbrance except for the
security interest created by this Agreement;
(viii) Such Obligor shall deliver to MLMCI the Covenant
Compliance Certificate referred to in Paragraph 12 of
these Supplemental Terms by the same manner of
delivery and at the same time as such Obligor is
required to deliver it under the Warehouse Facility,
and MLMCI may rely on such Covenant Compliance
Certificate as if it were a direct addressee;
(ix) Such Obligor shall service the Mortgage Loans in
accordance with the provisions of Paragraph 16 of
these Supplemental Terms;
(x) Such Obligor shall promptly notify MLMCI after the
occurrence of any change contemplated by Paragraph
11(a) of these Supplemental Terms;
I-14
<PAGE> 22
(xi) Notwithstanding any other provision of this Agreement
and as of any date of determination, no more than
$40,000,000 of the Mortgage Loans (determined on the
basis of the outstanding principal amount of each
Mortgage Loan on the date that such Mortgage Loan
first becomes subject to this Agreement) shall be
Non- Agency Mortgage Loans;
(xii) Notwithstanding any other provision of this
Agreement, no Agency Mortgage Loan shall be subject
to this Agreement or to the Custody Agreement for
more than sixty (60) days in aggregate unless such
Agency Mortgage Loan is a Pooled Mortgage Loan;
(xiii) Notwithstanding any other provision of this
Agreement, no Non-Agency Mortgage Loan shall be
subject to this Agreement or to the Custody Agreement
for more than ninety (90) days in aggregate unless
such Non-Agency Mortgage Loan is the subject of a
Trade Commitment, a copy of which has been delivered
to MLMCI;
(xiv) On an ongoing basis, at such Obligor's expense
without request of MLMCI, such Obligor shall provide
MLMCI with such Obligor's audited year-end balance
sheet and income statement within 120 days after the
end of such Obligor's fiscal year and such Obligor's
quarterly balance sheet and income statement within
90 days after the end of each of such Obligor's three
other fiscal quarters; and
(XV) IT WILL CAUSE THE CUSTODIAN TO ENTER INTO THE
AMENDMENT TO THE CUSTODY AGREEMENT CONTEMPLATED BY
SECTION 17(E) OF THE CUSTODY AGREEMENT NOT LATER THAN
SIXTY (60) DAYS AFTER THE DATE OF THE CUSTODY
AGREEMENT.
10. EVENTS OF DEFAULT.
(a) The term "Event of Default" shall, in addition to the
definition set forth in the Master Repurchase Agreement,
include the following events:
(i) Any governmental or self-regulatory authority shall
take possession of a party hereto or all or
substantially all of its properties or appoint any
such trustee, receiver, conservator or other
official, or such party shall take any action to
I-15
<PAGE> 23
authorize any of the actions set forth in this clause
(i).
(ii) MLMCI or an Obligor shall have reasonably determined
that the other party is or will be unable to meet its
commitments under this Agreement, shall have notified
such other party of such determination and the cause
for such determination and such other party shall not
have responded with appropriate information to the
contrary to the satisfaction of the notifying party
within one (1) Business Day.
(iii) A final judgment by any competent court in the United
States of America or the Commonwealth of Puerto Rico
for the payment of money in an amount of at least
$500,000 is rendered against the defaulting party,
and the same remains undischarged or unpaid for a
period of sixty (60) days during which execution of
such judgment is not effectively stayed.
(iv) This Agreement shall for any reason cease to create a
valid, first priority security interest in favor of
MLMCI in any of the Mortgage Loans purported to be
covered thereby; provided, however, that such
circumstance shall not constitute an Event of Default
if, after determining the Market Value of the
Mortgage Loans without taking into account the
Mortgage Loans with respect to which such
circumstance has occurred, no other Event of Default
shall have occurred and be continuing.
(v) Any material representation or warranty made by an
Obligor in this Agreement or the Custody Agreement
shall have been materially incorrect or untrue when
made or repeated or when deemed to have been made or
repeated and MLMCI's interests shall have been
materially adversely affected thereby.
(vi) An Obligor shall breach any material covenant in this
Agreement or the Custody Agreement and MLMCI's
interests shall have been materially adversely
affected thereby.
(vii) An Act of Insolvency shall occur with respect to
either Obligor or a controlling entity of either of
them.
I-16
<PAGE> 24
(viii) Any Approvals of either Obligor are materially
adversely modified or revoked.
(b) In addition to the other remedies available to MLMCI or an
Obligor upon the occurrence and during the continuance of an
Event of Default by a defaulting party, MLMCI shall have the
following additional remedies upon the occurrence and during
the continuance of an Event of Default by an Obligor;
(i) All rights of both Obligors to receive payments which
they would otherwise be authorized to receive
pursuant to Paragraph 5 of these Supplemental Terms
shall cease, and all such rights shall thereupon
become vested in MLMCI, which shall thereupon have
the sole right to receive such payments and apply
them to the aggregate unpaid Repurchase Prices owed
by the Obligors.
(ii) All payments that are received by an Obligor contrary
to the provisions of the preceding clause (i) shall
be received in trust for the benefit of MLMCI and
shall be segregated from other funds of either
Obligor.
(c) Any sale of Purchased Securities under Paragraph 11 of the
Master Repurchase Agreement shall be conducted in a
commercially reasonable manner and subject to any applicable
legal requirements.
(d) Expenses incurred in connection with an Event of Default shall
include without limitation those reasonable costs and expenses
incurred by the non-defaulting party as a result of the early
termination of any repurchase agreement or reverse repurchase
agreement entered into by the non-defaulting party in
connection with the Transaction then in default.
11. ADDITIONAL EVENTS OF TERMINATION.
At the option of MLMCI, exercised by written notice to the Obligors,
the Repurchase Date for any or all Transactions under this Agreement
shall be deemed to immediately occur in the event that:
(a) In the reasonable judgment of MLMCI a material adverse change
shall have occurred in the business, operations, properties,
prospects or condition (financial or otherwise) of an Obligor;
I-17
<PAGE> 25
(b) MLMCI shall request written assurances as to the financial
well-being of an Obligor and such assurances shall not have
been provided within one (1) Business Day of such request;
(c) An Obligor shall be in default with respect to any normal and
customary covenants under any material contract or agreement
to which it is a party which default permits acceleration of
the obligations of such Obligor under such contract or
agreement by any other party thereto;
(d) The senior debt obligations or short-term debt obligations of
Merrill Lynch & Co., Inc. shall be rated below the four
highest generic grades (without regard to any pluses or
minuses reflecting gradations within such generic grades) by
any nationally recognized statistical rating organization;
(e) An Obligor shall merge or consolidate into any entity unless
the surviving or resulting entity shall be acceptable to
MLMCI, in its sole discretion, and such entity expressly
assumes by written agreement, executed and delivered to MLMCI
in form and substance satisfactory to MLMCI, the performance
of all of such Obligor's duties and obligations hereunder and
under the Custody Agreement;
(f) A firm of independent accountants shall have failed to issue
an opinion or shall have issued a qualified opinion in
connection with the most recent audited financial statements
of an Obligor;
(g) Any Agency Mortgage Loan shall have been subject to this
Agreement or to the Custody Agreement for more than sixty (60)
days in aggregate without having become a Pooled Mortgage
Loan;
(h) Any Non-Agency Mortgage Loan shall have been subject to this
Agreement OR TO THE CUSTODY AGREEMENT for more than ninety
(90) days in aggregate without there having been delivered to
mlmci a trade commitment relating thereto;
(i) Any Agency Mortgage Loan which is not a Pooled Mortgage Loan
shall have been subject to this Agreement or to the Custody
Agreement for more than sixty (60) days in aggregate;
I-18
<PAGE> 26
(j) FFCC's Book Net Worth shall at any time be less than
$70,000,000;
(k) FFCC's Adjusted Consolidated Debt shall at no time be more
than ten times Consolidated Stockholders' Equity;
(l) FFCC shall cease to maintain a servicing portfolio of at least
$2,000,000,000;
(m) The total delinquency experience of FFCC's mortgage loan
servicing portfolio shall exceed by more than 3% the average
quarterly delinquency rate for the United States for
conventional, FHA- or VA-insured Mortgage Loans, as published
by the Mortgage Bankers Association in the most recent edition
of the National Delinquency Survey;
(n) The outstanding principal amount of Mortgage Loans that have
defaulted and are currently held by FFCC as "real estate
owned" shall exceed 50% of Book Net Worth;
(o) FFCC shall experience losses or changes in its financial
condition which cause its Book Net Worth for any two
consecutive calendar quarters to be less than or equal to 80%
of its Book Net Worth as of the date hereof;
(p) MLMCI shall determine, in its reasonable judgment, that either
Obligor is not conducting its servicing, mortgage banking and
Agency securitization operations in accordance with standards
generally observed by experienced mortgage bankers that
regularly securitize mortgage loans with Agencies.
The acceleration of the Repurchase Date as provided in this Paragraph
11 shall be in addition to any other rights of the parties to cause
such an acceleration under this Agreement.
12. FINANCIAL STATEMENTS.
(a) As of the date hereof, MLMCI shall provide each Obligor, and
each Obligor shall provide MLMCI, with its audited year-end
financial statements and its most recent available interim
financial statement. MLMCI shall from time to time provide
each Obligor, and each Obligor shall from time to time provide
MLMCI, with audited year-end financial statements and
additional available interim financial statements upon such
other party 's reasonable request.
(b) Each Obligor shall provide MLMCI, at the expense of such
Obligor without request of MLMCI, with copies of
I-19
<PAGE> 27
all financial statements, reports, notices and proxy
statements sent by such Obligor or any of such Obligor's
Consolidated Subsidiaries in a general mailing to their
respective stockholders and of all reports and other material
(including copies of all registration statements under the
Securities Act of 1933, as amended) filed by any of them with
any securities exchange or with the Securities and Exchange
Commission or any governmental authority succeeding to any or
all of the functions of said Commission. In addition, each
Obligor shall deliver to MLMCI the quarterly certificate (the
"Covenant Compliance Certificate"), if any, required to be
delivered to the lending banks under the Warehouse Facilities
and MLMCI shall be permitted to rely on such Covenant
Compliance Certificate to the same extent as such lending
banks.
(c) Each delivery of Purchased Securities by an Obligor to MLMCI
hereunder will constitute a representation by such Obligor
that there has been no material adverse change in such
Obligor's financial condition not disclosed to MLMCI since the
date of such Obligor's most recent unaudited balance sheet or
income statement delivered to MLMCI. Each Obligor shall
provide MLMCI, from time to time at such Obligor's expense,
with such information of a financial or operational nature as
MLMCI may reasonably request promptly upon receipt of such
request.
13. REPURCHASE PRICE; PRICE DIFFERENTIAL. The Price Differential shall be
payable in arrears with respect to each Transaction, together with the
Purchase Price therefor, on the termination date for the related
Transaction or as may be otherwise mutually agreed upon by the parties
and as specified in the related Confirmation/Funding Request. Payment
of the Repurchase Price (including the Price Differential) shall be
made by wire transfer in immediately available funds.
14. ADDITIONAL INFORMATION; CONFIDENTIALITY.
(a) At any reasonable time each Obligor shall permit MLMCI, its
agents or attorneys, to inspect and copy any and all documents
and data in their possession pertaining to each Mortgage Loan
that is the subject of any Transaction. Such inspection shall
occur upon the request of MLMCI at a mutually agreeable
location during regular business hours and on a date not more
than two (2) Business Days after the date of such request.
I-20
<PAGE> 28
(b) Each Obligor acknowledges that this Agreement and the Custody
Agreement are confidential in nature and each Obligor agrees
that, unless otherwise directed by a court of competent
jurisdiction or as may be required by federal or state law
(which determination as to federal or state law shall be based
upon written advice of counsel), it shall limit the
distribution of such documents to its officers, employees,
attorneys, accountants and agents as required in order to
conduct its business with MLMCI.
15. MARGIN MAINTENANCE. Paragraph 4(a) of the Master Repurchase Agreement
is hereby modified to provide that if the notice to be given by MLMCI
to an Obligor under such paragraph is given at or prior to 10:00 a.m.
New York City time on a Business Day, the Obligors agree, jointly and
severally, to transfer the cash or Additional Purchased Securities to
MLMCI (in the manner contemplated by this Agreement and the Custody
Agreement) prior to the close of business in New York City on the date
of such notice, and if such notice is given after 10:00 a.m. New York
City time, the Obligors agree, jointly and severally, to transfer the
cash or Additional Purchased Securities (in the manner as aforesaid)
prior to the close of business in New York City on the Business Day
following the date of such notice.
16. SERVICING ARRANGEMENTS.
(a) The parties hereto agree and acknowledge that, notwithstanding
the purchase and sale of the Mortgage Loans contemplated
hereby, the related Obligor shall continue to service the
Mortgage Loans for the benefit of MLMCI and, if MLMCI shall
exercise its rights to sell the Mortgage Loans pursuant to
this Agreement prior to such securitization, MLMCI's assigns;
provided, however, that the obligation of the related Obligor
to service Mortgage Loans for the benefit of MLMCI as
aforesaid shall cease upon the securitization of Agency
Mortgage Loans into Agency Securities or the sale of the
Agency Mortgage Loans to the applicable Agency under its cash
purchase program, in the case of Transactions involving Agency
Mortgage Loans, and upon the receipt by MLMCI of the related
Repurchase Price in the case of Transactions involving
Non-Agency Mortgage Loans.
(b) Each Obligor shall service and administer the Mortgage Loans
in accordance with prudent mortgage loan servicing standards
and procedures generally accepted in the mortgage banking
industry and in accordance with the standards incorporated
(with respect to the GNMA securitization program) the GNMA
Guide or
I-21
<PAGE> 29
(with respect to the FNMA securitization program) the FNMA
Guide or (with respect to the FHLMC securitization program)
the FHLMC Guide; provided, however, that each Obligor shall at
all times comply with applicable law and FHA regulations and
VA regulations so that the FHA insurance, VA guarantee or any
other applicable insurance or guarantee, if any, in respect of
any Mortgage Loan is not voided or reduced. Each Obligor
shall at all times maintain accurate and complete records of
its servicing of the Mortgage Loans.
(c) Each Obligor shall provide MLMCI and its permitted assigns
with periodic reports concerning the Mortgage Loans with such
frequency and containing such information as MLMCI or its
permitted assigns may reasonably request.
(d) MLMCI shall, in connection with the exercise of its rights to
sell the Mortgage Loans pursuant to Paragraph 11(d) of the
Master Repurchase Agreement, have the option to sell the
Mortgage Loans on a servicing released basis without the
payment of any termination fee to either Obligor.
17. APPOINTMENT OF AGENT. MLMCI hereby appoints MLGSIPR as its agent for
purposes of the receipt, registration and sale of Agency Securities.
18. FURTHER ASSURANCES. Each Obligor shall promptly provide such further
assurances or agreements as MLMCI may request in order to effect the
purposes of this Agreement, the Trade Commitment and the Takeout
Assignment.
19. MLMCI AS ATTORNEY-IN-FACT. MLMCI is hereby appointed to act after the
occurrence and during the continuation of an Event of Default as the
attorney-in-fact of each Obligor for the purpose of carrying out the
provisions of this Agreement and taking any action and executing any
instruments that MLMCI may deem necessary or advisable to accomplish
the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the
generality of the foregoing, MLMCI shall have the right and power
after the occurrence and during the continuation of any Event of
Default to receive, endorse and collect all checks made payable to the
order of an Obligor representing any payment on account of the
principal of or interest on any of the Purchased Securities and to
give full discharge for the same.
20. JOINT AND SEVERAL LIABILITY OF OBLIGORS. The Obligors agree to be
jointly and severally liable for the obligations of either Obligor
hereunder and all representations, warranties, covenants and
agreements made by or on behalf of
I-22
<PAGE> 30
either or both Obligors in this Agreement or in any exhibit hereto or
any document, instrument or certificate delivered pursuant hereto
shall be deemed to have been made by each Obligor, jointly and
severally. The Obligors further agree that, notwithstanding any right
of MLMCI to investigate fully the affairs of the Obligors and
notwithstanding any knowledge of facts determined or determinable by
MLMCI, MLMCI has the right to rely fully on the representations,
warranties, covenants and agreements of either or both Obligors
contained in this Agreement and upon the accuracy of any document,
instrument, certificate or exhibit given or delivered hereunder. The
joint and several obligation of each Obligor hereunder is absolute,
unconditional, irrevocable, present and continuing and coupled with an
interest and, with respect to any payment to be made to MLMCI, is a
guaranty of payment (and not of collectability) and is in no way
conditional or contingent upon the continued existence of the other
Obligor and is not and will not be subject to any set-offs. Any
notice or other communication provided to one Obligor pursuant hereto
shall be deemed to have been given to both Obligors and failure to be
sent any notice or Communication contemplated hereby shall not relieve
an Obligor from its joint and several liability for the obligations of
the other Obligor hereunder.
21. TERMINATION. Notwithstanding any provisions of Paragraph 15 of the
Master Repurchase Agreement to the contrary, this Agreement and all
Transactions outstanding hereunder shall terminate automatically
without any requirement for notice on the date occurring eleven
calendar months and twenty-nine days after the date as of which this
Agreement is entered into; provided, however, that this Agreement and
any Transaction outstanding hereunder may be extended by mutual
agreement of MLMCI and both Obligors; and provided further, however,
that no such party shall be obligated to agree to such an extension.
22. MINIMUM AND MAXIMUM TRANSACTION AMOUNT.
(a) The daily minimum aggregate Repurchase Price for the Purchased
Securities subject to this Agreement shall be $2,000,000.
(b) The aggregate outstanding Repurchase Price for the Purchased
Securities subject to this Agreement as of any date of
determination shall not exceed $100,000,000.
23. EXPENSES. Each party hereto shall pay its own expenses in connection
with the Transactions contemplated hereby.
I-23
<PAGE> 31
24. AGENCY DOCUMENTATION. All references in this Agreement to items of
Agency Documentation shall, if such items are amended or superseded
from time to time by the related Agency, be deemed references to such
Agency Documentation as so amended or superseded.
25. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which counterparts shall be deemed to be an
original, and such counterparts shall constitute but one and the same
instrument.
26. INCORPORATION OF TERMS. The Master Repurchase Agreement as
supplemented hereby shall be read, taken and construed as one and the
same instrument.
I-24
<PAGE> 32
EXHIBIT A
CONFIRMATION / FUNDING REQUEST AND CONFIRMATION OF PLEDGE
<TABLE>
<S> <C> <C>
TO: First Financial Caribbean Corporation TO: Doral Mortgage Corporation FROM: Merrill Lynch Mortgage Capital Inc.
1159 Franklin D. Roosevelt Avenue Doral Building 101 Hudson Street, 12th Floor
Puerto Nouvo, Puerto Rico 00920 650 Munoz Rivera Avenue Jersey City, NJ 07302
Attention: Mario S. Levis San Juan, Puerto Rico 00918 Attention: Robert Eckerstrom
Vice President Attention: Alfredo Casals
</TABLE>
RE: TRANSACTIONS INVOLVING AGENCY MORTGAGE LOANS THAT ARE POOLED MORTGAGE LOANS
AGENCY (check one): FNMA [ ] FHLMC [ ] GNMA [ ]
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is pleased to confirm your sale
and our purchase of the pools of Mortgage Loans (composed of the Mortgage Loans
listed on Attachment I hereto) described below pursuant to the Master
Repurchase Agreement (including the supplemental terms set forth in Annex I
thereto), dated as of January 12, 1995 (the "Master Repurchase Agreement")
among MLMCI, First Financial Caribbean Corporation ("FFCC") and Doral Mortgage
Corporation ("DMC") under the following terms and conditions:
<TABLE>
<S> <C> <C> <C> <C> <C>
POOL/COMMITMENT NO.: _____ _____ _____ _____ _____
ORIG PRIN AMT OF MTG LOANS: _____ _____ _____ _____ _____
REM PRIN AMT OF MTG LOANS: _____ _____ _____ _____ _____
PURCHASE DATE: _____ _____ _____ _____ _____
REPURCHASE DATE: _____ _____ _____ _____ _____
PURCHASE PRICE: _____ _____ _____ _____ _____
PRICING RATE: _____ _____ _____ _____ _____
PRICE DIFFERENTIAL DUE: _____ _____ _____ _____ _____
</TABLE>
FFCC and DMC hereby grant to MLMCI a first priority security interest in and
lien on the Mortgage Notes evidencing each Mortgage Loan listed on Attachment I
hereto subject to the terms of the Master Repurchase Agreement.
A-1
<PAGE> 33
The Master Repurchase Agreement is incorporated by reference into this
Confirmation/Funding Request and made a part hereof as if it were fully set
forth herein. All capitalized terms used herein but not otherwise defined
shall have the meanings specified in the Master Repurchase Agreement.
<TABLE>
<S> <C>
[FIRST FINANCIAL CARIBBEAN CORPORATION] MERRILL LYNCH MORTGAGE CAPITAL INC.
[DORAL MORTGAGE CORPORATION]
BY:____________________________________
BY:_______________________________________ NAME:__________________________________
NAME:_____________________________________ TITLE:_________________________________
TITLE:____________________________________
AFFIDAVIT NO.:____________________________
</TABLE>
A-2
<PAGE> 34
Affidavit No. ______
Acknowledged to and subscribed before me by ________________________
of legal age, married, and a resident of __________________________, in his
capacity as an authorized officer of [FFCC] [DMC], to me personally known, this
__ day of ___________, 199_, in San Juan, Puerto Rico.
________________________________________
Notary Public
ACKNOWLEDGED AND AGREED:
{BUYER}
A-3
<PAGE> 35
EXHIBIT B
CONFIRMATION/FUNDING REQUEST AND CONFIRMATION OF PLEDGE
<TABLE>
<S> <C> <C>
TO: First Financial Caribbean Corporation TO: Doral Mortgage Corporation FROM: Merrill Lynch Mortgage Capital Inc.
1159 Franklin D. Roosevelt Avenue Doral Building 101 Hudson Street, 12th Floor
Puerto Nouvo, Puerto Rico 00920 650 Munoz Rivera Avenue Jersey City, NJ 07302
Attention: Mario S. Levis San Juan, Puerto Rico 00918 Attention: Robert Eckerstrom
Vice President Attention: Alfredo Casals
</TABLE>
RE: TRANSACTIONS INVOLVING NON-AGENCY MORTGAGE LOANS
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is pleased to confirm your sale
and our purchase of the Mortgage Loans described below and on Attachment I
hereto pursuant to the Master Repurchase Agreement (including the supplemental
terms set forth in Annex I thereto), dated as of January 12, 1995 (the "Master
Repurchase Agreement") among MLMCI, First Financial Caribbean Corporation
("FFCC") and Doral Mortgage Corporation ("DMC") under the following terms and
conditions:
<TABLE>
<CAPTION>
ADDITIONAL AGGREGATE
---------- ----------
<S> <C> <C>
ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: __________ __________
CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: __________ __________
PURCHASE DATE: __________ __________
REPURCHASE DATE: __________ __________
PURCHASE PRICE: __________ __________
PRICING RATE: __________ __________
PRICE DIFFERENTIAL DUE DATE: __________ __________
</TABLE>
The Master Repurchase Agreement is incorporated by reference into this
Confirmation/Funding Request and made a part hereof as if it were fully set
forth herein. All capitalized terms used herein but not otherwise defined
shall have the meanings specified in the Master Repurchase Agreement.
FFCC and DMC hereby grant to MLMCI a first priority security interest in and
lien on the Mortgage Notes evidencing each Mortgage Loan listed on Attachment I
hereto subject to the terms of the Master Repurchase Agreement.
B-1
<PAGE> 36
<TABLE>
<S> <C>
[FIRST FINANCIAL CARIBBEAN CORPORATION] MERRILL LYNCH MORTGAGE CAPITAL INC.
[DORAL MORTGAGE CORPORATION]
BY:__________________________________
BY:______________________________________ NAME:________________________________
NAME:____________________________________ TITLE:_______________________________
TITLE:___________________________________
AFFIDAVIT NO.:___________________________
</TABLE>
B-2
<PAGE> 37
ATTACHMENT I
TO EXHIBIT B
CONFIRMATION/FUNDING REQUEST AND CONFIRMATION OF PLEDGE
FOR NON-AGENCY MORTGAGE LOANS
Request No.: ________
Date: ________
<TABLE>
<CAPTION>
Product Wire Loan Borrower Loan Purchase Market Takeout Note Maturity
Investor Type Date Number Last Amount Price Value Date Rate Date
-------- ------- ---- ------ -------- ------ -------- ------ ------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
TOTALS:
[First Financial Caribbean Corporation]
[Doral Mortgage Corporation]
By:______________________________________
Title:___________________________________
Date:____________________________________
Amount to be
funded by MLMCI: $____________
B-3
<PAGE> 38
Affidavit No. ______
Acknowledged to and subscribed before me by _______________________ of
legal age, married, and a resident of _______________________, in his capacity
as an authorized officer of [FFCC] [DMC], to me personally known, this __ day
of ___________, 199_, in San Juan, Puerto Rico.
________________________________________
Notary Public
ACKNOWLEDGED AND AGREED:
{BUYER}
B-4
<PAGE> 39
EXHIBIT C
CONFIRMATION/FUNDING REQUEST AND CONFIRMATION OF PLEDGE
<TABLE>
<S> <C> <C>
TO: First Financial Caribbean Corporation TO: Doral Mortgage Corporation FROM: Merrill Lynch Mortgage Capital Inc.
1159 Franklin D. Roosevelt Avenue Doral Building 101 Hudson Street, 12th Floor
Puerto Nouvo, Puerto Rico 00920 650 Munoz Rivera Avenue Jersey City, NJ 07302
Attention: Mario S. Levis San Juan, Puerto Rico 00918 Attention: Robert Eckerstrom
Vice President Attention: Alfredo Casals
</TABLE>
RE: TRANSACTIONS INVOLVING AGENCY MORTGAGE LOANS THAT ARE NOT POOLED MORTGAGE
LOANS
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is pleased to confirm your sale
and our purchase of the Mortgage Loans described below (composed of the
Mortgage Loans listed on Attachment I hereto) pursuant to the Master Repurchase
Agreement (including the supplemental terms set forth in Annex I thereto),
dated as of January 12, 1995 (the "Master Repurchase Agreement") among MLMCI,
First Financial Caribbean Corporation ("FFCC") and Doral Mortgage Corporation
("DMC") under the following terms and conditions:
<TABLE>
<CAPTION>
ADDITIONAL AGGREGATE
---------- ---------
<S> <C> <C>
ORIG. PRINCIPAL AMOUNT OF MORTGAGE LOANS: __________ __________
CURRENT PRINCIPAL AMOUNT OF MORTGAGE LOANS: __________ __________
PURCHASE DATE: __________ __________
REPURCHASE DATE: __________ __________
PURCHASE PRICE: __________ __________
PRICING RATE: __________ __________
PRICE DIFFERENTIAL DUE DATE: __________ __________
</TABLE>
The Master Repurchase Agreement is incorporated by reference into this
Confirmation/Funding Request and made a part hereof as if it were fully set
forth herein. All capitalized terms used herein but not otherwise defined
shall have the meanings specified in the Master Repurchase Agreement.
FFCC and DMC hereby grant to MLMCI a first priority security interest in and
lien on the Mortgage Notes evidencing each Mortgage Loan listed on Attachment I
hereto subject to the terms of the Master Repurchase Agreement.
C-1
<PAGE> 40
<TABLE>
<S> <C>
[FIRST FINANCIAL CARIBBEAN CORPORATION] MERRILL LYNCH MORTGAGE CAPITAL INC.
[DORAL MORTGAGE CORPORATION]
BY:__________________________________
BY:______________________________________ NAME:________________________________
NAME:____________________________________ TITLE:_______________________________
TITLE:___________________________________
AFFIDAVIT NO.:___________________________
</TABLE>
C-2
<PAGE> 41
ATTACHMENT I
TO EXHIBIT C
CONFIRMATION/FUNDING REQUEST AND CONFIRMATION OF PLEDGE
FOR AGENCY MORTGAGE LOANS
Request No.: ________
Date: ________
<TABLE>
<CAPTION>
Product Wire Loan Borrower Loan Purchase Market Takeout Note Maturity
Investor Type Date Number Last Amount Price Value Date Rate Date
------- ------- ---- ----- -------- ------ -------- ------ ------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
TOTALS:
[First Financial Caribbean Corporation]
[Doral Mortgage Corporation]
By:______________________________________
Title:___________________________________
Date:____________________________________
Amount to be
funded by MLMCI: $____________
C-3
<PAGE> 42
Affidavit No. ______
Acknowledged to and subscribed before me by _______________________ of
legal age, married, and a resident of _______________________, in his capacity
as an authorized officer of [FFCC] [DMC], to me personally known, this __ day
of ___________, 199_, in San Juan, Puerto Rico.
________________________________________
Notary Public
ACKNOWLEDGED AND AGREED:
{BUYER}
C-4
<PAGE> 43
EXHIBIT D
A. the information set forth on the related Mortgage
Loan Schedule is complete, true and correct in all material respects;
B. immediately prior to a Transaction each Obligor is
sole owner of beneficial title and holder of the Mortgage Note secured
by a Mortgage Loan free and clear of any and all liens, claims,
encumbrances, participation interests, equities, pledges, charges or
security interests of any nature and has full right and authority,
subject to no interest or participation of, or agreement with, any
other party, to sell and assign the same pursuant to this Agreement;
C. upon recordation, the Mortgage will be a valid and
subsisting first lien on the Mortgaged Property therein described, and
the Mortgaged Property is free and clear of all encumbrances and liens
having priority over the first lien of the Mortgage except for liens
for real estate taxes and special assessments not yet due and payable,
easements and other matters of public record generally acceptable to
mortgage lenders. The Mortgage Loan creates a valid and subsisting
first lien on the property described therein and the related Obligor
has full right to sell and assign the Mortgage Note pursuant to this
Agreement;
D. the Mortgaged Property is free and clear of all
mechanics' and materialmen's liens or liens in the nature thereof (and
no rights are outstanding that under law could give rise to any such
lien) that are or may become liens prior or equal to or coordinate
with the lien of the related Mortgage;
E. there do not exist any circumstances or conditions
with respect to the Mortgage Loan, the Mortgaged Property, the
mortgagor or the mortgagor's credit standing that can be reasonably
expected to cause the relevant Agency, or Trade Investor, to regard
the Mortgage Loan as an unacceptable investment, cause the Mortgage
Loan to become delinquent or adversely affect the value or
marketability of the Mortgage Loan or the acceptability thereof for
transfer to ANY relevant Agency or Trade Investor, in exchange for
related Agency Securities or Cash Purchase Price and no information
concerning the related Obligor or any Mortgage Loan set forth herein
or in any related Mortgage Loan Schedule will contain any material
misrepresentation of a material fact or omit to state any material
fact necessary to make the
D-1
<PAGE> 44
information contained herein or therein not misleading in light of the
circumstances in which made;
F. all payments required to be made for each Mortgage
Loan under the terms of the Mortgage have been made; no Mortgage Loan
is currently 30 days or more delinquent in its payments ("Delinquent")
or has been Delinquent more than once during the prior twelve month
period;
G. the Mortgage File delivered to the Custodian pursuant
to the Custodial Agreement contains each of the documents and
instruments specified to be included therein, duly executed and in due
and proper form; each Mortgage Note and Mortgage relating to an Agency
Mortgage Loan, and any endorsements or assignments thereof, are on
forms approved by the relevant Agency and each other document or
instrument included in the related Mortgage File is in form acceptable
to such Agency;
H. the Mortgage Note and the related Mortgage are
genuine, and each is the legal, valid and binding obligation of the
maker thereof, enforceable in accordance with its terms. All parties
to the Mortgage Note and the Mortgage had legal capacity to execute
the Mortgage Note and the Mortgage, and each Mortgage Note and
Mortgage have been duly and properly executed by the Mortgagor; each
Mortgage secures the related Mortgage Note or such other evidence of
indebtedness which is a negotiable instrument;
I. any and all requirements of any federal, state or
local law including, without limitation, usury, truth-in-lending, real
estate settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to each Mortgage Loan have
been complied with, and the related Obligor shall maintain in its
possession for so long as the related Mortgage Loan is subject to this
Agreement, available for MLMCI's inspection, and shall deliver to
MLMCI upon demand, evidence of compliance with all such requirements;
J. the proceeds of each Mortgage Loan have been fully
disbursed, there is no requirement for future advances thereunder and
any and all requirements as to completion of any on-site or off-site
improvements and as to disbursements of any escrow funds therefor have
been complied with; all costs, fees and expenses incurred in making,
closing or presenting for recordation the Mortgage Loans were paid;
K. each Mortgage Loan is covered by an ALTA mortgage
title insurance policy or other generally acceptable form of policy of
insurance (with, in the case of Pooled Mortgage Loans, all requisite
endorsements, acceptable to the
D-2
<PAGE> 45
relevant Agency issued by and the valid and binding obligation of a
title insurer acceptable to such Agency) and qualified to do business
in the jurisdiction where the Mortgaged Property is located, insuring
the related Obligor, its successors and assigns, as to the first
priority lien of the Mortgage in the original principal amount of the
Mortgage Loan; the related Obligor, its successors and assigns, are
the named insured and the sole insured of such mortgage title
insurance policy; the assignment to MLMCI of the related Obligor's
interest in such mortgage title insurance policy does not require the
consent of or notification to the insurer; such mortgage title
insurance policy is in full force and effect and will be in full force
and effect and inure to the benefit of MLMCI upon the sale of such
Mortgage Loan to MLMCI under this Agreement, and no claims have been
made under such mortgage title insurance policy; and no prior holder
of the related Mortgage, including the related Obligor, has done, by
act or omission, anything which would impair the coverage of such
mortgage title insurance policy;
L. there is no default, breach, violation or event of
acceleration existing under the Mortgage or the related Mortgage Note
and no event which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default,
breach, violation or event of acceleration; and such Obligor has not
waived any default, breach, violation or event of acceleration;
M. except for any rights which any mortgagor may have
under the Homestead Acts (43 U.S.C. Section 161 et seq., as amended,
and 31 L.P.R.A. Section 1851, et seq., as amended), each Mortgage Loan
is not subject to any right of rescission, set-off, counterclaim or
defense, including the defense of usury, nor will the operation of any
of the terms of the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note or the Mortgage
unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or
defense has been asserted with respect thereto;
N. with respect to each Mortgage Loan with a
loan-to-value ratio greater than 80%, the excess over 75% is and will
be insured as to payment defaults by a policy of primary mortgage
guaranty insurance until the loan-to-value ratio is reduced below 80%;
all provisions of such primary mortgage guaranty insurance policy have
been and are being complied with and such policy is in full force and
effect; and all premiums due thereunder have been paid; the related
Mortgage for any Mortgage Loan subject to such policy of
D-3
<PAGE> 46
primary mortgage guaranty insurance obligates the mortgagor thereunder
to maintain such insurance and pay all premiums and charges in
connection therewith; the insurer for such policy is an approved
mortgage insurance company by an Agency; the annual interest rate for
the Mortgage Loan as set forth on the related Mortgage Loan Schedule
is net of any such insurance premium; if the Mortgage Loan is an
FHA-insured or VA-guaranteed loan, such insurance or guaranty is in
effect;
O. each AGENCY Mortgage Loan was underwritten in
accordance with, and each Mortgagor's income and debt ratios met the
published underwriting standards for conventional residential mortgage
loans of an Agency or as required by applicable regulations for
FHA-insured or VA-guaranteed mortgage loans;
P. EACH NON-AGENCY MORTGAGE LOAN WAS UNDERWRITTEN IN
ACCORDANCE WITH, AND EACH MORTGAGOR'S INCOME AND DEBT RATIOS
SATISFIED, THE UNDERWRITING STANDARDS EMPLOYED BY PRUDENT MORTGAGE
LENDERS WITH RESPECT TO MORTGAGE LOANS SUCH AS THE NON-AGENCY MORTGAGE
LOANS;
Q. there exist no deficiencies with respect to escrow
deposits and payments, if such are required, for which customary
arrangements for repayment thereof have not been made, and no escrow
deposits or payments of other charges or payments due the Obligor have
been capitalized under the Mortgage or the related Mortgage Note; with
respect to escrow deposits and payments in those instances where such
were required, there exist no deficiencies in connection therewith for
which customary arrangements for repayment thereof have not been made
and no escrow deposits or payments or other charges or payments due
the Obligor have been capitalized under any Mortgage or the related
Mortgage Note;
R. in the case of Agency Mortgage Loans, the related
Obligor hereby makes to MLMCI, its successors and assigns each of the
representations and warranties regarding the related Obligor and the
Agency Mortgage Loans which the Obligor makes to the related Agency as
such Agency requires pursuant to its Guide from time to time.
D-4
<PAGE> 47
EXHIBIT E
INVESTOR COMMITMENT REPORT
AGENCY MORTGAGE LOANS
(SECURITIZATION AND CASH SALE)
<TABLE>
<CAPTION>
Confirmation/ Takeout Investor
Funding Request Trade or Purchasing Delivery MBS Note/Coupon Delivery Trade Commitment
(Listed by Number) Date Agency Month Type Rate Price Amount Number Number Reason
------------------ ----- ---------------- -------- ---- ----------- -------- ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
NON-AGENCY MORTGAGE LOANS
<TABLE>
<CAPTION>
Confirmation/
Funding Request Trade Trade Delivery MBS Note/Coupon Delivery Commitment
(Listed by Number) Date Investor Month Type Rate Price Amount Number
----------------- ----- -------- -------- ---- ----------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
E-1
<PAGE> 48
EXHIBIT F
RELEASE
Banco Popular de Puerto Rico,
as Custodian
Gentlemen:
With respect to the Mortgage Loans listed on the Mortgage Loan
Schedule, we hereby certify to you that we will release all right, interest or
claim of any kind with respect to such Mortgage Loans upon receipt of
immediately available funds in the amount of $__________ by wire transfer to
account number _______ at (bank) for the account of MLMCI.
------------------
MERRILL LYNCH MORTGAGE CAPITAL
INC.
By:___________________________
Name:_________________________
Title:________________________
Confirmed by:
SELLER
By:_________________________________
Name:_______________________________
Title:______________________________
F-2
<PAGE> 1
EXHIBIT 10.58
[LOGO] FIRST FINANCIAL CARIBBEAN CORPORATION
December 7, 1994
David Lewis
71 Washington Street
Condado, Puerto Rico 00907
<TABLE>
<S> <C> <C> <C> <C>
Re.: FFCC #2 Class B $565,355 Face 7.40%
#3 " 675,374 7.40%
#6 " 306,626 6.75%
#7 " 841,927 6.00%
#8 " 692,366 6.25%
#9 " 1,181,386 5.80%
#10 " 1,315,119 6.385%
#11 " 1,780,379 6.35%
</TABLE>
Dear Mr. Levis:
As agreed, on December 8, 1994, we will deliver the above-referenced
Class B Certificates, and the following are the details of this transaction:
<TABLE>
<S> <C>
Principal Balance (Trust #2) of 501,043.15 O/B @ 88.50 (To yield 10%) =$ 443,423.20
(Trust #3) of 593,698.60 O/B @ 88.50 (To yield 10%) = 525,423.26
(Trust #7) of 792,979.19 O/B @ 85.65 (To yield 9%) = 679,186.68
(Trust #8) of 662,671.25 O/B @ 86.20 (To yield 9%) = 571,222.62
(Trust #9) of 1,138,579.18 O/B @ 84.16 (To yield 9%) = 958,228.23
(Trust #11)of 1,758,965.43 O/B @ 85.61 (To yield 9%) =1,505,850.30
-------------
Total Principal $4,683,334.29
=============
</TABLE>
The above certificates will be given to Mr. David Levis on December 8,
1994 and registered in his name. In consideration of the above, David Levis
will deliver to First Financial Caribbean Corporation on December 8, 1994 the
following P.R. GNMA Certificates.
<TABLE>
<CAPTION>
DESCRIPTION FACE OUTSTANDING BAL.
----------- ---- ----------------
<S> <C> <C> <C>
GNMA #90629 8.50% $1,193,681.09 $ 689,724.50
#43039 7.50% 1,009,265.00 1,009,265.00
#376629 7.00% 1,018,276.00 1,018,276.00
#379073 7.00% 1,018,344.00 1,018,344.00
#379074 7.00% 1,009,434.00 1,009,434.00
------------
$4,745,043.50
=============
</TABLE>
<PAGE> 2
Additionally, FFCC will pledge and deliver to David Levis as
additional collateral the following Class B Certificates:
FFCC # 6 $ 306,626 face $284,674.68 O/B 6.75% Coupon
#10 $1,315,119 face $1,281,056.23 O/B 6.385% Coupon
This additional collateral represents approximately 25% of haircut.
The 25% overcollateralization is to be maintained at all times to reflect
changes in market price. If FFCC cannot comply with this agreement, David
Levis may at his option accelerate the put option described below.
Furthermore, it has been agreed that First Financial has the right to
call back the certificates at any time with 10 days prior notice. If this call
option is exercised, First Financial will deliver back all the GNMA's and David
Levis will deliver back all of the Class B Certificates plus any principal he
may have received on the Class B Certificates.
Also, it has been agreed that David Levis has the option to put back
the Certificates at any time with 10 days prior notice but not earlier than
December 8, 1995. If this option is exercised, FFCC will give back all of the
GNMA's and David Levis will give back all of the Class B Certificates plus any
principal he may have received on the Class B Certificates. In addition, David
Levis will reimburse First Financial the cost of financing the GNMA's which
cost will not exceed 6% per annum.
Sincerely,
/s/ RICHARD BONINI
Richard Bonini
Senior Executive Vice President
Accepted by: /s/ David Levis Date:
--------------------------- ---------------------------
David Levis
<PAGE> 1
EXHIBIT 10.59
(Logo) FIRST FINANCIAL CARIBBEAN CORPORATION
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED ("THE ACT"), THE PUERTO RICO UNIFORM SECURITIES ACT (THE "UNIFORM
ACT") OR ANY OTHER STATE SECURITIES LAW. THIS SECURITY WAS ACQUIRED BY THE
HOLDER FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT COVERING THIS SECURITY UNDER THE 1933 ACT
AND THE UNIFORM ACT. ANY SUCH SALE OR DISPOSITION MUST BE MADE IN COMPLIANCE
WITH THE RESTRICTIONS ON TRANSFER SET FORTH IN THIS NOTE.
PROMISSORY NOTE
Principal Amount: $3,250,000
Interest Rate: 10.00% per annum
Interest Payment Date (s): 25th of each month
Maturity Date: On Demand
Issue Date: December 9, 1994
Registered Owner ("Holder"): Ven-Lour Enterprises, Inc.
For value received, First Financial Caribbean Corporation (the
"Company") promises to pay to the Holder, the Principal Amount on the Maturity
Date, and to pay interest on the unpaid balance of the Principal Amount of
this Note, in arrears, from and including the date of this Note or from the
most recent Interest Payment Date to such Maturity Date and on the Maturity
Date, at the Interest Rate on each Interest Payment Date and on the Maturity
Date, commencing on January, 1995. The interest so payable on any Interest
Payment Date will be paid to the person in whose name this Note is registered
at the close of business on the 25th day of the calendar month next preceding
such Interest Payment Date. The Principal Amount of this Note is payable upon
presentation of this Note at the principal office of the Company in the City of
San Juan, Puerto Rico.
<PAGE> 2
-2-
Interest will be calculated on the basis of a year of 360 days,
consisting of twelve 30-day months. All payments hereunder shall be made in
lawful money of the United States. Any extension of time for the payment of
the Principal Amount of this Note resulting from the Maturity Date falling on a
Saturday, Sunday or legal holiday in the Commonwealth of Puerto Rico will be
included in the computation of interest.
The Company will not prepay this Note in full or in part.
The Holder may declare this Note immediately due and payable before
its Maturity Date upon the failure of the Company to pay principal of or
interest on this Note when the same shall become due (an "event of default").
If an event of default has occurred and is continuing, the Holder of
the Note may, by written notice of default given to the Company, declare this
Note to be immediately due and payable, whereupon the unpaid Principal Amounts
hereof, together with accrued interest thereon, shall be immediately due and
payable without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived by the Company.
The Company agrees to pay all expenses of enforcement, including
collection costs and reasonable attorneys' fees, in case default is made by the
Company in the payment of interest or principal of this Note or any part
thereof.
This Note is a registered obligation and is transferable only by
surrender thereof at the principal office of the Company, duly endorsed or
accompanied by written instrument of transfer duly executed by the registered
Holder hereof or his attorney duly authorized in writing and a letter of
representation in form acceptable to the Company is delivered by the transferee
whereby it represents that is acquiring this Note for investment and not with a
view to the distribution thereof and said transfer is exempt from the
registration requirements of the Act and the Uniform Act. The Company may
treat the person in whose name this Note is registered on the books and records
of the Company as the owner hereof for the purpose of receiving payment and for
all other purposes, and the Company shall not be affected by any notice to the
contrary, until all conditions of transfer reasonably required by the Company
have been complied with, including the delivery of any opinion of counsel
confirming the exemption from the registration requirements of the Act.
<PAGE> 3
-3-
This Note shall be construed according to and governed by the laws of the
Commonwealth of Puerto Rico.
First Financial Caribbean Corporation
/s/ Mario S. Levis
-----------------------------------
Mario S. Levis
Vice President & Treasurer
AFFIDAVIT #6984
Subscribed and sworn to before me by Mario S. Levis, of legal age,
married, and resident of San Juan, Puerto Rico in his capacity as Vice
President of First Financial Caribbean Corp. personally known to me in San
Juan, P.R. on this 9th day of December, 1994.
(SEAL)
-------------------------
Notary Public
<PAGE> 1
EXHIBIT 10.60
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY OTHER STATE SECURITIES LAW. THIS NOTE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT COVERING THIS NOTE UNDER THE 1933 ACT OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, AS EVIDENCED BY AN
OPINION OF COUNSEL KNOWLEDGEABLE IN SECURITIES LAW MATTERS ACCEPTABLE TO THE
COMPANY. THE INITIAL PURCHASER OF THIS NOTE AND ANY SUBSEQUENT TRANSFEREE WILL
BE REQUIRED TO MAKE CERTAIN WRITTEN REPRESENTATIONS TO THE COMPANY REGARDING,
AMONG OTHERS, ITS STATUS AS AN ACCREDITED INVESTOR, AND ITS ACQUISITION OF THIS
NOTE FOR INVESTMENT AND NOT WITH A VIEW TO THE RESALE OR DISTRIBUTION THEREOF.
DURING THE NINE MONTH PERIOD COMMENCING ON THE DATE OF THE LAST SALE UNDER THE
OFFERING OF THE NOTES AND UNTIL THE RECEIPT BY THE COMPANY OF AN OPINION OF
COUNSEL KNOWLEDGEABLE IN SECURITIES LAW MATTERS ACCEPTABLE TO THE COMPANY THAT
SUCH PERIOD HAS ELAPSED, THIS NOTE MAY BE OFFERED AND SOLD ONLY TO INDIVIDUALS
HAVING THEIR PRINCIPAL RESIDENCE OR CORPORATIONS OR OTHER FORM OF BUSINESS
ORGANIZATIONS HAVING THEIR PRINCIPAL OFFICE AND PRINCIPAL PLACE OF BUSINESS
WITHIN THE COMMONWEALTH OF PUERTO RICO (THE "COMMONWEALTH"). ANY SALE,
TRANSFER, PLEDGE, HYPOTHECATION OR DISPOSITION MUST BE MADE IN COMPLIANCE WITH
THE RESTRICTIONS ON TRANSFER SET FORTH ABOVE.
MEDIUM TERM NOTE, 1994 SERIES PR-A
Principal Amount: $_______________________ Cusip No.____________
Interest Rate: _____% per annum
Interest Payment Date(s): First day of each month
Maturity Date: __________________________________
Issue Date: _____________________________________
Registered Owner ("Holder"): ____________________
RN-_______
For value received, First Financial Caribbean Corporation (the "Company")
promises to pay to the Holder, the Principal Amount on the Maturity Date and to
pay interest on the unpaid balance of the Principal Amount, in arrears, on each
Interest Payment Date, commencing on ________, 199_, and on the Maturity Date.
Interest on this Note shall accrue at the Interest Rate from and including the
Issue Date or from the most recent Interest Payment Date to the immediately
succeeding Interest Payment Date or Maturity Date, as applicable. The interest
so payable on any Interest Payment Date will be paid to the person in whose
name this Note is registered at the close of business on the 15th day of the
calendar month next preceding such Interest Payment Date (the "Record Date").
Interest (other than interest due at maturity) will be paid by check mailed to
the person in whose name this Note is registered at his address as it appears
on the registration books of the Company as of the Record Date. Payment of the
interest and principal of this Note due at maturity shall be made upon
presentation and surrender of this Note at the principal office of the Company
in San Juan, Puerto Rico, or in such other place in San Juan, Puerto Rico, as
the Company may notify the Holder in writing. Any extension of time for the
payment of the Principal Amount of this Note resulting from the Maturity Date
occurring on a Saturday, Sunday or legal holiday in the Commonwealth of Puerto
Rico will be included in the computation of interest. Interest on this Note
will be computed on the basis of a 360-day year of twelve 30-day months.
This Note is not subject to prepayment by the Company either in whole or
in part prior to its Maturity Date.
The Holder may declare this Note immediately due and payable before its
Maturity Date upon the failure of the Company to pay interest on this Note when
the same shall become due and payable or the commencement of any insolvency,
bankruptcy, receivership or similar proceedings by or against the Company
(each, an "Event of Default").
If an Event of Default has occurred and is continuing, the Holder of this
Note may, by written notice of default given to the Company, declare this Note
to be immediately due and payable, whereupon the unpaid Principal Amount
hereof, together with accrued interest thereon, shall be immediately due and
payable without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived by the Company.
The Company agrees to pay all expenses of enforcement, including
collection costs and reasonable attorneys' fees, in case an Event of Default
has occurred and is continuing.
This Note is an obligation registered in books of the Company and is
transferable only by surrender thereof at the principal office of the Company,
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered Holder hereof or his attorney duly authorized in writing and
an opinion of counsel knowledgeable in securities law matters acceptable to the
Company stating that the transfer of such Note to the proposed transferee will
not require registration of the Notes under the Act or would otherwise result
in a violation of any federal, Commonwealth or state securities law. The
Company may treat the person in whose name this Note is registered on the books
and records of the Company as the owner hereof for the purpose of receiving
payment and for all other purposes, and the Company shall not be affected by
any notice to the contrary, until all conditions of transfer mentioned herein
have been complied with. The Company may, but is not required to effect a
exchange or registration of transfer of a Note after the 15th day of the month
immediately preceding on Interest Payment Date.
This Note shall be construed according to and governed by the laws of the
Commonwealth of Puerto Rico.
FIRST FINANCIAL CARIBBEAN CORPORATION
_____________________________________
Name:
Title:
(Corporate Seal)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATMENTS OF FIRST FINANCIAL CARIBBEAN CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 35,916
<SECURITIES> 386,723
<RECEIVABLES> 14,961
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,996
<DEPRECIATION> (3,529)
<TOTAL-ASSETS> 768,019
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 7,182
0
204
<OTHER-SE> 83,110
<TOTAL-LIABILITY-AND-EQUITY> 768,019
<SALES> 0
<TOTAL-REVENUES> 72,043
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,046
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,252
<INCOME-PRETAX> 18,745
<INCOME-TAX> 2,529
<INCOME-CONTINUING> 16,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,215
<NET-INCOME> 17,431
<EPS-PRIMARY> 2.46
<EPS-DILUTED> 2.30
</TABLE>
