<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ------------
Commission file number 0-17224
-------
First Financial Caribbean Corporation
-------------------------------------
(Exact name of the registrant as specified in its charter)
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (787) 749-7100
including area code --------------
Former name, former address and Not Applicable
former fiscal year, if changed --------------
since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock outstanding at September 30, 1996 - 9,111,092
===============================================================================
<PAGE> 2
FIRST FINANCIAL CARIBBEAN CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1996 (Unaudited) and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters ended
September 30, 1996 and September 30, 1995 and nine months ended September 30, 1996 and
September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows (Unaudited) - Nine-month period ended September
30, 1996 and September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2 - Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3 - Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4 - Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
2
<PAGE> 3
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(unaudited) (audited)
----------- ---------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 57,329 $ 59,872
Mortgage loans held for sale, net 279,139 245,484
Mortgage-backed securities held for trading 395,099 407,941
Securities held to maturity 112,658 77,945
Securities available for sale 12,036 14,579
Loans receivable, net 107,824 51,355
Accounts receivable and mortgage servicing advances, net 12,681 9,592
Accrued interest receivable 9,659 8,155
Mortgage servicing rights 18,681 11,164
Excess servicing fees receivable 20,232 10,407
Property, leasehold improvements and equipment, net 6,488 6,505
Cost in excess of fair value of net assets acquired 6,553 6,526
Real estate held for sale, net 2,438 2,085
Prepaid and other assets 9,776 6,312
------------ -----------
Total Assets $ 1,050,593 $ 917,922
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $ 223,354 $ 234,707
Securities sold under agreements to repurchase 387,473 363,728
Deposit accounts 147,265 95,740
Notes payable 91,231 51,682
Advances from Federal Home Loan Bank of N.Y. 15,000 10,407
Convertible Subordinated Debentures 10,000 10,000
Accounts payable and other liabilities 23,523 17,376
Income tax payable 5 388
Deferred tax liability 7,004 4,877
------------ -----------
Total liabilities 904,855 788,905
============ ===========
Commitments and contingencies - - - - - - - - - - - -
Stockholders' equity:
Serial Preferred Stock, $1.00 par value, 2,000,000 shares
authorized; no shares outstanding (1995 - 108,397 shares of
10.5% Cumulative Convertible Preferred Stock, Series A
outstanding) - - - 108
Common Stock, $1.00 par value, 20,000,000 shares
authorized; 9,125,092 shares issued (1995 - 8,884,170);
9,111,092 shares outstanding (1995 - 8,870,170) 9,125 8,884
Paid-in capital 38,673 38,331
Retained earnings 98,244 81,892
------------ -----------
146,042 129,215
Unrealized (loss) gain on securities available for sale (161) 9
Treasury stock at par value, 14,000 shares (14) (14)
Unearned compensation under employment contracts (129) (193)
------------ -----------
Total stockholders' equity 145,738 129,017
------------ -----------
Total liabilities and stockholders' equity $ 1,050,593 $ 917,922
============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands of dollars, except for per share data)
Unaudited
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Mortgage loans sales and fees $ 7,049 $ 4,899 $20,471 $ 8,604
Servicing income 2,645 2,603 8,342 8,044
Interest income 16,430 15,749 49,030 46,667
Gain on sale of servicing rights 1,813 - - - 1,813 3,623
Rental and other income 211 114 511 413
------- ------- ------- -------
28,148 23,365 80,167 67,351
------- ------- ------- -------
Expenses:
Interest 10,941 11,708 32,759 31,892
Employee cost, net (See Note g) 1,735 1,081 6,268 4,953
Taxes, other than payroll and income taxes 303 279 785 802
Maintenance 199 180 488 478
Advertising 938 586 2,661 1,580
Professional services 634 667 2,021 2,044
Telephone 444 423 1,364 1,278
Rent 505 531 1,552 1,550
Other, net (See Note g) 3,523 2,542 8,768 6,303
------- ------- ------- -------
19,221 17,997 56,566 50,880
------- ------- ------- -------
Income before income taxes 8,927 5,368 23,601 16,471
Income taxes:
Current (5) 85 663 144
Deferred 1,507 355 2,127 1,832
------- ------- ------- -------
1,502 440 2,790 1,976
------- ------- ------- -------
Net Income 7,424 4,928 20,811 14,495
Retained earnings at beginning of period 92,368 74,159 81,892 66,706
Less cash dividends paid:
Convertible preferred stock - - - 47 14 144
Common stock 1,548 1,088 4,445 3,105
------- ------- ------- -------
Retained earnings at the end of period $98,244 $77,952 $98,244 $77,952
======= ======= ======= =======
Net Income per share:
Primary $0.81 $0.68 $2.30 $1.99
Fully Diluted $0.78 $0.65 $2.19 $1.91
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE> 5
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine-Month Period Ended
September 30,
-----------------------
1996 1995
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,811 $ 14,495
-------- ----------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of excess servicing fee receivable . . . . . . . . . . . . . . . . . 996 634
Amortization of cost in excess of fair value of net assets acquired . . . . . . . 282 282
Amortization of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . 722 399
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 1,308 1,287
Gain on sale of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . (1,813) (3,623)
Allowances for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 229
Origination and purchases of mortgage loans held for sale . . . . . . . . . . . . (542,745) (386,061)
Principal repayment and sales of loans held for sale . . . . . . . . . . . . . . 325,795 208,754
Purchases of mortgage-backed securities held for trading . . . . . . . . . . . . . (67,840) (68,528)
Principal repayments and sales of mortgage-backed securities held for trading . . 263,977 259,854
(Increase) decrease in interest receivable . . . . . . . . . . . . . . . . . . . . (1,504) 992
Decrease in loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,352) (100,445)
Increase in loans payable related to securities sold not yet purchased . . . . . . - - - 22,090
Increase in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 339
Increase in securities sold under agreements to repurchase . . . . . . . . . . . . 23,745 58,247
Increase (decrease) in payables and accrued liabilities . . . . . . . . . . . . . 5,750 (2,121)
Decrease in income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . (383) (2,267)
Deferred tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,127 1,832
Amortization of unearned compensation under employment contracts . . . . . . . . . 64 48
-------- ----------
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 (8,058)
-------- ----------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 20,946 6,437
-------- ----------
Cash flows from investing activities:
Purchases of securities held to maturity . . . . . . . . . . . . . . . . . . . . . . (41,480) (5,855)
Principal repayments of investments held to maturity . . . . . . . . . . . . . . . . 6,767 1,768
Origination of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (66,333) (36,354)
Principal repayments of loans receivable . . . . . . . . . . . . . . . . . . . . . . 9,864 7,992
Purchase of securities available for sale . . . . . . . . . . . . . . . . . . . . . (4,639) - - -
Principal repayments and sales of securities available for sale . . . . . . . . . . 7,012 - - -
Increase in accounts receivable and mortgage servicing advances . . . . . . . . . . (3,698) (6,207)
Additions to excess servicing fee receivable . . . . . . . . . . . . . . . . . . . . (10,821) (2,316)
Purchase of property, leasehold improvements and equipment . . . . . . . . . . . . . (1,291) (512)
Additions to cost in excess of fair value of net assets acquired . . . . . . . . . . (309) (209)
Proceeds from disposal of real estate held for sale . . . . . . . . . . . . . . . . 677 1,392
Acquisition of real estate held for sale . . . . . . . . . . . . . . . . . . . . . . (1,031) (1,321)
Increase in mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . (8,239) (4,722)
Proceeds from sale of servicing rights . . . . . . . . . . . . . . . . . . . . . . . 1,813 3,708
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,463) (3,031)
-------- ----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . (115,171) (45,667)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,548 21,546
Increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,525 32,619
Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,459) (3,246)
Issuance of advances from FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,593 9,990
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475 - - -
-------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 91,682 60,909
-------- ----------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . (2,543) 21,679
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . 59,872 35,916
-------- ----------
Cash and cash equivalents at the end of period . . . . . . . . . . . . . . . . . . . $ 57,329 $ 57,595
======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Noncash financing activities-conversion of preferred stock . . . . . . . . . . . . . $ 1,080 $ 307
======== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,364 $ 31,553
======== ==========
Cash used to pay income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,046 $ 3,965
======== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
FIRST FINANCIAL CARIBBEAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) 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 de Puerto Rico, Inc., AAA Financial
Services Corporation ("AAA Financial") and de Peurto Rico Doral Federal
Savings Bank ("Doral Federal"). All significant intercompany accounts
and transactions have been eliminated in consolidation. The Consolidated
Financial Statements (unaudited) have been prepared in conformity with
the accounting policies stated in the Company's Annual Audited Financial
Statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and should be read in conjunction with the
Notes to the Consolidated Financial Statements appearing in that report.
All adjustments (consisting only of normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation of
results for the interim periods have been reflected.
b. The results of operations for the quarters and nine-month periods ended
September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
c. Cash dividends per share paid for the quarters and nine-month periods
ended September 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
----------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Series A Preferred Stock $ -- $0.2625 $0.3825 $0.7875
Common Stock $0.17 $ 0.15 $ 0.49 $ 0.43
</TABLE>
All outstanding shares of Series A Preferred Stock were redeemed on May
10, 1996.
d. At September 30, 1996, escrow funds include approximately $23.6 million
deposited with Doral Federal. These funds are included in the Company's
financial statements. Escrow funds also include approximately $13.8
million deposited with other banks excluded from the Company's assets and
liabilities.
e. Certain reclassifications of prior years' data have been made to conform
to 1996 classifications.
f. The number of average shares of common stock used for computing the
primary and fully diluted net income per share was as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
--------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary 9,111,092 7,226,293 9,051,555 7,207,798
Fully diluted 9,683,394 7,576,964 9,680,647 7,576,964
</TABLE>
g. Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs
that, pursuant to SFAS No. 91 are capitalized as part of the carrying
cost of mortgage loans and are offset against mortgage loan sales and
fees when the loans are sold. Employee costs would have been $7.3
million and $5.9 million, respectively, for the quarters ended September
30, 1996 and 1995, and $22.3 million and $18.1 million, respectively, for
the nine-month periods ended September 30, 1996 and 1995, except for the
application of SFAS No. 91. Other expenses would have been $4.4 million
and $3.1 million, respectively, for the quarters ended
6
<PAGE> 7
September 30, 1996 and 1995, and $11.8 million and $8.7 million,
respectively, for the nine-month periods ended September 30, 1996 and
1995, except for the application of SFAS No. 91.
Set forth below is a breakdown of direct loan origination costs that were
deferred pursuant to SFAS No. 91.
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
---------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Employee Costs $ 5,537 $ 4,829 $ 16,073 $ 13,183
Other Costs 853 538 3,005 2,344
------- ------- -------- --------
$ 6,390 $ 5,367 $ 19,078 $ 15,527
======= ======= ======== ========
</TABLE>
h. On May 12, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122"), an amendment to SFAS No. 65.
The Company elected to adopt this standard for its financial statement
reporting in the second quarter of 1995. SFAS No. 122 prohibits
retroactive application. Accordingly, the Company's financial statement
reporting for the first quarter of 1995 was accounted for under the
original SFAS No. 65 and the results for the nine-month period ended
September 30, 1996 are not directly comparable to the results for the
nine-month period ended September 30, 1995 with respect to this specific
matter.
For the quarter and nine-month period ended September 30, 1996, the
Company realized additional net income of approximately $1.0 million and
$3.8 million, respectively, from the adoption of SFAS No. 122, compared
to additional net income of $200,000 and $600,000, respectively, for the
quarter and nine-month period ended September 30, 1995. If the Company
had not adopted SFAS No. 122 in the second quarter of 1995, the Company
would have reported a net income of approximately $6.4 million for the
third quarter of 1996 ($0.71 and $0.68 per common share on a primary and
fully-diluted basis, respectively) and $17 million for the nine-month
period ended September 30, 1996 ($1.88 and $1.79 per common share on a
primary and fully-diluted basis, respectively).
SFAS No. 122 requires that part of the cost of originating a mortgage
loan be allocated to the mortgage servicing right based on its fair value
relative to the aggregate fair value of the loan and the related
servicing right taken as a whole. To determine the fair value of the
servicing rights pursuant to SFAS No. 122, the Company used market prices
under comparable servicing sale contracts.
SFAS No. 122 also requires that all capitalized mortgage servicing rights
be evaluated for impairment based on the excess of the carrying amount of
mortgage servicing rights over their fair value. For purposes of
measuring impairment, capitalized mortgage servicing rights are
stratified pool by pool on the basis of interest rates. An impairment is
recognized whenever the prepayment pattern of the mortgage pool shows
that the fair value of the related capitalized servicing rights is less
than its carrying amounts. An impairment is recognized by charging such
excess to income. The Company determined that no reserve for impairment
was required for the nine-month period ended September 30, 1996.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise from loan originations and
purchases, repayments of debt upon maturity, payments of operating and interest
expenses and servicing advances and loan repurchases. The Company's primary
sources of liquidity are sales in the secondary mortgage market of the loans it
originates and purchases, short term borrowings under warehouse, gestation and
repurchase agreement lines of credit secured by pledges of its loans and
mortgage-backed securities (in most cases until such loans are sold and the
lenders repaid) and revenues from operations. In the past, the Company has also
relied on publicly offered and privately-placed debt financings and preferred
and common stock issuances. Doral Federal, the Company's thrift subsidiary,
also relies on deposits, borrowings from the Federal Home Loan Bank of New York
(the "FHLB-NY") as well as term notes backed by letters of credit of the
FHLB-NY.
Total liabilities were approximately 6.21 and 6.12 times stockholders'
equity at September 30, 1996 and December 31, 1995, respectively. The
Company's leverage at September 30, 1996, reflects a net increase in stockho-
lders' equity of $16.7 million while liabilities increased by $116 million,
primarily as a result of an increase in deposit accounts and notes payable.
The interim Consolidated Statement of Cash Flows reflects the working
capital needs of the Company. Operating activities provided approximately $20.9
million of net cash during the nine-month period ended September 30, 1996,
compared to approximately $6.4 million in the comparable period of 1995.
Mortgage loan originations for the nine-month period ended September 30, 1996
increased by 44% as compared to the 1995 period. Increased originations
resulted in increased sales of mortgage-backed securities and loans held for
sale during the period. FFCC held mortgage loans (including mortgage loans
converted into mortgage-backed securities) prior to sale for an annualized
average period of approximately 294 days for the nine-month period ended
September 30, 1996 and 352 days during the year ended December 31, 1995. This
decrease was due to increased sales of mortgage-backed securities held for
trading.
Investing activities used cash of approximately $115.2 million during the
nine-month period ended September 30, 1996 due primarily to origination of
loans receivable and purchases of securities held to maturity of approximately
$66.3 million and $41.5 million, respectively. The Company capitalized $8.2
million of mortgage servicing rights during the first nine months of 1996 in
relation to the adoption of SFAS No. 122 and mortgage loan purchases from third
parties.
During the first nine months of 1996, financing activities provided
approximately $91.7 million of net cash primarily due to additional deposits
amounting to approximately $51.5 million received by Doral Federal and an
increase in notes payable of approximately $39.5 million.
FFCC borrows money under warehousing lines of credit to fund its mortgage
loan commitments and repays the borrowings as the mortgages are sold. The
warehousing lines of credit then become available for additional borrowings.
Included among FFCC's warehousing line of credit facilities are gestation or
presale facilities that permit the Company to obtain more favorable rates once
mortgage loans are in the process of securitization but prior to actual
issuance of the mortgage-backed securities as well as to finance such
mortgage-backed securities upon their issuance. At September 30, 1996 and
December 31, 1995, FFCC had available warehousing lines of credit, including
gestation lines of credit, of $665 million and $525 million, respectively. At
September 30, 1996 and December 31, 1995, FFCC had used approximately $203.4
million and $171.6 million, respectively, of credit available under its
warehousing lines of credit. FFCC's warehousing lines of credit are generally
subject to termination at the discretion of the lender.
FFCC also obtains short-term financing through repurchase agreement lines
of credit with financial institutions and investment banking firms. Under
these agreements, FFCC sells GNMA, FNMA or FHLMC-guaranteed mortgage-backed
securities or collateralized mortgage obligations and simultaneously agrees to
repurchase them at a future date at a fixed price. FFCC uses the proceeds of
such sales to repay borrowings under its warehousing lines of credit. The
effective cost of funds under repurchase agreements is typically lower than the
cost of funds borrowed under FFCC's warehousing lines of credit. At September
30, 1996, FFCC had used approximately $387.5 million of credit under repurchase
agreements. FFCC's continued use of repurchase agreements will depend on the
cost of repurchase agreements relative to the cost of borrowing under its
warehousing lines of credit with banks and other financial institutions.
8
<PAGE> 9
The monthly weighted average interest rate of FFCC's borrowings for
warehousing lines of credit and for repurchase agreement lines of credit was
6.73% and 5.5%, respectively, for the nine-month period ended September 30, 1996
compared to 7.15% for warehousing lines of credit and 5.9% for repurchase
agreements in each case for the year ended December 31, 1995.
Doral Federal obtains funding for its lending activities through the
receipt of deposits, FHLB-NY advances and from other borrowings, such as term
notes backed by FHLB-NY letters of credit. As of September 30, 1996, Doral
Federal held approximately $155.1 million in deposits, including $7.8 million of
intercompany deposits that are eliminated in consolidation, at a weighted
average interest rate of 3.75%, approximately 27% of which consisted of
non-interest bearing deposits. Approximately $10.8 million of total deposits
consisted of brokered certificates of deposit obtained through broker-dealers
with maturities ranging from three to five years. Doral Federal, as a member of
FHLB-NY, has access to collateralized borrowings from the FHLB-NY up to a
maximum of 30% of its total assets. Advances and reimbursement obligations with
respect to letters of credit must be secured by qualifying assets with a market
value between 105% and 115% of the advances or reimbursement obligations. At
September 30, 1996, Doral Federal had $15 million in outstanding advances from
the FHLB-NY at a weighted average interest rate cost of 6.24%. In addition, as
of September 30, 1996, Doral Federal had $53.1 million outstanding in term notes
secured by FHLB-NY letters of credit at an average interest rate cost of 6.28%.
Approximately $5.0 million principal amount of such term notes bear interest at
a fluctuating rate based on the London Interbank bid rate for dollar deposits
("LIBID"). The interest rate on such floating rate notes has effectively been
fixed pursuant to an interest rate swap agreement with a major brokerage house.
The interest rates on all term notes are subject to an upward adjustment to a
rate equal to 100% of LIBID for a term equal to the remaining term of the note
as a result of the recent changes to Section 936 of the Internal Revenue Code.
See "Prospective Trends -- Repeal of Section 936" herein.
As of September 30, 1996, Doral Federal met all its minimum regulatory
capital requirements (i.e., tangible and core capital of at least 1.5% and
3.0%, respectively, of adjusted total assets and risk-based capital at least 8%
of risk adjusted total assets). As of September 30, 1996, Doral Federal had
tangible capital and core capital of $17.5 million or approximately 7.21% of
adjusted total assets. As of such date, Doral Federal had risk-based capital
of $18.2 million or 17.8% of risk adjusted total assets.
Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA and certain other investors and mortgage loans sold to
certain other purchasers, require FFCC to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. FFCC generally recovers funds advanced
pursuant to these arrangements within 30 days. During the nine-month period
ended September 30, 1996, the monthly average amount of funds advanced by the
Company under such servicing agreements was approximately $6.5 million.
During the nine-month period ended September 30, 1996, the Company
collected an average of approximately $925,000 per month in net servicing fees,
including late charges. At September 30, 1996 and December 31, 1995, the
servicing portfolio amounted to approximately $3 billion and $2.7 billion,
respectively. The Company may, from time to time, determine to sell portions
of its servicing portfolio and to purchase servicing rights from third parties.
On October 10, 1996, the Company issued $75,000,000 of its 7.84% Senior
Notes due 2006 (the "Senior Notes"). The Senior Notes were issued pursuant to
an Indenture entered into between the Company and Bankers Trust Company, as
trustee. The Senior Notes were sold in a public underwritten offering through
BT Securities Corporation. The net proceeds from the sale of the notes were
used to repay $17.7 million on indebtedness owed by the Company under a five-
year senior servicing secured loan facility with a syndicate of banks
management by Bankers Trust Company, and for general corporate purposes,
including capital contributions to Doral Federal, AAA Financial and other
subsidiaries. See "Part II - Item 2 - Changes in Securities" for certain
covenants imposed on the Company under the Indenture for the Senior Notes.
FFCC expects that it will continue to have adequate liquidity and
financing arrangements to finance its operations. The Company will continue to
explore alternative and supplementary methods of financing its operations,
including both debt and equity financing. There can be no assurance, however,
that the Company will be successful in consummating any such transactions.
ASSETS AND LIABILITIES
At September 30, 1996, total assets were $1.051 billion compared to $918
million at December 31, 1995. This increase was due primarily to a net
increase of $34.7 million and $56.5 million in securities held to maturity and
loans receivable,
9
<PAGE> 10
respectively, at Doral Federal. As of September 30, 1996, Doral Federal had
$243 million in assets compared to $160 million at December 31, 1995. Total
liabilities were $905 million at September 30, 1996 compared to $789 million at
December 31, 1995. This increase was largely the result of an increase in
deposit accounts and notes payable. At September 30, 1996, Doral Federal's
deposit accounts totaled $155 million compared to $114 million at December 31,
1995. Deposit accounts include $44.7 million in non-interest bearing demand
deposits representing escrow funds and other servicing accounts from the
Company's mortgage servicing operations. The increase in deposits at Doral
Federal is primarily due to the offering of competitive interest rates and
increased market recognition achieved by Doral Federal.
The Company's mortgage banking business is subject to the risk that
future changes in interest rates may adversely affect the value of the
Company's portfolio of mortgage loans and mortgage-backed securities. Interest
rate fluctuations may also adversely affect net interest income. FFCC attempts
to reduce these risks through forward commitments and other hedging techniques.
The Company does not generally hedge conventional loans in the pipeline
or in the process of origination because these loans are generally offered to
customers at a certain spread over a prevailing rate that adjusts weekly rather
than established prior to closing and locked-in for a specified period of time.
The Company seeks to obtain commitments for the purchase of FNMA and FHLMC
conforming loans and FNMA and FHLMC mortgage-backed securities following the
funding of such loans. These loans are normally sold to institutional
investors or at the FNMA and FHLMC cash windows. To the extent the Company
does engage in offerings of mortgage products which lock-in the interest rate
until the closing date, it attempts to obtain forward commitments at the time
it fixes the rates for the loans. Non-conforming conventional loans are
normally sold in bulk to local financial institutions or packaged into
collateralized mortgage obligations. The sale of non-conforming conventional
loans normally takes longer than the sale of conforming mortgage loans.
Accordingly, the Company attempts to manage the interest rate risk associated
with the holding of non-conforming loans for sale through the purchase of
listed options on U.S. Treasury securities as well as the purchase of option
contracts in the over-the-counter market on other interest rate sensitive
instruments.
The Company normally holds GNMA 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.
Prices for GNMA securities in Puerto Rico tend to be more stable than on the
mainland U.S. because of the tax exempt status of interest paid on these
securities under Puerto Rico law. This relative stability of prices for Puerto
Rico GNMA securities allows the Company to conduct a less aggressive hedging
strategy to attempt to protect the value of these assets than what might
otherwise be required. The Company seeks to protect itself from interest rate
risk associated with its inventory of GNMA securities by purchasing listed
options on treasury bond futures contracts and other interest rate sensitive
instruments, as well as purchasing options on U.S. GNMA securities in the
over-the-counter market. The Company has in place long-term repurchase
agreements secured by GNMA securities with a principal amount of approximately
$71.2 million. The Company does not obtain forward commitments or otherwise
hedge such GNMA securities because they are financed pursuant to long-term
repurchase agreements.
Contracts designated as trading hedges are marked-to-market monthly with
the resulting gains and losses charged to operations. Changes in the market
value of such contracts that qualify as hedges of existing assets and
liabilities are recognized as an adjustment to the value of the asset or
liability being hedged. Investment in such options is increased or decreased
in relation to interest rates changes and other market factors.
The operations of the Company are also subject to interest rate risk
because its interest earning assets and interest-bearing liabilities reprice at
different times and in varying amounts. FFCC's loans held for sale and
mortgage-backed securities held for trading inventories are fixed rate
interest-earning assets that are not subject to repricing (except for
replacement of assets through repayments, sales and new originations) while the
short-term borrowings used to finance these positions normally reprice
quarterly. To protect against major fluctuations in short- term interest
rates, the Company purchases and writes listed put options on financial
instruments, including Eurodollars contracts. This policy attempts to ensure a
relatively stable short-term cost of funds which the company can use to fund
its fixed rate interest earning assets.
Doral Federal is also subject to risk as a result of fluctuations in
interest rates. Since most of Doral Federal's assets have fixed rates and
because interest on deposits will rise more quickly in a rapidly rising interest
rate environment than the composition of its loan portfolio, the net interest
income of Doral Federal could be adversely affected in such an environment.
Doral Federal attempts to obtain long-term deposits and other long- term debt
financing and/or advances from the FHLB-NY and term notes backed by FHLB-NY
letters of credit in order to fund its portfolio of loans receivable and other
fixed rate assets.
In the future, FFCC may use alternative hedging techniques including
futures, options or other hedge vehicles to help mitigate interest rate and
market risk. However, there can be no assurance that any of these hedging
techniques will be
10
<PAGE> 11
successful. To the extent they are not successful, the Company's profitability
may be adversely affected. For the nine-months ended September 30, 1996, the
Company experienced hedging gains of $4.1 million, while for the nine-month
period ended September 30, 1995, the Company experienced hedging losses of $2.8
million.
RESULTS OF OPERATIONS FOR QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995
Net income for the quarter ended September 30, 1996 increased to $7.4
million from $4.9 million for the comparable period of 1995. The increase in
net income of $2.5 million from 1995 was due mainly to higher mortgage loan
sales and fees and to gains on sales of servicing rights amounting to $1.8
million. No such sales of servicing rights were made in the third quarter of
1995. Doral Federal contributed approximately $337,000 in net income for the
third quarter of 1996 compared to $580,000 for the third quarter of 1995. The
decreased contribution of Doral Federal was due to a nonrecurring expense of
$588,000 related to the payment of a special assessment to the Federal Deposit
Insurance Corporation ("FDIC") due to the recent enactment of legislation to
recapitalize the Savings Association Insurance Fund ("SAIF").
Revenues from mortgage loan sales and fees increased to $7.0 million for
the quarter ended September 30, 1996 from $4.9 million for the comparable period
of 1995. This increase was primarily attributable to higher gains on loan sales
and fees from the increased volume of loan originations, due in part, to the
increased demand created by the deregulation of interest rates for conventional
mortgages in Puerto Rico. The total volume of loans originated and purchased
for the quarter ended September 30, 1996 was $186 million compared to $156
million for the quarter ended September 30, 1995. The total volume of loans
purchased was approximately $16 million for the quarter ended September 30, 1996
compared to $13 million for the comparable period of 1995.
Net interest income increased by $1.4 million for the quarter ended
September 30, 1996 versus the comparable period of 1995. Results for the
quarter include approximately $500,000 of interest expense attributable to
additional financing costs not directly related to interest earning assets,
compared to approximately $300,000 for the quarter and nine months period ended
September 30, 1995. Doral Federal contributed approximately $1.7 million and
$1.1 million to the consolidated net interest income of the Company for the
quarters ended September 30, 1996 and 1995, respectively.
The weighted average interest rate spread was 242 basis points
during the third quarter of 1996 compared to 277 basis points for the
comparable period of 1995.
When FFCC sells the mortgage loans it has originated or purchased, it
generally retains the rights to service such loans and receives the related
servicing fees. Mortgage loan servicing fees are based on a percentage of the
principal balances of the mortgages serviced and are credited to income as
mortgage payments are collected. Loan servicing income was $2.65 million for
the quarter ended September 30, 1996 compared to $2.60 million for the same
period in 1995. The Company's servicing portfolio totaled $3.0 billion at
September 30, 1996 compared to $2.6 billion at the same date a year ago. The
Company's servicing portfolio at September 30, 1996 increased by approximately
$300 million over the size of the servicing portfolio at December 31, 1995.
FFCC capitalizes as an asset any excess servicing fees receivable on
loans sold with servicing rights retained whenever the stated servicing fee
rate is materially higher than the servicing fee normally permitted by FNMA or
FHLMC. The excess servicing fee receivable represents the discounted present
value of the excess of the interest rate on the loan over a normal servicing
fee and the interest required to be paid to investors. 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 sale of the loan and is recorded in
the accompanying Consolidated Statement of Income and Retained Earnings under
"Mortgage loan sales and fees" even though such amount is received by the
Company over the life of the loan. Sales of mortgage loans made during the
third quarter of 1996 resulted in the recording of approximately $3.1
million in excess servicing fee receivable compared approximately to $1.0
million for the third quarter of 1995.
Amortization of such excess servicing fees for each of the quarters ended
September 30, 1996 and 1995 was approximately $367,000 and $246,000,
respectively. Amortization of excess servicing fees is based on the amount and
timing of estimated future cash flows. The amortization of excess servicing
fee receivable is recorded as a reduction of servicing income.
At September 30, 1996, the unamortized balance of mortgage servicing
rights approximated their fair value. The amortization of mortgage servicing
rights for the quarters ended September 30, 1996 and 1995 was $246,000 and
$125,000, respectively, and is recorded in the accompanying Consolidated
Statement of Income and Retained Earnings under "Other
11
<PAGE> 12
Expenses." The Company capitalized approximately $2.4 million in mortgage
servicing rights during the third quarter of 1996.
Aggregate expenses for the quarter ended September 30, 1996, increased by
approximately $1.2 million compared to the third quarter of 1995, primarily due
to a special one-time SAIF insurance assessment of $588,000 payable by Doral
Federal in connection with the recapitalization of the SAIF insurance fund,
additional costs associated with expanding the Company's customer base and loan
origination capacity and approximately $200,000 of expenses incurred in
connection with the commencement of operations of AAA Financial, the Company's
new broker-dealer subsidiary which commenced operations in September 1996.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995.
The Company's net income for the nine months ended September 30, 1996
increased to $20.8 million, compared to $14.5 million for the corresponding
period of 1995. For the nine-month period ended September 30, 1996, Doral
Federal contributed approximately $1.5 million in net income compared to $1.2
million for the nine months ended September 30, 1995. Results for the first
nine months of 1996 reflect the adoption by the Company as of April 1, 1995 of
SFAS No. 122. Additional net income of approximately $3.8 million was realized
for the nine months ended September 30, 1996, compared to $600,000 for
the nine-month period ended September 30, 1995, from the adoption of SFAS No.
122. During the first nine months of 1996, the Company had gains on sales of
servicing rights of approximately $1.8 million, compared to $3.6 million for
the nine months period ended September 30, 1995.
Revenues from mortgage loan sales and fees for the first nine months of
1996 increased 137% to $20.5 million from $8.6 million for the comparable
period of 1995. This increase was due to a higher volume of loan originations
and higher loan sales and fees. The total volume of loans originated and
purchased was approximately $609 million for the nine-month period ended
September 30, 1996 compared to approximately $422 million for the nine-month
period ended September 30, 1995. The increase of 44% in loan originations and
purchases was the result of increased demand for refinancing loans.
Refinancing loans comprised 48% of production in the first nine months of 1996
compared to 42% for the same period in 1995. The increase also reflected
hedging gains of approximately $4.1 million for the first nine months of 1996
compared to hedging losses of $2.8 million for the first nine months of 1995.
Mortgage loan sales and fees reflect approximately $6.2 million of additional
gains on sale of mortgage loans as a result of the adoption of SFAS No. 122.
Net interest income increased by approximately $1.5 million for the
nine-month period ended September 30, 1996 versus the comparable period of
1995. The weighted average interest rate spread was 254 basis points
during the nine months ended September 30, 1996 compared to 277 basis points
for the comparable period of 1995. Doral Federal contributed approximately
$4.9 million and $2.9 million to the consolidated net interest income of the
Company for the nine-month periods ended September 30, 1996 and 1995,
respectively.
For the nine-month period ended September 30, 1996 loan servicing income
was $8.3 million compared to $8.0 million for the same period in 1995. Sales
of mortgage loans during the first nine months of 1996 resulted in the
recording of approximately $10.1 million in excess servicing fees receivable
compared to $2.3 million for the first nine month of 1995. Amortization of
excess servicing fee receivable for each of the nine-month periods ended
September 30, 1996 and 1995 was approximately $1.0 million and $600,000,
respectively. The amortization of excess servicing fee receivable is recorded
as a reduction of servicing income. For the nine-month periods ended September
30, 1996 and 1995, amortization of mortgage servicing rights was $722,000 and
$399,000, respectively. Amortization of servicing rights is recorded as a
component of "Other Expenses."
Aggregate expenses for the nine-month period ended September 30, 1996
increased by $5.7 million compared to the same period for 1995, primarily
because of additional costs associated with the expansion of the Company's
customer base and loan origination capacity.
PROSPECTIVE TRENDS
MARKET TRENDS. Demand for mortgage loans and prices for mortgage loans
and mortgage-backed securities are sensitive to changes in interest rates.
Increases in prevailing interest rates tend to adversely impact demand and
prices for mortgage loans and mortgage-backed securities and thereby adversely
impact mortgage loan originations and gain on sale of mortgage loans. An
increase in prevailing interest rates could also adversely impact the Company's
net interest income.
12
<PAGE> 13
PRODUCT DIVERSIFICATION. The Company has begun to further diversify its
available loan products by more aggressively offering home equity and personal
loans secured by mortgages. These loans, which are secured by first or second
mortgage liens, generally have lower balances (between $10,000 and $40,000),
shorter maturities (between five to ten years) and bear higher interest rates.
The Company intends to sell these loans, other than such loans funded and
retained by Doral Federal, to local financial institutions, or to package them
into collateralized mortgage obligations. When the Company sells these loans,
it normally retains the right to receive as a servicing fee interest payable on
the loan above a specified rate. The present value of the servicing fee income
to be received over the life of the loan over and above the typical servicing
fee payable on conforming conventional loans and the interest rate required to
be paid to investors is recognized on the Company's income statement as a
component of the sale of the mortgage loan and is reflected as an asset on the
Company's balance sheet as excess servicing fees receivable. As the volume of
originations of this type of loan product increases, the amount of excess
servicing fees receivable reflected on the financial statements of the Company
will increase.
NEW BROKER-DEALER SUBSIDIARY. During the third quarter of 1996, the
Company organized a new subsidiary, AAA Financial, a NASD licensed
broker-dealer. AAA Financial is involved in a general securities business
with special attention to the sale of Puerto Rico tax exempt GNMA Financial
mortgage-backed securities and other Puerto Rico securities. AAA Financial
operates out of facilities located in the Hato Rey business district of San
Juan and commenced operations in September 1996 with 12 employees and will
continue to recruit and hire additional personnel in the near future,
expecting to have approximately 20 employees by the end of the year.
NEW ACCOUNTING STANDARDS. In June 1996, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS No. 125").
SFAS No. 125 establishes accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
the consistent application of the financial components approach. This approach
requires the recognition of financial assets and servicing assets that are
controlled by the reporting entity, the derecognition of financial assets when
control is surrendered, and the derecognition of liabilities when they are
extinguished. Specific criteria are established for determining when control
has been surrendered in the transfer of financial assets.
Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be measured
at fair value, if practicable. Servicing assets and other retained interests
in transferred assets are required to be measured by allocating the previous
carrying amount between the assets sold, if any, and the interest that is
retained, if any, based on the relative fair values of the assets at the date
of the transfer. Servicing assets retained are subsequently subject to
amortization and assessment for impairment.
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996.
It is to be applied prospectively, earlier or retroactive application is not
permitted.
Management has not yet estimated the effect, if any, of the adoption of
SFAS No. 125 on the Company's financial statements.
REPEAL OF SECTION 936. Section 936 of the U.S. Internal Revenue Code
("Section 936"), has historically provided incentives for U.S. corporations to
invest in Puerto Rico by granting a credit to qualifying corporations ("936
Corporations") against a portion of the U.S. income tax payable from the active
conduct of a trade or business in Puerto Rico and 100% of certain qualifying
investment income derived in Puerto Rico. Section 936 together with
complementary Puerto Rico laws has provided incentives for 936 Corporations and
financial intermediaries receiving funds from 936 Corporations to invest in
mortgage loans and mortgage-backed securities originated in Puerto Rico.
Accordingly, Section 936 helped to create a pool of lower cost funds in Puerto
Rico that the Company has historically used to fund mortgage loans and
mortgage-backed securities.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
"Small Business Job Protection Act") was enacted into law. The Small Business
Job Protection Act provides for the elimination of the U.S. federal income tax
benefits available to U.S. corporations operating and investing in Puerto Rico
under Section 936. The Act repeals Section 936 subject to a ten-year
grandfather rule for 936 Corporations that were engaged in the active conduct
of a trade or business on October 13, 1995 and that qualified for and elected
the benefits of Section 936 for the corporation's taxable year which includes
such date. During the grandfather period, the amount of income that will
benefit from the credit available under Section 936 derived from the active
conduct of a trade or business will be subject to varying caps. The credit
available for
13
<PAGE> 14
investment income was not subject to the grandfather rule and was eliminated
effective for taxable years beginning after December 31, 1995 but in no event
prior to July 1, 1996.
While the final impact of a repeal of Section 936 cannot be determined at
this time, the repeal of Section 936 could have an adverse effect on the
general economic condition of Puerto Rico, the Company's predominant service
area, by reducing incentives for investment in Puerto Rico. Any such adverse
effect on the general economy of Puerto Rico could lead to an increase in
mortgage delinquencies and a reduction in the level of residential construction
and demand for mortgage loans. The elimination of Section 936, particularly
the elimination of the credit for investment income, could also lead to a
decrease in the amount of funds invested in the Puerto Rico financial market by
936 Corporations ("936 Funds"), thereby increasing funding costs and decreasing
liquidity for Puerto Rico mortgage products. The magnitude of the impact of
the repeal of Section 936 on the Company's profitability or financial condition
cannot be determined at this time. Management believes that the principal
impact of the loss of 936 Funds will be a moderate increase in the Company's
funding costs. The Company, however, has taken steps to attempt to reduce the
impact of any such adverse changes by diversifying its sources of funding and
identifying additional investors for its mortgage products. During recent
periods, the disparity between the cost of 936 Funds and other sources of
funding such as the Euro-dollar market have decreased, thereby reducing the
adverse effect that the loss of such funding could have on the profitability of
the Company.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
(a) Not Applicable.
(b) On October 10, 1996, the Company issued $75,000,000 of its 7.84%
Senior Notes due 2006 (the "Senior Notes"), pursuant to an Indenture dated
October 10, 1996 (the "Indenture"), between the Company and Bankers Trust
Company, as trustee.
Under the terms of the Indenture, the Company is restricted from
making certain payments and capital distributions, including the payment of
dividends on its Common Stock ("Restricted Payments") if (i) an event of default
exists under the Indenture at the time of making such Restricted Payment or (ii)
at the time of and after giving effect to the proposed Restricted Payment, the
aggregate amount of all Restricted Payments made after October 10, 1996 exceeds
the sum of (a) 50% of the aggregate consolidated net income (or, in the case of
a consolidated net loss, minus 100% of such loss) of the Company for the period
(taken as one accounting period) commencing on October 1, 1996 to and including
the last day of the fiscal quarter ended immediately prior to the date of the
proposed Restricted Payments, plus (b) the aggregate net proceeds, received by
the Company from the issuance or sale (other than to a subsidiary) after October
10, 1996, of (A) shares of its capital stock (other than certain types of
preferred stock) or (B) indebtedness of the Company which has been converted
into or exchanged for shares of its capital stock (other than certain types of
preferred stock) plus (c) $15,000,000.
A copy of the Indenture is included as Exhibit 10.69 to this
Quarterly Report on Form 10-Q.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5 - OTHER INFORMATION
Not Applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.69 - Indenture, dated as of October 10, 1996, between the
Company and Bankers Trust Company, as trustee, including form of
Senior Note (incorporated herein by reference to the same exhibit
number of the Company's Current Report on Form 8-K, dated October
10, 1996.)
Exhibit 10.70 - Employment Agreement, dated as of July 1, 1996,
between FFCC and Mario S. Levis.
Exhibit 27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
15
<PAGE> 16
(i) Current Report on Form 8-K, dated September 11, 1996,
reporting under Item 5 "Other Events" the effect of the
passage of Hurricane Hortense on the Company's operations and
the receipt of all required regulatory approvals by AAA
Financial Services Corporation.
(ii) Current Report on Form 8-K, dated October 10, 1996, reporting
under Item 5 "Other Events," the closing of the issuance and
sale of $75,000,000 of the Company's 7.84% Senior Notes due
2006.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL CARIBBEAN CORPORATION
(Registrant)
Date: November 12, 1996 /s/ Salomon Levis
----------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: November 12, 1996 /s/ Richard F. Bonini
----------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: November 12, 1996 /s/ Ricardo Melendez
----------------------------------
Ricardo Melendez
Vice President, Controller and
Principal Accounting Officer
17
<PAGE> 1
EXHIBIT 10.70
FIRST FINANCIAL CARIBBEAN CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of July 1, 1996
Mr. Mario S. Levis
1159 F.D. Roosevelt Avenue
San Juan, Puerto Rico 00920
Dear Mr. Levis:
We are pleased to detail herein below the provisions of your employment
agreement with First Financial Caribbean Corporation ("FFCC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
retroactively to January 1, 1996 and ending December 31, 1997, unless sooner
terminated as herein provided. This Agreement supersedes and cancels all prior
employment, personal service or similar agreements between you and FFCC and its
subsidiaries, divisions and ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as Executive Vice President and Treasurer of FFCC.
By your acceptance of this Agreement, you undertake to accept such employment
and to devote your full time and attention to FFCC, and to use your best
efforts, ability and fidelity in the performance of the duties attaching to
such employment. During the term of your employment hereunder, you shall not
perform any services for any other company, which services conflict in any way
with your obligations under the two preceding sentences of this Section 2,
whether or not such company is competitive with the businesses of FFCC,
provided, however, that nothing in this Agreement shall preclude you from
devoting reasonable periods required for
i) serving as a director or member of a committee of any
organization involving no conflict or potential conflict of interest with the
interests of FFCC;
ii) delivering lectures, fulfilling speaking engagements, teaching
at educational institutions;
iii) engaging in charitable and community activities; and
iv) managing your personal and family investments, provided that
such activities do not interfere with the regular performance of your duties
and responsibilities under this Agreement.
You shall, at all times during the term hereof, be subject to the
supervision and direction of the Chairman of the Board and Chief Executive
Officer and of the President of FFCC with respect to your duties,
responsibilities and the exercise of your powers.
<PAGE> 2
Mr. Mario S. Levis
As of July 1, 1996
Page 2
3. COMPENSATION
(a) During the term of this Agreement you shall receive an annual
salary of $275,000 annually, payable in equal monthly payments in accordance
with corporate policy; provided that for calendar year 1996 any amounts paid to
you prior to the execution of this Agreement in excess of such monthly payments
will be deducted from the incentive compensation payable to you pursuant to
Section 3(b) below.
(b) (i) During the term of this Agreement, you shall also be
entitled to receive an annual incentive bonus equal to the sum
of the following:
(1) $275,000 to the extent FFCC earns at least
$10.0 million of Adjusted Net Income (as hereinafter
defined);
(2) 2 1/2% of Adjusted Net Income in excess of
$10.0 million and up to $20.0 million to the extent such
Adjusted Net Income exceeds an amount equal to a 15%
Return on Equity (as hereinafter defined); and
(3) 4% of Adjusted Net Income in excess of $20.0
million, to the extent such Adjusted Net Income exceeds
an amount equal to a 15% Return on Equity Capital;
provided, however, that total salary and incentive compensation payable to you
pursuant to this Agreement shall not exceed $1.2 million per annum.
(ii) The incentive bonus shall be payable annually by
FFCC within 30 days following the date on which its Annual
Report on Form 10-K for the fiscal year ended the prior
December 31 shall have been filed with the United States
Securities and Exchange Commission; provided that such amount
shall only be payable if you shall have served as Executive
Vice President and Treasurer to FFCC pursuant to this
Agreement for the entire fiscal year to which such payments
relate. As used in this Section 3, "Adjusted Net Income"
means the annual consolidated net income by FFCC and its
subsidiaries after all taxes (including net income from equity
interests held by FFCC in any other venture and net income of
any successor of FFCC which may be formed by merger,
consolidation or sale of substantially all of the assets of
FFCC) during the calendar year preceding the payment as
determined in accordance with generally accepted accounting
principles applied on a consistent basis throughout the
periods involved and as shown by FFCC's published consolidated
financial statements audited by its independent accountants
(hereinafter referred to as "GAAP"), such net income to be
adjusted (A) by reducing from such net income any payments
made pursuant to Section 3(b)(i) hereof and payments of
similar incentive compensation to the Chairman of the Board
and Chief Executive Officer, the President, Senior
Executive Vice President and any other Executive Vice
President of FFCC, and (B) by adding back to such net income
any extraordinary items of income and expense such as merger
related expenses. As used in this Section 3, (1) "Equity
Capital" means FFCC's consolidated Stockholders Equity
including preferred stock at the December 31 immediately
preceding the beginning of the fiscal year for which the
calculation is being made, determined in accordance with GAAP
and (2) "Return on Equity Capital" for any fiscal year means
the percentage determined by dividing FFCC's consolidated net
income after all taxes determined in accordance with GAAP for
such fiscal year by Equity Capital for such preceding December
31; provided that such calculation shall be adjusted as set
forth in the immediately succeeding sentence. If FFCC sells
its equity securities during the fiscal year, Equity Capital
shall be increased by the net proceeds to FFCC (after
expenses) of such sale multiplied by a fraction the numerator
of which shall be the number of days in such fiscal year which
had elapsed on the date of the closing of such sale and the
denominator of which shall be 365.
<PAGE> 3
Mr. Mario S. Levis
As of July 1, 1996
Page 3
(iii) At the option of FFCC and subject to any
requirements of the National Association of Securities
Dealers or any stock exchange on which FFCC Common Stock
may be listed, up to 50% of the amount payable under
Section 3(b)(i) may be in the form of shares of FFCC
Common Stock. For purposes of computing the number of
shares to be issued, the shares of Common Stock will be
assigned a value equal to the average of last sales
prices of the Common Stock as reported on the NASDAQ
National Market System for the five trading dates
immediately preceding the date of issuance;
(c) You shall be entitled to participate in the other benefit
plans of FFCC upon the terms and conditions on which such benefits are made
available to other officers of FFCC. Nothing herein shall obligate FFCC to
continue any existing benefit plan or to establish any replacement benefit
plan.
(d) You shall be entitled to reimbursement for reasonable travel
and entertainment expenses incurred in connection with the rendering of your
services hereunder. Nothing contained herein shall authorize you to make any
political contributions, including but not limited to payments for dinners and
advertising in any political party program or any other payment to any person
which might be deemed a bribe, kickback or otherwise and improper payment under
corporate policy or practice and no portion of the compensation payable
hereunder is for any such purpose.
(e) Payments under this Agreement shall be subject to reduction by
the amount of any applicable federal, Commonwealth, state or municipal income,
withholding, social security, state disability insurance, or similar or other
taxes or other items which may be required or authorized to be deducted by law
or custom.
(f) No additional compensation shall be due to you for services
performed or offices held in any subsidiary, division, affiliate, or venture of
FFCC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER MATTERS
(a) Your acceptance of this Agreement will confirm that you
understand and agree that the granting of the incentive compensation referred
to in Section 3(b) (the "incentive compensation"), and any action thereunder,
does not involve any statement or representation of any kind by FFCC as to its
business, affairs, earnings or assets, or as to the tax status of the incentive
compensation or the tax consequences of any payment thereof, or otherwise. You
further agree that any action at any time taken by or on behalf of FFCC or by
its directors or any committee thereof, which might or shall at any time
adversely affect you or the incentive compensation, may be freely taken
notwithstanding any such adverse effect without your being thereby or otherwise
entitled to any right or claim against FFCC, any subsidiary or affiliate of
FFCC or any other person or party by reason thereof.
(b) The incentive compensation is personal to you and, except as
provided as contemplated in Section 3(b) above, in the event of your death or
incapacity, is not transferable or assignable either by your act or by
operation of law, and no assignee, trustee in bankruptcy, receiver or other
party whosoever shall have any right to demand any incentive compensation or
any other right with respect to it. If, in the event of your death or
incapacity, your legal representative shall be entitled to demand the incentive
compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references
to "you" shall apply to said representative.
(c) If and when questions arise from time to time as to the
intent, meaning or application of any one or more of the provisions hereof such
questions will be decided by the Board of Directors of FFCC or any Committee
appointed to consider such matters, or, in the event FFCC is merged into or
consolidated with any other corporation, by the Board of Directors (or a
Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to
what is a fair and equitable settlement of each such question or as to what is
a fair and proper interpretation of any provision hereof or thereof, whatever
the effect of such a decision may be, beneficial or adverse, upon the incentive
<PAGE> 4
Mr. Mario S. Levis
As of July 1, 1996
Page 4
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) FFCC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance
damaging to FFCC, (y) conversion to you of an FFCC opportunity, or (z) a
violation of FFCC's conflict of interest policy, in each case as determined in
the sole discretion of the Board of Directors, and (2) in the event FFCC is
unable to make any payment under this Agreement because of insolvency,
bankruptcy or similar status or proceedings, you will be treated as a general
unsecured creditor of FFCC and may be entitled to no priority under applicable
law with respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one year after
you cease to be an employee of FFCC or an affiliate of FFCC, you will not,
without the prior written consent of FFCC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with FFCC, or any affiliate thereof for any purpose which would be
competitive with the mortgage banking business within the Commonwealth of
Puerto Rico or any other geographic area in which FFCC or any affiliate of FFCC
by which you were employed, conducted operations (the "Restricted Area") or any
business as to which studies or preparations relating to the entry into which
were made by FFCC or any affiliate of FFCC by which you were employed within
two years prior thereto (collectively, the "Restricted Businesses") or (b)
directly or indirectly, enter into or in any manner take part in or lend your
name, counsel or assistance to any venture, enterprise, business or endeavor,
whether as proprietor, principal, investor, partner, director, officer,
employee, consultant, adviser, agent, independent contractor or in any other
capacity whatsoever for any purpose which would be competitive with the
Restricted Businesses in the Restricted Area. An investment not exceeding 5%
of the outstanding stock in any corporation regularly traded on any National
Securities Exchange or in the Over-the-Counter market shall not be deemed to
violate this provision, provided that you shall not render any services for
such corporation.
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for dishonesty,
death, incapacity, or inability to perform the duties of your employment on a
daily basis, resulting from physical or mental disability caused by illness,
accident or otherwise or refusal to perform the duties and responsibilities of
you employment hereunder, or breach of fidelity to FFCC.
(b) At any time following a "Change in Control" of FFCC, this
Agreement may be terminated by FFCC or you on 30 days' written notice to you or
FFCC, as the case may be, such termination to be effective as of the end of the
calendar year during which such notice is given. As used herein, a "Change in
Control" shall be deemed to have occurred at such time as (i) any person or
group becomes the beneficial owner of more than 50% of the voting power of
FFCC's voting stock, or (ii) FFCC consolidates with or merges into any other
corporation or conveys or otherwise disposes of all or substantially all of its
assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of FFCC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the
calendar year in which such date of termination occurs.
You agree that this Section 6 shall create no additional rights in
you to direct the operations of FFCC.
<PAGE> 5
Mr. Mario S. Levis
As of July 1, 1996
Page 5
7. REGISTRATION RIGHTS
(a) Upon your written request or requests that FFCC effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the securities granted to you pursuant to Section
3(b)(iii) hereof (the "Registrable Securities") and other senior executives of
FFCC holding similar registration rights (individually a "Holder" and
collectively, the "Holders"), FFCC will:
(i) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders;
(ii) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from FFCC; provided,
however, that FFCC shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 7: a) if Form S-3 is not
available for such offering by the Holders; b) if the Holders, together with
the holders of any other securities of FFCC entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public (net of any underwriters'
discounts or commissions) of less than $250,000; c) if FFCC shall furnish to
the Holders a certificate signed by an officer of FFCC stating that in the good
faith judgment of the Board of Directors of FFCC, it would be seriously
detrimental to FFCC and its shareholders for such Form S-3 registration
statement to be filed, in which event FFCC shall have the right to defer the
filing of the Form S-3 Registration Statement for a period of not more than 120
days after receipt of the request of the Holder or Holders under this Section
7; d) if FFCC has, within the 12-month period preceding the date of such
request, already effected two registrations on Form S-3 for the Holders
pursuant to this Section 7; e) if FFCC shall have effected any registration
(other than on S-3 or any successor Form) within the six month period preceding
the date of such request; or f) in any particular jurisdiction in which FFCC
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance;
and
(iii) Subject to the foregoing, FFCC shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or
requests of the Holders. All expenses incurred in connection with a
registration requested pursuant to this Section 7, including (without
limitation) all registration, filing, qualification, printer's and accounting
fees and the reasonable fees and disbursements of counsel for the selling
Holder or Holders and counsel for FFCC, but excluding any underwriters'
discounts or commissions associated with Registrable Securities, shall be borne
pro rata by the Holder or Holders selling securities pursuant to Form S-3
Registration.
(b) The rights to cause FFCC to register Registrable Securities
pursuant to this Section 7 may not be assigned or transferred in any fashion.
8. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between
the parties, but only by an instrument in writing signed by the party against
whom any waiver, change, discharge or termination is sought.
<PAGE> 6
Mr. Mario S. Levis
As of July 1, 1996
Page 6
9. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the
event that any provision, or any portion of any provision, of this Agreement
shall be held to be void and unenforceable, the remaining provisions of this
Agreement, and the remaining portion of any provision found void or
unenforceable in part only, shall continue in full force and effect.
10. ARBITRATION
Any dispute arising under this Agreement shall be submitted to
arbitration in New York, New York under the rules of the American Arbitration
Association.
11. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in
a similar manner. Any notice or communication intended for FFCC shall be
addressed to the attention of its Board of Directors.
12. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Puerto Rico.
13. MISCELLANEOUS
This Agreement shall be binding upon the successors and assigns of
FFCC. This Agreement is personal to you, and you therefore may not assign your
duties under this Agreement. The headings of the Sections of this Agreement
are inserted for convenience only and shall not be deemed to constitute a part
thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your mutual
understanding with FFCC, kindly endorse your acceptance and agreement therewith
in the space below provided, whereupon this shall become a binding agreement.
Very truly yours,
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ Salomon Levis
---------------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to as of the
date first above set forth:
/s/ Mario S. Levis
- ----------------------------------
Mario S. Levis
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST FINANCIAL CARIBBEAN CORPORATION FOR THE NINE
MONTHS ENDED SEPT. 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 57,329
<SECURITIES> 519,793
<RECEIVABLES> 22,340
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 12,643
<DEPRECIATION> 6,155
<TOTAL-ASSETS> 1,050,593
<CURRENT-LIABILITIES> 0
<BONDS> 10,000
0
0
<COMMON> 9,123
<OTHER-SE> 136,613
<TOTAL-LIABILITY-AND-EQUITY> 1,050,593
<SALES> 0
<TOTAL-REVENUES> 80,167
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,759
<INCOME-PRETAX> 23,601
<INCOME-TAX> 2,790
<INCOME-CONTINUING> 20,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,811
<EPS-PRIMARY> 2.30
<EPS-DILUTED> 2.19
</TABLE>
