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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
X THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED,
- -- EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 are code: (787) 749-7100.
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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
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. [ ]
---
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.
$188,381,573 approximately, based on the last sale price of $27 1/2 per
share on the NASDAQ National Market System on March 7, 1997. For the purposes
of the foregoing calculation only, all directors and executive officers of the
registrant and certain related parties of such persons 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: 9,111,092 shares as of March 7, 1997. (continued)
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C> <C>
PART III
Item 10 Directors and Executive Officers of Information in response to this
the Registrant. Item is incorporated into this
Annual Report on Form 10-K by
reference to the section
entitled "Election of Directors
and Related Matters" and
"Executive Compensation" in the
Company's definitive Proxy
Statement for use in connection
with its 1997 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 Information in response to this
Beneficial Owners and Management. Item is 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
Transactions. Item is 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>
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FIRST FINANCIAL CARIBBEAN CORPORATION
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business............................................................................................. 1
Item 2. Properties........................................................................................... 37
Item 3. Legal Proceedings.................................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 38
Item 6. Selected Financial Data.............................................................................. 39
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 41
Item 8. Financial Statements and Supplementary Data.......................................................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 54
PART III
Item 10. Directors and Executive Officers of the Registrant................................................... 54
Item 11. Executive Compensation............................................................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................... 54
Item 13. Certain Relationships and Related Transactions....................................................... 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 54
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL.
First Financial Caribbean Corporation ("FFCC" or the "Company"), together
with its wholly-owned subsidiaries, is primarily engaged in a wide range of
mortgage banking activities, including the origination, servicing, purchase and
sale of mortgages on single-family residences, the issuance and sale of various
mortgage-backed securities, the holding and financing of mortgage loans and
mortgage-backed securities for sale or investment, the purchase and sale of
servicing rights associated with such mortgage loans and, to a lesser extent,
the origination of construction loans and loans secured by commercial real
estate (the "Mortgage Banking Business"). FFCC is the leading mortgage banking
institution in Puerto Rico in terms of the volume of origination of first
mortgage loans on single family residences. During 1996, the Company issued
$373 million of GNMA mortgage-backed securities to rank No.1 in Puerto Rico and
No. 34 in the United States in such issuances according to the "Mortgage
Marketplace". The Company's Mortgage Banking Business is principally conducted
through two operating units: Doral Mortgage Corporation ("Doral Mortgage"), a
wholly-owned subsidiary of the Company, and HF Mortgage Bankers Division ("HF
Division"), a division of the Company. The Company is also engaged in the
savings and loan business through Doral Federal Savings Bank ("Doral Federal"),
a federal savings and loan association which was acquired by FFCC in September
1993 and in the securities business through AAA Financial Services, Inc., a new
broker-dealer subsidiary that was established in September 1996. References
herein to the "Company" or "FFCC" shall be deemed to refer to the Company and
its consolidated subsidiaries, unless the context requires otherwise.
The Company is an approved seller/servicer for the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), an approved issuer for the Government National Mortgage Association
("GNMA") and an approved servicer under the GNMA, FNMA and FHLMC
mortgage-backed securities programs. FFCC is also qualified to originate
mortgage loans insured by the Federal Housing Administration ("FHA") and
guaranteed by the Veterans Administration ("VA"). Prior to the acquisition of
Doral Federal , substantially all of the Company's revenues were derived from
its Mortgage Banking Business.
Substantially all of the Company's business is conducted in Puerto Rico.
The Mortgage Banking Business is currently is conducted in Puerto Rico through
19 branches, 15 of which are operated by Doral Mortgage, 3 by HF Division and 1
by Centro Hipotecario, Inc., a wholly-owned mortgage banking subsidiary.
Since 1992, Doral Mortgage has also maintained branch offices in Orlando and
Miami, Florida. The Florida offices are staffed by seven employees and
originated approximately $9 million and $11 million in mortgage loans during
and the years ended December 31, 1996 and 1995, respectively.
The Company's strategy is to increase its volume of loan originations and
servicing portfolio as well as to maximize net interest income. The Company
seeks to increase its volume of loan originations by emphasizing quality
customer service and maintaining the most extensive system of branch offices of
any mortgage banking institution in Puerto Rico. The Company strives to increase
its servicing portfolio by relying primarily on internal loan originations and
supplementing such originations with wholesale purchases of loans and mortgage
servicing rights from third parties. The Company has traditionally emphasized
the origination of 15-year and 30-year conventional and FHA-insured or
VA-guaranteed mortgage loans on single-family residences. The Company relies on
net interest income for a more significant portion of its earnings than mortgage
banking companies generally do. The Company seeks to maximize net interest
income by holding mortgage-backed securities,
<PAGE> 5
primarily GNMA securities, for longer periods prior to sale than most mortgage
banking companies. This strategy has the effect of reducing the Company's
overall effective tax rate because the interest on GNMA securities backed by
Puerto Rico mortgages is tax exempt under Puerto Rico law. For information
regarding a proposal to repeal such tax exemption, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Recent
Developments-Possible Changes in Favorable Puerto Rico Tax Laws" herein. The
Company also seeks to increase net interest income by funding and holding for
investment through Doral Federal mortgage loans and mortgage-backed securities.
The Company's thrift subsidiary, Doral Federal, currently operates through
two branches in the San Juan metropolitan area, which serve primarily as
deposit-taking operations. Three additional branches are scheduled to open in
the San Juan Metropolitan area during the first half of 1997. To date, most
loans have been originated pursuant to a Master Loan Production Agreement with
the Company. See "Other Lending and Investment Activities -- Lending Activities
of Doral Federal and Real Estate Owned" herein. Doral Federal has experienced
rapid growth since its acquisition by the Company, increasing from $13.1
million in assets as of September 10, 1993 to $281 million in assets as of
December 31, 1996. To date, this growth has been funded primarily through
increases in certificate of deposit accounts and non-interest bearing deposits
consisting primarily of corporate and custodial accounts. As of December 31,
1996, Doral Federal had total deposits and net worth of $187 million and $23.6
million, respectively. Custodial accounts associated with the Company's
servicing portfolio, commercial demand deposit accounts of the Company and
certificates of deposits accounts constituted approximately 16%, 15% and 53%,
respectively, of Doral Federal's total deposit accounts. The Company intends to
commit substantial management and financial resources to continue to increase
the assets, deposit base and branch network of Doral Federal.
During the third quarter of 1996, the Company's new broker-dealer
subsidiary, AAA Financial, became operational. AAA Financial operates through
a single branch in the San Juan metropolitan area and employed 16 persons as of
December 31, 1996. While AAA Financial engages in a general securities
business, it currently emphasizes the sale of Puerto Rico tax-exempt GNMA
securities and other Puerto Rican securities.
The business and profitability of FFCC depend, to a large degree, on its
ability to sell mortgage loans to investors in the secondary mortgage market at
prices that are higher than the prices at which FFCC originates or purchases
such loans. The growth of the secondary mortgage market is attributable in
large part to programs maintained by the FNMA, FHLMC and GNMA. In addition,
part of the Company's business is affected significantly by the continuation of
various programs administered by the FHA for the United States Department of
Housing and Urban Development ("HUD"), which insures mortgage loans, and the
VA, which partially guarantees mortgage loans. Any discontinuation of, or
significant reduction in, the various programs administered by FNMA, FHLMC,
GNMA, FHA or VA could have a material adverse effect on the Company's
operations. See "-- Mortgage Banking Business -- Sale of Loans; Issuance of
Mortgage Backed Securities" herein.
The Company is subject to the rules and regulations of, and supervision
by, several Federal and Puerto Rico entities, including the Office of
Thrift Supervision (the "OTS"), FNMA, FHLMC, GNMA, FHA, VA, HUD and the Office
of the Commissioner of Financial Institutions of Puerto Rico (the "Office of the
Commissioner"), with respect to, among other things, licensing requirements,
establishment of maximum interest rates, required disclosure to customers and
the origination, processing, underwriting, selling and securitizing of mortgage
loans. See "Regulation" herein. Doral Federal's operations are subject to
regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
AAA Financial's operations are subject to regulation by the Securities and
Exchange Commission (the "SEC"), the office of the Commissioner and the National
Association of Securities Dealers, Inc. (the "NASD"). FFCC's operations in the
state of Florida are subject to supervision by the Florida
2
<PAGE> 6
Department of Banking and Finance. In addition, the Company's operations
are affected by Federal and Puerto Rico laws and regulations designed to promote
economic development in Puerto Rico. See "--Mortgage Banking Business -- Puerto
Rico Secondary Mortgage Market and Favorable Tax Treatment" herein.
MORTGAGE BANKING BUSINESS
Loan Origination and Purchase of Mortgages. FFCC has the most extensive
system of branch offices for originating mortgage loans of any mortgage banking
institution in Puerto Rico. HF Division operates three branches in the San Juan
Metropolitan area. Doral Mortgage operates 15 branches throughout Puerto Rico
and two small branch offices in the State of Florida. Centro Hipotecario, Inc.,
a wholly-owned subsidiary of the Company, 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) mortgage loans secured by single-family residences guaranteed by the VA
("VA loans") or insured by HUD ("FHA loans"). VA loans and FHA loans qualify
for inclusion in the mortgage-backed securities program sponsored by GNMA. A
portion of the conventional loans are conforming loans which qualify for
inclusion in guarantee programs sponsored by FNMA or FHLMC. The Company also
originates construction loans for owner-occupied single-family residences and
other real estate developments and mortgage loans on commercial properties.
Construction loans and mortgage loans on commercial properties constituted
approximately 3% and 1% of the total dollar volume of loans originated and
purchased by the Company for the years ended December 31, 1996, and 1995,
respectively.
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. According to applicable VA guidelines, the maximum amount of a VA
loan originated in Puerto Rico is currently $230,000. Pursuant to applicable
FHA guidelines, the maximum amount of a FHA loan ranges from $78,660 to
$152,000, depending on the municipality where the mortgaged property is
located. The average loan size for FHA/VA mortgage loans and conventional
mortgage loans was approximately $70,300 and $46,700, respectively, for the
year ended December 31, 1996.
The Company also offers second mortgages. During 1996, second mortgages
constituted approximately 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).
Commencing in 1995, the Company made a strategic decision to increase its
offering of home equity or personal loans secured by mortgages up to $40,000.
These loans are generally made for debt consolidation, home improvements,
refinancing or other personal credit needs. These loans are generally secured
by first or second mortgages on single-family residences, are payable within
five to ten years and provide for higher interest rates than typical
conventional mortgages. During the years ended December 31, 1996 and 1995, the
Company originated approximately $74 million and $10 million of such loans,
respectively.
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
3
<PAGE> 7
prospective borrower specifying the amount of the loan and the loan
origination fees, discount points and closing costs to be paid by the borrower
or seller and the date on which the commitment expires.
The Company's strategy is to increase its servicing portfolio primarily
through internal originations through its branch network. FFCC, however, also
purchases FHA loans and VA loans from other mortgage bankers for resale to
institutional investors in the form of GNMA securities. The amount of loans
purchased from third parties was approximately $63 million, $77 million, $63
million, $1 million and $29 million, and for the years ended December 31, 1996,
1995, 1994, 1993, and 1992, respectively. All loans purchased consisted of FHA
and VA loans.
In addition to loan originations through its retail branch network and
purchases from third parties, the Company originates mortgage loans referred to
it by approved mortgage brokers. The mortgage broker receives a fee payable at
closing by the borrower for its services. Approximately $34 million and
$10 million of mortgage loans were originated through mortgage brokers for the
years ended December 31, 1996, and 1995, respectively. Purchases of loans from
other mortgage bankers in the wholesale loan market as well as origination of
mortgage loans through loan brokers provides the Company with a source of low
cost production that allows the Company to efficiently increase the size of its
servicing portfolio.
4
<PAGE> 8
The following table sets forth the number and dollar amount of the
Company's mortgage loan originations for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ----------- ----------
(Dollars in thousands, except average initial loan balance)
<S> <C> <C> <C> <C> <C>
FHA/VA LOANS:(1)
Number of Loans..................... 4,362 4,016 7,037 8,364 3,224
Volume of Loans..................... $306,753 $267,909 $433,748 $ 532,654 $207,239
Percent of Total Volume............. 41% 48% 57% 37% 30%
CONVENTIONAL AND OTHER
LOANS:(2)
Number of Loans..................... 9,575 5,059 6,285 12,658 7,637
Volume of Loans..................... $446,957 $291,537 $326,698 $ 899,794 $486,484
Percent of Total Volume............. 59% 52% 43% 63% 70%
TOTAL LOANS:
Number of Loans(3).................. 13,937 9,075 13,322 21,022 10,861
Volume of Loans(4).................. $753,710 $559,446 $760,446 $1,432,448 $693,723
AVERAGE INITIAL LOAN
BALANCE:
FHA/VA Loans........................ $ 70,300 $ 66,700 $ 61,600 $ 63,700 $ 64,300
Conventional and other
Loans(2)............................ $ 46,700 $ 57,600 $ 52,000 $ 71,100 $ 63,700
REFINANCING(5)...................... 47% 41% 59% 80% 67%
</TABLE>
(1) Excludes $63 million, $77 million, $63 million, $1 million and 29
million, respectively, of loans purchased from third parties, for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992.
(2) 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).
(3) Includes 2,044, 834, 898 and 61, of loans funded by Doral Federal
pursuant to the Master Loan Production Agreement for the years ended
December 31, 1996, 1995, 1994 and 1993, respectively. See "-- Other
Lending and Investment Activities -- Lending Activities of Doral Federal
and Real Estate Owned" herein.
(4) Includes $98.7 million $52.3 million, $26.3 million and $4.9 million,
principal amount of loans funded by Doral Federal pursuant to the Master
Loan Production Agreement for the years ended December 31, 1996, 1995,
1994 and 1993, respectively. See "-- Other Lending and Investment
Activities -- Lending Activities of Doral Federal and Real Estate Owned"
herein.
(5) As a percentage of the total dollar volume of loans originated.
A substantial proportion of the Company's total mortgage loan originations
consistently been comprised of refinancing loans. Demand for refinancing
loans has traditionally been high in Puerto Rico because this product is often
used as a vehicle for debt consolidation. For the years ended December 31, 1996,
1995 and 1994, refinancing activity represented approximately 47%, 41% and 59%,
respectively, of the Company's total dollar volume of mortgage loans originated.
The decrease in refinancing activity during 1994 compared to 1993 was due to the
rise in interest rates experienced during the second half of 1994. The continued
decrease in refinancing loans during 1995 reflected the continued weakness in
demand for this product following the unusually high refinance activity
experienced during 1993. A significant future increase in mortgage interest
rates in Puerto Rico could adversely affect the Company's business if it results
in a significant decrease in refinancing of first mortgage loans. In recent
years, the Company, primarily through its HF Division, has increased relations
with realtors and developers in order to increase home purchase loan
originations, particularly in new residential developments. Mortgage loans to
finance the acquisition of new residential units increased 63% during 1996
5
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from $84 million to $136 million and represented 17% total mortgage loan
originations for 1996 compared to 13% for 1995. The Company believes that by
increasing its home purchase originations it may offset, in part, the adverse
effects that increasing interest rates or lower demand for refinancing loans
could have on overall mortgage loan production.
For the years ended December 31, 1996, 1995 and 1994, non-conforming
conventional loans represented approximately 31%, 45% and 28%, respectively, of
the Company's total volume of mortgage loans originated.
All loan originations, regardless of whether originated through the retail
network, obtained through mortgage brokers 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, and 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.
Typically, when a mortgage loan is originated through the Company's retail
branches, the borrower is required to pay an origination fee to the Company.
These fees range up to 6% of the principal amount of the mortgage loan, and are
payable at the closing of such loan. The Company may also charge discount
points depending upon market conditions and regulatory considerations as well
as the Company's objectives concerning mortgage loan origination volume and
pricing. The Company incurs certain costs in originating mortgage loans,
including overhead, out-of-pocket costs and, in some cases, where the mortgage
loans are subject to a purchase commitment from private investors, related
commitment fees. The volume and type of mortgage loans and of commitments made
by investors vary with competitive and economic conditions, resulting in
fluctuations in revenues from mortgage loan originations. Generally Accepted
Accounting Principles ("GAAP") require that general operating expenses incurred
in originating mortgage loans be charged to current expense. Direct origination
costs and origination income must be deferred and amortized using the interest
method, until the repayment or sale of the related mortgage loans.
Loan Servicing. The Company's principal source of servicing rights is
mortgage loan originations. 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. During 1996, the weighted
average servicing fee for the Company's servicing portfolio was approximately
.39%. In general, FFCC's servicing agreements are terminable by the investor
for cause. With respect to all mortgage loans funded by Doral Federal after
October 1, 1995, Doral Federal may terminate the Company's servicing rights
without cause upon notice to the Company.
6
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Servicing rights represent a contractual right and not a beneficial
ownership interest in the underlying mortgage loans. Failure to service the
loans in accordance with contract requirements may lead to a termination of the
servicing rights and the loss of future servicing fees. There has been no
termination of servicing rights by any mortgage loan owners because of the
failure by the Company to service in accordance with its contractual
obligations.
At December 31, 1996 and 1995, approximately $256.6 million and $267.5
million, respectively, or 8% and 10%, respectively, of the Company's total
servicing portfolio consisted of mortgage loans securitized by the Company and
sold to grantor trusts or other mortgage conduits such as REMICs. The insurance
company insuring the senior certificates issued by such grantor trusts and
other conduits may terminate the Company's servicing rights if, among other
things: (i) the Company becomes ineligible or losses its rights as an approved
servicer for GNMA, FNMA or FHLMC; (ii) the number of loans included in the
trusts which are delinquent 90 days or more (including properties acquired upon
foreclosure) exceeds 8% of the aggregate outstanding principal balance of the
mortgage loans included in the trusts; (iii) realized losses with respect to
mortgage loans included in the trusts exceed certain thresholds on an annual
basis (1% of the outstanding balance of mortgage loans) and on a cumulative
basis over various periods of time (ranging from 0.45% to 4.00% of the original
principal balance of loans in the trusts).
The Company's mortgage loan servicing portfolio is subject to reduction by
reason of normal amortization, prepayments and foreclosure of outstanding
mortgage loans. Additionally, the Company may sell mortgage loan servicing
rights from time to time to other institutions if market conditions are
favorable.
7
<PAGE> 11
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,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMPOSITION OF SERVICING
PORTFOLIO AT PERIOD END:
FHA and VA Mortgage Loans.......... $1,305,792 $1,117,296 $1,062,108 $ 955,624 $ 851,853
Conventional and Other
Mortgage Loans(1).................. 1,762,690 1,550,964 1,581,418 1,420,031 885,571
---------- ---------- ---------- ---------- ----------
Total Servicing Portfolio......... $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ==========
BEGINNING SERVICING PORTFOLIO...... $2,668,260 $2,643,526 $2,375,655 $1,737,424 $1,413,006
ADD:
Loans Funded and Purchased(2)...... 816,566 678,330 823,834 1,433,448 722,723
LESS:
Servicing Sales Transferred........ 102,000 310,000 202,000 198,700 53,400
Run-off(3)......................... 314,344 343,596 353,963 596,517 344,905
---------- ---------- ---------- ---------- ----------
ENDING SERVICING PORTFOLIO......... $3,068,482 $2,668,260 $2,643,526 $2,375,655 $1,737,424
========== ========== ========== ========== ==========
SELECTED DATA REGARDING
MORTGAGE LOANS SERVICED:
Number of Loans.................... 62,199 54,993 52,515 48,272 39,562
Weighted Average Interest Rate..... 8.53% 8.43% 8.21% 8.15% 9.09%
Weighted Average Maturity (months). 221 181 192 226 204
Weighted Average Servicing Fee Rate .3933 .3831 .3945 .4195 .4040
DELINQUENT MORTGAGE LOANS AND
PENDING FORECLOSURES AT PERIOD
END:(4)
60-89 days past due................ 1.77% 1.78% 1.53% 1.49% 1.39%
90 days or more past due........... 2.18% 2.22% 1.48% 1.62% 1.55%
---------- ---------- ---------- ---------- ----------
Total delinquencies................ 3.91% 4.00% 3.01% 3.11% 2.94%
========== ========== ========== ========== ==========
Foreclosures Pending............... 1.12% 1.04% 1.19% 1.21% 1.44%
</TABLE>
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(1) Includes $152.3 million, $73.7 million, $26 million and $4.7 million of
loans serviced for Doral Federal for the years ended December 31, 1996,
1995, 1994 and 1993, respectively, which represented 4.96%, 2.76%, 0.98%
and 0.20% of the total servicing portfolio as of such date.
(2) Loans funded and purchased represent that portion of loans originated or
purchased with respect to which the servicing rights were retained by the
Company. For 1995 and 1991, there is also included $42.3 million and $49.2
million, respectively, of servicing rights acquired in bulk from third
parties.
(3) Run-off refers to regular amortization of loans, prepayments and
foreclosures.
(4) Expressed as a percentage of the total number of loans serviced.
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, 1996 and 1995, less than 2% 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 the State of Florida).
8
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The amount of principal prepayments on mortgage loans serviced by the
Company was $201 million, $160 million and $281 million for the years ended
December 31, 1996, 1995 and 1994, respectively. This represented approximately
7%, 6% and 11% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid were $35,360,
$37,800 and $41,800, respectively. Principal prepayments remained stable during
1996 as compared to 1995. Principal prepayments declined during 1995 and 1994
as a result of decreased refinancing activity following the refinance boom of
1993. The primary means used by the Company to reduce the sensitivity of its
servicing fee income to changes in interest and prepayment rates is the
maintenance 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 the years
ended December 31, 1996 and 1995, the monthly average amount of funds advanced
by FFCC under such servicing agreements was approximately $6.3 million and $4.7
million, respectively. Funds advanced by FFCC pursuant to these arrangements
are generally recovered by FFCC within 30 days.
The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is
non-recourse or recourse. In non-recourse servicing, the principal credit risk
to the servicer is the cost of temporary advances of funds. In recourse
servicing, the servicer agrees to share 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, 1996, 1995
and 1994, the Company was servicing mortgage loans with an aggregate principal
amount of $74 million, $85 million and $112 million, respectively, on a
recourse basis. During the last five years, losses incurred due to recourse
servicing have not been material.
In the ordinary course of business, the Company makes certain
representations and warranties to purchasers and insurers of mortgage loans and
to the purchasers of servicing rights. In connection with any purchases by the
Company of servicing rights, the Company is also exposed to liability as a
successor to third party originators' representations and warranties. If a loan
defaults and there has been a breach of representations and warranties, the
Company may become liable for the unpaid principal and interest on defaulted
loans. In such a case, the Company may be required to repurchase the mortgage
loan and bear any subsequent loss on the mortgage loan. During 1996, 1995, and
1994, the impact of loans repurchased as a result of borrower
misrepresentations was not material.
FFCC's servicing rights provide a significant continuing source of income
for FFCC. There is a market in Puerto Rico for servicing rights, which
are generally valued in relation to the present value of the expected income
stream generated by the servicing rights. Among the factors which influence the
value of a servicing portfolio are servicing fee rates, loan balances, loan
types, loan interest rates, expected average life of underlying loans (which may
be reduced through foreclosure or prepayment), the value of escrow balances,
delinquency and foreclosure experience, servicing costs, servicing termination
rights of permanent investors, and any recourse provisions. During the years
ended December 31, 1996, 1995 and 1994 , FFCC sold servicing rights on $102
million, $310 million and $202 million, respectively, of mortgage loans. While
the Company's general strategy is to increase the size of its servicing
portfolio by retaining the servicing rights related to the mortgage loans it
originates and
9
<PAGE> 13
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, servicing income generated from the
Company's mortgage loan servicing portfolio may also decline through increased
amortization and the recognition of impairment of servicing rights. Conversely,
as mortgage interest rates increase, the market value of the Company's mortgage
loan servicing portfolio may be positively affected. Increases in the rate of
delinquencies and foreclosures on mortgage loans tend to increase the costs
associated with administering mortgage loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Interest Rate
Fluctuations" herein.
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 $900,000, $860,000, and $726,000 for the years ended
December 31, 1996, 1995, and 1994, respectively. FFCC owns 33% of 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. Moreover, because substantially all the mortgage loans in its
servicing portfolio are serviced on a non-recourse basis, foreclosure losses in
connection with the Company's Mortgage Banking Business are generally the
responsibility of the investors or insurer and not of the Company. Real estate
owned as a result of foreclosures ("REO") related to the Company's Mortgage
Banking Business arises primarily through foreclosure on mortgage loans
repurchased from investors either because of breach of representations or
warranties or pursuant to recourse arrangements. As of December 31, 1996, 1995
and 1994, FFCC held REO with a book value of approximately $2.2 million, $2.1
million and $2.1 million, respectively. Sales of REO resulted in net losses to
FFCC of approximately $305,000, $145,000, and $473,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. There is no liquid secondary
market for the sale of the Company's REO.
In addition to the REO held by the Company, a real estate partnership, in
which the Company owns a 15% interest and in which members of management are
investors, held REO with a book value of approximately $1.8 million as of
December 31, 1996. The REO was part of $4.7 million of REO that was sold by the
Company to the partnership in December 1990. Of the $4.7 million purchase
price, $600,000 was paid in cash and $4.1 million was paid in notes of the
partnership. The Company sold $2.8 million of such notes to a financial
institution with recourse to the Company. As of December 31, 1996, the unpaid
balance of the notes held by the Company was $1.8 million including $1.2
million of notes previously sold to financial institutions which were
repurchased during the year as a result of the recourse provision.
With respect to mortgage loans securitized through GNMA programs, the
Company is fully insured as to principal by the FHA against foreclosure
loss, while the VA guarantee is subject to a limitation which is generally equal
to 25% to 50% of the principal amount of the loan, up to a maximum ranging from
$22,500 to $50,750, depending upon the amount of the loan. As a result of these
programs, foreclosure on these loans had generated no loss of principal as of
December 31, 1996. 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, 1996, 1995 and 1994 total
expenses related to FHA or VA loans foreclosed amounted to $60,000, $75,000 and
$464,000, respectively. Although FNMA and FHLMC are obligated to reimburse the
Company for
10
<PAGE> 14
principal and interest payments advanced by the Company as a servicer
(except for recourse servicing), the funding of delinquent payments or the
exercise of foreclosure rights involves costs to the Company which may not be
recovered. Such nonrecovered expenses have been immaterial to date.
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 and increasing the costs of administering loans.
Sale of Loans; Issuance of Mortgage-Backed Securities. FFCC customarily
sells most of the loans that it originates, except for those originated by
Doral Federal, which are generally held until maturity, utilizing different
sales channels described below. FFCC issues GNMA-guaranteed mortgage-backed
securities, which involve the packaging of FHA loans or VA loans into pools of
$1 million or more ($2.5 million to $5 million for serial notes) for sale
primarily to broker-dealers in Puerto Rico. During the years ended December 31,
1996 and 1995, FFCC issued approximately $373 million and $366 million,
respectively, in GNMA-guaranteed mortgage-backed securities.
Certain GNMA-guaranteed mortgage-backed securities sold by FFCC are in the
form of GNMA serial notes. 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 securities issued under the serial note program
are structured into 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 years ended
December 31, 1996 and 1995, FFCC issued GNMA serial notes totaling
approximately $317 million and $284 million, respectively.
Conforming conventional loans, other than those funded by Doral Federal
under the Master Loan Production Agreement, 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 mortgage loans that it
originates or purchases and also provides income by increasing the value and
marketability of such loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called non-conforming loans) are sold to financial institutions or other
private investors or are securitized into "private label" mortgage-backed
securities through grantor trusts or other mortgage conduits that either are
organized by the Company or third parties and sold through broker-dealers. The
Company is generally able to originate non-conforming loans at higher interest
rates which permits the Company to earn higher revenues on the sale of such
loans through the recognition of excess servicing fees receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Revenues from Mortgage Loan Sales and Fees".
The securitization of non-conforming loans involves the creation of a
grantor trust or REMIC which issues mortgage-backed securities to investors.
These 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 are made. To
11
<PAGE> 15
date, credit enhancement, in the form of an insurance policy and
subordination, has generally been used to increase the credit rating of the
senior certificates and thereby improve their marketability. During the years
ended December 31, 1996 and 1995, the Company securitized approximately $37
million and $75 million, respectively, aggregate principal amount of
non-conforming mortgage loans. Financial Security Assurance, Inc. ("FSA")
insured approximately $35 million and $70 million of senior certificates issued
in connection with such securitization transactions during and the years ended
December 31, 1996 and 1995, respectively. Subject to market conditions, the
Company contemplates entering into similar securitization transactions in the
future. As part of its arrangement with FSA, the Company has agreed to retain
and pledge to FSA the residual certificates issued by the respective trusts. The
Company also generally retains the subordinate certificates issued in such
transactions. As of December 31, 1996 and 1995, the Company held approximately
$14.6 million and $13.1 million, respectively, in subordinate certificates and
$7.7 million and $8.8 million, respectively, in residual certificates issued in
securitization transactions involving the Company. Currently a liquid secondary
market for subordinate or residual certificates does not exist in Puerto Rico.
The value of residual certificates represents the present value of expected
future distributions on such certificates over the life of the trusts and is
subject to substantial fluctuations as a result of changes in prevailing
interest rates.
The decision whether to sell non-conforming loans in bulk to local
financial institutions or to securitize such loans through mortgage conduits is
dependent on market conditions and the relative pricing and other terms of such
alternative sales channels. Similarly, the relative emphasis on the
origination of FHLMC and FNMA conforming loans versus FHA and VA loans and
non-conforming 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.
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.
Recourse sales generally involve the sale of non-conforming loans to local
financial institutions. Recourse obligations have decreased in recent years, in
part due to 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 or a limited
recourse basis. The Company estimates the fair value of the retained recourse
obligation at the time mortgage loans are sold. The Company has not provided a
reserve or allowance for losses in the Company's financial statements for these
recourse obligations because the Company has historically been successful in
reselling repurchased loans for at least their carrying costs. Accordingly, as
of December 31, 1996, the Company did not deem it necessary to establish
reserves for possible losses related to recourse obligations. At December 31,
1996 and 1995, respectively, the Company's recourse obligations relating to its
mortgage servicing portfolio were approximately $74 million and $85 million,
respectively. Of these recourse obligations, approximately $14 million and $16
million, respectively, in principal amount consisted of loans sold to FNMA and
FHLMC or exchanged into securities of such agencies, and approximately $60
million and $69 million principal amount, respectively, consisted of
non-conforming loans sold to other private investors. At December 31, 1996,
existing commitments to sell loans to FHLMC 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 often converted into collateralized mortgage
obligations by the purchasers and sold in the local Puerto Rico market.
12
<PAGE> 16
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, 1996, the Company had outstanding $105
million in mortgage-backed securities sold subject to put arrangements, which
expire in varying amounts from January 1997 through April 1999, all of which
were accounted for as sales.
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 has traditionally held
FHA-VA mortgage loans and GNMA mortgage-backed securities for longer periods
prior to sale than mortgage banking institutions generally do, in order to
maximize the tax exempt interest income earned on such instruments. See
"Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment" herein.
For the years ended December 31, 1996 and 1995, the Company held mortgage loans
(including mortgage-backed securities) prior to sale for an average period of
259 days and 352 days, respectively. The decrease in the number of days
mortgage loans and mortgage-backed securities were held during 1996 was
primarily due to increased sales of mortgage loans and mortgage-backed
securities during the period.
Puerto Rico regulatory requirements and the operation of the GNMA serial
note program in Puerto Rico also tend to increase the period during which
mortgage loans are held prior to sale. 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.
Interest Rate Management. The Company's Mortgage Banking Business is
subject to the risk that future changes in interest rates may adversely affect
the value of the Company's portfolio of mortgage loans and mortgage-backed
securities. Interest rate fluctuations may also adversely affect the Company's
net interest income. FFCC attempts to minimize these risks through the use of
forward commitments and other hedging techniques. For a more detailed
discussion of such risks and the techniques used by the Company to attempt to
mitigate such risks see "Managements' Discussion and Analysis of Financial
Condition and Results of Operations -- Interest Rate Fluctuations," herein.
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, the Puerto Rico secondary mortgage
market has historically benefitted from certain incentives provided by United
States and Puerto Rico tax laws. Section 936, which has historically provided
certain of these incentives, was repealed on August 20, 1996, subject to a
ten-year grandfather period discussed below.
13
<PAGE> 17
Under the various Puerto Rico Industrial Incentives Acts (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 Industrial Incentive Acts also encourage investment in Puerto
Rico by allowing Exempt Companies to reduce the otherwise applicable 10% tax
(the "Tollgate Tax") on distributions to shareholders by investing their exempt
industrial development income ("IDI") in Puerto Rico for fixed periods of time,
generally from five years to ten years. Investment income that qualifies for
this exemption includes interest on certain mortgage loans and interest on
funds of Exempt Companies ("936 Funds") placed with eligible institutions in
Puerto Rico (primarily savings and loan associations, commercial banks and
registered broker-dealers), provided such funds are invested in certain
"eligible activities" as defined in regulations promulgated by the Office of
the Commissioner, including certain mortgage loans and mortgage-backed
securities and warehousing loans to finance the origination of mortgage loans.
Most Exempt Companies are United States corporations ("Section 936
Corporations") that meet certain requirements and have elected the benefits of
Section 936 of the Internal Revenue Code ("Section 936"). Section 936 has
historically permitted 936 Corporations to credit against their United States
corporate income tax a portion of such tax attributable to (i) income derived
from the active conduct of a trade or business within Puerto Rico or from the
sale or exchange of substantially all assets used in the active conduct of such
trade or business ("Active Business Income") and (ii) qualified possession
source investment income ("QPSII"). QPSII includes interest derived from
mortgage loans secured by real property located in Puerto Rico and
mortgage-backed securities consisting of such mortgage loans as well as
interest on deposits with financial institutions which in turn use such funds
to finance the origination of certain qualifying eligible activities that
include mortgage loans and other qualifying assets. In the past, the credit
provided by QPSII has favorably affected FFCC's net interest income by helping
create a pool of lower-cost funds that FFCC could access through financial
intermediaries such as banks and broker-dealers and use to fund mortgage loans
and mortgage-backed securities pending sale. The credit provided for QPSII also
tended to increase the demand for Puerto Rico mortgage loans and
mortgage-backed securities by providing incentives for 936 Corporations and
financial intermediaries to invest in certain mortgage loans and mortgage
backed securities originated in Puerto Rico.
The Omnibus Budget Reconciliation Act of 1993 amended various provisions
of Section 936. The amendments (the "OBRA Amendments"), were generally
effective for taxable years beginning after December 31, 1993, and permitted a
taxpayer to compute the tax credit available under Section 936 (the "936
Credit") as under prior law but limited the amount of credit allowed with
respect to Active Business Income under one of two alternatives to be selected
at the option of the taxpayer. Under the first alternative, the limit was equal
to a fixed percentage of the amount of tax credit allowable under prior law (the
"Fixed Percentage Method"). This fixed percentage commenced at 60% for taxable
years beginning in 1994 and is reduced by 5% per year until 1998. For taxable
years beginning in 1998, such percentage would be 40%. Under the second
alternative (the "Economic Activity Method"), which is based on the amount of
economic activity conducted by the taxpayer in Puerto Rico, the credit could not
exceed the sum of the following three components: (i) 60% of the qualified
possession wages and the allocable fringe benefits paid by the taxpayer, (ii)
applicable percentages of certain depreciation deductions claimed for regular
tax purposes by the taxpayer with respect to qualified tangible property and
(iii) a portion of the possession income taxes paid by the taxpayer except where
the taxpayer uses the profit-split method for determining its income. The OBRA
Amendments did not limit the 100% credit available under Section 936 for QPSII.
On August 20, 1996, the Small Business Job Protection Act, which provides
for the repeal of Section 936, was signed into law. 936 Corporations that were
engaged in the active conduct of 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
11
<PAGE> 18
includes such date will have the benefit of a ten-year grandfather rule.
Under the grandfather rule, the amount of Active Business Income eligible for
the 936 Credit is subject to certain caps similar to those introduced by the
OBRA Amendments that will vary depending upon whether the 936 Corporation
computed its 936 Credit under the Economic Activity Method (which was moved to a
new Section 30A of the Code) or under the Fixed Percentage Method. The credit
available for QPSII was not entitled to the benefit of the grandfather rule and
was eliminated with respect to amounts received or accrued for taxable years
commencing after December 31, 1995 but no earlier than July 1, 1996.
While the long-term impact of the 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 QPSII, could also lead to a
decrease in the amount of 936 Funds invested in Puerto Rico financial assets by
936 Corporations, including mortgage loans and mortgage-backed securities.
While the final magnitude of the impact of any such changes on the Company's
profitability or financial condition cannot be determined at this time,
management believes, based on recent experience, that the principal impact of
the loss of 936 Funds will be a moderate increase in the Company's funding
costs. The Company has taken steps to attempt to reduce the impact of any such
adverse changes by diversifying its sources of funding and identifying
additional investors for its mortgage products. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "--Funding" herein.
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 their
sale. From time to time, the government of Puerto Rico has examined whether the
existing tax exemption for FHA and VA loans and GNMA securities should be
modified or repealed. For a discussion of a pending proposal to eliminate the
tax exemption on FHA and VA loans, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments--Possible
changes in Favorable Puerto Rico Tax Laws."
Any change in Puerto Rico's political status could also result in the
elimination or modification of these tax benefits described above. See "The
Commonwealth of Puerto Rico -- Relationship of Puerto Rico with the
United States" for a description of legislation introduced into the United
States Congress regarding the holding of a referendum on the political status
of Puerto Rico.
OTHER LENDING AND INVESTMENT ACTIVITIES
Lending Activities of Doral Federal and Real Estate Owned. The Company,
through Doral Federal, originates for investment mortgage loans secured by
residential real estate, including personal loans up to $40,000 secured by
first or second mortgages. To a lesser extent, Doral Federal also originates
development and construction loans, commercial real estate loans and general
commercial loans. Prior to being acquired by the
15
<PAGE> 19
Company in September 1993, Doral Federal also engaged in unsecured
consumer and commercial lending and finance leases. During 1996 Doral Federal
commenced to offer unsecured consumer loans on a limited basis.
At December 31, 1996 and 1995, loans held for investment which were
originated as part of the Company's other lending activities through Doral
Federal, totaled $128.8 million and $51.4 million, respectively, and 81% and
72%, respectively, of such loans were secured by mortgages on owner-occupied
single-family residences. While Doral Federal has nationwide lending authority
as a federal savings association, substantially all of its loans are secured by
real property located in Puerto Rico. At December 31, 1996 and 1995, 98% and
99%, respectively, of the mortgage loans held for investment by Doral Federal
were secured by property located in Puerto Rico. At December 31, 1996, the
largest loan held for investment by Doral Federal was $645,000 and the maximum
aggregate amount of loans that Doral Federal could make to a single borrower
under OTS regulations was $3.5 million. The Company anticipates continued
growth in Doral Federal's portfolio of loans held for investment.
In addition to its portfolio of loans held for investment, Doral Federal
maintains a portfolio of mortgage loans held for sale consisting entirely of
first mortgage loans secured by residential properties. As of December 31,
1996 and 1995, Doral Federal held mortgage loans available for sale of $35.0
million and $31.7 million, respectively. Such mortgage loans are recorded in
the financial statements of the Company at the lower of cost or market value.
In connection with FFCC's acquisition of Doral Federal, Doral Federal
entered into a Master Loan Production Agreement with the Company whereby the
Company agreed to help the thrift meet its stated production goals by, among
other things, (1) advertising, promoting and marketing to the general public,
(2) interviewing prospective borrowers and conducting the 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. In the future, Doral Federal may determine to engage in direct
mortgage loan originations through its branch network.
For mortgage loans originated prior to October 1, 1995, Doral Federal had
in effect a Master Purchase, Servicing and Collection Agreement (the "Master
Purchase Agreement") with the Company providing for the sale by Doral Federal
to the Company of the servicing rights to all first and second mortgage loans
secured by residential properties, all loans secured by commercial real estate,
all commercial business loans, consumer and any other loans secured by
mortgages and forming a part of Doral Federal's loan portfolio (the "Doral
Federal Loans"). The Master Purchase Agreement further provides that the
Company, exclusively, will service the Doral Federal Loans according to a fee
schedule contained in the Master Purchase Agreement. The fee schedule
provides that the purchase price of the servicing rights with respect to the
Doral Federal Loans is a percentage of the outstanding principal amount of such
Doral Federal Loans.
For Doral Federal Loans originated after October 1, 1995, the Master
Purchase Agreement was substituted with a Master Servicing and Collection
Agreement (the "Master Servicing Agreement") whereby Doral Federal will
contractually agree to service all Doral Federal Loans originated after the
date of the Master Servicing Agreement. Under the Master Servicing Agreement,
FFCC will not, however, purchase the intangible right to service such Doral
Federal Loans. The Company is entitled to receive a servicing fee ranging from
25 to 50 basis points of the outstanding principal amount of the Doral Federal
Loans being serviced. Doral Federal retains the right to terminate the
Company's servicing rights, without cause, upon notice to the Company.
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<PAGE> 20
The following table sets forth certain information regarding the Company's
loans held for investment as part of its other lending activities through Doral
Federal as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, PERCENT DECEMBER 31, PERCENT
1996 OF TOTAL 1995 OF TOTAL
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans.......................... $ 2,793 2% $ 2,637 5%
Residential mortgage loans.................. 91,595 70 29,481 57
Commercial real estate...................... 18,462 14 9,205 18
Consumer -- Secured by mortgage............. 12,207 9 7,362 14
Consumer -- other........................... 356 (1) 324 (1)
Commercial (non-real estate)................ 2,047 2 702 1
Loans on Saving Deposits.................... 1,771 1 1,940 4
Land secured................................ 814 (1) 330 (1)
-------- --- ------- ---
Gross loans(2)(3).......................... 130,046 100% 51,980 100%
-------- -------
Less:
Unearned interest and deferred loan fees... (561) (383)
Allowance for loan losses.................. (719) (242)
-------- -------
(1,280) (625)
-------- -------
Loans receivable, Net(4)................... $128,766 $51,355
======== =======
</TABLE>
(1) Less than one percent.
(2) Sum of the columns may not add up to the totals due to rounding.
(3) Excludes residential mortgage loans held for sale by Doral Federal of
$35.0 million and $31.7 million as of December 31, 1996 and 1995,
respectively.
(4) Net of deferred loan fees resulting from the sale of servicing rights to
affiliates which are eliminated in the preparation of the Company's
Consolidated Financial Statements.
Doral Federal originates adjustable and fixed interest rate loans.
However, given traditional consumer preferences in Puerto Rico for fixed rate
mortgage loans, Doral Federal's principal product, the Company does not
anticipate significant growth in adjustable rate mortgages. At December 31,
1996 and 1995 approximately 3% and 7%, respectively, of Doral Federal's loans
held for investment were adjustable rate loans. The adjustable rate loans have
interest rate adjustment limitations and are generally tied to the prime rate.
Future market factors may affect the correlation of the interest rate
adjustment with the rate Doral Federal pays on the short-term deposits that
have primarily funded these loans.
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<PAGE> 21
The following information indicates as of December 31, 1996, with respect
to the Company's loans held for investment through Doral Federal, the time
periods during which fixed rates loans mature and adjustable rate loans
reprice:
<TABLE>
<CAPTION>
FIXED RATE LOANS ADJUSTABLE RATE LOANS
---------------- ---------------------
BOOK BOOK
VALUE VALUE
----- TERM OF DATE OF -----
TERM TO MATURITY (IN THOUSANDS) RATE ADJUSTMENT (IN THOUSANDS)
---------------- --------------- ------------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 month -- 1 year $ 3,349 1 month -- 1 year $3,808
1 year -- 3 years 2,011 Non-performing 188
3 years -- 5 years 6,030 ------
5 years -- 10 years 32,501 $3,996
10 years -- 20 years 44,897 ======
Over 20 years 35,722
Non-performing 1,540
--------
$126,050
========
</TABLE>
Nonperforming Assets and Allowance for Loan 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 90 days or more past due on
non-accrual basis, at which point a reserve for all unpaid interest previously
accrued 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 collectibility is reasonably assured. Mortgage
loans held for sale as part of the Company's Mortgage Banking Business are
normally only placed on a non-accrual basis upon commencement of foreclosure
proceedings (which normally occurs within six to eight months following
default). For the years ended December 31, 1996, 1995 and 1994, the Company
would have recognized $114,000, $211,000 and $287,000, respectively, in
additional interest income had all delinquent loans owned by the Company been
accounted for on an accrual basis. See "-- Regulation -- Savings and Loan
Operations -- Doral Federal -- Classification of Assets" for additional
information regarding classified assets of Doral Federal.
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<PAGE> 22
The following table sets forth information with respect to the Company's
non-accrual loans, REO and other nonperforming assets as of December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage Banking Business(1):
Non-accrual loans(2).................................. $ - $1,250 $4,260
Other real estate owned............................... 2,246 2,085 2,029
Other nonperforming assets(3)......................... 1,833 893 448
Other Lending Activities through Doral Federal(4):
Non-accrual loans..................................... 1,728 949 459
Other real estate owned............................... - -- 87
Total NPAs as a percentage of loans receivable, net...
and other real estate owned.......................... 1.3% 1.8% 1.6%
Ratio of allowance for loan receivables to
nonperforming loans.................................. 41.62% 25.50% 93.25%
</TABLE>
(1) Includes mortgage loans held for sale and real estate owned related to
the Company's Mortgage Banking Business.
(2) Of the amounts shown $1.25 million and $2.9 million represented loans
that were required to be repurchased by a non-affiliated Puerto Rico
government institution at par on a non-recourse basis as of December 31,
1995 and 1994, respectively.
(3) This amount refers to a mortgage loan to a real estate partnership to
which the Company previously sold REO. This loan is included in
"Mortgage-backed securities and investments held to maturity" in the
Company's financial statements. See "-- Mortgage Banking Business --
Foreclosure Experience and Real Estate Owned."
(4) Includes mortgage loans and REO of Doral Federal.
The Mortgage Banking Business' other real estate owned arises primarily
through foreclosure on mortgage loans repurchased from investors, either
because of breach of representations or warranties or pursuant to recourse
arrangements. The Company believes that the value of the REO reflected on its
financial statements represents a reasonable estimate of the properties' fair
value, net of cost of sales. During the past five years, the impact of loans
repurchased as the result of breach of representations or warranties or
pursuant to recourse arrangements has not been material.
The provision for loan losses relating to loans held by Doral Federal was
$719,000 as of December 31, 1996 as compared to $242,000 as of December 31,
1995. The increase in the allowance was primarily the result of the increase in
the size of the loan portfolio and an increase in the amount of home equity and
consumer loans secured by mortgages for which Doral Federal provides a higher
allowance.
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 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
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<PAGE> 23
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 for both Doral Federal and the Company's
Mortgage Banking Business for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REAL ESTATE HELD FOR SALE:
Balance at beginning of period....... $ 356 $ 356 $ 525
Provision for losses................. -- -- --
Losses charged to the allowance...... -- -- (169)
Other................................ -- -- --
------ ----- -----
Balance at end of period............. $ 356 $ 356 $ 356
===== ===== =====
ALLOWANCE FOR LOAN RECEIVABLES(1):
Balance at beginning of period....... $ 242 $ 428 $ 234
Provision for loan losses............ 655 110 168
Recoveries........................... 49 7 26
Losses charged to the allowance...... (227) (303) --
----- ----- -----
Balance at end of period............. $ 719 $ 242 $ 428
===== ===== =====
</TABLE>
(1) Relates to loans held for investment by Doral Federal.
Other Investment Activities. As a result of the Company's mortgage
securitization activities, the Company maintains a substantial portfolio of
mortgage-backed securities held for trading. At December 31, 1996, the Company
held securities held for trading with a fair value of $411.4 million,
approximately $371.6 million of which consisted of GNMA and other tax-exempt
securities. These tax-exempt securities are generally held by the Company for
longer periods prior to sale in order to maximize the tax-exempt interest
received thereon.
As of December 31, 1996, the Company also held approximately $109.1
million of securities and other investments which are classified as held to
maturity because the Company had the intent and ability to hold these
securities until maturity. Of this amount, approximately $48.4 million were
held by Doral Federal. The $58.8 million in securities classified as held to
maturity included as part of the Company's Mortgage Banking Business consist of
tax exempt GNMA-backed collateralized mortgage obligations. The holding of
these securities until maturity is consistent with the Company's strategy to
maximize tax exempt interest income. The Company does not believe that the
holding of these securities will have an adverse effect on the liquidity of the
Company because it believes that it will be able to obtain continuous financing
for these securities under its existing credit facilities or pursuant to
deposits, in the case of securities owned by Doral Federal.
For information regarding the amortized cost, fair value, maturity dates
and aggregate gross unrealized holding gains and losses with respect to the
Company's mortgage-backed securities and other investments held to maturity,
refer to Note 7 to the Company's Consolidated Financial Statements included
elsewhere herein.
As of December 31, 1996, Doral Federal also held approximately $12.0
million in FNMA, FHLMC and GNMA mortgage-backed securities that are classified
as available for sale. For additional information regarding such securities
refer to Note 8 to the Company's Consolidated Financial Statements included
elsewhere herein.
20
<PAGE> 24
BROKER-DEALER ACTIVITIES
In September 1996, the Company's new broker-dealer subsidiary, AAA
Financial, commenced operations. While AAA Financial intends to engage in a
general securities business, it is currently emphasizing the sale of Puerto
Rico tax exempt GNMA securities and other Puerto Rican securities. AAA also
earns revenues in the form of net interest income form the operation of a
repurchase book operation. As of December 31, 1996, AAA Financial operated
from a single branch in the San Juan metropolitan area and employed 16 persons.
FUNDING
BORROWING ARRANGEMENTS RELATING TO MORTGAGE BANKING OPERATIONS. Except as
noted below with respect to GNMA securities, 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 conforming loans that qualify for the
mortgage-backed securities programs of FNMA and FHLC are normally sold within
60 days of origination.
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, gestation facilities
and repurchase agreements, with financial institutions. FFCC's principal short
term facilities include a Syndicated Credit Agreement with Bankers Trust
Company and four other lending institutions (the "Syndicated Credit
Agreement"), warehousing lines of credit with three local commercial banks and
pre-sale, gestation or repurchase 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 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 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." 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. 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, except in the case of gestation facilities, are
usually repaid after FFCC packages such mortgage loans into GNMA, FNMA or FHLMC
certificates and receives the proceeds from the sale of such certificates or
the financing of such securities under repurchase agreements. FFCC's
warehousing lines of credit are generally terminable at the discretion of the
lender.
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.
21
<PAGE> 25
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, 1996, the Company's credit facilities included three
pre-sale or gestation facilities with affiliates of major U.S. brokerage houses
and the Syndicated Credit Facility. Obtaining credit from financial
institutions located outside Puerto Rico generally permits the Company to
obtain larger lines of credit and reduces its dependence on funding available
in the local market.
As part of its strategy to continue to diversify its sources of funding,
FFCC entered into the Syndicated Credit Agreement on June 30, 1995. The
Syndicated Credit Agreement currently provides for credit facilities totaling
up to $110 million and expiring on June 27, 1997. The facilities include: (i)
a $100 million secured one-year revolving warehousing credit facility to
finance residential mortgage loans and mortgage-backed securities; (ii) a $7
million secured one-year revolving credit facility to provide financing for
receivables and working capital needs; and (iii) an additional $3 million
working capital facility. The amounts available under the Syndicated Credit
Agreement are subject to a borrowing base which consists of mortgage loans and
mortgage-backed securities for the first facility and receivables relating to
servicing advances and real estate owned for the second facility. A $17.7
million servicing secured facility previously outstanding under the Syndicated
Credit Agreement was paid in full in October 1996 from the proceeds of the
Company's Senior Notes discussed below.
During 1995, the Company also entered into a Debenture Purchase Agreement
dated September 25, 1995, as amended and restated as of December 15, 1995 (the
"Debenture Purchase Agreement") with BanPonce Corporation ("BanPonce") a bank
holding company headquartered in San Juan, Puerto Rico, providing for the
issuance and sale to BanPonce of up to $10,000,000 of Convertible Subordinated
Debentures in a private placement transaction. Approximately $6.6 million of
Convertible Subordinated Debentures were issued on September 25, 1995 and the
remaining $3.4 million were issued on December 22, 1995. The Convertible
Subordinated Debentures are convertible into shares of common stock at a
conversion price of $17.50 per share, subject to adjustment in certain events.
In order to facilitate the receipt of all required regulatory approvals,
approximately $1.8 million of the Convertible Subordinated Debentures are not
convertible into shares of Common Stock prior to January 1, 1999. The
Convertible Subordinated Debentures are subordinated to all existing and future
senior debt (as defined in the Debenture Purchase Agreement) of the Company. If
the entire $8.2 million of the Convertible Subordinated Debentures that are
immediately convertible into shares of Common Stock were converted, they would
equal 466,262 shares, or approximately 4.9% of the Company's total outstanding
shares of Common Stock as of March 7, 1997, as adjusted for the conversion of
such Convertible Subordinated Debentures. Under the terms of the Debenture
Purchase Agreement, BanPonce also obtained the right to acquire up to 200,000
additional shares of Common Stock at a price of $17.50 per share (subject to
adjustment in certain events) to the extent that the shares of Common Stock
issued or issuable upon conversion of all the Debentures (including the
Convertible Subordinated Debentures that are not immediately convertible)
represent less than 5% of the Company's fully diluted outstanding shares of
Common Stock.
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 Senior Notes
were used to repay $17.7 million owed by the Company under a five-year senior
servicing secured loan facility under the Syndicated Credit Agreement, and for
general corporate purposes, including capital contributions to Doral Federal,
AAA Financial and other subsidiaries.
FUNDING ARRANGEMENTS RELATING TO SAVINGS AND LOAN OPERATIONS. Deposits
and borrowings, consisting of FHLB-NY advances and term notes, are the primary
sources of Doral Federal's funds for use in its lending,
22
<PAGE> 26
investment and other business activities. In addition, Doral Federal
obtains funds in the form of loan repayments and income from operations as well
as capital contributions from FFCC. FFCC made capital contributions of $5
million and $8.5 million in Doral Federal during 1996 and 1995, respectively.
Loan repayments are a relatively stable source of funds while net increase in
deposits are significantly influenced by general interest rates and money market
conditions.
Deposits have been the principal source of funds for Doral Federal's
lending activities. At December 31, 1996, Doral Federal held $187 million in
deposits at a weighted average interest rate cost of 3.80%. Doral Federal
offers passbook savings accounts, checking accounts, 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,
1996, $64.2 million or approximately 34% of Doral Federal's total deposits
consisted of non-interest bearing accounts. Approximately 90% of such amount
related to corporate and custodial accounts of the Company and its affiliates.
This amount includes approximately $28.3 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 low cost funding source for Doral Federal.
For additional information regarding the characteristics of Doral Federal's
deposit accounts, refer to Note 19 of the Company's Consolidated Financial
Statements included elsewhere herein.
Doral Federal may also obtain funding through collateralized borrowings
directly from the Federal Home Loan Bank of New York (the "FHLB-NY") and
through borrowings secured by FHLB-NY letters of credit, up to a maximum of 30%
of total assets. Such advances or letter of credit reimbursement obligations
must be secured by qualifying assets with a market value of at least 110% of
the outstanding obligation. At December 31, 1996, Doral Federal had $15 million
in outstanding advances from the FHLB-NY at a weighted average interest rate
cost of 6.24%. For additional information regarding funding for Doral Federal
through the issuance of term notes secured by FHLB-NY letters of credit, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".
From time to time, Doral Federal may also obtain funding through the use
of repurchase agreements with brokerage firms and other financial institutions.
As of December 31, 1996, Doral Federal did not have any outstanding borrowings
under repurchase agreements.
FUNDING ARRANGEMENTS RELATING TO BROKER-DEALER OPERATIONS
Since commencing operations in September 1996, AAA Financial's primary
sources of funding have been capital contributions from FFCC, repurchase
agreements with financial institutions and other institutional investors
involving marketable securities and cash flows from operations.
PUERTO RICO INCOME TAXES
FFCC is subject to Puerto Rico income taxes. 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"). Most
changes affecting corporations are effective for taxable years commencing after
June 30, 1995. While the PRIRC incorporates many of the provisions of the prior
tax law, it also provides for various amendments and changes from prior law.
23
<PAGE> 27
Among the most important changes introduced by the PRIRC were (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.
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 (including FHA loans, VA loans and
GNMA securities) 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 PRIRC, corporations are not permitted to file consolidated returns
with their subsidiaries and affiliates. Effective for taxable year commencing
after June 30, 1995, FFCC is entitled to a 100% dividend received deduction on
dividends received from Doral Mortgage or any other Puerto Rico corporation
subject to tax under PRIRC. No dividends received deduction is available for
dividends received from U.S. corporations such as Doral Federal. Effective July
1, 1995, the PRIRC also provided 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%.
UNITED STATES INCOME TAXES
FFCC and its subsidiaries, other than Doral Federal, are corporations
organized under the laws of Puerto Rico. Accordingly, FFCC and its
subsidiaries, other than Doral Federal, 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. Doral Mortgage operates two branches in the State of
Florida. Accordingly, Doral Mortgage is subject to both Florida income and
franchise taxes and federal income tax on income effectively connected with the
conduct of the trade or business of these branches. In addition, the United
States may impose a branch profits tax of 30% in the event that profits from
the Florida branches are repatriated to Puerto Rico. Both the federal tax as
well as the branch profit tax may be claimed as a tax credit in Puerto Rico,
subject to certain limitations.
Doral Federal, as a federal savings association, is also subject to U.S.
income taxes. 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 "Mortgage Banking Business
- -- Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment" for a
description of Section 936. On February 24, 1997, Doral Federal filed an
application with Puerto Rico banking authorities for authority to convert its
banking charter to that of a Puerto Rico chartered commercial bank. See
"Regulations--Savings and Loan Operations--Proposed Charter Conversion of Doral
Federal and Related Regulatory Consequences to the Company." Following the
conversion of Doral Federal to a Puerto Rico commercial bank, it would be
subject to taxation in substantially the same manner as FFCC and the other
subsidiaries of the Company.
24
<PAGE> 28
EMPLOYEES
At December 31, 1996, FFCC employed 823 persons, of whom 413 were
administrative personnel, 130 were loan originators, 119 were involved in
processing of loan applications (including quality control auditors), 17 were
loan underwriters, 137 were involved in loan servicing activities and 7 engaged
in financial consulting 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 of 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, HUD 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 their 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 Office of the Commissioner, with
respect to, among other things, licensing requirements and establishment of
maximum interest rates on certain mortgage products. 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.
FFCC and each of its mortgage banking subsidiaries is licensed by the
Office of the Commissioner as a mortgage banking institution in Puerto Rico.
Such authorization to act as a mortgage banking institution must be renewed as
of January 1 of each year. In the past, FFCC has not had any difficulty in
renewing its authorization to act as a mortgage banking institution, and
management is unaware of any existing practices, conditions or violations which
would result in FFCC being unable to receive such authorization in the future.
FFCC operations in the State of Florida are subject to supervision by the
Florida Department of Banking and Finance.
Section 5 of the Puerto Rico Mortgage Banking Institutions Law (the
"Mortgage Banking Law") requires the prior approval of the Office 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 Office of the
Commissioner is obligated to make such
25
<PAGE> 29
inquiries as he deems necessary to review the transaction. Under the
Mortgage Banking Law, the determination of the Office of the Commissioner
whether or not to authorize a proposed change of control is final and
non-appealable.
REGULATION -- SAVINGS AND LOAN OPERATIONS
The Company
As a result of the acquisition of Doral Federal in September 1993, FFCC
became a savings and loan holding company ("SLHC"), subject to the restrictions
and requirements of the Home Owners' Loan Act, as amended (the "HOLA"). FFCC is
registered as an SLHC with the Director (the "Director") of the OTS and is
subject to the various requirements of Sections 10 and 11 of the HOLA and the
regulations thereunder, including examination, supervision and reporting
requirements. Of particular importance, is the requirement that a subsidiary
savings association give the Director at least 30 days' advance notice of the
proposed declaration by its directors of dividends on its stock. Any such
dividend declared within the 30-day notice period, or declared without giving
such notice, is invalid. Payment of cash dividends by a savings association on
shares of its capital stock is also subject to the limitations on capital
distributions imposed by the OTS. See "Regulation -- Savings and Loan
Operations -- Doral Federal -- Dividends."
Federal law and OTS regulations place certain limits on the types of
activities in which a SLHC and its subsidiaries may engage. However, in
general, these activity restrictions do not apply to a holding company that
controls only one savings and loan association, provided such association meets
the "qualified thrift lender" test, which generally requires an association to
have 65% of its portfolio assets in "qualified thrift investments" for nine
months out of the immediately preceding 12 months. For Puerto Rico-based
institutions, these investments include, among other things, home mortgages,
mortgage-backed securities, and personal loans. In the event a SLHC's
subsidiary savings association does not hold sufficient "qualified thrift
assets" to meet the "qualified thrift lender test", a SLHC may be deemed for
regulatory purposes to become a bank holding company. In such event, a SLHC
would become subject to certain activity restrictions. In addition, any savings
association subsidiary would be subject to the activity and branching
restrictions applicable to national banks, including the application of the
statutes and regulations governing the payment of dividends by a national bank
in the same manner and to the same extent as though it were a national bank.
Under the National Bank Act, national banks are only permitted to pay dividends
out of "net profits" (as defined therein) subject to the requirement that a
certain portion of net profits must be carried periodically to the bank's
surplus fund until the surplus fund shall equal its common capital. Capital may
not be used to pay dividends. Doral Federal currently is in compliance with the
"qualified thrift lender" test and expects to continue to comply with this
requirement.
With certain specific exceptions, a SLHC is prohibited from acquiring more
than 5% of the "voting shares" of a savings association that is not a
subsidiary, or of another SLHC that is not a subsidiary. An association which
is a subsidiary of a SLHC is prohibited from or subject to restrictions upon
engaging in certain transactions involving its affiliates under the provisions
of Sections 23A and 23B of the Federal Reserve Act, which are made applicable
to savings associations under 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 by the OTS pursuant to Section 23A
as to such non-bank subsidiary).
Because of the Company's status as a SLHC, owners of the Common Stock are
subject to certain restrictions and disclosure obligations under various
federal laws, including the Change in Bank Control Act (the "Control
26
<PAGE> 30
Act") and the Savings and Loan Holding Company Act (the "SLHCA").
Regulations pursuant to the Control Act and the SLHCA 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 to
exist 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.
Doral Federal
General. Doral Federal is a federal savings association. Accordingly, its
investments, borrowing, lending, issuance of securities, establishment of
branch offices and all other aspects of its operation are subject to the
jurisdiction of the OTS.
As a creditor and financial institution, Doral Federal is subject to
certain regulations promulgated by the Federal Reserve Board including, without
limitations, Regulation B (Equal Credit Opportunity Act), Regulation DD (The
Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation
F (Limits on Exposure to Other Banks), Regulation Z (Truth in Lending Act),
Regulation CC (Expedited Funds Availability Act), Regulation X (Real Estate
Settlement Procedures Act), Regulation BB (Community Reinvestment Act) and
Regulation 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.
As an Eligible Depository Institution licensed to receive 936 Funds
directly from 936 Corporations, Doral Federal is subject to an annual license
renewal and certain regulations promulgated by the Office of the Commissioner.
The regulations are designed to require that 936 Funds received by Doral
Federal are channeled into investments that promote employment, production and
income in Puerto Rico.
Capital Requirements. Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") established capital standards for savings
associations, including three capital requirements: a "leverage ratio" or "core
capital requirement," a "tangible capital requirement" and a "risk-based
capital requirement." FIRREA required the Director to promulgate regulations to
prescribe 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.
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<PAGE> 31
An institution is required by statute to maintain tangible capital of not
less than 1.5% of adjusted total assets. "Tangible Capital" consists of core
capital less any intangible assets, plus a limited amount of mortgage
servicing rights ("MSR") valued in accordance with OTS regulations. Any MSR
over this limit would generally be deducted in calculating tangible capital.
The leverage ratio requires savings associations to maintain "core
capital" of not less than 3% of adjusted total assets. The Director has
proposed revisions to its 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 other 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 has 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 interests in the equity accounts of fully
consolidated subsidiaries. Intangible assets (other than MSR includable as
tangible capital and purchased credit card relationship) must be deducted from
core capital. At December 31, 1996, Doral Federal had approximately $343,000 of
intangible assets that were required to be deducted from core and tangible
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 mortgage servicing rights (both originated
and purchased) valued at the lower of 90% of fair market value or 100% of
remaining unamortized book value. Doral Federal did not have any MSR or ESFR
in its tangible or core capital at December 31, 1996.
The risk-based capital requirement provides that the book value of 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, 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, 1996, Doral Federal had
approximately $343,000 of intangible assets that were required to be deducted
from capital.
At December 31, 1996, Doral Federal complied with each of the then
current tangible capital, core capital, and risk-based capital requirements. In
the event that Doral Federal fails to satisfy any applicable capital
requirements, Doral Federal may be subject to sanctions, and its operations may
be subject to severe regulatory
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restrictions and limitations. Set forth below is a description of Doral
Federal's actual capital levels relative to its regulatory capital requirements
as of December 31, 1996:
<TABLE>
<CAPTION>
To be well capitalized
Minimum Capital under prompt corrective
Actual Requirements action provisions(1)
Amount Ratio(%) Amount Ratio(%) Amount Ratio(%)
------- -------- ---------- ---------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital
(to adjusted
assets) $23,376 8.3 $4,206 >1.5 - -
Tier I capital (to -
risk weighted
assets) 23,376 19.3 - - 7,282 > 6.0
Core capital (to -
adjusted assets) 23,376 8.3 8,412 >3.0 14,021 > 5.0
Total capital (to - -
risk weighted
assets) 24,095 19.8 9,709 >8.0 12,137 >10.0
- -
</TABLE>
(1) See discussion under caption "FDICIA" below for additional capital
requirements imposed by the Federal Deposit Insurance Corporation
Improvement Act of 1991.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") federal banking regulators must take prompt corrective
action in respect of depository institutions that do not meet minimum capital
requirements. The FDICIA and regulations thereunder establish five capital
tiers: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution is deemed well capitalized if it maintains a leverage
ratio of at least 5%, a risk-based Tier I capital ratio of at least 6% and a
risk-based Total capital ratio of at least 10% and is not subject to any
written agreement or directive to meet a specific capital level. A depository
institution is deemed adequately capitalized if it is not well capitalized but
maintains a leverage ratio of at least 4% (or at least 3% if given the highest
examination rating and not experiencing or anticipating significant growth), a
risk-based Tier I capital ratio of at least 4% and a risk-based total capital
ratio of at least 8%. A depository institution is deemed undercapitalized if it
fails to meet the standards for adequately capitalized institutions (unless it
is deemed significantly or critically undercapitalized). An institution is
deemed significantly undercapitalized if it has a leverage ratio of less than
3%, a risk-based Tier I capital ratio of less than 3% or a risk-based Total
capital ratio of less than 6%. An institution is deemed critically
undercapitalized if it has tangible equity equal to 2% or less of total assets.
A depository institution may be deemed to be in a capitalized category that is
lower than is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any one of four categories.
At December 31, 1996, Doral Federal was well capitalized. See table under
"--Capital Requirements" above for Doral Federal's actual capital levels in
relation to the prompt corrective action standards under FDICIA. An
institution's capital category, as determined by applying the prompt corrective
action provisions of law, may not constitute an accurate representation of the
overall financial condition or prospects of Doral Federal and should be
considered in conjunction with other available information regarding the Doral
Federal's financial condition and results of operations.
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<PAGE> 33
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. In addition, undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and
cessation of receipt of deposits from correspondent banks. Critically
undercapitalized depository institutions are subject to appointment of a
receiver or conservator.
Enforcement Provisions. FIRREA includes enforcement provisions that are
applicable to all depository institutions, including savings institutions.
FIRREA extended the enforcement authority of bank regulatory agencies to
"institution-affiliated parties". 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 of duty or unsafe practice likely to cause a
loss to the savings institution. FIRREA includes significantly increased
penalties for violations of cease-and-desist orders and other regulations. At
the same time, requirements for the issuance of such orders were lessened by
the statute.
Payment of Dividends. Doral Federal's payment of dividends is subject to
the limitations of the capital distribution regulation promulgated by the OTS.
The OTS' regulation determines a savings association's ability to pay
dividends, make stock repurchases, or make other types of capital
distributions, according to the institution's capital position. The rule
establishes "safe-harbor" amounts of capital distributions that institutions
can make after providing notice to the OTS, without constituting an unsafe or
unsound practice. Associations that do not meet their capital requirements can
make distributions with the prior approval of the OTS.
For associations such as Doral Federal, that meet all applicable capital
requirements, the safe-harbor amount is the greater of (a) 75% of net
income for the prior four quarters, or (b) the sum of (i) the current year's net
income and (ii) the amount that causes the excess of any component of the
association's total capital to be less than 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.
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. As a result, the FDIC has certain regulatory and
enforcement authority over Doral Federal. The FDICIA required the FDIC to
implement a risk-based assessment system, under which an institution's
assessment will be based on the probability that the deposit insurance fund
will incur a loss with respect to the institution, the likely amount of any
such loss, and the revenue needs of the deposit insurance fund. Under this
system, the FDIC established premium rates for SAIF insured institutions which
until 1995 ranged from 0.23% to 0.31% based upon their capital ratios and
supervisory evaluation. Doral Federal's insurance premium assessment was set at
0.23% effective January 1, 1994.
The FDIC revised the premium schedule for Bank Insurance Fund ("BIF")
insured banks, effective in the third quarter of 1995, to provide a range of
.04% to .31% of deposits (as compared to the former range of .23% to .31% of
deposits for both BIF and SAIF insured institutions) in anticipation of the BIF
achieving its statutory reserve ratio. Effective January 1, 1996, the schedule
was further revised to provide a range of 0% to .27% with
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<PAGE> 34
a minimum annual premium of $2,000. The lower premiums did not apply to
SAIF members. At the time of such action, the FDIC noted that the SAIF would
likely not be adequately recapitalized until 2002, absent a substantial increase
in premium rates or the imposition of special assessments or other significant
developments such as a merger of the SAIF and the BIF. As a result of this
disparity, SAIF members were placed at a significant competitive disadvantage to
BIF members due to higher costs for deposits insurance.
In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted on September 30, 1996. The legislation
provided for a one-time assessment to be imposed on all deposits assessed at
the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF. It
also provided for the merger of the BIF and the SAIF on January 1, 1999
provided no savings associations then exists. The special assessment paid by
Doral Federal was $588,000. In connection with the recapitalization of the
SAIF, Doral Federal's deposit insurance premiums were decreased to .06%. While
SAIF rates were reduced by this legislation they were not equalized with BIF
rates as a result of the continuing assessment payable by SAIF members to repay
obligations issued by a federally chartered corporation to provide financing for
resolving the thrift crisis in the 1980s.
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 the 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 the loss becomes probable and estimable.
The following table sets forth information with respect to Doral Federal's
classified assets as of December 31, 1996:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------
SUBSTANDARD DOUBTFUL LOSS TOTAL
----------- -------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
One to four family.................. $1,258 $0 $0 $1,258
Commercial.......................... 596 0 0 596
Consumer -- secured by mortgage..... 71 0 0 71
REO.................................. 125 0 0 125
Consumer loans -- unsecured.......... 96 0 0 96
Other................................ 22 0 0 22
------ -- -- ------
Total classified assets........... $2,168 $0 $0 $2,168
====== == == ======
</TABLE>
Proposed Banking Legislation. Various legislation, including proposals to
overhaul the bank regulatory system, expand bank and bank holding company
powers and limit the investments that a depository institution may make with
insured funds, is from time to time introduced in Congress. The Company cannot
determine the ultimate effect that such potential legislation, if enacted, or
implementing regulations, would have upon its financial condition or results of
operations.
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<PAGE> 35
Proposed Charter Conversion of Doral Federal and Related Regulatory Consequence
to the Company
As a result of the reduction in the 936 Credit introduced by the OBRA
Amendments as well as the repeal of Section 936 as part of the Small Business
Job Protection Act, the income earned by Doral Federal is no longer fully
covered by the 936 Credit and, Doral Federal is subject to double taxation on
its income earned in Puerto Rico because it is generally not entitled to a
credit under Puerto Rico tax law for federal income taxes paid with respect to
income earned in Puerto Rico. In addition, dividends payable by a United States
corporation, such as Doral Federal, to a Puerto Rico corporation, such as the
Company, are not entitled to any dividends received deduction and are subject
to taxation as ordinary income at the normal statutory tax rates. Conversion to
a Puerto Rico chartered commercial bank would address both issues since
dividends received by a Puerto Rico corporation from a Puerto Rico chartered
commercial bank are subject to a 100% dividends received deduction. In
addition, a Puerto Rico chartered commercial bank is only subject to U.S.
federal income taxes on its income, if any, from sources within the United
States.
Because of the above adverse tax consequences and in light of the fact
that all of Doral Federal's operations are conducted in Puerto Rico, on
February 24, 1997, Doral Federal filed an application with the Office of the
Commissioner to convert its charter to that of a Puerto Rico commercial bank.
The consummation of the conversion requires the approval of the Office of the
Commissioner under the Puerto Rico Banking Act and of the Federal Reserve Board
(the "Federal Reserve") under the Bank Holding Company Act of 1956 (the
"BHCA"). While the Company does not anticipate any major difficulties in
obtaining the required regulatory approvals, no assurance can be given as to
when or whether all such approvals will be obtained. The conversion would
result in certain changes in the regulatory treatment of the Company and Doral
Federal. The principal regulatory consequences of such a conversion are
discussed below.
Bank Holding Company Considerations. The conversion of Doral Federal into
commercial bank would cause the Company to become bank holding company subject
to supervision and examination by the Federal Reserve under the BHCA . The BHCA
and Federal Reserve regulations promulgated thereunder generally place
limitations on the types of activities in which a bank holding company and its
subsidiaries may engage. In general, such activities must be banking services or
activities so closely related to the business of banking as to be a proper
incident thereto. Regulation K promulgated by the Federal Reserve, generally
grants bank holding companies and their subsidiaries somewhat broader powers
with respect to activities conducted "outside the United States" than with
respect to activities conducted within the United States. For purposes of
Regulation K, Puerto Rico is considered to be outside the United States.
In addition to the activity restrictions discussed above, the BHCA also
imposes various other restrictions on bank holding companies and their
subsidiaries. Many of these restrictions are similar to those currently imposed
on the Company under the SLHCA. For example, the BHCA contains provisions
restricting the acquisition of capital stock and other securities of the
Company similar to those contained in the SLHCA. See "Regulation -- Savings and
Loan Operations -- The Company." Sections 23A and 23B of the Federal Reserve
Act also apply in the same manner to bank holding companies and their
subsidiaries as to savings and loan holding companies.
As a bank holding company, the Company would, however, be subject to
certain additional regulatory restrictions that are not otherwise applicable to
savings and loan holding companies. For example, unlike savings and loan
holding companies, bank holding companies are subject to certain regulatory
capital requirements. Under the Federal Reserve's risk-based capital
guidelines, a bank holding company must maintain a ratio of total capital
("Total Capital") to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of
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<PAGE> 36
credit) equal to 8%. At least half of the Total Capital is to be
comprised of common equity, retained earnings, minority interests in
unconsolidated subsidiaries, noncumulative perpetual preferred stock and a
limited amount of cumulative perpetual preferred stock, less goodwill and less
certain intangible assets discussed below ("Tier 1 capital"). The remainder may
consist of a limited amount of subordinated debt, other preferred stock, certain
other instruments, and a limited amount of loan and lease loss reserves ("Tier 2
capital").
The Federal Reserve has adopted regulations that require most intangibles,
including core deposit intangibles, to be deducted from Tier 1 capital. The
regulations, however, permit the inclusion of a limited amount of intangibles
related to MSR and purchased credit card receivables in a manner similar to the
capital requirements applicable to savings associations. The Federal Reserve has
also decided to exclude from regulatory capital the amount of net unrealized
gains and losses on securities available-for-sale, except the net unrealized
losses of equity securities with readily determinable fair values.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 capital to average quarterly assets of 3% for bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory rating. All other bank holding companies are required to
maintain a leverage ratio of 3% plus an additional cushion of at least 100 to
200 basis points. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Furthermore, the
guidelines indicate that the Federal Reserve will continue to consider a
"tangible Tier 1 leverage ratio" (deducting all intangibles) and other indicia
of capital strength in evaluating proposals for expansion or new activities.
The tangible Tier 1 leverage ratio is the ratio of a banking organization's
Tier 1 capital, less all intangibles, to total assets, less all intangibles.
The Federal Reserve has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only
out of current operating earnings. In addition, under Federal Reserve policy, a
bank holding company is expected to act as a source of financial strength to
each of its subsidiary banks and to commit resources to support each subsidiary
bank. This support may be required at times, when absent such policy, the bank
holding company might not otherwise provide such support.
The Company believes that if it were to become subject to the provisions
of the BHCA it would be in compliance with all of the above regulatory and
capital requirements and would be able to continue to conduct its Mortgage
Banking Business as presently conducted.
Banking Law Considerations Applicable to Doral Federal. The conversion of
Doral Federal into a Puerto Rico chartered bank would subject Doral Federal to
supervision and examination by the Office of the Commissioner and to the
provisions of the Puerto Rico Banking Act and the regulations promulgated
thereunder. Certain of the principal regulatory requirements that would be
imposed on Doral Federal under the Puerto Rico Banking Law are discussed below.
Section 27 of the Puerto Rico Banking Act requires that at least ten
percent (10%) of the yearly net income of a bank be credited annually to a
reserve fund. This apportionment shall be done every year until the reserve
fund shall be equal to ten percent (10%) of the total deposits or the total
paid-in capital of the bank, whichever is greater.
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<PAGE> 37
Section 27 of the Puerto Rico Banking Act also provides that when the
expenditures of a bank are greater than the receipts, the excess of the former
over the latter shall be charged against the undistributed profits of the bank,
and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If there is no reserve fund sufficient to cover such
balance in whole or in part, the outstanding amount shall be charged against
the capital account and no dividend shall be declared until said capital has
been restored to its original amount and the reserve fund to 20% of the
original capital of the bank.
Section 16 of the Puerto Rico Banking Act requires every bank to maintain
a legal reserve which shall not be less than 20% of its demand liabilities,
except government deposits (federal, state and municipal) which are secured by
actual collateral.
Section 17 of the Puerto Rico Banking Act permits banks to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. If
such loans are secured by collateral worth at least twenty-five percent (25%)
more than the amount of the loan, the aggregate maximum amount may reach one
third of the paid-in capital the Bank, plus its reserve fund. There are no
restrictions under Section 17 on the amount of loans that are wholly secured by
bonds, securities and other evidences of indebtedness of the Government of the
United States or Puerto Rico, or by current debt bonds, not in default, of
municipalities or instrumentalities of Puerto Rico. The Office of the
Commissioner has issued a circular letter permitting well-capitalized
institutions to take into account 50% of their retained earnings in computing
their applicable lending limits.
Section 14 of the Puerto Rico Banking Act authorizes banks to conduct
certain financial and related activities directly or through subsidiaries,
including finance leasing of personal property, making and servicing mortgage
loans and operating a small-loan company. These provisions are somewhat more
restrictive than those applicable to federal savings associations.
The Finance Board, which is a part of the Office of the Commissioner, but
also includes as its members the Secretary of the Treasury, the Secretary of
Commerce, the Secretary of Consumer Affairs, the President of the Planning
Board, and the President of the Government Development Bank for Puerto Rico,
has the authority to regulate the maximum interest rates and finance charges
that may be charged on loans to individuals and unincorporated businesses in
Puerto Rico. The current regulations of the Finance Board provide that the
applicable interest rate on loans to individuals and unincorporated businesses
(including real estate development loans but excluding FHA and VA loans secured
by mortgages on real estate properties) is to be determined by free
competition. The Finance Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, which are currently set
at 21%, and for credit card purchases, which are currently set at 26%. There
is no maximum rate set for installment sales contracts involving motor
vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
Additional Restrictions on Investments in Capital Stock of the Company.
Sections 12 of the Puerto Rico Banking Act requires the prior approval of the
Office of the Commissioner with respect to a transfer of capital stock of a
bank that results in a change of control of the bank. Under Section 12, a
change of control is presumed to occur if a person or group of persons acting
in concert, directly or indirectly, acquire more than 5% of the outstanding
voting capital stock of the bank. In the past, the Office of the Commissioner
has interpreted the restrictions of Section 12 to apply to acquisitions of
voting securities of entities controlling a bank, such as a bank holding
company. The provisions of the Mortgage Banking Law and the SLHCA currently
applicable to acquisition of the Company's capital stock only require
regulatory approval for the acquisition of more than 10% of the Company's
outstanding voting securities. Accordingly, the conversion of Doral Federal
into a Puerto Rico
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<PAGE> 38
commercial bank would result in additional restrictions to be placed on
the acquisition of the Company's common stock.
FDIC Capital Requirements. Following conversion, Doral Federal would also
be subject to regulation by the FDIC, including the capital requirements of the
FDIC. The capital requirements of the FDIC are substantially similar to those
currently imposed on Doral Federal by the OTS.
REGULATION -BROKER-DEALER OPERATIONS
AAA Financial is registered as a broker-dealer with the SEC and the Office
of the Commissioner. AAA Financial is also a member of the NASD. As a
registered broker-dealer, it is subject to regulation by the SEC, the NASD and
the Office of the Commissioner in matters relating to the conduct of its
securities business, including record keeping and reporting requirements,
supervision and licensing of employees and obligations to customers. In
particular, AAA Financial is subject to the SEC's net capital rules, which
specify minimum net capital requirements for registered broker-dealers and are
designed to ensure that broker-dealers maintain adequate regulatory capital in
relation to their liabilities and the size of their customer business.
MARKET AREA AND COMPETITION
Prior to March 1992, Puerto Rico was FFCC's exclusive service area.
Although Doral Mortgage has since opened branch offices in Orlando and
Miami, Florida, Puerto Rico remains the Company's predominant service area
accounting for 98% of the Company's loan originations for the years ended
December 31, 1996 and 1995. Within Puerto Rico, FFCC's primary market area is
the metropolitan San Juan area, which accounted for approximately 55% and 45% of
FFCC loan originations in 1996 and 1995, 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 37 mortgage banks, two savings
institutions and 20 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. Management believes that Doral Federal's most direct
competition for deposits comes from local commercial banks and credit unions.
During certain interest rate environments, increased competition for deposits
may be expected from mutual funds and money market mutual funds.
THE COMMONWEALTH OF PUERTO RICO
General. 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 southeast of Miami, Florida. It is approximately 100 miles long and 35
miles wide. The population of Puerto Rico for 1990, as determined by the United
States Census Bureau, was approximately 3.5 million as compared to 3.2 million
in 1980. According to estimates of the Puerto Rico Planning Board, the
population of Puerto Rico increased to 3.7 million in fiscal 1996. 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
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<PAGE> 39
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 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,
and statehood and independence received 46.3% and 4.4% of the votes casts,
respectively.
On February 26, 1997 legislation (the "Young Bill") was introduced in the
U.S. House of Representatives proposing a mechanism to settle permanently the
political relationship between Puerto Rico and the United States, either
through full self government (e.g., statehood or independence, including, as an
alternative, free association via a bilateral treaty) or continued
Commonwealth. Under the legislation, failure to settle on full self government
after completion of the referendum process provided therein would result in
retention of the current Commonwealth status. A similar bill (the "Senate
Status Bill") was introduced into the Senate on March 19, 1997. The Young Bill
and the Senate Status Bill would have to be approved by both houses of the
Congress and signed by the President (or his veto overridden) before becoming
law. It is not possible at this time to determine the ultimate outcome of this
legislation.
The Economy. Puerto Rico has established policies and programs directed
at the development of manufacturing and the expansion and modernization of the
island's infrastructure. The investment of funds by mainland United States,
foreign and local entities in new factories has been stimulated by selective
tax exemption, development loans, and other financial and tax incentives.
Infrastructure expansion and modernization have been to a large extent financed
by bonds and notes issued by the Commonwealth, its public corporations and
municipalities. Economic progress has been aided by significant increases in
the levels of education and occupational skills of the island's population. The
percentage of the college-age population enrolled in institutions of higher
learning has increased from 16.8% in 1970 to 36.9% in 1995.
The economy of Puerto Rico is closely integrated with that of the mainland
United States. During the fiscal year ended June 30, 1996, approximately 88% of
Puerto Rico's exports went to the United States mainland, which was also the
source of approximately 62% of Puerto Rico's imports. For the fiscal year ended
June 30, 1996, Puerto Rico experienced a positive adjusted merchandise trade
balance of $3.2 billion.
The economy of Puerto Rico is dominated by the manufacturing and service
sectors. The manufacturing sector has experienced a basic change over the years
as a result of increased emphasis on higher wage, high technology industries
such as pharmaceuticals and electronics. The service sector also plays a major
role in the economy. It ranks second only to manufacturing in contribution to
the gross domestic product and leads all sectors in providing employment. In
recent years, the service sector has experienced significant growth.
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<PAGE> 40
Gross product increased from $23.7 billion for fiscal 1992 to $30.2
billion ($26.7 billion in 1992 prices) for fiscal 1996, an increase of 27.7%
(12.9% in 1992 prices). Since fiscal 1985, personal income, both aggregate and
per capita, has increased consistently each fiscal year. In fiscal 1996,
aggregate personal income was $29.4 billion ($27.8 billion in 1992 prices) and
personal income per capita was $7,882 ($7,459 in 1992 prices). Average
employment increased from 977,000 in fiscal 1992 to 1,092,300 in fiscal 1996.
Average unemployment decreased from 16.5% in fiscal 1992 to 13.8% in fiscal
1996.
Future growth in the Puerto Rico economy will depend on several factors
including the condition of the United States economy, the relative stability in
the price of oil imports, the exchange value of the U.S. dollars and the level
of interest rates and changes to existing tax incentive legislation as
discussed below.
The Small Business Job Protection Act, which was signed into law on August
20, 1996, provides for the repeal of Section 936. The elimination of the
benefits of Section 936, without the substitution of another fiscal incentive
to attract investment to Puerto Rico, could have an adverse effect on the
future growth of the Puerto Rico economy. At this point, the Company cannot
predict the long-term impact of the repeal of Section 936 on the economy of
Puerto Rico. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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, Puerto Rico and consist of approximately 33,000 square feet of office
space. Both of these facilities are leased. 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 1996, 1995 and 1994 were $2,083,538,
$2,096,979 and $2,004,023, respectively. Except for its interest in real estate
held in the ordinary course of business (including REO as a result of
foreclosures), the Company does not own any real property except for a 2,000
square foot building and underlying real property where Doral Federal's branch
in Catano, Puerto Rico is located and a 2 acre parcel of undeveloped land, which
the Company purchased for $2,956,895 in December 1996, for future development of
office facilities for the Company.
ITEM 3. 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 or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 41
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") was traded on the over-the-counter
market and was quoted on the NASDAQ system under the symbol FRCCP until it was
redeemed in whole on May 10, 1996.
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.
<TABLE>
MARKET PRICE DIVIDENDS DECLARED*
CALENDAR COMMON SERIES A PREFERRED SERIES A
------ ------------------
YEAR QUARTER HIGH LOW HIGH LOW COMMON PREFERRED
- ---- ------- ---- --- ---- --- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 1st $13 1/2 $10 1/2 $24 1/4 $ 22 $0.13 $0.2625
2nd 15 1/2 12 29 1/2 24 1/4 0.15 0.2625
3rd 17 3/4 14 33 1/2 28 0.15 0.2625
4th 20 15 3/4 37 1/4 32 0.15 0.2625
1996 1st $22 3/4 $17 3/4 $40 $ 34 0.15 $0.2625
2nd 23 1/2 18 3/4 40 40 0.17 .12
3rd 25 18 3/4 N/A N/A 0.17 N/A
4th 28 3/4 20 3/4 N/A N/A 0.17 N/A
</TABLE>
As of March 7 1997, the approximate number of record holders of the
Company's Common Stock was 839, 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 as quoted on the NASDAQ NMS on such date was $27.50 per
share.
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.
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<PAGE> 42
The ability of the Company to pay dividends in the future is limited by
various restrictive covenants contained in the debt agreements of the Company,
the earnings, cash position and capital needs of the Company, general, business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Debenture Purchase Agreement
and under the Indenture for the Senior Notes (the "Senior Note Indenture") from
paying dividends on any capital stock (other than dividends payable in capital
stock or in stock rights), if an event of default exists under any such
agreement at such time, or if the amount of dividends payable by the Company
together with the aggregate amount of dividends paid and other capital
distributions made since June 1, 1995, in the case of the Debenture Purchase
Agreement, or October 1, 1996, in the case of the Senior Note Indenture (each
such date, a "Measure Date") exceed the sum of:(i) 50% of the Company's
Consolidated Net Income (as defined in such Agreements), accrued from the
respective Measure Dates to the end of the quarter ending not less than 45 days
prior to the dividend payment date; (ii) $20 million, in the case of the
Debenture Purchase Agreement and $15 million in the case of the Senior Note
Indenture; and (iii) the net proceeds of any sale of capital stock subsequent
to the applicable Measure Dates. In addition, under the Debenture Purchase
Agreement, the Syndicated Credit Agreement and other debt agreements of the
Company, the Company may be prohibited from paying dividends if it fails to
maintain specified minimum levels of net worth, net earnings to debt service
and dividends ratios, and certain other financial ratios.
The Puerto Rico Internal Revenue Code generally imposes a 10% withholding
tax on the amount of any dividends paid by FFCC to individuals, whether
residents of Puerto Rico or not, trusts, estates, special partnerships and
non-resident foreign corporations and partnerships at a special 10% withholding
tax.
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 10% 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 $3,000 if married.
United States income tax law permits a credit against United States income
tax liability, subject to certain limitations, for certain foreign income taxes
paid or deemed paid with respect to such dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data for the Company on a historical basis for each of the five years ended
December 31, 1996. This information should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and
"Management's Discussion and Analysis" contained herein.
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<PAGE> 43
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues..........................$ 107,833 $ 91,837 $ 72,043 $ 70,228 $ 49,804
Interest expense.................. 46,443 43,380 23,252 9,710 9,270
Loan origination costs and
administrative and general expenses 30,111 26,396 30,046 29,597 24,118
Income before income taxes........ 31,279 22,061 18,745 30,921 16,416
Income taxes...................... 4,238 2,500 2,530 9,601 3,371
Income before cumulative
effect............................ 27,041 19,560 16,215 21,320 13,045
Cumulative effect................. -- -- 1,215 - -
Net income........................ 27,041 19,560 17,430 21,320 13,045
Cash dividends paid............... 6,008 4,374 3,943 3,142 2,182
BALANCE SHEET DATA:
Mortgage loans held for sale
mortgage-backed securities held
for trading, securities available
for sale and mortgage notes
receivable, net..................$ 685,062 $ 666,653 $ 582,977 $ 388,231 $ 261,063
Loans receivable, net and
securities held to maturity...... 237,820 129,300 101,613 16,091 None
Total assets...................... 1,101,955 916,118 768,019 486,431 320,972
Loans payable and securities sold
under agreements to repurchase... 584,048 597,983 569,436 335,994 227,179
Deposits.......................... 158,902 95,740 66,471 26,451 -
Stockholders' Equity.............. 150,531 129,017 90,496 76,945 58,467
PER SHARE DATA:(1)
Net Income- Primary............... 2.98 2.65 2.46 $ 3.15 2.35
- Fully diluted(2).......... 2.84 2.53 2.30 2.81 2.06
Cash dividends
Common Stock................ 0.66 0.58 .52 0.40 0.30
Series A Preferred Stock(3). 0.3825 1.05 1.05 1.05 1.05
Weighted average shares
outstanding:(2)
Primary........................... 9,066,561 7,307,945 6,942,734 6,614,854 5,321,600
Fully diluted..................... 9,681,268 7,760,135 7,576,964 7,516,964 6,347,392
OPERATING DATA:
Mortgage loans originated and
purchased........................ 816,566 $ 636,000 $ 823,834 $1,433,448 $ 722,723
Loan Servicing Portfolio.......... 3,068,000 $2,668,000 $2,644,000 $2,375,000 $1,700,000
</TABLE>
____________________
(1) Adjusted to reflect two-for-one stock split effective December 10, 1993.
(2) On a fully diluted basis, both net earnings and shares outstanding are
adjusted to assume the conversion of the Company's 10 1/2% Cumulative
Convertible Preferred Stock, Series A (which was redeemed in whole on May 10,
1996) and the 8.25% Convertible Subordinated Debentures. Shares of Common
Stock outstanding during the period reflect the issuance of 1,510,000 shares of
Common Stock on December 11, 1995.
(3) The Series A preferred Stock was redeemed in whole on May 10, 1996.
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<PAGE> 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
FFCC is the leading originator of mortgage loans in Puerto Rico, in terms
of the volume of originations of first mortgages on single family residences.
The volume of loans originated and purchased by FFCC was approximately $819
million, $636 million, $824 million, $1.44 billion, and $724 million for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The
Company issued $373 million of GNMA mortgage-backed securities to rank No. 1 in
Puerto Rico and No. 34 in the United States in such issuances according to the
"Mortgage Marketplace."
The increase in 1993 was primarily due to declines in mortgage interest
rates which declined to their lowest levels in decades during 1993, thereby
stimulating demand for both refinancing loans and loans to finance the
acquisition of new and existing residential units. The decrease in 1994 as
compared to 1993 is attributable to rising interest rates causing a lower level
of loan originations, decreased refinancing activity and increased competition.
The decrease in 1995 as compared to 1994 was the result of continued reduced
demand for mortgage loans, especially refinancing loans. The increase in 1996
is due to an increase in refinancing activity as well as increased originations
relating to loans to finance the acquisition of new residential units.
Refinancing loans comprised 47% of loan originations in 1996 compared to 41%
and 59% in 1995 and 1994, respectively. Mortgage loans to finance the
acquisition of new residential units for 1996 increased 63% during 1996
increasing from $84 million for 1995 to $136 million for 1996. Such loans
comprised 17% of total originations for 1996 compared to 13% for 1995 and 8%
for 1994.
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 Company reentered the Puerto
Rico wholesale mortgage loan purchase market during the second quarter of 1994
in order to diversify its sources of loan production and compensate for the
decrease in volume caused by higher interest rates and increased competition.
The amount of loans purchased from third parties was approximately $ 63
million, $77 million, $63 million, $1 million, and $29 million for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The Company
believes that the purchase of mortgage loans is a low cost method of increasing
mortgage loan production that complements retail loan originations. Purchases
of loans from third parties are generally limited to FHA and VA loans.
The Company entered the savings and loan industry in September 1993
through the acquisition of Doral Federal, which operates through two
branches in Puerto Rico. During the year ended December 31, 1994, Doral Federal
contributed $205,000 to the consolidated net income of the Company as a result
of the incurrence of expenses associated with creating the infrastructure
necessary to support bank growth. For the years ended December 31, 1995 and
1996, Doral Federal's net income increased to $1.5 million and $2.3 million,
respectively, reflecting a substantial increase in interest earning assets.
Doral Federal increased its assets from $86.4 million as of December 31, 1994
to $160.4 million and $280.7 million as of December 31, 1995 and 1996,
respectively. This growth was funded largely through increases in certificate
of deposit accounts, non-interest bearing deposits from affiliated companies,
advances from the Federal Home Loan Bank of New York ("FHLB-NY") and the
private placement of five year notes secured by FHLB-NY letters of credit with
U.S. Corporations electing the benefits of Section 936.
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<PAGE> 45
FFCC's results of operations are primarily influenced by: (i) the
direction of interest rates; (ii) the level of demand for mortgage credit,
which is affected by such external factors as the level of interest rates and
the strength of the economy in Puerto Rico; and (iii) the relationship between
mortgage interest rates and the costs of funds.
The principal components of FFCC's revenues are: (i) mortgage loan sales
and fees; (ii) net interest income; (iii) servicing income; (iv) gain on sale
of servicing rights; and (v) other income.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loan sales and fees.............. $26,610 $13,529 $10,573
Interest income........................... 66,987 61,907 46,508
Interest expense.......................... 46,443 43,380 23,252
Net interest income....................... 20,544 18,527 23,256
Servicing income.......................... 11,659 10,577 11,448
Gain on sale of servicing rights.......... 1,813 5,205 3,003
Other income.............................. 764 620 511
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994.
Net Income. The Company's net income for the year ended December 31, 1996
increased to $27 million compared to $19.6 million for 1995. Consolidated
results include the operations of Doral Federal, which contributed
approximately $2.3 million to the Company's consolidated net earnings in 1996,
compared to $1.5 million for 1995 and $205,000 in 1994. Consolidated results
for 1995 reflect the adoption by the Company as of April 1, 1995 of Statement
of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights." Additional net income of approximately $1.5 million was
realized for the year ended December 31, 1995 as a result of the adoption of
SFAS No. 122. Since SFAS No. 122 does not permit retroactive application, the
results for 1995 are not directly comparable to prior years. See Note 2 to the
Company's Consolidated Financial Statements included elsewhere herein. Results
for 1994 include a one time benefit of $1.2 million from the cumulative effect
of the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" as of January 1, 1994.
Revenues from Mortgage Loan Sales and Fees. As part of its mortgage
banking business, FFCC sells substantially all of the loans that it originates,
except for certain mortgage loans originated by Doral Federal, which are
generally held until maturity. When FFCC sells mortgage loans and
mortgage-backed securities, it realizes a 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. See "Interest Rate Fluctuations" and "Recent
Developments-- Possible Changes in Favorable Puerto Rico Tax Laws."
Substantially, all the mortgage loans originated by FFCC are fixed interest
rate loans.
Revenues from mortgage loan sales and fees increased by 97% during 1996,
compared to 28% in 1995 and to a decrease of 70% in 1994. The increase for
1996 was the result of increased volume of loan originations and higher excess
servicing fees receivable ("ESRs") related to sale of non-conforming and low
balance loans as discussed below. The increase for 1995 was primarily due to
the adoption SFAS No. 122 during the second quarter of 1995 which
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<PAGE> 46
has the effect of increasing the gain on the sale of mortgage loans by requiring
that the carrying costs of mortgage loans be reduced by a portion of the fair
value of the related mortgage servicing rights ("MRSs"). The amount allocated
to MSRs is included as a component of mortgage loan sales and fees in the
Company's Consolidated Statement of Income. 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 pressures on pricing as a result of
increased competition.
During the years ended December 31, 1996 and 1995, the Company capitalized
$10.8 million and $8.2 million, respectively, in MSRs which are included in the
Company's revenues as part of "Mortgage Loan Sales and Fees." The Company
amortizes MSRs over their expected life. See "Amortization of Excess Servicing
Fees Receivable and Mortgage Servicing Rights."
Sales of mortgage loans made during 1996 resulted in the recording of
approximately $15.9 million of ESRs compared to $2.6 million and $5.8 million
in 1995 and 1994, respectively. FFCC capitalizes as an asset any ESRs 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 ESR represents the discounted present value of the excess (the "excess
spread") of the interest rate on the loan over a normal servicing fee and the
interest required to be paid to investors. The ESR 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 under "Mortgage loan sales and fees." Most of the Company's ESR is
related to the sale in bulk to financial institutions of non-conforming and low
balance mortgage loans which the Company is generally able to originate at
higher interest rates and thereby retain a larger excess spread on such loans.
See "Recent Developments--Product Diversification." ESRs are amortized over
their expected life and such amortization is recorded as a reduction of
servicing income. See "Amortization of Excess Servicing Fees Receivable and
Mortgage Servicing Rights."
For the year ended December 31, 1995, the increase in mortgage loan sales
and fees was net of losses on options on futures contracts used for hedging
purposes in the amount of $5.4 million, while in 1996 and 1994 such hedging
activities produced gains in the amount of $3.1 million and $2.2 million,
respectively, thereby increasing mortgage loan sales and fees by the same
amount.
Net Interest Income. Net interest income is the difference between the
interest income earned on interest earning assets and the interest paid by FFCC
on its interest bearing liabilities. 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 Bid Rate for deposits
of U.S. dollars ("LIBID"), the cost of 936 Funds, interest on retail deposits,
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
interest earning assets has exceeded interest expense on FFCC's
short-term borrowings and other financing arrangements. Net interest income
increased by 11% from 1995 to 1996 after having decreased by approximately 20%
from 1994 to 1995, and increased by approximately 65% from 1993 to 1994. The
increase in net interest income during 1996 reflects an increase in average
interest earning assets, particularly at Doral Federal. Average interest
earnings assets at Doral Federal increased from $106.1 million as of December
31, 1995 to $199.6 million as of December 31, 1996. The decline in net
interest income during 1995 as compared to 1994 was the result of decreased
interest spreads, primarily from mortgage banking operations, as mortgage
interest rates declined more rapidly than short-term interest rates payable on
warehousing and repurchase agreement lines of credit
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<PAGE> 47
and the other funding vehicles used to finance such assets. The Company's
weighted average interest rate spread was approximately 218 basis points during
1996 as compared with approximately 250 basis points and 385 basis points
during 1995 and 1994, respectively. The decrease in interest spread during 1996
and 1995 compared to 1994 also reflects additional interest costs incurred in
connection with borrowings not directly related to interest earning assets,
including a servicing secured bank term loan, unsecured senior notes, and
ten-year convertible subordinated debentures. See "Liquidity and Capital
Resources." The decrease in the interest rate spread from 1993 to 1994 was due
to higher short-term borrowing costs. The Company has been able to continue to
maintain a positive interest 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 and the availability of low cost 936
Funds. As of December 31, 1996, approximately $64.2 million ($28.3 million of
such deposits are not reflected in the Consolidated Financial Statements of the
Company because of inter-company eliminations) or 34% of total deposits held at
Doral Federal consisted of non-interest bearing accounts, comprised primarily
of servicing accounts and corporate demand accounts maintained by the Company
and its affiliates.
Doral Federal contributed approximately $6.9 million or 34% of the
consolidated net interest income of the Company for the year ended December 31,
1996 compared to $4.3 million or 23% for the year ended December 31, 1995. This
increase reflects an increase in average interest earning assets from $106.1
million for the year ended December 31, 1995 to $199.6 million for the year
ended December 31, 1996 that was partially offset by a decrease in the average
interest rate spread from 336 basis points for 1996 compared to 407 basis
points for 1995.
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 income produced by these
securities. During the year ended December 31, 1996, the Company held mortgage
loans and mortgage-backed securities for an average period of 259 days prior to
sale as compared to 352 days for the year ended December 31, 1995. This
decrease in the amount of days mortgage loans and mortgage-backed securities
were held prior to sale was due principally to increased sales of loans and
mortgage backed securities.
Servicing Income. Servicing income represents revenues earned by FFCC for
administering mortgage loans. FFCC's loan servicing fees depend on the type of
mortgage loan being serviced and range 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 and the
size of its servicing portfolio. Servicing fees increased 10% from 1995 to 1996
and 33% from 1993 to 1994. Loan servicing fees, however, decreased 8% from 1994
to 1995. The decrease in loan servicing income during 1995 was due primarily to
sales made during 1995 and the last quarter of 1994 of mortgage servicing rights
aggregating approximately $512 million. Increases in the amount of loan
servicing fees for 1996 and 1994 were primarily due to increases in the
principal amount of loans serviced as compared to prior years. The mortgage
servicing portfolio was approximately $3.1 billion at December 31, 1996,
compared to $2.7 billion as of December 31, 1995. At December 31, 1996, less
than 2% of the Company's servicing portfolio was related to mortgages originated
outside Puerto Rico (all of which were originated in Florida).
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<PAGE> 48
The amount of principal prepayments on mortgage loans serviced by the
Company was $201 million, $160 million, and $281 million for the years ended
December 31, 1996, 1995 and 1994, respectively. This represented approximately
7%, 6%, and 11% of the aggregate principal amount of mortgage loans serviced
during such periods and the average size of the loans prepaid was $35,360,
$37,800, and $41,800, respectively. The primary means used by the Company to
reduce the sensitivity of its servicing income to increases in prepayment rates
is the maintenance of a strong retail origination network that has allowed it
to increase or maintain the size of its servicing portfolio even during periods
of high prepayments.
Amortization of Excess Servicing Fees Receivable and Mortgage Servicing
Rights. ESRs are amortized over the expected life of the asset and such
amortization is recorded as a reduction of servicing income. The amortization
of ESRs is based on the amount and timing of estimated future cash flows. See
Note 2 to the Company's Consolidated Financial Statements for additional
information regarding the accounting treatment of ESRs. Amortization of such
ESRs for each of the years ended December 31, 1996, 1995, and 1994 was
approximately $1,628,000, $988,000, and $570,000, respectively.
MSRs are amortized in proportion to, and over the period of estimated
servicing income. Amortization of MSRs is included as a component of "Other
Expenses" in the Company's Consolidated Financial Statements. During 1996,
total amortization of MSRs amounted to $998,789 versus $562,054 for 1995.
Increases in prepayment rates over anticipated levels can adversely affect
a mortgage company's revenues and liquidity by increasing the amortization
rates for MSRs and ESRs as well as requiring the Company to recognize an
impairment against income over and above scheduled amortization. See "Interest
Rate Fluctuations." The portion of the Company's mortgage servicing portfolio
consisting of MSRs that were originated by the Company prior to the adoption of
SFAS No. 122 is not reflected as an asset on the Company's Consolidated
Financial Statements, and is not subject to amortization or impairment.
Gain on Sale of Servicing Rights. During the years ended December 31,
1996, 1995 and 1994, the Company sold servicing rights of $102 million, $310
million, and $202 million, respectively, realizing pretax gains of
approximately $1.8 million, $5.2 million, and $3.0 million, respectively. While
the Company's strategy is to continue to increase the size of its servicing
portfolio by retaining the servicing rights to the mortgage loans it
originates, the Company may continue to sell servicing rights in the future
when market conditions are favorable.
Other Income and Expenses. Other income increased 23% in 1996 as compared
to 1995, and 21% from 1994 to 1995. The increases during 1996 and 1995 were due
primarily to increased fees earned by Doral Federal.
Total expenses in 1996 increased by $6.8 million compared to the same
period for 1995, as a result of higher interest expense associated with the
financing of the Company's mortgage loans and mortgage-backed securities
portfolios. Employee costs and advertising expense increased 39% and 41%,
respectively, over 1995 levels reflecting additional costs associated with
expanding the Company's customer base and loan origination capacity.
For 1995 compared to 1994 aggregate expenses increased by approximately
31% as a result of higher interest expense associated with the financing of the
Company's mortgage loan and mortgage-backed securities portfolio. Telephone
and advertising expenses decreased 19% and 41%, respectively, compared to 1994
levels as a result of cost reduction measures implemented by management
commencing during 1994. Employee costs
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in 1994 reflected approximately $1.75 million in voluntary reductions
taken by the Chief Executive Officer in salary.
Puerto Rico Income Taxes. The Puerto Rico maximum statutory corporate
income tax rate is 39%. For 1996, the effective income tax rate of FFCC was
13.5% as compared to 11.3% for 1995 and 16.3% for 1994. The decrease in
effective tax rates for 1996 and 1995 compared to 1994 was mainly due to the
increase in holdings of tax exempt GNMA mortgage-backed securities. The
decrease for 1995 also reflects deductions for the value of shares previously
granted under employment agreements.
The lower effective tax rates (as compared to the maximum statutory rate)
experienced by FFCC, 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. Net income tax savings to FFCC
attributable to this exemption amounted to approximately $8.5 million, $4.6
million and $5.4 million for the years ended December 31, 1996, 1995 and 1994,
respectively. See Note 21 to the Company's Consolidated Financial Statements
for a reconciliation of the provision for income taxes to the amount computed
by applying the applicable Puerto Rico statutory tax rates to income before
taxes.
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. The Company's primary sources of liquidity are
sales in the secondary mortgage market of the loans it originates and
purchases, short term borrowings under warehouse, gestation and repurchase
agreement lines of credit secured by pledges of its loans and mortgage-backed
securities (in most cases until such loans are sold and the lenders repaid) and
revenues from operations. In the past, the Company has also relied on
privately-placed and publicly offered debt financings and public offerings of
preferred and common stock. Doral Federal, the Company's thrift subsidiary,
also relies on deposits, borrowings from the FHLB-NY as well as term notes
backed by letters of credit of the FHLB-NY.
Total liabilities were approximately 6.32 and 6.10 times stockholders'
equity at December 31, 1996 and 1995, respectively. The Company's leverage
reflects a net increase in stockholders' equity of $21.5 million and an
increase in liabilities of $164.3 million, primarily as a result of increases
in deposit accounts held by Doral Federal and additional long term financing
obtained by the Company.
The Consolidated Statement of Cash Flows reflects the working capital
needs of the Company. Operating activities used approximately $26.1
million of net cash during the year 1996, compared to approximately $25.3
million in the comparable period of 1995. Mortgage loan originations for 1996
increased by 23% compared to 1995. 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 average period of
approximately 259 days for the year ended December 31, 1996 and 352 days during
the year ended December 31, 1995. The decrease in days was due to increased
sales of mortgage-backed securities held for trading and mortgage loans held
for sale. The Company capitalized $10.8 million of mortgage servicing rights
during 1996 related to the adoption of SFAS No. 122 and mortgage loan purchases
from third parties. The Company also recorded $15.9 million in increases in
ESRs during 1996 compared to $2.6 million during 1995.
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Investing activities used cash of approximately $111 million during the
year ended December 31, 1996, due primarily to origination of loans receivable
and purchases of securities held to maturity of approximately $98.7 million and
$54.5 million, respectively.
During 1996, financing activities provided approximately $158.4 million of
net cash, primarily due to additional deposits amounting to approximately $63.2
million received by Doral Federal, the Company's thrift subsidiary, and a net
increase of approximately $96.2 million in notes payable, of which
approximately $35 million represent term notes issued by Doral Federal and $75
million are related to the Company's 7.84% unsecured Senior Notes due 2006 that
were sold in a public underwritten offering in October 1996.
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. FFCC's warehousing lines of
credit are generally subject to termination at the discretion of the lender.
See Note 15 to the Company's Consolidated Financial Statements included
elsewhere herein for more information on the Company's warehousing lines of
credit.
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 costs of funds under repurchase agreements is typically lower than
the cost of funds borrowed under FFCC's warehousing lines of credit. FFCC's
continued use of repurchase agreements will depend on the cost of repurchase
agreements relative to the cost of borrowing under its warehousing lines of
credit with banks and other financial institutions. See Note 16 to the
Company's Consolidated Financial Statements included elsewhere herein for more
information on the Company's repurchase agreements.
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. For information regarding
Doral Federal's deposit accounts see Note 19 to the Company's Consolidated
Financial Statements included elsewhere herein. 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 of 110% of the advances or reimbursement obligations. At December
31, 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
December 31, 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 6.29%.
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 one-time a 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 "Recent Developments--Repeal of Section 936"
herein. Because Doral Federal has the right to prepay the notes upon an upward
adjustment of the rate, in all but one of the three cases
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in which the investor has requested an upward adjustment, Doral Federal
has been successful in negotiating a rate adjustment below 100% of LIBID.
As of December 31, 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 assets and risk-based capital of at least 8% of
risk weighted assets). As of December 31, 1996, Doral Federal had tangible
capital and core capital of $23.4 million or approximately 8.3% of adjusted
assets. As of such date, Doral Federal had risk-based capital of $24 million
or 19.8% of risk weighted assets. See Note 4 to the Company's Consolidated
Financial Statements included elsewhere herein for more information regarding
Doral Federal's regulatory capital requirements.
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 year ended December
31, 1996, the monthly average amount of funds advanced by the Company under
such servicing agreements was approximately $6.4 million.
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 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 managed by Bankers Trust Company, and
for general corporate purposes, including capital contributions to Doral
Federal, AAA Financial Services Corporation ("AAA Financial") and other
subsidiaries.
The Indenture for the Senior Notes as well as certain of the other debt
agreements of the Company contain various provisions that could affect the
ability of the Company to pay dividends and remain in compliance with such
obligations. These provisions include limitations on the amounts of dividends
and other distributions that may be paid as a percentage of the Company's net
revenues as well as requirements as to net worth, tangible net worth and other
financial covenants. These provisions have not had, and are not expected to
have, an adverse impact on the ability of the Company to pay dividends.
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 December 31, 1996, total assets were $1.1 billion compared to $916
million at December 31, 1995. This increase was due primarily to a net
increase of $31.1 million and $77.4 million in securities held to maturity and
loans receivable, respectively. Total liabilities were $951 million at
December 31, 1996, compared to $787 million at December 31, 1995. This increase
was largely the result of an increase in deposit accounts at Doral Federal and
long term notes payable. At December 31, 1996, deposit accounts totaled $159
million, compared to $96 million at December 31, 1995. Deposit accounts include
$30.3 million in non-interest bearing demand deposits representing escrow funds
and other servicing accounts from First Financial's servicing operations. The
increase in deposits is primarily due to the offering of competitive interest
rates and increased market
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recognition achieved by Doral Federal. As of December 31, 1996, Doral
Federal had $280.7 million in assets, compared to $160 million at December 31,
1995.
INTEREST RATE FLUCTUATIONS
Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates affect the volume of
mortgage loan originations and acquisitions, the interest rate spread on the
Company's portfolio of loans and mortgage-backed securities, the amount of gain
on sale of loans and the value of the Company's loan servicing portfolio and
mortgage-backed securities holdings.
Lower interest rates tend to increase demand for mortgage loans for home
purchases, as well as the demand for refinancing of existing mortgages. Higher
interest rates make it more difficult for potential borrowers to purchase
residential properties and to qualify for mortgage loans and reduce demand for
refinance loans. As a result, higher interest rates may adversely affect the
volume of loan originations and income related to mortgage production.
Although the Company has increased home purchase originations, a significant
future increase in mortgage interest rates in Puerto Rico would adversely
affect the Company's business if it results in a significant decrease in
refinancing of mortgage loans.
Changes in prevailing long-term market interest rates between the time the
Company commits to or establishes an interest rate on a mortgage loan and the
time commitments to purchase the mortgage loan are obtained or the loan is sold
affect FFCC's gain or loss on the sale of such mortgage loan. The Company uses
forward commitments and other hedging techniques in an attempt to reduce its
exposure to changes in interest rates pending the sale of such mortgage loans.
The Company does not generally hedge conventional loans in the pipeline or
in the process of origination because the Company does not generally permit
customers to lock-in an interest rate prior to closing. Instead, the interest
rates on loans are generally fixed at closing based on a certain spread over a
prevailing rate that adjusts weekly. For FNMA and FHLMC conforming loans and
FNMA and FHLMC mortgage-backed securities, the Company seeks to sell or obtain
commitments for the sale of such loans or mortgage-backed securities following
the funding of such loans. These loans are normally sold to institutional
investors or to FNMA and FHLMC. 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 this interest rate risk through the purchase of listed
options on U.S. Treasury Securities, as well as through the purchase of option
contracts in the over-the-counter market on other interest rate sensitive
instruments.
In the case of GNMA securities, the Company normally holds such securities
for longer periods prior to sale 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 certificates in Puerto Rico
tend to be more stable than on the mainland U.S. because the tax exempt status
of interest paid on these securities under Puerto Rico law makes them more
attractive to retail investors. This relative stability of prices for Puerto
Rico GNMA securities allows the Company to carry out 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-
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counter market. The Company has in place long-term repurchase
agreements secured by collateralized mortgage obligations backed by GNMA
certificates with a principal amount of approximately $65 million. The Company
does not obtain forward commitments or otherwise hedge such securities because
they are financed pursuant to long-term repurchase agreements. The Company has
the right to substitute similar securities under the repurchase agreements.
The cost of unexpired options, net of premiums collected on written
options, is capitalized as part of the carrying cost of the mortgage loans and
charged to income when they expire. Unrealized net gains or losses on
unexpired options positions are considered as part of the lower cost or market
evaluation made for mortgage loans.
Declines in interest rates can adversely affect the Company's revenues by
increasing prepayment rates and causing an increase of the amortization of
MSRs and ESRs or causing an impairment to be recognized with respect to such
assets. Moreover, increased prepayment rates can reduce the Company's
servicing income by decreasing the size of the Company's servicing portfolio.
To date, the Company has not used synthetic hedge devices to protect the value
of its MSRs and ESRs from future interest rate fluctuations. The primary means
used by the Company to reduce the sensitivity of the Company's servicing income
to possible reduction of its servicing portfolio has been the development of a
strong retail origination network that has allowed the Company to increase or
maintain the size of its servicing portfolio even during periods of high
prepayments.
The net interest income of the Company is also subject to interest rate
risk because its interest earning assets and interest-bearing liabilities
reprice at different times and varying amounts. Most of the Company's interest
earning assets, including its mortgage-backed securities held for trading, 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 on a
periodic basis (e.g., daily, monthly or quarterly). To protect against major
fluctuations in short-term interest rates, the Company purchases listed put and
call options and sells call options on financial instruments, including
Eurodollar contracts. This policy attempts to ensure a relatively stable
short-term cost of funds. With respect to the loans receivable and securities
held to maturity of Doral Federal, Doral Federal attempts to obtain long-term
deposits and other long-term debt financing, including advances from the
FHLB-NY and term notes backed by FHLB-NY letters of credit.
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 the above hedging
techniques will be successful. To the extent they are not successful, the
Company's profitability may be adversely affected.
INFLATION
FFCC is affected by inflation in the areas of loan production and
servicing fees. General and administrative expenses increase with
inflation. However, 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. Interest rates normally
increase during periods of high inflation and decrease during periods of low
inflation. See "Interest Rate Fluctuations" for a discussion of the effects of
changes of interest rates on the Company's operations.
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CHANGES IN ACCOUNTING PRINCIPLES
In January 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." This Statement 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 dependant.
Loans that are measured at fair value or at the lower of cost or fair value,
are excluded.
In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets,
to be held and used. Under SFAS No. 121, long-lived assets and certain
identifiable intangibles to be held and used must be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In performing the review of
recoverability, an estimate of the future cash flows expected to result from
the use of the asset and its eventual disposition must be made. If the sum of
the future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, an impairment loss is recognized.
In January 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-based Compensation." This Statement defines a fair value based method of
accounting for employee stock options and encourages all entities to adopt that
method of accounting for all of their stock-based employee compensation plans.
As allowed by SFAS No. 123, the Company elected to continue to measure
compensation cost for its stock compensation plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25. No transactions
of the nature covered by SFAS No. 123 have been made.
The adoption of these Statements have had no material effect on the
Company's result of operations or financial position.
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on the application of a financial-components approach that
focuses on control. That 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.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets sold, if
any, and retained interest, if any, based on their relative fair values at the
date of the transfer. Servicing assets and liabilities must be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income or loss and (b) assessment for asset impairment or
increased obligation based on their fair values.
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The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued a statement that defers for one year the
effective date applicable to the provisions of SFAS No. 125 that deal with
secured borrowings and collateral. Additionally, the deferment provision would
apply to transfers of financial assets only for repurchase agreements, dollar
rolls and securities lending.
Management believes that the adoption of these standards will not have a
material adverse effect on the Company's results of operations or financial
position.
RECENT DEVELOPMENTS
Product Diversification. Commencing in 1995, the Company began to offer
home equity and personal loans secured by mortgages in order to diversify its
loan products. 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 sells these loans, other than such loans funded and retained by Doral
Federal, to local financial institutions, or packages 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 is recognized on the Company's income statement
as a component of Mortgage Loan Sales and Fees and is reflected as an asset on
the Company's balance sheet as ESRs. As the volume of originations of this
type of loan product increases, the amount of the Company's revenues consisting
of increases in ESRs and the amount of ESRs reflected on the balance sheet of
the Company will increase.
Deregulation of Interest Rates. Mortgage interest rates on non-government
guaranteed mortgage loans in Puerto Rico were deregulated effective April 1996.
Management believes that this deregulation may result in an increase in loan
originations by expanding the market of potential borrowers. The deregulation
of interest rates in Puerto Rico may also have a positive impact on the
Company's net interest income by allowing the Company to originate higher
yielding mortgage loans.
New Broker-Dealer Subsidiary. During the second quarter of 1996, the
Company organized a new securities broker-dealer subsidiary, AAA Financial,
which commenced operations on September 12, 1996. The new broker-dealer
subsidiary commenced operations from a single branch in the San Juan
metropolitan area and employed 16 persons by the end of 1996. While the new
subsidiary is engaged in a general securities business, its efforts are
concentrated on the sale of Puerto Rico tax exempt GNMA securities and other
Puerto Rico securities. The operations of AAA Financial did not have a material
impact on the Company's results of operations for 1996.
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. On August 20,
1996, the Small Business Job Protection Act of 1996 (the "Small Business Job
Protection Act") was signed into law. The Small Business Job Protection Act
provides for the elimination of
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the special U.S. federal income tax benefits available under Section
936 to U.S. corporations operating and investing in Puerto Rico. The Act
repealed 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 investment
income is not be 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. While the final magnitude of the
impact of any such changes on the Company's profitability or financial
condition cannot be determined at this time, management believes, based on
recent experience, 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.
Possible Changes in Favorable Puerto Rico Tax Laws. The Company currently
benefits from Puerto Rico tax laws that exempt from Puerto Rico income taxes the
interest received on FHA and VA loans and on GNMA mortgage-backed securities
backed by FHA and VA loans. This favorable tax treatment has permitted the
Company to sell tax-exempt Puerto Rico GNMA mortgage-backed securities to local
investors at higher prices than those at which comparable instruments trade in
the mainland United States and to reduce its effective tax rate through the
receipt of tax exempt interest. On February 28, 1997, the Government of Puerto
Rico announced its intention to seek legislation to repeal the exemption for
interest received on FHA and VA loans. Under the Government's proposal,
interest on FHA and VA loans originated after June 30, 1997, with the exception
of certain loans made to finance the purchase of homes in low and moderate
income housing projects sponsored by local housing authorities, would cease to
be exempt. Individuals receiving interest on FHA and VA loans originated after
such date, however, would be taxed at a preferential 17% rate that would also
apply to Puerto Rico corporate debt obligations. The Government's proposal
would not alter the tax exempt status of FHA and VA loans and securities backed
by such loans originated prior to July 1, 1997.
The Government's proposal is part of a broader initiative to reform the
capital markets in Puerto Rico. The repeal of the tax exemption for interest on
FHA and VA loans must be approved by the Puerto Rico legislature before becoming
effective. To date, implementing legislation has not been introduced into the
Puerto Rico legislature. In the opinion of management, while the final impact
of the proposal cannot be fully measured until management has had the
opportunity to review the implementing legislation as finally approved,
management believes that the adoption of the proposal, in its current form,
would not have a material adverse effect on the Company's financial condition or
results of operation.
53
<PAGE> 57
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.
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" and
"Executive Compensation - Section 16(a) Beneficial Ownership Reporting
Compliance" contained in Company's definitive Proxy Statement for its 1997
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 10-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.
54
<PAGE> 58
(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.
55
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of FFCC, as currently in effect.(22)
3.2 By-laws of FFCC, as amended as of January 30, 1996.(18)
4.1 Common Stock Certificate.(22)
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)
10.18 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 September 8, 1995 between FFCC and Banco Santander Puerto
Rico.(14)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (a) Repurchase Agreement, between FFCC and BP Capital Markets, Inc., dated November 10,
1995. (18)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November
28, 1989.(4)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24,
1992.(5)
10.35 Employment Agreement dated August 29, 1995 between FFCC and Salomon Levis.(16)
10.36 Employment Agreement dated August 29, 1995 between FFCC and Zoila Levis.(16)
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 Employment Agreement dated August 29, 1995, between FFCC and Richard F. Bonini.(16)
</TABLE>
56
<PAGE> 60
<TABLE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
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)
10.49 Employment Agreement dated as of December 1, 1996 between FFCC and Luis Alvarado.(22)
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 Amended and Restated Master Production Agreement, dated as of October 1, 1995, between
FFCC, Doral Mortgage and Doral Federal, Master Production Agreement, dated as of October 1,
1995, between FFCC, Doral Mortgage 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 Puerto Rico-A.(14)
10.61 Credit Agreement, dated as of June 30, 1995, between FFCC, Doral Mortgage, the lenders
party thereto and Bankers Trust Company, as Agent.(17)
10.62 Debenture Purchase Agreement dated as of September 25, 1995, and amended restated as of
December 15, 1995, between the Company and BanPonce Corporation (including the forms of
Series A and Series Debentures.(15)
10.63 Financing Agreement dated October 10, 1995, between FFCC and Banco Santander together with
related Assignment and Pledge Agreements.(16)
10.64 Master Servicing and Collection Agreement dated October 1, 1995, between FFCC and Doral
Federal Savings Bank.(18)
10.65 Employment Agreement, dated as of February 20, 1996, between FFCC and Frederick C. Teed.(18)
10.66 First Amendment to Master Servicing and Collection Agreement, dated as of March 1, 1996,
between FFCC and Doral Federal Savings Bank.(19)
</TABLE>
57
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
10.67 First Amendment to Amended and Restated Master Production Agreement, dated as of March 1,
1996, between FFCC, Doral Mortgage Corporation and Doral Federal Savings Bank,
respectively.(19)
10.68 First Amended and Restated Credit Agreement, dated as of September 25, 1996, between FFCC,
Doral Mortgage, the lenders party thereto and Bankers Trust Company, as Agent, as amended
by First Amendment dated January 7, 1997.(22)
10.69 Indenture, dated as of October 10, 1996, between the Company and Bankers Trust Company, as
trustee, including form of Senior Note. (20)
10.70 Employment Agreement, dated as of July 1, 1996, between FFCC and Mario S. Levis.(21)
10.71 Employment Agreement, dated as of December 31, 1996, between Doral Mortgage and Edison
Velez.(22)
21 List of FFCC's subsidiaries.(22)
27 Financial Data Schedule (Edgar version only).(22)
</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.
(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.
58
<PAGE> 62
(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) 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, 1994.
(15) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated December 22, 1995.
(16) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(17) 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, 1995.
(18) 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, 1995.
(19) 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, 1996.
(20) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report For 8-K, dated October 10, 1996.
(21) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(22) Filed herewith.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K ("Form 8-K"), dated October 10, 1996,
reporting under Item 5 - "Other Items" the closing of the issuance and sale of
the Company's Senior Notes.
59
<PAGE> 63
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 27, 1997
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>
Chairman of the Board and
/s/ Salomon Levis Chief Executive Officer March 27, 1997
- --------------------------
(Salomon Levis)
/s/ Richard F. Bonini
- -------------------------- Director and March 27, 1997
(Richard F. Bonini) Chief Financial Officer
/s/ Edgar M. Cullman, Jr
- -------------------------- Director March 27, 1997
(Edgar M. Cullman, Jr.)
/s/ Frederick M. Danziger
- -------------------------- Director March 27, 1997
(Frederick M. Danziger)
/s/ John L. Ernst
- -------------------------- Director March 27, 1997
(John L. Ernst)
/s/ Zoila Levis
- -------------------------- Director March 27, 1997
(Zoila Levis)
/s/ A. Brean Murray
- -------------------------- Director March 27, 1997
(A. Brean Murray)
/s/ Victor M. Pons, Jr.
- -------------------------- Director March 27, 1997
(Victor M. Pons, Jr.)
/s/ Ricardo Melendez
- -------------------------- Vice President and March 27, 1997
(Ricardo Melendez) Controller, Principal
Accounting Officer
</TABLE>
60
<PAGE> 64
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> 65
FIRST FINANCIAL CARIBBEAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
JANUARY 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants...................................................... F-3
Consolidated Financial Statements
Consolidated Balance Sheet as of December 31, 1996 and 1995........................ F-4
Consolidated Statement of Income for the years ended
December 31, 1996, 1995 and 1994.................................................. F-5
Consolidated Statement of Changes in Stockholder's Equity for the years ended
December 31, 1996, 1995 and 1995 .................................................. F-6
Consolidated Statement of Cash Flows for the years ended December 31, 1996,
1995 and 1994...................................................................... F-7
Notes to Consolidated Financial Statements.......................................... F-9
</TABLE>
All financial schedules have been omitted because they are not applicable,
or because the information required is included in the consolidated financial
statements or notes thereto.
F-2
<PAGE> 66
[PRICE WATERHOUSE LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
First Caribbean Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
First Financial Caribbean Corporation and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, 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. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65", effective April 1, 1995.
/s/ Price Waterhouse
PRICE WATERHOUSE
San Juan, Puerto Rico
January 31, 1997
Stamp 1392092 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
F-3
<PAGE> 67
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 81,213,266 $ 59,871,646
Mortgage loans held for sale, net 261,607,809 244,132,116
Securities held for trading 411,447,299 407,941,495
Securities held to maturity 109,054,782 77,945,425
Securities available for sale 12,006,540 14,578,997
Loans receivable, net 128,765,669 51,355,258
Accounts receivable and mortgage servicing
advances, net 15,882,059 9,591,627
Accrued interest receivable 10,090,549 8,155,028
Mortgage servicing rights, net 20,968,937 11,164,065
Excess servicing fees receivable, net 24,678,425 10,407,297
Property, leasehold improvements and equipment, net 9,359,550 6,504,725
Cost in excess of fair value of net assets acquired, net 6,561,918 6,526,131
Real estate held for sale, net 2,246,449 2,084,541
Prepaid and other assets 8,071,477 5,859,593
-------------- --------------
Total assets $1,101,954,729 $ 916,117,944
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Loans payable $196,396,627 $234,367,019
Securities sold under agreements to repurchase 387,651,266 363,615,500
Deposit accounts 158,901,811 95,740,441
Notes payable 147,892,823 51,682,156
Advances from Federal Home Loan Bank of N.Y 15,000,000 10,407,111
Convertible Subordinated Debentures 10,000,000 10,000,000
Accounts payable and other liabilities 26,992,355 16,024,065
Income tax payable 216,873 388,041
Deferred tax liability 8,372,005 4,877,068
-------------- --------------
Total liabilities 951,423,760 787,101,401
============== ==============
Commitments and contingencies (Note 25)
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding (1995 - 108,397
shares of 10.5% Cumulative Convertible Preferred
Stock, Series A,
outstanding) -- 108,397
Common stock, $1 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) 9,125,092 8,884,170
Paid-in capital 38,672,523 38,329,800
Retained earnings 102,925,252 81,892,300
-------------- --------------
150,722,867 129,214,667
Unrealized (loss) gain on securities available for sale,
net of deferred tax (81,358) 8,856
Treasury stock at par value, 14,000 shares (14,000) (14,000)
Unearned compensation under employment contracts (96,540) (192,980)
-------------- --------------
Total stockholders' equity 150,530,969 129,016,543
-------------- --------------
Total liabilities and stockholders' equity $1,101,954,729 $916,117,944
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 68
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Interest income $ 66,986,946 $ 61,907,114 $ 46,507,972
Mortgage loan sales and fees 26,610,264 13,528,534 10,572,734
Servicing income 11,658,588 10,576,826 11,447,772
Gain on sale of mortgage servicing rights 1,813,108 5,204,933 3,003,459
Other income 764,082 619,923 510,705
------------ ------------ ------------
107,832,988 91,837,330 72,042,642
------------ ------------ ------------
Expenses:
Interest 46,443,095 43,380,148 23,251,898
Employee cost 8,981,538 6,471,059 6,000,632
Taxes, other than payroll and income taxes 1,086,556 1,150,416 847,856
Maintenance 694,000 654,354 712,627
Advertising 3,500,444 2,474,638 4,205,312
Professional services 2,670,920 2,867,316 3,658,557
Telephone 1,813,094 1,682,412 2,076,049
Rent 2,083,538 2,096,979 2,004,023
Other 9,281,164 8,999,491 10,540,576
------------ ------------ ------------
76,554,349 69,776,813 53,297,530
------------ ------------ ------------
Income before income taxes and cumulative
effect of change in accounting principle 31,278,639 22,060,517 18,745,112
------------ ------------ ------------
Income taxes:
Current 961,124 1,400,044 2,092,696
Deferred 3,277,000 1,100,169 436,899
------------ ------------ ------------
4,238,124 2,500,213 2,529,595
------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 27,040,515 19,560,304 16,215,517
Cumulative effect of change in accounting
principle - adoption of SFAS 115, net of
deferred income taxes of $880,000 -- -- 1,215,000
------------ ------------ ------------
Net income $ 27,040,515 $ 19,560,304 $ 17,430,517
============ ============ ============
Earnings per share:
Primary:
Income before cumulative effect of change
in accounting principle $ 2.98 $ 2.65 $ 2.29
Cumulative effect of change in accounting
principle -- -- .17
------------ ------------ ------------
Net income $ 2.98 $ 2.65 $ 2.46
============ ============ ============
Fully diluted:
Income before cumulative effect of change in
accounting principle $ 2.84 $ 2.53 $ 2.14
Cumulative effect of change in accounting
principle -- -- .16
------------ ------------ ------------
Net income $ 2.84 $ 2.53 $ 2.30
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 69
FIRST FINANCIAL CARIBBEAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Unrealized
(loss) gain
on securities
Preferred Common Paid-in Retained available
stock stock capital Earnings for sale
------------ ------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 414,413 $ 6,762,138 $16,884,486 $ 53,219,178
Shares converted (210,084) 420,168 (210,084)
Cash dividends:
Convertible preferred stock,
$1.05 per share (325,045)
Common stock - $.52 per share (3,618,215)
Net income 17,430,517
Amortization of unearned compensation ------------- ------------- ----------- ------------
Balance at December 31, 1994 204,329 7,182,306 16,674,402 66,706,435
shares issued on December 11, 1995 1,510,000 21,751,330
Shares converted (95,932) 191,864 (95,932)
Cash dividends:
Convertible preferred stock,
$1.05 per share (187,639)
Common stock - $.58 per share (4,186,800)
Net income 19,560,304
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net
of deferred taxes 8,856
-------- --------- ----------- ---------- -----
Balance at December 31, 1995 108,397 8,884,170 38,329,800 81,892,300 8,856
Shares issued on January 31, 1996 25,000 455,000
Shares converted (107,961) 215,922 (107,961)
Shares redeemed (436) (4,316)
Cash dividends:
Convertible preferred stock,
$.3825 per share (13,998)
Common stock - $.66 per share (5,993,565)
Net income 27,040,515
Amortization of unearned compensation
Net change in fair value of securities
available for sale, net of
deferred taxes
(90,214)
------------- ------------- ----------- ------------ -------------
Balance at December 31, 1996 $ 9,125,092 $38,672,523 $102,925,252 $ (81,358)
============= ============= =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
Unearned
compensation
under
Treasury employment
stock contracts Total
------------ -------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1993 ($14,000) ($321,568) $ 76,944,647
Shares converted
Cash dividends:
Convertible preferred stock,
$1.05 per share (325,045)
Common stock - $.52 per share (3,618,215)
Net income 17,430,517
Amortization of unearned compensation 64,294 64,294
------- -------- ----------
Balance at December 31, 1994 (14,000) (257,274) 90,496,198
shares issued on December 11, 1995 23,261,330
Shares converted
Cash dividends:
Convertible preferred stock,
$1.05 per share (187,639)
Common stock - $.58 per share (4,186,800)
Net income 19,560,304
Amortization of unearned compensation 64,294 64,294
Net change in fair value of securities
available for sale, net
of deferred taxes 8,856
------- -------- ----------
Balance at December 31, 1995 (14,000) (192,980) 129,016,543
Shares issued on January 31, 1996 480,000
Shares converted
Shares redeemed (4,752)
Cash dividends:
Convertible preferred stock,
$.3825 per share (13,998)
Common stock - $.66 per share (5,993,565)
Net income 27,040,515
Amortization of unearned compensation 96,440 96,440
Net change in fair value of securities
available for sale, net of
deferred taxes (90,214)
--------- ------------ ------------
Balance at December 31, 1996 ($14,000) ($96,540) $150,530,969
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 70
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 27,040,515 $ 19,560,304 $ 17,430,517
------------ ------------ ------------
Adjustments to reconcile net income
to net cash (used) provided by
operating activities:
Depreciation and amortization 1,796,043 1,764,500 1,533,750
Amortization of excess servicing
fees receivable 1,628,427 988,082 566,668
Amortization of cost in excess of fair
value of net assets acquired 374,530 376,158 358,097
Amortization of mortgage servicing rights 998,789 562,054 730,059
Deferred tax provision 3,277,000 1,100,169 436,899
Gain on sale of mortgage servicing rights (1,813,108) (5,204,933) (3,003,459)
Cumulative effect of change in accounting
principle -- -- (1,215,000)
Allowances for losses 797,000 352,000 299,523
Origination and purchases of mortgage
loans held for sale (719,886,000) (583,659,000) (797,582,000)
Principal repayments and sales of mortgage
loans held for sale 368,572,642 283,829,870 216,918,548
Purchases of mortgage-backed securities
held for trading (156,935,000) ( 72,124,000) (265,025,000)
Principal repayments and sales of
mortgage-backed securities held for trading 488,619,000 357,461,000 653,479,000
Increase in mortgage servicing rights (10,803,661) (8,207,139) (581,130)
Additions to excess servicing fees
receivable (15,899,555) (2,638,790) (5,859,312)
(Increase) decrease in accounts receivable
and mortgage servicing advances (7,087,432) (2,857,582) 8,112,720
Increase in accrued interest receivable (1,935,521) (280,477) (3,853,140)
(Decrease) increase in loans payable (26,203,023) (94,428,485) 72,911,782
(Decrease) increase in payable related to
short sales (12,106,847) 22,089,547 --
Increase in interest payable 2,388,123 382,912 788,079
Increase in securities sold under
agreements to repurchase 23,923,266 59,885,483 160,530,375
Increase (decrease) in accounts payable and
other liabilities 7,228,028 (2,151,491) (21,838,018)
Decrease in income tax payable (171,168) (2,183,732) (1,177,206)
Amortization of unearned compensation
under employment contracts 96,440 64,294 64,294
------------ ------------ ------------
Total adjustments (53,142,027) (44,879,560) 16,595,529
------------ ------------ ------------
Net cash (used) provided by
operating activities (26,101,512) (25,319,256) 34,026,046
------------ ------------ ------------
Cash flows used for investing activities:
Purchases of securities held to maturity (54,480,000) (10,789,000) (61,789,000)
Principal repayments of securities
held to maturity 23,370,643 3,207,857 799,896
Origination of loans receivable (98,680,000) (52,341,000) (26,252,000)
Principal repayments of loans receivable 21,269,589 4,060,159 836,792
Purchases of securities available for sale (4,639,000) -- --
Principal repayments and maturities of
securities available for sale 7,121,243 -- --
Purchase of property, leasehold improvements
and equipment (4,650,868) (802,245) (3,229,537)
Payments of contingent purchase price
of subsidiary (410,317) (292,887) (430,929)
Proceeds from sale of real estate held for sale 1,182,627 1,616,911 3,163,069
Acquisition of real estate held for sale (1,344,535) (1,585,541) (2,350,675)
Proceeds from sale of mortgage servicing rights 1,813,108 5,228,985 3,306,286
Increase in prepaid and other assets (1,541,969) (1,799,225) (591,019)
------------ ------------ ------------
Net cash used by investing activities (110,989,479) (53,495,986) (86,537,117)
------------ ------------ ------------
</TABLE>
(Continued)
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 71
FIRST FINANCIAL CARIBBEAN CORPORATION
-------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by financing activities:
Increase in deposits $ 63,161,370 $ 29,269,330 $ 40,020,265
Proceeds from convertible
subordinated debentures -- 10,000,000 --
Proceeds from issuance of common stock, net 475,248 23,261,330 --
Proceeds (repayment) of advances
from Federal Home Loan Bank 4,592,889 9,987,866 (2,012,134)
Increase in notes payable 96,210,667 34,626,676 17,055,480
Dividends declared and paid (6,007,563) (4,374,439) (3,943,260)
------------- ------------- -------------
Net cash provided by financing activities 158,432,611 102,770,763 51,120,351
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents 21,341,620 23,955,521 (1,390,720)
Cash and cash equivalents at beginning of year 59,871,646 35,916,125 37,306,845
------------- ------------- -------------
Cash and cash equivalents at the end of year $ 81,213,266 $ 59,871,646 $ 35,916,125
============= ============= =============
Supplemental Schedule of Noncash
Investing and Financing
Activities:
Noncash financing activities-conversion
of preferred stock $ 1,083,970 $ 959,320 $ 2,100,840
============= ============= =============
Supplemental Cash Flow Information:
Cash used to pay interest $ 44,055,000 $ 43,000,000 $ 22,460,000
============= ============= =============
Cash used to pay income taxes $ 1,132,000 $ 3,360,000 $ 3,260,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE> 72
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 de Puerto Rico, Inc., Doral Federal Savings Bank ("Doral Federal")
and AAA Financial Services Corporation ("AAA Financial"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
AAA Financial, a securities broker dealer, commenced operations in September
1996. Its operations for the year ended December 31, 1996 were not significant.
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 selected markets in
Florida. The Company, in combination with its subsidiaries, services FHA
insured, VA guaranteed and conventional mortgage loans pooled for issuance of
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") backed
securities and collateralized mortgage obligations certificates issued by
grantor trusts established by the Company ("CMO Certificates"). It also services
loans for private investors. The Company also originates loans for investment
and provides banking services through a federal savings bank that operates two
branches located in Puerto Rico. It also provides brokerage services through AAA
Financial.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The following summarizes the more significant accounting policies followed in
the preparation of the accompanying consolidated financial statements.
Securities held for trading
Securities held for trading are recorded at fair value. Changes in fair value
are recorded currently in income.
F-9
<PAGE> 73
Securities held to maturity
Securities held to maturity are recorded at amortized cost.
Securities available-for-sale
Securities available-for-sale are recorded at fair value, with unrealized gains
and losses excluded from earnings and reported, net of taxes, in a separate
component of stockholders' equity.
Mortgage loans held for sale
Mortgage loans held for sale are recorded at the lower of cost or market
computed on an aggregate portfolio basis.
Loans receivable
Loans receivable are held by Doral Federal principally for investment purposes.
These consist of residential first and second mortgages, commercial and consumer
loans.
Loans receivable are presented at the unpaid balance, less unearned interest,
net deferred loan fees 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 loans receivable, accounts
receivable and real estate held for sale. The allowance is established 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
loans sold with recourse at the time of sale. Ordinarily the amounts involved
are minimal insofar as the recourse obligations are met by substituting loans.
The Company has generally been able to rehabilitate and resell the reacquired
loans for at least their carrying amount. Accordingly, a reserve for possible
losses arising from recourse obligations has not historically been deemed
necessary.
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 related servicing
rights. 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
contractual servicing 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 sponsored secondary market makers. Accordingly, the
Company has recorded, as excess servicing fees receivable, amounts equal to the
present value of servicing fees to be
F-10
<PAGE> 74
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 receivable is realized through receipt of the excess service
fees over time. The Company periodically evaluates 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
used to calculate the original excess servicing fees receivable asset. Any
impairment in the value of the excess servicing fees receivable due to actual
and anticipated prepayment experience, is recognized currently as a reduction of
excess servicing fees receivable. Excess servicing fees receivable is
amortized over their estimated life using a method approximating the level-yield
method. The amortization is recorded as a reduction of servicing income.
Mortgage servicing rights
In April 1995, the Company adopted Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB No.
65," ("SFAS 122"). This Statement changed the accounting for servicing rights
related to loans originated by an entity. Previously, the Company followed the
guidance provided by SFAS 65 which, among other things, prohibited the
recognition of servicing rights related to loans originated by an entity. SFAS
122 requires that under certain conditions a portion of the cost of originating
a mortgage loan be allocated to the mortgage servicing right. The allocation is
based on the aggregate independent fair values of the loan and the related
servicing right. To determine the fair value of the servicing rights, the
Company uses the market prices of comparable servicing sale contracts.
SFAS 122 also requires that all mortgage servicing rights be evaluated for
impairment. In determining impairment, mortgage servicing rights are
disaggregated into pools based on their predominant risk characteristic. The
Company has determined that risk characteristic to be interest rates. Impairment
is recognized whenever the prepayment pattern of a particular mortgage pool
indicates that the fair value of the related mortgage servicing rights is less
than its carrying amount. Impairment is recognized by charging such excess to
income. The Company determined that no reserve for impairment is required.
The adoption of this standard had the effect of increasing net income and
mortgage loan sales and fees by approximately $1,500,000 and $2,600,000,
respectively, for the year ended December 31, 1995, and increasing capitalized
servicing rights at December 31, 1995 by approximately $4,150,000. If the
Company had not adopted SFAS 122, earnings per share would have been
approximately $2.44 and $2.33, on a primary and fully diluted basis,
respectively, for the year ended December 31, 1995. SFAS 122 prohibits
retroactive application, therefore, mortgage servicing rights related to loans
originated prior to April 1, 1995 continue to be unrecognized in the Company's
financial statements.
F-11
<PAGE> 75
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.
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
acquisitions made before Doral Federal and a 10-year period for the acquisition
of Doral Federal).
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. These range from five to ten years.
Securities purchased under agreements to resell
Resale agreements are treated as short-term investments. These are carried at
the amounts at which the transaction will be settled. The securities underlying
the agreements are not recorded in the asset accounts of the Company.
Securities sold under agreements to repurchase
From time to time the Company enters into sales of securities under agreements
to repurchase the same or similar securities. Amounts received under these
agreements represent short-term borrowings and the securities underlying the
agreements remain in the asset accounts.
Income and expense recognition
Loan origination fees and related direct loan origination costs are deferred and
amortized to income as an adjustment of the yield throughout the life of the
related mortgage loan. Such fees and costs related to mortgage loans held for
sale are deferred and recognized in income as a component of gain on sale of
mortgage loans when the related loans are sold or securitized.
F-12
<PAGE> 76
Sale of securities with put arrangements
From time to time the Company may sell mortgage-backed securities with put
arrangements. Pursuant to these arrangements the Company grants the buyer a put
option that allows the buyer to sell the securities back to the Company at a
negotiated price. The accounting treatment for these transactions (as a
borrowing or a sale) is based on an assessment of the probability that the put
option will be exercised. If on the transaction date, management determines that
it is probable that the put option will be exercised, the transaction is
accounted for as a borrowing. If it is not judged probable that the put option
will be exercised, the transaction is accounted for as a sale.
The premium collected on such put and any gain on the securities 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.
Amortization of debt issuance costs
Costs related to the issuance of debt are amortized under a method which
approximates the interest method and shown as part of the related debt.
Interest rate risk management
The Company has various mechanisms to reduce its exposure to interest rate
fluctuations, as these affect the value of its portfolio and the prices of newly
generated loans, loans to be originated and sales with put options.
The Company may enter into financial derivatives such as futures contracts,
options and interest rate swaps.
The cost of unexpired options, net of premiums collected on written options, is
capitalized as part of the carrying cost of the mortgage loans and charged to
income when these expire. Unrealized net gains or losses on unexpired options
positions are considered as part of the lower cost or market evaluation made for
mortgage loans.
F-13
<PAGE> 77
Loan servicing
The Company pools FHA insured and VA guaranteed mortgages for issuance of GNMA
mortgage-backed securities. Conventional loans are pooled and issued as FNMA or
FHLMC mortgage-backed securities and CMO certificates as well as sold in bulk to
investors with servicing retained. Under the servicing agreement, 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, 1996, accounts
receivable include advances to investors of approximately $8,195,000 (1995 -
$5,340,000).
The Company is also required to foreclose on loans in the event of default by
the mortgagor. 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 mortgage servicing rights
The Company recognizes gain or loss on the sale of mortgage servicing rights
after 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.
Income taxes
The Company follows an asset and liability approach that 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 which, based on management's evaluation, 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.
Statement of cash flows
Cash and cash equivalents include cash in banks, overnight deposits and
certificates of deposit (1996 - $49,400,000 and 1995 - $25,099,000) and other
highly liquid securities with an original maturity of three months or less.
At December 31, 1996, other highly liquid securities include $21,373,791 of
securities purchased under agreements to resell maturing between January 8 and
February 20, 1997.
F-14
<PAGE> 78
At December 31, 1996, collateral for securities purchased under agreements to
resell are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Carrying value market value
-------------- ------------
<S> <C> <C>
Mortgage-backed securities $12,317,534 $12,699,334
US Treasury Notes 10,000,000 10,018,750
----------- ------------
$22,317,534 $22,718,084
=========== ===========
</TABLE>
These securities were held by the dealers that arranged the transactions.
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 during the period 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 shares of convertible preferred stock and convertible
subordinated debentures are converted into common stock, and after giving
retroactive effect to the elimination of interest expense, net of income taxes,
applicable to the convertible subordinated debentures.
The number of shares of common stock used for computing the primary and fully
diluted earnings per share was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<C> <C> <C> <C>
Primary 9,066,561 7,307,945 6,942,734
Fully diluted 9,681,268 7,760,135 7,576,964
</TABLE>
Fair value of financial instruments
The reported fair values of financial instruments are based on a variety of
factors. For a substantial portion of financial instruments, fair values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of year end or that may be realized in the future.
F-15
<PAGE> 79
Changes in accounting principles
In January 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement 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. Loans that are
measured at fair value or at the lower of cost or fair value, are excluded.
In January 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed." SFAS
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets,
to be held and used. Under SFAS No. 121, long-lived assets and certain
identifiable intangibles to be held and used must be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review for recoverability, an
estimate of the future cash flows expected to result from the use of the asset
and its eventual disposition must be made. If the sum of the future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized.
In January 1996, the Company also adopted SFAS No. 123, "Accounting for
Stock-based Compensation." This Statement defines a fair value based method of
accounting for employee stock options and encourages all entities to adopt that
method of accounting for all of their stockbased employee compensation plans. As
allowed by SFAS No. 123, the Company elected to continue to measure compensation
cost for its stock compensation plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25. No transactions of the nature
covered by SFAS No. 123 have been made.
The adoption of these Statements had no effect on the Company's results of
operations or financial position.
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued a new
Statement of Financial Accounting Standards "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125"). This Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
the application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
F-16
<PAGE> 80
This Statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained interest,
if any, based on their relative fair values at the date of the transfer.
Servicing assets and liabilities must be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.
The provisions of this Statement, except as indicated below, are effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and must be applied prospectively. Earlier or
retroactive application is not permitted. In December 1996, the FASB issued a
statement that defers for one year the effective date applicable to the
provisions of SFAS No. 125 that deal with secured borrowings and collateral.
Additionally, the deferment provision would apply to transfers of financial
assets only for repurchase agreements, dollar rolls and securities lending.
Management believes that the adoption of these standards will not have a
material adverse effect on the Company's financial statements.
Other
Certain amounts reflected in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to the presentation for 1996.
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 resulting in $1,620,000 of cost in excess of the fair
value of net assets acquired. The terms of the purchase agreement required
additional pay-outs to the former stockholder over a ten-year period that ended
in 1996. The additional pay-outs are contingent payments under the purchase
agreements, and are accounted for as additional cost over the fair value of
assets acquired. The amount of such pay-outs was determined based on a
percentage ranging from 1/16% to 1/4% of the aggregate principal amount of
mortgage loans closed.
F-17
<PAGE> 81
The changes in cost in excess of fair value of net assets acquired are shown
below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $6,526,131 $6,609,402 $6,536,570
Contingent payments under Doral
purchase agreement 410,317 292,887 430,929
Amortization expense (374,530) (376,158) (358,097)
------------ ------------ ------------
Balance at the end of period $6,561,918 $6,526,131 $6,609,402
========== ========== ==========
</TABLE>
Total accumulated amortization relating to cost in excess of fair value of net
assets acquired amounted to $3,726,190, $3,351,660 and $2,975,502 at December
31, 1996, 1995 and 1994, respectively.
NOTE 4 - REGULATORY REQUIREMENTS:
Holding Company Requirements
As a result of the acquisition of Doral Federal, the Company 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 SLHC, the
Company was registered 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 an SLHC and
its subsidiaries may engage. However, in general, these 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 savings institutions,
these investments include, among other things, home mortgages, mortgage-backed
securities, and personal loans.
Thrift Regulatory Capital Requirements
Doral Federal is also subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Doral Federal's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Doral
Federal must meet specific capital guidelines that involve quantitative measures
of Doral Federal's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Doral Federal's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk weightings, and other factors.
F-18
<PAGE> 82
Quantitative measures established by regulation to ensure capital adequacy
require Doral Federal to maintain minimum amounts and ratios (set forth in the
table below) of tangible capital to adjusted assets, core capital to adjusted
assets, and total risk-based capital to risk weighted assets, all as defined in
the regulation. Management believes, as of December 31, 1996, that Doral Federal
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS categorized
Doral Federal as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized Doral Federal must
maintain minimum total risk-based, core and Tier I risk-based capital ratios as
set forth in the table. There are no conditions or events since the notification
that management believes have changed the institution's category.
Doral Federal's actual capital amounts and ratios are also presented in the
table. Totals of $343,339 and $394,626 were deducted from tangible, core and
total risk-based capital for certain non-allowable assets in 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
To be well capitalized
For Capital Under prompt corrective
Actual Adequacy Purposes action provisions
--------------------- ------------------ -------------------------
Amount Ratio (%) Amount Ratio(%) Amount Ratio (%)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tangible capital (to adjusted
assets) $23,376,244 8.3 $4,206,239 >= 1.5 - -
Tier I risk-based capital (to risk
weighted assets) $23,376,244 19.3 - - $ 7,282,044 >= 6.0
Core capital (to adjusted assets) $23,376,244 8.3 $8,412,479 >= 3.0 $14,020,798 >= 5.0
Total risk-based capital (to risk
weighted assets) $24,095,420 19.8 $9,709,392 >= 8.0 $12,136,740 >= 10.0
As of December 31, 1995:
Tangible capital (to adjusted
assets) $16,010,824 10.0 $2,400,180 >= 1.5 - -
Tier I risk-based capital (to risk
weighted assets) $16,010,824 25.4 - - $ 3,778,961 >= 6.0
Core capital (to adjusted assets) $16,010,824 10.0 $4,800,360 >= 3.0 $ 8,000,600 >= 5.0
Total risk-based capital (to risk
weighted assets) $16,249,331 25.8 $5,038,615 >= 8.0 $ 6,298,269 >= 10.0
</TABLE>
F-19
<PAGE> 83
Housing and Urban Development Requirements
The Company is a U.S. Department of Housing and Urban Development approved, non
supervised mortgagee and is required to maintain an excess of current assets
over current liabilities and minimum net worth, as defined by the various
regulatory agencies. The Company is also required to maintain fidelity bonds and
errors and omission's insurance coverages based on the balance of its servicing
portfolio.
SAIF Assessment
During the third quarter of 1996, the Company recorded a nonrecurring expense of
$588,000 related to the payment of a special assessment to the Federal Deposit
Insurance Corporation due to the enactment of legislation to recapitalize the
Savings Association Insurance Fund.
Registered Broker-Dealer Requirements
AAA Financial is registered as a broker-dealer with the Securities and Exchange
Commission ("SEC") and the Puerto Rico Office of the Commissioner of Financial
Institutions (the "CFI"). AAA Financial is also a member of the National
Association of Securities Dealers (the "NASD"). As a registered broker-dealer,
it is subject to regulation by the SEC, the NASD and the CFI in matters relating
to the conduct of its securities business, including record keeping and
reporting requirements, supervision and licensing of employees and obligations
to customers. In particular, AAA Financial is subject to the SEC's net capital
rules, which specify minimum net capital requirements for registered
broker-dealers and are designed to ensure that broker-dealers maintain adequate
regulatory capital in relation to their liabilities and the size of their
customer business.
The Company is in compliance with these regulatory requirements.
NOTE 5 - MORTGAGE LOANS HELD FOR SALE:
Mortgage loans held for sale consist of:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Mortgage Loans:
Conventional loans $193,644,969 $160,723,158
FHA/VA loans 62,548,030 79,338,335
Construction and commercial loans 5,414,810 4,070,623
------------ ------------
$261,607,809 $244,132,116
============ ============
</TABLE>
F-20
<PAGE> 84
At December 31, 1996, the aggregate amortized cost and approximate market value
of these loans are as follows:
<TABLE>
<CAPTION>
Gross unrealized Gross unrealized Approximate
Amortized cost holding gains holding losses market value
-------------- ------------- -------------- ------------
<S> <C> <C> <C>
$261,607,809 $11,207,655 ($7,625,151) $265,190,313
============ =========== ========== ============
</TABLE>
Proceeds from sales of mortgage loans held for sale and mortgage-backed
securities held for trading during 1996 was approximately $765,195,000 (1995 -
$725,236,000, 1994 - $774,313,000). Gross gains of $33,580,000 (1995 -
$42,472,000, 1994 - $56,010,000) and gross losses of $19,014,000 (1995 -
$27,362,000, 1994 - $41,452,000) were realized on those sales.
NOTE 6 - SECURITIES HELD FOR TRADING:
Securities held for trading consist of:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Mortgage-backed securities:
GNMA $219,324,613 $242,327,525
CMO certificates 158,109,657 157,535,436
FHLMC 6,369,721 7,091,819
FNMA 929,498 986,715
US Treasury Bonds 10,218,750 --
US Treasury Notes 9,450,000 --
US Treasury Bills 5,095,060 --
Other 1,950,000 --
------------ ------------
$411,447,299 $407,941,495
============ ============
</TABLE>
CMO certificates include the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Certificates of other issuers $135,815,885 $135,572,829
Subordinated certificates, CMO's established
by the Company 14,597,551 13,136,055
Residual certificates, CMO's established by
the Company 7,696,221 8,826,552
------------ ------------
$158,109,657 $157,535,436
============ ============
</TABLE>
F-21
<PAGE> 85
At December 31, 1996, CMO certificates include approximately $14,894,000 of
interest only certificates.
Net unrealized holding gains on trading securities included in earnings for the
year ended December 31, 1996 amounted to approximately $2,796,000 (1995 -
$4,864,000, 1994 - net unrealized holding losses of $1,485,000).
NOTE 7 - SECURITIES HELD TO MATURITY:
Securities held to maturity consist of:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
Amortized Fair Amortized Fair
cost value cost value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Mortgage backed securities:
CMO certificates of other issuers $ 58,828,043 $ 59,803,233 $ 59,248,183 $ 59,520,647
GNMA 37,879,031 38,483,168 10,744,705 10,918,536
Debt securities:
Federal Home Loan Bank Notes 3,492,882 3,487,300 4,999,354 4,995,300
U.S. Treasury Notes 6,956,248 6,976,250 1,997,436 2,001,880
U.S. Treasury Bills 65,871 69,000 63,075 63,360
Other investments:
Mortgage notes receivables 1,832,707 1,832,707 892,672 892,672
------------ ------------ ------------ ------------
$109,054,782 $110,651,658 $ 77,945,425 $ 78,392,395
============ ============ ============ ============
</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 which has the ability to finance these securities with
deposits, advances from Federal Home Loan Bank of N.Y. and other long-term
funding sources.
At December 31, 1996, CMO certificates include approximately $4,550,000 of
interest only certificates.
At December 31, 1996, securities held to maturity include approximately
$16,220,000 pledged to secure public funds deposited in Doral Federal.
F-22
<PAGE> 86
Contractual maturities of securities held to maturity at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
MBS Debt securities Other
--- --------------- -----
<S> <C> <C> <C>
Within one year $ -- $ 65,871 $ 1,832,707
After 1 year through five years 12,487,500 8,956,248 --
After 5 years through 10 years 12,483,350 1,492,882 --
After 10 years 71,736,224 -- --
----------- ----------- -----------
$96,707,074 $10,515,001 $ 1,832,707
=========== =========== ===========
</TABLE>
Expected maturities on mortgage-backed securities and loans will differ from
contractual maturities because borrowers have the right to prepay obligations
with or without prepayment penalties.
Aggregate gross unrealized holding gains and losses are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995 1996 1995
---- ---- ---- ----
MBS Debt securities
<S> <C> <C> <C> <C>
Gross unrealized holding gains $1,613,352 $ 480,645 $ 23,131 $ 4,730
========== ========== ========== ==========
Gross unrealized holding losses $ 34,025 $ 34,350 $ 5,582 $ 4,055
========== ========== ========== ==========
</TABLE>
NOTE 8 - SECURITIES AVAILABLE FOR SALE:
Securities available for sale consist of the following certificates:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
FNMA $ 2,241,007 $ 2,133,870 $ 7,164,471 $ 7,132,358
FHLMC 2,364,808 2,277,139 4,413,676 4,381,228
GNMA 7,534,100 7,595,531 2,991,994 3,065,411
----------- ----------- ----------- -----------
$12,139,915 $12,006,540 $14,570,141 $14,578,997
=========== =========== =========== ===========
</TABLE>
F-23
<PAGE> 87
Aggregate gross unrealized holding gains and losses are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross unrealized holding gains $ 61,430 $ 95,406
======== ========
Gross unrealized holding losses $194,805 $ 86,550
======== ========
</TABLE>
The contractual maturity of the securities available for sale at December 31,
1996 is over ten years.
Proceeds from sales of securities available for sale during 1996 were
approximately $6,548,000. Gross gains of $33,478 were realized on those sales.
There were no sales during 1995 and 1994.
NOTE 9 - LOANS RECEIVABLE:
Loans receivable consist of:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Residential mortgage loans $ 91,595,388 $ 29,480,931
Commercial real estate 18,461,975 9,204,612
Consumer - secured by mortgage 12,207,143 7,361,606
Construction loans 2,793,026 2,637,523
Loans on savings deposits 1,771,242 1,939,912
Commercial 2,047,174 701,650
Consumer - other 356,237 323,744
Land secured 813,975 330,345
------------- -------------
Gross loans 130,046,160 51,980,323
Less:
Unearned interest and deferred loan fees (561,315) (382,894)
Reserve for loan losses (719,176) (242,171)
------------- -------------
(1,280,491) (625,065)
------------- -------------
Total loans $ 128,765,669 $ 51,355,258
============= =============
</TABLE>
As of December 31, 1996, the Company had loans amounting to approximately
$1,728,000 (1995 - $949,000) on 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 $114,000 (1995 - $86,000).
F-24
<PAGE> 88
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, 1996, the composition of loans receivable was as follows:
<TABLE>
<CAPTION>
Fixed rate Adjustable rate
---------- ---------------
Term to date of
Term to maturity Book value rate adjustment Book value
---------------- ---------- --------------- ----------
<S> <C> <C> <C>
1 month - 1 year $ 3,348,611 1 month - 1 year $3,808,206
1 year - 3 years 2,010,815 Non performing 188,200
3 years - 5 years 6,030,170 ----------
5 years - 10 years 32,501,114 $3,996,406
10 years - 20 years 44,896,737 ==========
More than 20 years 35,722,130
Non - performing 1,540,177
-----------
$126,049,754
============
</TABLE>
NOTE 10 - ALLOWANCES FOR LOSSES:
The changes in the allowances for losses were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Accounts receivable and mortgage servicing advances:
Balance at beginning of period $1,805,701 $1,563,701 $1,446,563
Provision for losses 142,000 242,000 132,000
Losses charged to the allowance (514,927) - (14,862)
---------- ---------- ----------
Balance at the end of period $1,432,774 $1,805,701 $1,563,701
========== ========== ==========
Real estate held for sale:
Balance at beginning of period $ 356,035 $ 356,035 $ 525,000
Provision for losses - - -
Losses charged to the allowance - - (168,965)
---------- ---------- ----------
Balance at the end of period $ 356,035 $ 356,035 $ 356,035
========== ========== ==========
Reserve for bank loan losses:
Balance at beginning of period $ 242,171 $ 428,046 $ 234,200
Provision for loan losses 655,000 110,000 167,523
Recoveries 48,540 6,810 26,323
Losses charged to the allowance (226,535) (302,685) -
---------- ---------- ---------
Balance at the end of period $ 719,176 $ 242,171 $ 428,046
========== ========== =========
</TABLE>
F-25
<PAGE> 89
NOTE 11 - EXCESS SERVICING FEES RECEIVABLE:
The changes in excess servicing fees receivable are shown below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $10,407,297 $ 8,756,589 $3,463,945
Additions 15,899,555 2,638,790 5,859,312
Amortization
Scheduled (1,628,427) (988,082) (566,668)
Unscheduled - - -
----------- ----------- ----
Balance at the end of period $24,678,425 $10,407,297 $8,756,589
=========== =========== ==========
</TABLE>
There was no impairment of excess servicing fees receivable during any of the
above periods.
NOTE 12 - PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Property, leasehold improvements and equipment consist of:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Office furniture and equipment $ 6,763,942 $ 6,076,902
Leasehold improvements 5,383,776 4,634,187
Automobiles 334,880 262,428
Office building 361,794 335,982
Real estate under rental agreements 73,660 73,660
----------- -----------
12,918,052 11,383,159
Less - Accumulated depreciation and amortization (6,515,397) (4,956,434)
----------- -----------
6,402,655 6,426,725
Land 2,956,895 78,000
----------- -----------
$ 9,359,550 $ 6,504,725
=========== ===========
</TABLE>
F-26
<PAGE> 90
NOTE 13 - MORTGAGE SERVICING RIGHTS:
The changes in mortgage servicing rights are shown below:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $11,164,065 $ 3,543,032 $3,994,788
Capitalization of rights 10,803,661 7,901,308 581,130
Rights sold - (24,052) (302,827)
Rights purchased - 305,831 -
Impairments - - -
Amortization:
Scheduled (998,789) (562,054) (730,059)
Unscheduled - - -
----------- ----------- ----------
Balance at the end of period $20,968,937 $11,164,065 $3,543,032
=========== =========== ==========
</TABLE>
The Company's servicing portfolio amounted to approximately $3,100,000,000 and
$2,668,000,000 at December 31, 1996 and 1995, respectively, including
$74,390,000 and $85,170,000 respectively, of loans sold with recourse which are
not government guaranteed or insured.
During the years ended December 31, 1996, 1995 and 1994, the Company sold rights
to service loans amounting to approximately $102,000,000, $310,000,000 and
$202,000,000, respectively. Mostly all sales were from pre-SFAS No. 122. During
the years ended December 31, 1996 and 1994, the Company did not purchase rights
to service loans (1995 - $40,000,000). The carrying amount of those mortgage
servicing rights recorded post-SFAS No. 122 approximates its fair value.
NOTE 14 - ACCOUNTS PAYABLE AND OTHER LIABILITIES:
Accounts payable and other liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Amounts retained on mortgage loans,
generally paid within 5 days $ 3,427,154 $ 2,164,834
Customer mortgages and closing expenses payable 2,360,763 1,756,931
Deferred compensation plan 2,605,658 1,982,142
Incentive compensation payable 5,900,768 2,162,867
Accrued expenses and other payables 12,698,012 7,957,291
----------- -----------
$26,992,355 $16,024,065
=========== ===========
</TABLE>
F-27
<PAGE> 91
NOTE 15 - LOANS PAYABLE:
At December 31, 1996 and 1995, the Company had several mortgage warehousing
lines of credit and gestation or presale facilities totaling $595,000,000 and
$525,000,000, 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,
------------
1996 1995
---- ----
<S> <C> <C>
Loans payable resulting from use of
warehousing lines of credit and gestation or
presale facilities, due in 1997. At various
variable rates averaging - 6.69% and
6.77% at December 31, 1996 and 1995,
respectively, and other financing arrangements $186,413,927 $171,277,562
Securities sold short at 7.5% due on January 1997
(1995 - due December 31, 1996) 9,982,700 22,089,547
Amount payable in connection with securities
returned under put arrangement on January 1996, at
7.50 % -- 41,000,000
------------ ------------
$196,396,627 $234,367,109
============ ============
</TABLE>
Maximum borrowings outstanding at any month-end during 1996 and 1995 were
$223,000,000 and $280,000,000, respectively. The approximate average outstanding
borrowings during the periods were $203,000,000 and $223,000,000, respectively.
The weighted average interest rate of such borrowings, computed on a monthly
basis, was 6.71% in 1996 and 7.15% in 1995.
F-28
<PAGE> 92
In 1995, FFCC entered into a Syndicated Credit Agreement (the "Syndicated Credit
Agreement") with five banks providing for three credit facilities totaling up to
$125 million. The credit facilities were structured by Bankers Trust Company, as
administrative and syndicate agent. The three facilities include: (i) a $100
million secured one-year revolving warehousing credit facility to finance
residential mortgage loans and mortgage-backed securities; (ii) a $7 million
secured one-year revolving credit facility to provide financing for receivables
and working capital needs; and (iii) a $18 million five-year senior secured term
loan, secured with a portion of the Company's servicing portfolio, to finance
the acquisition of additional servicing rights and general working capital
purposes. On September 25, 1996, the Syndicated Credit Agreement was amended and
restated to extend the maturity date until June 27, 1997, and add an additional
$3 million to the working capital line. In addition, the third facility was
repaid and eliminated from the amended Syndicated Agreement. The amounts
available under the Syndicate Credit Agreement are subject to a borrowing base
which consists of mortgage loans and mortgage-backed securities for the first
facility and receivables relating to servicing advances and real estate owned
for the second facility. Loans payable include advances from the warehousing
credit facility. Advances from the other facility is included in notes payable.
The existing warehousing credit facilities, the Syndicated Credit Agreement and
other financing arrangements require the Company to maintain certain capital
ratios and to comply with other requirements. At December 31, 1996, the Company
was in compliance with these requirements.
NOTE 16 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The Company sells mortgage-backed securities and mortgage loans under agreements
to repurchase. At December 31, 1996 and 1995, the Company had several repurchase
agreement lines of credit, totaling $692,000,000 and $617,000,000, respectively.
At December 31, 1996 and 1995, the Company had a liability of $387,651,266 and
$363,615,500, respectively, relating to such agreements at interest rates
ranging from 5.32% to 6.50% in 1996 and 5.09% to 6.95% in 1995.
F-29
<PAGE> 93
These agreements mature at various dates as follows:
December 31, 1996:
<TABLE>
<CAPTION>
Approximate market
Repurchase and book value of
Type of security liability underlying securities
- ---------------- --------- ---------------------
<S> <C> <C>
GNMA (1) $116,459,015 $122,827,388
FHLMC (1) 6,030,638 6,176,947
FNMA (1) 763,266 929,498
CMO Certificates (1) 70,467,504 76,752,780
FHLB Discount Note (1) 159,905 160,000
------------ ------------
193,880,328 206,846,613
------------ ------------
GNMA (2) 97,513,474 106,275,154
FHLMC (2) 170,608 192,775
CMO Certificates (2) 36,165,588 48,891,806
------------ ------------
133,849,670 155,359,735
------------ ------------
GNMA (3) 4,437,827 4,510,502
------------ ------------
CMO Certificates (4) 55,483,441 64,514,858
------------ ------------
$387,651,266 $431,231,708
============ ============
</TABLE>
F-30
<PAGE> 94
December 31, 1995:
<TABLE>
<CAPTION>
Approximate market
Repurchase and book value of
Type of security liability underlying securities
- ---------------- --------- ---------------------
<S> <C> <C>
GNMA (1) $143,475,000 $152,157,723
FHLMC (1) 6,917,000 7,091,819
FNMA (1) 1,001,000 986,515
CMO Certificates (1) 126,630,000 148,223,489
------------ ------------
278,023,000 308,459,546
------------ ------------
GNMA (2) 39,998,000 42,541,205
CMO Certificates (2) 25,554,000 29,707,699
------------ ------------
65,552,000 72,248,904
------------ ------------
GNMA (3) 5,014,000 5,708,786
------------ ------------
CMO Certificates (4) 15,026,500 17,767,400
------------ ------------
$363,615,500 $404,184,636
============ ============
</TABLE>
(1) Term up to 30 days
(2) Term over 30 days to 120 days
(3) Term over 120 days to 1 year
(4) Term between 3 to 5 years
Maximum borrowings outstanding at any month-end during 1996 and 1995 under the
repurchase agreements were $413,000,000 and $389,000,000, respectively. The
approximate average borrowings outstanding during the periods were $387,000,000
and $368,000,000, respectively. The weighted average interest rate of such
borrowings, computed on a monthly basis was 5.45% in 1996 and 5.90% in 1995.
At December 31, 1996, securities sold under agreements to repurchase are
classified by dealer as follows:
<TABLE>
<CAPTION>
Approximate
market value of
Balance of borrowing underlying securities
-------------------- ----------------------
<S> <C> <C>
BP Capital Markets, Inc. $114,150,827 $133,702,984
PaineWebber, Inc. of Puerto Rico 23,018,000 26,392,352
Merrill Lynch Government Securities of Puerto Rico, SA 184,596,457 199,848,841
Bear Stearns Securities Corp. 14,362,000 15,285,675
CS First Boston Corporation 4,025,000 4,330,308
Privately placed with institutions and other investors 27,305,982 29,264,775
Conservation Trust of Puerto Rico 20,193,000 22,406,773
------------ ------------
Total $387,651,266 $431,231,708
============ ============
</TABLE>
F-31
<PAGE> 95
NOTE 17 - NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
<S> <C> <C>
Demand note payable at 9% interest, collateralized by
CMO certificates $ 1,000,000 $ 1,000,000
Unsecured medium term notes, payable at interest rates
ranging from 7.00% to 13.63%, final payment dates
ranging from January to June 1997 660,000 1,590,000
Unsecured notes, payable at interest rates ranging from
6.50% to 9.25%, final payment dates ranging from
January 1997 to May 2001 4,675,000 5,915,480
Note payable to bank, collateralized by CMO certificates,
at 8.50% interest rate and due on October 10, 1997 9,275,447 9,776,676
Term-notes payable to corporate investors, collateralized
by stand-by letters of credit issued by the Federal Home
Loan Bank of New York:
at 5.55% maturing on October 13, 2000 8,100,000 8,100,000
at a variable rate (4.67% at December 31, 1996)
maturing on November 17, 2000 5,000,000 5,000,000
at 5.23% maturing on November 27, 2000 5,000,000 5,000,000
at 6.05% maturing on May 23, 2001 5,000,000 -
at 5.98% maturing on June 19, 2001 10,000,000 -
at 6.30% maturing on September 18, 2001 10,000,000 -
at 6.28% maturing on September 24, 2001 10,000,000 -
Note payable to bank, at 7.15% interest rate, due
June 27, 1997 3,000,000 -
Note payable to bank, collateralized by CMO certificates,
at 8.00% interest rate and due on February 15, 1997 3,280,882 -
7.84% Senior Notes due on October 10, 2006 70,766,494 -
Mortgage note secured by land at 7.63% interest rate
and due on June 11, 1997 2,135,000 -
Loan payable to Bank, collateralized by mortgage
servicing rights held by the Company - 15,300,000
------------ -----------
$147,892,823 $51,682,156
============ ===========
</TABLE>
F-32
<PAGE> 96
At December 31, 1996, the scheduled aggregate annual maturities of notes payable
were approximately as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1997 $ 21,741,329
1998 735,000
1999 1,500,000
2000 18,100,000
2001 35,050,000
2002 and thereafter 75,000,000
------------
152,126,139
Less : Debt issuance costs including
interest rate hedging costs (4,233,506)
------------
$147,892,823
============
</TABLE>
NOTE 18 - CONVERTIBLE SUBORDINATED DEBENTURES:
Consists of 8.25% Convertible Subordinated Debentures due January 1, 2006 (the
"Subordinated Convertible Debentures") sold to BanPonce Corporation ("BanPonce")
under a Debenture Purchase Agreement (the "Debenture Agreement"). The
Subordinated Convertible Debentures are convertible into shares of common stock
of the Company at a conversion price of $17.50 per share, subject to adjustments
in certain events. The Subordinated Convertible Debentures are subordinated to
all existing and future senior debt of the Company (as defined in the Debenture
Agreement). Under the Debenture Agreement, BanPonce has the right to acquire up
to 200,000 additional shares of the Company's common stock at a price of $17.50
per share (subject to adjustment in certain events) to the extent that its
investment in the Company is reduced below 5% on a fully-diluted basis. Such
right to acquire the additional shares expires on June 30, 1999 and is subject
to termination upon the occurrence of certain corporate events involving the
acquisition of the Company.
F-33
<PAGE> 97
NOTE 19 - DEPOSIT ACCOUNTS:
At December 31, 1996, deposits and their weighted average interest rates are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Certificates of deposit $ 99,614,530 5.87 $ 52,326,703 6.12
Regular savings 17,054,578 4.36 10,271,981 3.68
NOW accounts 6,330,229 3.46 2,046,765 3.35
Non interest-bearing deposits 35,902,474 - 31,094,992 -
------------ -----------
$158,901,811 $95,740,441
============ ===========
</TABLE>
At December 31, 1996, certificates of deposit over $100,000 amounted to
$44,025,000.
A summary of certificates of deposit by maturity as of December 31, 1996
follows:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Within one year $64,534,289 $40,465,351
One to three years 12,253,299 5,252,095
Over three years 22,826,942 6,609,257
------------ -------------
$99,614,530 $52,326,703
=========== ===========
</TABLE>
A summary of certificates of deposit by interest rate at December 31, 1996
follows:
<TABLE>
<CAPTION>
Rate Amount
------ -------
<S> <C>
2.99% or less $ 40,000
From 3.00% to 3.99% 5,000
From 4.00% to 4.99% None
From 5.00% to 5.99% 54,292,300
From 6.00% to 6.99% 36,714,218
From 7.00% to 7.99% 8,473,012
From 8.00% to 8.99% 90,000
-----------
Total $99,614,530
===========
</TABLE>
F-34
<PAGE> 98
At December 31, 1996, Doral Federal had brokered certificates of deposit
amounting to $16,300,000 maturing as follows:
<TABLE>
<S> <C>
One to three years $ 5,460,971
Over three years 10,839,029
----------
Total $16,300,000
===========
</TABLE>
At December 31, 1996, Doral Federal had deposits from officers, directors,
employees and stockholders of the Company amounting to approximately $700,000
(1995 - $1,100,000).
The Company as a servicer of loans is required to maintain certain balances on
behalf of the borrowers, called escrow funds. At December 31, 1996, escrow funds
amounted to approximately $38,519,000 (1995 - $35,377,000), of which $30,316,000
were deposited with Doral Federal (1995 - $27,430,000). The remaining escrow
funds, $8,203,000 (1995 - $7,947,000) were deposited with other banks and
therefore excluded from the Company's assets and liabilities.
NOTE 20 - ADVANCES FROM THE FEDERAL HOME LOAN BANK:
At December 31, 1996, advances from the Federal Home Loan Bank of New York
("FHLB") consist of the following:
<TABLE>
<S> <C>
6.307% due on July 21, 2000 $ 5,000,000
6.445% due on July 17, 2002 5,000,000
5.959% due on January 29, 2003 5,000,000
------------
Total $ 15,000,000
============
</TABLE>
At December 31, 1996, the Company had qualified collateral, in the form of first
mortgage notes and mortgage-backed securities with a carrying value of
$82,705,750 which were pledged to secure the above advances from the FHLB and
stand-by letters of credit issued by the FHLB as collateral for the term-notes
in the amount of $53,100,000 shown under notes payable.
F-35
<PAGE> 99
NOTE 21 - 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 mortgage loans
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.
Accordingly, 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. Therefore, 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.
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 part of the federal income taxes
attributable to income from operations in Puerto Rico. The 1996 Omnibus Budget
Reconciliation Act repealed the Section 936 for U.S. business operations in
Puerto Rico, effective for the taxable years beginning on January 1, 1996. A
10-year grandfather period was provided for existing credit claimants such as
Doral Federal. The Company has experienced no significant adverse effect because
of the repeal.
The mortgage banking operations of the Company conducted through Puerto Rico
corporations are not subject to United States income tax for business carried
out in Puerto Rico. Substantially all of the Company's mortgage banking
operations are conducted in Puerto Rico, therefore, the amount of U.S. income
taxes with respect to such operations is not significant.
Consolidated tax returns are not permitted under the Puerto Rico Internal
Revenue Code, therefore, income tax returns are filed individually by each
Company.
F-36
<PAGE> 100
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,
-----------------------
1996 1995 1994
---- ---- ----
Income before income taxes $31,278,639 $22,060,517 $20,840,112
=========== =========== ===========
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rates $ 12,198,669 39.0 $ 9,265,417 42.0 $ 8,752,847 42.0
Tax effect of exempt interest
income - net (8,502,187) (27.2) (4,590,485) (20.8) (5,435,541) (26.1)
Tax effect of capital gains (510,588) (2.5)
Tax effect of amortization of
goodwill, other non-deductible
expenses and other 541,642 1.7 (281,246) (1.3) 602,877 2.9
Tax effect of shares issued
under employment contracts -- -- (1,893,473) (8.6) -- --
------------ ------ ------------- ---- ------------ --
Provision for income taxes $ 4,238,124 13.5 $ 2,500,213 11.3 $ 3,409,595 16.3
============ ====== ============ ==== ============ ====
</TABLE>
At December 31, 1996, the components of the net deferred tax liability are:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities resulting from:
Untaxed income ($12,990,675) ($6,460,876)
Deferred costs (1,643,124) (1,986,637)
------------ ----------
(14,633,799) (8,447,513)
------------ ----------
Deferred tax assets:
Unrealized losses 1,570,277 1,108,105
Deferred income 3,655,434 1,539,361
Net operating loss 773,148 922,979
Reserve for doubtful accounts
and others 262,935 -
------------ ----------
6,261,794 3,570,445
------------ ----------
Net deferred tax liability ($ 8,372,005) ($4,877,068)
============ ==========
</TABLE>
Deferred income tax expense for the year ended December 31, 1994 amounted to
$1,316,899 of which $436,899 is presented as current and $880,000 is shown as
part of the cumulative effect of change in accounting principle.
F-37
<PAGE> 101
At December 31, 1996, a subsidiary had net operating losses available to offset
future taxable Puerto Rico source income amounting to approximately $1,982,000
expiring in 2001.
NOTE 22 - RELATED PARTY TRANSACTIONS:
Mortgage loans held for sale include approximately $230,000 of loans to various
officers of the Company at prevailing interest rates (1995 - $460,000).
The Company paid a computer service bureau, in which it holds a 33% interest,
$900,000, $860,000 and $726,000 for services rendered during the years ended
December 31, 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
the 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 lack of
materiality. At December 31, 1996 and 1995, securities held to maturity include
approximately $1,800,000 and $890,000, respectively, due from the Partnership.
NOTE 23 - 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 may 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 nonperformance 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, 1996, commitments to extend credit to
individuals for residential mortgages amounted to approximately $5,000,000 and
commitments to sell mortgage-backed securities and loans amounted to
approximately $32,000,000. 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 to 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.
F-38
<PAGE> 102
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 counterpart. A
geographic concentration exists within the Company's mortgage loans portfolio
since most of the Company's business activity is with customers located in
Puerto Rico.
The Company controls the credit risk of its future contracts through credit
approvals, limits and monitoring procedures. Options on future contracts confer
the right from sellers to buyers to take a future position at a stated price.
Risks arise from the possible inability of counterparts 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 24 - PENSION AND COMPENSATION PLANS:
The Company has a noncontributory target benefit pension plan ("the Plan"). The
Plan generally 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 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, 1996, 1995 and
1994 amounted to approximately $722,000, $640,000 and $700,000, respectively.
Plan assets consist principally of mortgage loans 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. The expense for the years ended December 31, 1996 and 1995 amounted to
approximately $232,000 and $62,000, respectively. For the year ended December
31, 1994 there was no deferred compensation expense.
F-39
<PAGE> 103
The Company also has incentive compensation arrangements with certain employees
payable currently. The incentive payments are based on the amount of
consolidated net income in excess of an established return on stockholders'
equity, as defined in the agreements. The expense under these arrangements for
the years ended December 31, 1996, 1995 and 1994 amounted to approximately
$6,446,000, $2,415,000 and $2,721,000, respectively.
NOTE 25 - COMMITMENTS AND CONTINGENCIES:
The Company has several noncancellable operating leases for office facilities
expiring through 2005. Total minimum rental commitments for leases in effect at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $ 1,538,000
1998 938,000
1999 400,000
2000 247,000
2001 229,000
2002 and thereafter 5,590,000
</TABLE>
Total rental expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $2,100,000, $2,100,000 and $2,000,000, 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.
From time to time the Company may sell mortgage-backed securities with put
options. At December 31, 1996, the amounts outstanding under these arrangements
were as follows:
<TABLE>
<CAPTION>
Amount
Dates on which put expires outstanding
-------------------------- -----------
<S> <C>
Within six months $ 55,932,000
One to two years 34,405,000
Three years and thereafter 14,663,000
------------
$105,000,000
============
</TABLE>
F-40
<PAGE> 104
If the put option is exercised, the Company would have to buy back these
securities at an agreed price, adjusted for future prepayments. As part of its
hedging program, the Company includes the risks associated with its put
arrangements.
The Insurance and Indemnity Agreements (the "Agreements") covering certain
financial guaranty insurance policies covering the payment of senior
certificates issued by CMO grantors trusts established by the Company, provide,
among other things, that the Company cannot sell, transfer or pledge the
residual certificates issued by the trusts (amounting to approximately
$4,833,000) without the insurance company approval because the residual
certificates are pledged as collateral to the insurance company.
FFCC currently benefits from Puerto Rico tax laws. Of particular importance is
the current income tax exemption, available under Puerto Rico law for interest
on FHA loans and VA loans secured by residential property located in Puerto Rico
and mortgage-backed securities backed by such mortgage loans. As a result of
this exemption, FFCC has been able to sell tax-exempt Puerto Rico GNMA
mortgage-backed securities to local investors at higher prices than those at
which comparable instruments would be sold in the mainland United States. This
exemption has also permitted the Company to reduce its effective tax rate, since
a significant portion of its net interest income is tax exempt. The government
of Puerto Rico announced that it plans to eliminate the exemption on new FHA and
VA loans closed after July 1, 1997, except for loans made to finance the
purchase of homes in low and moderate income housing projects sponsored by local
housing authorities. This proposal must be approved by the Puerto Rico
legislature before becoming effective. Such interest income would be taxed at a
preferential rate of 17%. FHA and VA loans closed before July 1, 1997, as well
as securities backed by such mortgage loans would continue to be tax exempt.
While the impact of such proposal cannot be fully measured until management has
the opportunity to review the implementing legislation as finally approved,
management believes that the adoption of the proposal in its current form would
not have a material adverse effect in the Company's results of operations.
F-41
<PAGE> 105
NOTE 26 - CAPITAL STOCK AND PAID-IN CAPITAL:
The authorized number of shares was increased during 1996 from 10,000,000 to
20,000,000 shares.
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. During 1994 and
prior years 177,806 shares were awarded and issued under the Restricted Stock
Plan. No additional shares have been awarded subsequent to 1994. 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. The Stock Option
Plan provides for the granting to selected officers and key employees of option
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.
All of the outstanding shares of the Company's 10.5% Cumulative Convertible
Preferred Stock Series A, were redeemed in May 1996.
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 cause the capital of Doral Federal to fall below the
regulatory capital requirements.
The ability of the Company to pay dividends in the future is limited by various
restrictive covenants contained in the debt agreements of the Company, the
earnings, cash position and capital needs of the Company, general business
conditions and other factors deemed relevant by the Company's Board of
Directors. The Company is prohibited under the Indenture for the Senior Notes
and the Debenture Agreement from paying dividends on any capital stock (other
than dividends payable in capital stock or in stock rights), if an event of
default under any such agreements exist at such time, or if the amount of
dividends payable by the Company together with the aggregate amount of
dividends paid and other capital distributions made since specified dates
exceed a defined amount. In addition, under the Debenture Agreement, the
Syndicated Credit Agreement, the Senior Notes Indenture and other debt
agreements of the Company, the Company is prohibited from paying dividends if
it fails to maintain specified minimum levels of net worth, net earnings to
debt service and dividends ratios, and certain other financial ratios.
F-42
<PAGE> 106
NOTE 27 - 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
SFAS No. 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 SFAS No. 91, employee
costs and other expenses would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Employee costs $31,487,527 $24,395,306 $28,537,321
=========== =========== ===========
Other expenses $13,104,839 $12,042,064 $12,802,432
=========== =========== ===========
</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,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Offset against mortgage loan
sales and fees $22,006,118 $16,398,038 $21,008,323
Capitalized as part of loan inventory 4,213,138 5,093,940 5,093,940
----------- ----------- -----------
$26,219,256 $21,491,978 $26,102,263
=========== =========== ===========
</TABLE>
F-43
<PAGE> 107
NOTE 28 - 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, 1996 and 1995. FASB Statement
No. 107, "Disclosures about Fair Value of Financial Instruments," defines the
fair value of financial instruments 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>
1996 1995
---- ----
Carrying Carrying
amount Fair value amount Fair value
------ ---------- ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 81,213 $ 81,213 $ 59,872 $ 59,872
Mortgage loans held for sale 261,608 265,190 244,132 244,148
Securities held for trading 411,447 411,447 407,941 407,941
Securities held to maturity 109,055 110,652 77,945 78,392
Securities available for sale 12,007 12,007 14,579 14,579
Loans receivable 128,766 128,766 51,355 51,355
Accounts receivable and
mortgage servicing advances 15,882 15,882 9,592 9,592
Accrued interest receivable 10,091 10,091 8,155 8,155
Excess servicing fees receivable 24,678 24,678 10,407 10,407
Mortgage servicing rights 20,969 20,969 11,164 11,164
---------- ---------- -------- --------
$1,075,716 $1,080,895 $895,142 $895,605
========== ========== ======== ========
Financial liabilities:
Loans payable $ 196,397 $ 196,397 $234,367 $234,367
Securities sold under agreements
to repurchase 387,651 387,651 363,616 363,616
Deposit accounts 158,902 158,902 95,740 95,740
Notes payable 147,893 147,893 51,682 51,682
Advances from FHLB 15,000 15,000 10,407 10,407
Payables and accrued liabilities 26,992 26,992 16,024 16,024
Convertible Subordinated Debentures 10,000 10,000 10,000 10,000
Income tax payable 8,589 8,589 5,265 5,265
---------- ---------- -------- --------
$ 951,424 $ 951,424 $787,101 $787,101
========== ========== ======== ========
</TABLE>
F-44
<PAGE> 108
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 short-term financial liabilities.
Mortgage loans held for sale, securities held for trading, securities held to
maturity and securities available-for-sale: 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.
Loans receivable: 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 loans,
adjusted for different loan characteristics, are also used in estimating fair
value.
Excess servicing fees receivable and mortgage servicing rights: valued based on
the present value of the estimated remaining future servicing fee revenue.
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 values of fixed-maturity deposits, including certificates of deposit,
are 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.
Notes payable, advances from FHLB and convertible subordinated debentures: The
carrying amounts are reasonable estimates of fair values due to recent issuance
date and current interest rates.
F-45
<PAGE> 109
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.
NOTE 29 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
Financial data showing results of the 1996 and 1995 quarters is presented below.
These results are unaudited. 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>
1996
- ----
Revenue $26,035 $25,984 $28,148 $27,665
Net income 6,354 7,034 7,424 6,230
Net income per share:
Primary .71 .77 .81 .68
Fully diluted .67 .74 .78 .65
<CAPTION>
Quarters
--------------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1995
- ----
Revenue $20,710 $23,277 $23,365 $24,487
Net income 3,430 6,137 4,928 5,065
Net income per share:
Primary .47 .84 .68 .66
Fully diluted .45 .81 .65 .62
</TABLE>
NOTE 30 - RISK MANAGEMENT ACTIVITIES:
The Company's principal objective in holding derivatives and certain other
financial instruments is the management of interest rate risk arising out of its
portfolio holdings and related borrowings. 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 risk
consistent with the Company's business strategies.
F-46
<PAGE> 110
Asset/liability risk management activities are conducted in the context of
Company's sensitivity to interest rate changes. This sensitivity arises due to
changes in the value of mortgage loans held for sale and mortgage-backed
securities held for trading from the time such assets are originated to the time
these are sold. In addition, interest-bearing liabilities reprice more
frequently than interest-earning assets and, therefore, the Company is affected
by the interrelationships between long-term and short-term interest rates.
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, 1996, the Company,
as a purchaser, had unexpired options where it had the right to sell bonds and
GNMA contracts for a notional amount of $465,000,000. It also had rights to buy
bonds and GNMA contracts for a notional amount of $290,000,000. As a writer of
options, the Company had unexpired options where it had the obligations to sell
bonds and GNMA contracts for a notional amount of $353,000,000, and obligations
to buy bonds and GNMA contracts for a notional amount of $210,000,000. In
addition, at December 31, 1996 the Company had approximately $32,000,000 of
forward commitments to sell mortgage-backed securities and loans.
Generally, the options purchased or written have expired without being
exercised. During the years ended December 31, 1996, 1995 and 1994 net gains
(net losses) from these transactions, designated as hedges, amounted to
approximately $3,100,000, ($5,400,000) and $2,172,000, respectively. These
amounts are presented as part of mortgage loan sales and fees. At December 31,
1996, mortgage loans held for sale includes capitalized costs of unexpired
options of approximately $3,185,000. At December 31, 1996, unrealized net losses
on open positions related to unexpired options, including capitalized costs,
amounted to approximately $5,900,000.
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 counterparts involved, as daily cash settlements are not
required. Options are contracts that grant the purchaser, for a premium payment,
the right to either purchase from or sell to the writer of the option a
financial instrument at a specified price within a specified period of time or
on a specified date.
The risk that counterparts to both derivative and cash instruments might default
on their obligations is monitored on an ongoing basis. To manage the level of
credit risk the Company deals with counterparts 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 counterpart in the
event of default.
F-47
<PAGE> 111
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.
The Company enters into rate swap agreements in managing its interest rate
exposure. Interest rate swap agreements generally involve the exchange of fixed
and floating rate interest payment obligations without the exchange of the
underlying principal.
At December 31, 1996, the Company had outstanding an interest rate swap
agreement with an investment banker to change the Company's interest rate
exposure. The agreement is for a notional principal amount of $5,000,000
covering the Company's interest rate exposure of a $5,000,000 floating rate
term-note. This agreement ends at the time the related obligation matures. The
interest rate to be received is 87% of the three-months LIBOR rate minus .125%
(4.676% at December 31, 1996) and the interest rate to be paid is 4.92%.
Nonperformance by the counterpart will expose the Company to an interest rate
risk.
The Company entered into a transaction to hedge the funding cost of the 7.84%
Senior Notes due on October 10, 2006 (the "Senior Notes"). The loss incurred in
such transaction has been deferred and is being amortized throughout the life of
the Senior Notes as an adjustment to the Notes' yield. Unamortized balance at
December 31, 1996 was approximately $2,500,000, and is shown as part of the
Senior Notes.
F-48
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of FFCC, as currently in effect.(22)
3.2 By-laws of FFCC, as amended as of January 30, 1996.(18)
4.1 Common Stock Certificate.(22)
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)
10.18 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 September 8, 1995 between FFCC and Banco Santander Puerto
Rico.(14)
10.33 Loan Agreement dated November 25, 1987 between FFCC and Scotiabank de Puerto Rico.(4)
10.34 (a) Repurchase Agreement, between FFCC and BP Capital Markets, Inc., dated November 10,
1995. (18)
(f) Repurchase Agreement between FFCC and First Boston (Puerto Rico), Inc., dated November
28, 1989.(4)
(k) Master Repurchase Agreement between FFCC and PaineWebber, Inc., dated as of March 24,
1992.(5)
10.35 Employment Agreement dated August 29, 1995 between FFCC and Salomon Levis.(16)
10.36 Employment Agreement dated August 29, 1995 between FFCC and Zoila Levis.(16)
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 Employment Agreement dated August 29, 1995, between FFCC and Richard F. Bonini.(15)
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------
<S> <C>
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)
10.49 Employment Agreement dated as of December 1, 1996 between FFCC and Luis Alvarado.(22)
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 Amended and Restated Master Production Agreement, dated as of October 1, 1995, between
FFCC, Doral Mortgage and Doral Federal, Master Production Agreement, dated as of October 1,
1995, between FFCC, Doral Mortgage 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 Puerto Rico-A.(14)
10.61 Credit Agreement, dated as of June 30, 1995, between FFCC, Doral Mortgage, the lenders
party thereto and Bankers Trust Company, as Agent.(17)
10.62 Debenture Purchase Agreement dated as of September 25, 1995, and amended restated as of
December 15, 1995, between the Company and BanPonce Corporation (including the forms of
Series A and Series Debentures.(15)
10.63 Financing Agreement dated October 10, 1995, between FFCC and Banco Santander together with
related Assignment and Pledge Agreements.(16)
10.64 Master Servicing and Collection Agreement dated October 1, 1995, between FFCC and Doral
Federal Savings Bank.(18)
10.65 Employment Agreement, dated as of February 20, 1996, between FFCC and Frederick C. Teed.(18)
10.66 First Amendment to Master Servicing and Collection Agreement, dated as of March 1, 1996,
between FFCC and Doral Federal Savings Bank.(19)
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
10.67 First Amendment to Amended and Restated Master Production Agreement, dated as of March 1,
1996, between FFCC, Doral Mortgage Corporation and Doral Federal Savings Bank,
respectively.(19)
10.68 First Amended and Restated Credit Agreement, dated as of September 25, 1996, between FFCC,
Doral Mortgage, the lenders party thereto and Bankers Trust Company, as Agent, as amended
by First Amendment dated January 7, 1997.(22)
10.69 Indenture, dated as of October 10, 1996, between the Company and Bankers Trust Company, as
trustee, including form of Senior Note. (20)
10.70 Employment Agreement, dated as of July 1, 1996, between FFCC and Mario S. Levis.(21)
10.71 Employment Agreement, dated as of December 31, 1996, between Doral Mortgage and Edison
Velez.(22)
21 List of FFCC's subsidiaries.(22)
27 Financial Data Schedule (Edgar version only).(22)
</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.
(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.
<PAGE> 115
(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) 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, 1994.
(15) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K dated December 22, 1995.
(16) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995.
(17) 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, 1995.
(18) 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, 1995.
(19) 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, 1996.
(20) Incorporated herein by reference to the same exhibit number of the
Company's Current Report on Form 8-K, dated October 10, 1996.
(21) Incorporated herein by reference to the same exhibit number of the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1996.
(22) Filed herewith.
(b) Reports on Form 8-K.
(1) Current Report on Form 8-K ("Form 8-K"), dated October 10, 1996,
reporting under Item 5 - "Other Items" the closing of the issuance and sale of
the Company's Senior Notes.
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
FIRST FINANCIAL CARIBBEAN CORPORATION
First Financial Caribbean Corporation, a corporation organized under
the laws of the Commonwealth of Puerto Rico, does hereby certify pursuant to
Article 8.05 of the Puerto Rico General Corporation Law, that
FIRST: The name under which it was originally incorporated was HF,
Inc.
SECOND: Its original Certificate of Incorporation was filed in the
Office of the Secretary of State of the Commonwealth of Puerto Rico on October
23, 1972, Reg. No. 29,324.
THIRD: This Restated Certificate of Incorporation was approved by the
Board of Directors of First Financial Caribbean Corporation at a meeting duly
called and held on January 29, 1997 and does not further amend the provisions
of First Financial Caribbean Corporation s Certificate of Incorporation as
heretofore amended, and there are no discrepancies between those provisions and
of this Restated Certificate of Incorporation, except that the names of the
incorporators have been eliminated from the Restated Certificate of
Incorporation, and the numbers of Articles FIFTH through NINTH were renumbered
as a result of the elimination of the prior Article FIFTH which contained the
names of the incorporators.
FOURTH: The text of the Certificate of Incorporation of First
Financial Caribbean Corporation, as amended, is hereby restated without further
amendment or change, effective as of the date of filing of this instrument with
the Secretary of State of the Commonwealth of Puerto Rico, to read as follows:
FIRST: The name of the corporation (hereinafter
called the Corporation) is FIRST FINANCIAL CARIBBEAN
CORPORATION.
SECOND: The principal office of the Corporation in
the Commonwealth of Puerto Rico is located at Avenida F.D.
Roosevelt 1159,
<PAGE> 2
2
Puerto Nuevo, Puerto Rico 00920, in the Municipality of San
Juan. The name of the resident agent of the Corporation
is David Levis, the mailing address of such resident agent is
Avenida F.D. Roosevelt 1159, Puerto Nuevo, Puerto Rico 00920.
THIRD: The nature of the business of the Corporation
and the objects or purposes to be transacted, promoted or
carried on by it are as follows:
1. To engage in the business of mortgage
banking, including but not limited to the
origination, servicing and resale of first and second
mortgages, both conventional and Veterans
Administration guaranteed and Federal Housing
Administration insured, and the issuance and
brokerage of mortgage-backed certificates.
2. To make, manufacture, produce, prepare,
process, purchase or otherwise acquire, and to hold,
own, use, sell, import, export, dispose of or
otherwise trade or deal in and with, machines,
machinery, appliances, apparatus, goods, wares,
products and merchandise of every kind, nature and
description; and, in general, to engage or
participate in any manufacturing or other business of
any kind or character whatsoever, whether or not
related to, conducive to, incidental to or in any way
connected with the above business.
3. To engage in research, exploration,
laboratory and development work relating to any
material, substance, compound or mixture now known or
which may hereafter be known, discovered or
developed, and to perfect, develop,
<PAGE> 3
3
manufacture, use, apply and generally to deal in and
with any such material, substance, compound or
mixture.
4. To adopt, apply for, obtain, register,
purchase, lease, take licenses in respect of or
otherwise acquire, and to maintain, protect, hold,
use, own, exercise, develop, manufacture under,
operate and introduce, and to sell and grant licenses
or other rights in respect of, assign or otherwise
dispose of, turn to account, or in any manner deal
with and contract with reference to, any trademarks,
trade names, patents, patent rights, concessions,
franchises, designs, copyrights and distinctive marks
and rights analogous thereto, and inventions,
devices, processes, recipes, formulae and
improvements and modifications thereof.
5. To act as agent or broker for any person,
firm or corporation including, but not limited to,
acting as agent for any local, municipal, state or
Commonwealth agency or instrumentality.
6. To purchase, lease or otherwise acquire,
to hold, own, use, develop, maintain, manage and
operate, and to sell, transfer, lease, assign,
convey, exchange or otherwise turn to account or
dispose of, and otherwise deal in and with such real
property, whether located within the Commonwealth of
Puerto Rico or elsewhere, as may be necessary or
convenient in connection with the business of the
Corporation, and personal property, tangible or
intangible, without limitation; provided, however,
that the Corporation shall not be authorized, as
respects real property located within the
Commonwealth of Puerto Rico, to conduct
<PAGE> 4
4
the business of buying and selling real estate, and
shall in all other respects be subject to the
provisions of Section 14 of Article VI of the
Constitution of the Commonwealth of Puerto Rico.
7. To enter into any joint ventures,
agreements and any other lawful arrangements for
sharing profits, union of interest, reciprocal
concession or cooperation, with any corporation,
association, partnership, syndicate, entity, person
or governmental, municipal or public authority,
domestic or foreign, in the carrying on of any
business that the Corporation is authorized to carry
on or any business or transaction deemed necessary,
convenient or incidental to carrying out any of the
purposes of the Corporation.
8. To enter into, make, perform and carry out
contracts of every kind and description, not
prohibited by law, with any person, firm,
association, corporation or governmental body; and to
guarantee the contracts or obligations, and the
payment of interest or dividends on securities of any
other person, firm, association, corporation or
governmental body.
9. To lend its uninvested funds from time to
time to such extent, to such persons, firms,
associations, corporations or governments or
subdivisions, agencies or instrumentalities thereof,
and on such terms and on such security, if any, as
the Board of Directors of the Corporation may
determine.
<PAGE> 5
5
10. To acquire and undertake all or any part
of the business assets and liabilities of any person,
firm, association or corporation on such terms and
conditions as may be agreed upon, and to pay for the
same in cash, property or securities of the
Corporation, or otherwise, and to conduct the whole
or any part of any business thus acquired, subject
only to the provisions of the laws of the
Commonwealth of Puerto Rico.
11. To merge into, merge into itself or
consolidate with, and to enter into agreements and
cooperative relations, not in contravention of law,
with any person, firm, association or corporation.
12. To purchase, lease, construct or
otherwise acquire, and to hold, own, use, maintain,
manage and operate, buildings, factories, plants,
laboratories, installations, equipment, machinery,
pipelines, rolling stocks, and other structures,
facilities and apparatus of every kind and
description, used or useful in the conduct of the
business of the Corporation.
13. To purchase, lease, construct, or
otherwise acquire, and to hold, own, use, maintain,
manage and operate dwelling houses and other
buildings at or near any place of business of the
Corporation for the purpose of furnishing housing and
other conveniences to employees of the Corporation,
and others, and to carry on a general mercantile
business at or near any such place of business for
the convenience of those residing in the vicinity
thereof, and others.
<PAGE> 6
6
14. To purchase or otherwise acquire, and to
hold, pledge, sell, exchange, or otherwise dispose of
securities (which term, for the purpose of this
Article THIRD, shall include any shares of stock,
bonds, debentures, notes, mortgages or other
obligations and any certificates, receipts or other
instruments representing rights to receive, purchase
or subscribe for the same, or representing any other
rights or interests therein or in any property or
assets) created or issued by any person, firm,
association, corporation or governmental body, and
while the holder thereof to exercise all the rights,
powers and privileges in respect thereof, including
the right to vote, to the same extent as a natural
person might or could do.
15. To borrow money for any of the purposes
of the Corporation, from time to time, and without
limit as to amount; from time to time to issue and
sell its own securities in such amounts, on such
terms and conditions, for such purposes and for such
consideration, as may now be or hereafter shall be
permitted by the laws of the Commonwealth of Puerto
Rico; and to secure the same by mortgage upon, or the
pledge of, or the conveyance or assignment in trust
of, the whole or any part of the properties, assets,
business and goodwill of the Corporation, then owned
or thereafter acquired.
16. To purchase, or otherwise acquire and to
hold, cancel, reissue, sell, exchange, transfer or
otherwise deal in its own securities from time to
time to such extent and upon such terms as shall be
permitted by the laws of the
<PAGE> 7
7
Commonwealth of Puerto Rico; provided, however, that
shares of its own capital stock so purchased or held
shall not be directly or indirectly voted, nor shall
they be entitled to dividends during such period or
periods as they shall be held by the Corporation.
17. To such extent as a corporation organized
under the laws of the Commonwealth of Puerto Rico may
now or hereafter lawfully do, to do, either as
principal or agent and either alone or through
subsidiaries or in connection with other persons,
firms, associations or corporations, all and
everything necessary, suitable, convenient or proper
for, or in connection with, or incident to, the
accomplishment of any of the purposes or the
attainment of any one or more of the objects herein
enumerated, or designed directly or indirectly to
promote the interests of the Corporation or to
enhance the value of its properties; and in general
to do any and all things and exercise any and all
powers, rights, and privileges which a corporation
may now or hereafter be organized to do or to
exercise under the laws of the Commonwealth of Puerto
Rico.
The foregoing provisions of this Article THIRD shall
be construed both as purposes and powers and each as an
independent purpose and power. The foregoing enumeration of
specific purposes and powers shall not be held to limit or
restrict in any manner the purposes and powers of the
Corporation, and the purposes and powers herein specified
shall, except when otherwise provided in this Article THIRD,
be in no wise limited or restricted by reference to, or
inference from, the terms of any
<PAGE> 8
8
provisions of this or any other Article of this Certificate of
Incorporation.
The Corporation is to be carried on for pecuniary
profit.
FOURTH: The total number of shares of all classes of
stock which the Corporation is authorized to issue is
22,000,000 shares, consisting of 20,000,000 shares of Common
Stock, $1.00 par value and 2,000,000 shares of Serial
Preferred Stock, $1.00 par value.
The minimum amount of capital with which the
Corporation will commence business is $10,000.00.
The Board of Directors is authorized at any time, and
from time to time, to provide for the issuance of shares of
Serial Preferred Stock in one or more series, and to determine
the designations, preferences, limitations and relative or
other rights of the Serial Preferred Stock or any series
thereof. For each series, the Board of Directors shall
determine, by resolution or resolutions adopted prior to the
issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including
but not limited to the following relative rights and
preferences, as to which there may be variations among
different series:
(a) The rates or rates (which may be
floating, variable or adjustable), or the method of
determining such rate or rates and the times and
manner of payment of dividends, if any (and whether
such payment should be in cash or securities);
(b) Whether shares may be redeemed or
purchased, in whole or in part, at the
<PAGE> 9
9
option of the holder or the Corporation and, if so,
the price or prices and the terms and conditions of
such redemption or purchase;
(c) The amount payable upon shares in the
event of voluntary or involuntary liquidation,
dissolution or other winding up of the Corporation;
(d) Sinking fund provisions, if any, for the
redemption or purchase of shares;
(e) The terms and conditions, if any, on
which shares may be converted or exchanged into
shares of Common Stock or other capital stock or
securities of the Corporation;
(f) Voting rights, if any; and
(g) Any other rights and preferences of such
shares, to the full extent now or hereafter permitted
by the laws of the Commonwealth of Puerto Rico.
All shares of Serial Preferred Stock (i) shall rank
senior to the Common Stock in respect of the right to receive
dividends and the right to receive payments out of the assets
of the Corporation upon voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, (ii) shall be of
equal rank, regardless of series, and (iii) shall be identical
in all respects except as provided in (a) through (g) above.
The shares of any series of the Serial Preferred Stock shall
be identical with each other in all respects except as to the
dates from and after which dividends thereof shall be
cumulative. In case the stated dividends or the amounts
payable on liquidation are not paid in full, the shares of all
series of the
<PAGE> 10
10
Serial Preferred Stock shall share ratably in the payment of
dividends, including accumulations, if any, in accordance with
the sums which would be payable on said shares if all
dividends were declared and paid in full, and in any
distribution of assets other than by way of dividends in
accordance with the sums which would be payable on such
distribution if all sums payable were discharged in full.
The Board of Directors shall have the authority to
determine the number of shares that will comprise each series.
Unless otherwise provided in the resolution establishing such
series, all shares of Serial Preferred Stock redeemed, retired
by sinking fund payment, repurchased by the Corporation or
converted into Common Stock shall have the status of
authorized but unissued shares of Serial Preferred Stock
undesignated as to series.
Prior to the issuance of any shares of a series, but
after adoption by the Board of Directors of the resolution
establishing such series, the appropriate officers of the
Corporation shall file such documents with the Commonwealth of
Puerto Rico as may be required by law.
No holder of shares of Common Stock or Serial
Preferred Stock shall be entitled as a matter right to
subscribe for or purchase, or have any preemptive right with
respect to, any part of any new or additional issue of stock
of any class whatsoever, or of securities convertible into any
stock of any class whatsoever, whether now or hereafter
authorized and whether issued for cash or other consideration
or by way of dividend.
<PAGE> 11
11
FIFTH: The Corporation is to have perpetual existence.
SIXTH: For the management of the business and for the
conduct of the affairs of the Corporation, and in further
creation, definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders, it
is further provided:
1. The number of directors of the Corporation
shall be fixed by, or in the manner provided in, the By-laws,
but in no case shall the number be less than three. The
directors need not be stockholders. Election of directors need
not be by ballot unless the By-laws so require. Meetings of
the Board of Directors may be held at such place or places
within or without the Commonwealth of Puerto Rico as shall be
specified in the respective notices thereof or in the
respective waivers of notice thereof signed by all the
directors of the Corporation at the time in office
2. In furtherance and not in limitation of the
powers conferred by the laws of the Commonwealth of Puerto
Rico, and subject at all times to the provisions thereof, the
Board of Directors is expressly authorized and empowered:
(a) To make, alter and repeal the
By-laws of the Corporation, subject to the power of the
stockholders to alter or repeal the By-laws made by the Board
of Directors.
(b) To determine, from time to time,
whether and to what extent and at what times and places and
under what conditions and regulations the accounts and books
and documents of the Corporation (other than the stock
ledger), or any of them, shall be open to inspection by the
stockholders; and no
<PAGE> 12
12
stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by
the laws of the Commonwealth of Puerto Rico, unless and until
duly authorized to do so by resolution of the Board of
Directors.
(c) To authorize and issue obligations
of the Corporation, secured or unsecured, to include therein
such provisions as to redeemability, convertibility or
otherwise, as the Board cf Directors in its sole discretion
may determine, and to authorize the mortgaging or pledging of,
and to authorize and cause to be executed mortgages and liens
upon, any property of the Corporation, real or personal,
including after-acquired property.
(d) To determine whether any, and, if
any, what part, of the net profits of the Corporation or of
its net assets in excess of its capital shall be declared in
dividends and paid to the stockholders, and to direct and
determine the use and disposition thereof.
(e) To set apart a reserve or reserves,
and to abolish any such reserve or reserves, or to make such
other provisions, if any, as the Board of Directors may deem
necessary or advisable for working capital, for additions,
improvements and betterments to plant and equipment, for
expansion of the business of the Corporation (including the
acquisition of real and personal property for that purpose)
and for any other purpose of the Corporation.
(f) To establish bonus, profit-sharing,
pension, thrift, and other types of incentive, compensation or
retirement plans for the officers and employees (including
officers and employees who are also directors)
<PAGE> 13
13
of the Corporation and to fix the amounts of profits to be
distributed or shared or contributed and the amounts of the
Corporation's funds otherwise to be devoted thereto and to
determine the persons to participate in any such plans and the
amounts of their respective participations.
(g) To issue, or grant options for the
purchase of, shares of stock of the Corporation to officers
and employees (including officers and employees who are also
directors) of the Corporation and its subsidiaries for such
consideration and on such terms and conditions as the Board of
Directors may from time to time determine.
(h) To enter into contracts for the
management of the business of the Corporation for terms not
exceeding three years.
(i) By resolution or resolutions passed
by a majority of the whole Board, to designate one or more
committees, each committee to consist of two or more of the
directors of the Corporation, which to the extent provided in
such resolution or resolutions or in the Bylaws, shall have
and may exercise the powers of the Board of Directors (other
than to remove or elect officers) in the management of the
business and affairs of the Corporation and may have power to
authorize the seal of the Corporation to be affixed to all
papers which may require it, such committee or committees to
have such name or names as may be stated in the By-laws or as
may be determined from time to time by resolution adopted by
the Board of Directors.
(j) To exercise all the powers of the
Corporation, except such as are conferred by law, or by this
Certificate of
<PAGE> 14
14
Incorporation or by the By-laws of the Corporation, upon the
stockholders.
3. Any one or all of the directors may be
removed, with or without cause, at any time, by either (a) the
vote of the holders of a majority of the stock of the
Corporation issued and outstanding and entitled to vote and
present in person or by proxy at any meeting of the
stockholders called for the purpose, or (b) an instrument or
instruments in writing addressed to the Board of Directors
directing such removal and signed by the holders of a majority
of the stock of the Corporation issued and outstanding and
entitled to vote; and thereupon the term of each such director
who shall be so removed shall terminate.
4. No contract or other transaction between the
Corporation and any other corporation, whether or not such
other corporation is related to the Corporation through the
direct or indirect ownership by such other corporation of a
majority of the shares of the capital stock of the Corporation
or by the Corporation of a majority of the shares of the
capital stock of such other corporation, and no other act of
the Corporation shall, in the absence of fraud, in any way be
affected or invalidated by the fact that any of the directors
of the Corporation are pecuniarily or otherwise interested in,
or are directors or officers of, such other corporation or by
the fact that such other corporation is so related to the
Corporation. Any director of the Corporation individually, or
any firm or association of which any director may be a member,
may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation,
provided that the fact that he individually or such firm or
association is so
<PAGE> 15
15
interested shall be disclosed or shall have been known to the
Board of Directors or a majority of such members thereof as
shall be present at any meeting of the Board of Directors at
which action upon any such contract or transaction shall be
taken. Any director of the Corporation who is also a director
or officer of such other corporation or who is so interested
may be counted in determining the existence of a quorum at any
meeting of the Board of Directors which shall authorize any
such contract or transaction, with like force and effect as if
he were not such director or officer of such other corporation
or not so interested.
5. Any person made or threatened to be made a party
to any action or proceeding, whether civil or criminal, by
reason of the fact that he, his testator or intestate is or
was a Director, officer or employee of the Corporation or
serve or served any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprises in
any capacity at the request of the Corporation shall be
indemnified by the Corporation, and the Corporation may
advance his related expenses, to the fullest extent permitted
by law. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a Director, officer,
employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a Director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity,
or arising out of his status as such.
<PAGE> 16
16
SEVENTH: A director of this Corporation shall not be
personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or
limitation thereof is not permitted under the Puerto Rico
General Corporation Law of 1995 as the same exists or may
hereafter be amended. Any repeal or modification of the
foregoing provisions of this Article SEVENTH shall not
adversely affect any right or protection of a director of the
Corporation existing hereunder with respect to any act or
omission occurring prior to or at the time of such repeal or
modification.
EIGHTH: The Corporation reserves the right to amend,
alter or repeal any of the provisions of this Certificate of
Incorporation and to add other provisions authorized by the
laws of the Commonwealth of Puerto Rico at the time in force
in the manner and at the time prescribed by said laws, and all
rights, powers and privileges at any time conferred upon the
Board of Directors and the stockholders are granted subject to
the provisions of this Article."
IN WITNESS WHEREOF, the said First Financial Caribbean Corporation,
has caused its corporate seal to be hereunto affixed and this Certificate to be
signed by Zoila Levis, its President, and Luis Alvarado, its Assistant
Secretary, this 25th day of February, 1997.
/s/ Zoila Levis
----------------------------------
President
/s/ Luis Alvarado
----------------------------------
Assistant Secretary
<PAGE> 1
EXHIBIT 4.1
COMMON STOCK
PAR VALUE $1
NUMBER SHARES
C
FIRST FINANCIAL CARIBBEAN CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PUERTO RICO
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF THE PAR VALUE OF
$1 EACH, OF FIRST FINANCIAL CARIBBEAN CORPORATION, transferable on the books of
the Corporation in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
FIRST FINANCIAL CARIBBEAN CORPORATION
CORPORATE SEAL
PUERTO RICO
1972
/s/ /s/
- ------------------------------- -------------------------------
Secretary President
<PAGE> 2
FIRST FINANCIAL CARIBBEAN CORPORATION
The Corporation will furnish without charge to each shareholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series which the
Corporation is authorized to issue and the qualifications, limitations or
restrictions of such preferences and/or rights. Any request should be made to
the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFTS MIN ACT - ____________ Custodian ____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants
in common Act ______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ] _________________________________________
_______________________________________________________________________________
Please print or typewrite name and address,
including postal zip code of assignee.
________________________________________________________________________ Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer said stock on the book of the within-named Corporation with full
power of substitution in the premises.
Dated,________________________
__________________________________
<PAGE> 1
EXHIBIT 10.49
FIRST FINANCIAL CARIBBEAN CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of December 1, 1996
Mr. Luis A. Alvarado
650 Mufioz Rivera Avenue
San Juan, Puerto Rico 00912
Dear Mr. Alvarado:
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 an Executive President 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.
<PAGE> 2
Mr. Luis A. Alvarado
As of December 1, 1996
Page 2
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, the President and the Senior Executive Vice President of FFCC with
respect to your duties, responsibilities and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $150,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus
equal to the greater of (A) $25,000 and (B) 2% of
Adjusted Net Income (as hereinafter defined), to the
extent such Adjusted Net Income exceeds an amount
equal to a 15% Return on Equity Capital (as
hereinafter defined);
provided, however, that total salary and incentive compensation payable to you
pursuant to this Agreement shall not exceed $300,000 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 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) adding
back to net income any payments made pursuant to
Section 3(b)(i) hereof and payments of similar
incentive compensation to other executive officers 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 from
the date of
<PAGE> 3
Mr. Luis A. Alvarado
As of December 1, 1996
Page 3
the closing of such sale to the end of such fiscal
year and the denominator of which shall be 365.
(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
<PAGE> 4
Mr. Luis A. Alvarado
As of December 1, 1996
Page 4
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 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
<PAGE> 5
Mr. Luis A. Alvarado
As of December 1, 1996
Page 5
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.
7. 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.
8. 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.
9. 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.
10. 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.
<PAGE> 6
Mr. Luis A. Alvarado
As of December 1, 1996
Page 6
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
12. 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/ Zoila Levis
-------------------------------------
Name: Zoila Levis
Title: President
Accepted and Agreed to as of the
date first above set forth:
/s/ Luis A. Alvarado
- ---------------------------------
Luis A. Alvarado
<PAGE> 1
EXHIBIT 10.68
FIRST AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of September 25, 1996
Between
FIRST FINANCIAL CARIBBEAN CORPORATION,
DORAL MORTGAGE CORPORATION,
THE LENDERS PARTY HERETO
And
BANKERS TRUST COMPANY,
as Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Terms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 2 AMOUNTS AND TERMS OF LOANS AND ACCEPTANCES . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.1 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 2.2 Method of Borrowing and of Conversions/Continuations;
Creation of Acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 2.3 Conversions/Continuations of Loans; Exchange of Acceptances . . . . . . . . . . . . . . . . 30
Section 2.4 Disbursement of Funds; Bank Acceptance Participants . . . . . . . . . . . . . . . . . . . . 31
Section 2.5 Notes; Acceptance Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.6 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 2.7 Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.8 Mandatory Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 2.9 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 2.10 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 2.11 Payments, Etc, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 2.12 Eurodollar Rate Not Determinable; Illegality or Impropriety . . . . . . . . . . . . . . . . 43
Section 2.13 Reserve Requirements; Change in Circumstances . . . . . . . . . . . . . . . . . . . . . . . 44
Section 2.14 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 2.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 2.16 Sharing of Setoffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE 3 CONDITIONS TO CREDIT EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 3.1 Conditions to Credit Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE 4 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.1 Corporate Existence; Compliance with Law and
Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.2 Corporate Power; Authorization; Enforceable Obligations. . . . . . . . . . . . . . . . . . 52
Section 4.3 No Legal or Contractual Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 4.4 Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 4.5 No Material Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 4.6 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.7 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.8 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 4.11 Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 4.12 Agency Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 4.13 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
<PAGE> 3
- ii -
<TABLE>
<S> <C> <C>
ARTICLE 5 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.1 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.2 Negative Covenants of Each Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 5.3 Additional Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE 6 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
ARTICLE 7 THE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 7.1 Appointment of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 7.2 Nature of Duties of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 7.3 Lack of Reliance on Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 7.4 Certain Rights of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 7.5 Reliance by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.6 Indemnification of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.7 Agent in its Individual Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.8 Holders of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 7.9 Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
ARTICLE 8 MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 8.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 8.2 Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.3 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Section 8.4 Payment of Expenses, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 8.5 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 8.6 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Section 8.7 GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . 75
Section 8.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 8.9 Headings Descriptive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 8.10 Survival of Representations and Indemnities . . . . . . . . . . . . . . . . . . . . . . . . 76
Section 8.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 8.12 Indemnification of Collateral Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 8.13 Joint and Several Nature of the Obligations . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 8.14 Certain Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Section 8.15 Subrogation, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Section 8.16 [Reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 8.17 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 8.18 Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Section 8.19 Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Section 8.20 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
</TABLE>
<PAGE> 4
- iii -
<TABLE>
<S> <C>
EXHIBITS
Exhibit A-1 Form of Facility 1 Note
Exhibit A-2 Form of Facility 2 Note
Exhibit B-1 Request for Acceptance
Exhibit B-2 Form of Draft
Exhibit C First Amended and Restated Security Agreement (Warehousing Collateral)
Exhibit D First Amended and Restated Security Agreement (Servicing Collateral)
Exhibit E First Amended and Restated Cash Collateral Agreement
Exhibit F-1 Form of Opinion of New York Counsel
Exhibit F-2 Form of Opinion of Puerto Rico Counsel
Exhibit G-1 Officer's Certificate (FFCC)
Exhibit G-2 Officer's Certificate (DMC)
Exhibit H-1 Facility 1 Borrowing Base Certificate
Exhibit H-2 Facility 2 Tranche A Borrowing Base Certificate
Exhibit H-3 Facility 2 Tranche B Borrowing Base Certificate
Exhibit I Notice of Borrowing
Exhibit J Notice of Conversion/Continuation
Exhibit K Form of Power of Attorney
Exhibit L Approved Investors
Exhibit M Addresses for Notices
Exhibit N Eligible REO Criteria
Exhibit O Material Litigation
Exhibit P [Reserved]
Exhibit Q Confidentiality Agreement Form
Exhibit R Permitted Subordinated Indebtedness
Exhibit S-1 REO Demand Note
Exhibit S-2 REO Pledge
Exhibit S-3 REO Mortgage
Exhibit T Pledged Servicing Portfolio Report
Exhibit U Form of Statement of Accounts Receivable
Exhibit V Authorized Officers
</TABLE>
<PAGE> 5
FIRST AMENDED AND RESTATED
CREDIT AGREEMENT
THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT is made and
dated as of September 25, 1996, by and between the Lenders party hereto from
time to time, BANKERS TRUST COMPANY, a New York banking corporation, as agent
for the Lenders, and FIRST FINANCIAL CARIBBEAN CORPORATION, a corporation
organized under the laws of the Commonwealth of Puerto Rico ("FFCC"), and
DORAL MORTGAGE CORPORATION, a corporation organized under the laws of the
Commonwealth of Puerto Rico, and a wholly-owned subsidiary of FFCC ("DMC", and
together with FFCC, each a "Borrower" and collectively, the "Borrowers") with
reference to the Credit Agreement, dated as of June 30, 1995, between the
Lenders, the Agent and the Borrowers (as amended by the First Amendment to
Credit Agreement dated as of December 29, 1995, the Second Amendment to Credit
Agreement dated as of May 1, 1996, and the Third Amendment to Credit Agreement
dated as of June 28, 1996 (as amended to the date hereof, the "Original Credit
Agreement")). Capitalized terms not otherwise defined herein are defined in
Article I.
The Lenders, the Agent and the Borrowers wish to amend and
restate the Original Credit Agreement in its entirety.
ACCORDINGLY, the parties hereto agree that the Original Credit
Agreement is amended and restated in its entirety as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINED TERMS.
For purposes of this Agreement, the terms set forth below
shall have the following meanings:
"ACCEPTANCE AGENT" shall mean an entity acceptable to the
Agent and Borrowers who will provide the services previously
provided by Bankers Trust Caribe Capital Markets, Inc. under
the Funding Agreement.
"ACCEPTANCE OBLIGATION" shall have the meaning set forth in
Section 2.5(b).
"ACCEPTANCE PARTICIPANT" shall have the meaning set forth in
Section 2.4(g).
"ACCUMULATED FUNDING DEFICIENCY" shall mean a funding
deficiency described in Section 302 of ERISA.
"ACKNOWLEDGMENT AGREEMENT" shall mean an acknowledgment
agreement in form and substance satisfactory to the Agent
pursuant to which FNMA, FHLMC, GNMA
<PAGE> 6
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or any private Person which owns mortgage loans or has issued
mortgaged-backed securities for which either Borrower holds
direct servicing rights, acknowledges and recognizes the
security interest in such rights granted to the Secured
Parties.
"ADJUSTED TANGIBLE NET WORTH" shall mean, as of any date, (a)
the sum of: (i) Book Net Worth as of such date, (ii) 0.95% of
the outstanding principal balance of mortgage loans with
respect to which the Borrowers have direct servicing rights on
such date, and (iii) the aggregate principal amount of
Permitted Subordinated Indebtedness outstanding as of such
date, less (b) all excess servicing fees receivable, all
purchased loan administration contracts and all other assets
that would be classified as intangible assets under GAAP,
including purchased and capitalized value of servicing rights,
goodwill (whether representing the excess cost over book value
of assets acquired or otherwise), patents, trademarks, trade
names, copyrights, franchises, deferred charges (including
unamortized debt discount and expense, organization and
acquisition costs and research and product development costs),
and in accordance with FASB 65, as amended by FASB 122, by the
Financial Accounting Standards Board, any originated mortgage
servicing rights.
"ADMINISTRATIVE FEE" shall have the meaning set forth in
Section 2.10(d).
"AFFILIATE" shall mean, as to any Person, any other Person
directly or indirectly Controlling, Controlled by or under
direct or indirect common Control with, such Person, whether
through the ownership of voting securities, by contract or
otherwise. "Control" as used herein (and all forms of the
word) means the power to direct the management and policies of
a Person.
"AGENCY" shall mean FHA, FHLMC, FNMA, GNMA or VA.
"AGENCY CUSTODIAL AGREEMENT" shall mean the agreement, as
amended, modified or supplemented from time to time, between
FHLMC, FNMA or GNMA, as applicable, and the Borrowers and any
Person meeting the eligibility requirements set forth in the
FHLMC Guide, FNMA Guide or GNMA Guide, as applicable, to serve
as a "custodian," "certificating custodian," or as "document
custodian", as applicable, pursuant to which such Person is
authorized to act as Certificating Custodian.
"AGENCY FEE" shall have the meaning given such term in Section
2.10(e).
"AGENCY GUIDES" shall mean the FHLMC Guide, the FNMA Guide and
the GNMA Guide.
"AGENT" shall mean Bankers Trust Company, in its capacity as
agent for the Lenders hereunder, and any successor agent
appointed pursuant to Section 7.9.
"AGREEMENT" shall mean this Agreement, as amended, modified or
supplemented from time to time.
<PAGE> 7
- 3 -
"AMENDMENT EFFECTIVE DATE" shall have the meaning set forth
in Section 8.18.
"APPROVED INVESTOR" shall mean FNMA, FHLMC or any Person
listed on Exhibit L. At the request of the Borrowers, the
Required Facility 1 Lenders may from time to time agree in
writing to add Persons to the list set forth on Exhibit L. By
written notice to the Borrowers, the Required Facility 1
Lenders or the Agent may in their or its reasonable
discretion, based on their or its evaluation of the
creditworthiness or funding ability of any Approved Investor
listed on Exhibit L, remove such Approved Investor from such
list. Such removal shall become effective immediately upon
written notice from the Agent.
"AUTHORIZED OFFICERS" shall mean those officers identified on
Exhibit V attached hereto; provided that FFCC or DMC, as the
case may be, may, with respect to its Authorized Officers, by
notice to the Agent in accordance with Section 8.1, add or
delete any person from the list of Authorized Officers set
forth above.
"BANK BOOK" shall mean that certain binder entitled "First
Financial Caribbean Corporation" dated April 26, 1995 compiled
by Bankers Trust containing information delivered to Bankers
Trust by the Borrowers, which binder was delivered to each of
the Lenders.
"BANKERS TRUST" shall mean Bankers Trust Company, in its
capacity as a Lender hereunder.
"BASE EURODOLLAR RATE" shall mean, with respect to any
Eurodollar Loan, a rate per annum equal to the offered rate
for U.S. Dollar deposits, in an amount equal to amount of the
Eurodollar Loan proposed to be subject to such rate and with
maturities comparable to such Eurodollar Interest Period, that
appears on Telerate Page 314 as of approximately 11:00 a.m.,
London time, two (2) Eurodollar Business Days prior to the
commencement of such Eurodollar Interest Period; provided that
if such rate does not appear on Telerate Page 314, the "Base
Eurodollar Rate" applicable to a particular Eurodollar
Interest Period shall mean a rate per annum equal to the rate
at which U.S. Dollar deposits, in an amount equal to the
principal amount of the Eurodollar Loans proposed to be
subject to such rate and with maturities comparable to such
Eurodollar Interest Period, are offered in immediately
available funds in the London Interbank Market to the London
office of the Agent by leading banks in the London Interbank
Market as of approximately 11:00 a.m., London time, two (2)
Eurodollar Business Days prior to the commencement of the
Eurodollar Interest Period to which such Base Eurodollar Rate
is applicable.
"BOARD" shall mean the Board of Governors of the Federal
Reserve System of the United States and any successor thereto.
"BOOK-ENTRY MBS" shall mean a Mortgage-Backed Security (a)
that is not represented by an instrument (other than the
physical security issued to GNMA's nominee, MBSCC & Co.,
evidencing a GNMA Mortgage- Backed Security) and
<PAGE> 8
- 4 -
(b) the ownership and transfer of which are entered upon books
maintained for that purpose by a depository.
"BOOK NET WORTH" shall mean (a) the sum of (i) the net worth,
determined in accordance with GAAP consistently applied, of
(A) FFCC on a non-consolidated basis, (B) DMC, (C) RSC Corp.,
(D) Centro Hipotecaro de Puerto Rico, Inc. and (E) other
Subsidiaries of FFCC engaged primarily in the business of
mortgage banking (as reasonably determined by the Agent, but
excluding Doral Federal Savings Bank and AAA Financial
Services Corporation) and (ii) the amount of intercompany
payables between FFCC and DMC, less (b) the sum of (i) the
amount of intercompany receivables between FFCC and DMC and
(ii) investments by FFCC and/or DMC in any Subsidiaries, which
investments are listed under the account titled "Other Assets"
(as such term is used in the consolidated balance sheet of
FFCC dated as of December 31, 1995) or which are listed under
other accounts. Notwithstanding the foregoing, if at any time
any of the entities listed in clauses (B), (C) or (D) above
become businesses engaged primarily in activities other than
mortgage banking (as reasonably determined by the Agent), then
the net worth of such entity shall not be included in clause
(i) for the purposes of calculating Book Net Worth.
"BORROWER" and "BORROWERS" shall have the meaning given such
terms in the introductory paragraph.
"BORROWING" shall mean a Facility 1 Borrowing, a Facility 2
Borrowing or a Swing-Line Borrowing.
"BORROWING DATE" shall mean any date on which Bankers Trust
makes a Swing-Line Loan or the Lenders make Facility 1 Loans
or Facility 2 Loans at the Borrowers request pursuant to
Section 2.2.
"BUSINESS DAY" shall mean any day other than (i) a Saturday,
Sunday and any other day on which banks in New York City are
required or authorized to close or (ii) any public or bank
holiday in the Commonwealth of Puerto Rico.
"CASH COLLATERAL ACCOUNT" shall have the meaning set forth in
the Cash Collateral Agreement.
"CASH COLLATERAL AGREEMENT" shall mean the First Amended and
Restated Cash Collateral Agreement, substantially in the form
of Exhibit E hereto, as amended, modified or supplemented from
time to time.
"CASH COLLATERAL SECURITY" shall mean the cash collateral
pledged to the Agent and the Secured Parties pursuant to the
Cash Collateral Agreement, as such amount may fluctuate from
time to time.
<PAGE> 9
- 5 -
"CERTIFICATING CUSTODIAN" shall mean any Person acting as the
Borrowers "document custodian," "custodian" or "certificating
custodian," as such terms are used in the Agency Guides, for
purposes of (a) certifying that the documentation relating to
Mortgage Loans received by such Person from the Borrowers (or
the Warehousing Collateral Agent) is complete and acceptable
under an applicable Agency Guide for purposes of including
such Mortgage Loan in a pool of Mortgage Loans in which
Mortgage-Backed Securities will represent interests and (b)
holding such documentation following formation of such pools
and issuance of such Mortgage-Backed Securities. The
Certificating Custodian shall at all times be party to the
Agency Custodial Agreements. The Certificating Custodian
shall be initially Banco Popular de Puerto Rico.
"CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations
issues thereunder as from time to time in effect.
"COLLATERAL" shall mean the Warehousing Collateral, the
Servicing Collateral, the Collateral as defined in the Cash
Collateral Agreement, the REO Notes and the REO Property
encumbered by the REO Mortgages.
"COLLATERAL AGENTS" shall mean the Warehousing Collateral
Agent and the Servicing Collateral Agent.
"COLLATERAL VALUE OF THE FACILITY 1 BORROWING BASE" shall
mean, at the time of determination thereof, (a) the aggregate
collateral value of all Eligible Conforming Mortgage Loans and
Eligible Non- Conforming Mortgage Loans included in the
Facility 1 Borrowing Base plus (b) the aggregate collateral
value of all Eligible Mortgage-Backed Securities included in
the Facility 1 Borrowing Base. For purposes hereof, the
collateral value of (x) each Eligible Conforming Mortgage Loan
and each Eligible Mortgage-Backed Security shall be an amount
equal to ninety-eight percent (98%) of the current unpaid
principal balance of such Mortgage Loan or the unpaid
principal balance of such Mortgage-Backed Security at the time
such Mortgage-Backed-Security is included in the Facility 1
Borrowing Base, as applicable, and (y) each Eligible
Non-Conforming Mortgage Loan shall be in an amount equal to
ninety-five percent (95%) of the current unpaid principal
balance thereof; provided that if the Agent, in its sole
discretion, at any time believes that the collateral value of
any Seasoned Loan included in the Facility 1 Borrowing Base is
greater than the Fair Market Value of such Seasoned Loan then
the collateral value of any such Seasoned Loan shall, until
further notice from the Agent, be equal to (I) in the case of
each Eligible Conforming Mortgage Loan, ninety-eight percent
(98%) of the lesser of (x) the Fair Market Value of such
Seasoned Loan and (y) the current unpaid principal balance of
such Seasoned Loan and (II) in the case of each Eligible
Non-Conforming Mortgage Loan, ninety-five percent (95%) of the
lesser of (x) the Fair Market Value of such Seasoned Loan and
(y) the current unpaid principal balance of such Seasoned
Loan. The Collateral Value of the Facility 1 Borrowing Base
shall be determined by reference to the most recent Facility 1
Borrowing Base Certificate delivered by the Borrowers to the
Agent absent any error in such
<PAGE> 10
- 6 -
Facility 1 Borrowing Base Certificate as of the date
delivered. By adding any Mortgage Loan or Mortgage-Backed
Security to the Facility 1 Borrowing Base in accordance with
the Warehousing Security Agreement, each Borrower shall be
deemed to represent and warrant to the Agent and each Lender
at and as of the date of such addition that with respect to
such Mortgage Loans or Mortgage-Backed Securities, that each
of the statements set forth in the definition of Eligible
Conforming Mortgage Loan, Eligible Non-Conforming Mortgage
Loan or Eligible Mortgage-Backed Security, as the case may be,
is true and correct. If any such statement proves to be
untrue or incorrect in any respect at any time, then such
Mortgage Loan or Mortgage-Backed Security, as the case may be,
shall be deemed to have no collateral value for purposes of
computing the Collateral Value of the Facility 1 Borrowing
Base.
"COLLATERAL VALUE OF THE FACILITY 2 TRANCHE A BORROWING BASE"
shall mean, at the time of determination thereof, an amount
equal to eighty percent (80%) of the aggregate amount of
Eligible Servicing Receivables that are included in the
Facility 2 Tranche A Borrowing Base at such time. The
Collateral Value of the Facility 2 Tranche A Borrowing Base
shall be determined by reference to the most recent Facility 2
Tranche A Borrowing Base Certificate delivered by the
Borrowers to the Agent absent any error in such Facility 2
Tranche A Borrowing Base Certificate as of the date delivered.
Notwithstanding the foregoing, no Eligible Servicing
Receivable shall be deemed to have any collateral value for
purposes of computing the Collateral Value of the Facility 2
Tranche A Borrowing Base (x) on the date of repayment of any
advanced amount which is an Eligible Servicing Receivable by
any Obligor or any other Person (including any Agency) and (y)
to the extent such reimbursement right which is an Eligible
Servicing Receivable is being contested or disputed by any
applicable Agency or by any Person who could be liable for
such reimbursement or by any other Person with standing to do
so. By adding any Eligible Servicing Receivable to the
Facility 2 Tranche A Borrowing Base in accordance with the
Servicing Security Agreement, each Borrower shall be deemed to
represent and warrant to the Agent and each Lender at and as
of the date of such addition that with respect to such
Eligible Servicing Receivable, each of the statements set
forth in the definition of Eligible Servicing Receivable, is
true and correct. If any such statement proves to be untrue
or incorrect in any respect at any time, then such Eligible
Servicing Receivable shall be deemed to have no collateral
value for purposes of computing the Collateral Value of the
Facility 2 Tranche A Borrowing Base.
"COLLATERAL VALUE OF THE FACILITY 2 TRANCHE B BORROWING BASE"
shall mean, at any time, an amount equal to fifty percent
(50%) of the REO Valuation of the REO Property included in the
Facility 2 Tranche B Borrowing Base at such time. The
Collateral Value of the Facility 2 Tranche B Borrowing Base
shall be determined by reference to the most recent Facility 2
Tranche B Borrowing Base Certificate delivered by the
Borrowers to the Agent absent any error in such Facility 2
Tranche B Borrowing Base Certificate as of the date delivered.
<PAGE> 11
- 7 -
"COLLATERAL VALUE OF THE PLEDGED SERVICING PORTFOLIO" shall
mean, at the time of determination thereof, an amount equal to
the lesser of (i) sixty-five percent (65%) of the fair market
value of the servicing rights relating to the mortgage loans
included in the Pledged Servicing Portfolio and (ii) 0.95% of
the unpaid principal balance of the mortgage loans included in
the Pledged Servicing Portfolio (in each case as reflected on
the most recent Pledged Servicing Valuation Report delivered
to the Agent).
"COMMITMENTS" shall mean the Facility 1 Commitments and the
Facility 2 Commitments.
"CONFORMING LOAN" shall mean a Mortgage Loan underwritten in
conformity with the underwriting standards of FNMA or FHLMC in
effect at the time of such underwriting and that is otherwise
eligible for inclusion in a pool of Mortgage Loans supporting
FNMA or FHLMC Mortgage-Backed Securities or for sale at the
FNMA or FHLMC cash window.
"CONTRACTUAL OBLIGATION" shall mean, as to any Person, any
provision of any security issued by such Person or of any
agreement, instrument or undertaking to which such Person is a
party or by which it or any of its property is bound.
"CONVENTIONAL MORTGAGE LOAN" shall mean a Mortgage Loan that
is not insured by the FHA or guaranteed by the VA.
"CONVERSION/CONTINUATION DATE" shall mean (a) any date on
which the Lenders, pursuant to Sections 2.2 and 2.3, (i)
convert Facility 1 Loans to Facility 1 Loans bearing interest
at a different interest rate, or continue outstanding
Eurodollar Loans for an additional Eurodollar Interest Period
(which date shall be a Eurodollar Business Day in the case of
a conversion of Fed Funds Loans into Eurodollar Loans or the
continuation of a Eurodollar Loan) or (ii) exchange Old
Acceptances for New Acceptances and (b) the last day of each
Eurodollar Interest Period in the case of a Eurodollar Loan.
"CREDIT EVENT" shall mean either (i) a Borrowing, or (ii) the
creation of a Facility 1 Acceptance as provided in Section
2.1(f)(iii).
"DEFAULT RATE" shall have the meaning given such term in
Section 2.6(d).
"DEFAULTING LENDER" shall have the meaning given such term in
Section 2.4(b).
"DISCOUNT EXPENSE" shall have the meaning given such term in
Section 2.8(f).
"DRAFT" shall have the meaning given such term in Section
2.1(f)(iii).
"EFFECTIVE DATE" shall mean the date of the Original Credit
Agreement.
<PAGE> 12
- 8 -
"ELIGIBLE CONFORMING MORTGAGE LOAN" shall mean a Mortgage Loan
with respect to which each of the following statements is true
and correct:
(a) such Mortgage Loan is an Eligible Mortgage Loan; and
(b) such Mortgage Loan is insured by the FHA or
guaranteed by the VA (or there exists a binding
commitment to issue such insurance or guaranty
subject to the satisfaction of customary conditions)
or is a Conforming Loan.
"ELIGIBLE MORTGAGE-BACKED SECURITY" shall mean a
Mortgage-Backed Security owned by the Borrowers with respect
to which each of the following statements is true and correct:
(a) such Mortgage-Backed Security is a valid and binding
obligation of the Obligor thereon, is in full force
and effect and is enforceable in accordance with its
terms;
(b) such Mortgage-Backed Security is free of any default
and from any rescission, cancellation or avoidance,
and all rights thereof, whether by operation of law
or otherwise;
(c) such Mortgage-Backed Security has either been
deposited with and is held by the Warehousing
Collateral Agent or an agent, bailee and custodian of
the Warehousing Collateral Agent under the
Warehousing Security Agreement (or by a Person who
has executed a custodial agreement acceptable to the
Required Facility 1 Lenders), properly endorsed in
blank for transfer or, if such Mortgage-Backed
Security is a Book-Entry MBS, such Mortgage-Backed
Security is the subject of a Perfected Assignment;
(d) at all times such Mortgage-Backed Security will be
free and clear of all liens, encumbrances, charges,
rights and interests of any kind, except in favor of
the Secured Parties under the Warehousing Security
Agreement; and
(e) such Mortgage-Backed Security represents an interest
in Eligible Conforming Mortgage Loans.
"ELIGIBLE MORTGAGE LOAN" shall mean a Mortgage Loan owned by
the Borrowers for which each of the following statements is
true and correct:
(a) such Mortgage Loan is a valid and binding obligation
of the Obligor thereon, is in full force and effect
and is enforceable in accordance with its terms;
(b) such Mortgage Loan is secured by a first priority
mortgage (or deed of trust) on the Property
encumbered thereby;
<PAGE> 13
- 9 -
(c) such Mortgage Loan is genuine, in all respects, as
appearing on its face or as represented in the books
and records of the applicable Borrower, and all
information set forth therein is true and correct;
(d) such Mortgage Loan is free of any material default
(other than as permitted in subsection (e) below) of
any party thereto (including the Borrowers),
counterclaims, offsets and defenses and from any
rescission, cancellation or avoidance, and all rights
thereof, whether by operation of law or otherwise;
(e) no payment under such Mortgage Loan is more than
thirty (30) days past due the payment due date set
forth in the underlying promissory note and mortgage
(or deed of trust);
(f) such Mortgage Loan contains the entire agreement of
the parties thereto with respect to the subject
matter thereof, has not been modified or amended in
any respect and is free of concessions or
understandings with the Obligor thereon of any kind
not expressed in writing therein;
(g) such Mortgage Loan is in all respects as required by
and in accordance with all applicable laws and
regulations governing the same, including the federal
Consumer Credit Protection Act and the regulations
promulgated thereunder and all applicable usury laws
and restrictions; and all notices, disclosures and
other statements or information required by law or
regulation to be given, and any other act required by
law or regulation to be performed, in connection with
such Mortgage Loan have been given and performed as
required;
(h) all advance payments and other deposits on such
Mortgage Loan have been paid in cash, and no part of
such sums has been loaned, directly or indirectly, by
either Borrower to the Obligor thereon;
(i) at all times such Mortgage Loan will be free and
clear of all liens, encumbrances, charges, rights and
interests of any kind, except in favor of the Secured
Parties under the Warehousing Security Agreement;
(j) the Property encumbered by such Mortgage Loan is
insured against loss or damage by fire and all other
hazards normally included within standard extended
insurance coverage (including flood plain insurance
if such Property is located in a federally designated
flood plain) in accordance with the provisions of
such Mortgage Loan with the applicable Borrower named
as a loss payee thereon;
(k) the Property encumbered by such Mortgage Loan is free
and clear of all Liens except Liens in favor of the
applicable Borrower, which has assigned any and all
such Liens to the Secured Parties under the
Warehousing Security Agreement, subject only to (i)
Liens junior in priority to the Lien of such
Borrower; (ii) the Lien of real property taxes and
assessments not yet due and
<PAGE> 14
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payable; (iii) covenants, conditions and restrictions,
rights of way, easements and other matters of public
record, as of the date of recording, being acceptable
to mortgage lending institutions generally and
specifically referred to in a lender's title insurance
policy delivered to the originator of the Mortgage
Loan and (A) referred to or otherwise considered
in the appraisal made for the originator of the
Mortgage Loan or (B) that do not materially adversely
affect the appraised value of such Property as set
forth in such appraisal; and (iv) other matters to
which like properties are commonly subject that do not
materially interfere with the benefits of the security
intended to be provided by the Mortgage Loan or the
use, enjoyment, value or marketability of the related
Property;
(l) if the promissory note for such Mortgage Loan (or any
other documentation relating thereto) has been
withdrawn from the possession of the Warehousing
Collateral Agent on terms and subject to conditions
set forth in Section 6 of the Warehousing Security
Agreement, the promissory note and any related
documentation for such Mortgage Loan has been shipped
by the Warehousing Collateral Agent directly to an
Approved Investor for purchase, as permitted under
Section 6(b) of the Warehousing Security Agreement,
and such shipment has occurred within the immediately
preceding twenty-four (24) hours (or within the
immediately preceding five (5) days in the case of
Mortgage Loan sales to the FNMA or FHLMC cash
window);
(m) with respect to Conventional Mortgage Loans, in the
event the Loan-to-Value Ratio of such Mortgage Loan
exceeds eighty percent (80%), such Mortgage Loan is
the subject of a private mortgage insurance policy
issued in favor of the applicable Borrower by an
insurer approved by FNMA, FHLMC, GNMA or by
nationally recognized rating agencies or pool
insurers for inclusion in privately-issued
mortgage-backed securities;
(n) such Mortgage Loan has not been included in the
Facility 1 Borrowing Base for a period in excess of
one hundred and eighty (180) days from the date such
Mortgage Loan was first included in the Facility 1
Borrowing Base;
(o) (i) if such Mortgage Loan is to be included in the
Facility 1 Borrowing Base, the Borrowers have
delivered (or caused to be delivered) those items
described on Attachment 2 to the Warehousing Security
Agreement for such Mortgage Loan to the Warehousing
Collateral Agent prior to the inclusion of such
Mortgage Loan in the Facility 1 Borrowing Base; and
(ii) the Borrowers hold in trust for the Secured
Parties those items described in Attachment 6 to the
Warehousing Security Agreement; and
(p) such Mortgage Loan is not subject to any servicing
arrangement with any Person other than the Borrowers
nor are any servicing rights relating to such
Mortgage Loan subject to any lien, claim, interest or
negative pledge in favor of any Person other than as
permitted hereunder.
<PAGE> 15
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"ELIGIBLE NON-CONFORMING MORTGAGE LOAN" shall mean a Mortgage
Loan with respect to which each of the following statements is
true and correct:
(a) such Mortgage Loan is an Eligible Mortgage Loan;
(b) such Mortgage Loan (i) would be a Conforming Mortgage
Loan but for the fact that (A) its original principal
amount is in excess of the maximum amount eligible
for purchase by FNMA or (B) it is a second-priority
Mortgage Loan, or (ii) has been underwritten to
guidelines approved by nationally recognized rating
agencies or pool insurers whose long term debt is
rated AAA by Standard and Poor's Corporation and AA
by Moody's Investors Service for inclusion in
privately- issued mortgage-backed securities;
(c) the original principal amount of such Mortgage Loan
is $600,000 or less; and
(d) if such Mortgage Loan is a second-priority Mortgage
Loan, then if the original principal amount of such
second-priority Mortgage Loan, when added to the
original principal amount of any other second
Eligible Non-Conforming Mortgage Loans which are
second-priority mortgage loans included in the
Facility 1 Borrowing Base, exceeds $3,000,000, then
such Mortgage Loan shall be deemed to have no
collateral value for purposes of computing the
Collateral Value of the Facility 1 Borrowing Base.
"ELIGIBLE REO PROPERTY" shall mean REO Property meeting the
criteria set forth on Exhibit N hereto.
"ELIGIBLE SERVICING RECEIVABLE" shall mean either Borrower s
right to be reimbursed for the amount that such Borrower has
advanced to investors as servicer of (i) any FHA-insured,
VA-guaranteed or Conforming Mortgage Loan included in its
Servicing Portfolio, or (ii) any other Mortgage Loan included
in its Servicing Portfolio and backing privately issued
mortgage-backed securities, insured by nationally recognized
pool insurers acceptable to the Agent, in each case in respect
of principal, interest, tax or insurance payments or any other
payments in connection with the servicing of such Mortgage
Loan, which advanced amount is fully or substantially
reimbursable by the Obligor under such Mortgage Loan or any
other Person (including any Agency), and the right of such
Borrower to such reimbursement is either subject to the Lien
of the Servicing Security Agreement or is subject to Section
5.2 (o), and in either case such receivable is also reflected
on the books and records of such Borrower as a current
receivable.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as the same may from time to time be supplemented or
amended, and the rules and regulations issued thereunder as
from time to time in effect.
<PAGE> 16
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"ERISA AFFILIATE" shall mean each trade or business, including
the Borrowers, whether or not incorporated, that together with
the Borrowers would be treated as a single employer under
section 4001 of ERISA.
"EURODOLLAR BUSINESS DAY" shall mean any Business Day on which
commercial banks are open for international business
(including dealings in dollar deposits) in London, England.
"EURODOLLAR INTEREST PERIOD" shall mean, with respect to any
Eurodollar Loan, the period commencing on the Borrowing Date
or a Conversion/Continuation Date for such Eurodollar Loan, as
the case may be, and ending thirty (30), sixty (60) or ninety
(90) days thereafter as the Borrowers may elect in the
applicable Notice of Borrowing or Notice of
Conversion/Continuation; provided that (a) any Eurodollar
Interest Period that would otherwise end on a day that is not
a Eurodollar Business Day shall be extended to the next
succeeding Eurodollar Business Day, unless such Eurodollar
Business Day falls in another calendar month, in which case
such Eurodollar Interest Period shall end on the next
preceding Eurodollar Business Day; (b) any Eurodollar Interest
Period that begins on the last Eurodollar Business Day of a
calendar month or any Eurodollar Interest Period that begins
on a day for which there is no numerically corresponding day
in the calendar month at the end of such Eurodollar Interest
Period shall end on the last Eurodollar Business Day of such
calendar month at the end of such Eurodollar Interest Period;
and (c) no Eurodollar Interest Period shall end after the
Maturity Date.
"EURODOLLAR LOAN" shall mean any Facility 1 Loan bearing
interest at the rate set forth in Section 2.6(b).
"EURODOLLAR RATE" shall mean, with respect to any Eurodollar
Interest Period, a rate per annum equal to the quotient
obtained by dividing (a) the Base Eurodollar Rate applicable
to such Eurodollar Interest Period by (b) one minus the
Reserve Requirement (expressed as a decimal) applicable to
such Eurodollar Interest Period. The Eurodollar Rate shall be
rounded, if necessary, to the next higher one-sixteenth of one
percent (1/16 of 1%).
"EVENT OF DEFAULT" shall have the meaning given such term in
Article VI.
"FACILITY 1 ACCEPTANCE" or "ACCEPTANCE"shall have the meaning
given such term in Section 2.1(f).
"FACILITY 1 BORROWING" shall mean a borrowing pursuant to a
Notice of Borrowing consisting of Facility 1 Loans made
concurrently by all of the Facility 1 Lenders.
"FACILITY 1 BORROWING BASE" shall mean, at any time, all
Eligible Conforming Mortgage Loans, Eligible Non-Conforming
Mortgage Loans and Eligible Mortgage-Backed Securities
delivered to and held by the Warehousing Collateral Agent
under the Warehousing Security Agreement as collateral
security for the Obligations.
<PAGE> 17
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"FACILITY 1 BORROWING BASE CERTIFICATE" shall mean a
certificate in the form of and containing the information
required by Exhibit H-1, delivered to the Agent pursuant to
the Loan Documents.
"FACILITY 1 COMMITMENT" shall mean, with respect to each
Lender, the commitment, if any, of such Lender to make
Facility 1 Loans or to become an Acceptance Participant with
respect to Facility 1 Acceptances hereunder as set forth in
Section 2.1(a) and 2.1(f), as such commitment may be reduced
pursuant to Section 8.6(c).
"FACILITY 1 LENDER" shall mean any Lender with a Facility 1
Commitment or an outstanding Facility 1 Loan or Swing-Line
Loan or any Lender who is an Acceptance Participant with
respect to a Facility 1 Acceptance.
"FACILITY 1 LOAN" shall mean a loan made by a Facility 1
Lender pursuant to Section 2.1(a) for the purposes set forth
in the first sentence of Section 4.9.
"FACILITY 1 MAXIMUM AMOUNT" shall have the meaning set forth in
Section 2.1(a).
"FACILITY 1 NOTE" shall have the meaning given such term in
Section 2.5.
"FACILITY 1 SETTLEMENT ACCOUNT" shall have the meaning given
such term in Section 6(b) of the Warehousing Security
Agreement.
"FACILITY 2 BORROWING" shall mean a Facility 2 Tranche A
Borrowing, a Facility 2 Tranche B Borrowing or a Facility 2
Tranche C Borrowing.
"FACILITY 2 COMMITMENT" shall mean, with respect to each
Lender, the commitment, if any, of such Lender to make
Facility 2 Loans hereunder as set forth in Section 2.1(b), (c)
and (d), as such commitment may be reduced from time to time
pursuant to Section 8.6(c).
"FACILITY 2 LENDER" shall mean any Lender with a Facility 2
Commitment or an outstanding Facility 2 Loan.
"FACILITY 2 LOANS" shall mean Facility 2 Tranche A Loans,
Facility 2 Tranche B Loans and Facility 2 Tranche C Loans, as
the context requires.
"FACILITY 2 NOTE" shall have the meaning given such term in
Section 2.5.
"FACILITY 2 TRANCHE A BORROWING" shall mean a borrowing
pursuant to a Notice of Borrowing consisting of Facility 2
Tranche A Loans made concurrently by all of the Facility 2
Lenders.
"FACILITY 2 TRANCHE A BORROWING BASE" shall mean, at any time,
all Eligible Servicing Receivables, the proceeds of the
repayment of which have been pledged
<PAGE> 18
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to the Servicing Collateral Agent under the Servicing Security
Agreement as collateral security for the Obligations.
"FACILITY 2 TRANCHE A BORROWING BASE CERTIFICATE" shall mean a
certificate in the form of Exhibit H-2 delivered to the Agent
pursuant to the Loan Documents.
"FACILITY 2 TRANCHE A LOAN" shall mean a loan made by a
Facility 2 Lender pursuant to Section 2.1(b) for the purposes
set forth in the second sentence of Section 4.9.
"FACILITY 2 TRANCHE A MAXIMUM AMOUNT" shall have the meaning
set forth in Section 2.1(b).
"FACILITY 2 TRANCHE B BORROWING" shall mean a borrowing
pursuant to a Notice of Borrowing consisting of Facility 2
Tranche B Loans made concurrently by all of the Facility 2
Lenders.
"FACILITY 2 TRANCHE B BORROWING BASE" shall mean, at any time,
all Eligible REO Property mortgaged to the Secured Parties, as
collateral security for the Obligations.
"FACILITY 2 TRANCHE B BORROWING BASE CERTIFICATE" shall mean a
certificate in the form of Exhibit H-3 delivered to the Agent
pursuant to the Loan Documents.
"FACILITY 2 TRANCHE B LOAN" shall mean a loan made by a
Facility 2 Lender pursuant to Section 2.1(c) for the purposes
set forth in the third sentence of Section 4.9.
"FACILITY 2 TRANCHE B MAXIMUM AMOUNT" shall have the meaning
set forth in Section 2.1(c).
"FACILITY 2 TRANCHE C BORROWING" shall mean a borrowing
pursuant to a Notice of Borrowing consisting of Facility 2
Tranche C Loans made concurrently by all of the Facility 2
Lenders.
"FACILITY 2 TRANCHE C LOAN" shall mean a loan made by a
Facility 2 Lender pursuant to Section 2.1(d) for the purposes
set forth in the fourth sentence of Section 4.9.
"FACILITY 2 TRANCHE C MAXIMUM AMOUNT" shall have the meaning
set forth in Section 2.1(d).
"FAIR MARKET VALUE" shall mean at any date with respect to any
Eligible Mortgage Loan or Eligible Non- Conforming Mortgage
Loan, (i) the bid price (expressed as a percentage) quoted to
the Agent as of the computation date by any nationally
recognized dealer (or Puerto Rican subsidiary of such dealer)
or investor selected by
<PAGE> 19
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the Agent or its designee who at the time regularly purchases
similar Mortgage Loans, multiplied by (ii) the outstanding
principal balance thereof.
"FDIC" shall mean the Federal Deposit Insurance Corporation
and any successor thereto.
"FED FUNDS LOAN" shall mean any Facility 1 Loan or Facility 2
Loan bearing interest at the rate set forth in Section 2.6(c).
"FEDERAL FUNDS RATE" shall mean, for any period, a fluctuating
interest rate per annum equal for each day during such period
to the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the preceding
Business Day) by the Federal Reserve Bank of New York or, if
such rate is not so published for any day that is a Business
Day, the average of the quotations for such day on such
transactions received by the Agent from three (3) Federal
funds brokers of recognized standing selected by it.
"FEES" shall mean all fees payable by the Borrowers to the
Agent and/or the Lenders pursuant to Section 2.10 or
otherwise.
"FHA" shall mean the Federal Housing Administration and any
successor thereto.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation
and any successor thereto.
"FHLMC GUIDE" shall mean the "Sellers" & Servicers Guide"
published by FHLMC, as amended, modified or supplemented from
time to time.
"FNMA" shall mean the Federal National Mortgage Association
and any successor thereto.
"FNMA GUIDE" shall mean, collectively, the "Selling Guide" and
the "Servicing Guide" published by FNMA, as amended, modified
or supplemented from time to time.
"FNMA/FHLMC SERVICING PORTFOLIO" shall mean the portfolio of
outstanding residential mortgage loans (other than mortgage
loans owned by either Borrower or its Affiliates that are not
covered by a Permitted Affiliate Servicing Agreement)
specified on Attachment 1-A to the Servicing Security
Agreement, as such attachment is amended, modified or
supplemented from time to time, that are owned by FNMA or
FHLMC or included in pools of mortgage loans with respect to
which FNMA or FHLMC has issued a mortgage-backed security and
with respect to which either Borrower holds direct servicing
rights, and that are covered by an effective Acknowledgment
Agreement.
<PAGE> 20
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"FUNDING AGREEMENT" shall mean a Funding Agreement between the
Borrowers and the Acceptance Agent in substantially the form
of the Funding Agreement (as defined in the Original Credit
Agreement) and otherwise in form and substance satisfactory to
the Agent.
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
"GNMA" shall mean the Government National Mortgage Association
and any successor thereto.
"GNMA GUIDE" shall mean, collectively, the "GNMA I
Mortgage-Backed Securities Guide" and the "GNMA II
Mortgage-Backed Securities Guide" published by HUD, as
amended, modified or supplemented from time to time.
"GNMA SERVICING PORTFOLIO" shall mean the portfolio of
outstanding residential mortgage loans (other than mortgage
loans owned by either Borrower or its Affiliates that are not
covered by a Permitted Affiliate Servicing Agreement)
specified on Attachment 1-B to the Servicing Security
Agreement, as such attachment is amended, modified or
supplemented from time to time, that are guaranteed by GNMA or
included in pools of mortgage loans with respect to which GNMA
has issued a mortgage-backed security and with respect to
which either Borrower holds direct servicing rights, and that
are covered by an effective Acknowledgment Agreement if
requested by the Agent and the Lenders.
"GOVERNMENTAL AUTHORITY" shall mean any nation or government,
any state, commonwealth or other political subdivision
thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or
pertaining to government.
"HEDGING INVENTORY REPORT" shall mean a monthly report,
prepared by the Borrowers, in form and substance satisfactory
to the Agent, setting forth the existing Take-Out Commitments
and all options or cash market instruments, pursuant to which
the Borrowers have hedged against interest rate fluctuations
to protect the value of Mortgage Loans and/or Mortgage-Backed
Securities owned by the Borrowers, and whether there has been
any change in the hedging policies of the Borrowers from the
statement of hedging policies dated January 1995 and delivered
to the Lenders prior to the Effective Date.
"HEDGING POLICY" shall mean the hedging policy of the
Borrowers as described in the statement of hedging policies
dated January 1995 included in the Bank Book.
"HUD" shall mean the Department of Housing and Urban
Development and any successor thereto.
<PAGE> 21
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"INDEBTEDNESS" shall mean, with respect to any Person, all
items of indebtedness that, in accordance with GAAP, would be
included in determining liabilities as shown on the liability
side of a statement of financial condition of such Person as
of the date as of which indebtedness is to be determined,
including all obligations for money borrowed, the deferred
purchase price of property or services and capitalized lease
obligations, and shall also include all indebtedness and
liabilities of others assumed or guaranteed by such Person, or
secured by any Lien upon property owned by such Person,
whether or not such indebtedness is assumed, or in respect of
which such Person is secondarily or contingently liable (other
than by endorsement of instruments in the course of
collection), including contingent reimbursement obligations of
such Person under undrawn letters of credit, whether by reason
of any agreement to acquire such indebtedness or to supply or
advance sums or otherwise (but excluding any obligations
(whether recourse or nonrecourse) to advance principal and
interest payments and taxes and insurance payments on Mortgage
Loans in advance of receipt of such payments from the
underlying Obligor under servicing agreements entered into by
either Borrower which agreements exist on the date hereof and
any similar agreements entered into after the date hereof).
"LENDERS" shall mean the banks and other financial
institutions party hereto from time to time.
"LIEN" shall mean any security interest, mortgage, pledge,
lien, claim on property, charge or encumbrance (including any
conditional sale or other title retention agreement), any
lease in the nature thereof, and the filing of or agreement to
give any financing statement under the Uniform Commercial Code
of any jurisdiction.
"LOAN DOCUMENTS" shall mean this Agreement, the Security
Agreements, the Notes, the Acknowledgment Agreements and any
other document, instrument or agreement executed by the
Borrowers in connection herewith or therewith, as any of the
same may be amended, modified or supplemented from time to
time.
"LOAN-TO-VALUE RATIO" shall mean, with respect to any Mortgage
Loan, the ratio of the principal amount of such Mortgage Loan
outstanding at the origination thereof divided by the
appraised value of the Property encumbered thereby (as set
forth in the appraisal delivered in connection with the
origination of such Mortgage Loan).
"LOANS" shall mean the Facility 1 Loans, the Facility 2 Loans
and the Swing-Line Loans.
"MARGIN STOCK" shall have the meaning given such term in
Regulation U of the Board.
"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect
with respect to (a) the business, operations or financial
condition of a Borrower, (b) the ability of any Borrower to
pay and perform its Obligations, (c) the validity or
enforceability of this Agreement, any of the other Loan
Documents, the Funding Agreement or the rights
<PAGE> 22
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and remedies of the Secured Parties hereunder or thereunder or
(d) the value of the Collateral.
"MATERIAL AMOUNT" shall mean, at any time, ten percent (10%)
of Book Net Worth, as set forth in the most recent annual or
quarterly financial statement of FFCC delivered to the Lenders
and used in FFCC's Securities and Exchange Commission 10-K or
Securities and Exchange Commission 10-Q filing, as applicable,
absent manifest error in such statement.
"MATURITY DATE" shall mean June 27, 1997; provided that upon
the written request of the Borrowers to the Agent, the Lenders
may elect to extend the Maturity Date on terms as they may
deem appropriate in their sole discretion.
"MINIMUM ATNW" shall have the meaning assigned thereto in
Section 5.3(b).
"MINIMUM BNW" shall have the meaning assigned thereto in
Section 5.3(c).
"MORTGAGE-BACKED SECURITY" shall mean (a) a security
(including a participation certificate) guaranteed by GNMA
that represents interests in a pool of loans secured by
mortgages, deeds of trusts or other instruments creating a
Lien on property that is improved by a completed single family
dwelling (one-to- four family units) other than a mobile home
or other temporary housing facilities, or (ii) a security
(including a participation certificate) issued by FNMA or
FHLMC that represents interests in such a pool.
"MORTGAGE LOAN" shall mean a one-to-four family, residential
real estate secured loan other than any loan secured by mobile
homes or other temporary housing facilities.
"MULTIEMPLOYER PLAN" shall mean a plan described in section
4001(a)(3) of ERISA to which the Borrowers or any ERISA
Affiliate is required to contribute on behalf of any of its
employees.
"NEW ACCEPTANCE" shall have the meaning set forth in Section
2.3(b).
"NOTES" shall mean the Facility 1 Notes and the Facility 2
Notes.
"NOTICE OF BORROWING" shall have the meaning given such term
in Section 2.2.
"NOTICE OF CONVERSION/CONTINUATION" shall have the meaning
given such term in Section 2.2.
"OBLIGATIONS" shall mean, in respect of each of the Borrowers,
any and all debts, obligations and liabilities (including
Acceptance Obligations) of such Borrower to the Lenders, the
Agent, the Collateral Agents and any other Secured Parties,
(whether now existing or hereafter arising, voluntary or
involuntary, whether or not jointly
<PAGE> 23
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owed with others, direct or indirect, absolute or contingent,
liquidated or unliquidated, and whether or not from time to
time decreased or extinguished and later increased, created or
incurred), under or arising out of the Loan Documents.
"OBLIGOR" shall mean the Person or Persons obligated to pay
the indebtedness that is the subject of a Mortgage Loan or
Mortgage-Backed Security, including any guarantor of such
indebtedness.
"OLD ACCEPTANCE" shall have the meaning set forth in Section
2.3(b).
"ORIGINAL CREDIT AGREEMENT" shall mean the Credit Agreement,
dated as of June 30, 1995, between the Lenders, the Agent and
the Borrowers (as amended by the First Amendment to the Credit
Agreement dated as of December 29, 1995, the Second Amendment
to Credit Agreement dated as of May 1, 1996, and the Third
Amendment to Credit Agreement dated as of June 28, 1996).
"PAYMENT OFFICE" shall mean the Agent's office located at One
Bankers Trust Plaza, New York, New York 10015, or such other
office as the Agent shall specify by notice to the Borrowers
and the Lenders.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA and
any successor thereto.
"PERFECTED ASSIGNMENT" shall mean as to any Book-Entry MBS,
that such Book-Entry MBS has been transferred to the
Warehousing Collateral Agent or any entity designated by the
Warehousing Collateral Agent so that the Warehousing
Collateral Agent or such entity may maintain such Book-Entry
MBS as depository in one of its book-entry accounts with a
Federal Reserve Bank or with the Participants Trust Company or
its nominee, MBSCC & Co., and a pledge to the Secured Parties
has been registered with the Warehousing Collateral Agent or
such entity, or the Borrowers has taken such other action as
the Warehousing Collateral Agent may reasonably request to
perfect, protect and maintain the valid, first priority
security interest of the Secured Parties in such Book-Entry
MBS.
"PERMITTED AFFILIATE SERVICING AGREEMENT" shall mean an
agreement between either Borrower and an Affiliate thereof
pursuant to which such Borrower has direct servicing rights to
service mortgage loans owned by such Affiliate on terms and at
rates no less favorable than would be obtained from a
non-Affiliate.
"PERMITTED SUBORDINATED INDEBTEDNESS" shall mean the
$10,000,000 8.25% Convertible Subordinated Debentures due
January 1, 2006, of FFCC, issued under that certain Debenture
Purchase Agreement, dated as of September 25, 1995, as amended
and restated as of December 15, 1995, between FFCC and
BanPonce Corporation and any other Indebtedness incurred by
each Borrower (other than the Obligations) that is
subordinated to the Obligations in accordance with the
criteria set forth on Exhibit R attached hereto.
<PAGE> 24
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"PERSON" shall mean any corporation, natural person, firm,
joint venture, partnership, trust, unincorporated
organization, government or any political subdivision,
department, agency or instrumentality of any government.
"PLAN" shall mean any plan (other than a Multiemployer Plan)
subject to Title IV of ERISA maintained for employees of the
Borrowers or any ERISA Affiliate (and any such plan no longer
maintained by the Borrowers or any of its ERISA Affiliates to
which the Borrowers or any of its ERISA Affiliates has made or
was required to make any contributions during the five years
preceding the date on which such plan ceased to be
maintained).
"PLEDGED SERVICING CONTRACT" shall have the meaning given such
term in Section 2(a) of the Servicing Security Agreement.
"PLEDGED SERVICING PORTFOLIO" shall mean the FNMA/FLHMC
Servicing Portfolio, the GNMA Servicing Portfolio and the
Private Investor Servicing Portfolio, in each case with
respect to each of which the Secured Parties have a valid and
perfected first priority security interest in the related
direct servicing rights owned by either Borrower.
"PLEDGED SERVICING PORTFOLIO REPORT" shall mean a report
prepared by the Borrowers in the format prescribed by the
Mortgage Bankers Association of America listing the FNMA/GNMA
/FHLMC statistics and the other information shown on Exhibit
T.
"PLEDGED SERVICING VALUATION REPORT" shall mean a report
prepared by a nationally recognized mortgage servicing broker
acceptable to the Agent and the Borrowers, and otherwise in
form and substance reasonably satisfactory to the Agent,
setting forth the fair market value of the servicing rights
relating to the mortgage loans included in the Pledged
Servicing Portfolio as of such date (with the FNMA/FHLMC
Servicing Portfolio, the GNMA Servicing Portfolio and the
Private Investor Servicing Portfolio each listed and valued
separately (and, with respect to the FNMA/FHLMC Servicing
Portfolio, with the portfolio serviced for FNMA listed
separately from the portfolio serviced for FHLMC)), with such
value determined on the basis of the net present value of the
expected stream of annual cash flow generated thereby using
assumptions reasonably acceptable to the Agent.
"POWER OF ATTORNEY" shall mean a power of attorney granted by
the Borrowers, substantially in the form of Exhibit K attached
hereto.
"POTENTIAL DEFAULT" shall mean an event that with the lapse of
time or the giving of notice, or both, would, unless cured or
waived, constitute an Event of Default.
"PRIME RATE" shall mean the rate of interest that is publicly
announced from time to time by Bankers Trust Company in New
York City as its prime lending rate as in effect from time to
time, such rate to change automatically and without notice to
the
<PAGE> 25
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Borrowers when and as such prime lending rate changes. The
Prime Rate is a reference rate and does not necessarily
represent the best or lowest rate actually charged by Bankers
Trust Company to any customer. Bankers Trust Company may make
commercial loans or other loans at rates of interest at, above
or below the Prime Rate.
"PRIOR YEAR MINIMUM ATNW" shall have the meaning assigned
thereto in Section 5.3(b).
"PRIOR YEAR MINIMUM BNW" shall have the meaning assigned
thereto in Section 5.3(c).
"PRIVATE INVESTOR SERVICING PORTFOLIO" shall mean the
portfolio of outstanding residential mortgage loans specified
on Attachment 1-A to the Servicing Security Agreement, as such
attachment is amended, modified or supplemented from time to
time, that are owned by any Person (other than an Agency) or
included in pools of mortgage loans with respect to which such
Person (other than an Agency) has issued a mortgage-backed
security and with respect to which either Borrower holds
direct servicing rights, and that are covered by an effective
Acknowledgement Agreement.
"PROCEEDS" shall mean whatever is receivable or received when
Collateral or proceeds are sold, collected, exchanged or
otherwise disposed of, whether such disposition is voluntary
or involuntary, and includes all rights to payment, including
return premiums, with respect to any insurance relating
thereto.
"PROCESS AGENT" shall have the meaning set forth in Section
8.7.
"PROHIBITED TRANSACTION" shall mean any transaction described
in section 406 of ERISA that is not exempt by reason of
section 408 of ERISA or the transitional rules set forth in
section 414(c) of ERISA and any transaction described in
section 4975(c)(1) of the Code that is not exempt by reason of
section 4975(c)(2) or section 4975(d) of the Code, or the
transitional rules of section 2003(c) of ERISA.
"PROPERTY" shall mean the real property, including the
improvements thereon, and the personal property (tangible and
intangible) which are encumbered pursuant to a Mortgage Loan.
"REAL ESTATE CLOSING" shall mean a real estate closing with
respect to a Borrowing of a Facility 2 Tranche B Loan.
"REGULATION D" shall mean Regulation D of the Board as from
time to time in effect, and any other regulation hereafter
promulgated by the Board to replace the prior Regulation D and
having substantially the same function.
"REO DEMAND NOTE" shall mean a demand note, substantially in
the form of Exhibit S-1 hereto, as amended, modified or
supplemented from time to time.
<PAGE> 26
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"REO MORTGAGE" shall mean the deed of mortgage, substantially
in the form of Exhibit S-3 hereto, as amended, modified or
supplemented from time to time.
"REO PLEDGE" shall mean the pledge agreement, substantially in
the form of Exhibit S-2 hereto, as amended, modified or
supplemented from time to time.
"REO PROPERTY" shall mean real property owned by either
Borrower as a result of foreclosure of a mortgage loan held by
such Borrower.
"REO VALUATION" shall mean a valuation of the fair market
value of the REO Property, as determined by (i) an appraisal
of such REO Property conducted by an appraiser, which
appraisal and appraiser meet the criteria specified by FNMA,
FHLMC and HUD in connection with the origination of Mortgage
Loans and which appraisal was conducted and had an effective
date within the ninety (90) days preceding the date of the
Real Estate Closing covering such REO Property, or (ii) an
inspection report if no appraisal conducted within such
preceding ninety (90) days described in clause (i) exists,
which inspection report (A) was prepared by an appraiser
described in clause (i) above after an inspection of such REO
Property, (B) is an update of a previous appraisal described
in clause (i) above, and (C) has an effective date relating to
an inspection conducted within such preceding ninety (90)
days.
"REPORTABLE EVENT" shall mean any of the events set forth in
section 4043(c) of ERISA or the regulations thereunder, a
withdrawal from a Plan described in section 4063 of ERISA, a
cessation of operations described in section 4068(f) of ERISA,
an amendment to a Plan necessitating the posting of security
under section 401(a)(29) of the Code, or a failure to make a
payment required by section 412(m) of the Code and section
302(e) of ERISA when due.
"REQUEST FOR ACCEPTANCE" shall have the meaning set forth in
Section 2.2(b).
"REQUIRED ACCEPTANCE PAYMENT" shall have the meaning given
such term in Section 2.8(f).
"REQUIRED FACILITY 1 LENDERS" shall mean, at any time, Lenders
holding at least sixty-six and two- thirds percent (66.66%) of
(i) the then aggregate unpaid principal amount of the Facility
1 Loans (and, in the case of Bankers Trust, Swing-Line Loans
to the extent any Lender shall have failed to comply with its
obligation to refinance such Swing-Line Loans as provided in
Section 2.4) and (ii) Acceptance Obligations (provided that
Bankers Trust shall be deemed to hold the Acceptance
Obligations for any Lender who has failed to pay when due any
amounts due to Bankers Trust as a result of such Lender being
an Acceptance Participant) or, if no Facility 1 Loans or
Swing-Line Loans or Acceptance Obligations are then
outstanding, Lenders holding at least sixty-six and two-thirds
percent (66.66%) of the Facility 1 Commitments.
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"REQUIRED FACILITY 2 LENDERS" shall mean, at any time, Lenders
holding at least sixty-six and two- thirds percent (66.66%) of
the then aggregate unpaid principal amount of the Facility 2
Loans or, if no Facility 2 Loans are then outstanding, Lenders
holding at least sixty-six and two-thirds percent (66.66%) of
the Facility 2 Commitments.
"REQUIRED LENDERS" shall mean, at any time, Lenders holding at
least sixty-six and two-thirds percent (66.66%) of (i) the
then aggregate unpaid principal amount of all outstanding
Facility 1 Loans (and, in the case of Bankers Trust,
Swing-Line Loans to the extent any Lender shall have failed to
comply with its obligations to refinance such Swing-Line Loans
as provided in Section 2.4) and Facility 2 Loans and (ii)
Acceptance Obligations (provided that Bankers Trust shall be
deemed to hold the Acceptance Obligations for any Lender who
has failed to pay when due any amounts due to Bankers Trust as
a result of such Lender being an Acceptance Participant), or
if no Loans or Acceptances are then outstanding, Lenders
holding at least sixty-six and two-thirds percent (66.66%) of
the Commitments.
"REQUIREMENTS OF LAW" shall mean as to any Person the Articles
or Certificate of Incorporation and Bylaws or other
organizational or governing documents of such Person, and any
law, treaty, rule or regulation, or a final and binding
determination of an arbitrator or a determination of a court
or other Governmental Authority, in each case applicable to or
binding upon such Person or any of its property or to which
such Person or any of its property is subject.
"RESERVE REQUIREMENT" shall mean, with respect to any
Eurodollar Interest Period, the daily average during such
Eurodollar Interest Period of the maximum aggregate reserve
requirement (including all basic, supplemental, marginal and
other reserves and taking into account any transitional
adjustments or other scheduled changes in reserve requirements
during such Eurodollar Interest Period) which is imposed under
Regulation D on any member bank of the Federal Reserve System,
in respect of eurocurrency or eurodollar funding, lending or
liabilities.
"SEASONED LOAN" shall mean an Eligible Mortgage Loan or an
Eligible Non-Conforming Mortgage Loan (a) for which the date
of the underlying promissory note relating to such underlying
mortgage loan is earlier than ninety (90) days prior to the
date such Mortgage Loan is first included in the Facility 1
Borrowing Base and (b) which was originated and underwritten
by either Borrower.
"SECURED PARTIES" shall have the meaning given such term in
the Security Agreements.
"SECURITY AGREEMENTS" shall mean all REO Demand Notes, all REO
Mortgages, all REO Pledges, the Warehousing Security
Agreement, the Servicing Security Agreement, the Cash
Collateral Agreement and any other documents or certificates
creating or evidencing security interests granted to the
Secured Parties in connection with this Agreement and the
other Loan Documents.
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"SENIOR NOTES" shall mean the $75,000,000 principal amount
Senior Notes due 2006 to be issued by FFCC on or about October
1, 1996, constituting general unsecured and unsubordinated
obligations of FFCC, as further described in the Form S-3
Registration Statement filed by FFCC with the Securities and
Exchange Commission on September 9, 1996.
"SERVICING COLLATERAL" shall mean the collateral described in
Section 1 of the Servicing Security Agreement.
"SERVICING COLLATERAL AGENT" shall mean initially Bankers
Trust Company, and any successor collateral agent thereto
acceptable to the Required Facility 3 Lenders and the
Borrowers and designated as the "Collateral Agent" under the
Servicing Security Agreement.
"SERVICING PORTFOLIO" shall mean, at any time, the portfolio
of outstanding residential mortgage loans (other than mortgage
loans owned by the Borrowers and its Affiliates which are not
covered by Permitted Affiliate Servicing Agreements) with
respect to which the Borrowers have direct servicing rights.
"SERVICING SECURITY AGREEMENT" shall mean the First Amended
and Restated Security and Collateral Agency Agreement
(Servicing Collateral) substantially in the form of Exhibit D,
as amended, modified or supplemented from time to time.
"STATEMENT OF ACCOUNTS RECEIVABLE" shall mean a Statement of
Accounts Receivable, substantially in the form of Exhibit U
attached hereto.
"SUBSIDIARY" shall mean with respect to any Person, any
corporation, association or other business entity of which
more than fifty percent (50%) of the securities or other
ownership interests having ordinary voting power is, or with
respect to which rights to control management (pursuant to any
contract or other agreement or otherwise) are, at the time as
of which any determination is being made, owned, controlled or
held by such Person or one or more subsidiaries of such
Person.
"SWING-LINE BORROWING" shall mean a borrowing, pursuant to a
Notice of Borrowing, of a Swing-Line Loan made by Bankers
Trust.
"SWING-LINE LOAN" shall mean a loan made by Bankers Trust
pursuant to Section 2.1(e) for the purposes set forth in the
first sentence of Section 4.9.
"TAKE-OUT COMMITMENT" shall mean, with respect to any
specified aggregate amount of Mortgage Loans or
Mortgage-Backed Securities included in the Facility 1
Borrowing Base, a bona fide current, unfilled and unexpired
commitment of an Approved Investor, issued in favor of and
held by either Borrower, under which such Approved Investor
agrees to purchase such specified aggregate amount of Mortgage
Loans or Mortgage-Backed Securities at a specified price,
which commitment in the reasonably anticipated course of
events, (a) can be fully complied with prior to the
<PAGE> 29
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expiration thereof, (b) is not subject to any term or
condition that is not customary in commitments of like nature
and (c) is for a purchase to be consummated in more than
thirty (30) days from the date such commitment was entered
into.
"TAXES" shall have the meaning given such term in Section
2.15(a).
"TELERATE PAGE 314" shall mean the display designated as "Page
314" on the Associated Press-Dow Jones Telerate Service (or
such other page as may replace Page 314 on the Associated
Press-Dow Jones Telerate Service or such other service as may
be nominated by the British Bankers Association as the
information vendor for the purposes of displaying British
Bankers Association interest settlement rates for U.S. Dollar
deposits). Any Base Eurodollar Rate determined on the basis
of the rate displayed on Telerate Page 314 shall be subject to
corrections, if any, made in such rate and displayed by the
Associated Press-Dow Jones Telerate Service within one (1)
hour of the time when such rate is first displayed by such
service.
"TOTAL LIABILITIES" shall mean (i) the aggregate amount of all
liabilities of each Borrower and each of its consolidated
Subsidiaries (other than Doral Federal Savings Bank and AAA
Financial Services Corporation) determined in accordance with
GAAP, consistently applied, other than Permitted Subordinated
Indebtedness less (ii) the aggregate amount of intercompany
payables owing from one Borrower to the other.
"TYPE" shall mean (a) when used in respect of any Mortgage
Loan, an Eligible Conforming Mortgage Loan or an Eligible
Non-Conforming Mortgage ; (b) when used in respect of any
Commitment, a Facility 1 Commitment or a Facility 2
Commitment; and (c) when used in respect of any Loan, a
Facility 1 Loan, a Facility 2 Loan or a Swing-Line Loan.
"VA" shall mean the Veterans Administration and any successor
thereto.
"WAREHOUSING COLLATERAL" shall mean the collateral described
in Section 1 of the Warehousing Security Agreement.
"WAREHOUSING COLLATERAL AGENT" shall mean initially Banco
Popular de Puerto Rico, and any successor collateral agent
thereto acceptable to the Required Facility 1 Lenders and the
Borrowers and designated as the "Collateral Agent" under the
Warehousing Security Agreement.
"WAREHOUSING SECURITY AGREEMENT" shall mean the First Amended
and Restated Security, Custody and Collateral Agency Agreement
(Warehousing Collateral) substantially in the form of Exhibit
C, as amended, modified or supplemented from time to time.
<PAGE> 30
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SECTION 1.2 TERMS GENERALLY.
The definitions in Section 1.1 shall apply equally to both the
singular and plural forms of the terms defined. Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms. The words "include," "includes" and "including" shall be deemed
to be followed by the phrase "without limitation." All references herein to
Articles, Sections, Exhibits and Attachments shall be deemed references to
Articles and Sections of, and Exhibits and Attachments to, this Agreement or to
an Exhibit to this Agreement unless the context shall otherwise require.
Except as otherwise provided herein, all terms of an accounting or financial
nature shall be construed in accordance with GAAP, as in effect from time to
time; provided that, except as provided with respect to the adoption of FASB 65
in the definition of "Adjusted Tangible Net Worth" set forth in Section 1.1,
for purposes of determining compliance with any covenant set forth in Article
V, such term shall be construed in accordance with GAAP as in effect on the
date of this Agreement applied on a basis consistent with the financial
statements referred to in Section 4.4(a).
ARTICLE 2
AMOUNTS AND TERMS OF LOANS AND ACCEPTANCES
SECTION 2.1 COMMITMENTS.
(a) Facility 1 Loans. Subject to and upon the terms and
conditions herein set forth, each Facility 1 Lender agrees, severally and not
jointly, at any time and from time to time from the Amendment Effective Date up
to but excluding the date upon which the Facility 1 Commitments are terminated,
to make Facility 1 Loans to the Borrowers in an aggregate principal amount at
any time outstanding not to exceed the aggregate Facility 1 Commitment set
forth opposite such Facility 1 Lender's name on the signature pages hereto, as
such commitment may be reduced from time to time pursuant to Section 8.6(c);
provided that the aggregate principal amount of Facility 1 Loans and Swing-Line
Loans plus the aggregate face amount of Facility 1 Acceptances outstanding at
any time shall not exceed the lesser of: (i) the aggregate Facility 1
Commitments of the Facility 1 Lenders then in effect and (ii) the then current
Collateral Value of the Facility 1 Borrowing Base (such lesser amount is
referred to herein as the "Facility 1 Maximum Amount"). Subject to Section
2.12, each Facility 1 Loan shall be a Eurodollar Loan or a Fed Funds Loan.
Subject to Section 2.2(a)(ii), each Facility 1 Borrowing shall be in an
aggregate principal amount of at least $1,000,000 (or in any lesser amount
equal to the unused Facility 1 Commitments) and shall be made ratably by the
Facility 1 Lenders in proportion to their respective Facility 1 Commitments.
Within the foregoing limits and subject to the conditions set forth in Article
III, the Borrowers may borrow and reborrow Facility 1 Loans under Section 2.2
and prepay Facility 1 Loans under Section 2.9.
(b) Facility 2 Tranche A Loans. Subject to and upon the terms and
conditions herein set forth, each Facility 2 Lender agrees, severally and not
jointly, at any time and from time to time from the Amendment Effective Date up
to but excluding the date upon which the Facility 2 Commitments are terminated,
to make Facility 2 Tranche A Loans to the Borrowers in an aggregate principal
amount at any time outstanding not to exceed the Facility 2 Commitment set
forth opposite such Facility 2 Lender's name on the signature pages hereto, as
such commitment may be reduced from
<PAGE> 31
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time to time pursuant to Section 8.6(c); provided that the aggregate principal
amount of Facility 2 Tranche A Loans outstanding at any time shall not exceed
the least of (i) the aggregate Facility 2 Commitments of all of the Facility 2
Lenders then in effect less the aggregate amount of Facility 2 Tranche B Loans
and Facility 2 Tranche C Loans then outstanding, (ii) the then current
Collateral Value of the Facility 2 Tranche A Borrowing Base, and (iii)
$7,000,000 (such least amount is referred to herein as the "Facility 2 Tranche
A Maximum Amount"); and provided further, that the Borrowers shall not make any
Facility 2 Tranche A Borrowing, the Facility 2 Lenders shall not make any
Facility 2 Tranche A Loans and, pursuant to Section 2.8(b), no Facility 2
Tranche A Loans shall be outstanding, during the period commencing on the
seventh (7th) calendar day and ending on the twelfth (12th) calendar day of
each month. Each Facility 2 Tranche A Loan shall be a Fed Funds Loan. Each
Facility 2 Tranche A Borrowing shall be in an aggregate principal amount of at
least $500,000 (or in any lesser amount equal to the unused Facility 2 Tranche
A Commitments) and shall be made by the Facility 2 Lenders ratably in
proportion to their respective Facility 2 Commitments. Within the foregoing
limits and subject to the conditions set forth in Article III, the Borrowers
may borrow and reborrow Facility 2 Tranche A Loans under Section 2.2 and prepay
Facility 2 Tranche A Loans under Section 2.9.
(c) Facility 2 Tranche B Loans. Subject to and upon the terms and
conditions herein set forth, each Facility 2 Lender agrees, severally and not
jointly, at any time and from time to time from the Amendment Effective Date up
to but excluding the date upon which the Facility 2 Commitments are terminated,
to make Facility 2 Tranche B Loans to the Borrowers in an aggregate principal
amount at any time outstanding not to exceed the Facility 2 Commitment set
forth opposite such Facility 2 Lender's name on the signature pages hereto, as
the same may be reduced from time to time pursuant to Section 8.6(c); provided
that the aggregate principal amount of Facility 2 Tranche B Loans outstanding
at any time shall not exceed the least of: (i) the sum of the Facility 2
Commitments of all of the Facility 2 Lenders then in effect less the aggregate
amount of Facility 2 Tranche A Loans and Facility 2 Tranche C Loans then
outstanding, (ii) the then current Collateral Value of the Facility 2 Tranche B
Borrowing Base and (iii) $2,000,000 (such least amount is referred to herein as
the "Facility 2 Tranche B Maximum Amount"). Each Facility 2 Tranche B Loan
shall be a Fed Funds Loan. Each Facility 2 Tranche B Borrowing shall in an
aggregate principal amount of at least $1,000,000 (or in any lesser amount
equal to the unused Facility 2 Tranche B Commitments) and shall be made by the
Facility 2 Lenders ratably in proportion to their respective Facility 2
Commitments. No more than two (2) Borrowings for a Facility 2 Tranche B Loan
may be outstanding simultaneously hereunder. Within the foregoing limits and
subject to the conditions set forth in Article III, the Borrowers may borrow
and reborrow Facility 2 Tranche B Loans under Section 2.2 and prepay Facility 2
Tranche B Loans under Section 2.9.
(d) Facility 2 Tranche C Loans. Subject to and upon the terms and
conditions herein set forth, each Facility 2 Lender agrees, severally and not
jointly, at any time and from time to time from the Amendment Effective Date up
to but excluding the date upon which the Facility 2 Commitments are terminated,
to make Facility 2 Tranche C Loans to the Borrowers in an aggregate principal
amount at any time outstanding not to exceed the Facility 2 Commitment set
forth opposite such Facility 2 Lender's name on the signature pages hereto, as
the same may be reduced from time to time pursuant to Section 8.6(c); provided
that the aggregate principal amount of Facility 2 Tranche C Loans outstanding
at any time shall not exceed the lesser of: (i) the sum of the Facility 2
Commitments of all of the Facility 2 Lenders then in effect less the aggregate
amount of Facility 2
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Tranche A Loans and Facility 2 Tranche B Loans then outstanding, and (ii)
$3,000,000 (such lesser amount is referred to herein as the "Facility 2 Tranche
C Maximum Amount"). Each Facility 2 Tranche C Loan shall be a Fed Funds Loan.
Each Facility 2 Tranche C Borrowing shall in an aggregate principal amount of
at least $500,000 (or in any lesser amount equal to the unused Facility 2
Commitments) and shall be made by the Facility 2 Lenders ratably in proportion
to their respective Facility 2 Commitments. Within the foregoing limits and
subject to the conditions set forth in Article III, the Borrowers may borrow
and reborrow Facility 2 Tranche C Loans under Section 2.2 and prepay Facility 2
Tranche C Loans under Section 2.9.
(e) Swing-Line Loans. Subject to and upon the terms and
conditions herein set forth, Bankers Trust may, in its sole discretion, at any
time and from time to time from the Amendment Effective Date up to but
excluding the Maturity Date, make Swing-Line Loans to the Borrowers in an
aggregate principal amount at any time outstanding not to exceed $15,000,000;
provided that the aggregate principal amount of Swing-Line Loans outstanding at
any time shall not exceed the limitations set forth in Section 2.1(a). Subject
to Section 2.12, each Swing-Line Loan shall be a Fed Funds Loan. Within the
foregoing limits and subject to the conditions set forth in Article III, the
Borrowers may borrow and reborrow Swing-Line Loans under Section 2.2 and prepay
such Loans under Section 2.9. If Bankers Trust, in its sole discretion, elects
not to make a Swing-Line Loan on any date, the Agent shall treat the Notice of
Borrowing for such Swing-Line Loan as a Notice of Borrowing for Facility 1
Loans.
(f) Bankers Acceptances.
(i) Subject to and upon the terms and conditions herein
set forth, the Borrowers, at any time and from time to time on or
after the Amendment Effective Date up to but excluding the date on
which the Facility 1 Commitments are terminated, may request that
Bankers Trust accept a draft (a "Facility 1 Acceptance" or
"Acceptance") as herein provided in lieu of borrowing additional sums
under the Facility 1 Commitments in an aggregate face amount at any
time outstanding not to exceed the aggregate Facility 1 Commitments,
as such commitments may be reduced from time to time pursuant to
Section 8.6(c); provided that the aggregate principal amount of
Facility 1 Loans and Swing-Line Loans plus the aggregate face amount
of all Facility 1 Acceptances outstanding at any time shall not exceed
the Facility 1 Maximum Amount.
(ii) Bankers Trust may create Facility 1 Acceptances in
its sole and absolute discretion upon a request by the Borrowers
delivered in accordance with clause (i) above, and each such Facility
1 Acceptance shall be created hereunder by Bankers Trust's accepting a
draft, in substantially the form of Exhibit B-2 hereto (a "
Draft"). Each Draft shall be (a) drawn by the Borrowers on
Bankers Trust in accordance with the terms hereof and be payable in
U.S. Dollars, (b) payable only to the order of the Acceptance Agent,
(c) dated the date of acceptance of such Draft by Bankers Trust, (d)
in a face amount at least equal to $1,000,000 and shall (e) mature on
a Business Day either thirty (30), sixty (60) or ninety (90) days
after the date of such Draft; provided that in no event shall an
Acceptance (i) be created unless the conditions set forth in Article
III have been satisfied with respect to the issuance of such Facility
1 Acceptance, (ii) mature after the Maturity Date, or (iii) have a
face amount, together with the aggregate face amount of all other
Facility 1 Acceptances plus the
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aggregate principal amount of Facility 1 Loans and Swing-Line Loans
then outstanding, exceeding the Facility 1 Maximum Amount.
(iii) The Borrowers hereby acknowledge and agree that (a)
Bankers Trust has no obligation to discount any Facility 1 Acceptance,
(b) Bankers Trust has no obligation to create any Facility 1
Acceptance except in the exercise of its sole and absolute discretion
and, if and to the extent that any Facility 1 Acceptance is created,
such Facility 1 Acceptance may only be discounted by the Acceptance
Agent in accordance with the Funding Agreement which shall be in full
force and effect and (c) on the date of the creation by Bankers Trust
of any Facility 1 Acceptance, Bankers Trust is only obligated to
deliver such Facility 1 Acceptance as set forth in the Request for
Acceptance and to pay such Facility 1 Acceptance in accordance with
its terms.
SECTION 2.2 METHOD OF BORROWING AND OF CONVERSIONS/CONTINUATIONS;
CREATION OF ACCEPTANCES.
(a) Whenever the Borrowers desire to make a Facility 1 Borrowing,
a Facility 2 Borrowing or a Swing-Line Borrowing hereunder, to convert any
Facility 1 Loan pursuant to Section 2.3 or to continue any Facility 1 Loan for
an additional Eurodollar Interest Period pursuant to Section 2.3, an Authorized
Officer shall deliver to the Agent written notice of such proposed Borrowing,
conversion or continuation (a "Notice of Borrowing" or "Notice of
Conversion/Continuation," as the case may be), each such notice to be given (x)
prior to 12:00 noon (New York City time) on the date of such proposed Borrowing
or conversion, in the case of a Borrowing of Fed Funds Loans or a conversion of
Eurodollar Loans into Fed Funds Loans; and (y) prior to 12:00 noon (New York
City time) on the third Eurodollar Business Day before the date of such
proposed Borrowing, conversion or continuation (which date shall be a
Eurodollar Business Day), in the case of a Borrowing of Eurodollar Loans, a
conversion of Fed Funds Loans into Eurodollar Loans or a continuation of
Eurodollar Loans for an additional Eurodollar Interest Period. Each such
notice shall be irrevocable and shall be in the form of Exhibit I or J, as the
case may be. Notwithstanding any other provision hereof to the contrary, (i)
no more than four (4) Eurodollar Interest Periods for Facility 1 Loans may be
in effect hereunder at any time; and (ii) no Facility 1 Borrowing of Eurodollar
Loans shall be in an aggregate principal amount of less than $1,000,000.
(b) Whenever the Borrowers desire to have Bankers Trust accept a
Draft the Borrowers shall, prior to 12:00 noon (New York City time) on the
Business Day prior to the proposed date of creation of such Facility 1
Acceptance, deliver to (i) Bankers Trust a notice, in substantially the form of
Exhibit B-1 hereto ("Request for Acceptance"), specifying the information
necessary to complete the relevant Draft or Drafts, and (ii) the Collateral
Agent, Collateral of the type required for the Facility 1 Borrowing Base so
that the condition precedent set forth in Section 3.1(b)(iii) hereof shall be
satisfied with respect to the Facility 1 Acceptance to be created. Not later
than 12:00 noon (New York City time) on the Business Day specified by the
Borrowers in the Request for Acceptance and upon fulfilment of the applicable
conditions set forth in Article III, Bankers Trust, will, if it chooses to do
so in the exercise of its sole and absolute discretion and in accordance with
such Request for Acceptance, (x) fill in the date, amount and tenor of a Draft
or Drafts in such denominations as the Borrowers shall specify in such Request
for Acceptance, (y) accept such Draft or Drafts at its address
<PAGE> 34
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referred to in Section 8.1 and (z) deliver such Facility 1 Acceptance or
Facility 1 Acceptances as set forth in the Request for Acceptance.
(c) Without in any way limiting the Borrowers obligation to
deliver to the Agent a copy of any written Notice of Borrowing, Notice of
Conversion/Continuation or Request for Acceptance, the Agent may act without
liability upon the basis of any telephonic Notice of Borrowing, Notice of
Conversion/Continuation or Request for Acceptance believed by the Agent in good
faith to be from an Authorized Officer prior to receipt of written
confirmation. In each such case, the Borrowers hereby waive the right to
dispute the Agent's record of the terms of such telephonic notice. An
Authorized Officer shall promptly confirm in writing any Notice of Borrowing,
Notice of Conversion/Continuation or Request for Acceptance given by telephone.
(d) On the date of receipt of any Notice of Borrowing or Notice of
Conversion/Continuation), the Agent shall promptly give (and in any event by
1:00 p.m. (New York City time)) each Lender with a related Commitment
telefacsimile notice of each proposed Facility 1 Borrowing or Facility 2
Borrowing, such Lender's proportionate share thereof, each proposed conversion
or continuation and any other matters covered by the Notice of Borrowing or
Notice of Conversion/Continuation. Upon the creation or exchange of an a
Facility 1 Acceptance by Bankers Trust, the Agent shall promptly give each
Acceptance Participant telefacsimile notice of the creation or exchange of any
Facility 1 Acceptance and any other matters set forth in the Request for
Acceptance relating to the Facility 1 Acceptance. The Agent shall not be
required to notify any Lender (other than Bankers Trust) of a Swing-Line
Borrowing.
(e) Unless otherwise specified in a Notice of Borrowing, each Loan
to be made as part of a Facility 1 Borrowing shall be made as a Fed Funds Loan.
If a timely notice as specified in Section 2.2(a) is not received from the
Borrowers prior to the expiration of any Eurodollar Interest Period for any
outstanding Eurodollar Loan, the Borrowers shall be deemed to have irrevocably
elected to convert such Loan into a Fed Funds Loan. The Agent will endeavor to
notify the Borrowers prior to the expiration of any Eurodollar Interest Period
but shall have no liability for failure to provide such notice.
(f) By delivering a Notice of Conversion/Continuation to the Agent
hereunder of the continuation of any Eurodollar Loans for an additional
Eurodollar Interest Period or the conversion of any outstanding Loans to
Eurodollar Loans, or by delivering a notice in accordance with Section 2.3(b)
for the exchange of any Facility 1 Acceptances, the Borrowers shall be deemed
to have represented and warranted that no Potential Default or Event of Default
has occurred and is continuing.
SECTION 2.3 CONVERSIONS/CONTINUATIONS OF LOANS; EXCHANGE OF ACCEPTANCES.
(a) Subject to the terms and conditions hereof and in accordance
with the procedures for conversions and continuations and the other provisions
set forth in Section 2.2, each Facility 1 Lender agrees to convert outstanding
Facility 1 Loans that are Fed Funds Loans into Eurodollar Loans and Eurodollar
Loans into Fed Funds Loans and to continue Facility 1 Loans that are Eurodollar
Loans for an additional Eurodollar Interest Period, in each case in an
aggregate principal amount not to exceed the principal amount of the Fed Funds
Loans or Eurodollar Loans, as the case
<PAGE> 35
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may be, being converted or Eurodollar Loans, as the case may be, being
continued; provided that no Lender shall convert any Facility 1 Loan into a
Eurodollar Loan or continue any Eurodollar Loan for an additional Eurodollar
Interest Period if a Potential Default or an Event of Default has occurred and
is continuing.
(b) Subject to the terms and conditions hereof and in accordance
with the procedures for accepting Drafts set forth in Section 2.1(f)(iii) and
the other procedures for creating Facility 1 Acceptances and exchanges thereof
set forth in Section 2.2, Bankers Trust, if it chooses to do so in the exercise
of its sole and absolute discretion, shall exchange any existing Facility 1
Acceptance (an "Old Acceptance") for a new Acceptance (a "New Acceptance") on
the maturity date of such Old Acceptance, provided that (i) all conditions
precedent to the issuance of a Facility 1 Acceptance set forth in Section
2.1(f) have been satisfied and (ii) the Borrowers shall have paid to Bankers
Trust the amounts required to be paid pursuant to Section 2.8(f). If the
Borrowers desire to, or if the Borrowers have requested the Acceptance Agent
to, have Bankers Trust exchange an Old Acceptance for a New Acceptance on the
maturity date of such Old Acceptance, the Borrowers or the Acceptance Agent, as
applicable, shall give Bankers Trust notice thereof no later than 12:00 noon
(New York City time) two (2) Business Days prior to the maturity date of the
Old Acceptance being exchanged. The Borrowers hereby authorize Bankers Trust to
replace an Old Acceptance with a New Acceptance if Bankers Trust receives
authorization therefor from the Acceptance Agent pursuant to the Funding
Agreement. The requirements governing the issuance by Bankers Trust of a New
Acceptance shall be the same requirements for the issuance of a Facility 1
Acceptance hereunder except that prior to the issuance of the New Acceptance
(i) the Borrowers or the Acceptance Agent, as applicable, shall deliver the Old
Acceptance marked "cancelled" or "paid" to Bankers Trust, at the Acceptance
Desk, 12th Floor, 130 Liberty Street, New York, New York 10006 or to such other
place as Bankers Trust directs, and (ii) the Borrowers shall have paid to
Bankers Trust the amounts required pursuant to Section 2.8(f).
SECTION 2.4 DISBURSEMENT OF FUNDS; BANK ACCEPTANCE PARTICIPANTS.
(a) No later than 2:00 p.m. (New York City time) on the date of
each Facility 1 Borrowing and Facility 2 Borrowing, each Facility 1 Lender or
Facility 2 Lender, as the case may be, will make available to the Agent the
full amount of such Lender's pro rata share of such Borrowing, in immediately
available funds, by wire transfer of such funds to the Agent at the Payment
Office. Unless the Agent determines that any applicable condition in Article
III has not been satisfied, the Agent shall make the funds so received from the
Lenders available to the Borrowers by wire transfer of such funds to such
account as the Borrowers through the Agent may direct in writing for such
purpose. If a Facility 1 Borrowing or a Facility 2 Borrowing does not occur on
the requested date because any condition precedent herein specified has not
been satisfied, the Agent shall so notify the affected Lenders promptly and
shall return the amounts so received to the respective Lenders.
(b) Unless the Agent has been notified by any Facility 1 Lender or
Facility 2 Lender, as the case may be, before 2:00 p.m. (New York City time) on
the date of a proposed Facility 1 Borrowing or Facility 2 Borrowing, as the
case may be, that such Lender does not intend to make available to the Agent on
such date such Lender's portion of such Facility 1 Borrowing or Facility 2
Borrowing, the Agent may assume that such Lender will make such amount
available to the Agent
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on such date and the Agent may (but shall not be obligated to) make available
to the Borrowers a corresponding amount. If such corresponding amount is not
in fact made available to the Agent by such Lender (a "Defaulting Lender") on
such date, the Agent shall be entitled to recover such corresponding amount on
demand from such Defaulting Lender, together with interest at the overnight
Federal Funds Rate for each day until paid. A Defaulting Lender shall be
deemed to have assigned to the Agent the right to receive any and all payments
due to it in respect of the Obligations until the sum of such payments received
by the Agent is equal to the amount owed to the Agent by such Defaulting Lender
pursuant to the preceding sentence. The foregoing assignment shall be deemed
to be a power coupled with an interest and shall be absolute and irrevocable.
Nothing in this subsection shall be deemed to relieve any Lender from its
obligation to fulfill its obligation to make Loans hereunder or to prejudice
any rights that the Borrowers, the Agent or any Lender may have against any
Defaulting Lender hereunder.
(c) No later than 3:00 p.m. (New York City time) on the date of
each Swing-Line Borrowing, Bankers Trust shall, unless it has elected not to
make a Swing-Line Loan pursuant to the related Notice of Borrowing, or unless
it determines that any applicable condition in Article III has not been
satisfied, make the full amount of such Swing-Line Borrowing available to the
Borrowers by wire transfer of such funds such account as the Borrowers may
direct in writing for such purpose.
(d) No later than 12:00 noon (New York City time) on any Business
Day, the Agent shall, upon Bankers Trust's request, notify each Facility 1
Lender of the aggregate principal amount of Swing-Line Loans that are
outstanding and the amount of Facility 1 Loans required to be made by each
Facility 1 Lender (including Bankers Trust) to refinance such outstanding
Swing-Line Loans (which amount shall be equal to each Facility 1 Lender's pro
rata share of such outstanding Swing-Line Loan and which notice shall be deemed
automatically given upon the occurrence of an Event of Default under 6.1(h)).
Interest on the Swing-Line Loans being refinanced shall be payable by the
Borrowers in accordance with Section 2.6. Bankers Trust may request that the
Swing-Line Loans be refinanced pursuant to this Section 2.4(d) on any Business
Day.
(e) No later than 2:00 p.m. (New York City time) on each date that
the Agent gives notices to the Facility 1 Lenders of the refinancing of
Swing-Line Loans pursuant to Section 2.4(d), each Facility 1 Lender will make
available to the Agent for payment to Bankers Trust the full amount of such
Lender's pro rata share of the outstanding amount of Swing-Line Loans being
refinanced. Each amount made available to the Agent pursuant to this Section
2.4(e) (including Bankers Trust's pro rata share of such amount) shall be
deemed a Facility 1 Loan. Each such Swing-Line Loan being refinanced as a
Facility 1 Loan shall be Fed Funds Loan. The proceeds of Facility 1 Loans made
pursuant to this Section 2.4(e) shall be paid to the Agent (and not to the
Borrowers) and then paid over by the Agent to Bankers Trust, to be applied to
the outstanding Swing-Line Loans. The Borrowers authorize the Agent to charge
any account maintained by the Borrowers with the Agent in order to immediately
pay the Agent the amount of such outstanding Swing-Line Loans, to the extent
amounts received from the Facility 1 Lenders are insufficient to repay in full
the outstanding Swing-Line Loans to be refinanced. If any portion of any
amount paid to the Agent by the Borrowers pursuant to this Section 2.4(e)
(other than any amounts received by the Agent pursuant to the preceding
sentence) should be recovered by or on behalf of the Borrowers from the Agent
or Bankers Trust in bankruptcy or otherwise, the loss of the amount so
recovered shall be ratably shared among all the Facility 1 Lenders. In the
event that a refinancing of the Swing-Line
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Loans cannot be made for any reason on any date required by Bankers Trust, each
Facility 1 Lender hereby agrees that it shall immediately purchase from Bankers
Trust (without recourse or warranty) such assignment of the outstanding Swing-
Line Loans as shall be necessary to cause the Facility 1 Lenders to share in
such Swing-Line Loans ratably based on their respective pro rata Facility 1
Commitments; provided that all interest payable on such Swing-Line Loans shall
be for the account of Bankers Trust until the date the respective assignment is
purchased and, to the extent attributable to the purchased assignment, shall be
for the account of the Facility 1 Lender purchasing the assignment from and
after the date of such purchase. Each Facility 1 Lender's obligation to make
Facility 1 Loans or purchase assignments pursuant to this Section 2.4(e) shall
be absolute and unconditional and shall not be affected by any circumstance,
including, without limitation, (1) any setoff, counterclaim, recoupment,
defense or other right that such Facility 1 Lender may have against the Agent,
Bankers Trust, any Lender, the Borrowers or any other Person for any reason
whatsoever; (2) the occurrence or continuance of a Potential Default or Event
of Default; (3) any adverse change in the condition (financial or otherwise) of
the Borrowers ; (4) any breach of this Agreement or any other Loan Document by
the Borrowers, the Agent or any Lender; or (5) any other circumstance,
happening or event whatsoever, whether or not similar to any of the foregoing
including those described in Section 2.4(k); provided that in no event shall a
Facility 1 Lender be obligated to make a Facility 1 Loan pursuant to this
Section 2.4(e) if after giving effect thereto, the outstanding principal amount
of such Facility 1 Lender's Facility 1 Loans plus its pro rata share of any
Swing-Line Loans remaining outstanding plus its pro rata share of the aggregate
face amount of Facility 1 Acceptances outstanding would exceed its Facility 1
Commitment. If any Lender fails to make the full amount of its Facility 1 Loan
available to the Agent pursuant to this Section 2.4(e), Bankers Trust shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest for each day until paid at the overnight Fed Funds Rate.
Such Lender shall be deemed to have assigned to Bankers Trust the right to
receive any and all payments due to it in respect of the Obligations until the
sum of such payments received by the Agent and paid over to Bankers Trust is
equal to the amount owed to Bankers Trust by such Lender pursuant to the
preceding sentence. The foregoing assignment shall be deemed to be a power
coupled with an interest and shall be absolute and irrevocable.
(f) No Lender shall be responsible for any default by any other
Lender in its obligation to make Loans hereunder, and each Lender shall be
obligated to make the Loans on the terms set forth herein, regardless of the
failure of any other Lender to fulfill its obligations hereunder. If any
Facility 1 Lender fails to make available its pro rata share of any Facility 1
Borrowing or any Facility 2 Lender fails to make available its pro rata share
of any Facility 2 Borrowing (and the Agent does not advance such Lender's share
to the Borrowers pursuant to subsection (b) above), then the Borrowers may,
subject to all of the terms and conditions set forth in Sections 2.1 and 2.2,
make additional Facility 1 Borrowings or Facility 2 Borrowings, as the case may
be, hereunder to cover the unfunded share of the original Facility 1 Borrowing
or Facility 2 Borrowing.
(g) Immediately upon the creation by Bankers Trust of any Facility
1 Acceptance, Bankers Trust shall be deemed to have sold and transferred to
each other Facility 1 Lender (each such other Lender, in its capacity as an
obligor with respect to any Facility 1 Acceptance, an "Acceptance
Participant"), and each such Acceptance Participant shall be deemed irrevocably
and unconditionally to have purchased and received from Bankers Trust, without
recourse or warranty, an undivided interest and participation (each a
"participation"), to the extent of such Acceptance
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Participant's pro rata share (based on the ratio that such Acceptance
Participant's pro rata share of the Facility 1 Commitment bears to the total
amount of Facility 1 Commitments) in such Facility 1 Acceptance, each
substitute Acceptance and the obligations of the Borrowers under this Agreement
with respect thereto, and any security therefor or guaranty pertaining thereto
(although Administrative Fees will be paid directly to the Agent for the
ratable account of the Acceptance Participants as provided in Section 2.10(d)).
(h) Bankers Trust shall have no liability for any action taken or
omitted to be taken by Bankers Trust under or in connection with any Acceptance
if taken or omitted in the absence of gross negligence or willful misconduct.
(i) In the event that Bankers Trust makes any payment under any
Facility 1 Acceptance and the Borrowers shall not have reimbursed such amount
in full to Bankers Trust on the maturity date for such Facility 1 Acceptance
pursuant to Section 2.5(b), Bankers Trust shall promptly notify the Agent, who
shall immediately notify each Acceptance Participant of such failure, and each
Acceptance Participant shall immediately and unconditionally pay to the Agent
for the account of Bankers Trust, the amount of such Acceptance Participant's
pro rata share (as described above in Section 2.4(g)) of such unreimbursed
payment in U.S. Dollars and in same day funds. If and to the extent such
Acceptance Participant shall not have made such payment, Bankers Trust shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest thereon for each day until paid at the Federal Funds
Rate in effect from time to time. Such Acceptance Participant shall be deemed
to have assigned to Bankers Trust the right to receive any and all payments due
to it in respect of the Acceptance Obligations until the sum of such payments
received by the Agent and paid over to Bankers Trust is equal to the amount
owed to Bankers Trust by such Acceptance Participant pursuant to the preceding
sentence. The foregoing assignment shall be deemed to be coupled with an
interest and shall be absolute and irrevocable. No Acceptance Participant
shall be responsible for the failure of any other Acceptance Participant to
make available to the Agent such other Acceptance Participant's pro rata share
of any such payment, and each Acceptance Participant shall be obligated to make
its pro rata share of payments under this Section 2.4(i) on the terms set forth
herein, regardless of the failure of any other Acceptance Participant to
fulfill its obligations hereunder.
(j) [Reserved.]
(k) The obligations of the Acceptance Participants to make
payments to the Agent for the account of Bankers Trust with respect to Facility
1 Acceptances, and the Acceptance Obligations of the Borrower, shall be
absolute and irrevocable and not subject to counterclaim, set-off or other
defense or any other qualification or exception whatsoever and shall be made in
accordance with the terms and conditions of this Agreement under all
circumstances, including, without limitation, any of the following
circumstances:
(i) any lack of validity or enforceability of this
Agreement or any of the other Loan Documents;
(ii) the existence of any claim, set-off, defense or other
right which the Borrowers or any Lender may have at any time against
Bankers Trust, any transferee of any Facility 1
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Acceptance (or any Person for whom any such transferee may be acting),
the Agent, Bankers Trust, any Lender or Acceptance Participant, or
other Person, whether in connection with this Agreement, any Facility
1 Acceptance, the transactions contemplated herein or any unrelated
transactions (including any underlying transaction between the
Borrowers and the holder of a Facility 1 Acceptance);
(iii) any Facility 1 Acceptance proving to be forged or
fraudulent;
(iv) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan
Documents;
(v) the occurrence of any Potential Default or Event of
Default; or
(vi) the failure of any condition precedent set forth in
Article III hereof to have been satisfied at the time of the creation
of any Facility 1 Acceptance.
SECTION 2.5 NOTES; ACCEPTANCE OBLIGATIONS.
(a) Each Borrower's joint and several obligation to pay the
principal of and interest on the Facility 1 Loans made by each Facility 1
Lender and Swing-Line Loans made by Bankers Trust shall be evidenced by a
promissory note (each a "Facility 1 Note" and collectively the "Facility 1
Notes") substantially in the form of Exhibit A-1, with blanks appropriately
completed in conformity therewith and payable to the order of such Facility 1
Lender. Each Borrower's joint and several obligation to pay the principal of
and interest on the Facility 2 Loans made by each Facility 2 Lender shall be
evidenced by a promissory note (each a "Facility 2 Note and collectively the
"Facility 2 Notes") substantially in the form of Exhibit A-2, with blanks
appropriately completed in conformity therewith and payable to the order of
such Facility 2 Lender. Each Lender shall, and is hereby authorized by the
Borrowers to, endorse on the schedule attached to the applicable Note delivered
to such Lender (or on a continuation of such schedule attached to such Note and
made a part thereof), or otherwise to record in such Lender's internal records,
an appropriate notation evidencing the date and amount of each Loan of the
related Type from such Lender, each payment and prepayment of principal of any
such Loan, each payment of interest on any such Loan, and applicable interest
rates and Eurodollar Interest Periods and other information with respect
thereto, and any such recordation shall absent manifest error constitute prima
facie evidence of the accuracy of the information so recorded; provided that
the failure of any Lender to make such a notation or any error therein shall
not affect the joint and several Obligations of the Borrowers, including the
joint and several Obligation of the Borrowers to repay the Loans made by such
Lender in accordance with the terms of this Agreement and the applicable Notes.
(b) The Borrowers hereby agree to reimburse Bankers Trust, on the
maturity date for each Facility 1 Acceptance, an amount equal to the face
amount of such Facility 1 Acceptance (the obligation of the Borrowers under
this Section 2.5(b) and under Sections 2.6(h) and 2.10(d) with respect to any
Facility 1 Acceptance are referenced herein as the "Acceptance Obligations").
The Acceptance Obligations of the Borrowers are joint and several and absolute
and unconditional irrespective of the value, genuineness, validity, regularity
or enforceability of any Facility 1 Acceptance or any other matter described in
Section 2.4(k), it being the intent that the obligations
<PAGE> 40
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of the Borrowers hereunder shall be absolute and unconditional under any and
all circumstances. The Borrowers hereby expressly waive diligence,
presentment, demand of payment, protest and all other formalities of any kind
with respect to any Acceptance Obligation.
(c) To enable Bankers Trust to create Facility 1 Acceptances in
the manner specified in Section 2.2(b), the Borrowers shall supply Bankers
Trust, upon the Borrower's execution of this Agreement and thereafter forthwith
upon request by Bankers Trust, with a sufficient number of blank Drafts as
Bankers Trust may reasonably request, duly executed by the Borrowers. In that
connection, the Borrowers hereby irrevocably appoint Bankers Trust and each of
its authorized signatories as attorneys-in-fact of the Borrowers for the
purpose of completing blank Drafts in accordance with this Agreement. Bankers
Trust shall hold each Draft supplied in safekeeping to be filled in and
completed in accordance with this Agreement. Each Draft completed by Bankers
Trust pursuant to any written, telexed, telecopied or cable transmission or
oral instruction purported to be delivered by or on behalf of the Borrowers
shall be duly drawn, executed and delivered on behalf of the Borrowers for the
purposes of this Agreement. Bankers Trust shall incur no liability to the
Borrowers in acting on any such transmission or instruction that Bankers Trust
believes in good faith to have been given by a Person authorized to act on
behalf of the Borrowers or otherwise acting in good faith under this Agreement
without gross negligence.
SECTION 2.6 INTEREST.
(a) [Reserved]
(b) The Borrowers agree to pay interest in respect of the unpaid
principal amount of each Eurodollar Loan for each day during the Eurodollar
Interest Period applicable thereto at a rate per annum equal to 0.95% per annum
plus the Eurodollar Rate for such Eurodollar Interest Period.
(c) The Borrowers agree to pay interest in respect of the unpaid
principal amount of each Fed Funds Loan for each day such Fed Funds Loan is
outstanding at a rate per annum equal to (i) 1.07% per annum plus the Federal
Funds Rate if such Fed Funds Loan is a Facility 1 Loan or a Swing-Line Loan and
(ii) one and five-eighths percent (1.625%) per annum plus the Federal Funds
Rate if such Fed Funds Loan is a Facility 2 Loan.
(d) Overdue principal and interest in respect of each Loan and all
other overdue amounts owing hereunder shall bear interest for each day that
such amounts are overdue (after as well as before judgment) at a rate per annum
equal to two and one-quarter percent (2.25%) per annum plus the Prime Rate (the
"Default Rate").
(e) Interest on each Loan shall accrue from and including the
Borrowing Date thereof to but excluding the date of any repayment thereof and
shall be payable (i) on or before the third (3rd) Business Day after receipt of
the billing statement referred to in clause (f) below, (ii) on any prepayment
in full of all of any Lender's outstanding Loans, (iii) at maturity (whether by
acceleration or otherwise) and (iv) after maturity, on demand.
(f) The Agent shall deliver to the Borrowers one interest billing
statement for each month on or before the third (3rd) Business Day of the next
succeeding month, which interest billing
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statement shall set forth the interest accrued on the Loans for such month;
provided that any failure or delay in delivering such interest billing
statement or any inaccuracy therein shall not affect the Obligations.
(g) The Borrowers hereby promise to pay to Bankers Trust and the
other Lenders interest on any Acceptance Obligation, and on any other amount
payable by the Borrowers hereunder with respect to any Acceptance Obligation,
that shall not be paid in full when due (whether at stated maturity, by
acceleration or otherwise), for the period from and including the due date
thereof to but excluding the date the same is paid in full, at a rate per annum
equal to the Default Rate.
SECTION 2.7 TERMINATION OR REDUCTION OF COMMITMENTS.
(a) The Facility 1 Commitments shall automatically terminate on
the Maturity Date, subject to earlier termination as set forth in Section 2.7
(b) or pursuant to Section 6.1. The Facility 1 Commitments may not be reduced
in part by the Borrowers, but may be terminated in their entirety at any time
by the Borrowers upon at least fifteen (15) days prior irrevocable written
notice to the Agent.
(b) The Facility 2 Commitments shall automatically terminate on
the earliest of: (i) Maturity Date, and (ii) the date on which the Facility 1
Commitments terminate, subject to earlier termination pursuant to Section 6.1.
The Facility 2 Commitments may not be reduced in part by the Borrowers, but may
be terminated in their entirety at any time by the Borrowers upon at least
fifteen (15) days prior irrevocable written notice to the Agent; provided,
that upon delivery of a notice of termination of the Facility 2 Commitments by
the Borrowers, the parties to this Agreement agree to discuss the terms and
conditions upon which this Agreement and the Facility 1 Commitments shall
remain in effect; and provided further, that if the parties shall fail to agree
upon terms and conditions that are satisfactory to the Lenders in their sole
and absolute discretion, then the Facility 1 Commitments shall terminate thirty
(30) days following delivery by the Borrowers of the notice of termination of
the Facility 2 Commitments (which thirty (30) period may be extended to sixty
(60) days in the sole and absolute discretion of the Lenders).
SECTION 2.8 MANDATORY REPAYMENTS.
(a) The Borrowers shall repay all outstanding Facility 1 Loans and
Acceptance Obligations relating to Facility 1 Acceptances (whether matured or
unmatured) on the earlier to occur of the termination of the Facility 1
Commitments and the Maturity Date. Payments received on account of Acceptance
Obligations prior to the maturity date of the Facility 1 Acceptance relating
thereto shall be applied in accordance with Section 2.11(d).
(b) The Borrowers shall repay all outstanding Facility 2 Loans on
the earlier to occur of the termination of the Facility 2 Commitments and the
Maturity Date. Additionally, the Borrowers shall repay all outstanding
Facility 2 Tranche A Loans on the seventh (7th) calendar day of each month, so
that no Facility 2 Tranche A Loans remain outstanding during the period
commencing on the seventh (7th) calendar day and ending on the twelfth (12th)
calendar day of each month.
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(c) On any date upon which the aggregate principal amount of the
outstanding Facility 1 Loans, Swing-Line Loans and/or the aggregate face amount
of Facility 1 Acceptances exceeds the Facility 1 Maximum Amount, the Borrowers
shall repay on such date the aggregate principal amount of the Facility 1
Loans, Swing-Line Loans and/or Acceptance Obligations or, provided no Potential
Default or Event of Default exists, deliver additional Collateral of the type
required for the Facility 1 Borrowing Base, as shall be necessary so that the
aggregate principal amount of outstanding Facility 1 Loans and Swing-Line Loans
and the aggregate face amount of Facility 1 Acceptances outstanding does not
exceed the Facility 1 Maximum Amount. On any date upon which the aggregate
principal amount of the outstanding Facility 2 Tranche A Loans exceeds the
Facility 2 Tranche A Maximum Amount, the Borrowers shall repay on such date the
aggregate principal amount of the Facility 2 Tranche A Loans or, provided no
Potential Default or Event of Default exists, deliver additional Collateral of
the type required for the Facility 2 Tranche A Borrowing Base, as shall be
necessary so that the aggregate principal amount of outstanding Facility 2
Tranche A Loans does not exceed the Facility 2 Tranche A Maximum Amount. On
any date upon which the aggregate principal amount of the outstanding Facility
2 Tranche B Loans exceeds the Facility 2 Tranche B Maximum Amount , the
Borrowers shall repay on such date the aggregate principal amount of the
Facility 2 Tranche B Loans as shall be necessary so that the aggregate
principal amount of outstanding Facility 2 Tranche B Loans does not exceed the
Facility 2 Tranche B Maximum Amount. On any date upon which the aggregate
principal amount of the outstanding Facility 2 Tranche C Loans exceeds the
Facility 2 Tranche C Maximum Amount, the Borrowers shall repay on such date the
aggregate principal amount of the Facility 2 Tranche C Loans as shall be
necessary so that the aggregate principal amount of outstanding Facility 2
Tranche C Loans does not exceed the Facility 2 Tranche C Maximum Amount.
(d) [Reserved]
(e) [Reserved]
(f) If an Old Acceptance is being exchanged for a New Acceptance
in accordance with Section 2.3(b), the Borrowers shall repay on the date of
such exchange an amount equal to (i) the Discount Expense if the face amount of
the New Acceptance equals or exceeds the face amount of the Old Acceptance and
(ii) the Discount Expense plus the Required Acceptance Payment if the face
amount of the New Acceptance is less than the face amount of the Old
Acceptance. As used herein, "Discount Expense" shall mean the face amount of
the Old Acceptance less the discount proceeds of such Old Acceptance received
by the Borrowers on the date of discount of the Old Acceptance. As used herein
"Required Acceptance Payment" shall mean the difference between (x)(I) the face
amount of the Old Acceptance less (II) the Discount Expense relating thereto
and (y)(I) the face amount of the New Acceptance less (II) the Discount Expense
relating thereto.
(g) Each repayment of Loans of a certain Type under this Section
2.8 shall be allocated among the Lenders in accordance with the aggregate
outstanding principal amounts of their respective Loans of such Type. All
repayments of the Facility 1 Loans of any Facility 1 Lender under this Section
2.8 shall be applied first to such Lender's Facility 1 Loans that are Fed Funds
Loans and second, to such Lender's Facility 1 Loans that are Eurodollar Loans.
All repayments of Loans under this Section 2.8 shall be without premium or
penalty, except that any repayment of Eurodollar Loans shall be subject to the
provisions of Section 2.14. Interest shall be payable in
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accordance with the provisions of Section 2.6. Payments received on account of
Acceptance Obligations prior to the maturity date of the Acceptance relating
thereto shall be applied in accordance with Section 2.11(d). Any prepayment on
account of outstanding Acceptance Obligations prior to the maturity date of the
Facility 1 Acceptance relating thereto required under Section 2.8 shall be held
by Bankers Trust in accordance with Section 2.11(d), provided that such
prepayment shall include payment of the Administrative Fees due under Section
2.10(d), which Administrative Fees shall be due in the full amount as if the
Acceptance Obligations were not being prepaid (and regardless of whether less
than the aggregate face amount of the applicable Facility 1 Acceptance is being
prepaid) and were being paid on the date of the maturity of the Facility 1
Acceptance relating thereto.
SECTION 2.9 OPTIONAL PREPAYMENTS.
The Borrowers shall have the right at any time and from time
to time to prepay outstanding Loans of any Type, in whole or in part, upon one
(1) Business Days prior written notice to the Agent, in the case of Eurodollar
Loans, and without prior notice in the case of all other Loans; provided that
each partial prepayment of any Loan (other than a Swing-Line Loan, which may be
prepaid in any amount) shall be in an aggregate principal amount of $100,000 or
any multiple of $50,000 in excess thereof; and provided further, that the
Borrowers shall not prepay any Facility 1 Loans so long as any Swing-Line Loans
are outstanding. The Borrowers shall, at the time of making such prepayment,
designate whether it is a prepayment of Facility 1 Loans, Facility 2 Tranche A
Loans, Facility 2 Tranche B Loans or Facility 2 Tranche C Loans. If the
Borrowers fail to make such a designation, any funds received as a prepayment
pursuant to this Section 2.9 shall be applied first, to Facility 2 Tranche B
Loans then outstanding; second, to Facility 2 Tranche A Loans then outstanding;
third to Facility 2 Tranche C Loans then outstanding; and fourth, to Facility 1
Loans then outstanding. If such prepayment has not been designated by the
Borrowers, the Agent shall endeavor to contact the Borrowers for prepayment
instructions before applying the prepayment as noted herein but the Agent shall
not be liable for failure to so contact the Borrowers. Each prepayment of
Loans of a certain Type under this Section 2.9 shall be allocated among the
Lenders in accordance with the aggregate outstanding principal amounts of their
respective Loans of such Type. All prepayments of the Facility 1 Loans of any
Facility 1 Lender under this Section 2.9 shall be applied first, to such Lender
s Facility 1 Loans that are Fed Funds Loans, and second, to such Lender s
Facility 1 Loans that are Eurodollar Loans. All prepayments of Loans under
this Section 2.9 shall be without premium or penalty, except that any
prepayment of Eurodollar Loans shall be subject to the provisions of Section
2.14. Interest shall be payable upon such prepayment in accordance with the
provisions of Section 2.6.
SECTION 2.10 FEES.
(a) The Borrowers agree to pay to the agent for the account of
each Facility 1 Lender a facility fee at a rate per annum equal to 0.16% on the
amount of such Lender's Facility 1 Commitment (whether used or unused). The
Borrowers agree to pay to the Agent for the account of each Facility 2 Lender a
facility fee at a rate per annum equal to 0.20% on the amount of such Lender s
Facility 2 Commitment (whether used or unused). Such fees shall be deemed to
be earned in full upon the Amendment Effective Date and shall be payable in
advance on the Amendment Effective Date and thereafter in quarterly
installments on the last Business Day of each March, June,
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September and December, commencing December 31, 1996; provided that if the
Facility 1 Commitments or the Facility 2 Commitments are terminated at any time
prior to the Maturity Date, each remaining unpaid quarterly installment of the
respective fees shall be paid in full on the date of such termination.
(b) [Reserved]
(c) [Reserved]
(d) The Borrowers agree to pay to the Agent for the account of
each Facility 1 Lender a fee in respect of each Facility 1 Lender's pro rata
share of the face amount of each applicable Facility 1 Acceptance (the
"Administrative Fee"), computed for each day such Facility 1 Acceptance is
outstanding at a rate equal to one percent (1%) per annum of the face amount of
each Facility 1 Acceptance. The Administrative Fees relating to a Facility 1
Acceptance shall be due and payable on the maturity date of such Acceptance.
(e) The Borrowers agree to pay to the Agent, for its own account,
an agency fee (the "Agency Fee") in the amount and on the dates separately
agreed to by the Agent and the Borrowers.
(f) The fees set forth in this Section 2.10, once paid, shall not
be refundable under any circumstances.
SECTION 2.11 PAYMENTS, ETC,
(a) Except as otherwise specifically provided herein, all payments
by the Borrowers under this Agreement (including payments with respect to
Acceptance Obligations) shall be made without defense, set-off or counterclaim
to the Agent not later than 1:00 p.m. (New York City time) on the date when
due, it being expressly agreed and understood that if a payment is received
after 1:00 p.m. (New York City time) by the Agent, such payment will be deemed
to have been made on the next succeeding Business Day and interest thereon
shall be payable at the then applicable rate during such extension; provided
that if the Agent receives the federal wire confirmation number with respect to
such payment before 1:00 p.m. (New York City time) on the date when such
payment is due, and the payment is actually received and credited for value to
the appropriate account at Bankers Trust before the close of business on such
due date, then the payment will be deemed to be made on such due date. All
payments hereunder shall be made in U.S. Dollars in immediately available funds
at the Payment Office. The Agent will promptly after receipt of each such
payment (and in any event by the close of business on the day on which such
funds are received or deemed to have been received) distribute funds in the
form received relating to the payment of (i) principal or interest on any Type
of Loan to the Lenders with Loans of the corresponding Type ratably in
accordance with the aggregate principal amount of the Loans of such Type of
such Lenders, (ii) payments with respect to Acceptance Obligations to the Cash
Collateral Account if the Acceptances to which the payment relates have not
matured, to the Acceptance Agent if the Facility 1 Acceptances to which the
payment relates have matured unless Bankers Trust has already made payment to
the Acceptance Agent, and otherwise to Bankers Trust or to the Lenders entitled
thereto if any Lender has reimbursed Banker's Trust for such Lender s
obligation as an Acceptance Participant, (iii) Fees with respect to any Type of
Commitment or with respect to any Acceptance
<PAGE> 45
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Obligation ratably to Lenders with Commitments of the corresponding Type or to
Acceptance Participants with a pro rata share of liability relating to Facility
1 Acceptances, as applicable and (iv) any other amount payable to any Lender to
such Lender.
(b) Whenever any payment to be made hereunder or under any Note
shall be stated to be due on a day that is not a Business Day, the due date
thereof shall be extended to the next succeeding Business Day and, with respect
to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.
(c) All computations of interest and Fees shall be made on the
basis of a year of three hundred and sixty (360) days for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest or Fees are payable. Each determination by the
Agent of an interest rate or Fee hereunder shall be conclusive and binding
absent manifest error.
(d) Any payments received by Bankers Trust on account of
Acceptance Obligations as a result of a mandatory repayment of such Acceptance
Obligations under the Loan Documents prior to the maturity date of the Facility
1 Acceptance to which such Acceptance Obligations relate shall be held by
Bankers Trust as collateral security for the Obligations, including the
Acceptance Obligations, in a Cash Collateral Account pursuant to the Cash
Collateral Agreement.
(e) Acceptance Obligations (whether upon acceleration, upon any
date that the Facility 1 Commitments are terminated pursuant to Section 2.7(a)
or otherwise) or the occurrence and continuance of a Potential Default or an
Event of Default, all amounts received on any day by the Agent hereunder in
respect of principal of Facility 1 Loans or Swing- Line Loans or the Acceptance
Obligations or under the Warehousing Security Agreement, including amounts
received by the Agent from the Facility 1 Settlement Account, shall be applied
by the Agent as follows: first, to Bankers Trust, to repay the aggregate
principal amount of Swing-Line Loans outstanding on such day; second, to
Bankers Trust to the extent of any amounts due and payable on account of
matured Acceptance Obligations or otherwise payable pursuant to Section 2.8 on
account of Acceptance Obligations (and Bankers Trust shall distribute such
payments in accordance with 2.11(a)(ii)); third, ratably to the Facility 1
Lenders in accordance with the aggregate principal amounts of their respective
outstanding Facility 1 Loans to repay the aggregate principal amount of
Facility 1 Loans due and payable on such day pursuant to Section 2.8; fourth,
ratably to the Facility 1 Lenders in accordance with the aggregate principal
amounts of their respective outstanding Facility 1 Loans, to prepay outstanding
Facility 1 Loans being prepaid on such day pursuant to Section 2.9; and fifth,
the balance, if any, shall be released by the Agent to the Borrowers by
transfer to such account as the Borrowers may direct in writing for such
purpose; provided that if a Potential Default or an Event of Default has
occurred and is continuing, but the Lenders have not accelerated the Facility 1
Loans, Swing-Line Loans, or the Acceptance Obligations hereunder, then the
Agent shall not release any such amounts to the Borrowers and shall hold such
amounts in the Facility 1 Settlement Account until the earlier of (x) the cure
of such Potential Default or Event of Default or (y) the acceleration of the
Facility 1 Loans, Swing-Line Loans, or the Acceptance Obligations and, if the
event described in clause (x) occurs first, such amounts shall be released to
the Borrowers as described above in this subsection (e), and if the event
described in clause (y) occurs first, then such amounts shall be applied in
accordance with Section 2.11(h).
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(f) Prior to the maturity of the Facility 2 Loans (whether upon
acceleration, upon any date that the Facility 2 Commitments are terminated
pursuant to Section 2.7(b) or otherwise), or the occurrence and continuance of
a Potential Default or an Event of Default, all amounts received on any day by
the Agent hereunder in respect of principal of Facility 2 Loans or under the
Servicing Security Agreement in respect of the Collateral described therein or
in respect of Eligible REO Property mortgaged to the Secured Parties, shall be
applied by the Agent as follows: first, ratably to the Facility 2 Lenders in
accordance with the aggregate principal amounts of their respective outstanding
Facility 2 Loans, to repay the aggregate principal amount of Facility 2 Loans
due and payable on such day pursuant to Section 2.8; second, ratably to the
Facility 2 Lenders in accordance with the aggregate principal amounts of their
respective outstanding Facility 2 Loans, to prepay outstanding Facility 2 Loans
being prepaid on such day pursuant to Section 2.9; and third, the balance, if
any, shall be released by the Agent to the Borrowers by transfer to such
account as the Borrowers may direct in writing for such purpose; provided that
if a Potential Default or an Event of Default exists, but the Lenders have not
accelerated the Facility 2 Loans hereunder, then the Agent shall not release
any such amounts to the Borrowers and shall hold such sums in the Cash
Collateral Account until the earlier of (x) the cure of any Potential Default
or Event of Default or (y) the acceleration of the Facility 2 Loans, and if the
event described in clause (x) occurs first, the amounts shall be released to
the Borrowers as described in this subsection (f), and if the event described
in clause (y) occurs first, then such amounts shall be applied in accordance
with Section 2.11(i).
(g) [Reserved]
(h) Upon the maturity of the Facility 1 Loans and Facility 1
Acceptance Obligations (whether upon acceleration, upon any date that the
Facility 1 Commitments are terminated pursuant to Section 2.7(a) or otherwise),
all amounts in the Facility 1 Settlement Account and all amounts received by
the Agent from the Warehousing Collateral Agent under the Warehousing Security
Agreement shall be disbursed by the Agent as follows: first, ratably to the
Collateral Agents in accordance with the amounts due to them, to reimburse them
for all fees, costs and expenses reasonably incurred by them in connection with
a Potential Default or an Event of Default or otherwise payable to them in
their capacities as Collateral Agents under the Loan Documents or otherwise
payable to one or more of them under the Cash Collateral Agreement; second, to
the Agent, to reimburse the Agent for all fees, costs and expenses reasonably
incurred by it in connection with a Potential Default or an Event of Default,
or otherwise payable to it in its capacity as Agent under the Loan Documents;
third, to Bankers Trust to pay all accrued and unpaid interest on the
Swing-Line Loans due hereunder and to repay the principal of all outstanding
Swing-Line Loans; fourth, to Bankers Trust to pay all amounts due on account of
Acceptance Obligations (and Bankers Trust shall distribute such payments in
accordance with 2.11(a)(ii)); fifth, ratably to the Facility 1 Lenders in
accordance with the amount of interest and Fees on the Facility 1 Loans due to
such Lenders, to pay all accrued and unpaid interest on and Fees with respect
to the Facility 1 Loans due hereunder; sixth, ratably to the Facility 1 Lenders
in accordance with the aggregate principal amounts of their respective
outstanding Facility 1 Loans, to repay all outstanding Facility 1 Loans;
seventh, ratably to all of the Facility 2 Lenders in accordance with their
respective unpaid Obligations relating to Facility 2 Loans, to pay all of their
remaining unpaid Obligations relating to Facility 2 Loans; and eighth, provided
no Obligations remain unpaid to the Borrowers by transfer to such account as
the Borrowers may direct in writing for such purpose.
<PAGE> 47
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(i) Upon the maturity of the Facility 2 Loans (whether upon
acceleration, upon any date that the Facility 2 Commitments are terminated
pursuant to Section 2.7(b) or otherwise), all amounts received by the Agent
from the Servicing Collateral Agent under the Servicing Security Agreement
shall be disbursed by the Agent as follows: first, ratably to the Collateral
Agents in accordance with the amounts due to them, to reimburse them for all
fees, costs and expenses reasonably incurred by them in connection with a
Potential Default or an Event of Default or otherwise payable to them in their
capacities as Collateral Agents under the Loan Documents or otherwise payable
to one or more of them under the Cash Collateral Agreement; second, to the
Agent, to reimburse the Agent for all fees, costs and expenses reasonably
incurred by it in connection with a Potential Default or an Event of Default or
otherwise payable to it in its capacity as Agent under the Loan Documents;
third, ratably to the Facility 2 Lenders in accordance with the amount of
interest on and Fees with respect to the Facility 2 Loans due to such Lenders,
to pay all accrued and unpaid interest on and Fees with respect to the Facility
2 Loans due hereunder; fourth, ratably to the Facility 2 Lenders in accordance
with the aggregate principal amounts of their respective outstanding Facility 2
Loans, to repay all outstanding Facility 2 Loans; fifth, to Bankers Trust to
pay all accrued and unpaid interest on the Swing-Line Loans due hereunder and
to repay the principal of all outstanding Swing-Line Loans; sixth, to Bankers
Trust to pay all amounts due on account of Acceptance Obligations (and Bankers
Trust shall distribute such payments in accordance with 2.11(a)(ii)); seventh,
ratably to all of the Facility 1 Lenders in accordance with their respective
unpaid Obligations relating to Facility 1 Loans, to repay all of their
remaining unpaid Obligations relating to Facility 1 Loans; and eighth, provided
no Obligations remain unpaid, to the Borrowers by transfer to such account as
the Borrowers may direct in writing for such purpose.
(j) [Reserved]
(k) Upon the maturity of the Loans and all other Obligations
pursuant to Section 6.1, all amounts in any account of the Borrower maintained
with the Agent and all amounts (other than the amounts referred to in
subsections (h) and (i) above) received by the Agent on account of the
Obligations shall be disbursed by the Agent as follows: first, ratably to the
Collateral Agents in accordance with the amounts due to them, to reimburse them
for all fees, costs and expenses reasonably incurred by them in connection with
a Potential Default or an Event of Default or otherwise payable to them in
their capacities as Collateral Agents under the Loan Documents; second, to the
Agent, to reimburse the Agent for all fees, costs and expenses reasonably
incurred by it in connection with a Potential Default or an Event of Default or
otherwise payable to it in its capacity as Agent under the Loan Documents;
third, to Bankers Trust to pay all accrued and unpaid interest on the
Swing-Line Loans and to repay the principal of all outstanding Swing-Line
Loans; fourth, to Bankers Trust to pay all amounts due on account of Acceptance
Obligations (and Bankers Trust shall distribute such payments in accordance
with 2.11(a)(ii)); fifth, ratably to the Lenders in accordance with the amount
of interest and Fees due to each Lender, to pay all accrued and unpaid interest
and Fees due hereunder; sixth, ratably to the Lenders in accordance with the
aggregate principal amounts of their respective outstanding Loans, to repay all
outstanding Loans; seventh, ratably to the Lenders in accordance with their
respective unpaid Obligations, to pay all remaining unpaid Obligations; and
eighth, to the Borrowers by transfer to such account as the Borrowers may
direct in writing for such purpose.
<PAGE> 48
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SECTION 2.12 EURODOLLAR RATE NOT DETERMINABLE; ILLEGALITY OR IMPROPRIETY.
(a) In the event, and on each occasion, that on or before the day
on which the Eurodollar Rate for a Facility 1 Borrowing that is to include
Eurodollar Loans is to be determined, the Agent has determined in good faith
that the Eurodollar Rate cannot be determined for any reason, the Agent shall,
as soon as practicable thereafter, give written notice of such determination to
the Borrowers and the Lenders. Upon any such determination, any request by the
Borrowers for a Eurodollar Loan pursuant to Section 2.2 shall, until the Agent
has advised the Borrowers and the Lenders that the circumstances giving rise to
such notice no longer exist, be deemed to be a request for a Fed Funds Loan.
Each determination by the Agent hereunder shall be conclusive and binding
absent manifest error.
(b) If any Lender determines at any time that the introduction of,
or any change in, any applicable law, rule, regulation, order or decree or in
the interpretation or the administration thereof by any Governmental Authority
charged with the interpretation or administration thereof, or compliance by
such Lender with any request or directive (whether or not having the force of
law) of any such Governmental Authority, shall make it unlawful or improper for
such Lender to make, maintain or fund any Eurodollar Loan as contemplated by
this Agreement, then such Lender shall immediately give notice thereof to the
Agent and the Borrowers describing such illegality or impropriety in reasonable
detail. Effective thirty (30) days after the giving of such notice (or
effective upon such earlier date as required by such Governmental Authority),
the obligation of such Lender to make Eurodollar Loans shall be suspended for
the duration of such illegality or impropriety and, if and when such illegality
or impropriety ceases to exist, such suspension shall cease and such Lender
shall notify the Agent and the Borrowers thereof. If any such change makes it
unlawful or improper for any Lender to maintain any Eurodollar Loan such Lender
shall, upon the happening of such event, notify the Agent and the Borrowers
thereof, and the Borrowers shall immediately, or if permitted by applicable
law, rule, regulation, order, decree, interpretation, request or directive, no
later than the date permitted thereby, convert each such Eurodollar Loan into a
Fed Funds Loan. If any Lender notifies the Agent and the Borrowers pursuant to
this Section 2.12(b) that it is unlawful or improper for such Lender to make or
maintain Eurodollar Loans, as the case may be, but no other Lenders give
similar notices, then the Borrowers may require such Lender to sell, pursuant
to Section 8.6(c) all of its outstanding Loans and Commitments to another
Lender (if any other Lender agrees, in its sole and absolute discretion, to
purchase such Loans and Commitments) or to any other financial institution
reasonably acceptable to the Agent that is willing to make and maintain
Eurodollar Loans. The purchase price for such Loans and Commitments shall be
equal to the aggregate outstanding principal amount of the Loans of such Lender
plus such Lender's pro rata share of all other accrued and unpaid Obligations
(including obligations arising as a result of being an Acceptance Participant)
minus the pro rata portion (based on the number of days in the applicable
period) of such Lender's facility fees that relate to the period from the date
of such sale to the next payment date for the facility fees.
SECTION 2.13 RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) Notwithstanding any other provision herein, if after the date
of this Agreement any change in applicable law or regulation or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof (whether or not
<PAGE> 49
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having the force of law) imposes any tax on or changes the basis of taxation of
payments to any Lender of the principal of or interest on any Eurodollar Loan
or the face amount of a Facility 1 Acceptance made by such Lender or any
interest due on any Acceptance Obligations or any Fees or other amounts payable
hereunder (other than taxes imposed on the overall net income of such Lender by
the jurisdiction in which such Lender has its principal office or by any
political subdivision or taxing authority therein), or imposes, modifies or
deems applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of or credit extended by such
Lender (except any such reserve requirement that is reflected in the Eurodollar
Rate) or imposes on such Lender any other condition affecting this Agreement or
Eurodollar Loans or a Facility 1 Acceptances created by Bankers Trust, and the
result of any of the foregoing is to increase the cost to such Lender of making
or maintaining any Eurodollar Loan, becoming or remaining as an Acceptance
Participant or to reduce the amount of any sum received or receivable by such
Lender hereunder (whether of principal, interest, fee or otherwise) in respect
thereof by an amount deemed by such Lender to be material, then the Borrowers
shall pay to such Lender such additional amount or amounts as will compensate
such Lender for such additional costs incurred or reduction suffered. Any
amount or amounts payable by the Borrowers to any Lender in accordance with the
provisions of this Section 2.13(a) shall be paid by the Borrowers to such
Lender within ten (10) Business Days of receipt by the Borrowers from such
Lender of a statement setting forth in reasonable detail the amount or amounts
due and the basis for the determination from time to time of such amount or
amounts, which statement shall be conclusive and binding absent manifest error.
(b) If any Lender has determined that the adoption after the date
hereof of any applicable law, rule or regulation regarding capital adequacy, or
any change therein, or any change in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by
such Lender (or any lending office of such Lender, as the case may be) or by
the holding company of such Lender, as the case may be, with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has the effect of
reducing the rate of return on such Lender's capital or on the capital of such
Lender's holding company, as the case may be, as a consequence of such Lender s
obligations under the Loan Documents to a level below that which such Lender or
such Lender's holding company, as the case may be, could have achieved but for
such adoption, change or compliance (taking into consideration such Lender s
policies or such Lender's holding company's policies, as the case may be, with
respect to capital adequacy) by an amount deemed by such Lender to be material,
then from time to time, the Borrowers shall reimburse such Lender or such
Lender's holding company, as the case may be, for such reduction. Any amount
or amounts payable by the Borrowers to any Lender in accordance with the
provisions of this Section 2.13(b) shall be paid by the Borrowers to such
Lender within ten (10) Business Days of receipt by the Borrowers from such
Lender of a statement setting forth in reasonable detail the amount or amounts
due and the basis for the determination from time to time of such amount or
amounts, which statement shall be conclusive and binding absent manifest error.
(c) Each Lender agrees to use reasonable efforts to change its
lending office to avoid or minimize (i) any amounts that might otherwise be
payable to such Lender pursuant to this Section 2.13 or pursuant to Section
2.15 or (ii) the effect of any event referred to in Section 2.12(b); provided
that such efforts or change shall not cause the imposition on such Lender of
any additional
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cost or legal, regulatory or administrative burdens deemed by such Lender, in
its sole discretion, to be material.
(d) Failure on the part of any Lender to demand compensation for
any increased costs or reduction in amounts received or receivable or reduction
in return on capital with respect to any period shall not constitute a waiver
of such Lender's right to demand compensation with respect to such period or
any other period. The protection of this Section 2.13(d) shall be available to
any Lender regardless of any possible contention of the invalidity or
inapplicability of the law, rule, regulation, guideline or other change or
condition that shall have occurred or been imposed.
SECTION 2.14 INDEMNITY.
(a) The Borrowers shall indemnify and hold harmless each Lender
against any and all claims, demands, liabilities, damages, losses, costs,
charges and expenses (including reasonable attorney's fees) that such Lender
actually sustains or incurs as a consequence of (i) any failure by the
Borrowers to fulfill on the Amendment Effective Date or on the date of any
Credit Event hereunder the applicable conditions set forth in Article III, (ii)
the creation of any Facility 1 Acceptance or failure to accept any Draft, (iii)
any failure by the Borrowers to borrow any Eurodollar Loan hereunder, to
convert any Loan into a Eurodollar Loan or to continue any Eurodollar Loan for
an additional Eurodollar Interest Period, after irrevocable notice of such
borrowing, conversion or continuation has been given pursuant to Section 2.2 or
the breach by the Borrowers of any obligation under the Funding Agreement, (iv)
any payment, prepayment or conversion of a Eurodollar Loan required by any
provision of this Agreement or otherwise made on a date other than the last day
of the Eurodollar Interest Period applicable thereto or any payment, prepayment
of Acceptance Obligations or required by the Loan Documents made on a date
other than the maturity date applicable thereto, (v) any default in payment or
prepayment of the principal amount of any Eurodollar Loan or an Acceptance
Obligation or any part thereof or interest accrued thereon, as and when due and
payable (at the due date thereof, by irrevocable notice of prepayment or
otherwise) or (vi) the occurrence of any Event of Default, including, in each
such case, any loss or reasonable expense sustained or incurred in liquidating
or employing deposits from third parties acquired to effect or maintain such
Eurodollar Loan or any part thereof as a Eurodollar Loan. Such loss or
reasonable expense shall include but not be limited to an amount equal to the
excess, if any, as reasonably determined by such Lender, of (A) its cost of
obtaining the funds for the Eurodollar Loan being paid, prepaid or converted or
not borrowed, converted or continued (based on the Eurodollar Rate applicable
thereto) for the period from the date of such payment, prepayment, conversion
or failure to borrow, convert or continue to the last day of the Eurodollar
Interest Period, as the case may be, for such Loan (or, in the case of a
failure to borrow, convert, or continue the Eurodollar Interest Period, as the
case may be, for such Loan that would have commenced on the date of such
failure to borrow, convert or continue) over (B) the amount of interest (as
reasonably determined by such Lender) that would be realized by such Lender in
re-employing the funds so paid, prepaid or converted or not borrowed, converted
or continued for such period or Eurodollar Interest Period, as the case may be.
A certificate of any Lender setting forth in reasonable detail any amount or
amounts which such Lender is entitled to receive pursuant to this Section 2.14
shall be delivered to the Borrowers and shall be conclusive and binding absent
manifest error.
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(b) The Borrowers shall assume all risks of the acts, omissions or
misuse of any Facility 1 Acceptance by the holder thereof. Neither Bankers
Trust nor the Lenders shall be responsible for the following (except to the
extent caused by the gross negligence or willful misconduct of the Agent or the
Lenders): (i) the form, validity, sufficiency, accuracy, genuineness or legal
effect of any Facility 1 Acceptance, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged;
(ii) the validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Facility 1 Acceptance or the rights or
benefits thereunder or proceeds thereof, in whole or in part, that may prove to
be invalid or ineffective for any reason; (iii) failure of the holder of a
Facility 1 Acceptance to comply fully with conditions required in order to
receive payment under a Facility 1 Acceptance; (iv) errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telex or otherwise, whether or not they be in cipher; (v)
errors in interpretation of technical terms; (vi) any loss or delay in the
transmission or otherwise of any document required in order to receive payment
under a Facility 1 Acceptance or of the proceeds thereof; and (vii) any
consequences arising from causes beyond the control of Bankers Trust,
including, without limitation, any acts of any Governmental Authority. None of
the above shall affect, impair, or prevent the vesting of Bankers Trusts
rights or powers hereunder.
(c) Nothing in this Section is intended to limit the reimbursement
obligation of the Borrowers contained elsewhere in this Agreement. The
obligations of the Borrowers under this Section shall survive the termination
of this Agreement.
SECTION 2.15 TAXES.
All payments made by the Borrowers under this Agreement and
the other Loan Documents shall be made free and clear of, and without deduction
or withholding for or on account of, any present or future income, stamp or
other taxes, levies, imposts, duties, charges, fees, deductions or
withholdings, now or hereafter imposed, levied, collected, withheld or assessed
by any Governmental Authority, excluding, in the case of the Agent, each
Collateral Agent and each Lender, net income taxes and franchise taxes
(imposed in lieu of net income taxes) imposed on the Agent, such Collateral
Agent or such Lender, as the case may be, as a result of a present or former
connection between the jurisdiction of the government or taxing authority
imposing such tax and the Agent, such Collateral Agent or such Lender
(excluding a connection arising solely from the Agent, such Collateral Agent or
such Lender having executed, delivered, performed its obligations or received a
payment under, or enforced, this Agreement or the other Loan Documents) or any
political subdivision or taxing authority thereof or therein (all such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"). If any Taxes are required to
be withheld from any amounts payable to the Agent, any Collateral Agent or any
Lender hereunder or under other Loan Documents, the amounts so payable to the
Agent, such Collateral Agent or such Lender shall be increased to the extent
necessary to yield to the Agent, such Collateral Agent or such Lender (after
payment of all Taxes) interest or any such other amounts payable hereunder at
the rates or in the amounts specified in this Agreement and the other Loan
Documents. Whenever any Taxes are payable by the Borrowers, as promptly as
possible thereafter the Borrowers shall send to the Agent for its own account
or for the account of such Collateral Agent or such Lender, as the case may be,
a certified copy of an original official receipt received by the Borrowers
showing payment thereof. If the Borrowers fail to pay any Taxes when due to
the
<PAGE> 52
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appropriate taxing authority or fails to remit to the Agent the required
receipts or other required documentary evidence, the Borrowers shall indemnify
the Agent, the Collateral Agents and the Lenders for any incremental taxes,
interest or penalties that may become payable by the Agent, any Collateral
Agent or any Lender as a result of any such failure. The agreements in this
subsection shall survive the termination of this Agreement and the payment of
the Notes and all other amounts payable under the Loan Documents.
SECTION 2.16 SHARING OF SETOFFS.
Each Lender agrees that if it shall, through the exercise of a
right of banker's lien, setoff or counterclaim against the Borrowers, or
pursuant to a secured claim under Section 506 of Title 11 of the United States
Code or other security or interest arising from, or in lieu of, such secured
claim, received by such Lender under any applicable bankruptcy, insolvency or
other similar law or otherwise, or by any other means, obtain payment
(voluntary or involuntary) in respect of any Obligation as a result of which
the unpaid portion of its Obligations shall be proportionately less than the
unpaid portion of the Obligations of any other Lender, it shall simultaneously
purchase from such other Lender at face value a participation in the
Obligations of such other Lender, so that the aggregate unpaid amount of the
Obligations and such participations in Obligations held by each Lender shall be
in the same proportion to the aggregate unpaid amount of all Obligations then
outstanding as the amount of its Obligations prior to such exercise of banker s
lien, setoff or counterclaim or other event was to the principal amount of all
Obligations outstanding prior to such exercise of banker's lien, setoff or
counterclaim or other event; provided that, if any such purchase or purchases
or adjustments are made pursuant to this Section 2.16 and the payment giving
rise thereto is thereafter recovered, such purchase or purchases or adjustments
shall be rescinded to the extent of such recovery and the purchase price or
prices or adjustments restored without interest. The Borrowers expressly
consent to the foregoing arrangements and agrees that any Lender holding a
participation in an Obligation deemed to have been so purchased may exercise
any and all rights of banker's lien, setoff or counterclaim with respect to any
and all moneys owing by the Borrowers to such Lender by reason thereof as fully
as if such Lender had made a loan directly to the Borrowers in the amount of
such participation.
ARTICLE 3
CONDITIONS TO CREDIT EVENTS
SECTION 3.1 CONDITIONS TO CREDIT EVENTS.
(a) As conditions precedent to the initial Credit Event hereunder:
(i) Each Borrower shall have delivered or shall have had
delivered to the Agent, in form and substance and in quantities
reasonably satisfactory to the Agent and its counsel, each of the
following:
(A) this Agreement, duly executed by the parties
hereto;
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(B) each of the Warehouse Security Agreement,
Servicing Security Agreement, the Cash Collateral Agreement,
the Statement of Accounts Receivable and the Power of Attorney
for each Borrower, duly executed (and notarized where
required) by the parties thereto (which Powers of Attorney
shall be "protocolized" under the laws of Puerto Rico by
counsel to the Borrowers, and filed with the Registry of
Powers of Attorneys and Wills by local counsel to the Agent
promptly after the closing contemplated hereunder);
(C) a duly executed Facility 1 Note for each
Lender with a Facility 1 Commitment and a duly executed
Facility 2 Note for each Lender with a Facility 2 Commitment;
(D) duly executed Drafts as required under
Section 2.5(c);
(E) duly executed documents, instruments and
agreements, properly executed, deemed necessary or appropriate
by the Agent, in its reasonable discretion, to create in favor
of the Lenders a valid and perfected, first priority security
interest in and lien upon the Collateral;
(F) a certified copy of resolutions of the Board
of Directors of each of the Borrowers approving the execution,
delivery and performance of all Loan Documents required to be
delivered by such parties hereunder and the transactions
contemplated therein;
(G) a certificate of the Secretary or an
Assistant Secretary of each of the Borrowers certifying the
names and true signatures of the officers of such parties
authorized to sign the Loan Documents required to be executed
and delivered by such parties hereunder, in each case dated
the Effective Date;
(H) an opinion of special New York counsel to the
Agent in the form of Exhibit F-1 and covering such other
matters as the Agent may reasonably request and an opinion of
Puerto Rico counsel for the Borrowers in the form of Exhibit
F-2 and covering such other matters as the Agent may
reasonably request, in each case dated the Effective Date;
(I) a copy of the Certificate of Incorporation or
other equivalent document available in the applicable
jurisdiction of the Borrowers certified by the appropriate
officer of the jurisdiction of such party's incorporation as
of a recent date;
(J) a copy of the Bylaws of the Borrowers,
certified by the Secretary or an Assistant Secretary or other
appropriate officer of each such party on the Effective Date
as being accurate and complete;
(K) a certificate of the applicable officer in
the relevant jurisdiction or other equivalent document
available in the applicable jurisdiction of the jurisdiction
<PAGE> 54
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of incorporation of each of the Borrowers certifying that such
party is in good standing as of a recent date and a good
standing certificate from each jurisdiction in which each such
party is qualified to conduct business;
(L) a certificate of an executive officer of each
of the Borrowers, in the form of Exhibits G-1 and G-2,
respectively, dated the Effective Date;
(M) evidence satisfactory to the Agent that the
Facility 1 Settlement Account has been opened and that all
requirements for the opening of the Cash Collateral Account
have occurred;
(N) duly executed acknowledgment agreements from
each of FNMA and FHLMC relating to the validity of the
Servicing Collateral Agent's security interest in the Pledged
Servicing Portfolio;
(O) evidence of (I) the acceptance by the Process
Agent of its appointment pursuant to Section 8.7 and (II)
payment of all fees required by the Process Agent for serving
in such capacity;
(P) a copy of the letter delivered to the parties
to the contracts pledged and assigned to the Secured Parties
pursuant to the Loan Documents (together with evidence of such
delivery) notifying such parties of the security interests in
such contracts and the contract rights related thereto granted
to the Secured Parties pursuant to the Loan Documents, which
letter shall be in substantially the form of Attachments 5 and
2 to the Warehousing Security Agreement and the Servicing
Security Agreement, respectively;
(Q) evidence satisfactory to the Agent that all
reasonable fees, costs and expenses of its New York and Puerto
Rican counsel relating to the preparation, negotiation and
closing of the transaction contemplated hereby through the
Effective Date will be paid in full on such date;
(R) a Pledged Servicing Valuation Report and a
Pledged Servicing Portfolio Report;
(S) a Hedging Inventory Report dated as of a date
which is no longer than ten (10) days prior to the Effective
Date; and
(T) a letter agreement from the Warehousing
Collateral Agent pursuant to which the Warehousing Collateral
Agent agrees to serve as Collateral Agent in connection with
the REO Pledges.
(ii) All acts and conditions (including the obtaining of
any necessary regulatory approvals and the making of any required
filings, recordings or registrations) required to be done and
performed and to have happened prior to the execution, delivery and
performance of the Loan Documents and to constitute the same legal,
valid and binding obligations,
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enforceable in accordance with their respective terms, shall have been
done and performed and shall have happened in due and strict
compliance with all applicable laws or if any of such have not been
done, performed or happened, such has been expressly disclosed to the
Agent and waived by all of the Lenders in writing.
(iii) All documentation, including documentation for
corporate and legal proceedings in connection with the transactions
contemplated by the Loan Documents, shall be reasonably satisfactory
in form and substance to the Agent and its counsel.
(iv) The Borrowers shall have paid all Fees required to
have been paid under the Loan Documents prior to or on the Effective
Date.
(b) As conditions precedent to each Credit Event, at and as of the
date of such Credit Event, including the Amendment Effective Date:
(i) The representations and warranties of the Borrowers
contained in the Loan Documents shall be accurate and complete in all
material respects on and as of the date of such Credit Event as if
made on and as of such date.
(ii) No Potential Default or Event of Default shall have
occurred and be continuing.
(iii) Following the funding of the requested Loan or the
creation of any Acceptance, the aggregate principal amount of Loans
plus the aggregate face amount of Acceptances outstanding hereunder
shall not exceed the limitations set forth in Sections 2.1 and 2.8.
(iv) Since December 31, 1995, no material adverse change
shall have occurred in the business, financial condition or results of
operations of the FFCC and its Subsidiaries, taken as a whole.
(v) The Agent shall have received such other documents or
legal opinions as the Agent or any Lender or special counsel to the
Agent may reasonably request, all in form and substance reasonably
satisfactory to the Agent.
By delivering a Notice of Borrowing or Request for Acceptance to the Agent
hereunder for any Credit Event, as applicable, the Borrowers shall be deemed to
have represented and warranted the accuracy and completeness of the statements
set forth in subsections (i) through (iv) above as of the date of such Credit
Event.
(c) As conditions precedent to each Facility 2 Tranche B Borrowing
(in addition to those set forth in Sections 3.1(a) and (b) above):
(i) Each Borrower shall have delivered or shall have had
delivered to the Agent, in form and substance and in quantities
reasonably satisfactory to the Agent and its counsel, each of the
following:
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(A) all information reasonably requested by the
Agent contained in the files of the Borrowers relating to the
Eligible REO Property to be included in the Facility 2 Tranche
B Borrowing Base;
(B) duly executed REO Demand Note(s);
(C) duly executed REO Mortgages with respect to
all Eligible REO Property to be included in the Facility 2
Tranche B Borrowing Base;
(D) duly executed REO Pledge(s) of the REO Demand
Note(s) to the Agent and the Facility 2 Lenders; and
(E) documentation required under 3.1(a)(i)(F)-(L)
above, as applicable to the related Real Estate Closing, and
as is reasonable and customary, and such other documentation
as is also reasonable and customary, in connection with
commercial real estate closings in Puerto Rico as determined
by the Agent's counsel.
(ii) Simultaneously with such Facility 2 Tranche B
Borrowing or as is otherwise customary in commercial real estate
closings in Puerto Rico, the REO Mortgages shall be filed for
recording with the applicable registries.
(iii) The Borrowers shall have paid all taxes, including
mortgage recording and documentary stamp taxes, recording fees and
charges and all other fees and charges of whatever kind in connection
with the applicable Real Estate Closing, including costs and expenses
of the Agent's outside counsel, and evidence thereof shall have been
delivered to the Agent.
(d) As conditions precedent to each creation of a Facility 1
Acceptance (in addition to those set forth in Sections 3.1(a) and (b) above):
(i) the Borrowers and the Acceptance Agent shall have entered into the Funding
Agreement, and (ii) any necessary or desirable modifications or amendments
shall have been made to the Loan Documents (which modifications or amendments
relate to the Funding Agreement and/or the creation of Facility 1 Acceptances),
as determined by the Agent in its sole discretion.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
As an inducement to the Agent and each Lender to enter into
this Agreement and to make Loans and to be an Acceptance Participant as
provided herein, each of the Borrowers represents and warrants to the Agent and
each Lender that:
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SECTION 4.1 CORPORATE EXISTENCE; COMPLIANCE WITH LAW AND
CONTRACTUAL OBLIGATIONS.
Each Borrower (a) is duly organized, validly existing and in
good standing as a corporation under the laws of the Commonwealth of Puerto
Rico and in each jurisdiction where its ownership of property or conduct of
business requires such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect; (b) has the corporate power
and authority and the legal right to own and operate its property and to
conduct business in the manner in which it does and proposes so to do; and (c)
is not in violation of any Requirement of Law or any Contractual Obligation if
such violation could have a Material Adverse Effect.
SECTION 4.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS.
Each Borrower has the corporate power and authority to
execute, deliver and perform the Loan Documents to which it is a party and has
taken all necessary corporate action to authorize the execution, delivery and
performance of such Loan Documents. Such Loan Documents have been duly
executed and delivered on behalf of such Borrower and constitute legal, valid
and binding obligations of such Borrower enforceable against it in accordance
with their respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency and other similar laws affecting creditors
rights generally and by general principles of equity.
SECTION 4.3 NO LEGAL OR CONTRACTUAL BAR.
The execution, delivery and performance of the Loan Documents,
including the creation and perfection of the security interests contemplated
hereunder and thereunder, the borrowings of Loans hereunder and the use of the
proceeds thereof, do not and will not (a) violate any Requirement of Law or any
Contractual Obligation of either Borrower or any of its Subsidiaries, (b)
except as contemplated by this Agreement and the Security Agreements, require
any license, consent, authorization, approval or any other action by, or any
notice to or filing or registration with, any Governmental Authority or any
other Person or (c) result in the creation or imposition of any Lien on any
asset of either Borrower or any of its Subsidiaries except as contemplated by
the Loan Documents. Without limiting the scope of the preceding
representation, no Take-Out Commitments assigned to the Secured Parties
prohibit assignment thereof to the Secured Parties. The parties acknowledge
that as of the date hereof, GNMA's policies do not include the execution and
delivery of an Acknowledgment Agreement by GNMA and no representation in any
Loan Document as of the date hereof will be deemed to include a representation
that the Borrowers may assign any rights under the GNMA Servicing Portfolio in
contravention of GNMA's policies. Nothing contained in the preceding sentence
shall affect the Borrowers covenant contained in Section 5.1(g).
SECTION 4.4 FINANCIAL INFORMATION.
(a) The consolidated and consolidating balance sheet of FFCC and
its consolidated Subsidiaries as at December 31, 1995 and the related
consolidated and consolidating statements of income, retained earnings and cash
flows for the fiscal year then ended, including in each case the related
schedules and notes, reported on by Price Waterhouse, true copies of which have
been previously delivered to each of the Lenders, are complete and correct and
fairly present the
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consolidated and consolidating financial condition of FFCC and its consolidated
Subsidiaries as at the date thereof and the consolidated and consolidating
results of operations and cash flows for such period, in accordance with GAAP
applied on a consistent basis.
(b) The unaudited consolidated and consolidating balance sheet of
each Borrower and its consolidated Subsidiaries as at June 30, 1996, and the
related unaudited combined statements of income, retained earnings and cash
flows for the six months then ended, certified by the chief financial officer
of FFCC, true copies of which have been previously delivered to each of the
Lenders, are complete and correct and fairly present the consolidated and
consolidating financial condition of FFCC and its consolidated Subsidiaries as
at the date thereof and the consolidated and consolidating results of
operations and cash flows for such period in conformity with GAAP applied on a
basis consistent with the financial statements referred to in subsection (a) of
this Section 4.4, subject to normal year-end audit adjustments.
(c) Except for Indebtedness created by the issuance of the Senior
Notes, neither Borrower has any material liability of any kind, whether
accrued, contingent, absolute, determined, determinable or otherwise, and no
condition, situation or set of circumstances exists that could be reasonably
expected to result in such a liability, in each case that is not reflected in
the financial statements referred to in Section 4.4(b) or in the most recent
financial statements delivered to the Agent and the Lenders pursuant to Section
5.1(a)(i) or (ii) (other than liabilities permitted hereunder and incurred
after the date of such most recent financial statements and to be reflected in
the next financial statements to be delivered to the Agent and the Lenders
pursuant to Section 5.1 (a)(i) or (ii)).
(d) Since December 31, 1995, no material adverse change has
occurred in the business, financial condition or results of operations of FFCC
and its Subsidiaries, taken as a whole.
SECTION 4.5 NO MATERIAL LITIGATION.
Except as set forth on Exhibit O, no litigation, investigation
or proceeding of or before any arbitrator or Governmental Authority is pending
or, to the knowledge of either Borrower, threatened by or against such Borrower
or any of its Subsidiaries, or against any of such Borrower's or any such
Subsidiary's properties or revenues that, if adversely determined, could alone,
or with any other litigation, investigation or proceeding, affect the business,
financial condition or results of operations of such Borrower and its
Subsidiaries, taken as a whole, in excess of a Material Amount or could have a
Material Adverse Effect.
SECTION 4.6 TAXES.
Each Borrower and each of its Subsidiaries have filed or
caused to be filed all tax returns that are required to be filed and have paid
all taxes shown to be due and payable on such returns or on any assessments
made against them or any of their property other than taxes and assessments
that are being contested in good faith by appropriate proceedings and as to
which such Borrower or such Subsidiary has established adequate reserves in
conformance with GAAP.
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SECTION 4.7 INVESTMENT COMPANY ACT.
Neither Borrower is an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
SECTION 4.8 SUBSIDIARIES.
FFCC has no Subsidiaries as of the Amendment Effective Date
other than DMC, Doral Federal Savings Bank, Centro Hipotecario de Puerto Rico,
Inc., RSC Corp., First Florida Realty Corporation and AAA Financial Services
Corporation. FFCC owns, directly or through another Subsidiary, one hundred
percent (100%) of the stock of each such Subsidiary, and all of the stock of
each such Subsidiary has been duly issued and is fully paid and nonassessable.
SECTION 4.9 USE OF PROCEEDS.
The proceeds of all Facility 1 Loans and Swing-Line Loans
shall be used by the Borrowers solely for the purpose of originating, acquiring
or financing Eligible Conforming Mortgage Loans, Eligible Non-Conforming
Mortgage Loans and/or Eligible Mortgage-Backed Securities. The proceeds of all
Facility 2 Tranche A Loans shall be used by the Borrowers solely to make
advances (or to refinance advances previously made by either Borrower)
resulting in the creation of Eligible Servicing Receivables. The proceeds of
all Facility 2 Tranche B Loans shall be used by the Borrowers solely to provide
financing of the Eligible REO Property. The proceeds of Facility 2 Tranche C
Loans shall be used by the Borrowers for general working capital purposes. The
proceeds of the discounting of all Facility 1 Acceptances by the Acceptance
Agent shall be used by the Borrowers solely to purchase additional servicing
portfolios and for general working capital purposes.
SECTION 4.10 ERISA.
(a) No Prohibited Transactions, Accumulated Funding Deficiencies,
withdrawals from Multi employer Plans or Reportable Events have occurred with
respect to any Plans or Multiemployer Plans that, in the aggregate, could
subject either Borrower or any of such Borrower's Subsidiaries to any material
tax, penalty or other liability where such tax, penalty or liability is not
covered in full, for the benefit of such Borrower or such Subsidiary, by
insurance; (b) no notice of intent to terminate a Plan has been filed, nor has
any Plan been terminated under Section 4041 of ERISA, nor has the PBGC
instituted proceedings to terminate, or appoint a trustee to administer, a Plan
and no event has occurred or condition exists that might constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan; (c) the present value of all benefits
liabilities (as defined in Section 4001(a)(16) of ERISA) under all Plans (based
on the actuarial assumptions used to fund the Plans) does not exceed the assets
of the Plans; and (d) the execution, delivery and performance by Borrowers of
the Loan Documents and the borrowing of the Loans hereunder and the use of the
proceeds thereof will not involve any Prohibited Transaction.
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SECTION 4.11 SECURITY INTERESTS.
Subject to the penultimate sentence of Section 4.3 regarding
the GNMA Servicing Portfolio, the security interests created in favor of the
Secured Parties under the Security Agreements constitute (a) valid and binding
security interests in the Collateral and (b) will constitute perfected security
interests in the mortgage notes evidencing the Mortgage Loans, the
Mortgage-Backed Securities, the Take-Out Commitments, the REO Notes and the REO
Property encumbered by REO Mortgages, the Eligible Servicing Receivables and
the Pledged Servicing Portfolio, and such collateral is not and will not be
subject to any other Liens except as permitted by Section 5.2(a).
SECTION 4.12 AGENCY APPROVALS.
Each Borrower is a FHLMC approved Seller/Servicer, a HUD
Direct Endorsement Lender and a VA approved Lender in good standing, and FFCC
is also a FNMA approved Seller/Servicer and a GNMA approved Issuer/Servicer.
SECTION 4.13 SOLVENCY.
Each Borrower is able to pay its debts as they mature. The
aggregate estimated fair market value of each Borrower's assets is greater than
such Borrower's liabilities (including contingent, subordinated, unmatured and
unliquidated liabilities and any and all Obligations hereunder). Each Borrower
has capital sufficient to carry on the business and transactions in which it is
engaged and all business and transactions in which it is about to engage.
ARTICLE 5
COVENANTS
SECTION 5.1 AFFIRMATIVE COVENANTS.
Each Borrower hereby covenants and agrees that, as long as any
Obligations remain unpaid or any Lender has any Commitment hereunder, the
Borrowers shall:
(a) Reports to Agent. Furnish or cause to be furnished to the
Agent (with sufficient numbers of copies for each Lender which the Agent shall
forward to each Lender within a reasonable time after receipt thereof):
(i) Annual Financial Statements. As soon as available
and in any event within ninety (90) days after the end of each fiscal
year of FFCC, a consolidated and consolidating balance sheet of FFCC
and its consolidated Subsidiaries as at the end of such year and the
related consolidated and consolidating statements of income, retained
earnings and cash flows of FFCC and its consolidated Subsidiaries for
such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and
accompanied by a report thereon of Price Waterhouse or other
independent public accountants of comparable recognized national
standing, which report shall be unqualified as to scope of audit and
shall state that such financial statements present fairly the
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consolidated and consolidating financial condition as at the end of
such fiscal year, and the consolidated and consolidating results of
operations and cash flows for such fiscal year, of FFCC and its
consolidated Subsidiaries in accordance with GAAP consistently applied
(it being understood that the form of audited consolidated and
unaudited consolidating balance sheet, and the related statements of
income, retained earnings and cash flows contained in the Bank Book
shall satisfy the requirements of this subsection);
(ii) Quarterly Financial Statements. As soon as available
and in any event within forty-five (45) days after the end of each
fiscal quarter of FFCC, a consolidated and consolidating balance sheet
of FFCC and its consolidated Subsidiaries as at the end of such fiscal
quarter and the related consolidated and consolidating statements of
income, retained earnings and cash flows of FFCC and its consolidated
Subsidiaries for such fiscal quarter, setting forth in each case in
comparative form the figures for the previous fiscal quarter, all in
reasonable detail and certified by the chief financial officer of FFCC
that they present fairly the consolidated and consolidating financial
condition as at the end of such fiscal quarter, and the consolidated
and consolidating results of operations and cash flows for such fiscal
quarter, of FFCC and its consolidated Subsidiaries in accordance with
GAAP consistently applied, subject to normal year-end adjustments (it
being understood that the form of consolidated and consolidating
balance sheet, and the related statements of income, retained earnings
and cash flows contained in the Bank Book shall satisfy the
requirements of this subsection);
(iii) Monthly Financial Statements. Upon thirty (30) days
notice from the Agent (such notice to be given no earlier than the
first day of a month to receive a statement for the previous
month), a consolidated and consolidating balance sheet of FFCC and its
consolidated Subsidiaries as at the end of the previous month and the
related consolidated and consolidating statements of income and
retained earnings of FFCC and its consolidated Subsidiaries for such
month setting forth in each case in comparative form the figures for
the previous month, all in reasonable detail and certified by the chief
financial officer of FFCC that they are complete and correct and that
they present fairly the consolidated and consolidating financial
condition as at the end of such month, and the consolidated and
consolidating results of operations for such month and such portion of
the fiscal year, of FFCC and its consolidated Subsidiaries in
accordance with GAAP consistently applied (subject to normal year-end
adjustments);
(iv) No Default/Compliance Certificate. Together with the
financial statements required pursuant to subsections (i) and (ii)
above, a certificate of the chief financial officer of FFCC (A) to the
effect that, based upon a review of the activities of FFCC and its
Subsidiaries and such financial statements during the period covered
thereby, no Event of Default or Potential Default exists, or if an
Event of Default or a Potential Default exists, specifying the nature
thereof and the Borrowers proposed response thereto, and (B)
demonstrating in reasonable detail compliance with Section 5.3 as at
the end of such fiscal year or such fiscal quarter, as applicable;
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(v) Audit Reports. Upon request by the Agent, copies of
each HUD Single Family Audit Report and FNMA and FHLMC audit reports
on each Borrower and its operations;
(vi) Notice of Default or Misrepresentation. (a) Promptly
after obtaining knowledge of the occurrence of an Event of Default or
a Potential Default, a certificate of the chief financial officer of
FFCC specifying the nature thereof and FFCC
's or DMC 's proposed response thereto
and (b) at any time that any representation, warranty or other
information contained in any statement or certificate required to be
delivered hereunder or any representation or warranty deemed to have
been made hereunder shall prove to be false or misleading in any
material way, promptly after obtaining knowledge thereof give notice
thereof to the Agent describing how such representation, warranty or
information is misleading.
(vii) Loss of Qualification. Promptly after the occurrence
thereof, notice of any Mortgage Loan or Mortgage-Backed Security
included in the Facility 1 Borrowing Base, that ceases to qualify as
an Eligible Mortgage Loan or Eligible Mortgage-Backed Security, as the
case may be;
(viii) Litigation. Promptly after the occurrence thereof,
notice of the institution of or any material adverse development in
any action, suit or proceeding or any governmental investigation or
any arbitration, before any court or arbitrator or any governmental or
administrative body, agency or official, against either Borrower or
any material property of any thereof, in each case if such action,
suit, proceeding, investigation or arbitration could result in a
liability to the Borrowers in excess of the Material Amount;
(ix) ERISA. In connection with ERISA:
(A) Promptly and in any event within ten (10)
Business Days after either Borrower knows or has reason to know of the
occurrence of a Reportable Event with respect to a Plan with regard to
which notice must be provided to the PBGC, a copy of such materials
required to be filed with the PBGC with respect to such Reportable
Event and in each such case a statement of the chief financial officer
of such Borrower setting forth details as to such Reportable Event and
the action that such Borrower proposes to take with respect thereto;
(B) Promptly and in any event within ten (10)
Business Days after either Borrower knows or has reason to know of any
condition existing with respect to a Plan that presents a material
risk of termination of such Plan, imposition of an excise tax,
requirement to provide security to such Plan or occurrence of other
liability by the applicable Borrower or any ERISA Affiliate, a
statement of the chief financial officer of the applicable Borrower
describing such condition;
(C) At least ten (10) Business Days prior to the
filing by any plan administrator of a Plan of a notice of intent to
terminate such Plan, a copy of such notice;
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(D) Promptly and in no event more than ten (10)
Business Days after the filing thereof with the Secretary of the
Treasury, a copy of any application by either Borrower or an ERISA
Affiliate for a waiver of the minimum funding standard under section
412 of the Code;
(E) Upon request by the Agent from time to time,
copies of each annual report that is filed on Internal Revenue Service
Form 5500, together with certified financial statements for any Plan
(if any) as of the end of such year and actuarial statements on
Schedule B to such Form 5500;
(F) Promptly and in any event within ten (10)
Business Days after it knows or has reason to know of any event or
condition that might constitute grounds under section 4042 of ERISA
for the termination of, or the appointment of a trustee to administer,
any Plan, a statement of the chief financial officer of the applicable
Borrower describing such event or condition;
(G) Promptly and in no event more than ten (10)
Business Days after receipt thereof by either Borrower or any ERISA
Affiliate, a copy of each notice received by such Borrower or an ERISA
Affiliate concerning the imposition of any withdrawal liability under
section 4202 of ERISA; and
(H) Promptly after receipt thereof a copy of any
notice either Borrower or any ERISA Affiliate may receive from the
PBGC or the Internal Revenue Service with respect to any Plan or
Multiemployer Plan; provided that this subparagraph (H) shall not
apply to notices of general application promulgated by the PBGC or the
Internal Revenue Service;
(x) Borrowing Base, Commitment Status and Servicing
Reports.
(A) On Monday of each week, and on such other
days as the Agent may reasonably request, a Facility 1 Borrowing Base
Certificate and a Facility 2 Tranche A Borrowing Base Certificate, in
each case prepared by the Borrowers and dated as of the Friday
preceding such Monday or as of such other day;
(B) As soon as available and in any event no
later than five (5) days after the end of each month, and on such
other days as the Agent may reasonably request, a Hedging Inventory
Report, dated as of the last day of such month or as of such other
day;
(C) As soon as available and in any event no
later than forty-five (45) days after the end of each fiscal quarter,
a Pledged Servicing Portfolio Report dated as of the last day of such
quarter;
(D) As soon as available and in any event no
later than fifteen (15) days after the end of each six-month period
commencing with the six-month period ending December 31, 1996, a
Pledged Servicing Valuation Report, dated as of the last day of each
such six-month period; provided, that the Agent shall have the right
to request additional
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Pledged Servicing Valuation Reports at such times as it deems
necessary or desirable, which reports shall be prepared at the expense
of the Lenders;
(E) On the first Business Day of each month, and
on such other days as the Agent may reasonably request, a report, in
form and substance reasonably satisfactory to the Agent, prepared by
the Borrowers, on the aging of Mortgage Loans included in the Facility
1 Borrowing Base; and
(F) On the first Business Day of each month, and
in connection with any Real Estate Closing, and on such other days as
the Agent may reasonably request, a Facility 2 Tranche B Borrowing
Base Certificate, dated as of the preceding Business Day.
(xi) Certificating Custodian. Promptly after a
replacement of any Certificating Custodian, notice thereof together
with copies of the Agency Custodial Agreements appointing a successor
Certificating Custodian; and
(xii) Other Information. Promptly, such additional
financial and other information, including financial statements of the
Borrowers or any of its Subsidiaries or any Approved Investor (other
than FNMA or FHLMC), and such information regarding the Collateral as
any Lender, through the Agent, may from time to time reasonably
request, including such information as is necessary for any Lender to
grant participations of its interests in Loans hereunder or to enable
another financial institution to become a signatory hereto.
(b) Maintenance of Existence and Properties; Compliance with Laws;
Maintenance of Agency Status. (i) Except as provided in Section 5.2(e),
preserve and maintain, and cause each of its Subsidiaries to preserve and
maintain, its corporate existence and all rights, privileges, licenses,
approvals, franchises, properties and assets material to the normal conduct of
its business; comply, and cause each of its Subsidiaries to comply, in all
material respects with all Contractual Obligations and Requirements of Law,
except when the failure to maintain the existence of any such Subsidiary or to
so comply would not have a Material Adverse Effect; and (ii) except as
permitted under Section 5.2(m), preserve and maintain at all times its status
as a FHLMC approved Seller/Servicer, a HUD Direct Endorsement Lender and a VA
approved Lender in good standing and, with respect to FFCC, its status as a
FNMA approved Seller/Servicer and as a GNMA approved Issuer/Servicer.
(c) Inspection of Property; Books and Records; Discussions. (i)
Keep, and cause each of its Subsidiaries to keep, proper books of record and
account in which full, true and correct entries in conformity with GAAP and all
Requirements of Law shall be made of all dealings and transactions in relation
to its business and activities, and, (ii) permit representatives of the Agent
and the Lenders (at no cost to such Borrower unless a Potential Default or an
Event of Default has occurred and is continuing) to visit and inspect any of
its properties and examine and make copies from any of its books and records
during normal business hours, upon reasonable advance notice and as often as
may reasonably be desired by the Agent, and to discuss the business,
operations, properties and financial and other condition of such Borrower and
its Subsidiaries with officers of such parties, and, with their independent
certified public accountants (if a representative of FFCC or DMC shall have
been given the right upon reasonable notice to be present by phone or in
person),
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and with the consent of such Borrower, which consent shall not be unreasonably
withheld, with employees of the Borrowers.
(d) Insurance. Maintain or cause to be maintained with
financially sound and reputable insurers, insurance with respect to its
properties and business, and the properties and business of its Subsidiaries,
against loss or damage of the kinds customarily insured against by reputable
companies in the same or similar businesses, such insurance to be of such types
and in such amounts (with such deductible amounts) as is customary for such
companies under similar circumstances, including errors and omissions coverage
and fidelity coverage in form and substance acceptable under Agency guidelines,
and furnish the Agent on request evidence of all such insurance.
(e) Payment of Taxes and Claims, Etc. Pay, and cause each of its
Subsidiaries to pay, (i) all taxes, assessments and governmental charges
imposed upon it or upon its property, and (ii) all genuine claims (including
claims for labour, materials, supplies or services) that might, if unpaid,
become a Lien upon its property, unless, in each case, the validity or amount
thereof is being contested in good faith by appropriate proceedings and such
Borrower or such Subsidiary has maintained adequate reserves in accordance with
GAAP with respect thereto or has posted a bond in respect thereof satisfactory
to the Required Lenders.
(f) GNMA Acknowledgment Agreement. Obtain, execute and deliver an
Acknowledgment Agreement from GNMA relating to the acknowledgment of the
Servicing Collateral Agent's security interest in the GNMA Servicing Portfolio,
if and when requested by the Administrative Agent in its sole discretion.
(g) [Reserved]
(h) Further Documents. Execute and deliver or to cause to be
executed and delivered to the Agent or the Collateral Agents on behalf of the
Lenders from time to time such confirmatory or supplementary security
agreements, financing statements, reaffirmations and consents and such other
documents, instruments or agreements as the Agent may reasonably request, that
are in the Agent's reasonable judgment necessary or desirable to obtain for the
Agent on behalf of the Lenders the benefit of the Loan Documents and the
Collateral.
(i) Recording. Cause each Power of Attorney to be "protocolized"
under the laws of Puerto Rico and filed in the Registry of Powers of Attorneys
and Wills, and file each Statement of Accounts Receivable in the applicable
registry, and pay any and all fees and charges in connection therewith.
(j) Recourse/Purchase Obligations. If (i) FFCC sells
Mortgage-Backed Securities or Mortgage Loans and the terms of such sale
obligate FFCC to repurchase (whether conditionally or unconditionally) such
Mortgage-Backed Securities or Mortgage Loans or if FFCC has retained recourse
obligations with respect thereto and (ii) the then aggregate amount of all such
repurchase and recourse obligations of FFCC (in connection with the
contemplated transaction and all previous transactions) exceeds $250,000,000,
then FFCC shall give notice thereof to the Agent within five (5) Business Days
of such sale. If FFCC shall have assumed recourse obligations with respect to
Mortgage-Backed Securities or Mortgage Loans included in its Servicing
Portfolio and the aggregate
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amount of such recourse obligations of FFCC with respect to Mortgage-Backed
Securities or Mortgage Loans included in its Servicing Portfolio exceeds
$250,000,000, then FFCC shall give notice thereof to the Agent within five (5)
Business Days after such assumption. Notwithstanding the foregoing, FFCC shall
obtain the prior written consent of the Agent acting at the direction of the
Required Lenders before entering into any of the transactions described in the
preceding two sentences if, in the reasonable judgment of the management of
FFCC, such transaction (or the aggregate of such transaction with all previous
transactions for which obligations still exist) could result in a decrease in
FFCC's Book Net Worth by a Material Amount.
SECTION 5.2 NEGATIVE COVENANTS OF EACH BORROWER.
Each Borrower hereby covenants and agrees that, as long as any
Obligations remain unpaid or any Lender has any Commitment hereunder, such
Borrower shall not, directly or indirectly:
(a) Liens. Create, incur, assume or suffer to exist, or permit
any Subsidiary to create, incur, assume or suffer to exist, any Lien upon the
Collateral or the Servicing Portfolio now owned or hereafter acquired, except
in favor of the Secured Parties under the Security Agreements, other than:
(i) Liens or charges for current taxes, assessments or
other governmental charges that are not delinquent or which remain
payable without penalty;
(ii) Liens, deposits or pledges made to secure statutory
obligations, surety or appeal bonds, or bonds for the release of
attachments or for stay of execution, or to secure the performance of
bids and tenders or for purposes of like general nature in the
ordinary course of business of such Borrower or such Subsidiary;
(iii) if (x) the Facility 2 Commitments have been
terminated by the Borrowers, (y) all Facility 2 Loans and related
Obligations have been repaid or paid, respectively, by the Borrowers,
and (z) no Potential Default or Event of Default has occurred and is
continuing, (A) during the thirty (30) (or if applicable, sixty (60)
day) period described in the second proviso to Section 2.7(b), Liens
on the Servicing Portfolio other than a portion of the Servicing
Portfolio comprised of Mortgage Loans having an aggregate outstanding
principal balance of not less than $500,000,000, and (B) thereafter,
if the Borrowers and the Lenders have agreed upon the terms and
conditions upon which this Agreement and the Facility 1 Commitments
shall remain in effect (as contemplated in Section 2.7(b)), Liens on
that portion of the Servicing Portfolio not pledged to the Secured
Parties;
(iv) the interests of FNMA and FHLMC with respect to the
servicing rights relating to the underlying Mortgage Loans in the
Pledged Servicing Portfolio as set forth in acknowledgment agreements
with such Agencies and the interests of GNMA as set forth in the GNMA
Guide; and
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(v) involuntary Liens relating to liabilities not in
excess of $100,000 in the aggregate for each Borrower; provided that
such Borrower or such Subsidiary is making a diligent effort to remove
such Liens as soon as practicable.
(b) Change of Business. Except as permitted under Section 5.2(e),
engage in any type of business that is unrelated to the mortgage banking and
lending business and the servicing of mortgage loans or permit any of FFCC s
Subsidiaries to engage in any type of business other than financial services
(including, without limitation, any activity permitted for bank savings
associations or savings and loan or bank holding companies);
(c) Acquisitions. Except as permitted under Section 5.2(e),
purchase or acquire, or permit any of its Subsidiaries to purchase or acquire,
or incur liability for the purchase or acquisition of, or permit any of its
Subsidiaries or to incur liability for the purchase or acquisition of, any or
all of the assets or business of any Person (whether such purchase or
acquisition shall be by means of merger, stock purchase, asset purchase or
otherwise) other than (i) purchases and acquisitions in the ordinary course of
business as currently conducted and (ii) other purchases and acquisitions
relating to the mortgage banking and lending business and the servicing of
mortgage loans or other financial services (including, without limitation, any
activity permitted for bank savings associations or savings and loan or bank
holding companies).
(d) Transactions with Affiliates. Enter into, or permit any of
its Subsidiaries directly or indirectly to enter into, any transaction
(including the purchase, sale, lease or exchange of any property, the making or
borrowing of any loan or the rendering of any service) with any Affiliate on
terms that are less favorable to such Borrower or such Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates other
than the existing Master Production Agreement and the Master Purchase,
Servicing and Collection Agreement dated as of September 15, 1993 with Doral
Federal Savings as in effect on such date.
(e) Consolidation, Merger, Sale of Assets, Etc. (i) Enter into
any merger, consolidation or amalgamation, including any such transaction with
a regulated banking entity, or (ii) liquidate, wind-up or dissolve itself (or
suffer or permit any of the foregoing to occur) or (iii) sell, lease, assign,
transfer or otherwise dispose of, or permit any of its Subsidiaries to sell,
lease, assign, transfer or otherwise dispose of, more than twenty-five percent
(25%) of its assets based on the book value of all such assets as set forth in
the last audited financial statement of such Borrower whether now owned or
hereafter acquired, except that the following shall be permitted so long as no
Potential Default or an Event of Default has occurred and is continuing or
would result therefrom:
(A) the Borrowers may merge or consolidate with
another Person where FFCC is the surviving entity;
(B) the Borrowers may sell assets in the ordinary
course of business at fair market value (it being expressly agreed and
understood that the sale or other disposition of Mortgage-Backed
Securities and of Mortgage Loans with or without servicing released is
in the ordinary course of business and that the Borrowers may sell all
or a portion of its servicing rights to the extent and in the manner
permitted by Sections 5.2(d) and (h) hereof and by the Servicing
Security Agreement. Notwithstanding the foregoing, DMC may be
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merged into, become consolidated with or become a Subsidiary of any
Person that is a regulated banking entity so long as (x) FFCC (I)
becomes the sole borrower under the Loan Documents and affirms the
same pursuant to documentation reasonably satisfactory to Lenders and
Agent and (II) satisfies all the representations, warranties and
covenants hereunder, including the financial covenants, without DMC
being included in its consolidated and consolidating financial
statements; (y) no Potential Default or Event of Default exists at the
time of such event and after giving effect thereto; and (z) such event
does not have a Material Adverse Effect; provided that clause (x)
above shall not apply to any transaction permitted by Section 5.2 (e)
(D);
(C) the Borrowers may sell all of the outstanding
stock or assets of Centro Hipotecario de Puerto Rico, Inc.; and
(D) FFCC may become a bank holding company
through the conversion of Doral Federal Savings Bank into a commercial
bank.
(f) VA Guaranties and FHA Insurance. Commit any act that would
invalidate any VA guarantee or FHA insurance relating to any Mortgage Loan
pledged to the Secured Parties as Collateral under the Warehousing Security
Agreement if, after giving effect to such action, the then aggregate
outstanding principal amount of the Facility 1 Loans and Swing-Line Loans and
Facility 1 Acceptance Obligations would be less than the Collateral Value of
the Facility 1 Borrowing Base.
(g) ERISA. Take, or permit any of its Subsidiaries to take, any
of the following actions:
(i) Terminate or withdraw from any Plan so as to result
in any material liability to the PBGC;
(ii) Engage in or permit any Person to engage in any
Prohibited Transaction involving any Plan that would subject such
Borrower or any of its Subsidiaries to any material tax, penalty or
other liability;
(iii) Incur or suffer to exist any material Accumulated
Funding Deficiency, whether or not waived, involving any Plan;
(iv) Allow or suffer to exist any event or condition that
presents a risk of incurring a material liability to the PBGC;
(v) Amend any Plan so as to require the posting of
security under section 401(a)(29) of the Code; or
(vi) Fail to make payments required under section 412(m)
of the Code and section 302(e) of ERISA that would subject such
Borrower or any of its Subsidiaries to any material tax, penalty or
other liability.
(h) Transfer to Affiliates. Subject to the proviso in subsection
(e) above, sell, assign or otherwise transfer any of its assets to any
Affiliate of a Borrower without the prior written consent
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of the Required Lenders, or permit any of its Subsidiaries to sell, assign or
otherwise transfer any of their respective assets, to any Affiliate of a
Borrower without the prior written consent of the Required Lenders other than
inter- company dividends to Borrowers or Borrowers Subsidiaries; provided that
(I) any Subsidiary of a Borrower may, subject to subsection (e) above, sell,
assign or otherwise transfer any of their respective assets to such Borrower,
(II) DMC may, subject to subsection (e) above, sell, assign or otherwise
transfer its assets to FFCC and (III) FFCC may make capital investments in its
Subsidiaries.
(i) Subsidiaries. Form or cause to be formed after the date
hereof any Subsidiaries of the Borrowers without prior notice to the Agent.
(j) Margin Regulations. Use any or all of the proceeds of any
Loan or any Acceptance (i) to purchase or carry Margin Stock or extend credit
to others for the purpose of purchasing or carrying Margin Stock or (ii) in any
manner that will violate or be inconsistent with the provisions of Regulation
G, T, U or X of the Board.
(k) Funding Agreement. At any time after the execution and
delivery of the Funding Agreement by the parties thereto, fail to comply with
any or all of its obligations under the Funding Agreement or amend, modify,
supplement, terminate or assign the Funding Agreement.
(l) Hedging Policy. Fail to comply in all material respects with
the Hedging Policy or change the Hedging Policy in any material way, or
terminate the Hedging Policy without prior notice to the Agent.
(m) Agency Approvals. Fail to maintain the Agency approvals
described in Section 4.12 as a result of a change in business plan of the
Borrower without the prior consent of the Agent and Lenders thereto, which
consent shall not be unreasonably withheld as long as no Material Adverse
Effect would result therefrom.
(n) Custody Account. Take any action that would cause the
custodial account maintained with the Warehousing Collateral Agent into which
Book-Entry MBS's relating to Mortgage Loans included in the Facility 1
Borrowing Base shall be issued to cease to be in effect.
(o) Negative Pledges. Unless (i) the Facility 2 Commitments have
been terminated by the Borrowers, (ii) all Facility 2 Loans and related
Obligations have been repaid or paid, respectively, by the Borrowers, (iii) no
Potential Default or Event of Default has occurred and is continuing, and (iv)
the Borrowers and the Lenders have agreed upon the terms and conditions upon
which this Agreement and the Facility 1 Commitments shall remain in effect (as
contemplated in Section 2.7(b)), agree with any Person or Persons (other than
with the Lenders pursuant to this Agreement) not to create, incur, assume or
suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to
exist, any Lien upon the Servicing Portfolio or any rights relating thereto,
including, without limitation, any rights to receive payments in connection
with the Servicing Portfolio (including, without limitation, any reimbursement
of principal and interest advances, taxes and insurance advances and any other
servicing advances).
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SECTION 5.3 ADDITIONAL NEGATIVE COVENANTS.
Each Borrower hereby covenants and agrees that, as long as any
Obligations remain unpaid or any Lender has any Commitment hereunder, such
Borrower shall not at any time, directly or indirectly:
(a) Total Liabilities. Permit FFCC on a consolidated basis
(excluding any Subsidiaries that are not primarily engaged primarily in the
business of mortgage banking as reasonably determined by the Agent) to incur
Total Liabilities in excess of the sum of (i) one-hundred percent (100%) of
"Cash" or "cash equivalents"; (ii) ninety-five percent (95%) of the sum of (A)
"Mortgage Loans held for sale" and (B) "Mortgage-backed securities held for
trading"; (iii) ninety percent (90%) of "Accrued interest receivable"; (iv)
eighty percent (80%) of the sum of (A) Mortgage-backed securities held to
maturity", and (B) "Accounts receivable and mortgage servicing advances"; (v)
eighty percent (80%) of "prepaid and other assets" (excluding investment in
Subsidiaries); (vi) fifty percent (50%) of the sum of (A) "Property, leasehold
improvements and equipment" and (B) "Real estate held for sale"; and (vii)
0.95% of the principal amount of Mortgage Loans owned by Persons not affiliated
with FFCC or DMC or any of their Affiliates (unless covered by a Permitted
Affiliate Servicing Agreement) for which FFCC or DMC owns the direct servicing
rights. All quoted terms used in the preceding sentence shall have the same
meanings, and shall continue to be calculated and classified in the same
manner, as the terms used in the balance sheet of FFCC and its consolidated
Subsidiaries referred to in Section 4.4(a).
(b) Adjusted Tangible Net Worth. Permit Adjusted Tangible Net
Worth at any time to be less than the greater of (such greater number, the
"Minimum ATNW") (i) Prior Year Minimum ATNW and (ii) eighty-five percent (85%)
of Adjusted Tangible Net Worth as of the end of the immediately preceding
fiscal year. As used herein "Prior Year Minimum ATNW" shall mean Minimum ATNW
as of the end of the penultimate preceding fiscal year. For example, for
fiscal year 1996, Prior Year Minimum ATNW is determined as of the end of fiscal
year 1994. The parties acknowledge that Minimum ATNW determined as of the end
of fiscal year 1994 is $87,700,000 and that 85% of Adjusted Tangible Net Worth
as of the end of fiscal year 1995 is $97,680,619. Accordingly, Minimum ATNW at
any time during fiscal year 1996 is $97,680,619.
(c) Book Net Worth. Permit Book Net Worth at any time to be less
than the greater of (such greater number, the "Minimum BNW") (i) Prior Year
Minimum BNW and (ii) eighty-five percent (85%) of the Book Net Worth as of the
end of the immediately preceding fiscal year. As used herein "Prior Year
Minimum BNW" shall mean Minimum BNW as of the end of the penultimate preceding
fiscal year. For example, for fiscal year 1996, Prior Year Minimum BNW is
determined as of the end of fiscal year 1994. The parties acknowledge that
Minimum BNW determined as of the end of fiscal year 1994 is $84,100,000 and
that 85% of Book Net Worth as of the end of fiscal year 1995 is $95,711,904.
Accordingly, Minimum BNW at any time during fiscal year 1996 is $95,711,904.
(d) [Reserved]
(e) Servicing Portfolio. Permit FFCC on a consolidated basis
(excluding any Subsidiaries that are not primarily engaged in the business of
mortgage banking as reasonably
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determined by the Agent) to maintain a Servicing Portfolio of mortgage loans
with an aggregate outstanding principal balance of less than $1,800,000,000 or
such lesser amount as shall be agreed by the Lenders in their sole discretion.
(f) Pledged Servicing Portfolio. Permit (i) FFCC and DMC to
maintain mortgage loans in that portion of the Pledged Servicing Portfolio
consisting of the FNMA/FHLMC Servicing Portfolio and the GNMA Servicing
Portfolio to have an aggregate outstanding principal balance of less than
$1,000,000,000, or (ii) the Collateral Value of the Pledged Servicing Portfolio
to be less than $10,000,000.
ARTICLE 6
EVENTS OF DEFAULT
SECTION 6.1 EVENTS OF DEFAULT.
If one or more of the following events (each an "Event of
Default") shall have occurred and be continuing:
(a) Payments. (i) The Borrowers shall fail to pay when due
(whether at scheduled maturity, upon mandatory repayment or otherwise) any
principal of any Note or any Acceptance Obligation including any interest or
fee due with respect to any Acceptance Obligation; or (ii) the Borrowers shall
fail to pay within three (3) Business Days after the due date thereof any
interest on any Note or any other Obligation, or otherwise;
(b) Covenants Without Notice. The Borrowers shall fail to observe
or perform any covenant or agreement contained in Sections 5.1(b)(i), 5.1(f),
5.2 and 5.3 or if a default beyond applicable grace and cure periods shall
occur under the Funding Agreements; provided that any violation of Section
5.2(a) that is attributable to the existence of an involuntary Lien on the
Collateral (other than an involuntary Lien expressly permitted by Section
5.2(a)) shall not constitute an Event of Default until thirty (30) days after
the imposition thereof if at all times during such thirty (30) day period the
Borrowers are making a diligent effort by appropriate means to remove such
Lien);
(c) Covenants With Seven Business Day Grace Period. The Borrowers
shall fail to observe or perform any covenant or agreement contained in
Sections 5.1(a), 5.1(b)(ii) and 5.1(c)(ii), and such failure shall remain
unremedied for seven (7) Business Days after oral notice thereof to an
Authorized Officer (which shall be confirmed in writing (which may be by
facsimile) before the end of such seven (7) Business Day period);
(d) Covenants With Thirty Day Grace Period. The Borrowers shall
fail to observe or perform any covenant or agreement contained in any Loan
Document, other than those referred to in Sections 6.1(a), (b) or (c), and, if
capable of being remedied, such failure shall remain unremedied for thirty (30)
days after the earlier of (i) either Borrower's obtaining knowledge thereof or
(ii) notice thereof shall have been given to an Authorized Officer by any
Lender or the Agent before the end
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of such thirty (30) day period); provided that if such failure is capable of
being remedied but only in a period of more than thirty (30) days, then such
failure shall not constitute an Event of Default until sixty (60) days after
the earlier of the above dates if each Borrower is making a diligent effort by
appropriate means to observe or perform such covenant and there is otherwise no
Material Adverse Effect as a result of such delay;
(e) Representations. Any representation, warranty or statement
made or deemed to be made by either Borrower or any of their respective
officers under or in connection with any Loan Document shall have been
inaccurate, incomplete or incorrect in any respect when made or deemed to be
made and such inaccuracy, incompleteness or incorrectness could have a Material
Adverse Effect;
(f) Non-Payment of Other Indebtedness. Either Borrower shall fail
to make any payment of principal of or interest on any of its Indebtedness
(other than the Obligations) exceeding the Material Amount in the aggregate
when due (whether at stated maturity, by acceleration, on demand or otherwise)
after giving effect to any applicable grace period;
(g) Defaults Under Other Agreements. Either Borrower shall fail
to observe or perform any covenant or agreement contained in any agreement or
instrument relating to any of its Indebtedness (other than the Obligations) in
excess of the Material Amount in the aggregate within any applicable grace
period, or any other event shall occur if the effect of such failure or other
event is to accelerate, or to permit the holder of such Indebtedness or any
other Person to accelerate, the maturity of such Indebtedness; or any such
Indebtedness shall be required to be prepaid (other than by a regularly
scheduled required prepayment) in whole or in part prior to its stated
maturity;
(h) Bankruptcy. Either Borrower shall commence a voluntary case
concerning itself under Title 11 of the United States Code entitled
"Bankruptcy" as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); or any involuntary case is commenced against either
Borrower and the petition is not dismissed within sixty (60) days after
commencement of the case; or a custodian (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or any substantial part of the property
of either Borrower; or either Borrower commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors,
dissolution, insolvency or liquidation or similar law or there is commenced
against either Borrower any such proceeding that remains undismissed for a
period of sixty (60) days; or either Borrower is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or either Borrower shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts generally as
they become due; or either Borrower shall call a meeting of its creditors with
a view to arranging a composition or adjustment of its debts; or either
Borrower shall by any act or failure to act indicate its consent to, approval
of or acquiescence in any of the foregoing; or any corporate action is taken by
either Borrower for the purpose of effecting any of the foregoing;
(i) Money Judgment. A judgment or order for the payment of money
in excess of the Material Amount shall be rendered against either Borrower and
such judgment or order shall continue unsatisfied (in the case of a money
judgment) and in effect for a period of thirty (30) days
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during which execution shall not be effectively stayed or deferred (whether by
action of a court, by agreement or otherwise);
(j) ERISA. (i) Any Reportable Event or a Prohibited Transaction
shall occur with respect to any Plan; (ii) a notice of intent to terminate a
Plan under section 4041 of ERISA shall be filed; (iii) a notice shall be
received by the plan administrator of a Plan that the PBGC has instituted
proceedings to terminate a Plan or appoint a trustee to administer a Plan; (iv)
any other event or condition shall exist that might, in the opinion of the
Required Lenders, constitute grounds under section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan; (v)
the Borrowers or any ERISA Affiliate shall withdraw from a Multiemployer Plan
under circumstances that the Required Lenders determine could have a material
adverse effect on the financial condition of either Borrower; and in case of
the occurrence of any event or condition described in clauses (i) through (v)
above, such event or condition together with all other such events or
conditions, if any, could subject either Borrower to any tax, penalty or other
liabilities in the aggregate material in relation to the business, operations,
property or financial or other condition of either Borrower;
(k) Loan Documents. Any of the Loan Documents shall cease for any
reason to be in full force and effect, a breach by the Borrowers under any of
the Acknowledgement Agreements shall occur, or any action shall be taken by any
Person to terminate, revoke or discontinue, or to assert the invalidity or
unenforceability of, any of the Loan Documents; or
(l) Security Interests. The Secured Parties shall cease for any
reason (other than pursuant to the terms of the respective Security Agreements)
to have valid, security interests in the Collateral (with such priority as set
forth in the Loan Documents) or perfected security interests in the collateral
specifically described in Section 4.11(b), or any Person shall take any action
to discontinue or to assert the invalidity or unenforceability of such security
interests;
THEN, the Agent shall notify the Lenders of such Event of Default and may, and
upon the written request of the Required Lenders, shall, by written notice to
the Borrower, take any or all of the following actions: (A) declare the
Commitments terminated, whereupon the Commitment of each Lender shall terminate
immediately without any other notice of any kind; and (B) declare the principal
of and any accrued interest on the Loans, and all other Obligations (including
the Acceptance Obligations, to be, whereupon the same shall become, forthwith
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrowers; provided that, if an
Event of Default specified in Section 6.1(h) shall occur, the Commitments shall
terminate and all Obligations shall become immediately due and payable
automatically without the giving of any such notice and without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrowers.
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ARTICLE 7
THE AGENT
SECTION 7.1 APPOINTMENT OF AGENT.
Each Lender hereby designates Bankers Trust Company as Agent
to act as herein specified. Each Lender hereby irrevocably authorizes, and
each holder of any Note by the acceptance of a Note shall be deemed irrevocably
to authorize, the Agent to take such action on its behalf under the provisions
of this Agreement and the other Loan Documents and any other instruments and
agreements referred to herein or therein and to exercise such powers and to
perform such duties hereunder or thereunder as are specifically delegated to or
required of the Agent by the terms hereof and thereof and such other powers as
are reasonably incidental thereto. The Agent may perform any of its duties
hereunder or thereunder by or through its agents or employees.
SECTION 7.2 NATURE OF DUTIES OF AGENT.
The Agent shall have no duties or responsibilities except
those expressly set forth in this Agreement and the other Loan Documents.
Neither the Agent nor any of its officers, directors, employees or agents shall
be liable for any action taken or omitted hereunder or thereunder or in
connection herewith or therewith, unless caused by its or their gross
negligence or willful misconduct. The duties of the Agent shall be mechanical
and administrative in nature; the Agent shall not have by reason of this
Agreement or any other Loan Document a fiduciary relationship in respect of any
Lender; and nothing in this Agreement or any other Loan Document, express or
implied, is intended to or shall be so construed as to impose upon the Agent
any obligations in respect of this Agreement or any other Loan Document except
as expressly set forth herein or therein.
SECTION 7.3 LACK OF RELIANCE ON AGENT.
(a) Independently and without reliance upon the Agent, each
Lender, to the extent it deems appropriate, has made and shall continue to make
(i) its own independent investigation of the financial condition and affairs of
each Borrower and its Affiliates in connection with the taking or not taking of
any action in connection herewith and (ii) its own appraisal of the
creditworthiness of each Borrower and its Affiliates, and, except as expressly
provided in this Agreement, the Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Lender with any
credit or other information with respect thereto, whether coming into its
possession before the making of the Loans or at any time or times thereafter.
(b) The Agent shall not be responsible to any Lender for any
recitals, statements, information, representations or warranties herein or in
any document, certificate or other writing delivered in connection with this
Agreement or any other Loan Document or for the execution, effectiveness,
genuineness, validity, enforceability, collectibility, priority or sufficiency
of this Agreement or any other Loan Document or for the sufficiency of the
Collateral or the validity, perfection or priority of any security interest in
the Collateral or the financial condition of each Borrower or its Affiliates or
be required to make any inquiry concerning either the performance or observance
of any of the terms, provisions or conditions of this Agreement or any other
Loan
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Document, or the financial condition of each Borrower or its Affiliates, or the
existence or possible existence of any Potential Default or Event of Default.
SECTION 7.4 CERTAIN RIGHTS OF AGENT.
If the Agent shall request instructions from the Required
Lenders, the Required Facility 1 Lenders or the Required Facility 2 Lenders
with respect to any act or action (including the failure to act) in connection
with this Agreement or any other Loan Document, the Agent shall be entitled to
refrain from such act or taking such action unless and until the Agent shall
have received instructions from the Required Lenders, the Required Facility 1
Lenders or the Required Facility 2 Lenders, as the case may be; and the Agent
shall not incur liability to any Lender by reason of so refraining. Without
limiting the foregoing, no Lender shall have any right of action whatsoever
against the Agent as a result of the Agent acting or refraining from acting
hereunder or under any other Loan Document in accordance with the instructions
of the Required Lenders, the Required Facility 1 Lenders or the Required
Facility 2 Lenders, as the context may require. The provisions of this Section
7.4 are not intended to supersede the provisions of Section 8.2 that require
all of the Lenders to approve certain actions under the Loan Documents.
SECTION 7.5 RELIANCE BY AGENT.
The Agent shall be entitled to rely, and shall be fully
protected in relying, upon any notice, believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person. The Agent may
consult with legal counsel (including with the consent of FFCC, which consent
shall not be unreasonably withheld, counsel for FFCC or DMC), independent
public accountants (including those retained by FFCC or DMC if a representative
of FFCC or DMC, as applicable, shall have been given the right upon reasonable
notice to be present by phone or in person during such consultation) and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken by it in good faith in accordance with the advice of such counsel,
accountants or experts.
SECTION 7.6 INDEMNIFICATION OF AGENT.
To the extent the Agent is not reimbursed and indemnified by
FFCC or DMC, each Lender will reimburse and indemnify the Agent, in proportion
to its respective Commitments (before giving effect to any termination of the
Commitments pursuant to the terms of this Agreement) from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses (including reasonable attorneys fees and disbursements)
or disbursements of any kind or nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in performing its duties hereunder
and under the other Loan Documents, in any way relating to or arising out of
this Agreement or the other Loan Documents; provided that no Lender shall be
liable for any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements
resulting from the Agent's gross negligence or willful misconduct.
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SECTION 7.7 AGENT IN ITS INDIVIDUAL CAPACITY.
With respect to its obligation to lend under this Agreement,
the Loans made by it and the Notes issued to it, the Agent shall have the same
rights and powers hereunder as any other Lender or holder of a Note and may
exercise the same as though it were not performing the duties specified herein;
and the terms "Lenders," "Required Lenders," "Required Facility 1 Lenders,"
"Required Facility 2 Lenders", "holders of Notes" or any similar terms shall,
unless the context clearly otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of banking, trust, financial advisory or other
business with each Borrower or any Affiliate of the Borrowers as if it were not
performing the duties specified herein, and may accept fees and other
consideration from the Borrowers and any Affiliates of the Borrowers for
services in connection with this Agreement and the other Loan Documents and
otherwise without having to account for the same to the Lenders.
SECTION 7.8 HOLDERS OF NOTES.
The Agent may deem and treat the payee of any Note as the
owner thereof for all purposes hereof unless and until a written notice of the
assignment or transfer thereof shall have been filed with the Agent. Any
request, authority or consent of any Person who, at the time of making such
request or giving such authority or consent, is the holder of any Note shall be
conclusive and binding on any subsequent holder, transferee or assignee of such
Note or of any Note or notes issued in exchange therefor.
SECTION 7.9 SUCCESSOR AGENT.
(a) The Agent may resign as Agent hereunder at any time by giving
written notice thereof to the Lenders and the Borrowers if (i) it believes that
its duties hereunder present an actual or potential conflict of interest with
any other business of the Agent or (ii) it determines at any time that the
introduction of, or any change in, any applicable law, rule, regulation, order
or decree or in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration
thereof, or compliance by the Agent with any request or directive (whether or
not having the force of law) of any such Authority, shall make it unlawful or
improper for the Agent to continue as Agent hereunder. Upon any such
resignation or any removal of the Agent pursuant to Section 7.9(b), the
Required Lenders shall have the right, upon five (5) days notice to the
Borrowers, to appoint a successor Agent, which shall be a Lender. If no
successor Agent shall have been so appointed by the Required Lenders, and shall
have accepted such appointment, within thirty (30) days after the retiring
Agent's giving of notice of resignation, then, upon five (5) days notice to
the Borrowers, the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent, which shall be a bank which maintains an office in the United
States, or a commercial bank organized under the laws of the United States of
America or of any State thereof, or any Affiliate of such bank, having a
combined capital and surplus of at least $250,000,000.
(b) The Agent may be removed by the unanimous vote of all the
Lenders hereunder (not including the vote of the Agent if the Agent is also a
Lender hereunder) if (i) the Agent has engaged in willful misconduct with
respect to its obligations and duties hereunder and (ii) has failed to cure
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such willful misconduct after sixty (60) days notice by the Lenders to the
Agent of such willful misconduct.
(c) Any resignation or removal of the Agent hereunder shall be
effective only upon the acceptance of any appointment as Agent hereunder by a
successor Agent. Upon such acceptance, such successor Agent shall succeed to
and become vested with all the rights, powers, privileges and duties of the
retiring Agent, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents. After any
retiring Agent's resignation hereunder as Agent, the provisions of this Article
VII shall inure to its benefit as to any actions taken or omitted to be taken
by it while it was Agent under this Agreement.
ARTICLE 8
MISCELLANEOUS PROVISIONS
SECTION 8.1 NOTICES.
(a) Except as otherwise expressly set forth herein, all notices,
requests and other communications to any party hereunder shall be in writing
(including telecopy or similar teletransmission or writing) and shall be given
to such party at its address or telecopy number set forth on Exhibit M hereto
or such other address or telecopy number as such party may hereafter specify by
notice to the Agent and the Borrowers. Each such notice, request or other
communication shall be effective (a) if given by telecopy, when such telecopy
is transmitted to the telecopy number specified herein and the receipt thereof
is confirmed by the recipient or (b) if sent by overnight courier (with all
charges paid) providing for confirmation of delivery, then upon confirmation of
delivery by such courier; provided that notices to the Agent pursuant to
Article II shall not be effective until received.
(b) Any notice required to be given to one or more Borrowers
hereunder or under any other Loan Document shall be effective if delivered to
FFCC, it being the intent that notice to FFCC is effective notice to DMC. In
connection therewith, DMC hereby irrevocably appoints FFCC as its agent to
receive any and all notices hereunder or under any other Loan Document and such
appointment is coupled with an interest. In addition to the foregoing, the
Agent and the Lenders shall be entitled to, but shall not be required to, rely
on notice from either Borrower as constituting notice from both Borrowers.
SECTION 8.2 AMENDMENTS, ETC.
No amendment or waiver of any provision of any Loan Document,
nor consent to any departure by the Borrowers therefrom, shall in any event be
effective unless the same shall be in writing and signed by the Borrowers and
the Required Lenders, and then such amendment, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided that (a) notwithstanding anything else contained herein, no
amendment, waiver or consent shall, unless in writing and signed by all the
Lenders, do any of the following: (i) waive or change Section 5.2(e) or any of
the conditions specified in Article III, (ii) increase the Commitments of the
Lenders or subject the Lenders to any additional obligations, (iii) reduce the
principal of, or
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interest on, the Notes or the amount of the Acceptance Obligations or reduce
any fees payable to the Lenders hereunder, (iv) postpone any date fixed for any
payment in respect of principal of, or interest on, the Notes or payment of any
Acceptance Obligations, or the payment of any fees payable hereunder, or waive
any Event of Default under Section 6.1(a), (v) change the percentage of the
Commitments, the definitions of "Required Lenders," "Collateral Value of the
Facility 1 Borrowing Base," "Collateral Value of the Facility 2 Tranche A
Borrowing Base," "Collateral Value of the Facility 2 Tranche B Borrowing Base,"
"Collateral Value of the Pledged Servicing Portfolio", "Eligible Conforming
Mortgage Loan," "Eligible Mortgage-Backed Security," "Eligible Mortgage Loan,"
"Eligible Non-Conforming Mortgage Loan," "Eligible REO Property" or "Eligible
Servicing Receivable" (or any definitions contained in such definitions), or
the number or identity of Lenders that is required for any or all of the
Lenders to take any action hereunder, (vi) release the Lien of the Secured
Parties on any of the Collateral, except as provided in the Security Agreements
or (vii) amend this Section 8.2 or Section 8.6; (b) no amendment, waiver or
consent shall, unless in writing and signed by the Agent, affect the rights or
duties of the Agent under this Agreement or any other Loan Document; and (c) no
amendment, waiver or consent shall, unless in writing and signed by Bankers
Trust, amend, waive or modify Section 2.1(e) or Section 2.4(c), (d) or (e) or
otherwise affect the rights or obligations of Bankers Trust with respect to
Swing-Line Loans and Acceptances.
SECTION 8.3 NO WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of the Agent or any Lender in
exercising any right or remedy hereunder or under any other Loan Document and
no course of dealing between the Borrowers, on the one hand, and the Agent or
any Lender, on the other hand, shall operate as a waiver thereof, nor shall any
single or partial exercise of any right or remedy hereunder or under any other
Loan Document preclude any other or further exercise thereof or the exercise of
any other right or remedy hereunder or thereunder. The rights and remedies
expressly provided herein and in the other Loan Documents are cumulative and
not exclusive of any rights or remedies that the Agent or any Lender would
otherwise have. No notice to or demand on the Borrowers not required hereunder
or under the other Loan Documents in any case shall entitle the Borrowers to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Agent or any Lender to any other or
further action in any circumstances without notice or demand.
SECTION 8.4 PAYMENT OF EXPENSES, ETC.
The Borrowers shall:
(a) (i) pay all reasonable out-of-pocket costs and expenses
of the outside legal counsel of the Agent in connection with the preparation,
execution and delivery of, this Agreement and the other Loan Documents, or any
amendment, modification or supplement hereof or thereof, including the
documentation required pursuant to Section 3.1(c) and the closings contemplated
thereunder, and (ii) pay all reasonable out-of-pocket costs and expenses of the
Agent and each Lender in the preservation of rights under, enforcement of, and,
after the occurrence of a Potential Default or an Event of Default, the
refinancing, the renegotiating or the restructuring of, this Agreement and the
other Loan Documents and the documents and instruments referred to herein and
therein including in connection with any bankruptcy, insolvency, liquidation,
reorganization or similar proceeding and any amendment, waiver or consent
relating hereto and thereto (including the
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reasonable fees and disbursements of counsel (including allocated costs of
internal counsel) for the Agent and, in the case of enforcement, for each of
the Lenders);
(b) pay and hold the Agent and each of the Lenders harmless from
and against any and all present and future stamp and other similar taxes with
respect to the foregoing matters and save the Agent and each Lender harmless
from and against any and all liabilities with respect to or resulting from any
delay or omission to pay such taxes; and
(c) indemnify the Agent and each Lender, and their respective
officers, directors, employees, representatives and agents from, and hold each
of them harmless against, any and all out-of-pocket costs, losses, liabilities,
claims, damages or expenses actually incurred by any of them (whether or not
any of them is designated a party thereto) arising out of or by reason of any
investigation, litigation or other proceeding related to any actual or proposed
use by the Borrowers of the proceeds of any of the Loans or the Borrowers
entering into and performing of the Loan Documents to which they are a party,
or arising out of the creation Acceptances or the Acceptance Obligations
including the reasonable fees and disbursements of counsel (including allocated
costs of internal counsel) incurred in connection with any such investigation,
litigation or other proceeding; provided that neither the Agent nor any Lender
shall have the right to be indemnified hereunder for its own gross negligence
or willful misconduct. If and to the extent that the obligations of the
Borrowers under this Section 8.4 are unenforceable for any reason, the
Borrowers hereby agrees to make the maximum contribution to the payment and
satisfaction of such obligations that is permissible under applicable law.
SECTION 8.5 RIGHT OF SETOFF.
Subject to Section 2.16, in addition to and not in limitation
of all rights of offset that any Lender may have under applicable law, for so
long as any Event of Default has occurred and is continuing and whether or not
any Lender has made any demand or the Obligations have matured, such Lender
shall have the right to appropriate and apply to the payment of the Obligations
all deposits (general or special, time or demand, provisional or final) then or
thereafter held by, and other indebtedness or property then or thereafter owing
to the Borrowers by, such Lender, whether or not related to any Loan Document
or any transaction hereunder.
SECTION 8.6 BENEFIT OF AGREEMENT.
(a) This Agreement shall be binding upon and inure to the benefit
of and be enforceable by the respective successors and assigns of the parties
hereto; provided that neither of the Borrowers may assign or transfer any of
its interest or delegate any of its obligations under the Loan Documents
without the prior written consent of the Lenders and any such assignment or
transfer without the prior written consent of the Lenders shall be null and
void.
(b) Subject to the provisions of Section 2.13(c), any Lender may
make, carry or transfer Loans at, to or for the account of, any of its branch
offices or the office of an Affiliate of such Lender.
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(c) Subject to the limitations set forth below, no Lender may
assign its rights or delegate its obligations under this Agreement and the
other Loan Documents to any other financial institution without the prior
consent of the Agent and the Borrowers (such consent not to be unreasonably
withheld) and provided that (i) no Lender may make an assignment hereunder to a
Person (other than an Affiliate of such Lender or an existing Lender) that is
not a financial institution; and (ii) an assignment fee in the amount of $2,500
for each assignment hereunder shall be payable to the Agent by the applicable
assignee. Any assignment or delegation specifically prohibited by the
preceding sentence shall be null and void. Notwithstanding the foregoing, any
Lender may assign its rights and delegate its obligations under this Agreement
and the other Loan Documents to any Affiliate of such Lender without notice to
or consent by the Borrowers, the Agent, or any other Person, provided the fee
set forth in the proviso to the immediately preceding sentence shall be paid.
In the case of an assignment by a Lender, upon notice thereof by such Lender to
the Borrowers and the Agent, the assignee shall have, to the extent of such
assignment (unless otherwise provided thereby), the same rights and benefits as
it would have if it were a Lender under the Loan Documents and the holder of a
Note and, if the assignee has expressly assumed, for the benefit of the
Borrowers, the assignor Lender's obligations hereunder, such assignor Lender
shall be relieved of its obligations hereunder to the extent of such assignment
and assumption.
(d) Each Lender may transfer, grant or assign participations in
all or any part of such Lender's interests and obligations hereunder pursuant
to this Section to another financial institution, provided that (i) such Lender
shall remain a "Lender" for all purposes of this Agreement and the transferee
of such participation shall not constitute a Lender hereunder and (ii) no
participant under any such participation shall have rights to approve any
amendment to or waiver of this Agreement or any other Loan Document except to
the extent such amendment or waiver would (x) extend the final scheduled
maturity of any of the Loans or the Commitment in which such participant is
participating, (y) reduce the interest rate (other than as a result of waiving
the applicability of any post-default increases in interest rates) or Fees
applicable to any of the Loans, Commitments or Acceptances or postpone the
payment of any thereof or (z) release any collateral under the Security
Agreements. In the case of any such participation, the participant shall not
have any rights under this Agreement or any of the other Loan Documents (the
participant's rights against the granting Lender in respect of such
participation to be those set forth in the agreement with such Lender creating
such participation) and all amounts payable by the Borrowers hereunder shall be
determined as if such Lender had not sold such participation, provided that
such participant shall be entitled to receive additional amounts under Sections
2.13, 2.14 and 2.15 on the same basis as if it were a Lender.
(e) Any Lender may furnish any information concerning the
Borrowers and its Affiliates in the possession of such Lender from time to time
to Affiliates, participants and assignees, and prospective participants and
assignees, of such Lender. No Lender or its Affiliates may furnish such
information to any prospective assignee or participant without the prior
written consent of FFCC, which consent will not be unreasonably withheld. Any
prospective assignee or participant shall be required to execute a
confidentiality agreement in the form of Exhibit Q before receiving any such
information.
(f) Any Lender may at any time pledge all or any portion of its
rights under the Loan Documents to a Federal Reserve Bank without notice to or
consent of either Borrower, the Agent
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or any other Lender. No such pledge shall release the transferor Lender from
its obligations hereunder.
SECTION 8.7 GOVERNING LAW; SUBMISSION TO JURISDICTION.
(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER AND UNDER THE NOTES SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS TO WHICH EITHER BORROWER IS A PARTY MAY BE BROUGHT
IN THE COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY OR OF THE
UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE BORROWERS HEREBY ACCEPTS
FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE
JURISDICTION OF THE AFORESAID COURTS. THE PARTIES HERETO HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVE TRIAL BY JURY, AND, TO THE MAXIMUM EXTENT PERMITTED
BY APPLICABLE LAW, EACH OF THE BORROWERS HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED
ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE BRINGING OR MAINTAINING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
(c) EACH OF THE BORROWERS IRREVOCABLY AND UNCONDITIONALLY CONSENTS
TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO EACH SUCH BORROWER AT ITS SAID ADDRESS,
SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. IN
ADDITION, EACH BORROWER HEREBY IRREVOCABLY APPOINTS CT CORPORATION, 1633
BROADWAY, NEW YORK, NEW YORK 10019 (THE "PROCESS AGENT") TO RECEIVE, FOR IT AND
ON ITS BEHALF, SERVICE OF PROCESS IN ANY PROCEEDINGS OR ACTIONS IN NEW YORK.
IF FOR ANY REASON THE PROCESS AGENT IS UNABLE TO ACT AS SUCH, EACH BORROWER
WILL PROMPTLY NOTIFY THE AGENT AND WITHIN THIRTY (30) DAYS APPOINT A SUBSTITUTE
PROCESS AGENT ACCEPTABLE TO THE AGENT.
(d) NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT OR ANY
LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST EITHER BORROWER IN ANY OTHER
JURISDICTION.
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(e) EACH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE
MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER
IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION 8.7, ANY SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. THIS WAIVER IS MADE KNOWINGLY
AND VOLUNTARILY.
SECTION 8.8 COUNTERPARTS.
This Agreement may be executed in any number of counterparts
and by the different parties hereto on separate counterparts, each of which
when so executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument.
SECTION 8.9 HEADINGS DESCRIPTIVE.
The headings of the several sections and subsections of this
Agreement, and the Table of Contents, are inserted for convenience only and
shall not in any way affect the meaning or construction of any provision of
this Agreement.
SECTION 8.10 SURVIVAL OF REPRESENTATIONS AND INDEMNITIES.
All covenants, agreements, representations and warranties made
herein and in any certificate delivered pursuant hereto shall survive the
making by the Lenders of the Loans and the execution and delivery to the Agent
for the account of the Lenders of the Notes regardless of any investigation
made by the Agent or the Lenders and of the Agent's and the Lender's access to
any information and shall continue in full force and effect so long as any
Obligation is outstanding and unpaid. The Borrowers obligations under
Sections 2.13, 2.14, 2.15 and 8.4 and under any other indemnification
provisions of this Agreement and each Lender's obligations under Sections 7.6
and 8.12 and under any other indemnification provisions of this Agreement shall
survive the termination of this Agreement for any reason whatsoever and payment
of the Notes.
SECTION 8.11 SEVERABILITY.
In case any one or more of the provisions contained in this
Agreement or the Notes should be invalid, illegal or unenforceable in any
respect in any jurisdiction, the validity, legality and enforceability of such
provisions shall not be affected or impaired in any other jurisdiction, nor
shall the remaining provisions contained herein and therein in any way be
affected or impaired thereby.
SECTION 8.12 INDEMNIFICATION OF COLLATERAL AGENTS.
To the extent that any Collateral Agent is not reimbursed and
indemnified by the Borrowers pursuant to the applicable Security Agreement,
each Lender will reimburse and indemnify such Collateral Agent, in proportion
to its respective Commitments (before giving effect to any termination of the
Commitments pursuant to the terms of this Agreement), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses (including reasonable attorneys fees and disbursements)
or disbursements of any kind or nature whatsoever that may be imposed on,
incurred by or asserted against such Collateral Agent in
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performing its duties under the Loan Documents, in any way relating to or
arising out of the Loan Documents; provided that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from such
Collateral Agent's gross negligence or willful misconduct. The Collateral
Agents shall be entitled to rely on the provisions of this Section 8.12 as if
they were parties to this Agreement.
SECTION 8.13 JOINT AND SEVERAL NATURE OF THE OBLIGATIONS.
The Borrowers agree that any and all of the Obligations of the
Borrowers hereunder and under each other Loan Document shall be the joint and
several obligation of each of them notwithstanding any absence herein or
therein of a reference such as "jointly and severally" with respect to any such
obligation.
SECTION 8.14 CERTAIN WAIVERS.
Each of the Borrowers agrees that its joint and several
liability under this Agreement and each of the other Loan Documents shall be
absolute, unconditional and irrevocable irrespective of:
(a) any lack of validity, legality or enforceability of the
Obligations of the other Borrower or any other Person under this Agreement or
any other Loan Document;
(b) the failure of any Lender:
(i) to assert any claim or demand or to enforce any right
or remedy against the other Borrower or any other Person (including
any guarantor) under the provisions of this Agreement or any other
Loan Document or otherwise, or
(ii) to exercise any right or remedy against any guarantor
of, or Collateral securing, any Obligations;
(c) any change in the time, manner or place or payment of, or in
any other term of, all or any of the Obligations, or any other extension,
compromise or renewal of any Obligation with respect to the other Borrower or
any other Person;
(d) any reduction, limitation, impairment or termination of any of
the Obligations of the other Borrower or any other Person for any reason,
including any claim of waiver, release, surrender, alteration or compromise,
and the liability of each of the Borrowers shall not be subject to (and each of
them hereby waives any right to or claim of) any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the invalidity,
illegality, non- genuineness, irregularity, compromise, unenforceability of, or
any other event or occurrence affecting, any of the Obligations of the other
Borrower or any other Person;
(e) any rescission, waiver, amendment or other modification of, or
any consent to departure from, any of the Obligations of the other Borrower or
any other Person under the terms of this Agreement or any other Loan Document;
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(f) any exchange, release or non-perfection of any Collateral, or
any release, amendment or waiver of, or consent to departure from, any guaranty
or other agreement from the other Borrower or any other Person, securing any of
the Obligations; or
(g) any other circumstances which might otherwise constitute a
defense available to, or a legal or equitable discharge of, the other Borrower
or any surety or any guarantor. Each of the Borrowers waives any right to
require that any resort be made by the Lender to any of the Collateral.
SECTION 8.15 SUBROGATION, ETC.
At any time that a payment is made by either Borrower with
respect to the Obligations, such Borrower shall have a right of contribution
against the other Borrower in the maximum amount permitted by applicable law,
which right of contribution shall be subject to adjustment at the time of any
subsequent payment with respect to the Obligations; provided, that the maximum
aggregate liability of either Borrower with respect to such contribution rights
of the other Borrower shall not exceed the maximum amount of liability that
such first Borrower can incur without rendering such contribution rights void
or voidable under applicable law relating to fraudulent conveyance or
fraudulent transfers, and not for any greater amount, and provided further,
that neither Borrower will exercise any such contribution rights or any other
rights which it may acquire by reason of any payment made hereunder, whether by
way of rights of subrogation, reimbursement or otherwise, until the prior
payment, in full and in cash, of all Obligations and the termination of all
Commitments. Any amount paid to either Borrower on account of any payment made
hereunder prior to the payment in full of all Obligations other than
intercompany payments or reimbursements made in the ordinary course of the
businesses of each Borrower shall be held in trust for the benefit of the Agent
and the Lenders and shall immediately be paid to the Agent and credited and
applied against the Obligations, whether matured or unmatured, in accordance
with the terms of this Agreement and the other Loan Documents. In furtherance
of the foregoing, for so long as any Obligation or any Commitment remains
outstanding, each Borrower shall refrain from taking any action or commencing
any proceeding against the other Borrower (or its successors or assigns,
whether in connection with a bankruptcy proceeding or otherwise) to recover any
amounts in respect of payments made under this Agreement to the Agent and the
Lenders.
SECTION 8.16 [RESERVED]
SECTION 8.17 CONFIDENTIALITY.
Each Lender agrees not to disclose, without the prior written
consent of the Borrowers, any of the financial information or other information
of the Borrowers or any Affiliate of any of the Borrowers, designated in
writing by either Borrower as "confidential" and obtained under or in
connection with this Agreement or any of the other Loan Documents.
Notwithstanding the foregoing, each Lender may disclose such information: (a)
as is permitted under Section 8.6; (b) as is required by law or by subpoena or
similar court order, or by any governmental, regulatory or supervisory
authority or official or as otherwise required to be provided by the Lender in
the ordinary course of its business; (c) to counsel to such Lender in
connection with the transactions contemplated by this Agreement and the other
Loan Documents; (d) to independent auditors and other advisers retained by such
Lender; and (e) to the Agent or the Collateral Agents as contemplated
<PAGE> 85
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by this Agreement and the other Loan Documents. In addition, unless
specifically prohibited by applicable law or court order, each Lender shall, to
the extent practical, notify the Borrowers of any subpoena or similar court
order or of any request by any governmental, regulatory or supervising
authority or official (other than any such request in connection with an
examination of the financial condition of such Lender by such authority) for
disclosure of any such information prior to disclosure of such information so
that the Borrowers may seek an appropriate protective order. Notwithstanding
the foregoing, the Lenders shall have no obligation to keep any such
information confidential if such information (i) becomes generally available to
the public other than as a result of the disclosure by any Lender in violation
of this Section 8.17, (ii) is available to any Lender on a non-confidential
basis prior to its disclosure to such Lender by the Borrower or, if applicable,
by the Lender from whom such Lender has purchased its participation or
assignment, or (iii) becomes available to any Lender on a non-confidential
basis from a source other than the Borrower or, if applicable, the Lender from
whom such Lender has purchased its participation or assignment; and any Lender
may disclose any such information in connection with any litigation to which
such Lender is party relating to this Agreement or any of the other Loan
Documents.
SECTION 8.18 EFFECTIVENESS.
This Agreement shall become effective as of the date (the
"Amendment Effective Date"), on which each of the following conditions have
been satisfied to the satisfaction of the Agent:
(a) The Borrowers shall have delivered to the Agent, in form and
substance and in quantities reasonably satisfactory to the Agent and its
counsel, each of the following:
(i) this Agreement and the other Loan Documents, duly
executed and delivered by the parties hereto;
(ii) a certified copy of resolutions of the Board of
Directors of each of the Borrowers approving the execution, delivery
and performance of all documents required to be delivered by such
parties hereunder and the transactions contemplated therein;
(iii) an opinion of Puerto Rico counsel for the Borrowers
in form and substance satisfactory to Agent and covering such matters
as the Agent may reasonably request, dated the Amendment Effective
Date; and
(iv) such other documents, instruments and agreements,
duly executed, deemed necessary or appropriate by the Agent.
(b) The Senior Notes shall have been issued and a portion of the
net proceeds received from the sale of the Senior Notes shall have been used to
repay in full all outstanding "Facility 3 Loans" (as defined in the Original
Credit Agreement) and the Borrowers shall have paid all Fees and other
Obligations required to have been paid under the Original Credit Agreement,
this Agreement and the other Loan Documents prior to or on the Amendment
Effective Date.
<PAGE> 86
- 82 -
(c) All Loans and other Obligations (as such terms are defined in
the Original Credit Agreement) owing to Bank One, Texas N.A. under the Original
Credit Agreement shall have been repaid or paid, respectively, in full.
(d) All conditions precedent set forth in Section 3.1(b) shall
have been satisfied at and as of such date (both before and after giving effect
to this Agreement).
(e) All acts and conditions (including the obtaining of any
necessary regulatory approvals and the making of any required filings,
recordings or registrations) required to be done and performed and to have
happened prior to the execution, delivery and performance of this Agreement and
for the same to constitute the legal, valid and binding obligations,
enforceable in accordance with its terms, shall have been done and performed
and shall have happened in due and strict compliance with all applicable laws
or if any of such have not been done, performed or happened, such has been
expressly disclosed to the Agent and waived by all of the Lenders in writing.
<PAGE> 87
- 83 -
If each of the above conditions has been satisfied, on the
Amendment Effective Date, (A) all Facility 1 Loans and Facility 2 Loans of each
Type outstanding under the Original Credit Agreement shall remain outstanding
and shall be deemed to be Loans of the same type under this Agreement governed
by the terms hereof, (B) the promissory notes delivered to the Lenders pursuant
to the Original Credit Agreement shall become void, (C) any outstanding
Facility 3 Commitments shall be terminated, and (D) Bank One, Texas N.A. shall
cease to be a party to this Agreement and any other Loan Document and the
respective Commitments of each of the Lenders shall be in the amounts set forth
opposite its name on the signature pages hereto. Upon receiving the Notes
delivered pursuant to subsection (a)(i) above, each Lender will promptly cancel
its promissory notes delivered under the Original Credit Agreement and return
such promissory notes to the Borrowers. No failure of a Lender to cancel or
return such promissory notes shall affect the validity of the new Notes
delivered hereunder.
SECTION 8.19 RATIFICATION; NO NOVATION.
Except as set forth herein and therein, all Loan Documents are
hereby ratified and confirmed in all respects. The term Loan Documents, as
used in the Loan Documents, shall mean the Loan Documents as amended hereby and
thereby. The parties do not intend for this Agreement or any of the other Loan
Documents to effect, nor does this Agreement or any of the Loan Documents
constitute, a novation of the obligations of the Borrowers evidenced by the
Original Credit Agreement and the Loan Documents referred to therein but is
rather an amendment and restatement of the terms governing such obligations
SECTION 8.20 WAIVER OF JURY TRIAL.
THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THE SUBJECT
MATTER OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the day and year first above written.
FIRST FINANCIAL CARIBBEAN CORPORATION,
as a Borrower
By: /s/ Richard F. Bonini
------------------------------------
Richard F. Bonini
Senior Executive Vice President and
Secretary
By: /s/ Mario S. Lewis
------------------------------------
Mario S. Levis
Vice President and Treasurer
<PAGE> 88
- 84 -
<TABLE>
<S> <C>
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /s/ Mario S. Lewis
------------------------------------
Mario S. Levis
Vice President
Facility 1 Commitment: BANKERS TRUST COMPANY,
$20,000,000 as Agent and as a Lender
Facility 2 Commitment:
$2,000,000 By: /s/ Kevin M. McLann
------------------------------------
Name: Vice President
------------------------------------
Title: Bankers Trust Company
------------------------------------
Facility 1 Commitment: FIRST UNION NATIONAL BANK OF
$20,000,000 NORTH CAROLINA,
as a Lender
Facility 2 Commitment:
$2,000,000 By: /s/ R. Steven Hall
------------------------------------
Name: R. Steven Hall
------------------------------------
Title: Vice President
------------------------------------
Facility 1 Commitment: THE BANK OF BOSTON,
$20,000,000 as a Lender
Facility 2 Commitment:
$2,000,000 By: /s/ Paul Chmielinski
------------------------------------
Name: Paul Chmielinski
------------------------------------
Title: Vice President
------------------------------------
Facility 1 Commitment: THE BANK OF NEW YORK,
$20,000,000 as a Lender
Facility 2 Commitment:
$2,000,000 By: /s/ Robert A. Tweed
------------------------------------
Name: Robert A. Tweed
------------------------------------
Title: Vice President
------------------------------------
</TABLE>
<PAGE> 89
- 85 -
<TABLE>
<S> <C>
Facility 1 Commitment: NATIONAL CITY BANK OF KENTUCKY,
$20,000,000 as a Lender
Facility 2 Commitment:
$2,000,000 By: /s/ Robert Ogburn
___________________________________
Name: Robert Ogburn
___________________________________
Title: Vice President
____________________________________
</TABLE>
<PAGE> 90
EXHIBIT 10.68
(CONTINUED)
FIRST AMENDMENT TO
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
AND CERTAIN OTHER LOAN DOCUMENTS
THIS FIRST AMENDMENT TO FIRST AMENDED AND RESTATED CREDIT
AGREEMENT AND CERTAIN OTHER LOAN DOCUMENTS (the "Amendment"), dated as of
January 8, 1997, is entered into between the Lenders party hereto, BANKERS
TRUST COMPANY, a New York banking corporation, as agent for the Lenders (the
"Agent"), FIRST FINANCIAL CARIBBEAN CORPORATION, a corporation organized under
the laws of the Commonwealth of Puerto Rico ("FFCC"), DORAL MORTGAGE
CORPORATION, a corporation organized under the laws of the Commonwealth of
Puerto Rico and a wholly-owned subsidiary of FFCC ("DMC", and together with
FFCC, each a "Borrower" and collectively, the "Borrowers"), and BANCO POPULAR
DE PUERTO RICO, a corporation organized under the laws of the Commonwealth of
Puerto Rico, as collateral agent (the "Collateral Agent), with reference to the
First Amended and Restated Credit Agreement, dated as of September 25, 1996,
between the Lenders, the Agent and the Borrowers (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement") and the First
Amended and Restated Security, Custody and Collateral Agency Agreement
(Warehousing Collateral), dated as of October 10, l996, between the Borrowers,
the Agent and the Collateral Agent (as amended, supplemented or otherwise
modified from time to time, the "Security Agreement"). All capitalized terms
used but not otherwise defined herein shall have the meanings given such terms
in the Credit Agreement.
The Lenders, the Agent and the Borrowers wish to amend the
Credit Agreement as set forth herein.
ACCORDINGLY, the parties hereto agree as follows:
Section 1. Amendments to Article 1 of the Credit Agreement.
Section 1.1 of the Credit Agreement shall be amended as follows:
(a) The following definitions shall be added in appropriate
alphabetical order:
""BASE LIBOR RATE" shall mean, with respect to any month, the
average daily rate per annum for such month of the 30-day
LIBOR rates that appear on Telerate Page 3747 for each day
during such month; provided, that if such information is not
available on Telerate, the "Base LIBOR Rate" shall be
determined from information supplied to the Agent by a
nationally recognized reporting service for similar
information acceptable to the Agent."
""COLLATERAL VALUE OF THE FACILITY 1 BORROWING BASE" shall
mean, at any time, the sum of the Collateral Value of the
Facility 1 Tranche A Borrowing Base and the Collateral Value
of the Facility 1 Tranche B Borrowing Base."
<PAGE> 91
""COLLATERAL VALUE OF THE FACILITY 1 TRANCHE A BORROWING BASE"
shall mean, at the time of determination thereof, the
aggregate collateral value of all Eligible Gestation Mortgage
Loans and Eligible Mortgage- Backed Securities included in the
Facility 1 Tranche A Borrowing Base. For purposes hereof, the
collateral value of (x) each Eligible Gestation Mortgage Loan
shall be an amount equal to ninety-eight percent (98%) of the
current unpaid principal balance thereof, and (y) each
Eligible Mortgage-Backed Security shall be an amount equal to
ninety-eight percent (98%) of the face amount thereof;
provided, that if the Agent, in its sole discretion, at any
time believes that the collateral value of any Mortgage Loan
or Mortgage-Backed Security included in the Facility 1 Tranche
A Borrowing Base is greater than the Fair Market Value
thereof, then the collateral value of any such Mortgage Loan
or Mortgage-Backed Security shall, until further notice from
the Agent, be equal to (I) in the case of each Eligible
Gestation Mortgage Loan, ninety-eight percent (98%) of the
lesser of (i) the Fair Market Value of such Eligible Gestation
Mortgage Loan and (ii) the current unpaid principal balance of
such Eligible Gestation Mortgage Loan, and (II) in the case of
each Eligible Mortgage-Backed Security, ninety-eight percent
(98%) of the lesser of (i) the Fair Market Value of such
Eligible Mortgage-Backed Security and (ii) the face amount of
such Eligible Mortgage-Backed Security. The Collateral Value
of the Facility 1 Tranche A Borrowing Base shall be determined
by reference to the most recent Facility 1 Borrowing Base
Certificate delivered by the Borrowers to the Agent absent any
error in such Facility 1 Borrowing Base Certificate as of the
date delivered. By adding any Eligible Gestation Mortgage
Loan or Eligible Mortgage-Backed Security to the Facility 1
Tranche A Borrowing Base in accordance with the Warehousing
Security Agreement, each Borrower shall be deemed to represent
and warrant to the Agent and each Lender at and as of the date
of such addition that, with respect to such Mortgage Loans or
Mortgage-Backed Securities, each of the statements set forth
in the definition of Eligible Gestation Mortgage Loan or
Eligible Mortgage-Backed Security, as the case may be, is true
and correct. If any such statement proves to be untrue or
incorrect in any respect at any time, such then Mortgage Loan
or Mortgage-Backed Security, as the case may be, shall be
deemed to have no collateral value for purposes of computing
the Collateral Value of the Facility 1 Tranche A Borrowing
Base."
""ELIGIBLE GESTATION MORTGAGE LOAN" shall mean a Mortgage Loan
with respect to which each of the following statements is true
and correct:
(a) such Mortgage Loan meets all of the requirements in
the definition of Eligible Conforming Mortgage Loan
(except the requirement set forth in paragraph (c) of such
definition); and
(b) the Certificating Custodian has initially certified
that all documentation relating to such Mortgage Loan received
by the Certificating Custodian from the applicable Borrower
(or the Warehousing Collateral Agent) is complete and
acceptable under an applicable Agency Guide for purposes of
including such Mortgage Loan in a pool of Mortgage Loans in
which a Mortgage-Backed Security will represent an interest;
provided that if such Mortgage Loan is returned to the
<PAGE> 92
- 3 -
Warehousing Collateral Agent after the date of such initial
certification but before the issuance of such Mortgage-Backed
Security because of a determination that such Mortgage Loan
may not be included in such pool, such Mortgage Loan shall be
deemed an Eligible Conforming Mortgage Loan if such Mortgage
Loan meets all of the requirements set forth in the definition
of Eligible Conforming Mortgage Loan."
""FACILITY 1 TRANCHE A BORROWING" shall mean a borrowing
pursuant to a Notice of Borrowing consisting of Facility 1
Tranche A Loans made concurrently by all of the Facility 1
Lenders."
""FACILITY 1 TRANCHE A BORROWING BASE" shall mean, at any
time, all Eligible Gestation Mortgage Loans and Eligible
Mortgage-Backed Securities delivered to and held by the
Warehousing Collateral Agent under the Warehousing Security
Agreement as collateral security for the Obligations."
""FACILITY 1 TRANCHE A LOAN" shall mean a loan made by a
Facility 1 Lender pursuant to Section 2.1(a)(i) for the
purposes set forth in Section 4.9."
""FACILITY 1 TRANCHE B BORROWING" shall mean a borrowing
pursuant to a Notice of Borrowing consisting of Facility 1
Tranche B Loans made concurrently by all of the Facility 1
Lenders."
""FACILITY 1 TRANCHE B BORROWING BASE" shall mean, at any
time, all Eligible Conforming Mortgage Loans and Eligible
Non-Conforming Loans delivered to and held by the Warehousing
Collateral Agent under the Warehousing Security Agreement as
collateral security for the Obligations."
""FACILITY 1 TRANCHE B LOAN" shall mean a loan made by a
Facility 1 Lender pursuant to Section 1.1(a)(ii) for the
purposes set forth in Section 4.9."
""FIRST AMENDMENT" shall mean the First Amendment to First
Amended and Restated Credit Agreement and Certain Other Loan
Documents, dated as of January 8, l997, between the Borrowers,
the Agent, the Warehousing Collateral Agent and the Lenders."
""LIBOR LOAN" shall mean any Facility 1 Tranche A Loan bearing
interest at the rate set forth in Section 2.6(a)."
""TELERATE" shall mean the Associated Press-Dow Jones Telerate
Service (or such other service as may be nominated by the
British Bankers Association as the information vendor for the
purpose of displaying British Bankers Association interest
settlement rates for U.S. Dollar deposits)."
<PAGE> 93
- 4 -
""TELERATE PAGE 3747" shall mean the display designated as
"Page 3747" on Telerate (or such other page as may replace
such Page 3747 on Telerate). Any Base LIBOR Rate determined
on the basis of the rate displayed on Telerate Page 3747 shall
be subject to corrections, if any, made in such rate and
displayed by Telerate within one (1) hour of the time when
such rate is first displayed by Telerate."
(b) The definition of "COLLATERAL VALUE OF THE FACILITY 1
BORROWING BASE" shall be amended and restated in its entirety as follows:
""COLLATERAL VALUE OF THE FACILITY 1 TRANCHE B BORROWING BASE"
shall mean, at the time of determination thereof, the
aggregate collateral value of all Eligible Conforming Mortgage
Loans and Eligible Non- Conforming Mortgage Loans included in
the Facility 1 Tranche B Borrowing Base. For purposes hereof,
the collateral value of (x) each Eligible Conforming Mortgage
Loan shall be an amount equal to ninety- eight percent (98%)
of the current unpaid principal balance thereof, and (y) each
Eligible Non-Conforming Mortgage Loan shall be in an amount
equal to ninety-five percent (95%) of the current unpaid
principal balance thereof; provided that if the Agent, in its
sole discretion, at any time believes that the collateral
value of any Mortgage Loan included in the Facility 1 Tranche
B Borrowing Base is greater than the Fair Market Value
thereof, then the collateral value of any such Mortgage Loan
shall, until further notice from the Agent, be equal to (I) in
the case of each Eligible Conforming Mortgage Loan,
ninety-eight percent (98%) of the lesser of (i) the Fair
Market Value of such Mortgage Loan and (ii) the current unpaid
principal balance of such Mortgage Loan and (II) in the case
of each Eligible Non-Conforming Mortgage Loan, ninety-five
percent (95%) of the lesser of (i) the Fair Market Value of
such Mortgage Loan and (ii) the current unpaid principal
balance of such Mortgage Loan. The Collateral Value of the
Facility 1 Tranche B Borrowing Base shall be determined by
reference to the most recent Facility 1 Borrowing Base
Certificate delivered by the Borrowers to the Agent absent any
error in such Facility 1 Borrowing Base Certificate as of the
date delivered. By adding any Mortgage Loan to the Facility
1Tranche B Borrowing Base in accordance with the Warehousing
Security Agreement, each Borrower shall be deemed to represent
and warrant to the Agent and each Lender at and as of the date
of such addition that with respect to such Mortgage Loans,
each of the statements set forth in the definition of Eligible
Conforming Mortgage Loan or Eligible Non-Conforming Mortgage
Loan, as the case may be, is true and correct. If any such
statement proves to be untrue or incorrect in any respect at
any time, then such Mortgage Loan shall be deemed to have no
collateral value for purposes of computing the Collateral
Value of the Facility 1 Tranche B Borrowing Base."
(c) The phrase "(other than Facility 1 Tranche A Loans)" shall be
added after the phrase "convert Facility 1 Loans" in the definition of
"CONVERSION/CONTINUATION DATE".
<PAGE> 94
- 5 -
(d) The following clause shall be inserted before the period at
the end of the definition of "ELIGIBLE CONFORMING MORTGAGE LOAN": "; and (c)
such Mortgage Loan is not an Eligible Gestation Mortgage Loan."
(e) Clauses (n) and (o) of the definition of "ELIGIBLE MORTGAGE
LOAN" shall be amended and restated in their entirety as follows:
"(n) if such Mortgage Loan is included in the Facility 1
Tranche B Borrowing Base, such Mortgage Loan has not been
included in such Borrowing Base for a period in excess of one
hundred and eighty (180) days from the date such Mortgage Loan
was first included in such Borrowing Base, and if such
Mortgage Loan is included in the Facility 1 Tranche A
Borrowing Base, such Mortgage Loan has not been included in
the Facility 1 Tranche A Borrowing Base (as an unpooled
Mortgage Loan) for a period in excess of thirty (30) days from
the date such Mortgage Loan was first included in the Facility
1 Tranche A Borrowing Base and has not been included in the
Facility 1 Tranche A Borrowing Base and the Facility 1 Tranche
B Borrowing Base (as an unpooled Mortgage Loan) for a
cumulative period in excess of one hundred and eighty (180)
days from the date such Mortgage Loan was first included in
the Facility 1 Tranche B Borrowing Base;
(o) (i) if such Mortgage Loan is to be included in the
Facility 1 Tranche B Borrowing Base, the Borrowers have
delivered (or caused to be delivered) those items described on
Attachment 2 to the Warehousing Security Agreement for such
Mortgage Loan to the Warehousing Collateral Agent prior to the
inclusion of such Mortgage Loan in the Facility 1 Tranche B
Borrowing Base; (ii) if such Mortgage Loan is to be included
in the Facility 1 Tranche A Borrowing Base, the Borrowers have
delivered (or caused to be delivered), prior to the inclusion
of such Mortgage Loan in the Facility 1Tranche A Borrowing
Base (A) to the Certificating Custodian, documentation for
such Mortgage Loan that the Certificating Custodian is
required under the applicable Agency Guide to examine, for
completeness and acceptability, for purposes of initially
determining the suitability of such Mortgage Loan for
inclusion in a mortgage loan pool supporting a Mortgage-Backed
Security and (B) to the Warehousing Collateral Agent, a FHLMC
Custodial Certification Schedule (Form 1034) (or any
comparable or successor form), a FNMA Schedule of Mortgages
(Form 2005) (or any comparable or successor form) or a GNMA
Schedule of Pooled Mortgages (HUD Form 11706) (or any
comparable or successor form) listing such Mortgage Loan as a
Mortgage Loan to be pooled in a Mortgage-Backed Security, in
each case completed and duly executed by the Certificating
Custodian on or prior to the date such Mortgage Loan is to be
included in the Facility 1 Tranche A Borrowing Base; (iii)
the Borrowers hold in trust for the Secured Parties those
items described in Attachment 6 to the Warehousing Security
Agreement; and (iv) there has been delivered to the
Warehousing Collateral Agent, if the Agent or the Warehousing
Collateral Agent has so requested in writing, the additional
items described on Attachment 6 to the Warehousing Security
Agreement; and"
<PAGE> 95
- 6 -
(f) The phrase "Facility 1 Loans" in the definition of "FACILITY 1
BORROWING" shall be replaced with the phrase "Facility 1 Tranche A Loans and/or
Facility 1 Tranche B Loans".
(g) The definition of "FACILITY 1 MAXIMUM AMOUNT" shall be
deleted.
(h) The reference to "Section 2.1(a) and 2.1(f)" in the definition
of "FACILITY 1 COMMITMENT" shall be changed to "Section 2.1".
(i) The definition of "FACILITY 1 LOAN" shall be amended and
restated as follows:
""FACILITY 1 LOANS" shall mean the Facility 1 Tranche A Loans
and the Facility 1 Tranche B Loans."
(j) The reference to "Section 2.1(b), (c) and (d)" in the
definition of "FACILITY 2 COMMITMENT" shall be changed to "Section 2.1".
(k) The phrases "the second sentence of", "the third sentence of"
and "the fourth sentence of" in the definitions of "FACILITY 2 TRANCHE A LOAN",
"FACILITY 2 TRANCHE B LOAN" and "FACILITY 2 TRANCHE C LOAN", respectively,
shall be deleted.
(l) The definition of "FAIR MARKET VALUE" shall be amended and
restated as follows:
""FAIR MARKET VALUE" shall mean at any date with respect to
any Mortgage Loan or Mortgage-Backed Security, (i) the bid
price (expressed as a percentage) quoted to the Agent as of
the computation date by any nationally recognized dealer (or
Puerto Rican subsidiary of such dealer) or investor selected
by the Agent or its designee who at the time regularly
purchases similar Mortgage Loans or Mortgage-Backed
Securities, as applicable, multiplied by (ii) the outstanding
principal balance thereof in the case of Mortgage Loans, or
the face amount thereof in the case of Mortgage-Backed
Securities."
(m) The phrase "Facility 1 Loan" in the definition of "FED FUNDS
LOAN" shall be replaced with the phrase "Facility 1 Tranche B Loan".
(n) The definition of "SEASONED LOAN" shall be deleted.
(o) The definition of "TELERATE PAGE 314" shall be amended and
restated as follows:
""TELERATE PAGE 314" shall mean the display designated as
"Page 314" on Telerate (or such other page as may replace such
Page 314 on Telerate). Any Base Eurodollar Rate determined on
the basis of the rate displayed on Telerate Page 314 shall be
subject to corrections, if any, made in such rate and
displayed by Telerate within one (1) hour of the time when
such rate is first displayed by Telerate."
<PAGE> 96
- 7 -
(p) The definition of "TYPE" shall be amended and restated as
follows:
""TYPE" shall mean (a) when used in respect of any Mortgage
Loan, an Eligible Gestation Mortgage Loan, an Eligible
Conforming Mortgage Loan or an Eligible Non-Conforming
Mortgage Loan; (b) when used in respect of any Commitment, a
Facility 1 Commitment or a Facility 2 Commitment; and (c) when
used in respect of any Loan, a Facility 1 Tranche A Loan, a
Facility 1 Tranche B Loan, a Facility 2 Tranche A Loan, a
Facility 2 Tranche B Loan, a Facility 2 Tranche C Loan or a
Swing-Line Loan."
Section 2. Amendments to Article 2 of the Credit Agreement.
(a) The following subsection shall be added to Section 2.1
immediately prior to Section 2.1(a):
"(a) (i) Facility 1 Tranche A Loans. Subject to and upon the terms
and conditions herein set forth (including the limitations set forth in Section
2.1(g)), each Facility 1 Lender agrees, severally and not jointly, at any time
and from time to time from the Amendment Effective Date (as defined in the
First Amendment) up to but excluding the date upon which the Facility 1
Commitments are terminated, to make Facility 1 Tranche A Loans to the Borrowers
in an aggregate principal amount at any time outstanding not to exceed the
Facility 1 Commitment set forth opposite such Facility 1 Lender's name on the
signature pages hereto, as such commitment may be reduced from time to time
pursuant to Section 8.6(c); provided that the aggregate principal amount of
Facility 1 Tranche A Loans outstanding at any time shall not exceed the lesser
of (i) fifty percent (50%) of the aggregate Facility 1 Commitments then in
effect, and (ii) the then current Collateral Value of the Facility 1 Tranche A
Borrowing Base. Subject to Section 2.12, each Facility 1 Tranche A Loan shall
be a LIBOR Loan. Each Facility 1 Tranche A Borrowing shall be in an aggregate
principal amount of at least $1,000,000 (or in any lesser amount equal to the
unused Facility 1 Commitments) and shall be made ratably by the Facility 1
Lenders in proportion to their respective Facility 1 Commitments. Within the
foregoing limits and subject to the conditions set forth in Article III, the
Borrowers may borrow and reborrow Facility 1 Tranche A Loans under Section 2.2
and prepay Facility 1 Tranche A Loans under Section 2.9."
(b) Section 2.1(a) shall be amended and restated as follows:
"(ii) Facility 1 Tranche B Loans. Subject to and upon the terms and
conditions herein set forth (including the limitations set forth in Section
2.1(g)), each Facility 1 Lender agrees, severally and not jointly, at any time
and from time to time from the Amendment Effective Date (as defined in the
First Amendment) up to but excluding the date upon which the Facility 1
Commitments are terminated, to make Facility 1 Tranche B Loans to the Borrowers
in an aggregate principal amount at any time outstanding not to exceed the
Facility 1 Commitment set forth opposite such Facility 1 Lender s name on the
signature pages hereto, as such commitment may be reduced from time to time
pursuant to Section 8.6(c); provided that the aggregate principal amount of
Facility 1 Tranche B Loans plus the aggregate face amount of Facility 1
Acceptances outstanding at any time shall not exceed the then current
Collateral Value of the Facility 1 Tranche B Borrowing Base. Subject to
<PAGE> 97
- 8 -
Section 2.12, each Facility 1 Tranche B Loan shall be a Eurodollar Loan or a
Fed Funds Loan. Subject to Section 2.2(a)(ii), each Facility 1 Borrowing shall
be in an aggregate principal amount of at least $1,000,000 (or in any lesser
amount equal to the unused Facility 1 Commitments) and shall be made ratably by
the Facility 1 Lenders in proportion to their respective Facility 1
Commitments. Within the foregoing limits and subject to the conditions set
forth in Article III, the Borrowers may borrow and reborrow Facility 1 Tranche
B Loans under Section 2.2 and prepay Facility 1 Tranche B Loans under Section
2.9."
(c) The reference to "Section 2.1(a)" in Section 2.1(e) shall be
changed to "Section 2.1(g)" and the reference to "Facility 1 Loans" at the end
of Section 2.1(e) shall be changed to "Facility 1 Tranche B Loans".
(d) Clauses (i) and (ii) of Section 2.1(f) shall be amended and
restated as follows:
"(i) Subject to and upon the terms and conditions herein
set forth (including the limitations set forth in Sections
2.1(a)(ii) and 2.1(g)), the Borrowers, at any time and from
time to time on or after the Amendment Effective Date (as
defined in the First Amendment) up to but excluding the date
on which the Facility 1 Commitments are terminated, may
request that Bankers Trust accept a draft (a "Facility 1
Acceptance" or "Acceptance") as herein provided in lieu of
borrowing additional sums under the Facility 1 Commitments in
respect of Facility 1 Tranche B Loans in an aggregate face
amount at any time outstanding not to exceed the aggregate
Facility 1 Commitments, as such commitments may be reduced
from time to time pursuant to Section 8.6(c); provided that
the aggregate principal amount of Facility 1 Tranche B Loans
plus the aggregate face amount of Facility 1 Acceptances
outstanding at any time shall not exceed the then current
Collateral Value of the Facility 1 Tranche B Borrowing Base.
(ii) Bankers Trust may create Facility 1 Acceptances in
its sole and absolute discretion upon a request by the
Borrowers delivered in accordance with clause (i) above, and
each such Facility 1 Acceptance shall be created hereunder by
Bankers Trust s accepting a draft, in substantially the form
of Exhibit B-2 hereto (a "Draft"). Each Draft shall (a) be
drawn by the Borrowers on Bankers Trust in accordance with the
terms hereof and be payable in U.S. Dollars, (b) be payable
only to the order of the Acceptance Agent, (c) be dated the
date of acceptance of such Draft by Bankers Trust, (d) be in a
face amount at least equal to $1,000,000 and (e) mature on a
Business Day either thirty (30), sixty (60) or ninety (90)
days after the date of such Draft; provided that in no event
shall an Acceptance (i) be created unless the conditions set
forth in Article III have been satisfied with respect to the
issuance of such Facility 1 Acceptance, (ii) mature after the
Maturity Date, or (iii) have a face amount, together with the
aggregate face amount of all other then outstanding Facility 1
Acceptances, exceeding the limitations set forth in Sections
2.1(a)(ii) and 2.1(g)."
<PAGE> 98
- 9 -
(e) The following new Section 2.1(g) is added immediately
following Section 2.1(f):
"(g) Limitation on Aggregate Facility 1 Loans, Swing-Line
Loans and Facility 1 Acceptances. Notwithstanding anything
contained herein, the aggregate principal amount of Facility 1
Loans and Swing-Line Loans of all of the Facility 1 Lenders
and Bankers Trust at any time outstanding plus the aggregate
face amount of Facility 1 Acceptances then outstanding shall
not exceed the lesser of (i) the sum of the Facility 1
Commitments of all of the Facility 1 Lenders then in effect,
and (ii) the Collateral Value of the Facility 1 Borrowing
Base."
(f) Section 2.2(a) shall be amended and restated as follows:
"(a) Whenever the Borrowers desire to make a Facility 1
Borrowing, a Facility 2 Borrowing or a Swing-Line Borrowing
hereunder, to convert any Facility 1 Tranche B Loan pursuant
to Section 2.3 or to continue any Facility 1 Tranche B Loan
for an additional Eurodollar Interest Period pursuant to
Section 2.3, an Authorized Officer shall deliver to the Agent
written notice of such proposed Borrowing, conversion or
continuation (a "Notice of Borrowing" or "Notice of
Conversion/Continuation," as the case may be), each such
notice to be given (x) prior to 12:00 noon (New York City
time) on the date of such proposed Borrowing or conversion, in
the case of a Borrowing of Fed Funds Loans or LIBOR Loans or
a conversion of Eurodollar Loans into Fed Funds Loans; and (y)
prior to 12:00 noon (New York City time) on the third
Eurodollar Business Day before the date of such proposed
Borrowing, conversion or continuation (which date shall be a
Eurodollar Business Day), in the case of a Borrowing of
Eurodollar Loans, a conversion of Fed Funds Loans into
Eurodollar Loans or a continuation of Eurodollar Loans for an
additional Eurodollar Interest Period. Each such notice shall
be irrevocable and shall be in the form of Exhibit I or J, as
the case may be. Notwithstanding any other provision hereof
to the contrary, (i) no more than four (4) Eurodollar Interest
Periods for Facility 1Tranche B Loans may be in effect
hereunder at any time; and (ii) no Facility 1 Tranche B
Borrowing of Eurodollar Loans or LIBOR Loans shall be in an
aggregate principal amount of less than $1,000,000."
(g) The phrases "Facility 1 Loan" and "Facility 1 Loans" in
Sections 2.3(a) and 2.8(g) shall be replaced with the phrases "Facility 1
Tranche B Loan" and "Facility 1 Tranche B Loans", respectively, wherever they
appear.
(h) The following proviso shall be added at the end of the first
sentence of Section 2.4(a) immediately prior to the period: "; provided, that
pursuant to a Borrower's request set forth in a Notice of Borrowing, the
Facility 1 Lenders shall apply the proceeds of any Facility 1 Tranche A
Borrowing directly to the repayment of outstanding Facility 1 Tranche B Loans,
without any exchange of funds."
(i) The second and third sentences of Section 2.4(e) shall be
amended and restated as follows:
<PAGE> 99
- 10 -
" All amounts made available to the Agent pursuant to this
Section 2.4(e) (including Bankers Trust s pro rata share of
such amounts) shall be deemed Facility 1 Loans and shall be
allocated to each Type of Facility 1 Loan in the following
order of priority to the extent that such allocation can be
made without breaching the provisions of Section 2.1 or
causing a mandatory repayment under Section 2.8(c): first, to
Facility 1 Tranche A Loans; and second, to Facility 1 Tranche
B Loans. Each such Swing-Line Loan being refinanced as a
Facility 1 Loan shall be a LIBOR Loan in the case of a
refinancing with Facility 1 Tranche A Loans and a Fed Funds
Loan in the case of a refinancing with Facility 1 Tranche B
Loans."
(j) Section 2.6(a) shall be amended and restated as follows:
"(a) The Borrowers agree to pay interest in respect of the
unpaid principal amount of each Facility 1 Tranche A Loan for
each day during each month that such Facility 1 Tranche A Loan
is outstanding at a rate per annum equal to sixty-five
one-hundredths of one percent (0.65%) plus the Base LIBOR Rate
for such month."
(k) Section 2.8(c) shall be amended and restated as follows:
"(c) The Borrowers shall immediately prepay: (i)
Facility 1 Tranche A Loans to the extent that the aggregate
outstanding principal amount of Facility 1 Tranche A Loans
exceeds the limitations set forth in Section 2.1(a)(i) or
2.1(g) or, provided no Potential Default or Event of Default
has occurred and is continuing, deliver additional Collateral
of the type described in the definition of "Collateral Value
of the Facility 1 Tranche A Borrowing Base" in Section 1.1 as
shall be necessary so that the aggregate principal amount of
Facility 1 Tranche A Loans does not exceed such limitations,
(ii) Facility 1 Tranche B Loans and/or Acceptance Obligations
to the extent that the aggregate outstanding principal amount
of Facility 1 Tranche B Loans and the aggregate face amount
of outstanding Facility 1 Acceptances exceeds the limitations
set forth in Section 2.1(a)(ii) or 2.1(g) or, provided no
Potential Default or Event of Default has occurred and is
continuing, deliver additional Collateral of the type
described in the definition of "Collateral Value of the
Facility 1 Tranche B Borrowing Base" in Section 1.1 as shall
be necessary so that the aggregate principal amount of
Facility 1 Tranche B Loans and the aggregate face amount of
outstanding Facility 1 Acceptances does not exceed such
limitations, (iii) Swing-Line Loans to the extent that the
aggregate outstanding principal amount of Swing-Line Loans
exceeds the limitations set forth in Section 2.1(g), (iv)
Facility 2 Tranche A Loans to the extent that the aggregate
outstanding principal amount of Facility 2 Tranche A Loans
exceeds the Facility 2 Tranche A Maximum Amount or, provided
no Potential Default or Event of Default has occurred and is
continuing, deliver additional Collateral of the type
described in the definition of "Collateral Value of the
Facility 2 Tranche A Borrowing Base" in Section 1.1 as shall
be necessary so that the aggregate outstanding principal
amount of Facility 2 Tranche A Loans does not exceed the
Facility 2 Tranche A Maximum Amount , (v) Facility 2 Tranche B
Loans to the extent that the aggregate outstanding principal
amount of Facility 2 Tranche B Loans exceeds the Facility 2
<PAGE> 100
- 11 -
Tranche B Maximum Amount, and (vi) Facility 2 Tranche C Loans
to the extent that the aggregate outstanding principal amount
of Facility 2 Tranche C Loans exceeds the Facility 2 Tranche C
Maximum Amount."
(l) The second and third sentences of Section 2.9 shall be amended
and restated as follows:
"The Borrowers shall, at the time of making such prepayment,
designate whether it is a prepayment of Facility 1 Tranche A
Loans, Facility 1 Tranche B Loans, Facility 2 Tranche A
Loans, Facility 2 Tranche B Loans or Facility 2 Tranche C
Loans. If the Borrowers fail to make such a designation, any
funds received as a prepayment pursuant to this Section 2.9
shall be applied first, to Facility 2 Tranche B Loans then
outstanding; second, to Facility 2 Tranche A Loans then
outstanding; third to Facility 2 Tranche C Loans then
outstanding; fourth, to Facility 1 Tranche B Loans then
outstanding; and fifth, to Facility 1 Tranche A Loans then
outstanding."
(m) Section 2.10(f) shall be renumbered Section 2.10(g) and a new
Section 2.10(f) shall be added immediately following Section 2.10(e) as
follows:
" (f) In respect of any Loan which was originally
made as a Facility 1 Tranche A Loan and which, after a
completed review by the Warehousing Collateral Agent of the
relevant Mortgage Loans included in the Facility 1 Tranche A
Borrowing Base and the relevant documentation executed in
connection therewith, should have constituted for any period a
Facility 1 Tranche B Loan because the Collateral related
thereto did not satisfy the Facility 1 Tranche A Borrowing
Base requirements, the Borrowers agree to pay to the Agent for
the account of each of the Facility 1 Lenders a gestation
collateral reconciliation fee in an amount equal to the
difference between (i) the interest payable hereunder in
respect of such Loan had it been determined to be a Facility 1
Tranche B Loan for such period and (ii) the interest paid
hereunder during such period in respect of such Loan as a
Facility 1 Tranche A Loan."
(n) The following phrase shall be added at the beginning of
Section 2.11(e):
"Prior to the maturity of the Facility 1 Loans, Swing-Line
Loans and Facility 1".
(o) Section 2.12 and Section 2.13(a) shall be amended and restated
as follows:
"SECTION 2.12 EURODOLLAR RATE OR BASE LIBOR RATE NOT
DETERMINABLE; ILLEGALITY OR IMPROPRIETY.
(a) In the event, and on each occasion, that on
or before the day on which the Eurodollar Rate or Base LIBOR
Rate for a Facility 1 Borrowing that is to include
<PAGE> 101
- 12 -
Eurodollar Loans or LIBOR Loans is to be determined, the Agent
has determined in good faith that the Eurodollar Rate or Base
LIBOR Rate, as applicable, cannot be determined for any
reason, the Agent shall, as soon as practicable thereafter,
give written notice of such determination to the Borrowers and
the Lenders. Upon any such determination, any request by the
Borrowers for a Eurodollar Loan or LIBOR Loan, as applicable,
pursuant to Section 2.2 shall, until the Agent has advised the
Borrowers and the Lenders that the circumstances giving rise
to such notice no longer exist, be deemed to be a request for
a Fed Funds Loan. Each determination by the Agent hereunder
shall be conclusive and binding absent manifest error.
(b) If any Lender determines at any time that the
introduction of, or any change in, any applicable law, rule,
regulation, order or decree or in the interpretation or the
administration thereof by any Governmental Authority charged
with the interpretation or administration thereof, or
compliance by such Lender with any request or directive
(whether or not having the force of law) of any such
Governmental Authority, shall make it unlawful or improper for
such Lender to make, maintain or fund any Eurodollar Loan or
LIBOR Loan as contemplated by this Agreement, then such Lender
shall immediately give notice thereof to the Agent and the
Borrowers describing such illegality or impropriety in
reasonable detail. Effective thirty (30) days after the
giving of such notice (or effective upon such earlier date as
required by such Governmental Authority), the obligation of
such Lender to make Eurodollar Loans or LIBOR Loans, as
applicable, shall be suspended for the duration of such
illegality or impropriety and, if and when such illegality or
impropriety ceases to exist, such suspension shall cease and
such Lender shall notify the Agent and the Borrowers thereof.
If any such change makes it unlawful or improper for any
Lender to maintain any Eurodollar Loan or LIBOR Loan, such
Lender shall, upon the happening of such event, notify the
Agent and the Borrowers thereof, and the Borrowers shall
immediately, or if permitted by applicable law, rule,
regulation, order, decree, interpretation, request or
directive, no later than the date permitted thereby, convert
each such Eurodollar Loan or LIBOR Loan, as applicable, into a
Fed Funds Loan. If any Lender notifies the Agent and the
Borrowers pursuant to this Section 2.12(b) that it is unlawful
or improper for such Lender to make or maintain Eurodollar
Loans or LIBOR Loans, as the case may be, but no other Lenders
give similar notices, then the Borrowers may require such
Lender to sell, pursuant to Section 8.6(c) all of its
outstanding Loans and Commitments to another Lender (if any
other Lender agrees, in its sole and absolute discretion, to
purchase such Loans and Commitments) or to any other financial
institution reasonably acceptable to the Agent that is willing
to make and maintain Eurodollar Loans and LIBOR Loans. The
purchase price for such Loans and Commitments shall be equal
to the aggregate outstanding principal amount of the Loans of
such Lender plus such Lender s pro rata share of all other
accrued and unpaid Obligations (including obligations arising
as a result of being an Acceptance Participant) minus the pro
rata portion (based on the number of days in the applicable
period) of such Lender s facility fees that relate to the
period from the date of such sale to the next payment date for
the facility fees.
<PAGE> 102
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SECTION 2.13 RESERVE REQUIREMENTS; CHANGE IN CIRCUMSTANCES.
(a) Notwithstanding any other provision herein, if after
the date of this Agreement any change in applicable law or
regulation or in the interpretation or administration thereof
by any Governmental Authority charged with the interpretation
or administration thereof (whether or not having the force of
law) imposes any tax on or changes the basis of taxation of
payments to any Lender of the principal of or interest on any
Eurodollar Loan or LIBOR Loan or the face amount of a Facility
1 Acceptance made by such Lender or any interest due on any
Acceptance Obligations or any Fees or other amounts payable
hereunder (other than taxes imposed on the overall net income
of such Lender by the jurisdiction in which such Lender has
its principal office or by any political subdivision or taxing
authority therein), or imposes, modifies or deems applicable
any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of or credit
extended by such Lender (except any such reserve requirement
that is reflected in the Eurodollar Rate) or imposes on such
Lender any other condition affecting this Agreement or
Eurodollar Loans or LIBOR Loans or a Facility 1 Acceptances
created by Bankers Trust, and the result of any of the
foregoing is to increase the cost to such Lender of making or
maintaining any Eurodollar Loan or LIBOR Loan, becoming or
remaining as an Acceptance Participant or to reduce the amount
of any sum received or receivable by such Lender hereunder
(whether of principal, interest, fee or otherwise) in respect
thereof by an amount deemed by such Lender to be material,
then the Borrowers shall pay to such Lender such additional
amount or amounts as will compensate such Lender for such
additional costs incurred or reduction suffered. Any amount
or amounts payable by the Borrowers to any Lender in
accordance with the provisions of this Section 2.13(a) shall
be paid by the Borrowers to such Lender within ten (10)
Business Days of receipt by the Borrowers from such Lender of
a statement setting forth in reasonable detail the amount or
amounts due and the basis for the determination from time to
time of such amount or amounts, which statement shall be
conclusive and binding absent manifest error."
Section 3. Amendments to Article 4 of the Credit Agreement.
Articles 4 and 5 of the Credit Agreement shall be amended as follows:
(a) The first sentence of Section 4.9 shall be amended and
restated as follows:
"The proceeds of all Facility 1 Tranche A Loans shall be used
by the Borrowers solely for the purpose of financing Eligible
Gestation Mortgage Loans and Eligible Mortgage-Backed
Securities. The proceeds of all Facility 1 Tranche B Loans
shall be used by the Borrowers solely for the purpose of
originating, acquiring or financing Eligible Conforming
Mortgage Loans and/or Eligible Non-Conforming Mortgage Loans.
The proceeds of all Swing-Line Loans shall be used by the
Borrowers solely for the purpose of originating, acquiring or
financing Eligible Gestation Mortgage Loans, Eligible
Mortgage-Backed Securities, Eligible Conforming Mortgage
Loans and/or Eligible Non-Conforming Mortgage Loans."
<PAGE> 103
- 14 -
(b) The reference to "Facility 1 Borrowing Base" in Section 5.2(n)
of the Credit Agreement shall be changed to "Facility 1 Tranche A Borrowing
Base."
Section 4. Amendments to Article 8 of the Credit Agreement.
Clause (v) of Section 8.2 shall be amended and restated as follows:
"(v) change the percentage of the Commitments, the definitions
of "Required Lenders," "Collateral Value of the Facility 1
Tranche A Borrowing Base," "Collateral Value of the Facility 1
Tranche B Borrowing Base," "Collateral Value of the Facility
2 Tranche A Borrowing Base," "Collateral Value of the Facility
2 Tranche B Borrowing Base," "Collateral Value of the Pledged
Servicing Portfolio", "Eligible Conforming Mortgage Loan,"
"Eligible Gestation Mortgage Loan," "Eligible Mortgage-Backed
Security," "Eligible Mortgage Loan," "Eligible Non-Conforming
Mortgage Loan," "Eligible REO Property" or "Eligible Servicing
Receivable" (or any definitions contained in such
definitions), or the number or identity of Lenders that is
required for any or all of the Lenders to take any action
hereunder,".
Section 5. Amendments to the Warehousing Security Agreement.
The Security Agreement shall be amended as follows:
(a) Section 2(b) shall be amended and restated as follows:
" (b) All Mortgage-Backed Securities described on
Schedule A to Attachment 1-B hereto, all right to the payment
of monies and non-cash distributions on account thereof, all
new, substituted and additional securities at any time issued
(to the extent permitted by applicable law) with respect
thereto and the Custodial Account, together with any and all
Mortgaged-Backed Securities held therein or credited thereto
and any and all rights of each Borrower to insurance payments
made in respect of such Mortgage-Backed Securities or the
Custodial Account; "
(b) Section 4 shall be amended and restated as follows:
"4. Delivery of Collateral Documentation; Submission of
Collateral for Inclusion in Borrowing Base. From time to
time, the Borrowers shall deliver or cause to be delivered the
Collateral to the Collateral Agent as hereinafter provided.
The Borrowers shall deliver or cause to be delivered the
Collateral consisting of Mortgage Loans (the "Facility 1
Tranche A Mortgage Loans") and Mortgage- Backed Securities to
be included in the Facility 1 Tranche A Borrowing Base by
delivery to the Collateral Agent of a Facility 1 Tranche A
Borrowing Base Addition Report in the form of Attachments 1- A
and 1-B hereto, respectively, with all blanks completed in
conformity therewith (a copy of which completed Facility 1
Tranche A Borrowing Base Addition Report shall be delivered to
the Agent by the Collateral Agent upon its receipt thereof),
together with those documents, instruments and agreements
<PAGE> 104
- 15 -
described on Attachment 2 hereto (the "Required Documents")
for such Mortgage Loans or Mortgage-Backed Securities, as the
case may be. The Borrowers shall deliver or cause to be
delivered the Collateral consisting of Mortgage Loans to be
included in the Facility 1 Tranche B Borrowing Base (the
"Facility 1 Tranche B Mortgage Loans") by delivery to the
Collateral Agent of a Facility 1 Tranche B Borrowing Base
Addition Report in the form of Attachment 1-C hereto, with all
blanks completed in conformity therewith (a copy of which
completed Facility 1 Tranche B Borrowing Base Addition Report
shall be delivered to the Agent by the Collateral Agent upon
its receipt thereof), together with those documents,
instruments and agreements described on Attachment 2 hereto
(the "Required Documents") for such Mortgage Loans. At any
time that additional Take-Out Commitments are assigned to the
Secured Parties pursuant to this Agreement, the Borrowers
shall immediately execute and deliver to the Agent an
assignment supplement substantially in the form attached
hereto as Attachment 1-D (the "Assignment Supplement"). The
Borrowers may substitute other Mortgage Loans or
Mortgage-Backed Securities held by the Collateral Agent as
collateral, provided that the Mortgage Loans or
Mortgage-Backed Securities transferred to the Collateral Agent
will have a collateral value for purposes of determining the
Collateral Value of the Facility 1 Tranche A Borrowing Base or
the Collateral Value of the Facility 1 Tranche B Borrowing
Base, as applicable, at least equal to the collateral value
of the Mortgage Loans and Mortgage-Backed Securities for which
they are substituted. Such substitution shall be made by
transfer of such Mortgage Loans or Mortgage-Backed Securities
to the Collateral Agent pursuant to a Facility 1 Tranche A
Borrowing Base Addition Report or Facility 1 Tranche B
Borrowing Base Addition Report, as applicable, in the form of
Attachment 1-A, 1-B or 1-C, as applicable. No Collateral
shall be released until the Collateral Agent has reviewed the
substitute collateral and determined the collateral value
therefor is equivalent. All documentation relating to or
constituting Collateral delivered at any time to the
Collateral Agent under this Agreement shall be held by the
Collateral Agent in a fire resistant vault, drawer or other
suitable depository maintained and controlled solely by the
Collateral Agent in accordance with customary standards for
such custody and conspicuously marked to show the interest of
the Secured Parties therein. Mortgage-Backed Securities shall
be held in the Custodial Account. Book-Entry MBS shall be
held in accordance with Section 6(f)."
(c) All references to "Mortgage Loans" in Sections 6(a), 6(b) and
6(c) shall be changed to "Facility 1 Tranche B Mortgage Loans" wherever they
appear.
(d) All references to "Facility 1 Borrowing Base" in Section 6(d)
shall be changed to "Facility 1 Tranche B Borrowing Base" wherever they appear.
(e) The following sentence shall be added at the end of Section
6(e) immediately following the last sentence thereof:
"The Secured Parties shall hold their security interests in
and liens upon the Custodial Account and the other accounts
referred to in Section 2(b) above and all
<PAGE> 105
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Mortgage-Backed Securities at any time held therein or
credited thereto with all rights of a secured party under the
New York Uniform Commercial Code and other applicable New York
or federal law."
(f) Attachments 1-A, 1-B and 1-C shall be deleted and Attachments
1-A, 1-B, 1-C and 1-D attached as Exhibit A hereto shall be substituted
therefor.
(g) The reference to "FACILITY 1 BORROWING BASE" in Attachment 2
shall be changed to "FACILITY 1 TRANCHE B BORROWING BASE" and the following
new paragraph shall be added to Attachment 2:
"REQUIRED DOCUMENTS
FOR MORTGAGE LOANS TO BE INCLUDED IN
FACILITY 1 TRANCHE A BORROWING BASE
A copy of a FHLMC Custodial Certification Schedule, a FNMA
Schedule of Mortgages or a GNMA Schedule of Pooled Mortgages, or such other
documentation necessary under an applicable Agency Guide to be completed by the
Certificating Custodian for purposes of initially certifying mortgage loans for
inclusion in a pool supporting Mortgage-Backed Securities, in each case,
listing such Mortgage Loans as Mortgage Loans to be pooled in a Mortgage-Backed
Security and duly executed by the Certificating Custodian."
(h) The heading "I. Mortgage Loans Included in the Facility 1
Borrowing Base." in Attachment 4 shall be changed to "I. Mortgage Loans
Included in the Facility 1 Tranche B Borrowing Base."
Section 6. Amendments to Other Exhibits. Exhibits H-1, I and
J shall be amended and restated in the forms of Exhibits B, C and D hereto,
respectively.
Section 7. Representations and Warranties. The Borrowers
represent and warrant that, on and as of the date hereof, all of the
representations and warranties made by them in the Credit Agreement and the
other Loan Documents are true and correct as if made on and as of the date
hereof and no Potential Default or Event of Default has occurred and is
continuing.
Section 8. Effectiveness. This Amendment shall become
effective as of the date (the "Amendment Effective Date") on which each of the
following conditions have been satisfied to the satisfaction of the Agent:
(a) The Borrowers shall have delivered to the Agent, in form and
substance and in quantities reasonably satisfactory to the Agent and its
counsel, each of the following:
(i) this , duly executed and delivered by the parties hereto;
<PAGE> 106
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(ii) a certified copy of resolutions of the Board of
Directors of each of the Borrowers approving the execution, delivery and
performance of all documents required to be delivered by such parties hereunder
and the transactions contemplated therein; and
(iii) such other documents, instruments and agreements, duly
executed, deemed necessary or appropriate by the Agent.
(b) All acts and conditions (including the obtaining of any
necessary regulatory approvals and the making of any required filings,
recordings or registrations) required to be done and performed and to have
happened prior to the execution, delivery and performance of this Amendment and
for the same to constitute the legal, valid and binding obligations,
enforceable in accordance with its terms, shall have been done and performed
and shall have happened in due and strict compliance with all applicable laws
or if any of such have not been done, performed or happened, such has been
expressly disclosed to the Agent and waived by all of the Lenders in writing.
If each of the above conditions has been satisfied, on the Amendment
Effective Date, all Facility 1 Loans outstanding under the Original Credit
Agreement shall remain outstanding and shall be deemed to be Loans of the
appropriate Type under the Original Credit Agreement as amended by this
Amendment, as determined by the Agent and the Warehousing Collateral Agent,
governed by the terms hereof.
Section 9. Counterparts. This Amendment may be executed in
any number of counterparts, all of which taken together shall constitute one
agreement, and any party hereto may execute this Amendment by signing any such
counterpart.
Section 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 11. Miscellaneous. Except as expressly amended
hereby, the Credit Agreement and the other Loan Documents shall remain in full
force and effect. Nothing contained herein shall operate as a waiver of any
right, power or remedy of the Agent or the Lenders under the Credit Agreement
or any other Loan Document, nor constitute a waiver of any provision of the
Credit Agreement or any other Loan Document.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above written.
FIRST FINANCIAL CARIBBEAN CORPORATION,
as a Borrower
By: /s/ MARIO S. LEVIS
-------------------------------------
Name: Mario S. Levis
Title: Vice President
<PAGE> 107
- 18 -
DORAL MORTGAGE CORPORATION,
as a Borrower
By: /s/ MARIO S. LEVIS
------------------------
Name: Mario S. Levis
Title: Vice President
BANKERS TRUST COMPANY,
as Agent and as a Lender
By: /s/ KEVIN M. McCANN
------------------------
Name: Kevin M. McCann
Title: Vice President
BANCO POPULAR DE PUERTO RICO,
as Collateral Agent
By: /s/ HECTOR RIVERA RIVERA
------------------------
Name: Hector Rivera Rivera
Title: Vice President
FIRST UNION NATIONAL BANK OF NORTH CAROLINA,
as a Lender
By: Illegible
Name: _______________________
Title: _______________________
<PAGE> 108
- 19 -
THE BANK OF BOSTON,
as a Lender
By: /s/ PAUL CHMIELINSKI
------------------------
Name: Paul Chmielinsti
Title: Vice President
THE BANK OF NEW YORK,
as a Lender
By: /s/ ROBERT A. TWEED
------------------------
Name: Robert A. Tweed
Title: Vice President
NATIONAL CITY BANK OF KENTUCKY,
as a Lender
By: Illegible
Name: _____________________________________
Title: _____________________________________
<PAGE> 109
- 20 -
EXHIBIT A
ATTACHMENT 1-A
TO SECURITY AGREEMENT
(Warehousing Collateral)
(On Borrower Letterhead)
FACILITY 1 TRANCHE A BORROWING BASE ADDITION REPORT
[Eligible Gestation Mortgage Loans]
No. _________
__________ __, 199_
[Collateral Agent]
[Address]
Dear Sir or Madam:
As per the terms of the First Amended and Restated Credit
Agreement (as amended, modified or supplemented from time to time, the "Credit
Agreement") dated as of September 25, 1996 between the lenders party thereto,
Bankers Trust Company, as Agent (the "Agent"), [insert name of other Borrower]
and the undersigned, and the First Amended and Restated Security, Custody and
Collateral Agency Agreement (Warehousing Collateral) (as amended, modified or
supplemented from time to time, the "Security Agreement") dated as of October
10, 1996 between the Agent, the undersigned and Banco Popular de Puerto Rico,
as Collateral Agent, we hereby add the Eligible Gestation Mortgage Loans listed
on Schedule A attached hereto to the Facility 1 Tranche A Borrowing Base. The
capitalized terms used herein but not defined shall have the respective
meanings as set forth in the Credit Agreement.
With respect to each Mortgage Loan listed on the attached
schedule, we hereby certify that each of the documents listed on Attachment 2
to the Security Agreement that are required to be delivered for Eligible
Gestation Mortgage Loans has been delivered to you prior to (or is being
delivered to you simultaneously with) the delivery of this report.
With respect to each Mortgage Loan listed on the attached
schedule that was previously included in the Facility 1 Tranche B Borrowing
Base, we hereby certify that such Mortgage Loan has not been rejected by the
Certificating Custodian for pool formation following initial certification.
<PAGE> 110
- 21 -
We hereby pledge to you the mortgage notes evidencing the
Mortgage Loans listed on the attached schedule as Collateral under the Security
Agreement for the benefit of the Secured Parties as security for the
Obligations.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
or
[DORAL MORTGAGE CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
<PAGE> 111
- 22 -
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of First Financial Caribbean
Corporation, and ____________, of legal age, (single/married), property owner
and resident of ____________, ____________, in his/her capacity as (title)
__________ of (name of corporation), both personally known to me, in
_______________, Puerto Rico, on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of Doral Mortgage Corporation, and
____________, of legal age, (single/married), property owner and resident of
____________, ____________, in his/her capacity as (title) __________ of (name
of corporation), both personally known to me, in _______________, Puerto Rico,
on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
<PAGE> 112
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The attached schedule may be in any form mutually acceptable to the Borrowers,
the Agent and the Collateral Agent, but shall include the following
information: whether such Eligible Gestation Mortgage Loan was previously
included in the Facility 1 Tranche B Borrowing Base, the mortgage loan number,
the name of the obligor, the interest rate, the state (if other than Puerto
Rico), the type, the term, the original principal balance and the current
principal balance.
<PAGE> 113
- 24 -
Schedule A
Eligible Gestation Mortgage Loans
<PAGE> 114
- 25 -
ATTACHMENT 1-B
TO SECURITY AGREEMENT
(Warehousing Collateral)
(On Borrower Letterhead)
FACILITY 1 TRANCHE A BORROWING BASE ADDITION REPORT
[Eligible Mortgage-Backed Securities]
No. _________
__________ __, 199_
[Collateral Agent]
[Address]
Dear Sir or Madam:
As per the terms of the First Amended and Restated Credit
Agreement (as amended, modified or supplemented from time to time, the "Credit
Agreement") dated as of September 25, 1996 between the lenders party thereto,
Bankers Trust Company, as Agent (the "Agent"), [insert name of other Borrower]
and the undersigned, and the First Amended and Restated Security, Custody and
Collateral Agency Agreement (Warehousing Collateral) (as amended, modified or
supplemented from time to time, the "Security Agreement") dated as of October
10, 1996 between the Agent, the undersigned and Banco Popular de Puerto Rico,
as Collateral Agent, we hereby add the Eligible Mortgage-Backed Securities
listed on Schedule A attached hereto to the Facility 1 Tranche A Borrowing
Base. The capitalized terms used but not defined herein shall have the
respective meanings as set forth in the Credit Agreement.
With respect to each Mortgage-Backed Security listed on the
attached schedule, we hereby certify that each of the documents listed on
Attachment 2 to the Security Agreement that are required to be delivered for
Eligible Mortgage-Backed Securities has been delivered to you prior to (or is
being delivered to you simultaneously with) the delivery of this report.
With respect to each Mortgage-Backed Security listed on the
attached schedule, we hereby certify that (a) if such Mortgage-Backed Security
is certificated, it has been (or is simultaneously herewith being) deposited
with you or your designated agent, bailee or custodian, endorsed in blank for
transfer, and (b) if such Mortgage-Backed Security is a Book-Entry
Mortgage-Backed Security, such Mortgage-Backed Security is the subject of a
Perfected Assignment.
<PAGE> 115
- 26 -
We hereby pledge to you the Mortgage-Backed Securities listed
on the attached schedule as Collateral under the Security Agreement for the
benefit of the Secured Parties as security for the Obligations.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ___________________________________]
or
[DORAL MORTGAGE CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ___________________________________]
<PAGE> 116
- 27 -
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of First Financial Caribbean
Corporation, and ____________, of legal age, (single/married), property owner
and resident of ____________, ____________, in his/her capacity as (title)
__________ of (name of corporation), both personally known to me, in
_______________, Puerto Rico, on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of Doral Mortgage Corporation, and
____________, of legal age, (single/married), property owner and resident of
____________, ____________, in his/her capacity as (title) __________ of (name
of corporation), both personally known to me, in _______________, Puerto Rico,
on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
<PAGE> 117
- 28 -
The attached schedule may be in any form mutually acceptable to Borrowers, the
Agent and the Collateral Agent, but shall include the following information for
each Eligible Mortgage-Backed Security:
The MBS number, the interest rate, the term and the face amount of the
Mortgage-Backed Security.
<PAGE> 118
- 29 -
Schedule A
Eligible Mortgage-Backed Securities
<PAGE> 119
- 30 -
ATTACHMENT 1-C
TO SECURITY AGREEMENT
(Warehousing Collateral)
(On Borrower Letterhead)
FACILITY 1 TRANCHE B BORROWING BASE ADDITION REPORT
[Eligible Conforming and Eligible Non-Conforming Mortgage Loans]
No. _________
__________ __, 199_
[Collateral Agent]
[Address]
Dear Sir or Madam:
As per the terms of the First Amended and Restated Credit
Agreement (as amended, modified or supplemented from time to time, the "Credit
Agreement") dated as of September 25, 1996 between the lenders party thereto,
Bankers Trust Company, as Agent (the "Agent"), [insert name of other Borrower]
and the undersigned, and the First Amended and Restated Security, Custody and
Collateral Agency Agreement (Warehousing Collateral) (as amended, modified or
supplemented from time to time, the "Security Agreement") dated as of October
10, 1996 between the Agent, the undersigned and Banco Popular de Puerto Rico,
as Collateral Agent, we hereby add the Eligible Conforming Mortgage Loans and
the Eligible Non-Conforming Mortgage Loans listed on Schedule A attached
hereto to the Facility 1 Tranche B Borrowing Base. The capitalized terms used
herein but not defined shall have the respective meanings as set forth in the
Credit Agreement.
With respect to each Mortgage Loan listed on the attached
schedule, we hereby certify that each of the documents listed on Attachment 2
to the Security Agreement that are required to be delivered for Eligible
Conforming Mortgage Loans or Eligible Non-Conforming Mortgage Loans, as
applicable, has been delivered to you prior to (or is being delivered to you
simultaneously with) the delivery of this report. We also certify that each
such Mortgage Loan has closed.
With respect to each Eligible Conforming Mortgage Loan on the
attached schedule that was previously included in the Facility 1 Tranche A
Borrowing Base, we hereby certify that such Mortgage has been rejected by the
Certificating Custodian for pool formation following initial certification
thereof.
<PAGE> 120
- 31 -
We hereby pledge to you the mortgage notes evidencing the
Mortgage Loans listed on the attached schedule as Collateral under the Security
Agreement for the benefit of the Secured Parties as security for the
Obligations.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
or
[DORAL MORTGAGE CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
<PAGE> 121
- 32 -
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of First Financial Caribbean
Corporation, and ____________, of legal age, (single/married), property owner
and resident of ____________, ____________, in his/her capacity as (title)
__________ of (name of corporation), both personally known to me, in
_______________, Puerto Rico, on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of Doral Mortgage Corporation, and
____________, of legal age, (single/married), property owner and resident of
____________, ____________, in his/her capacity as (title) __________ of (name
of corporation), both personally known to me, in _______________, Puerto Rico,
on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
<PAGE> 122
- 33 -
The attached schedule may be in any form mutually acceptable to the Borrowers,
the Agent and the Collateral Agent, but shall include the following
information: whether such Mortgage Loan was previously included in the
Facility 1 Tranche A Borrowing Base, the mortgage loan number, the name of the
obligor, the interest rate, the state (if other than Puerto Rico), the type,
the term, the original principal balance and the current principal balance.
<PAGE> 123
- 34 -
ATTACHMENT 1-D
TO SECURITY AGREEMENT
(Warehousing Collateral)
Assignment Supplement
This document assigns those certain contracts more
particularly described in Schedule A attached hereto and made a part hereof
(the "Contracts"), pursuant to the terms of that certain [First Amended and
Restated Security, Custody and Collateral Agency Agreement (Warehousing
Collateral)] [First Amended and Restated Security and Custody Agreement
(Servicing Collateral)] (as amended, modified or supplemented from time to
time, the "Security Agreement") dated as of October 10, 1996 by and among the
undersigned, [insert name of other Borrower], [and] Bankers Trust Company, as
Agent,[ and the Collateral Agent]. Capitalized terms used and not defined
herein have the meanings specified in the Security Agreement.
We hereby assign to you the Contracts as Collateral under the
Security Agreement for the benefit of the Secured Parties as security for the
Obligations.
We hereby represent that simultaneously with the execution and
delivery of this Assignment Supplement we have delivered to each party to the
Contracts other than the undersigned a notice in the form of Attachment [5] [2]
to the Security Agreement.
IN WITNESS WHEREOF, this Assignment Supplement has been
executed by the undersigned in __________, Puerto Rico, this ____ day of
________, 199__.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: . . . . . . . . . . . . . . . . .
Name: . . . . . . . . . . . . . . . . .
Title: . . . . . . . . . . . . . . . . ]
or
[DORAL MORTGAGE CORPORATION
By: . . . . . . . . . . . . . . . . .
Name: . . . . . . . . . . . . . . . . .
Title: . . . . . . . . . . . . . . . . ]
<PAGE> 124
- 35 -
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of First Financial Caribbean
Corporation, and ____________, of legal age, (single/married), property owner
and resident of ____________, ____________, in his/her capacity as (title)
__________ of (name of corporation), both personally known to me, in
_______________, Puerto Rico, on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
AFFIDAVIT
Affidavit No. ______________
Subscribed and acknowledged before me by ______________, of legal age,
(single/married), property owner and resident of ___________, ___________, in
his/her capacity as (title) __________ of Doral Mortgage Corporation, and
____________, of legal age, (single/married), property owner and resident of
____________, ____________, in his/her capacity as (title) __________ of (name
of corporation), both personally known to me, in _______________, Puerto Rico,
on this ____ day of ________, 199__.
____________________________
NOTARY PUBLIC
<PAGE> 125
- 36 -
Schedule A
Take-Out Commitments
<PAGE> 126
- 37 -
EXHIBIT B
EXHIBIT H-1
FACILITY 1 BORROWING BASE CERTIFICATE
<PAGE> 127
- 38 -
EXHIBIT C
EXHIBIT I
NOTICE OF BORROWING
1. We refer to the First Amended and Restated Credit
Agreement (as amended, modified or supplemented from time to time, the "Credit
Agreement") dated as of September 25, 1996 by and between First Financial
Caribbean Corporation and Doral Mortgage Corporation, the Lenders party
thereto and Bankers Trust Company, as Agent. Capitalized terms used herein
without definitions shall have the meaning set forth in the Credit Agreement.
2. The undersigned, [First Financial Caribbean
Corporation, a corporation duly organized under the laws of the Commonwealth of
Puerto Rico,] [Doral Mortgage Corporation, a corporation duly organized under
the laws of the Commonwealth of Puerto Rico] ("Borrower"), hereby requests a
[Facility 1Tranche A] [Facility 1 Tranche B] [Facility 2 Tranche A] [Facility 2
Tranche B](1) [Facility 2 Tranche C] [Swing-Line] Borrowing in the aggregate
principal amount of $__________(2) to be made on ________________, 199___.(3)
[Such Facility 1 Tranche B Borrowing shall consist of [Fed Funds] [Eurodollar]
Loans.] [After giving effect to the Borrowing requested hereby, no more than
four (4) Eurodollar Interest Periods will be in effect.] [The Eurodollar
Interest Period for the Eurodollar Loan requested hereunder shall be [30] [60]
[90] days.]
3. [The Collateral Value of the [ Facility 1 Tranche A]
[Facility 1 Tranche B] Borrowing Base, as reported to the Borrowers by the
Warehousing Collateral Agent on the date hereof, is $___________.] [The
Collateral Value of the Facility 2 Tranche A Borrowing Base, as reported by the
Borrowers on the most recent Facility 2 Tranche A Borrowing Base Certificate is
$_____.] [The Collateral Value of the Facility 2 Tranche B Borrowing Base, as
determined in accordance with the Credit Agreement, is $____.] The Borrower
represents and warrants that it has no reason to believe that such amount is
incorrect. The aggregate principal amount of the Facility 1 Tranche A Loans,
Facility 1 Tranche B Loans, Swing-Line Loans and Facility 2
__________________________________
(1) No more than two Facility 2 Tranche B Borrowings may be outstanding
simultaneously at any time.
(2) Minimum amount of $1,000,000 for each Facility 1 Borrowing and each
Facility 2 Tranche B Borrowing. Minimum amount of $500,000 for each
Facility 2 Tranche A Borrowing and each Facility 2 Tranche C
Borrowing. No minimum amount for a Swing-Line Borrowing.
(3) Must be a Eurodollar Business Day for a Borrowing of Eurodollar Loans
and a Business Day for a Borrowing of all other Loans.
<PAGE> 128
- 39 -
Loans, and the aggregate face amount of Facility 1 Acceptances outstanding,
after giving effect to the Borrowing requested hereby will not exceed the
maximum amounts permitted under Sections 2.1 and 2.8 of the Credit Agreement.
4. The representations and warranties of the Borrowers
contained in the Loan Documents are accurate and complete in all material
respects on and as of the date hereof and will be accurate and complete in all
material respects on and as of the date of the Borrowing requested hereunder
both before and after giving effect to the Borrowing requested hereunder.
5. No Potential Default or Event of Default has occurred
and is continuing on the date hereof and none will occur after giving effect to
the Borrowing to be made in accordance with the terms hereof.
6. Since December 31, 1995, no material adverse change
has occurred in the business, financial condition or results of operations of
FFCC and its Subsidiaries, taken as a whole.
Date: _________ __, 199_.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
or
[DORAL MORTGAGE CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
<PAGE> 129
- 40 -
EXHIBIT D
EXHIBIT J
NOTICE OF CONVERSION/CONTINUATION
1. We refer to the First Amended and Restated Credit
Agreement (as amended, modified or supplemented from time to time, the "Credit
Agreement") dated as of September 25, 1996 by and between First Financial
Caribbean Corporation and Doral Mortgage Corporation, the Lenders party thereto
and Bankers Trust Company, as Agent. Capitalized terms used herein without
definitions shall have the meaning set forth in the Credit Agreement.
2. The undersigned, [First Financial Caribbean
Corporation, a corporation duly organized under the laws of the Commonwealth of
Puerto Rico,] [Doral Mortgage Corporation, a corporation duly organized under
the laws of the Commonwealth of Puerto Rico] ("Borrower"), hereby requests to
[convert an aggregate principal amount of Facility 1 Tranche B Loans that
constitute [Fed Funds] [Eurodollar] Loans equal to $__________(1) to [Fed Funds]
[Eurodollar] Loans] [continue an aggregate principal amount of Facility 1
Tranche B Loans that constitute Eurodollar Loans equal to $_____________] on
________________, 199_.(2) [The Eurodollar Interest Period for such Eurodollar
Loans following the requested [conversion] [continuation] shall be [30] [60]
[90] days.] [After giving effect to the conversion or continuation requested
hereby, no more than four (4) Eurodollar Interest Periods will be in effect.]]
3. The Collateral Value of the Facility 1 Tranche B
Borrowing Base, as reported to the Borrowers by the Warehousing Collateral
Agent on the date hereof, is $______. The aggregate principal amount of the
Facility 1 Tranche A Loans, Facility 1 Tranche B Loans and Swing-Line Loans and
the aggregate face amount of Facility 1 Acceptances outstanding after giving
effect to the [conversion] [continuation] hereunder will not exceed the maximum
amounts permitted under Sections 2.1 and 2.8 of the Credit Agreement.
__________________________________
(1) Minimum amount of $1,000,000 for a conversion of Fed Funds Loans into
Eurodollar Loans.
(2) Must be a Eurodollar Business Day for a conversion into or
continuation of Eurodollar Loans and a Business Day for conversions
into or continuations of all other Loans.
<PAGE> 130
- 41 -
4. No Potential Default or Event of Default has occurred
and is continuing on the date hereof and none will occur after giving effect to
the [conversion] [continuation] to be made pursuant to the terms hereof.(3)
Date: _________ __, 199_.
[FIRST FINANCIAL CARIBBEAN CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
or
[DORAL MORTGAGE CORPORATION
By: ____________________________________
Name: ____________________________________
Title: ____________________________________]
__________________________________
(3) Only required for a conversion into or a continuation of a
Eurodollar Loan.
<PAGE> 1
EXHIBIT 10.71
As of December 31, 1996
Mr. Edison Velez
650 Mueoz Rivera Avenue
San Juan, Puerto Rico 00920
Dear Mr. Velez:
We are pleased to detail herein below the provisions of your
employment agreement with Doral Mortgage Corporation ("DMC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing on
January 1, 1997 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 DMC or First Financial
Caribbean Corporation ("FFCC") and their respective subsidiaries, divisions and
ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as President of DMC. By your acceptance of
this Agreement, you undertake to accept such employment and to devote your full
time and attention to DMC, 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 DMC or 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 DMC or 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.
<PAGE> 2
Mr. Edison Velez
As of December 31, 1996
Page 2
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 the Board of Directors of DMC with respect to your duties,
responsibilities and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive
an annual salary of $240,000 annually, payable no less often than monthly in
accordance with corporate policy.
(b) (i) During the term of this Agreement, you shall
also be entitled to receive an annual incentive bonus
equal to the lesser of (x) 200,000 and (y) 3% of the
net income of DMC over and above Three Million
Dollars ($3,000,000) derived from its Mortgage
Banking Activities (as hereinafter defined).
(ii) One half (1/2) of the incentive bonus shall be
payable annually by DMC within 120 days following the
end of the preceding fiscal year, provided that such
amount shall only be payable if you shall have served
as President to DMC pursuant to this Agreement for
the entire fiscal year to which such payments relate.
As used in this Section 3, "Net Income" means the
annual net income by DMC and its subsidiaries after
all taxes 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 DMC's audited financial statements
audited by its independent accountants (hereinafter
referred to as "GAAP"). As used in this Section 3,
"Mortgage Banking Activities" shall mean the
origination, purchase, receipt of interest, servicing
and sale of mortgages or pools of mortgages on homes
in Puerto Rico and the purchase and sale of interests
in pools of mortgages. Until you have been given
notice to the contrary, all activities of DMC shall
be deemed to be Mortgage Banking Activities, and all
expenses of DMC (including all taxes) shall be deemed
to be related to its Mortgage Banking Activities.
(iii) The remaining one-half (1/2) of the incentive
bonus (the "Deferred Bonus") shall be deferred
pursuant to the deferred compensation arrangement
described in Exhibit A hereto.
(c) You shall be entitled to participate in the other
benefit plans of DMC upon the terms and conditions on which such benefits are
made available to other officers of DMC. 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
<PAGE> 3
Mr. Edison Velez
As of December 31, 1996
Page 3
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 DMC or 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 DMC
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 DMC 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 DMC, 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 and Exhibit A hereto,
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 DMC or any
Committee appointed to consider such matters, or, in the event DMC 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
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) DMC 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 DMC, (y) conversion to you of
<PAGE> 4
Mr. Edison Velez
As of December 31, 1996
Page 4
opportunity of DMC or FFCC, 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 DMC 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 DMC 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 DMC or an affiliate of DMC or FFCC, you
will not, without the prior written consent of DMC, (a) accept employment or
render service to any person, firm or corporation, directly or indirectly, in
competition with DMC or 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 DMC or any affiliate of
DMC or 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 DMC or FFCC or any affiliate of DMC or 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 DMC.
(b) At any time following a "Change in Control" of DMC,
this Agreement may be terminated by DMC 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 any person
other than FFCC or an entity controlled by or under common control with FFCC
ceases to be the owner of at least 51% of the outstanding voting securities of
DMC.
(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
<PAGE> 5
Mr. Edison Velez
As of December 31, 1996
Page 5
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 DMC.
7. 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.
8. 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.
9. 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.
10. 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 DMC shall be
addressed to the attention of its Board of Directors.
11. GOVERNING LAW
This Agreement shall be construed in accordance with the laws
of the Commonwealth of Puerto Rico.
<PAGE> 6
Mr. Edison Velez
As of December 31, 1996
Page 6
12. MISCELLANEOUS
This Agreement shall be binding upon the successors and
assigns of DMC. 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 DMC, kindly endorse your acceptance and agreement
therewith in the space below provided, whereupon this shall become a binding
agreement.
Very truly yours,
DORAL MORTGAGE 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/ Edison Velez
- --------------------------------
Edison Velez
<PAGE> 7
EXHIBIT A
DEFERRED ARRANGEMENT
1. Creation of Accounts by DMC.
(a) DMC shall create and maintain in its records a
Deferred Bonus Account for you with respect to the Deferred Bonus, if any,
earned by you under the Agreement. To that Account shall be credited the
Deferred Bonus and all interest earned thereon.
(b) DMC shall not segregate the amounts credited to you
but may utilize such amounts for such purposes as it deems appropriate,
including working capital.
(c) The Account shall bear interest (calculated on the
basis of a 360 day year consisting of twelve 30 day months) at the rate of
interest publicly announced by the Chase Manhattan Bank, N.A., New York, New
York as its "Reference Rate" on the first day of each calendar quarter less one
percentage point, which amount shall be credited to each Account as of the end
of each quarter in each year and such interest shall thereafter become a part
of the Account.
(d) DMC may withhold from the amount payable with respect
to the Deferred Bonus account, any amount which it deems necessary to withhold
by reason of applicable federal, state, Puerto Rican 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.
2. Termination of Right to Deferred Bonus.
(a) Your right to any Deferred Bonus Account hereunder
may be terminated for dishonesty or if you otherwise breach the provisions of
your employment agreement with DMC, including the provisions of Section 5
thereof.
(b) On your death or legally determined incapacity, your
Deferred Bonus Account shall be deemed to have been transferred to your legal
representative who may within twelve months after your death or legally
determined incapacity demand payment of all your Deferred Bonus Account whether
or not five years shall have elapsed since the accrual of the Deferred Bonus
giving rise to the Deferred Bonus Account.
3. Management and Statutory Creditor.
You acknowledge that you have no right to restrict or in any
way affect the management policies or decisions of DMC and that you shall not
obtain any status as a creditor of DMC.
4. Payment of Deferred Bonus, Notice, Withholding.
(a) Subject to Sections 2(a) and 2(b), you shall be
entitled to receive on demand the full amount of your Deferred Bonus Account
five (5) or more years after such Deferred Bonus was earned (e.g., January 1,
2003).
<PAGE> 8
2
(b) Demand for payment of the Deferred Bonus Account
shall be made by written notice, addressed to the Chairman of the Board of DMC,
specifying the amount of the then receivable Deferred Bonus Account and
requesting its payment at any time during which it is then payable. Payment
shall ordinarily be made to you within 30 days after request.
<PAGE> 1
EXHIBIT 21
Subsidiaries of First Financial Caribbean Corporation
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
<S> <C>
AAA Financial Services Corporation Puerto Rico
Centro Hipotecario, Inc. Puerto Rico
Doral Federal Savings Bank U.S.A.
Doral Mortgage Corporation Puerto Rico
RSC Corp. Puerto Rico
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST FINANCIAL CARIBBEAN CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 81,213
<SECURITIES> 532,509
<RECEIVABLES> 25,973
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 15,875
<DEPRECIATION> (6,515)
<TOTAL-ASSETS> 1,101,955
<CURRENT-LIABILITIES> 0
<BONDS> 10,000
0
0
<COMMON> 9,125
<OTHER-SE> 141,406
<TOTAL-LIABILITY-AND-EQUITY> 1,101,955
<SALES> 0
<TOTAL-REVENUES> 107,832
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 30,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,443
<INCOME-PRETAX> 31,279
<INCOME-TAX> 4,238
<INCOME-CONTINUING> 27,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,041
<EPS-PRIMARY> 2.98
<EPS-DILUTED> 2.84
</TABLE>
